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