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Explainer: After its troops moved into Ukraine, banks in Russia have been removed from the SWIFT international payment system. What are the implications?

SWIFT Payment System

As part of the sanctions announced by the US, UK, Germany and their allies the Russian banks have been disconnected form the SWIFT international payment system.  The move is expected to choke Russia’s financial payment mechanism and dent its cross border trade relations.

What is Swift payment system?

The Swift payment system, with more than 11000 banks and financial institutions is a secure messaging system. The Swift website says that the system collaborates with banks and financial institutions to enable end to end securities tracking and accelerate digital transformation. Through this system banks can access all messages relating to monetary transfers and other critical financial transactions. This helps in faster and a hassle-free transactions especially for international dealings.

When was this payment system created?

The Swift payment system was created in Belgium in 1973. The system is now managed by the G-10 central banks. The BBC said that the Swift payment system is overseen by the National Bank of Belgium, in partnership with major central banks around the world – including the US Federal Reserve and the Bank of England.

How will the sanction related to banning of Russian banks to access Swift impact?

The ban would mean that Russian banks and companies will not be able to access the relevant data and information. This would make it difficult for Russia to deal in trade activities with the western countries. Data suggests that Russia, until the sanctions, has been the second-most users after the US. About 300 Russian financial institutions are connected to the Swift payment system.

Will this put a halt to Russia’s international transactions?

The ban will impact Russia’s international dealings and trade but will not fully cripple the system. Russia can skirt the system and use other channels of payment mechanism. For example, it is already looking at trading with China skirting the system.