SWIFT is currently the most important global payment instruction messaging system, but it is not the case that without SWIFT cross-border economic transactions absolutely cannot be carried out. The disconnection of services by SWIFT is itself not a fundamental issue. The real concern is the possible impact that could be generated by the U.S.-European camp implementing severe economic sanctions or even fully decoupling.

On February 26 (U.S. time), the White House issued a joint statement by the leaders of the European Union, the United States, and Canada on their decision to ensure the removal of selected Russian banks from the SWIFT information system. (Note that this was not the removal of all Russian banks registered with SWIFT). This has been interpreted by many as: The United States and Europe have used a “financial nuclear bomb,” a “financial killer” that will shut down Russia’s foreign trade and international financial transactions, causing a devastating blow to Russia’s economic development and social stability.

This still needs to be scrutinized carefully.

First, it should be clear that SWIFT is only a part of the international payment settlement system, not all of it

The components of the international payment settlement system include settlement currency selection, payment instruction messaging systems, settlement funds account systems, and the actual processing of payment settlement. SWIFT is only one of the payment instruction messaging systems.

Settlement currency selection: When economic transactions occur between countries with different currencies, it is necessary to first determine the currency of denomination and settlement for the economic transactions. This may be the currency of the party in the economic transaction with the stronger voice, or it may be another country’s currency that is more internationalized. It is through an extensive global selection process that the relative shares or statuses of different countries’ currencies in international payments and foreign exchange reserves are formed. Behind this selection is a comparison of the overall national power and international influence of different countries, and only the currency of the country with the strongest international influence can become the most dominant international currency (international hard currency). At present, the dollar is the number one international currency. Its share of international payments is around 40%, and its share in international foreign exchange reserves is around 60%. The euro ranks second. Its share of international payments is close to 40%, and its share in international foreign exchange reserves is around 25%. Other national currencies lag far behind the dollar and euro.

Payment instruction messaging system: When economic transactions between countries occur, it is necessary for the payer to issue a payment instruction to its clearing institution (a bank in which it has an account). The clearing institution then deducts the payment accordingly and transfers it to the recipient’s account at the recipient’s bank, or reduces its own deposit in the recipient’s bank and issues a payment notice to the recipient’s bank. After the recipient’s bank receives the instruction, it registers an increase of its own deposit in the payer’s bank or a reduction of the payer’s deposit in its own bank, at the same time transferring the amount to the account of the recipient, and sends a notice of receipt of payment to the recipient. So, to realize cross-border settlement, it is necessary to connect the payment instruction message specification and processing systems of each country. Since different countries have different languages, different legal systems, and different time standards, it would be very troublesome and uneconomical if each country were to establish independent payment instruction messaging systems with other countries, and the high cost and low efficiency of doing so might even hinder the development of mutual economic transactions. At present, SWIFT is the most widely used payment instruction messaging system in the world.

Payment funds account system: International payment settlement involves the opening of funds accounts at clearing institutions and having sufficient balance of funds (including overdraft limit) to ensure the funds needed to settle payment. Because international payment settlement may involve multiple international currencies, clearing institutions are required to open many settlement accounts in banks of many countries and strengthen the management of settlement account funds (positions). Since international payment settlement involves different currencies, languages, etc., it is far more complex than domestic settlement in a single domestic currency and language. In order to prevent international payment settlement from negatively affecting their domestic settlement systems, many countries have established a relatively independent international payment settlement account system, forming a risk isolation wall while maintaining certain financial links with the domestic payment settlement system. For example, within the United States there is the Fedwire U.S. dollar system, whereas the cross-border system is CHIPS. Within China there is the High-Value Payment System (HVPS) for real-time settlement in renminbi (RMB), whereas for cross-border settlement there is the Cross-border Interbank Payment System (CIPS). The payment settlement account system in each country has strong sovereignty attributes and needs to be subject to close supervision by the country where it is located. Worldwide, the final payment settlement account for a country’s currency is in the country whose currency it is (the final payment settlement account for the U.S. dollar is CHIPS, the final payment settlement account for the RMB is CIPS, and so on) because the supply of a currency is ultimately controlled by the country that issues it.

It needs to be clarified that systems such as CHIPS and CIPS are first and foremost funds account systems. They are primarily for the currencies of their respective countries, and what they mainly resolve are the “flows of funds” of international settlements. This is not the same as being able to completely replace the payment instruction messaging system. They basically have to connect with SWIFT in order to complete international payment settlement business. SWIFT is a payment instruction messaging system. SWIFT itself does not involve the funds accounts of member units, and it mainly resolves the “information flows” of international payment settlement.

Actual processing of payment settlement: To settle the payment in a cross-border economic transaction, it is necessary to determine the specific clearing institution and settlement account, thereby determining the specific path for settlement instruction transmission and processing. The clearing institution carries out settlement account processing accordingly and deducts from the payer’s deposit. The processing is not considered completed until the transfer is made to the recipient’s account. If there is any problem, error finding and handling will still need to be carried out.

One can see from the foregoing that SWIFT, as the infrastructure for the standard formulation of payment instruction messages and for transmitting and processing instructions, is a very important link in international payment settlement, but it is only one of the links, not the whole of international payment settlement. Also, although SWIFT is currently the most important global payment instruction messaging system, it is not the case that cross-border economic transactions absolutely cannot be carried out without SWIFT. In fact, SWIFT was announced only in 1973, and it took a long time for it to become a payment instruction messaging system with global coverage. Cross-border economic transactions also existed before there was SWIFT. It is only that the development of cross-border economic exchanges was better facilitated after the emergence of SWIFT. Likewise, when the Soviet Union and the United States were sharply opposed to each other and it was hard for the Eastern socialist camp to obtain SWIFT services, its internal transnational economic transactions still existed. The currency of the most powerful country in the camp could be chosen as the currency for denomination and settlement, with payments settled by means of encrypted telegrams, mail, etc. Even the necessity of settling payments one by one was obviated by adopting “bookkeeping settlement,” that is, within the scope of an agreement, the economic transactions occurring between the two sides were first entered in their account books, then differences were periodically (e.g., annually) aggregated, and settlement was only carried out on the balance. If a country is excluded by SWIFT now, that country can still imitate SWIFT’s messaging rules and establish a new payment instruction messaging system with other countries for settling economic transaction payments over the internet and other channels, which is not difficult technically, though its cost of operation and efficiency might not be comparable to those of SWIFT. So, describing SWIFT as a “financial nuclear bomb or killer app” is in fact a bit of an exaggeration.

Second, what needs to be clarified even more are the relationships between payment settlement and economic transactions, and between cutting off SWIFT and the implementation of economic sanctions

Payment settlement is for economic transactions. If there were no transnational economic transactions, there would be no need for international payment settlement. Safe, efficient, and convenient settlement of international payments actively promotes the development of transnational economic transactions. Blocking the use of SWIFT will also have a profound impact on the development of a country’s foreign economic transactions, but blocking the use of SWIFT is only a means of economic sanctioning. The prerequisite for cutting off a country from the SWIFT information system is that the United States and Europe impose severe economic sanctions on the country. Without economic sanctions, the United States and Europe unilaterally blocking the SWIFT connection to Russia would also block their economic transactions with the country. Therefore, the economic sanctions against Russia by the U.S.-European camp are the main role, while cutting off SWIFT services is only a supporting role, and that order cannot be reversed.

Hence, the widely circulated statement that “Iran lost nearly half of its oil export revenue and a large amount of foreign trade as a result of the United States push to cut off the SWIFT connection to Iran in 2012” is actually putting the cart before the horse. The fundamental reason for the significant reduction in Iran’s oil exports and other foreign trade was that the United States and Europe had imposed a severe blockade on Iran’s oil exports and other foreign trade, including their own cut-off of Iranian oil imports, not simply because SWIFT had cut off the connection to Iran.

SWIFT is currently registered in Belgium and is mainly under the control of the European Union. At the same time, the United States has a major influence on it because the U.S. dollar occupies the most important position in international payments, so the EU and the United States together have decisive control over SWIFT. The announcement by the United States and Europe on removing selected Russian banks from SWIFT, and possibly even completely cutting off all Russian banks from SWIFT, means that those Russian banks will not be able to use the SWIFT infrastructure. Once the United States, the EU, Britain, and Canada announce the complete removal of Russian banks from SWIFT, it will also mean that these countries will be completely cut off from economic dealings with Russia, and it will also make it difficult for other countries to handle payment settlement with Russia through SWIFT. If other countries want to have economic dealings with Russia, they will have to establish a separate payment instruction transmission system with Russia, but they will also face the risk of being sanctioned by the U.S.-European camp. The U.S.-European camp has announced that it will also take action against those people and entities that provide facilitation to the Russia-Ukraine war and the Russian government. That is, they require other countries to control or cut off their economic dealings with Russia, which will force other countries to choose sides, either the camp with the United States, Europe, and other developed countries, or Russia. This would have a major impact not only on Russia, but it would also create a significant trade-off of interests for the many countries that have substantial amounts of economic dealings both with Russia and with the United States and Europe. If you choose Russia, you may offend or even break away from the U.S.-European camp and face the prospect of developed countries severing economic contacts, imposing advanced technology blockades, and blocking personnel exchanges, which would cause great harm to your own economic and social development. If you choose to join the U.S.-Europe-developed countries camp, you will thus cut off economic contacts with Russia. Since Russia is a major world exporter of energy, food, and minerals, as well as a permanent member of the United Nations [Security Council] with international influence, blocking Russia’s foreign trade and financial transactions would also have an impact on the international prices of related products and on global production and supply chains and financial markets, in addition to the impact on Europe’s current energy crisis and on the greater-than-expected inflation in the United States. If this causes SWIFT to cut off service to many countries that maintain trading and funds transactions with Russia, it will also give rise to alternatives to SWIFT, accelerate the internationalization of other currencies, and have a profound impact on SWIFT’s business development and the development of the U.S.-European camp’s foreign economic relations, as well as on the international circulation and international status of currencies such as the U.S. dollar and the euro. If this were to propel a serious division in the world and the formation of two sharply opposing camps, it would also pose a great threat to the development of economic globalization and to world peace and stability.

Thus, the disconnection of services by SWIFT is itself not a fundamental issue. The real concern is the possible impact of the U.S. and European camps implementing severe economic sanctions or even fully decoupling. Looking at the possible repercussions of SWIFT’s exclusion of Russia, it is important to see not only the impact on Russia but also the possible broader impact on the world economic and political landscape.