President Joe Biden unveiled new sanctions against Russia on Thursday in response to President Vladimir Putin's decision to invade Ukraine and said that, collectively, they will be "more consequential" than one of the strongest single options he could seek.
Biden stopped short of announcing that the U.S. and its allies would impose a harsh financial penalty against Russia — kicking it out of the SWIFT banking system — but said such action may still be on the table as the crisis unfolds.
"It is always an option," Biden told reporters at the White House, "but right now it's not the position that the rest of Europe wishes to take."
If and when that were to happen, which some financial analysts have likened to a "nuclear option," it would be an unprecedented move against one of the world's largest economies.
What is SWIFT?
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a cooperative of financial institutions formed in 1973 with headquarters in Belgium. It is overseen by the National Bank of Belgium in partnership with other major central banks, including the U.S. Federal Reserve System, the Bank of England and the European Central Bank.
But SWIFT isn’t a traditional bank and doesn’t transfer funds. Rather, it acts as a secure messaging system that links more than 11,000 financial institutions in over 200 countries and territories, alerting banks when transactions are going to occur. (For instance, U.S. banks have unique SWIFT codes that customers use for incoming wire transfers in U.S. dollars.)
SWIFT said it recorded an average of 42 million messages per day last year, an 11 percent increase from 2020, when Russia accounted for 1.5 percent of transactions.
What would be the effect on Russia?
For the U.S. and its European allies, cutting Russia out of the SWIFT financial system would be one of the toughest financial steps they could take, damaging Russia's economy immediately and in the long term. The move could cut Russia off from most international financial transactions, including profits from oil and gas production, which account for more than 40 percent of the country's revenue.
Allies on both sides of the Atlantic also dangled the SWIFT option in 2014, when Russia annexed Crimea and backed separatist forces in eastern Ukraine. Russia declared then that kicking it out of SWIFT would be equivalent to a declaration of war. The allies shelved the idea.
Russia since then has tried to develop its own financial transfer system, with limited success.
The U.S. has succeeded before in persuading the SWIFT system to kick out a country — Iran, over its nuclear program. But kicking Russia out of SWIFT would also hurt other economies, including those of the U.S. and a key ally, Germany.
How likely is Russia to be booted from SWIFT?
Some U.S. lawmakers want the U.S. to do so immediately, although Biden said Thursday that he preferred to use a raft of new sanctions, which include targeting Russian banks and Putin's billionaire supporters.
The U.S. Treasury Department said that all of Russia's largest financial institutions would be affected, including Sherbank and VTB Bank, and that the ability of state-owned and private entities to raise capital would be impeded, cutting off major parts of the Russian financial system and economy from access to the U.S. dollar more broadly.
"Treasury is taking serious and unprecedented action to deliver swift and severe consequences to the Kremlin and significantly impair their ability to use the Russian economy and financial system to further their malign activity," Treasury Secretary Janet Yellen said.
To pull Russia's SWIFT credentials, Biden pointed out, he would still need the support from his counterparts in Europe, who appear to be less gung-ho about such a drastic measure. Russia remains a key energy supplier to Europe.
In a statement issued in 2014 when it last discussed booting Russia, SWIFT said it is a "neutral global cooperative" and that "any decision to impose sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators."
But if U.S. allies don't want to go along with ousting Russia from SWIFT, Biden can act unilaterally by enforcing a move by the Federal Reserve, which clears transactions, to block Russian companies' access to U.S. dollars.
House Intelligence Committee Chairman Adam Schiff, D-Calif., expressed support for Biden’s severe sanctions but said on MSNBC that the administration can go further by forcing Russia out of SWIFT and that if European countries don't agree with harsher financial penalties, the U.S. should act unilaterally.
Hagar Chemali, an expert on sanctions who was the director for Syria and Lebanon at the National Security Council during the Obama administration, also said the latest round of sanctions is "very strong."
But whether these penalties will be tougher on Russia than the SWIFT option would be is "hard to measure because of the backlash you'd have from isolating Russia from SWIFT," Chemali said on MSNBC, and doing so is usually reserved for freezing out countries like Syria and Iran.