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Swift banking: how would Italy’s ban punish Russia?

In the latest round of sanctions against Russia, Italy and other Western allies agreed to take Russia out of the Swift payment system.

The group of world powers said in a statement it was “determined to impose charges on Russia that will further isolate Russia from the international financial system and our economies.”

Exclusion of Swift, a very discreet but important cog in the machinery of international finance, is one of the most disruptive sanctions the West has imposed on Russia for its invasion of Ukraine.

In recent weeks, this move has been threatened by the European Union and other Western allies in order to punish Russia for its aggression against its ex-Soviet neighbour.

ALSO READ: Italy and France block Russia back from Swift banking system

On Saturday, as the Russian military stepped up its attack on Ukrainian cities, Western powers attempted to weaken the country’s banking sector and currency by removing selected banks from the international system used to transfer money, reducing Russia’s ability to trade with most of the world was severely hindered.

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Italy and France supported the measurewith Germany shortly afterwards also pledging its supportalbeit in a slightly more cautious manner for fear of the collateral damage such a move would cause.

The United States, Canada, the European Commission and Great Britain have also expressed their support.

ALSO READ: How Italy could be affected by the Russian invasion of Ukraine?

Rich Russians with ties to President Vladimir Putin’s government will also no longer be allowed to use the so-called gold passport system to obtain European The Vanir-exodusship for themselves and their family members.

Ukrainian military vehicles drive through Kiev.

Ukrainian military vehicles drive through Kiev. (Photo by Daniel LEAL / AFP

What is Swift?

Founded in 1973, the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, does not process money transfers itself.

But the messaging system, developed in the 1970s to replace reliance on Telex machines, provides banks with the means to communicate quickly, securely and cheaply.

The privately held Belgium-based company is actually a cooperative of banks and claims to remain neutral.

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What does Swift do?

Banks use the Swift system to send standardized messages about mutual transfers, transfers for customers, and buy and sell orders for assets.

More than 11,000 financial institutions in more than 200 countries use Swift, making it the backbone of the international financial transfer system.

But its preeminent role in finance also meant that the company had to work with authorities to prevent terrorist financing.

ALSO READ: Is Italy pushing for the exclusion of sales of luxury goods to Russia from EU sanctions?

A Ukrainian soldier holds a rocket-propelled grenade launcher

A Ukrainian soldier holds a rocket-propelled grenade launcher at its frontline position near the village of Novognativka, Donetsk region on Feb. 20, 2022. Anatolii STEPANOV / AFP

Who represents Swift in Russia?

According to the national association Rosswift, Russia is the second largest country after the United States in terms of number of users, with some 300 Russian financial institutions belonging to the system.

More than half of Russia’s financial institutions are members of Swift, it added.

Russia has its own domestic financial infrastructure, including the SPFS bank transfer system and the Mir card payment system, similar to the Visa and Mastercard systems.

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Are there precedents for excluding countries?

In November 2019, Swift “suspended” access to its network by certain Iranian banks.

The move followed the imposition of sanctions on Iran by the United States and threats from then Treasury Secretary Steven Mnuchin that Swift would be the target of US sanctions if it did not comply with the measures.

Iran had been disconnected from the Swift network from 2012 to 2016.

Is it a credible threat?

Tactically, “the pros and cons are debatable,” Guntram Wolff, director of Brussels-based think tank Bruegel, told AFP.

Practically speaking, Swift’s removal means that Russian banks cannot use it to make or receive payments with foreign financial institutions for commercial transactions.

OPINION: This is Russia’s war, but we Europeans must learn quickly from our mistakes

“Operationally, it would be a real headache,” Wolff said, especially for European countries that have significant trade with Russia, their largest supplier of natural gas.

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Western countries threatened to exclude Russia from Swift in 2014 after the annexation of Crimea.

But excluding such a large country – Russia is also a major oil exporter – could prompt Moscow to accelerate the development of an alternative transfer system, for example with China.

What does Italy say about the move?

Italian Prime Minister Mario Draghi reiterated his support for Ukrainian President Volodymyr Zelensky on Saturday.

“Italy fully supports and will fully support the European Union’s line on sanctions against Russia, including those related to Swift,” he said in a telephone conversation, later published in a statement

Draghi added that Italy “will help Ukraine to defend itself”.

The decision to cut Russia off from the Swift banking system marked a revision of the country’s previous stance, which was much more cautious.

Italy had been heavily criticized for its reservations, with former European Council President Donald Tusk saying some EU governments had “disgraced themselves” by blocking “difficult decisions”.

Along with some other EU leaders, Draghi has reportedly struggled to commit to such measures over fears of the impact of the sanctions on the economy, which relies on Russian gas exports.

EU foreign ministers will meet on Sunday evening to discuss further sanctions.

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