In recent days, in the middle of Ukraine crisis, the (partial) ban of Russia from SWIFT system is very discussed. This retaliation is considered a “nuclear economic weapon”, the mother of all sanctions; therefore, it could be important understanding what SWIFT exactly is and how it works.
Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a Belgian cooperative providing secure messaging for international transfers of money. Founded in 1973 by 239 banks from 15 countries, it currently serves and links more than 11,000 institutions, operating in over 200 countries. As mentioned, the core business which SWIFT offers to financial institutions is a secure, scalable, and reliable network for the smooth movement of messages. Therefore, SWIFT is not a financial institution, and it does not manage financial flows; however, it facilitates secure communications between financial institutions and without it there would be many obstacles to asset transferring.
Thanks to its scalability and to the security of its platform, SWIFT is a dominant system, and it is thought to keep its position at least in the short-medium term. Formally, SWIFT is a global and neutral service provider: shareholders are countries and shares are allocated according to the contribution of shareholders for the service. In this way, each of first six nations ranked by number of shares (USA, UK, Belgium, France, Switzerland, and China if we consider Hong Kong) may propose 2 board directors; then, each of ten following nations of the ranking can express one director, and the other nations can propose no more than three directors. In addition to the first six, other current directors are from Spain, Italy, Germany, Sweden, Luxemburg, South Africa, Singapore, Netherlands, Canada, Russia and Japan. Although the balanced composition of the board, 40% of SWIFT transactions are in dollars, 35% in euro and 7% in pounds, allowing US or EU to block and exclude companies, financial institutions or whole countries from dollar or euro transactions. Moreover, being SWIFT a Belgian cooperative, it must respond to EU law.
Russia is not the first case of SWIFT ban. In 2012, indeed, it was the turn of Iran. The continuous process of uranium enrichment pursued by the country had raised many concerns since the early 2000s, leading to many sanctions over time, which ended up with the ban of Iranian banks from the SWIFT system. The Belgian cooperative implemented this decision complying with a decision by the European Union Council, taken under the pressure of US. Consequences on Iranian economy (due to many kinds of sanctions, not only SWIFT ones) were catastrophic: it was estimated in 2015 by the US Treasury Secretary that Iran’s economy was 15 to 20 percent smaller than it would have been without 2012 sanctions, with the rial’s value declined by 56% between 2012 and 2014, and with more than $100 billion held in restricted accounts out of the country (this latter mostly due to SWIFT ban). That situation condemned Iran to many years of austerity and to the ruin of oil industry. Engaging in stopping the nuclear program with the signing of JCPOA agreement, Iran obtained in 2016 the reconnection of its banks to the SWIFT system. However, after only two years, Iran broke the agreement, and, consequently, Trump administration pushed for another SWIFT ban; although the European resistance to this measure, US succeeded in making it. As a consequence, in 2019 EU launched INSTEX, a new system to allow European firms to trade with Iran avoiding the usage of SWIFT. However, the great majority of European firms had chosen not to use INSTEX system, fearing possible sanctions and partial exclusion from the US market, mindful of BNP Paribas case (a French bank which, after having been discovered doing business with Cuba, Iran and Sudan in spite of US sanction on those countries, was sanctioned with about $9 billion of fine and with a temporary ban from dollar transactions by the US Department of Justice). These events demonstrate that, despite being under the Belgian and European jurisdiction, SWIFT is strongly influenced by US, which can use the threat of secondary sanctions or that of pulling its banks from SWIFT system.
Are there any ways to mitigate this US dominance? New scenarios may open in the future…already in 2008 Chinese president Hu Jintao at G20 summit called for alternatives to the dollar-based system. Moreover, shortly after Iran’s SWIFT ban, People’s Bank of China began developing its own alternative for financial messaging and interbank payments, which launched in 2015, under the name of CIPS (Cross-Border Interbank Payment System). Furthermore, to spread the use of this system, in recent years China has been increasing the international circulation of renminbi through trade (in part relying on Belt and Road Initiative) and through the launch of the digital currency, the e-RMB. Currently, China is still making use of SWIFT and of dollar in foreign transactions, however, according to the economist Edward Prasad, “China’s government is astute enough not to challenge SWIFT until the CIPS has matured, but no doubt one day the challenge will come".
Concerning the Ukrainian crisis, on 3rd March 2022, the EU decided to disconnect seven Russian banks from SWIFT system. This decision has not been taking without sufferance and doubts, since it will damage also the sanctioning countries. Firstly, indeed, European countries would face short-term costs: European banks have $56 billions of frozen credits with Russian banks, in particular Italian, French and Austrian banks. Moreover, Russia provides 35% of Europe’s gas supply and if also Gazprombank (not banned for the moment) is disconnected from SWIFT, paying energy supplies will become harder for European countries. Secondly, SWIFT sanctions could push some countries, whose geopolitical interests differ from Western ones, to find alternatives, making them less vulnerable to sanctions themselves in the long run.
After Crimean crisis of 2014, Russia implemented two new systems. The first one, the MIR, is used for national transactions (in Russia, Armenia, Ossetia, and Abkhazia); the other one, the SPFS (System for Transfer of Financial Messages) is (at least it tries to be) a sort of substitute of SWIFT and it registered in 2021 20% of Russian transactions, with more than 400 institutions. Therefore, if the SWIFT ban menaced in 2014 was considered a “declaration of war” by Russia, now the impact on Russian firms may be hard but not so hard as thought. Russia can rely on its 2 systems, and, since China has not imposed any economic sanction, it may increase its usage of CIPS, creating a further connection between the two countries. However, this could represent a risk for Beijing, which could jeopardize commercial relations with the West (far more important than trade with Russia).
In conclusion, SWIFT system is a very strong weapon under EU (formally) and US (substantially) control. However, in a context in which the share of dollar as a reserve currency is decreasing (from 71% of 2001 to 59% of 2021), and with China that is increasing renminbi’s circulation, the SWIFT ban sanction against Russia could lead, in the long run, to a decrease of the dependency on dollar and to the creation of a new financial block, maybe based on CIPS. This latter in 2021 had a daily average volume of transactions of 310bn yuan ($50bn): it is still well behind SWIFT’s estimated $400bn, but it nearly doubles the volume of a year before.
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