The US, the European Union (EU) and their other Western allies have decided to disconnect Russia from the SWIFT global payment system. This is an attempt to mount greater pressure on Russia to end its attack on Ukraine.

The decision is expected to badly hit Russia as the country – like almost all other countries – is heavily reliant on the SWIFT platform for its key natural resources trade, especially the payments for its oil and gas exports. The move against Russia will only be partly implemented for now, with only some Russian banks being covered. The option of expanding it further to a pan-country ban would be exercised if this partial ban does not yield the desired impact. The only country that had been cut off from SWIFT earlier was Iran. It resulted in the country losing a third of its foreign trade.

So, what is SWIFT, and how does it work? The SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It is a secure platform for financial institutions to exchange information about global monetary transactions such as money transfers.

The SWIFT system does not actually move money. It operates as a middleman to verify information of transactions by providing secure financial messaging services to more than 11,000 banks in over 200 countries. Based in La Hulpe, Belgium, it was founded in 1973 and is overseen by central banks of eleven industrial countries.

In fact, the actual cross-border settlement of money takes place between banks through foreign bank branches or through correspondent banking channel (when a bank does not have a branch in a foreign country, it ties up with another bank that has a branch in that country and forms the correspondent bank network) and are finally settled through respective central banks of the countries.

SWIFT assigns each financial organisation a unique code that has either eight or 11 characters. The code is interchangeably called the Bank Identifier Code (BIC) or SWIFT code or SWIFT ID or ISO 9362 code.

It is unclear if banning Russia from SWIFT will really impact it and force it to stop the Ukrainian attack. North Korea has been completely cut off from the international economic system. However, it continues to survive and keeps mocking the sanctions by testing nuclear missiles and other new weapons, thanks to Chinese support. Russia could also turn to China for trade, entirely bypassing the dollar-based transaction network.