MICHEL MARTIN, HOST:

Yesterday, the U.S. and its allies ramped up their sanctions against Russia when they announced that certain Russian banks would be shut off from SWIFT. That's a global messaging system used by banks worldwide to conduct their business and issue payments. It's a key system when it comes to a country's ability to participate in international trade. SWIFT is an acronym for the Society for Worldwide Interbank Financial Communications. We wanted to better understand how it works and what these new sanctions could mean, so we called Scheherazade Rehman, professor of international finance at George Washington University. Professor Rehman, thank you so much for joining us.

SCHEHERAZADE REHMAN: Thank you.

MARTIN: So to start off, could you just tell us a bit more about what SWIFT is and why it's important?

REHMAN: Absolutely. So SWIFT is a Belgian messaging system whose acronym you just pronounced, and it connects about 11,000 financial institutions around the world. And it plays a pivotal role in supporting the global economy, but it has absolutely no authority to make sanctioned decisions itself. So its principal function really is a main messaging network, which enables to have international payments initiated. It has about - averages about 42 million messages daily and accounts about half of all the high-value cross-border payments in the world, linking those 11,000 financial institutions in over 200 countries and territories.

MARTIN: I'm glad you mentioned that because there's been some dispute about how effective a measure this really is as a part of a sanctioning process. Barring a country's banks from using SWIFT has been called the nuclear option when it comes to financial sanctions. Some allies in Europe were reluctant to take this step, but it was used before, though, with Iran in 2012. But others argue that cutting a few select Russian banks off of SWIFT doesn't really affect the country and its economy. So could you help us understand that?

REHMAN: If you remove all the Russian financial institutions from SWIFT, you're removing them from one key artery of finance, but you can't prevent them from using pre-SWIFT tools like the telephone, fax, telex or emails to engage and bank-to-bank transactions. Clearly that's not efficient, but it does work. But, you know, they will lose some international foreign trade because of this. Iran, as you mentioned, had this done to them, and they lost about 30% of foreign trade. And so the new sanctions, by cutting off only a few handpicked Russian banks from SWIFT, which are yet to be named, is, of course, very strategic to ensure the sanctions have the maximum impact on Russia while preventing too much impact - negative impact - on European countries like Germany, which has historically very strong ties with Russia in terms of business, investments and, of course, reliance on Russian gas. European businesses will continue to collect money owed and buy Russian energy. So Germany has the most to lose, with Italy coming in second, would they rely on Russian gas. Now, the French and the U.K., by the way, have less ties, and so they're all for kicking all the banks off SWIFT.

MARTIN: So - and something else that you alluded to - I wanted to ask you if you'd flesh that out. Is there a potential for unintended consequences? Does barring Russian banks from SWIFT carry risks for other countries or other banks that are not intended targets of this?

REHMAN: You know, so all banks are going to get hurt. Commercial banks are going to get hurt from these sanctions because they are barred from doing business. And any time you're barred from doing business with a big player like Russia - and remember; you know, this is an unprecedented move. You know, we have never done this to such a large country. It's the 12th largest economy in the world. It's one thing to do it to Iran. It's a different thing to do it to Russia. So, yes, unintended consequences - slower growth, you know, less business for U.S. banks and European banks, allowance of other systems to be put into place which are not entirely desirable, like the crypto market. And there are other consequences that we don't talk about very often.

MARTIN: Before we let you go - and you may not have an opinion about this, but I'm going to ask if you feel comfortable saying - do you feel this was the right move at the right time?

REHMAN: I believe so. It's very fluid. I call this, you know, Cold War 2.0. It is moving very, very fast. In a matter of days we went from, you know, partial sanctions to what you call the nuclear option yesterday, unprecedented global sanctions. And while we call that the nuclear option, to be perfectly honest, the big bomb of all bombs to torpedo the Russian economy and the currency is the new sanctions put on the Russian central bank. What they have done is dismantle Putin's war chest to access his $630 billion in reserves which he's accumulated. And this is the fourth largest set of reserves a country has built up. And in doing so, what you're doing is you are not allowing him to use his central bank to protect his banks, his economy and his currency, which is currently in a bit of a freefall.

MARTIN: That was Scheherazade Rehman, professor of international finance and international affairs at George Washington University. Professor Rehman, thank you so much for joining us and sharing this expertise with us.

REHMAN: Thank you. Transcript provided by NPR, Copyright NPR.