SWIFT, set up in 1973 by American and European banks, is overseen by the National Bank of Belgium, the US Federal Reserve System and the European Central Bank, among others.
The Western nations have announced that select Russian banks will be blocked from SWIFT, the global financial messaging system, in response to Russia’s military aggression in Ukraine. Their aim is to ensure that “these banks are disconnected from the international financial system and harm their ability to operate globally”. In this quick explainer, FE looks at what SWIFT is all about and how the move will impair Russia’s ability to trade internationally, and impact India.
What is SWIFT and how does it function?
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is essentially a secure messaging system that connects over 11,000 financial institutions in more than 200 countries and territories, and ensures rapid cross-border payments. This has emerged as the main mechanism for global trade finance. A bank typically asks a customer, who wishes to undertake a cross-border transaction, about the receiving bank’s SWIFT code, or electronic address, without which money can’t be transferred.
At the same time, SWIFT is also a Belgium-based institution, which forwards the electronic transfer order from the sender’s bank to the recipient’s bank. If it decides not to forward the transfer messages, money can’t be transferred. On an average, SWIFT recorded 42 million messages a day in 2021. Thus, it doesn’t move the money itself but still remains “the artery of the global financial system”.
Who controls or manages SWIFT?
SWIFT, set up in 1973 by American and European banks, is overseen by the National Bank of Belgium, the US Federal Reserve System and the European Central Bank, among others.
How will SWIFT sanctions impact Russia?
The West has so far moved in to block select Russian banks from the SWIFT system, and not all, analysts say. It will cripple the cross-border payment mechanism of these banks. Simultaneously, it will add to the hassles of international financial institutions and customers that have been dealing with these banks. Particularly, cross-border transactions for exports and imports made though these banks will come to a halt. The “partial blocking” is basically a warning to Russia to back off and also ensure limited collateral damage to other countries, mainly in Europe (such as Germany and Italy) that heavily depend on Russian oil and gas. But if it doesn’t, there is scope for expanding the SWIFT ban to cover all Russian banks. This will be devastating for Russia, 40% of whose revenues come from petroleum trade.
At the same time, if the ban covers all Russian banks, Russian importers may default on payments on a large scale, which will hurt Europe and others that trade with Moscow. Also, according to some estimates, Russian-based entities owe foreign banks have about $121 billion in assets, of which about $14.7 billion are owed to American banks alone. These foreign banks would find it extremely hard to recover what is owed to them.
Has any country been ousted from the SWIFT network and what’s the impact?
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.
Can Russia beat the SWIFT restriction?
If the SWIFT curb remains limited to few Russian banks, trade transactions can be routed through other Russian financial institutions that are still outside the ambit of the sanctions. However, if the ban is extended to the entire Russian banking system, it would be a herculean task for Moscow to tide over it. However, in that case, Russia may start to trade in currencies other than the dollar or the Euro or the Pound for some time. It may get into barter deals with trade partners (oil in exchange for other commodities). It may also decide to receive payments in gold, or in the worst possible scenario in cryptocurrencies (if some unconfirmed reports are to be believed) against its energy supplies. However, these are not going to help much and its economy will take a massive hit.
How does the SWIFT curb on Russian banks impact India?
India may witness some cancellations of supply orders by the Russians; domestic exporters, too, may choose to cancel some. If all Russian banks are ousted from the SWIFT network, payments will get delayed and ultimately hit trade.
Indian exporters are already urging the government to put in place a mechanism to ensure their payments are not stuck even if more sanctions are imposed on Moscow. The mechanism, they say, can be modelled on the rupee-rial architecture that was used to clear payments to domestic firms when the US had slapped sanctions on Iran. Since India has a trade deficit with Russia (it was as much as $4.34 billion until December this fiscal), in certain cases, a barter system can also be activated easily. Given the trade deficit, impact on India will ultimately limited, some analysts say. Under the rupee-rial mechanism, Indian refiners used to import crude oil from Iran and make payments to the designated rupee-account at Uco Bank and IDBI Bank. This money was, in turn, used to pay Indian exporters. This continued until crude oil was in the exempted list of US sanctions. India mostly buys petroleum products, diamonds and other precious stones and fertilisers from Russia. Similarly, it ships out capital goods, pharmaceutical products, organic chemicals and auto parts to Moscow.
When did SWIFT create a buzz in India?
The SWIFT network was the focal point of one of the country’s biggest banking scandals that came to light in 2018. It involved jewellers Nirav Modi and his uncle Mehul Choksi, who allegedly defrauded PNB of about $2 billion. The SWIFT system was misused by some officials at PNB to issue letters of undertaking (typically credit guarantees) to firms of the Nirav Modi and Choksi from 2011 onwards without making corresponding entries in PNB’s core banking solution (CBS) to escape tighter scrutiny of transactions. This prompted the Reserve Bank of India to direct mandatory linking of banks’ CBS with the SWIFT by April 2018.