On Thursday, President Joe Biden announced new sanctions against Russia in response to President Vladimir Putin's decision of invasion Ukraine. He said that they would be "more consequential" than any one of the strongest options he could pursue.
Biden did not announce that the U.S. would impose a severe financial penalty on Russia, but that it could be kicked out of SWIFT's banking system.
Biden said that it was always an option, but right now, it is not the position the rest of Europe wants to take.
It would be a shocking move against one the largest economies in the world if and when it happens, as some analysts have compared it to a " nuclear option".
What is SWIFT?
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a cooperative of financial institutions that was established in 1973 and has its headquarters in Belgium. The National Bank of Belgium oversees it in partnership with other central banks such as the Bank of England, the Bank of America, and the European Central Bank.
SWIFT doesn't transfer money and is not a bank. It acts more as a secure messaging platform that links over 11,000 financial institutions across 200 countries and territories. This alerts banks when transactions will occur. For example, U.S. banks use unique SWIFT codes to allow customers to make wire transfers into the U.S. dollars.)
SWIFT reported that it received an average of 42,000,000 messages per day in 2018, an 11 percent increase over the 2020 period, when Russia accounted 1.5 percent of transactions.
What effect would this have on Russia?
The U.S. and its European allies would consider cutting Russia from the SWIFT financial network one of their most difficult financial moves. This could cause serious economic damage to Russia's economy in the short and long-term. This could result in Russia being cut off from international financial transactions. It would also include profits from gas and oil production which accounts for more than 40% of Russia's revenue.
Both sides of the Atlantic also offered the SWIFT option when Russia annexed Crimea in 2014. They also supported separatist forces in Ukraine. Russia declared that the expulsion of SWIFT from Russia would constitute a declaration war. The idea was abandoned by the allies.
Russia has attempted to create its own financial transfer system since then, but with limited success.
The U.S. has successfully persuaded SWIFT to expel Iran from its network, as it did before with the nuclear program. However, kicking Russia from SWIFT would be a major economic loss for the U.S. as well as its key ally, Germany.
Is Russia likely to be relegated from SWIFT in the near future?
Some U.S. lawmakers would like the U.S. immediately to act, but Biden stated Thursday that he prefers to use a series of new sanctions to target Russian banks and Putin's billionaire supporter.
According to the U.S. Treasury Department, all Russia's major financial institutions, including Sherbank, VTB Bank and VTB Bank, would be affected. The ability of both state-owned and privately owned entities to raise capital will also be affected. This would cut off access to the U.S. Dollar for large parts of Russia's economy and financial system.
Janet Yellen, Treasury Secretary, stated that "Treasury has taken serious and unprecedented actions to bring swift and severe sanctions to the Kremlin" and to significantly impair their ability use the Russian economy or financial system to support their malign activities.
Biden noted that he would need to have the support of his European counterparts to pull Russia's SWIFT credentials. They seem less enthusiastic about such a drastic step. Russia is still a major energy supplier to Europe.
SWIFT stated in a 2014 statement that it was a neutral global cooperative and that any decision to impose sanctions against countries or individuals rests with the relevant government bodies and legislators.
If the U.S. and its allies aren't willing to support Russia's withdrawal from SWIFT then Biden can unilaterally impose a Federal Reserve move to stop Russian companies accessing U.S. Dollars.
D-Calif. House Intelligence Committee Chairman Adam Schiff (D-Calif.) expressed support for Biden’s harsh sanctions, but stated on MSNBC that the administration could go further and force Russia out SWIFT. If European countries refuse to agree to harsher financial penalties, the U.S. should take unilateral action.
Hagar Chemali is an expert on sanctions and was also the Director for Syria and Lebanon at The National Security Council under the Obama administration. She said that the most recent round of sanctions are "very strong".
However, it is difficult to determine if these sanctions will be more severe on Russia than the SWIFT option. This is because of the backlash that you'd have from isolating Russia SWIFT. This is usually reserved for countries like Syria or Iran.
