SWIFT: The Gmail of Banking
SWIFT stands for Society for Worldwide Interbank Financial Telecommunications. SWIFT is a global messaging network that allows banks and other financial institutions to send and receive information like money transfer orders promptly, correctly, and securely. The message format's stability allowed for massive scalability, permitting SWIFT to eventually grow up to providing services to virtually all the financial institutions. SWIFT has evolved into a vital component of the global financial system: last year, approximately 42,000,000 messages were sent on a daily basis (+11.4% compared to 2020) by 11,000+ financial institutions situated in more than 200 countries, figures proving SWIFT’s absolute dominance with respect to the other players in the market (e.g., Fedwire, CHIPS, Ripple). Its dominance may be linked to the fact that SWIFT introduces new message codes to transmit various financial transactions on a regular basis, as well as the security of its platform. SWIFT's worldwide supremacy has made it an important geopolitical matter. Iran's banks were sanctioned by the European Union in 2012, and they were cut off from the SWIFT network. In February 2022, US and EU officials decided to suspend selected Russian banks from SWIFT. Making an international transfer without the use of a SWIFT is typically impractical or impossible.
How does it work?
SWIFT gives a unique code to each financial institution, which can be eight or eleven characters long. The bank identifying code (BIC), SWIFT code, SWIFT ID, and ISO 9362 code are all synonyms for the same thing. Members are divided into groups based on the number of shares they possess. All members are charged a one-time membership fee as well as annual support fees that differ by member class. SWIFT was originally designed to deliver messages for basic payment instructions, but it today sends messages for a broad range of tasks, such as security, treasury, trade, and system transactions. According to Swift's most recent report, 44.5% of SWIFT traffic is for payment-based communications, 50.6% is for security transactions, and the rest is for Treasury, commerce, and system activities. In addition, SWIFT has introduced new services. These are backed up by SWIFT's extensive data repository. These services, which include business analytics, data sets, and compliance services, provide SWIFT with additional revenue sources.
Overview of the War
As the world has come to find out since February 24th, the Russian government is launching an attack on Ukraine. Putin’s reasoning is that of ensuring independence and autonomy of the Donetsk and Luhansk regions, which are self-proclaimed autonomous regions controlled by Pro-Russian separatists. In addition, Ukraine’s expanding relations with the West, especially the North Atlantic Treaty Organization (NATO), are a threat to Putin’s control, as it would further expand NATO’s borders with Russia.
Connection to SWIFT
Since SWIFT is a Belgian company, they are subject to EU regulations. Therefore, the European Union has the capacity to ban companies within its borders from working with certain institutions. In an attempt to limit the Russian government’s ability to fund the war, on the 2nd of March, the EU sanctioned the following 7 Russian banks:
Not coming off as a surprise, however, the EU did not sanction Gazprombank or Sberbank, the latter being the largest Russian banking institution with around $16 Billion in earnings in 2021. Gazprombank is partially owned by Gazprom, the Russian government majority owned energy firm, while Sberbank is majority owned by the Russian government. Since the EU depends heavily on Russian oil and natural gas (26.9% and 41.4% respectively of total imports as of 2019), banning banks such Gazprombank and Sberbank, which deal with energy payments, would have consequences in Europe. This decision differs from the U.S., as the American government did go as far as banning American institutions from dealing with those two banks. These two banks, and others that were exempted from the ban, such as Alfa-Bank, the third largest bank in Russia, allow the Russian government to not be completely isolated and have some power and influence over European affairs.
Consequences
The topic has given rise to several conflictual opinions from different countries due to the delicacy of the situation. The main reason behind such a fragmented front may be addressed by the plausible and alarming consequences that derive directly from the prominent role of Russia in the world economy.
As aforementioned, the last time a country was banned from SWIFT dates back to 2012 with Iran punished for its nuclear program. Nevertheless, such measures didn’t have a real and tangible impact on the world financial system because of the Iranian economy's characteristics that makes it only a minor player within the mechanisms of international economic activity.
Differently from the previous occasion, the likely repercussions both in the short and in the long run of the ban of Russian banks could be of large magnitude; mainly based on the dependence on Russia of European countries regarding energy supply, the main and nearest consequence may be an increase in energy prices that will further aggravate the economic position of most states which are already struggling to lower the level of inflation after the pandemic.
Hence, because of the dangerous balance between the different macroeconomic factors at stake, the partial character of the sanction is aimed at limiting its undesired side effects leaving the market of energy unaffected or at least creating as few damages as possible.
Regarding this purpose, the EU is working together with the US to increase the imports of energy from different suppliers and keep the energy prices from dramatically increasing in the medium-long run.
These results are what Jamie Dimon, chairman and CEO of JPMorgan Chase, referred to as “unintended consequences” while expressing the need for caution in taking this measure.
In any case, the Russian economy will be crippled by this sanction since it will make all cross-border transactions extremely difficult and costly for the excluded banks. It follows that this would prevent them and their customers from receiving/sending money from/to foreign parties using the platform; thus, it will be much more difficult to perform financial activity for sectors of the economy that concern international trade and finance, and to meet financial obligations owned abroad, increasing the risk of default.
Another repercussion could be represented by possible inconveniences in the domestic payment system since most of the bigger credit card companies use SWIFT.
Following this path, it has been said that this could be the beginning of a long process that can end with the economic closure of Russia that will become isolated from Europe and the US, but this could be considered mere speculation.
The concern of some politicians is also due to the “recoil” of the sanction that could reach the very countries that imposed it in the first place as well as the rest of the world. Adding to the problems related to energy supply and commodities, the possible default on Russian obligations abroad would have serious effects on foreign creditors leading to the possibility of a liquidity shock in the US and EU interbank markets.
In conclusion, the possibility of affecting international financial integration altering the equilibrium in the world economy seems further from a mirage and closer to reality.
Alternatives to SWIFT
Since SWIFT is only a messaging system, a Russian bank can overcome the ban through another bank that will serve as an intermediary for profit.
Although this option seems more than plausible in theory, it is difficult to find a financial institution that would accept to be an accessory to this expedient. The reason is that about half of global payments are made in dollars and those made between parties that do not have an account with one another need to be mediated by a third party that usually operates in the US; hence, this leads to the willingness of not interfering with US decisions.
It is clear how the predominance of the dollar and the US economy over the world can be used by the US government to its advantage for political purposes. Phenomena of the kind have been addressed as “weaponisation of finance”. The extent to which the US can influence the SWIFT decisions, even though the Belgian organization is supposed to be neutral, could be the cause of widespread discontent around the world.
Currently, there are no available alternatives as efficient as this platform, but there have been different attempts to create rival networks: in 2014 Russia established the SPFS (System for Transfer of Financial Messages) to perform transactions within its territory; one year after, in 2015, China launched its own payment system called CISP (Cross-Border Interbank Payment System).
As far as they remain isolated, those two attempts to replicate SWIFT are useless because of the network effect that comes with the latter, but the recent events are leading to a worrying scenario with China and Russia that are examining the option of connecting Russian banks to the CIPS starting a process of de-dollarisation of the economy.
This strong and dangerous partnership could also be joined by India which has recently expressed its interest in the matter. India is already on good terms with Russia, as can be noticed by their previous agreement to make transactions in arms sales without using the dollar, and this relationship between the two countries could play an important role in this situation.
Conclusions
The potential alternative solution to SWIFT would allow trade with countries under US sanctions and the global coverage of the system would be very attractive to states that are under the US radar or out the SWIFT (e.g. Iran or North Korea) or simply dissatisfied by the predominance of the dollar and the weaponisation of finance.
If so, this network would be big enough to be a real competitor to SWIFT and threaten the dominance of the dollar and the US.
China and India now must take a very delicate decision: will they help Russia and go on with the creation of an alternative system with the certainty of receiving sanctions or leave Putin and its country at his fate?
Conclusions cannot be outlined due to the uncertainty of the future; however, the picture is far from quiet with every option still available.
Written by Francesco Monteduro, Alejandro Ferrer and Andrea De Chiro
SWIFT stands for Society for Worldwide Interbank Financial Telecommunications. SWIFT is a global messaging network that allows banks and other financial institutions to send and receive information like money transfer orders promptly, correctly, and securely. The message format's stability allowed for massive scalability, permitting SWIFT to eventually grow up to providing services to virtually all the financial institutions. SWIFT has evolved into a vital component of the global financial system: last year, approximately 42,000,000 messages were sent on a daily basis (+11.4% compared to 2020) by 11,000+ financial institutions situated in more than 200 countries, figures proving SWIFT’s absolute dominance with respect to the other players in the market (e.g., Fedwire, CHIPS, Ripple). Its dominance may be linked to the fact that SWIFT introduces new message codes to transmit various financial transactions on a regular basis, as well as the security of its platform. SWIFT's worldwide supremacy has made it an important geopolitical matter. Iran's banks were sanctioned by the European Union in 2012, and they were cut off from the SWIFT network. In February 2022, US and EU officials decided to suspend selected Russian banks from SWIFT. Making an international transfer without the use of a SWIFT is typically impractical or impossible.
How does it work?
SWIFT gives a unique code to each financial institution, which can be eight or eleven characters long. The bank identifying code (BIC), SWIFT code, SWIFT ID, and ISO 9362 code are all synonyms for the same thing. Members are divided into groups based on the number of shares they possess. All members are charged a one-time membership fee as well as annual support fees that differ by member class. SWIFT was originally designed to deliver messages for basic payment instructions, but it today sends messages for a broad range of tasks, such as security, treasury, trade, and system transactions. According to Swift's most recent report, 44.5% of SWIFT traffic is for payment-based communications, 50.6% is for security transactions, and the rest is for Treasury, commerce, and system activities. In addition, SWIFT has introduced new services. These are backed up by SWIFT's extensive data repository. These services, which include business analytics, data sets, and compliance services, provide SWIFT with additional revenue sources.
Overview of the War
As the world has come to find out since February 24th, the Russian government is launching an attack on Ukraine. Putin’s reasoning is that of ensuring independence and autonomy of the Donetsk and Luhansk regions, which are self-proclaimed autonomous regions controlled by Pro-Russian separatists. In addition, Ukraine’s expanding relations with the West, especially the North Atlantic Treaty Organization (NATO), are a threat to Putin’s control, as it would further expand NATO’s borders with Russia.
Connection to SWIFT
Since SWIFT is a Belgian company, they are subject to EU regulations. Therefore, the European Union has the capacity to ban companies within its borders from working with certain institutions. In an attempt to limit the Russian government’s ability to fund the war, on the 2nd of March, the EU sanctioned the following 7 Russian banks:
- VTB
- Bank Otkritie
- Novikombank
- Promsvyazbank
- Bank Rossiya
- Sovcombank
- Vnesheconombank (VEB)
Not coming off as a surprise, however, the EU did not sanction Gazprombank or Sberbank, the latter being the largest Russian banking institution with around $16 Billion in earnings in 2021. Gazprombank is partially owned by Gazprom, the Russian government majority owned energy firm, while Sberbank is majority owned by the Russian government. Since the EU depends heavily on Russian oil and natural gas (26.9% and 41.4% respectively of total imports as of 2019), banning banks such Gazprombank and Sberbank, which deal with energy payments, would have consequences in Europe. This decision differs from the U.S., as the American government did go as far as banning American institutions from dealing with those two banks. These two banks, and others that were exempted from the ban, such as Alfa-Bank, the third largest bank in Russia, allow the Russian government to not be completely isolated and have some power and influence over European affairs.
Consequences
The topic has given rise to several conflictual opinions from different countries due to the delicacy of the situation. The main reason behind such a fragmented front may be addressed by the plausible and alarming consequences that derive directly from the prominent role of Russia in the world economy.
As aforementioned, the last time a country was banned from SWIFT dates back to 2012 with Iran punished for its nuclear program. Nevertheless, such measures didn’t have a real and tangible impact on the world financial system because of the Iranian economy's characteristics that makes it only a minor player within the mechanisms of international economic activity.
Differently from the previous occasion, the likely repercussions both in the short and in the long run of the ban of Russian banks could be of large magnitude; mainly based on the dependence on Russia of European countries regarding energy supply, the main and nearest consequence may be an increase in energy prices that will further aggravate the economic position of most states which are already struggling to lower the level of inflation after the pandemic.
Hence, because of the dangerous balance between the different macroeconomic factors at stake, the partial character of the sanction is aimed at limiting its undesired side effects leaving the market of energy unaffected or at least creating as few damages as possible.
Regarding this purpose, the EU is working together with the US to increase the imports of energy from different suppliers and keep the energy prices from dramatically increasing in the medium-long run.
These results are what Jamie Dimon, chairman and CEO of JPMorgan Chase, referred to as “unintended consequences” while expressing the need for caution in taking this measure.
In any case, the Russian economy will be crippled by this sanction since it will make all cross-border transactions extremely difficult and costly for the excluded banks. It follows that this would prevent them and their customers from receiving/sending money from/to foreign parties using the platform; thus, it will be much more difficult to perform financial activity for sectors of the economy that concern international trade and finance, and to meet financial obligations owned abroad, increasing the risk of default.
Another repercussion could be represented by possible inconveniences in the domestic payment system since most of the bigger credit card companies use SWIFT.
Following this path, it has been said that this could be the beginning of a long process that can end with the economic closure of Russia that will become isolated from Europe and the US, but this could be considered mere speculation.
The concern of some politicians is also due to the “recoil” of the sanction that could reach the very countries that imposed it in the first place as well as the rest of the world. Adding to the problems related to energy supply and commodities, the possible default on Russian obligations abroad would have serious effects on foreign creditors leading to the possibility of a liquidity shock in the US and EU interbank markets.
In conclusion, the possibility of affecting international financial integration altering the equilibrium in the world economy seems further from a mirage and closer to reality.
Alternatives to SWIFT
Since SWIFT is only a messaging system, a Russian bank can overcome the ban through another bank that will serve as an intermediary for profit.
Although this option seems more than plausible in theory, it is difficult to find a financial institution that would accept to be an accessory to this expedient. The reason is that about half of global payments are made in dollars and those made between parties that do not have an account with one another need to be mediated by a third party that usually operates in the US; hence, this leads to the willingness of not interfering with US decisions.
It is clear how the predominance of the dollar and the US economy over the world can be used by the US government to its advantage for political purposes. Phenomena of the kind have been addressed as “weaponisation of finance”. The extent to which the US can influence the SWIFT decisions, even though the Belgian organization is supposed to be neutral, could be the cause of widespread discontent around the world.
Currently, there are no available alternatives as efficient as this platform, but there have been different attempts to create rival networks: in 2014 Russia established the SPFS (System for Transfer of Financial Messages) to perform transactions within its territory; one year after, in 2015, China launched its own payment system called CISP (Cross-Border Interbank Payment System).
As far as they remain isolated, those two attempts to replicate SWIFT are useless because of the network effect that comes with the latter, but the recent events are leading to a worrying scenario with China and Russia that are examining the option of connecting Russian banks to the CIPS starting a process of de-dollarisation of the economy.
This strong and dangerous partnership could also be joined by India which has recently expressed its interest in the matter. India is already on good terms with Russia, as can be noticed by their previous agreement to make transactions in arms sales without using the dollar, and this relationship between the two countries could play an important role in this situation.
Conclusions
The potential alternative solution to SWIFT would allow trade with countries under US sanctions and the global coverage of the system would be very attractive to states that are under the US radar or out the SWIFT (e.g. Iran or North Korea) or simply dissatisfied by the predominance of the dollar and the weaponisation of finance.
If so, this network would be big enough to be a real competitor to SWIFT and threaten the dominance of the dollar and the US.
China and India now must take a very delicate decision: will they help Russia and go on with the creation of an alternative system with the certainty of receiving sanctions or leave Putin and its country at his fate?
Conclusions cannot be outlined due to the uncertainty of the future; however, the picture is far from quiet with every option still available.
Written by Francesco Monteduro, Alejandro Ferrer and Andrea De Chiro