Financial Sanctions Against Russia and Iran: the use of SWIFT

Swift

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.  SWIFT is not an international organization.  It is instead a cooperative society under Belgian law and it is owned by its member financial institutions…

But the network’s very usefulness means it is increasingly being cast in a new role, as a tool of international sanctions. In 2012 it was obliged, under European law, to cut off access for Iranian banks that had been subjected to sanctions by the European Union. Now there are calls for Russian banks to be banned from SWIFT in response to Russia’s invasion of Ukraine.

A group of American senators is arguing for the measure, which could be inserted into a broader bill on sanctions against Russia that has a good chance of being passed in the next session of Congress. The European Parliament passed a resolution in September calling on the EU to consider mandating a cut-off…European governments are divided, with Britain and Poland among the keenest.

The earlier SWIFT ban is widely seen as having helped persuade Iran’s government to negotiate over its nuclear programme. The ban was one of the first sanctions Tehran asked to be lifted, points out Mark Dubowitz of the Foundation for Defence of Democracies, a Washington-based think-tank. Though some of the banks blocked from SWIFT managed to keep moving money by leasing telephone and fax lines from peers in Dubai, Turkey and China, or (according to a Turkish prosecutor’s report) by using non-expelled Iranian banks as conduits, such workarounds are a slow and expensive pain. And the sanctions prompted Western banks to stop conducting other business with the targeted banks.

The impact of a reprise on Russia’s already fragile economy would be huge. Its banks are more connected to international trade and capital markets than Iran’s were. They are heavy users not only of SWIFT itself but also of other payment systems to which it connects them, such as America’s Fedwire and the European Central Bank’s Target2. Kommersant, a Russian newspaper, has reported that more than 90% of transactions involving Russian banks cross borders.

Foreign firms that do business in Russia would suffer, too. Countries that trade heavily with Russia, such as Germany and Italy, are therefore none too keen…

SWIFT’s own rules allow it to cut off banks involved in illegal activity, and it has occasionally done so. But if it ends up being used frequently for sanctions, it could come to be seen as an instrument of foreign policy…Already there are calls for it to be used in other conflicts: pro-Palestinian groups have recently sought for Israel’s banks to be shut out, for instance. And as China’s economic clout grows, might it want Taiwanese banks excluded?

Another risk is that using SWIFT in this way could lead to the creation of a rival. Russia’s central bank is pre-emptively working to develop an alternative network; China has also shown interest in shifting the world’s financial centre of gravity eastward. Earlier this year it co-founded a BRICS development bank with Russia, India, China and South Africa, and its UnionPay service, set up in 2002, has loosened the stranglehold of MasterCard and Visa on card payments. If China and other countries that feared being subjected to future Western sanctions joined the Russian venture, it might become an alternative to SWIFT—and one less concerned with preventing money laundering and the financing of terrorism…

America’s current crop of senior Treasury officials are similarly cautious, despite being vocal proponents of sanctions in general. SWIFT is a “global utility”, says one, and using it for sanctions should be “an extraordinary step, to be used in only the most extraordinary situations”. Blocking access to SWIFT, he frets, could mean that traffic shifts to networks that are less secure and easier to disrupt—and thus make life easier for criminals and cyberterrorists, including those in rogue governments. Against those who threaten global security, a SWIFT ban is a powerful and proven weapon. But it is also a risky one.

Financial Sanctions: The Pros and Cons of a SWIFT Response, Economist,  Nov. 22, 2014

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