SWIFT
The European Union, US, UK, and allies have agreed to exclude a number of Russian banks from Swift, an international payment system used by thousands of financial institutions. The Council decided in particular to prohibit the provision of specialized financial messaging services to Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, VNESHECONOMBANK (VEB), and VTB BANK’.
The move aims to hit the country's banking network and its access to funds via Swift, which is pivotal for the smooth transaction of money worldwide.
This article aims at offering an overview of what could be the macroeconomic and geopolitical consequences of a Russian ban from SWIFT after having explained what it is exactly. More specifically, we wonder about the repercussions of this measure both in continental Europe and in Russia as well as on the possible development of alternative payment systems as a countermeasure.
WHAT IS SWIFT?
SWIFT (Society for Worldwide Interbank Financial Telecommunication) was founded in 1973 to provide secure messaging for international payments. It is a Belgian member-owned co-operative, with around 11,000 member banks from 200 countries and territories. It is governed by the National Bank of Belgium in conjunction with the central banks of Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. It provides messaging systems for instructing and then monitoring interbank payments and trade finance, integrated into banks’ processing systems worldwide.
The key point is that SWIFT does messages and their supporting technology and standards; it has no role in payment execution. Suppose a London bank wants to send funds to a bank in Moscow. It may use SWIFT messaging to communicate the payment, but not to execute it. The actual execution can be done in various ways: using roubles held as a pre-existing balance with the bank in Russia; or acquiring roubles from the sale of either sterling in the foreign exchange market, or of rouble assets such as Russian government bonds. [1]
A NEW ERA OF COMPETING GLOBAL PAYMENT SYSTEMS?
Suppose SWIFT is no longer the global messaging system of choice. If that is the case, we will need to think carefully about how international monetary flows will be managed in the future, and what will happen to the cost of any financial transaction. The decision of 1973 to develop one global and open system has had the extraordinary consequence of limiting the cost of international transactions, hence maximizing its number. Competing systems will imply increased costs, and hence - comparatively speaking - a lower amount of transactions. Unless of course, we find new ways to come up with a truly global and agnostic system. We may say to better explain the situation using a metaphor that:
“Cutting a bank from SWIFT is like cutting a person off from the internet. While monetary flows would be possible in theory, without complementary information (where the money comes from, where it goes, what it is for) a bank would not be able to operate.”[2]
WHY HAS THE WEST BEEN DIVIDED OVER SWIFT?
The West would suffer blowback. Until now America has aimed its financial firepower at small or isolated countries such as Cuba, Iran, and Myanmar. Russia is twice the combined size of any economy America has ever embargoed. Any disruption in Russia would spill over to the countries that have business dealings with it. It is the EU’s fifth-largest trading partner, for instance. And European banks have $56bn-worth of claims on Russian residents. There would also be indirect damage through retaliation. But Russia is the source of 35% of Europe’s gas supply and is home to €310bn ($350bn) of EU assets. [3]
The EU has approved an "unprecedented" package of economic sanctions that will have "a serious impact on the Russian economy and political elite". As we have already seen seven Russian banks are suspended from the Swift payment system: Bank Otkritie, Novicombank, Promsvyazbank, Bank Rossiya, Sovcombank, VNEsheconombank (VEB), VTB Bank; however neither Gazprombank nor Sberbank appear on the list, through which the transactions for payments for energy imports of the Member States 'pass'.
The crucial importance of the question is also reflected in the words of some of the protagonists:
"Swift is the financial nuclear weapon. SWIFT is what would allow Russian financial institutions to be cut off from other financial institutions worldwide," the French Finance Minister Le Maire affirmed. "When you have a nuclear weapon in your hands, you think before using it, some member states have reservations, France is not one of them," he added.
A German government spokesperson said that kicking Russia out of SWIFT would be technically difficult to arrange and would have a massive impact on transactions for Germany and German businesses in Russia and the German Finance Minister Christian Lindner said: "We are open, but you have to know what you're doing."
CONSEQUENCES ON RUSSIA
According to the position firmly taken by the EU, UK, USA, and other allies, the move would "ensure that these banks are disconnected from the international financial system and harm their ability to operate globally". [4]
The primary goal is to avoid Russian companies from benefiting those facilities, such as rapid cross-border payments, that an instant messaging system like SWIFT provides.
Moreover, companies' denial of access to the system would reduce the movement of money into and out of Russia and further consequences will be a diminution of the Ruble’s value and the apex would be higher inflation of prices. “The rouble will fall even further, inflation will spike and the central bank will be left defenseless.” The Biden administration official stated.[5] In addition, all the payments related to energy and agricultural products will undergo an unprecedented fluctuation.[6]
Sanctions imposed on national banks to negotiate with one another, as a matter of fact, would weaken the efficiency of the whole system by incrementing delays and by incurring extra costs. Consequently, the Russian government would not be granted revenues any longer. [7]
Notwithstanding, it is not the first time Russia was threatened to get expelled by SWIFT. Indeed the first threat had been made in 2014 when it annexed Crimea. At the time Russia made a statement saying that “the move would be tantamount to a declaration of war”.[8]
A further aspect that deserves attention is repression on so-called "golden passports" that "let wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems"[9]. As a consequence, not just the bank system but also the whole economy will face a phase of transition that might be very tense.
ALTERNATIVES ADOPTED BY RUSSIA
Russia has to find an alternative channel to process transactions that could be cheaper but more insecure such as Russia’s SPFS and China’s CIPS.
On the one hand, banks could move to a new network developed by Russia’s central bank SPFS(system for transfer of financial messages). However, it is mainly used by domestic organizations to facilitate monetary traffic within the country.[10] Moreover, the new system has some limitations: it only operates during weekday working hours whereas SWIFT functions unconditionally and it can hardly manage not only to support transactions that are complex but that are beyond national frontiers considering that SPFS is not connected internationally.[11]
On the other hand, China is Russia's strongest partner and the latter could stimulate its banks to use Chinese-owned CIPS (cross-border interbank payment system). However, China's CIPS has enormous limitations regarding the conversion which is required from Ruble to Yuan. Moreover, its network comprehends only 1280 institutions.[]Some Analysts at Morgan Stanley said: “only 1.9% of international payments are made in the Chinese currency, against around 40% for U.S. dollars, which limited the effectiveness of CIPS as a method for funding cross-border trade”.[12]
A relevant aspect that is worth mentioning is the position undertaken by well-known payment systems such as VISA, Mastercard, and Paypal.
Card payment companies Visa and Mastercard asserted they would have suspended operations in Russia, joining the list of international companies which opposed doing business with Moscow over its invasion of Ukraine.[13] "We are compelled to act following Russia’s unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed," Visa chief executive Alfred Kelly said in a statement.
Being on the same wavelength PayPal chief executive Dan Schulman said: "PayPal supports the Ukrainian people and stands with the international community in condemning Russia’s violent military aggression in Ukraine”.
CONCLUSION
The analysis of the measures undertaken by these well-known payment systems and by western countries shows how significant and dramatic the situation in Ukraine is. Imposing sanctions on Russia is a counter-reaction that aims at isolating the country entirely. On its part, Russia is trying to find alternative ways such as its domestic instant messaging system or by relying on its financial partner China.
All things considered, the effects of this situation will have a huge impact both on western countries, in the sector of energy and gas, and on Russia’s investments. The transition period will be difficult globally.
BIBLIOGRAPHY
[1] Alistair Milne. “Swift: ejecting Russia is largely symbolic – here’s why” The conversation. February 2022
[2] Sandra Sieber. “How Cutting Russia From SWIFT Will Change The Financial Landscape” Forbes. March 2022
[3] “The hidden costs of cutting Russia off from SWIFT” The Economist. December 2021
[4,6,7,11] Hotten, Russel. “Ukraine conflict: What is Swift and why is banning Russia so significant?” BBC News, February 27,2022
[8,9] Sevastopulo Demetri and Smith Colby in Washington and Fleming Sam in Brussels “West to impose sanctions on Russian central bank and cut some lenders from Swift: pledges are most severe yet against Moscow as troops push into Ukraine’s second-largest city”. Financial Times. February 27, 2022
[10,11,12] Bergin, Tom. “Explainer: Russia could work around SWIFT ban but with high costs”. Reuters. March 7, 2022
[13] Martin,Henry.“Now Visa and Mastercard suspend operations in Russia after PayPal, Zara and Samsung shut down services in the country as Great Cancellation of Putin continues”. MailOnline. March 5,2022
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