The second Minsk accords have succeeded in fostering a cease-fire and yet the Russian government continues to support the armed separatist movement in eastern Ukraine, small acts of violence continue to take place, and the peace is fragile. The challenge for western policymakers is to come up with some greater incentive for Russia to embrace a lasting peace settlement. The threat of large-scale western military assistance for the Ukrainian government is unlikely to be sufficient. Russia has the advantage of proximity and a greater stake in victory than the west. If anything, overt western military involvement could cement support behind Putin in Russia and lead to further escalation in Ukraine.

The alternative sources of western leverage over Russia are only slightly more attractive and the prospects that any new sanctions will find agreement in a European Council that includes Cyprus, Greece, Hungary, France, and Italy are slim. Nevertheless, there is one financial sanction that seems to be gaining traction in conversations on both sides of the Atlantic. That sanction is to exclude Russian banks from the financial messaging service known as SWIFT — the Society for Worldwide Interbank Financial Telecommunication. British Prime Minister David Cameron raised this prospect last August suggesting that excluding Russian banks from SWIFT would offer considerable leverage over the Russian government. He returned to the idea late this February.

Most people who do cross-border wire transfers know SWIFT as the code you have to include in order for your transfer to arrive at the right bank. Then again, most people do not do cross-border wire transfers. Hence for the vast majority of people — including most politicians — SWIFT is at most a blank in a transfer request form or it is just a blank. This ignorance about SWIFT is important for its role as a financial sanction. Because SWIFT is much more than just a single identifier. It is a whole communication infrastructure with its own language, codes, standards, and protocols for making sure that any trade is agreed, cleared, and settled. SWIFT also makes it possible to communicate where the traded property is held in deposit (physically) and whether it should be moved (physically) from one place to the next.

The important point to note here is that the emphasis for SWIFT’S activities is communication — which is the transfer of meaning between different actors. That is why SWIFT places so much emphasis on language, codes, standards, and protocols. These things must not only be precise but the meaning must also be shared. Otherwise, there is a risk of misunderstanding on one side or another of any transaction. Clearing up those misunderstandings not only involves conflict but also makes markets less efficient. It is possible to work without SWIFT. The Society only came into being in the mid-1970s and it does not have a monopoly on financial communications. But it is a painstaking and labor intensive process either to create an alternative standard or to communicate financial transactions without one.

The argument for cutting the Russian banks out of the SWIFT network is precisely to make it difficult for them to communicate with each other and with the outside world. It goes without saying that would have a powerful impact on the Russian economy. We know this both from first principles and because the sanction was used against the Iranian government in March 2012 — and with great effect. So it is easy to understand why Cameron and others who support a SWIFT exclusion for Russian banks can see this as a source of leverage. What is harder to appreciate are the consequences that excluding Russian banks from SWIFT would have for western banks, investors, and governments.

Let’s start with the banks. Russia is not the only government that has banks working in Russia; foreign banks operate there as well. These banks work primarily for Russian clients and they are closely intertwined with their Russian counterparts. For a SWIFT exclusion to be effective, these foreign banks working in Russia either will have to be ring-fenced or they will have to be included in the sanctions. In any event, they will suffer greatly from the chaos that the policy will create in the Russian economy and financial system. Countries like Austria will be particularly hard hit. It is small wonder, therefore, that Austrian central bank governor Ewald Nowotny was so quick to raise concern about Cameron’s latest promotion of a SWIFT exclusion.

The impact on western investors will evolve through the failure of Russian banks to communicate routine financial transactions both of their own and on behalf of their clients. For example, every Russian bond has a coupon and most Russian equities have dividend payments. These are typically small transactions but they require a lot of effort to communicate. When that effort increases due to the SWIFT exclusion, the banks will likely fail to meet their legal obligations to communicate these transactions in a timely manner. The result will be widespread technical defaults, which may or may not count as ‘credit events’ and so may or may not trigger credit default payments. The challenge is to anticipate which non-Russian investors or financial firms will be most affected by these first- and second-order losses.

Then there is the impact on governments. In broad policy terms, excluding Russian banks from the SWIFT network will violate the neutrality of the communications standard and so will encourage both the Russian governments and governments in other countries to invest in any alternative network to communicate financial transactions. This is what the Russian government has been saying since last summer and it is an argument that Chinese authorities have made as well. The existence of rival communications networks will create inefficiencies. SWIFT is closer to a public good or utility than a pure business-to-business service. By encouraging the development of rivals, western governments will inadvertently undermine the utility of SWIFT as a global standard.

More narrowly, SWIFT offers an important window on the financial world. This argument is necessarily subtle. The SWIFT standard is heavily encrypted and the institution itself has a strong internal culture of confidentiality. The internal contents of the information packets communicated on behalf of clients cannot be read by the network managers. Nevertheless, some of the metadata associated with the transaction flow across the SWIFT network can be used by intelligence agencies like the NSA to keep an eye on money laundering and terrorist finances. The more western governments encourage the creation of parallel networks, the more likely it will be that illicit financial transactions will migrate to whichever standard makes it easiest to escape supervision.

These lines of argument all suggest that the blow-back from a sanction that excludes Russian banks from using SWIFT could be considerable. In other words, the idea may be gaining more traction than it deserves. It sounds like an easy way to exert leverage over the Russian government but it could end up being an even greater source of friction among European governments than the sanctions that are already implemented. Excluding Russian banks from SWIFT may also turn out to be far more trouble than it is worth. This does not mean western governments should do nothing in the face of Russian policy toward Ukraine. It just means they need to think harder about how to gain leverage over the Russian government.