Payments: Russia's Swift ban may prove to be a double-edged sword

For days, Western politicians have been campaigning for Russia to be excluded from the Swift global payment system if Moscow attacks Ukraine.

The comparisons range from the "sharpest sword" to the "financial atomic bomb".

But excluding Russia from the global payments network, which includes 11,000 banks from more than 200 countries, could prove to be a double-edged sword.

Because the United States' access to the network, which is organized as a cooperative and is based in Belgium, has long caused frustration and has prompted Russia and China to build alternatives to Swift.

Markus Fruehauf

Editor in Business.

• Follow I follow

Even Swift should not be happy about the current discussions. On Monday, the network said it was neutral and operated for the benefit of its members. "The decision to impose sanctions on countries or individual entities rests solely with the relevant government agencies and legislators," Swift said. One of the few politicians who expressed concerns about Russia's Swift exclusion these days was CDU chairman Friedrich Merz. "Questioning Swift could be the nuclear bomb for the capital markets and also for goods and services relations," he said at the weekend. Swift's strength lies precisely in its independence. As a political pawn, however, this is undermined.

This has also led to considerations in the EU to examine alternatives for its own payment network.

In August 2018, the then German Foreign Minister Heiko Maas (SPD) and the French Economics and Finance Minister Bruno Le Maire spoke out in favor of setting up a European payment system in order to bypass the Swift system controlled by the United States.

At that time, the President in the White House was still Donald Trump, whose demeanor increased the need for more independence in the EU.

Does the NSA monitor payment transactions?

The desire of American authorities to gain access to the Swift data had already caused a dispute after the September 11, 2001 terrorist attacks. To protect EU citizens and their data, the EU and the US signed a Swift agreement. According to this, US authorities should only have access to EU data after Europol, as the control authority, has approved the request. But doubts have been raised since Edward Snowden, a former NSA operative, hinted in 2013 that his former employer was still monitoring Swift.

Undoubtedly, expulsion from the Swift system would be a blow to Russia's economy. Because the country's banks would be excluded from the international flow of money. For the Russian economy, which is dependent on raw material exports, the movement of goods and payments with other countries would be significantly more difficult. But that would also affect the EU and especially Germany as an important trading partner of Russia. After all, EU banks have claims of 56 billion dollars on Russian customers. And the Russian economy is significantly larger than Iran's.

In the dispute over its nuclear program, Iran was excluded from Swift from 2012 to 2016.

In November 2018, Swift again had to lock out some Iranian banks due to US sanctions.

This makes payment transactions more difficult because the institutes have to switch to other locations such as Dubai, which is expensive and cumbersome.

European banks are forced to comply with US sanctions because they need access to the dollar.

Around 60 percent of world trade is handled through it.

Washington leverage

The most important access point is the Swift payment system, through which every second large cross-border payment is made. Swift has been established as a network since 1973. The cooperative is owned by the banks and overseen by the central banks of the G-10 countries. The abbreviation Swift stands for "Society for Worldwide Interbank Financial Telecommunication". The Swift transfers are based on messages among banks, more than 40 million daily. A key Washington leverage is Swift's operational center in Virginia, the closure of which in the event of US sanctions violations could spell the deathblow for the payments network.

However, Swift is not only under pressure because of political instrumentalization, but also because of new transfer alternatives, which are increasingly based on blockchain technology. The desire among banks for Swift alternatives has increased after the network played a decisive role in hacker attacks such as on the central bank in Bangladesh in February 2016.

The constant threat of a Swift ban has accelerated efforts by China and Russia, geopolitical opponents of the United States, to build alternative payment systems.

In Russia it is called the System for Transfer of Financial Messages (SPFS).

It will be years before these networks can guarantee smooth payment transactions comparable to Swift.

But as a political pawn, Swift does not live up to its own claim of neutrality in the long run.