As part of economic sanctions imposed on Russia, the United States and other countries are barring certain Russian banks from the network used to exchange messages that accompany major cross-border financial transactions. The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is used by large financial institutions and governments to exchange information about rapid money transfers such as those traversing the Federal Reserve's Fedwire service.
Known as a financial services utility, SWIFT is critical to conducting global business and finance. Being shut out of the SWIFT network will make it difficult for Russian financial institutions, businesses, and ultimately individuals to pay for imports, receive payment for exports, and borrow or invest overseas. Though there are concerns that Russian financiers will devise ways to circumvent SWIFT through other messaging services, the available alternatives do not have nearly the reach of SWIFT, a member-owned cooperative that connects more than 11,000 financial institutions and corporations in more than 200 countries and territories, according to SWIFT’s website.
This episode is not the first time SWIFT has cut off users as part of economic sanctions. SWIFT removed Iranian banks in 2012 after the European Union sanctioned them over the country's nuclear program. After removal from SWIFT, Iran suffered declines in oil export revenue and foreign trade, though how much of that impact resulted from the SWIFT exclusion alone is difficult to quantify.
The Federal Reserve System has connections to SWIFT in the processing of high-value transactions among financial institutions and governments, said Nell Campbell-Drake, vice president, industry relations, Federal Reserve Financial Services Retail. SWIFT, she explained, does not actually transmit the payments themselves. Rather, the service allows users to exchange the information that makes the settlement and reconciliation of the transactions possible—information such as account information and payment amounts for both payers and recipients.
A key reason why SWIFT is central to global commerce is that it serves as a sort of global translator. The service provides a standardized technology platform so financial institutions that do business in many currencies, languages, and technology protocols can smoothly exchange payment information.
SWIFT is based in Belgium and has offices in 26 countries, including US locations in Miami and New York City. The Miami office serves as SWIFT’s Latin American headquarters. The nonprofit cooperative was founded in 1973 by 239 banks from 15 countries and began operating in 1977. SWIFT replaced the Telex technology that previously was widely used by banks to trade instructions related to transnational financial transfers.
Charles Davidson
Staff writer for Economy Matters