Elain Brown Tech 03.02.2022 05:Mar AM EST

SWIFT Explained: How Does it Work and How Important Is It?

Recently, President Biden announced that the United States would impose sanctions on Russia. This comes after the latter country initiated acts of aggression against Ukraine.

The U.S., U.K., Canada, France, Germany, Italy, and European allies collectively agreed that the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system will cut off several Russian banks in its system.

The coalition expects that this will keep these banks from being able to operate globally and make it more difficult for them to do business around the world.

What is SWIFT?

According to CNN, SWIFT functions as a global provider of secure financial messaging services.

The company, which was founded in Belgium in 1973, operates its own financial messaging network, known as SWIFTnet. This provides banks, brokers and investment businesses with safe and standardized communication services and software.

The Belgian-based company connects more than 11,000 financial institutions that operate in more than 200 countries and territories, serving as a vital center for international payments.

Last year, the system processed an average of 42 million communications each day, which included payment requests, confirmations, trades and currency exchanges.

Over 1% of the messages are believed to be related to Russian payments. SWIFT is widely regarded as the backbone of international banking.

SWIFT is not a bank. It does not manage accounts for individuals or banks and does not hold third-party funds. It is essentially a messaging system for international payments.

SWIFT is administered by a board of directors with 25 members.

It is a consortium of central banks, including the National Bank of Belgium, the Federal Reserve System of the United States, the Bank of England, the European Central Bank and the Bank of Japan. These central banks are governed by officials from their member banks.

How Does SWIFT Work?

Investopedia describes how SWIFT works.

"Let's assume a Bank of America (BAC) branch customer in New York wants to send money to their friend who banks at the UniCredit Banca branch in Venice. The New York customer can walk into their Bank of America branch with their friend's account number and UniCredit Banca's unique SWIFT code for its Venice branch."

After the transaction is made, "Bank of America will send a payment transfer SWIFT message to the UniCredit Banca branch over the secure SWIFT network. Once Unicredit Banca receives the SWIFT message about the incoming payment, it will clear and credit the money to the Italian friend's account."

How Important Is SWIFT to Russia?

Russian financial institutions were shut off from SWIFT by economic penalties advocated by countries in Eastern Europe and France at the outset of the crisis.

This sanction is designed to have the potential to make it more difficult for Russian firms to complete transactions through SWIFT.

In addition, this also aims to stifle the Russian economy's ability to conduct business outside of its boundaries.

As reported by the Washington Post, some countries have asked for Russia to be cut off totally from the rest of the world, but the German government disagreed. Germany stated that this designated sanction is targeted and functional. The present plan to only cut off several banks from SWIFT will allow Russia to supply oil to its neighboring country.

However, there is also a great threat in cutting out Russia financially from the rest of the world. When blocking all financial connections in Russia, this would mean that the international debt the country has will be left unpaid.

French Finance Minister Bruno Lemaire referred to this as the "financial nuclear option" because this would make it more difficult for European investors to recoup payments on the nearly $30 billion in debt owed to them by Russian corporations and individual debtors.