The SWIFT Network and the Complex Reality of Sanctions

By Noah Schwartz

The potential invasion of Ukraine has American policymakers scrambling for a sanctions package that could effectively deter Russia. Sanctioning an economy the size of Russia is difficult, leading some to propose the “nuclear option” of disconnecting Russia from SWIFT. 

SWIFT (Society for Worldwide Interbank Telecommunications) was founded in 1973. Today, SWIFT amounts to the central nervous system for capital, as it is the largest communication apparatus between banks.

The SWIFT network made itself exceptional from other financial telecommunications networks due to its standardized codes assigned to each of the 11,000 financial institutions enrolled within SWIFT. 

Suppose you live in Washington, D.C. and have a friend in London that you wish to send some money. You could walk into any major American bank in Washington with your friend’s account number and the SWIFT code for their financial institution in London and send them the money. SWIFT would alert the British bank of the transaction, making it secure for the British bank to deposit the money into your friend’s account. 

In this sense, SWIFT truly is the largest and most important financial messaging apparatus in the whole world. For the entire year of 2021, SWIFT recorded 42 million such financial messages per day.

Despite this extraordinary feat, it is important to remember that SWIFT is merely a messaging service and does not actually hold any capital on behalf of its customers. 

The European Parliament has already passed a nonbinding resolution to disconnect Russia from SWIFT, should Russia invade Ukraine. This would likely cause Russia’s GDP to shrink by 5%. 

In 2014, there was discussion of excluding Russia from SWIFT due to its annexation of Crimea. At the time, Russian Prime Minister Dmitry Medvedev said the disconnection of Russia from SWIFT would be tantamount to “a declaration of war.” 

Perhaps for this reason, there are recent reports that seem to indicate the West is dropping SWIFT removal from its potential sanctions regime. Regardless, SWIFT removal is still likely to be an option on the table for the West should Russia invade Ukraine. This further highlights the complicated economic relationship between the West and Russia. 

Economic statecraft has long been a fixture of the American-Russian relationship. Integrating Russia into the neoliberal order proved to be a painful task. Western economic gurus such as Jeffery Sachs and Lawerence Summers advised a policy of ‘shock therapy’ that involved the mass privatization of the Russian state. 

Studies indicate that the policy of shock therapy in Russia led to a 12.8% increase in deaths. These reforms became so extreme that some suggested in 2000 that newly elected Russian president, Vladimir Putin, ‘apply the Pinochet stick’ in order to fast-track liberalization.  

The collapse of communism as a viable political option forced Russia to integrate itself painfully into the neoliberal economic order. SWIFT is representative of this order as a borderless interconnected system of financial telecommunication that helped ease the spread of capital across the world. 

In a twist of fate, SWIFT was founded the same year as the Chilean coup d’etat that economist David Harvey describes as “the first experiment with neoliberal state formation.” Cutting Russia off from SWIFT would amount to the decoupling of the Russian and Western economies, and in a sense negate the shock therapy of the 1990s. 

Washington seems to believe that isolating Russia from the world economy will compel the Kremlin to align more with American interests. However, this belief seems to be premised on the idea that there is no alternative to SWIFT or the Western economic order.

CIPS (Cross-Border Inter-Bank Payments System) operates essentially as the Chinese mirror image to SWIFT. CIPS works to allow cross border transactions in the yuan and appears miniscule in comparison to the size and scope to SWIFT. 

However, CIPS was founded much more recently in 2015 and already shows signs of massive reach and growth. Kicking Russia out from SWIFT could ultimately lead to deeper Russian integration within CIPS and a sizable counter-hegemonic financial network.

As German Foreign Minister Annalena Baerbock recently put it, “decoupling all payment transactions would perhaps be the biggest stick, but not the sharpest sword.” 

Russia could even attempt something more audacious and replace SWIFT with blockchain technology. Venezuela has attempted to circumvent United States sanctions with the introduction of the Petro, a cryptocurrency issued by the government of Venezuela. 

The Petro has had little to no success as a viable alternative. However, the idea of using blockchain technology to cut-out Western financial institutions is viable.

As Leonid Bershidsky wrote recently, “creating a transparent, low-fee, fast system for international transfers, block chain-based or along the lines of Visa Direct and Mastercard Send, neither of which relies on SWIFT, would be a great project for a group of developing nations — perhaps for an institution like the New Development Bank, set up by Brazil, Russia, India, China and South Africa in 2015.”

Cutting Russia out of SWIFT would be the latest in a long line of Western economic statecraft blunders that prioritize inflicting economic pain instead of a coherent strategy. If Washington isn’t careful, its deepening reliance on sanctions may prove to be a shock therapy for both sides. 

 Noah Schwartz is a senior at George Mason University studying Government and International Politics. He specializes in Chinese grand strategy and Left Realism.