What is the SWIFT payments system and why is it being used to sanction Russia?

What exactly is SWIFT and why did this part of the financial system become a major factor in the international response to Russia’s invasion of Ukraine? We explain and look at some ways people in Australia could be impacted.

If you’ve ever sent money overseas or provided your bank details to someone sending you funds from abroad, there’s a decent chance you would have needed a SWIFT code to complete the transfer.

But as the conflict between Russia and Ukraine continues, SWIFT is being used for a very different purpose. Countries opposing Russia’s invasion have moved to ban a number of Russian banks from the SWIFT international payments system as a form of sanction. The aim is to damage Russia’s economy and force its President, Vladimir Putin, to stop military activity in Ukraine.

To find out more about SWIFT and why it’s being used in this way, Canstar spoke to Associate Professor Eliza Wu who is Head of Finance at the University of Sydney Business School.

What is SWIFT?

SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is a system that facilitates the smooth and fast transfer of money internationally. Participating banks across the world each have their own unique SWIFT code which you need to use when transferring money overseas to make sure the funds goes to the right place. SWIFT can be used for payments between individuals, and by companies and other large organizations engaging in international trade.

Associate Professor Wu explained that SWIFT is not a financial institution itself, but rather a network that connects thousands of banks globally.

“It really just is plumbing in the system,” she said. “It’s a messaging system that enables international payment transfers and it works really efficiently. On a daily basis, you have over 40 million messages being exchanged between banks using SWIFT and trillions of dollars being transferred cross-border between banks. “

She said the system was set up so that international payments could be organised collectively by the banking system, rather than being run as a monopoly by one country. SWIFT, which is based in Belgium, says it is a strictly neutral organisation, meaning it does not take sides when there are disputes. However, as is now happening, groups of countries can act collectively to remove particular banks from the system.

Why is SWIFT being used as a sanction against Russia?

The banning of some of its banks from using the SWIFT system could cause a lot of disruption to the Russian economy.

“The reason this is so powerful is because it’s much more difficult to receive payments if you’re out of that system,” according to Associate Professor Wu.

She said Russia’s economy relies heavily on exporting oil, gas, grains and other commodities and the exclusion of some major banks from SWIFT would make it slower and expensive for the country to sell these goods overseas. It could also impact Russia’s ability to import goods it needs.

“Russia relies a lot on manufactured goods coming in and they won’t be able to pay for those through this international system, so it’s effectively killing off their international trade with the world if they can’t access the payments system.”

But there could be costs for other countries too, and restricting Russian banks from the SWIFT system was seen as an extreme measure.

“The concern for Europe – and this is why they were reticent in introducing the ban initially – is because they are heavily reliant on these exports from Russia, they want to be able to continue to be able to pay for these goods through the SWIFT system and not have shortages in energy or crazy food prices coming through due to shortages.”

While banning certain Russian banks from the SWIFT system was viewed by many as a big development in the current conflict, some experts have argued it will have a limited practical impact and it is more of a symbolic action, because alternative systems for transferring money exist.

Could the banning of some Russian banks from SWIFT have an impact in Australia?

Associate Professor Wu said it could be much harder for people in Australia looking to send money to Russia or receive a payment from there.

“It’s not impossible, but harder in the sense that it’s going to be more costly to do that,” she said.

“There are alternative payment systems and routes you can still utilise, and remember this is not a blanket ban as yet, so there will be some Russian banks that are not yet cut off from the system that will still be able to take payments.”

She said the Russian Central Bank had established its own “rudimentary international payment system”, which some international banks participate in but only a small fraction of those that are part of the SWIFT network.

Your bank or international money transfer provider may be able to advise you on your current options.

Beyond money transfers, Australian companies that trade with Russia could be affected, and we may even see price rises for consumers if the cost of some imports increases.

“Global energy prices have already jumped and will continue to do so because Russia was a major supplier of oil and gas and now there will be more competition for the alternative suppliers…and that is going to flow through to costs that we’ll have to face in Australia and the rest of the world,” Associate Professor Wu said.

More broadly, Reserve Bank of Australia governor Philip Lowe said the war in Ukraine is “a major new source of uncertainty”, with rising commodity prices being one of the impacts felt so far. For now, however, he said the Australian economy “remains resilient”.

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