In today's Finshots we talk about SWIFT and see why removing a country from the messaging platform can be so devastating

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The Story

Sanctions are punitive measures. The idea is to increase the cost of war and dissuade Russia from pursuing the military invasion of Ukraine.

It’s a deterrent of sorts.

If Russia doesn’t cease all military operations, you stop western banks from lending money to agents operating out of the country. If Russia still doesn’t listen, stop supplying them with semiconductors, lasers, sensors, and more. If that doesn’t deter them, freeze all foreign assets linked to the Russian regime.

In effect, sanctions can take many shapes and forms so long as they “punish” Russia. However, most of these options can’t be implemented overnight. Instead, it takes time. Time that Ukrainians don’t have right now.

As you’re reading this, Russia’s military is busy pounding several cities across Ukraine. It recently set an oil terminal ablaze, blew up a natural gas pipeline, and its forces have moved within 20 miles of Kyiv — the capital. Things have gotten out of hand pretty fast and something drastic needs to happen before Kyiv capitulates.

The only viable option?

Western countries will have to go for the jugular with these sanctions. Something along the lines of… “let’s see what happens when we cut Russia off from SWIFT…”

So, what is this SWIFT everyone keeps talking about?

SWIFT, stands for ‘Society for Worldwide Interbank Financial Telecommunication.’ But unlike its tedious long name, its purpose is quite clear. SWIFT acts as a global messaging system relaying instructions from one bank to another.

In other words, moving money internationally from one account to another often involves the participation of multiple intermediaries. And since there are many intermediaries involved you have to get everybody to agree on how to communicate. SWIFT does it for you. In fact, it doesn’t actually move money, but only offers a secure platform to communicate transfer requests between these institutions. It routes payment instructions from one bank to another, allowing them to know how the money should move. And if people and institutions within a country need to effect cross border payments, they’ll probably be relying on SWIFT.

So it’s kind of a big deal. And kicking Russia off of SWIFT can have major repercussions, overnight.

For instance, the Russian economy depends heavily on the export of oil and gas. And their financial institutions rely on SWIFT to execute these transactions. Cutting off Russia entirely from SWIFT would disrupt trade in a big way. And the effects won’t just be limited to the Russian government. Instead, every Russian will feel the impact.

Or at least that is what the West hopes.

However, there are a few caveats. For starters, only a select few Russian banks are expected to be kicked off of SWIFT. Not every bank in Russia. If you’re wondering why — Know that a disruption in trade doesn’t just affect Russia, but also its counterparts — the likes of Germany for instance. So the western countries have to be mindful of the impact while going for the “jugular.”

Also, it’s not like Russia won’t be able to engage in trade the moment they’re kicked off of SWIFT. They’ll still be able to communicate payment instructions. Only, they may have to rely on crude methods or as the White House put it — it will make the country dependent on “the telephone or a fax machine” to make payments.

Then there’s the fact that Russia has already been preparing for these sanctions since 2014 — when they got a taste of it after annexing Crimea — a part of Ukraine. They’ve reduced their dependence on dollar transactions and nurtured a more fruitful relationship with the likes of China. They have also developed their own alternative to SWIFT and while it may not be sophisticated or ubiquitous, it still gets the job done. At least in some cases.

The point here is this — Although Western countries have decided to cut off Russia from SWIFT (at least partially), it may still not be enough to dissuade President Vladimir Putin from backing off.

What will convince him?

Well, if only we knew eh?

Until next time…

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