SWIFT Is The Nuclear Option Of Economic Sanctions. Will It Be Used?

Joe Biden crossed a critical red line on Saturday and the world will never be the same.

Biden and other Western powers agreed to kick certain Russian banks out of the SWIFT message system. This is like cutting off oxygen to someone in intensive care.

The Russian economy will slowly suffocate without access to SWIFT. Still, Biden went further.

They not only kicked Russian commercial banks out of SWIFT but also kicked the Central Bank of Russia out of the system except for certain transactions that may be approved on a case-by-case basis.

What is SWIFT? This article gives a good overview.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. Contrary to what you may hear, SWIFT is not a financial institution and it’s not a payment channel. It’s a message system. But the messages are of the utmost importance.

It’s how one major bank confirms to another major bank that a large payment is being made by specifying the sender, receiving bank, amount, currency, date, and other details. Once the message is sent, the receiving bank becomes the legal owner of the amount in question.

The actual payment may go through various payment systems such as Fedwire, ACH, TARGET2, etc. but that’s mechanical. The SWIFT message is what sets the legally binding terms for both sides.

SWIFT messages are irrevocable. If there’s an error, the sender and receiver have to sort that out on their own; SWIFT does not act as a referee or arbitrator.

The only major country that has been “de-SWIFTed” in the recent past was Iran in 2011 and that was devastating to their economy. The SWIFT sanctions on Russia are likely to be equally devastating. Too devastating?

Russia is one of the three largest oil producers in the world alongside the U.S. and Saudi Arabia. It is the source of many critical industrial commodities, including neon gas for semiconductors and titanium and aluminum used in aircraft manufacture. If you handicap the Russian economy, you are handicapping the global economy.

Is that what Biden wants? He may get a global depression before he knows it. Be careful what you wish for.

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