In the latest round of sanctions against Russia, Germany and other Western allies agreed to remove Russia from the Swift payment system.
The group of world powers said in a statement it was “determined to impose charges on Russia that will further isolate Russia from the international financial system and our economies.”
Exclusion of Swift, a very discreet but important cog in the machinery of international finance, is one of the most disruptive sanctions the West has imposed on Russia for its invasion of Ukraine.
ALSO READ: Germany closes airspace for Russian planes on Sunday
In recent weeks, this move has been threatened by the European Union and other Western allies in order to punish Russia for its aggression against its ex-Soviet neighbour.
As the Russian military ramped up its assault on Ukrainian cities on Saturday, Western powers attempted to weaken the country’s banking sector and currency by removing selected banks from the international system used to transfer money, reducing Russia’s ability to interact with the most of the world trade was severely hindered.
Italy and France supported the measure, while Germany also pledged its support shortly after, albeit in a slightly more cautious manner for fear of the collateral damage such a move would cause.
German leaders said they were working to exclude Russia from the Swift interbank system in a “targeted and functional” way.
The United States, Canada, the European Commission and Great Britain have also expressed their support.
EXPLAINED: How the crisis in Ukraine could affect Germany
Rich Russians with ties to President Vladimir Putin’s government will also no longer be allowed to use the so-called gold passport system to obtain European The throwdowntvship for themselves and their family members.
What is Swift?
Founded in 1973, the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, does not process money transfers itself.
But the messaging system, developed in the 1970s to replace reliance on Telex machines, provides banks with the means to communicate quickly, securely and cheaply.
The privately held Belgium-based company is actually a cooperative of banks and claims to remain neutral.
What does Swift do?
Banks use the Swift system to send standardized messages about mutual transfers, transfers for customers, and buy and sell orders for assets.
More than 11,000 financial institutions in more than 200 countries use Swift, making it the backbone of the international financial transfer system.
But its preeminent role in finance also meant that the company had to work with authorities to prevent terrorist financing.
ALSO READ: Germany says EU will punish Putin ‘severely’
Who represents Swift in Russia?
According to the national association Rosswift, Russia is the second largest country after the United States in terms of 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 has its own domestic financial infrastructure, including the SPFS bank transfer system and the Mir card payment system, 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 from then Treasury Secretary Steven Mnuchin that Swift would be the target of US sanctions if it did not comply with the measures.
Iran had been disconnected from the Swift network from 2012 to 2016.
Is it a credible threat?
Tactically, “the pros and cons are debatable,” Guntram Wolff, director of Brussels-based think tank Bruegel, told AFP.
Practically speaking, Swift’s removal means that Russian banks cannot use it to make or receive payments with foreign financial institutions for commercial transactions.
OPINION: This is Russia’s war, but we Europeans must learn quickly from our mistakes
“Operationally, it would be a real headache,” Wolff said, especially for European countries that have significant trade with Russia, their largest supplier of natural gas.
Western countries threatened to exclude Russia from Swift in 2014 after the annexation of Crimea.
But excluding such a large country – Russia is also a major oil exporter – could prompt Moscow to accelerate the development of an alternative transfer system, for example with China.
What does Germany say about the move?
Banks affected by the new measures are “all those banks that have already been sanctioned by the international community, as well as other institutions, if necessary,” a German government spokesman said in a statement.
“This is intended to cut off these institutions from international financial flows, which will greatly limit their global operations,” he added.
The allies also agreed to impose restrictive measures to prevent Russia’s central bank from “using international financial transactions to support the ruble,” he said.
Germany has previously shown hesitation to back the move – earlier this week, German Finance Minister Christian Lindner said he was “open” to including Swift in the EU’s response package to sanctions, but expressed concern about the the country’s heavy dependence on Russian gas.
Blocking Russia from Swift by Germany “would mean that there is a high risk that Germany will no longer receive gas and raw materials from Russia,” he added.
But authorities have since revised their position and agreed to support the move in an effort to step up sanctions against Russia.
EU foreign ministers will meet on Sunday evening to discuss further sanctions.