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Swift banking: How would Italy’s ban sanction Russia?

Since Italy supported a ban on Russia from the Swift global payments system, here's what that entails and how it would act as a sanction on Russia.

Swift banking: How would Italy's ban sanction Russia?
A person waves the Ukrainian flag during a demonstration against Russia's invasion of Ukraine, in the northern city of Milan, on February 26, 2022. (Photo by Tiziana FABI / AFP)

In the latest round of sanctions against Russia, Italy and other Western allies agreed to cut Russia out of the Swift payments system.

The group of world powers said in a statement it was “resolved to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies.”

Exclusion from Swift, a very discreet but important cog in the machinery of international finance, is one of the most disruptive sanctions the West has deployed against Russia for its invasion of Ukraine.

The move had been threatened in recent weeks by the European Union and other Western allies as a means of escalating punishment of Russia for its aggressions against its ex-Soviet neighbour.

READ ALSO: Italy and France back blocking Russia from Swift banking system

On Saturday, as the Russian military stepped up its assault on Ukrainian cities, Western powers sought to debilitate the country’s banking sector and currency by cutting selected banks from the international system used to transfer money, severely hamstringing Russia’s ability to trade with most of the world.

Italy and France backed the measure, with Germany shortly after also pledging its support, albeit in a slightly more cautious manner due to fears of the collateral damage such a move would create.

The United States, Canada, the European Commission and Britain have also given their support.

READ ALSO: How Italy could be impacted by Russia’s invasion of Ukraine

Wealthy Russians connected to President Vladimir Putin’s government will also no longer be allowed to use the so-called golden passport system to obtain European citizenship for themselves and their family members.

Ukrainian military vehicles drive through Kyiv.

Ukrainian military vehicles drive through Kyiv. (Photo by Daniel LEAL / AFP)
 
 

What is Swift?

Founded in 1973, the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, actually doesn’t handle any transfers of funds itself.

But its 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.

What does Swift do?

Banks use the Swift system to send standardised messages about transfers of sums between themselves, transfers of sums for clients, and buy and sell orders for assets.

More than 11,000 financial institutions in over 200 countries use Swift, making it the backbone of the international financial transfer system.

But its preeminent role in finance has also meant that the firm has had to cooperate with authorities to prevent the financing of terrorism.

READ ALSO: Is Italy pushing to exclude luxury goods sales to Russia from EU sanctions?

A Ukrainian serviceman holds a rocket-propelled grenade launcher

A Ukrainian serviceman holds a rocket-propelled grenade launcher on his position on the front line near Novognativka village, Donetsk region on February 20th, 2022. Anatolii STEPANOV / AFP

Who represents Swift in Russia?

According to the national association Rosswift, 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.

More than half of Russia’s financial institutions are members of Swift, it added.

Russia does have its own domestic financial infrastructure, including the SPFS system for bank transfers and the Mir system for card payments, similar to the Visa and Mastercard systems.

Are there precedents for excluding countries?

In November 2019, Swift “suspended” access to its network by certain Iranian banks.

The move followed the imposition of sanctions on Iran by the United States and threats by then-Treasury Secretary Steven Mnuchin that Swift would be targeted by US sanctions if it didn’t comply.

Iran had already been disconnected from the Swift network from 2012 to 2016.

Is it a credible threat?

Tactically, “the advantages and disadvantages are debatable,” Guntram Wolff, director of the Brussels-based Bruegel think tank, told AFP.

In practical terms, being removed from Swift means Russian banks can’t use it to make or receive payments with foreign financial institutions for trade transactions.

OPINION: This is Russia’s war, but we Europeans need to learn fast from our mistakes

“Operationally it would be a real headache,” said Wolff, especially for European countries that have considerable trade with Russia, which is their single biggest supplier of natural gas.

Western nations threatened to exclude Russia from Swift in 2014 following its annexation of Crimea.

But excluding such a major country – Russia is also a major oil exporter – could spur Moscow to accelerate the development of an alternative transfer system, with China for example.

What does Italy say about the move?

Italy’s prime minister Mario Draghi reaffirmed his support to Ukraine’s president Volodymyr Zelensky on Saturday.

“Italy fully supports and will continue to support the European Union’s line on sanctions against Russia, including those regarding Swift,” he said in a phone call, later published in a statement.

Draghi added that Italy “will provide Ukraine with assistance to defend itself”.

The decision to cut off Russia from the Swift banking system marked a revision of the country’s earlier stance, which was much more cautious.

Italy had been heavily criticised for its reservations, with former European Council President Donald Tusk saying some EU governments had “disgraced themselves” by blocking “tough decisions”.

Along with some other EU leaders, Draghi has reportedly struggled to commit to such measures due to fears about how the sanctions would impact the economy, reliant as it is on Russian gas exports.

EU foreign ministers are due to meet on Sunday evening to discuss further sanctions.

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ENERGY

How long will it take Italy to wean itself off Russian gas?

Italy's government has repeatedly said it plans to end its dependence on Russia for gas supplies following the invasion of Ukraine. But as the timeline keeps changing, when and how could this happen?

How long will it take Italy to wean itself off Russian gas?

Italy is heavily dependent on Russian gas, but has been seeking new sources since Moscow’s invasion of Ukraine as part of an effort to end this reliance in the coming years.

But it remains unclear whether Italy can really end its dependence on Russia for its gas supply – or when this might be feasible.

READ ALSO: What does Italy’s Algerian gas deal mean for energy supplies?

The government has been seeking new sources since Moscow’s invasion of Ukraine, including with a recent deal to boost supplies from Algeria.

Prime Minister Mario Draghi said last week the country could be independent of Russian gas by the second half of 2024 – the latest in a series of changing estimates.

“Government estimates indicate that we can make ourselves independent from Russian gas in the second half of 2024,” Draghi told the Senate, while adding that the “first effects” of this plan would be felt by the end of this year.

He said his government was also seeking to boost its production of renewable energy, including by “destroying bureaucratic barriers” to investment, saying it was the “only way” to free Italy from having to import fossil fuels.

Explained: Why and how Italy will pay for Russian gas in rubles

In April, Italy‘s Ecological Transition Minister Roberto Cingolani estimated the country would no longer need Russian gas within 18 months, following an earlier prediction that it could take until 2025.

Italy is one of Europe’s biggest users and importers of natural gas, importing 90 percent of its gas supply with 45 percent of that coming from Russia – up from 27 percent ten years ago.

Italy now imports 29 billion cubic metres of Russian gas a year, which Cingolani said in March “must be replaced” – but he didn’t specify with what.

Analysts have said there are “a lot of questions” about how helpful Italy’s gas deal with Algeria will be.

Despite its vast natural gas reserves, Algeria is already exporting at close to full capacity.

Draghi repeated his strong support for EU sanctions on Moscow last week, including a proposed ban on imports of Russian oil, although this is currently being blocked by Hungary.

“We must continue to keep up the pressure on Russia through sanctions, because we must bring Moscow to the negotiating table,” he said.

But for now, Italian energy giant Eni says it plans to pay for Russian gas supplies in rubles, meeting a demand from Vladimir Putin.

It was not immediately clear whether the plan would fall foul of European Union sanctions, although Eni said it was “not incompatible”.

The company said its decision to open the accounts was “taken in compliance with the current international sanctions framework” and that Italian authorities had been informed.

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