Following the Russian regime’s recent invasion of Ukraine, the global west’s leadership responded with a strong package of sanctions. Without any doubt, the hardest hitting of these sanctions was Russia’s removal from the SWIFT global banking network. However, some commentators have criticised the move alleging that it may disrupt the globalisation process. In this post we will examine what the implications of Russia’s removal from SWIFT mean for global trade, for India, and whether the time has come to re-imagine the global banking network.
What Is SWIFT?
Founded in 1973 in Brussels, The Society for Worldwide Interbank Financial Telecommunication was born out of early recognition of the emerging trend for telecommunicative bank transfers. Initially consisting of 239 banks from 15 countries, the SWIFT network soon rose to become the world’s dominant interbank messaging system that underpins international money transfers. Today the SWIFT network operates in over 200 countries, helps carry 40 million interbank messages each day, and facilitates the processing of trillions of dollars of international money transfers each year.
SWIFT has become one of the backbones of the global banking industry and membership is essential for any institution that wishes to partake in the world’s financial marketplace. Put simply, without access to SWIFT, Russian banks cannot send money across borders and neither can their customers.
Therefore, Russia’s abrupt removal from the network immediately threw the nation’s banking system into disarray, sent the Ruble plummeting and threatened to force Russia’s multinational companies out of business.
Some of the consequences of this were perhaps not immediately obvious. When the decision to expel Russia from SWIFT was announced, some Russians were shocked to find that their Paypal accounts had either been frozen or closed. This is because even non-bank institutions and non-bank providers for international money transfers, that rely on SWIFT are prevented from transferring money to or from Russia. This includes household names like Paypal as well as more niche fin-tech providers like Revolut.
Impacts on India
Russia’s removal from SWIFT has resulted in both direct and indirect consequences for the Indian economy. The two nations have a very sizable bilateral trade relationship and in the financial year 2021-2022, trade between the two amounted to $9.4 billion. Without an efficient, reliable and cost-effective way to transfer money between them, that trade will eventually wilt.
The trickle-down ramifications may also be felt by many ordinary Indians. India is reliant upon Russia for its imports of crude oil, petrol gold and precious metals, coal and fertiliser. This means that unless other trading partners are found and fast, supplies of these essential goods will eventually dry up, hitting Indian industry and potentially even agriculture. Russia is also India’s largest supplier of arms and the very notion of losing access to 60-70% of its imports just as the world seems to be drifting towards armed confrontation, should already be causing sleepless nights in the mess hall’s of Dehradun.
Finally, the local economies in states like Goa are heavily dependent on Russian package tourists. Following Russia’s removal from SWIFT, visitors from Russia were no longer able to pay for their holidays bringing an abrupt end to Goa’s tourist season – bad news for a state already struggling to recover from the COVID pandemic.
Moving SWIFTLY on – Is It Time for An Alternative?
Russia’s removal from SWIFT has already caused some to question the fairness and long term viability of the network. Indeed, some of the staunchest critics of the move are pointing out that over-reliance on SWIFT ultimately leaves countries at the mercy of the networks controlling interests.
But what exactly are those controlling interests? SWIFT is a member-controlled cooperative headed by 25 independent directors but there is no denying that the political and financial clout of the US can exert some real influence over its decision making. It is for this reason that both Cuba and Iran have long been blacklisted from SWIFT and are unlikely to even be considered for admission in this generation.
The former Reserve Bank of India (RBI) Governor Raghuram Rajan wrote in a recent essay that “If used too widely, sanctions could reverse the process of globalisation that has allowed the modern world to prosper” and he does have a point – overusing expulsion from SWIFT would eventually erode all trust in it. Of course, it does need to be borne in mind that the invasion of sovereign countries by neighbouring superpowers perhaps does far more to disrupt globalisation and mutual prosperity than the consequent financial sanctions ever could. Furthermore, allowing rogue states to use SWIFT would also invite a loss of trust in its sanctity.
There are already a few workarounds to SWIFT even if there isn’t a ready-to-go, full-blown alternative in place. Perhaps anticipating its eventual estrangement from SWIFT, Russia launched its own System for Transfer of Financial Messages (SPFS) back in 2014. Whilst so far only 200 financial institutions have joined up, Russia is now trying to get its remaining allies to sign up and use it for international money transfers. Perhaps more interestingly though, China launched CIPS in 2015; by the close of 2021 CIPS was processing transactions worth around $12.68 trillion, had attracted 1,280 financial institutions and established a presence in 103 countries and regions.
That said, if one’s criticism of SWIFT is that it lends an unfair amount of political and economical power to Western superpowers, then surely the solution cannot be to simply replace the network with one underwritten by other, less democratic, superpowers.
Bringing our focus squarely back to India here, being dependent upon a global banking system controlled by China would not be in the national interest.
Decentralisation Fund Transfers
If there is ever going to be a fully ‘veto-proof’ financial processing system that it would have to be completely decentralised. So far, the only competent example of fully decentralised processing technology seems to be Blockchain, the tech that underwrites BitCoin and most other cryptocurrencies. And indeed, whilst Russian citizens may have had their Paypal accounts closed, they are still able to send or receive payment in Bitcoin.
It may be that a decentralised payment network emerges in the coming years that will eventually replace SWIFT and all of its pretenders. Indeed, many may even be looking to India to facilitate this as the spearhead of the Non-Aligned Movement. However, it is difficult to imagine the central banks of the world taking this lightly, and any such network would probably undergo a difficult teething process. Just as several governments have previously threatened to make Bitcoin illegal, some may be tempted to ban their currency from being traded on any decentralised network, or even ban their citizens from using it.
Final Thoughts
There is no denying that SWIFT has been weaponized and deployed against Russia. Still, whilst this has attracted some criticism, allowing Russia to remain in SWIFT would have attracted far more as it would effectively have been enabling a ‘business as usual’ approach to global finance, ignoring the painful realities of war.
Rather, the controlling interests behind SWIFT have calculated that allowing Russia to remain a user, would only have prolonged the war in Ukraine. Aside from the questionable morality of this, it must be remembered that a prolonged war in Europe ultimately means bad news for the global economy including India.
Under the current status-quo, isolating members of SWIFT is going to happen from time to time. Doing so will always cause some economic damage but thus far there is no evidence to suggest that the SWIFT sanction is going to be overused. In conclusion, whilst there are going to be economic and trade impacts on India like the ones we are seeing now, the reality is that India is far better off inside the SWIFT system than it is outside of it.
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