Chatter around the Society for Worldwide Interbank Financial Telecommunication (SWIFT) has been picking up after President Joe Biden issued additional sanctions to Russia yesterday. However, Biden held back from announcing any outright ban of Russia from SWIFT. Meanwhile, leaders from Ukraine and the United Kingdom are pushing for the removal of Russia from the payment system. So, what exactly is the SWIFT payment system? And what might Russia’s removal from it mean for bank stocks?
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What Is the SWIFT Payment System?
SWIFT is a global messaging system that delivers secure messages between more than 11,000 institutions in over 200 countries and territories. It is a member-owned collective founded in Brussels in 1973, and it is vitally important infrastructure for financial institutions. Indeed, last year the system recorded an average of 42 million messages per day. These messages include “orders and confirmations for payments, trades and currency exchanges.” While SWIFT doesn’t physically move the money, the system moves information about the money, which is critical for transactions.
Could a Removal of Russia From SWIFT Affect Bank Stocks?
A removal of Russia from SWIFT could affect bank stocks in the U.S. However, Russia would ultimately face the most damage. If SWIFT is restricted, U.S. institutions doing business with Russian institutions could face difficulties in sending and receiving money. Maria Shagina, a fellow at the Finnish Institute of International Affairs, wrote in a research paper that: “The cutoff would terminate all international transactions, trigger currency volatility, and cause massive capital outflows.”
Furthermore, a similar situation has occurred before. In 2012, Iran banks were cut off from SWIFT access after its nuclear program violated policy. After this, Iran lost nearly half of its oil export revenue and 30% of foreign trade.
Furthermore, according to Shagina, U.S. and German banks may feel the strongest effects if Russia is removed from SWIFT. This is because these two countries communicate most with Russian banks via SWIFT. However, the global economy would likely see a trickle effect from the removal of Russia from SWIFT. Russian lawmakers have stated that the removal could stop shipments of gas, oil and metals to Europe. Nikolai Zhuravlev, a Russian upper house parliament member, explained the potential consequences:
“If Russia is disconnected from SWIFT, then we will not receive [foreign] currency, but buyers, European countries in the first place, will not receive our goods — oil, gas, metals and other important components.”
For now, no sanctions regarding Russia’s use of SWIFT have been announced. However, it still seems to be a possibility on the table even though the removal would certainly have a ripple effect across the global economy.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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