The effects of Russia’s expulsion from SWIFT

Although Ukraine did not give Russia any political excuses, Russia entered Kyiv as it had planned for a long time. Russia, known for its militaristic policies, seemed ultimately confident in its nuclear weapons. Russia is not only pursuing a policy of military expansion by being confident in its brute force but also destroying civilian objects. It opens fire on civilians in the Ukrainian capital. In other words, it demonstrates all kinds of military behavior, far from the rules of war. Just because it has military power, it behaves in a way that all the states in the region are threatened. After a five-day (24.02.2022) war, the whole world united on the anti-Russian front. US and EU economic sanctions against Russia have been expanded to be multi-vector. Finally, the United States and its allies rightly expelled Russia from SWIFT (Source: https://www.whitehouse.gov/.../joint-statement-on.../). By the way, SWIFT is one of the most effective tools of economic sanctions.

What is the impact of SWIFT?

There is probably a need to explain the institutional meaning of SWIFT as an institution. Simply put, it is the name of an international financial institution that allows money to be sent from one point to another without borders. In other words, it is an acronym for Society for Worldwide Interbank Financial Telecommunication (SWIFT). Expulsion from SWIFT means disruption of both domestic and international banking operations.

SWIFT is an association of more than 11,000 banks and various financial players from more than 200 countries around the world. These 11,000 business actors carry out banking operations, communication, and orders with each other through this system. Financial institutions and structures "talk" to each other with codes of 8-11 digits with 40 million messages a day through this system. Their communication languages ​​are those codes. When you buy or sell a product or service with your business partners, SWIFT requires a code. If you are not in SWIFT, then you will not be able to pass that code to the other party and the operation will not take place. When you are removed from this system, you will not be able to use or operate a correspondent account. In this case, it becomes impossible for you as a state to be guaranteed at the international level.

SWIFT’s office is located in Belgium. However, the company has two other important offices in the United States and Switzerland. Russia is one of the three countries in the world that conducts the most operations in this system. According to the volume of banking operations on this system, it is one of the twelve countries. Apparently, Russia carries out very fast and large-scale banking operations through this banking system. Disconnecting SWIFT for that country is, in parallel, a policy of isolation that creates a multifaceted domino effect, such as the devaluation of securities, the collapse of bank guarantees, and even the outflow of "cold money" from the country.

What does the expulsion from SWIFT mean for Russia?

But the problem is that Russia's expulsion from SWIFT will not only “hit” it but also “hit”, for example, the partner countries that buy oil and gas from Russia. It will affect them as well. That is why the countries that expelled Russia from SWIFT say that this should not be applied to banks that buy energy from Russia. So far, Russia "breathes easily" through this. This exception, obviously, seriously underestimates the impact of this decision. Because it is through these banks that payments are made to Russia, and the volume of financial transactions of ten billions of dollars coming to Russia through imports from the energy sector is the main dominance.

The annual volume of transactions of Russian banks with trading partners is estimated at a hundred billions of dollars. Due to the use of the SWIFT system, a Russian investor writes an order for banking operations in the message box of this institution and receives a response.

Expulsion from SWIFT is not only a mechanism of economic isolation but also a factor of legitimacy. This means that the state has become a serious source of danger for the world, and no state wants to enter into civil banking transactions with it. It gives a clear idea of the degree of dangerousness of the state.

Examples of expulsion from SWIFT

There are states and unions in the world that not only do not have the same political, military, and economic interests but are also in deep conflict at the level of confrontation. Because of these negative attitudes, they do not use a tool like SWIFT. Even the world community has not taken this step against North Korea. A similar step was taken only against Iran and Venezuela. Iran was expelled from SWIFT in 2014. However, it was restored two years later, and in 2018, it was expelled again. It was after its expulsion from SWIFT that the trade volume of the Islamic Republic of Iran decreased by 1/3. This was a very serious figure.

Expectations and forecasts

As we know, Russia is one of the most important importers of processed products. According to the World Bank, since the Netherlands and Germany are Russia's top five trading partners, Russia's expulsion from SWIFT will create certain problems for those countries as well.

Of course, Russia's expulsion from SWIFT will not be the end of the world. There are corporate associations in the world that carry out similar activities. Iran and China have such operating systems. It does not mean that serious banking operations will be dropped to zero but that Russia will not breathe easily.

If Russian banks are not in this system, foreign partners will consider it riskier to send goods to Russia, and these goods will automatically become more expensive. This means that after this step, prices for goods and services in Russia will rise sharply.

Opportunities to put pressure on the ruble in the monetary sphere will increase. Against the background of declining banking operations, the size of the illegal economy will expand. Inflation can even be three digits. The probability of devaluation will increase. Social conditions will worsen.

I am against presenting the impact of SWIFT as greater than it really is. But its effects are not local. It is as if you are isolating your economy, including its "vascular system," from the global banking system. This means that the expulsion from SWIFT is not only a way to the collapse of the banking system of a state but also a factor that strengthens the elements of the economic downturn. There will be long-term panic and severe price fluctuations on the stock exchanges. This process will continue until the economic plane lands on stable rails.

Mammad Talibli