Just, in a move to counter Russia’s war over Ukraine, the US and the European Commission published a joint announcement to prohibit some Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system.
What is SWIFT?
SWIFT is a messaging system utilized by banks and financial organizations globally for the rapid exchange of data about financial transactions.
The Belgium-headquartered SWIFT connects more than 11,000 banking and securities organizations in over 200 countries and territories. Each player on the platform is dedicated to a unique eight-digit SWIFT code or a bank identification code (BIC). If a person from America wants to send money to someone in India, the payee would have to submit to his bank details, the beneficiary’s account number along with the eight-digit SWIFT code. So SWIFT works as an intermediary that is received and approved, the money would be credited to the required account.
It was established in 1973 and is based in Belgium.
It is overseen by the central banks from eleven industrial countries: Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, besides Belgium.
Prior to SWIFT, the only reliable means of message confirmation for international funds transfer was Telex. It was discontinued due to a range of issues such as low speed, security concerns, and a free message format.
How ban will impact the Russian economy?
If a nation is prohibited from the most participatory financial facilitating platform, its foreign funding would take a hit, making it reliant on domestic investors. This is particularly difficult when institutional investors are constantly striving for new markets in newer countries.
So after banning from SWIFT The Russian Central Bank began a provisional prohibition on brokers selling domestic securities on behalf of foreign residents. Besides, the central bank more than doubled the interest rates to 20% per annum from the existing 9%.
The increase of the key rate will guarantee an increase in deposit rates to levels wanted to reimburse for the increased depreciation and inflation risk.
Russia is heavily reliant on the SWIFT platform for its key natural resources trade, especially the payments for its oil and gas exports. It will freeze the assets of Russia’s central bank, which would stop Russia from “using its war chest”, pertaining to its forex reserves.
What are More Alternatives for SWIFT?
- Russia has worked on options, including the SPFS (System for Transfer of Financial Messages) an equivalent of the SWIFT for Central Bank of Russia.
- Russia is reported to be collaborating with China and India on a possible venture which will be a likely challenger to SWIFT.
- Or by cryptocurrency for the international payments
Before Russia, Iran and North Korea are already out of the SWIFT platform. When Iran faced the SWIFT ban in 2012, its total trade dropped about 30% and oil trade by a half. North Korea’s economy remains practically crippled with very limited trade.
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