What is SWIFT financial system? Know how US, EU can use it to hurt Russia’s economy

The tensions between Russia and Ukraine are currently running high, with war-like situations and devastations arising from the latter after the Russian forces began launching attacks inside the Ukrainian borders with the intention of invasion.

Amid this, the United States, European Union, and the United Kingdom have imposed several rigorous sanctions on Russia, mainly targeting its financial sector, banks, politicians, and the import and export services of the country.

Amid this, the US and EU have further threatened Russia with the exclusion from SWIFT, which can deeply impact the economy and financial services of the country amid the current conflicts with neighbouring Ukraine.

SWIFT can cause a major problem for Russia when it comes to managing international finances, and the country's exclusion from the system could have a major impact on its financial and banking sector.

What is SWIFT?

The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, was founded in 1973 in Brussels and was supported by 15 countries. Interestingly, SWIFT doesn't handle any transfers of funds itself.

SWIFT’s messaging system, developed in the 1970s to replace relying upon Telex machines, provides banks the means to communicate rapidly, securely, and inexpensively. The non-listed, Belgium-based firm is actually a cooperative of banks and proclaims to remain neutral, according to AFP reports.

The countries that use the SWIFT system have banks rely on it for sending standardised messages about transfers of sums between themselves, transfers of sums for clients, and buy and sell orders for assets. SWIFT has become the backbone of international finance, being used by over 11,000 financial institutions in over 200 countries.

Russia’s exclusion from SWIFT

As per the news agency AFP, Russia is the second-largest country following the United States in terms of the number of users, with some 300 Russian financial institutions belonging to the system. Russia is deeply relying on SWIFT as more than half of its financial institutions use the system.

Cutting off Russia from SWIFT could also cut it out of the financial markets of other countries. It would also make it hard for pay for imports and receive payment for exports, which is bound to impact the supply and make goods more expensive in the country.

Though Russian banks have the option to use an alternative messaging system such as phones, messaging apps, or email to make payments via banks in other countries which have not yet imposed such sanctions, these methods can be significantly less secure and efficient.

(With inputs from agencies)