Debt Resolution Process - Indian perspective

SWIFT and RUSSIA

 

In recent days, the term SWIFT has been heard a number of times, in context with sanctions imposed on Russia by western countries, in retaliation for Russian invasion of Ukraine. Here an attempt is being made to explain SWIFT to the uninitiated, its importance and usage. We shall also briefly touch upon Russia’s position.

 

SWIFT stands for Society for the Worldwide Interbank Financial Telecommunication. When I joined the banking industry in early eighties, financial messages viz. opening of letters of credit were effected through tele printer (telex) machines The system was slow and over a period of time it was unable to handle increasing number of transactions. Therefore a need was felt for establishment of a an advanced secure messaging system that would facilitate cross-border financial transactions. SWIFT was born in 1973 with its headquarters at Brussels, Belgium.

The organization started with 500 member institutions in 22 countries and currently serves over 11,000 financial clients located in 200 countries. It operates a processing and communications service for financial messages such as letters of credit, payments etc. SWIFT is a pure messaging system and does not handle money itself. It operates on a standardized platform, programmed in a language known as FIN, which provides specified codes to the member institutions for conveying various details of the transaction. SWIFT FIN is a message type (MT) code represented by a three digit number for transmitting financial information from one institution to another.

SWIFT code contains 11 characters. First 4 characters are used to identify Banks or Financial Institution, next 2 characters are used to identify Country and next 5 characters are branch codes for that particular Bank. For example SWIFT code for a Bank of India branch in India would be BKIDINxxxxx, where the last 5 alphabets are the branch code.  Any Bank anywhere in the world wishing to send a financial message to this branch of Bank of India would use this code. SWIFT code has therefore become the global unique digital identification code for a particular bank branch.

 

Its voluntary for Banks to become part of the SWIFT system and obtain / assign codes to its various offices. But since the system has gained so much popularity, it has become the preferred messaging and communication channel between Banks internationally.

Stoppage of SWIFT Services to Russia

After Russia’s invasion of Ukraine on 24^th February, 2022, Western countries led by the United States moved to impose economic sanctions on Russia. Although the purported objective was to punish Russia for its invasion, but the main aim was to weaken Russia economically. This may impede Russia’s ability to carry on with the war for a longer time as well as weaken Russia as a world economic power and as a rival of the US led western bloc. Russia has 4^th largest forex reserves aggregating USD 643 billion in the world, ranking  after China, Japan and Switzerland.

As part of these economic sanctions, on 2^nd March 2022,  the European Union expelled 7 large Russian Banks from the SWIFT system. Since SWIFT is headquartered in Belgium, it is subject to EU laws. Russia’s two largest Banks Sberbank and Gazprombank were exempted from sanctions probably because most Oil and Gas payments in Europe are routed through these two Banks and excluding them from SWIFT would have hurt EU countries themselves. Switching off the SWIFT system from main Russian Banks shall prevent these Banks from conducting international trade smoothly and thus damage Russian economy.

 

Russia’s Options

In 2014, at the time of Crimea crisis, when the Western world threatened Russia with imposition of  economic sanctions including exclusion from SWIFT platform, Russian Central Bank started working on its own financial messaging system as an alternative to SWIFT.

In December 2017, Central Bank of Russia started implementing SPFS (Sistema Peredachi Finansovykh Soobscheniy,  meaning System for Transfer of Financial Messages). The system is currently used majorly in Russia with some Banks in friendly countries like Belarus, Armenia, Kazakhstan and Kyrgyzstan etc. also on boarding the platform. The system was developed as a contingency tool for situations like the current one, to prevent total collapse of Russian Banking system, and not as an international alternative to SWIFT.  Currently about 20 % transactions in Russia, are routed through SPES. China has also developed its own financial messaging platform called CIPS ie. China Inter-Bank Payments System.

SWIFT and  SPFS /CIPS are based on similar algorithms. Therefore, any friendly country / Bank who wish to circumvent western sanctions and continue trade with Russia can onboard SPFS quickly.

The Future

Latest developments in global geo politics show that financial systems can be conveniently used to further political agenda. SWIFT is a financial messaging tool and barring Russian Banks from the platform shall ultimately hurt the Russian public at large, creating shortages and giving rise to inflation. But such adverse situations will give rise to further refinement and integration of platforms like SPFS and CIPS thus challenging western domination of international financial system in the long run. In such an eventuality, it is possible that the current measures may ultimately hurt US and its allies also and reduce their dominance in world affairs.