What is SWIFT, how does it work, why is it important and how nations are using it to punish Russia
- Western nations have been contemplating banning
Russiafrom the SWIFTpayments system over its invasion of Ukraine.
- Initially, only a few commercial banks would be suspended from using SWIFT, although a final decision on which banks will be included is not known yet.
- Find out what SWIFT is and how it works.
AdvertisementThe ongoing Russia-Ukraine war has brought the SWIFT payment system into the limelight, with the US and European nations threatening to cut off Russia from the financial world. This could prove to be a fatal blow to Russian banks, especially the smaller ones.
But what does it mean? What exactly is SWIFT and why is it so important that the US and European nations are using it as a major threat against Russia?
What is SWIFT?
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication.
Simply put, SWIFT is a global payments system, which is used by more than 11,000 financial institutions and companies around the world, across over 200 countries.
Think of SWIFT as Gmail for banks. Or like SMS, but for money transfers.
In short, SWIFT is a messaging system for money transfers.
How does SWIFT work?
Banks and financial institutions use the SWIFT payment system to securely and reliably send and receive money transfer instructions.
Under the SWIFT system, each organisation is assigned a 8 or 11 character unique code.
AdvertisementNow, let’s understand how SWIFT works.
Let’s assume a State Bank of India (SBI) customer wants to send money to their friend in the USA, who has an account with Bank of America (BofA).
The SBI customer can do this by logging into net banking and entering the details of the BofA customer, like the account number, branch name and the SWIFT code.
Once this transaction is initiated, SBI will send a SWIFT message to BofA, which will then be verified and cleared by BofA and the recipient will get the credit in their BofA account.
Why is SWIFT important?
The wide coverage of SWIFT – covering over 11,000 institutions in more than 200 countries around the world – makes it an almost-universally accepted system. It counts central banks of countries like the US, UK, Germany, France, Japan, India, China, Singapore and others among its list of overseers.
Given how most of the world uses SWIFT for international money transfers, a ban on Russia from the payment system would mean that the banks in the country will not be able to accept funds or make payments outside of Russia.
How can SWIFT be used to punish Russia?
A SWIFT ban would make exports and imports from and to Russia almost impossible, and Russia would have to look for alternative means to transfer money.
Some analysts suggest this would lead to ‘autarky’ – an economic system of self-sufficiency and limited trade. In simpler terms, this would isolate Russia from most of the world, and force the economy to look inwards to sustain itself and the country.
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