What would be the consequences of Russia’s exclusion from SWIFT?

Who is allowed to use SWIFT?

SWIFT is a global messaging system for banks that connects more than 11,000 banks in 200 countries. Banks around the world use SWIFT to pass on information about payments they have been instructed to make. More than 95 percent of cross-border payments are processed through this system. SWIFT sets minimum requirements for banks, so in principle any reputable financial institution that complies with laws and security regulations can participate. Only the respective national supervisory authority can restrict this.

Why can the U.S. impose major restrictions on SWIFT?

Most payment instructions across borders are made in dollars. These payments are then made via U.S. correspondent banks, even if the transfer itself does not originate in the U.S. or is not intended to go there. The purpose of the transfer must always be disclosed. The correspondent banks then have the obligation to check the payments against existing requirements and to report questionable payments. If necessary, payments may even be confiscated, and in the event of misuse, accounts of foreign correspondent banks may also be closed.

90 percent of SWIFT payments are settled in U.S. dollars and are therefore also verified by U.S. correspondent banks. This is an important fact to understand why the U.S. enjoys supremacy in the international financial market. If companies, states or banks try to evade the audits and controls and they get caught, they willingly pay extremely high penalties – anything is better than having to accept restrictions or even being kicked out of the SWIFT system.

Can states, banks and companies escape U.S. influence in the financial market?

So far, the U.S. government has applied its sanctions regime to foreign banks, but not to payments that are not denominated in dollars. U.S. correspondent banks and their strict regulations can be circumvented by companies and their business partners if they agree on another currency.
However, a dollar ban would already have drastic consequences for Russia. The Russian stock market would collapse because foreigners would no longer be able to invest. As a result, the population would have to do without many imported goods, such as German cars.
If the U.S. instructs SWIFT to completely sever ties with Russia, payments to and from Russia can no longer be made – even regardless of the currency. This has already been implemented in a few cases in the past (Iran and North Korea).

What would happen if Russia is excluded from SWIFT?

More difficult access to international financial transactions would slow down payments or prevent them altogether. Exports to and from Russia would collapse. Goods flows would stop, e.g. German companies would stop supplying or servicing machines and co to Russia – and vice versa there would be no more natural gas from Russia for Germany. Investors would withdraw from Russia so that they would not have to bear the export costs. This would noticeably weaken Russia’s already struggling economy, which depends heavily on the gas trade. Average income would be significantly reduced (similar to Iran, where living standards have fallen by an average of 17.7 percent since 2010).

However, in the long term China would step into the gap and further expand its position as Russia’s central trading partner. Financial and goods flows would shift even more toward China. Only recently, the two countries concluded a billion-euro deal for natural gas supplies, making Russia more independent of Europe.

But what would that mean for Europe? 55 percent of German gas consumption is currently sourced from Russia. Since there are only insufficient or very expensive alternatives for this, one can quickly imagine that a SWIFT exclusion of Russia is a double-edged sword and could also have dramatic consequences for Germany and other trading partners…

What would be the consequences for the international financial market if SWIFT were ejected?

Russia has set up a system similar to SWIFT, but currently just 400 banks participate. However, it can only be used for rubles. In the corresponding Chinese system, on the other hand, the yuan is the only currency (while SWIFT is in principle open to all currencies). After all, there are already 1,200 global participants in this one. In the event of sanctions, these systems would have to serve as alternatives and would certainly be expanded in the long run. However, this would endanger the supremacy of the U.S. dollar as its reserve currency and quickly blunt the weapon of SWIFT sanctions – even for other countries – within a few years.

Conclusion: SWIFT exclusion – Fatal for Russia, but also disastrous for other nations

As the US threats would also sanction the EU and Germany in particular, the US can only seek a SWIFT exclusion if it decides to do so jointly with the EU. However, the disastrous consequences, which would entail, among other things, a loss of gas supplies and affect European-Russian exports, make politicians row back. That is why the CDU chairman Friedrich Merz also called the SWIFT ejection an “atomic bomb of the capital markets”.