How expelling Russia from SWIFT could impact the country. And why there's reluctance to do so

UPDATE: After this story was published, news broke that the U.S., U.K., Europe and Canada plan toblock Russia's access to the SWIFT international banking communications platform as part of another round of sanctions against Moscow.

Countries around the world have placed sanctions on Russia for its invasion of Ukraine, with some also calling for Moscow to be banned from SWIFT, a banking communications platform used by financial institutions in over 200 countries.

CBC News takes a look at SWIFT, how Russia mightbe impacted if removed from the important system, and why some countries are reluctant to take that step.

What is SWIFT?

SWIFT is the acronym forthe Society of Worldwide Interbank Financial Telecommunication. The Belgian-based co-operative is used by thousands of financial institutions in over 200 countries, including Russia, andprovidesa secure messaging system to facilitate cross-border money transfers.

The systemaveraged 42 million messages daily last year to enable payments. About half of all high-value payments that cross national borders go through its platform.

SWIFT is much like a"social network for banks"that doesn't move money around, but provides information about where the money is going, said Alexandra Vacroux,executive director of the Davis Center for Russian and Eurasian Studies at Harvard University in Massachusetts.

"It's really like a social messaging system, and it's like Twitter for banks," Vacrouxsaid.

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Banks thatconnect to the SWIFT system and establish relationships with other banks can usemessages within the system to make payments, Reuters reports. The messages are secure so that payment instructions are typically honoured without question. This allows banks to process high volumes of transactions at high speed. It has become the principal mechanism for financing international trade.

You can think of SWIFT as the backbone of the financial services sector.- Markos Zachariadis, University of Manchester

"You can think of SWIFT as the backbone of the financial services sector," saidMarkos Zachariadis, a professor and chairin financial technology and informationsystems at the University of Manchester.

"It is the most influentialinfrastructure we have in financial services in terms of the volume and value of money that it's being moved around the world."

How reliant is Russia on SWIFT?

According to the Russian National Swift Association,about300 leadingbanksand organizations in the country are users of SWIFT, more than half of the Russian credit organizations are represented in SWIFT, and Russia is ranked second by number of users of the platform, after the United States.

How would Russia be impacted if banned from SWIFT?

ExcludingRussian banks from SWIFT would restrict the country's access to financial markets aroundthe world.

It would be almost like cutting a countryfrom the internet,Zachariadis said.

"Imagine all these organizations that operate online. They have their customers where they send information and transact with suddenly having zero access to this infrastructure."

Maria Shagina,an international sanctions expert based in Helsinki, wrote last year in an article for the Carnegie Moscow Center that the impact of banning Russia from SWIFT could be as devastating as it was for Iran, which was denied access to the system in 2012 over its nuclear program.

"Russia is heavily reliant on SWIFT due to its... exportsof hydrocarbons denominated in U.S. dollars. The cutoff would terminate all international transactions, trigger currency volatility, and cause massive capital outflows," she wrote.

Vacroux said that because Russia's federal budget is so highly dependent on taxesgenerated from the export of raw materials like oil and gas, itwould make itdifficult to conduct sales and then get themoney needed for the country's budget.

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Challenged by reporters over the effectiveness of sanctions against Russia for its actions in Ukraine, U.S. President Joe Biden said the measures were 'profound' and 'exceed anything that's ever been done.'

But some experts have questioned whether expelling Russia from SWIFT is as devastating as other potential sanctions.

"I think there's excessive attention on SWIFT relative to its impactand insufficient attention on U.S.bankingsanctions relative to their impact,"said Chris Miller,an assistant professor of international history at the Fletcher School at Tufts University, andco-director of the Massachusetts school's Russia and Eurasia Program.

Miller saidthreatening to cut off major Russian banks from the U.S. financial system would certainly have more bite.

"It's a communications platform, not a financial payments system," Adam Smith, an international lawyer whofocuses on international trade and worked in the Obama administration, told CBS News. "If you remove Russia from SWIFT, you're removing them from a key artery of finance, but they can use pre-SWIFT tools like telephone, telex or email to engage in bank-to-bank transactions."

Are there alternative systems Russia coulduse?

Following the Russian invasion of Crimea in 2014 that ledtocalls to boot Russia offSWIFT,the Central Bank of Russia began plans to develop a SWIFTalternativethe System for Transfer of Financial Messages (SPFS).

As of February 2020, more than 400 Russian banks had joined SPFS, exceedingthe number of Russian banks enrolled in SWIFT, according toHarley Balzer,an expert on Russia and Russian-Chinese relations, and professor emeritus at Georgetown University in Washington, D.C.

The Russiangovernment has subsidized banks to try to encourage use, which has madebanksin the country want to be part of SPFS because it lowers their fees, Balzer said

But so far,only about a dozen foreign banks are using it, includingone Chinese bank, meaning "it really is not going to help [Russia]very much for international payment transfers,"hesaid.

Why are some countries reluctant to ban Russia from SWIFT?

Countries seem divided over whetherRussia shouldbe ejected from SWIFT.Britain as well as Canadian Prime Minister Justin Trudeau have called for Russia to be cut off from the platform.

On Friday,France's finance minister said the European Union will soon analyzethe consequences ofRussia's expulsion from SWIFT, while Italy said it would not veto such a proposal.Meanwhile, GermanForeign MinisterAnnalena Baerbock expressed skepticism over such a move,while U.S. President Joe Biden has ruled it out for now.

The United States and Germany would stand to lose the most if Russia were disconnected from SWIFT, because banks in those two countries most frequently use SWIFT to communicate with Russian banks, Shagina, theinternational sanctions expert,wrote inthe Carnegie Moscow Center article.

For Germany and Italy, it's what SWIFT is used to pay for that would pose problems if Russia is cut out.

"Both Germany and Italy are very heavily dependent on imported gas from Russia. So comprehensive sanctions against Russian banks or a blanket exclusion of the entire Russian financial system from SWIFTwould mean that they couldn't pay their gas bills, " saidAdam Tooze, ahistory professor at ColumbiaUniversity in New York anddirector of the European Institute.

Zachariadis said it's not just Russia that would sufferby being cut out of SWIFT.

"But also all the other countries thattransactwith Russia, including a lot of the EU countries and other countries around the world who get a lot of their energy resourcesfrom Russia as well, and other businesses that transact with Russian organizations."