Can countries replace it with another system?
The sanction by the West to stop Russia from seeing out its operation in Ukraine reached a new height last week. The US, UK, Canada and their allies in the European Union reached a deal to settle their differences over banning Russia from using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and cut the world’s largest country out of the global payment network.
The UK and its strong ally, the US, were the first to call for the implementation of the ban, though some European countries were hesitant to do so. EU members such as Germany, Italy and Austria, were first reluctant to take such steps since European countries use SWIFT to pay for oil purchased from suppliers in Russia, which is a source for a large amount of oil imports for these countries.
In particular, leaders of Germany and Italy insisted the ban should be a last option to be employed by the EU to stop Russia from invading Ukraine, citing repercussions on their economies. They also feared Russian oil companies would turn-off their taps if they do not get their payments on time.
Not only that, a ban on SWIFT transfer means companies from Germany such as BMW to Italy’s Dolce & Gabbana, will not be allowed to continue trading with customers in Russia.
Despite the cost of placing the ban, countries that have previously opposed the measure, agreed to ban Russia from the system.
Though the measure undoubtedly would be more costly for Russia, considering its reliance on the payment system, it is also a signal that there is a possibility that country’s would face similar measures if they go against the Wests political interests. It also shows how far they would go, if one country does something to compromise the security of the Union and their allies, going as far as employing a measure which many refer to as “a nuclear option,” which prevents countries from accessing their own fund via a global payment network.
What is SWIFT?
SWIFT, created in 1973, is an independent enterprise that provides a messaging system to enable financial institutions send and receive money from each other. Headquartered in Belgium, SWIFT is considered as a global member-owned cooperative, while it is founded by 239 banks, based in 15 countries. It is now owned by shareholders representing over 3,500 financial institutions across the world.
SWIFT uses standardized messages that allow institutions send and receive information between banks. While that can be transfers for clients, and purchase orders for assets, it has no control over financial transactions of its customers, as it only provides a messaging service. The platform, which is in use by over 200 countries, including Ethiopia, facilitates trillions of dollars in cross-border payments between 11,000 financial institutions.
Every member of SWIFT has its own SWIFT Code and over 40 million financial messages are exchanged using the platform yearly. It is overseen by the central banks of the G-10 countries and the Central Bank of Europe, under the leadership of the National Bank of Belgium. In times of sanction, financial institutions handling transactions will shoulder the responsibility of applying the ban.
But this does not mean the global payment network won’t be forced to disconnect its members if they are sanctioned. A decade ago, a four-year ban was placed against Iran over its nuclear program, leading to a fall in export proceeds from oil by half, another case which shows the consequence if countries are barred from using the service.
Are there any replacements for SWIFT?
Six years ago, in the aftermath of the war in Crimea, Russia decided to develop its own alternative financial messaging system, when it faced threats from the West that it would be removed from the SWIFT network. Russia continued forward in employing its own system called System for Transfer of Financial Messages, widely known as SPFS.
Despite staying in the financial market for over half a decade, however, SPFS was restricted to local banks and their users for a long time. It has not been even a year since foreign banks joined the SPFS network. So far, over 20 Belarusian banks, the Armenian Arshidbank, Bank of China and the Kyrgyz Bank of Asia have joined, with its network now reaching 399 users.
Even though it is still alien to many financial institutions across the world, the SPFS has overseen two million financial messages monthly in 2020, 21 percent higher than what the SWIFT handled. As of 2021, the SPFS was handling up to 20 percent of Russia’s payment messaging volume. Yet the system has its own drawbacks. Russian financial institutions conduct USD 46 billion in foreign exchange transactions using SWIFT, despite having its own system, which can handle the same transactions.
SPFS is only active on weekdays, during working hours, while messages exceeding 20 kilobytes in size cannot be transacted using the system. In contrast, SWIFT works 24/7 and allows the transmission of a 10 megabyte message across its network. Coupled with the lower confidence of the public on the Russian economy due to recent sanctions, this has killed the interests of many that had the desire to be part of the network.
Launched in 2015, China created the Cross-Border Interbank Payment System, or CIPS, in a bid to provide an independent international Yuan payment and clearing system, while it is connected with financial institutions across the world. Overseen by the People’s Bank of China, CIPS reported 2.68 million transactions in the first 11 months of last year, a 58 percent jump, with 1,280 users across 103 countries, including 75 directly participating banks and 1,205 indirect participants.
Observing Russia’s exclusion from SWIFT and the China-US trade friction in recent years, authorities in China believe it is necessary to reduce the reliance on SWIFT to ensure financial security. It is a sentiment shared by their counterparts in Russia, Middle-East and Africa, as fear develops that the leading global payment network is being used as a financial weapon, with a potential to freeze once economy in a matter of days.
African countries, under the leadership of Afrexim Bank, have already created the Pan-African Payment and Settlement System – a cross-border financial infrastructure that enables payment transactions across Africa. With the platform still in its infancy, time will tell if it becomes a success story and enable African countries achieve a financial sovereignty from the west.