Economic sanctions have been the most significant tool from the West when it comes to impacting Russian aggression against Ukraine – with many citing the removal of the country from SWIFT as being the most potent action that could be taken. 

However, we spoke to Peter Klein, CTO and Co-Founder of FinLync, who shared his insight on just how significant the move taken by the West will be, and what Russia may have done to mitigate the damage caused to its economy and payment system. 

PaymentExpert: Firstly, are you able to tell us more about SWIFT and why it has become the forefront of news during this conflict? 

Peter Klein: At its core, SWIFT is a messaging network that moves files from one party to another. The SWIFT network enables bank-to-bank connectivity, which means that member banks in Russia can send and receive data with banks outside the country. 

It also offers corporate-to-bank connectivity, which provides treasury and finance teams of member corporations with connectivity to their member banks in Russia for domestic and cross-border payment initiation, as well as cash visibility and other treasury activities. 

SWIFT has come to the forefront amid the current situation in Ukraine because it is the dominant global payment network. That said, removing certain Russian banks from the SWIFT network is actually unlikely to have a significant impact on the movement of money in and out of Russia, because there are many other ways to send data from one party to another. 

The attention that we’re seeing on SWIFT actually comes as SWIFT is being replaced with new, more innovative bank connectivity methods and ways to move money and data. In particular, banks are building their own APIs that allow them to transact with their customers and other banks directly in real-time.

PE: Will the delay in implementing the SWIFT sanctions have allowed for alternative plans to have been put in place for Russia? 

PK: Even prior to the current sanctions, banks and corporations would have business continuity plans in place to control for a SWIFT outage. It is likely that Russian banks would have already built alternate methods for moving their data through different channels. 

Indeed, the development of Russia’s homegrown SWIFT-equivalent, called SPFS, was started in 2014 in response to the threat of being expelled from SWIFT due to Russia’s annexation of Crimea.

PE: Can Russia call on alternative relationships to mitigate the impact of being removed from SWIFT? 

PK: While SWIFT is the most common network for moving money globally, some countries have built their own messaging networks. For example, Russia developed its SWIFT equivalent, SPFS, or the System for Transfer of Financial Messages, in 2014, when it was threatened with expulsion from SWIFT due to its annexation of Crimea. SPFS allows for transfer of funds between any two banks on the system. 

Because only select Russian banks are to be removed from SWIFT, some Russian banks will still remain active on SWIFT – so funds could be moved from a sanctioned Russian bank to an unsanctioned Russian bank via a messaging network like SPFS. 

Non-Russian banks with branches in Russia also remain active on SWIFT, which means that funds could also be moved from a sanctioned bank to the Russia branch of a foreign bank through an alternate messaging network

China has also developed its own messaging network, CIPS, which as of 2021 counted 80 financial institutions as its members, including approximately 23 Russian banks. Funds in the impacted Russian banks could be transferred to unsanctioned banks via CIPS. 

Phones and fax machines are also a possible route for sanctioned Russian banks, according to the Biden Administration in the United States. 

Additionally, when thinking about connectivity between banks and companies, while SWIFT remains the most commonly-used channel globally today, it is becoming increasingly obsolete in the face of advancements in bank APIs. 

That said, connecting to a bank API is not easy, and while corporate bank API aggregators offer a streamlined process for connecting, doing so is not an overnight process and depends on the readiness of the company’s bank partners. 

PE: How much will the removal of select Russian banks from SWIFT impact Western nations on the receiving who previously dealt with Russia? 

PK: The removal of select Russian banks from SWIFT has technical impacts on corporate finance teams at businesses based in Western nations and around the world. These include verifying whether any bank partners are now under sanctions or expected to be soon, eliminating sanctioned banks from pre-authorised wire transfer platforms and, more broadly, evaluating their organisation’s total exposure to the war in Ukraine. 

In addition to these technical impacts, there are also reputational impacts and associated fallout from the removal of select Russian banks from SWIFT, the consequences of which are already being seen with the devaluation of the ruble, long lines at ATM machines and the closure of the Moscow Exchange.