An employee stands beside banks of Terdata Corp. Enterprise Data Warehouse (EDW) server towers inside the 16,500-square-meter Yuzhny Port data center, operated by OAO Sberbank, in Moscow, on Wednesday, Jan. 21, 2015. VTB Group along with Sberbank, Russia’s biggest lender, is challenging the European Union in court over sanctions imposed to force President Vladimir Putin to curtail any interference in Ukraine. (Andrey Rudakov/Bloomberg)

In the last few days, the Russians have been making bellicose threats about what might happen if they are excluded from SWIFT. On Friday, the CEO of Russia’s second largest bank said,

If there is no Swift, there is no banking . . . relationship, it means that the countries are on the verge of war, or they are definitely in a cold war. … The next day, the Russian and American ambassadors would have to leave the capitals.

On Tuesday, Russia’s prime minister, Dmitry Medvedev, expanded on this theme, saying

We’ll watch developments and if such decisions [to restrict access to SWIFT] are made, I want to note that our economic reaction and generally any other reaction will be without limits.

Senior government officials are very careful in their choice of language. When Medvedev says that (a) the reaction will not only be an economic one, and (b) that it will be “without limits” he is suggesting that Russia might treat any blocking of Russian banks’ access to SWIFT as justifying a very serious escalation on Russia’s part. To be clear — Russia would not engage in nuclear hostilities if it were frozen out of SWIFT. More likely, Medvedev is suggesting that Russia would move from its current stance of passive hostility to the West to a combination of specific retaliations (perhaps through manipulating gas supplies to Western Europe) with a far more active hostility of the kind that it displayed before the fall of the Berlin Wall.

So what is SWIFT?

SWIFT is a cooperative organization based in Belgium that plays a key role in the world financial system. It runs a secure messaging system for the financial industry. While it doesn’t itself clear financial transactions, it sends the messages between banks that make financial transactions possible. It’s one of the core frameworks of international finance.

And why does the Russian government care?

Because SWIFT plays such a crucial role in international financial transactions. Russia’s own financial system relies on SWIFT and would likely be crippled if it were no longer able to use the system. Russian banks would have great difficulty in engaging in transactions with each other. This would have consequences in turn for the Russian economy. As we saw during the financial crisis, the real economy can grind to a near-halt when the financial sector is frozen up. Some Russians suggest that their country could improvise a communication system in the absence of SWIFT. However, this would be at best a stopgap solution, mitigating heavy economic damage rather than preventing it. Furthermore, even if Russia managed to do this, Russian financial institutions would still be frozen out of financial relations with the West.

Could SWIFT actually do this?

Yes — if it is told to (SWIFT sees itself as apolitical, and would prefer not to take action against Russia; however it will implement a ban if the key Western governments tell it to). SWIFT has previously cut a significant state out of the financial system — sanctions led it to stop facilitating transactions for Iranian banks. Iran was less integrated into the international financial system than Russia, but still suffered very badly (a resumption of SWIFT messaging is one of the key Iranian demands in the current negotiations). Russia would be a much bigger target, and cutting it out of the system would have much bigger implications. Still, it is certainly possible.

Is a ban likely to happen?

That depends. Russia appears to be doubling down on supporting the rebels in Eastern Ukraine, presenting the European Union and the United States with a dilemma. If both the United States and the European Union agree that a SWIFT freeze is an appropriate measure, they can take action, but they do need to agree on this. In the past, the United States and the European Union have disagreed over SWIFT (after Sept. 11, the United States secretly forced SWIFT to break European privacy law by providing it with information on global financial transactions). However, if the United States was to act on its own today, it would likely fail and would probably undermine the existing sanctions regime against Russia.

This said, is not clear that either the United States or Europe is prepared to make SWIFT freeze the Russians out. Treasury Secretary Jack Lew’s statement that the West has “more tools” that it could use against Russia may be intended to suggest United States is thinking about using SWIFT. However, actually implementing a SWIFT ban on Russia would be a big step. There are also internal divisions in Europe. Some European Union member states (such as Britain) have tried to put a SWIFT freeze on the European Union’s policy agenda, while others, such as Germany, have been much more cautious. The new Greek government has signaled that it will fight against new sanctions (although this may also be a bargaining ploy in its battle to reduce Greek debt). A SWIFT freeze would be a very big step. It would likely signal that the Western powers see no short term prospect of Russia changing its approach to Ukraine, and are starting to think explicitly about how best to contain a hostile regional power, barring substantial internal changes in Russia’s government.

What would a SWIFT ban mean?

The SWIFT threat provides one example of how the international politics of finance has changed. The United States is increasingly willing to use its privileged position in the global economic system to achieve both economic and security goals. The role of the dollar in the international financial system means that it can threaten financial institutions that don’t comply with its demands. This in turn means that it can turn banks and financial institutions into instruments of policy, even if they are based outside the United States. Its power to do this is not unlimited – typically it needs at least the acquiescence of allies such as the European Union. But when the European Union is prepared to go along, the Treasury Department has remarkable international clout.

Over time, there is likely to be a backlash against exercises of U.S. power, as countries which do not like them make themselves less dependent on an international financial system that is vulnerable to U.S. pressure. Even so, other countries are likely to have a tough time building a separate financial system of their own, because the existing system is economically more attractive than any other (providing e.g. a lot of liquidity), and building a serious alternative would require a clatter of states with very different interests and ways of doing business to reach consensus. Russia’s willingness to suggest that it will undertake extreme countermeasures if the SWIFT bomb is dropped is, in a sense, an indication of its vulnerability to American and European Union financial hegemony.