Society for Worldwide Interbank Financial Telecommunication (SWIFT)

In News 

• The U.S., Europe and several other western nations are moving to exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

What is SWIFT?

• SWIFT is a messaging network used by banks and financial institutions globally for quick and faultless exchange of information pertaining to financial transactions. 
  • SWIFT was founded in the 1970s, based on the ambitious and innovative vision of creating a global financial messaging service, and a common language for international financial messaging.
• SWIFT does not actually move money; it operates as a middleman to verify information of transactions by providing secure financial messaging services to more than 11,000 banks in over 200 countries.
• It provides standardised and reliable communication to facilitate the transaction.
• SWIFT doesn’t hold deposits. 
• Based in Belgium, it is overseen by the central banks from eleven industrial countries: Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, besides Belgium.
  • Swift delivers an average of 40 million messages a day that includes orders and confirmations for payments, trades and currency exchanges.
• Swift would bar countries or entities only if the EU passes a sanction. SWIFT has 40% of its payment flows in US dollars.
• In 2021, the SWIFT financial messaging platform had recorded an average of 42 million FIN messages per day. 
  • The full-year figure was an 11.4% growth on a year-over-year basis.

How does SWIFT work?

• Financial institutions connected to SWIFT use its messaging system to establish relationships with other banks and make payments. 
  • The secure messaging system allows banks to honour the payment instructions without question, subsequently helping banks process high volumes of transactions at speed. Each year, trillions of dollars are transferred using the system.

• Each participant on the platform is assigned a unique eight-digit SWIFT code or a bank identification code (BIC). 
  • If a person, say, in New York with a Citibank account, wants to send money to someone with an HSBC account in London, the payee would have to submit to his bank, the London-based beneficiary’s account number along with the eight-digit SWIFT code of the latter’s bank. 
  • Citi would then send a SWIFT message to HSBC. 
  • Once that is received and approved, the money would be credited to the required account.

What happens if one is excluded from SWIFT?

• If a country is excluded from the most participatory financial facilitating platform, its foreign funding would take a hit, making it entirely reliant on domestic investors. 
• This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
• An alternative system would be cumbersome to build and even more difficult to integrate with an already expensive system. 
• Excluded countries 

• Certain Iranian banks were ousted from the system in 2018 despite resistance from several countries in Europe. 

How could a SWIFT ban affect Russia?

• Banning Russian banks from availing SWIFT services restricts the country’s access to financial markets across the world. 
• Russia is heavily reliant on SWIFT due to its multibillion exports of hydrocarbons denominated in US dollars. The cutoff would terminate all international transactions, trigger currency volatility, and cause massive capital outflows.
• It would make it harder for Russian companies and individuals to pay for imports and receive cash for exports, selling goods to Russia is also bound to become riskier and more expensive.

Impact on India

• Amid sanctions on Russia, India might face interruption and delay in arms import.
• Bilateral trade between India and Russia stood at $9.4 billion so far this fiscal year, against $8.1 billion in 2020-21.
• India majorly imports crude oil, petroleum products, coal, fertilisers, gold, precious stones, and precious metals. Besides, Russia is also India’s biggest arms supplier. Almost 60-70% of its military supplies are from Russia.
  • India is procuring the S-400 air defence systems from Russia. It also recently signed a contract for AK-203 rifles with production slated to begin in India soon.
  • Sanctions on Russia could jeopardise India’s recent $375 million BrahMos cruise missile export contract with the Philippines.

Impact on other countries

• A ban on Russia could make international trade more difficult and hurt other countries’ economies.
• European countries will not be able to receive goods – oil, gas, metals, and other important components of their imports.
• Exporters would find selling goods to Russia riskier and more expensive.
• The United States and Germany would stand to lose the most if Russia were disconnected, because US and German banks are the most frequent SWIFT users to communicate with Russian banks.
• The EU is cautious due to its dependence on Russia for oil and gas. The EU relies on Russia for around 40% of gas needs.

Is there an alternative to SWIFT?

• Since 2014, Russia has run its own financial messaging system for Russian and foreign banks.
  •  It has developed an alternative messaging system called SPFS (Financial messaging system of the Bank of Russia) which handles about a fifth of domestic payments. It has only 400 users. 
  • This is a reliable and secure channel for sending electronic messages on financial transactions.

Conclusion 

• There is some relief for the country as India and Russia bilateral payments are made in Indian Rupee and sometimes in other currencies like Euro for both imports and exports. So, sanctions on Russia may not have an impact on the payments.
• The arrangement ensures that the Russian payments will be settled even if Russia is cut off from the SWIFT gateway.
• But the geopolitical crisis between Russia and Ukraine spells trouble for India among other Asian economies.

Source:TH