I have reading up on SWIFT quite a bit recently, to understand more about how corporates can benefit from the various available SWIFT corporate solutions. The benefits of SWIFT include a single connectivity channel to all of your banks, greater transaction visibility and reporting, combined with increased security and reliability – all of which enable comparatively lower transaction costs. But interestingly in and amongst my exploration I came to find out that member owned cooperative network plays a much greater role in its capacity as a ‘connector’ in the overall geopolitical and economic world. With the developing situation in Russia as the backdrop the purpose of this post is to share why I think SWIFT must not exclude Russian banks from the global interbank network.
1. SWIFT does not want to exclude Russian Banks
As the Ukraine crisis escalated last year (2014), European Union pressure to adopt new Russia sanctions also increased. This resulted in EU / US sanctions on Russia which targeted senior Russian officials, and Russia’s state finances, energy and arms sectors.
From a SWIFT perspective, this culminated in a European Parliament Resolution (2014/2841[RSP]) “on the situation in Ukraine and the state of play of EU-Russia resolutions”. Within the Resolution, there is a call “for the EU to consider excluding Russia from civil nuclear cooperation and the Swift system“.
The SWIFT Statement was direct:
- Stating that under the principles of European Law, “the singling out of SWIFT in this manner interferes disproportionately with SWIFT’s fundamental right to conduct business”
- Calling the European Parliament’s Resolution “discriminatory”
- Revealing how SWIFT’s reputation as a global and neutral service provider had been damaged
SWIFT was previously instructed to disconnect sanctioned Iranian banks following a EU Council decision in March 2012
2. SWIFT is a GLOBAL network through which the financial traffic flows
SWIFT states that it is a “member owned cooperative through which the financial world conducts its business operations”. Over 10,800 financial institutions and corporates in over 200 countries use the network on a daily basis to exchange financial messages.
In the article The Threat to Exclude Russia from SWIFT Erik Jones stresses the importance of SWIFT as a communication platform and as an authority who is able to bring together various groups to agree global language, standards, codes and protocols. Having a shared and common global platform where this exchange, communication and collaboration can take place is critical in a global economy.
3. SWIFT exclusion of Russia has global repercussions
In the Moscow Times article What Would Exclusion From Payment System SWIFT Mean For Russia? Howard Amos shares that SWIFT has been an integral part of the Russian financial system since its first use of the network in 1989. Howard cites Roman Chernov (head of SWIFT in Russia) who, according to RIA Novosti, shared that Russia is the second highest user of SWIFT in the world with over 600 Russian financial institutions using the network.
Simply put if you exclude Russian banks from the network they no longer have the ability, via SWIFT, to talk to one another or with banks outside of Russia. Many commentators explain that Russia has a globally focused economy that is connected to many countries around the world, and that such an exclusion would hurt Russian and foreign banks and corporates operating in Russia.
4. SWIFT neutrality must be paramount
In his article Erik explains that excluding Russia from the network “violates the neutrality of the communications standard”, and as such encourages governments to look for, or worse still develop, alternative networks. This in turn would damage SWIFT’s reputation as a global communication and standards network.
Oliver Stuenkel describes SWIFT’s “perceived neutrality is its key strength”, and that the exclusion of Russian banks sends out a message globally that SWIFT is a “tool of Western foreign policy”.
If you pursue this line of thought you have the emergence of one or more communication networks with different standards, which overall starts to “weaken” as Oliver puts it “SWIFT as a global standard”.
5. Exclusion would lead to fragmentation
You could argue that the emergence of other networks is already underway:
- China has been enhancing its platform China Union Pay since 2002, and is being touted as a very real SWIFT alternative
- Central Bank of Russia is said to be pre-emptively developing its alternative SWIFT network
- The BRICS (Brazil, Russia, India, China, South Africa) development bank is arguably shifting the focus from the West to the East…
- Oliver explains that other large economies such as India and Brazil would consequently use SWIFT but also these other networks while trading with China and Russia — all of which weakens SWIFT’s stronghold and fragments the routing of financial messages globally
Given the current Ukraine crisis the role of SWIFT is of course being debated with Russia in mind. But for the same reasons as outlined above SWIFT has a duty and responsibility far beyond Russia. The question is can the network withstand immense political pressure and remain neutral?
- The Threat to Exclude Russia from SWIFT
- Why China would benefit from Western SWIFT sanctions against Russia
- Russia To Retaliate If Bank’s Given SWIFT Kick
- ECB Warns UK: Excluding Russia From SWIFT “Could Undermine Confidence In The Whole System”
- Russian payment operator Cyberplat offers alternative to SWIFT for domestic transactions
- The Pros and Cons of a SWIFT response
- What Would Exclusion From Payment System SWIFT Mean For Russia?