Why did the UE propose to take other Russian banks out of SWIFT? What would be the long-term consequences? And what would happen if Russia was excluded from the global payment system? In this article, we'll discuss some of the alternatives available to russian banks, and what this move will mean for the global payment system. In addition, we'll consider some alternatives to SWIFT that Russian banks may find useful.
UE proposes to remove other russian banks from SWIFT
The European Union is set to announce measures to cut off Russian banks from SWIFT, a global payment network. The decision is a response to the Russian army's military offensive in Ukraine. This is the largest supplier of energy to Europe. France and Germany have already committed to cutting off Russian banks from SWIFT, but they will leave some Russian banks connected to SWIFT so that they can make export payments.
The decision to ban Russian banks from SWIFT has received substantial media coverage. The sanctions are aimed at the country's central bank and banks, affecting its access to the global financial system. In addition, the sanctions ban the sale, supply, transfer and export of euro-denominated banknotes to Russian individuals and entities. While the US and UK are not directly involved in the decision, they are coordinating with SWIFT to make sure that the move has a maximum impact on Russian energy prices.
The EU's proposal to ban Russian banks from SWIFT is a way to cut off Russia from the global financial system, while also preventing its banks from securely communicating with other banks. However, this is not a simple decision, and Western nations must consider all the consequences of such a move before committing to a decision. If the Russian military strikes Ukraine, it could strike the European Union or other countries. This new decision, however, will help to protect European banks from possible attacks by Russian-backed terrorists.
The proposal to ban oil imports from Russia and to cut Sberbank from the SWIFT payments network are aimed at the conflict in Ukraine. Both moves are part of the sixth round of sanctions imposed by the EU on Russia for the invasion of Ukraine. The EU's decision to ban Russian oil imports and refined products from the European Union would phase out their imports within six months and end the embargo on Russian crude and gas by the end of next year.
In addition to the proposed sanctions against Russia, the EU has already banned three state-owned broadcasters and banned six other Russian banks from SWIFT. The latest sanctions also target high-ranking military officials, individuals responsible for Bucha war crimes and the inhumane Mariupol siege. Those who are affected by these measures will face the full force of the sanctions. So, what's next?
Russia has its own payment system
The Russian central bank is pushing an initiative to unite all retail banks into a single real-time banking payment system, which it has dubbed the "System of Fast Payments". The aim of the new system is to make it possible to send and receive money faster, and also make it easier for consumers to make purchases and pay utility bills. But there are challenges. The Russian government has not announced the number of participating banks or financial institutions.
The use of digital payment methods has increased in recent years, with total digital payments projected to reach 45 billion U.S. dollars in 2024. According to the World Bank, more than 70 million people will use digital payment services in the country. In Russia, nearly 40 percent will use mobile POS services. Currently, the most popular payment system is Visa, which accounts for nearly 60% of the market. However, most Russians aged between 25 and 34 still prefer to pay using their eWallets.
The NSPK launched the Mir card network in 2017, but most Russians continued to use Visa or Mastercard. However, in 2017, Moscow passed a law that required banks to accept the cards. The number of Mir card users rose from two million to 95 million over the next five years. However, the card is not yet accepted in many countries. If the government is serious about changing its payment system, it will likely continue to make it more convenient for consumers.
With the development of CIPS, the Chinese could use it as an alternative to the Russian SPFS. The Chinese also have their own payment system, which is also referred to as a regional alternative to SWIFT. China and Russia already agreed to a "no limits" partnership before the Russian invasion. The move makes sense, especially given the current situation. In addition to Swift, the EU launched INSTEX, a payment system that can bypass sanctions.
While SWIFT is the preferred global messaging network for sending and receiving money, Russia has its own system. In 2014, the central bank of Russia created the System for Transfer of Financial Messages (SPFS), which replaced SWIFT. The system now has more than 400 financial institutions connected to the network. The Central Bank of Russia recently reduced the SPFS tariffs to less than one-fifth of the SWIFT fees. As of 2020, the SPFS is only available during working hours and the messages are only 20 kilobytes in size.
Alternatives to SWIFT for russian banks
While SWIFT is a global messaging system, some countries, such as Russia, have built their own systems. Russia, for example, developed its own messaging system called SPFS, or System for the Transfer of Financial Messages. Launched in December 2017, SPFS consists of major Russian financial institutions and a few foreign banks. By 2020, it is estimated that one-fifth of all domestic bank transactions will be handled via the system.
CIPS, a payment system operated by the central bank of China, is also considered an alternative to SWIFT. The Chinese messaging system can be used by Russian banks, as well as by their overseas partners. These bespoke bilateral systems can be used by Russian banks to complete settlements, while overseas partners would pay Russian exporters. A foreign lender has already created such a system after Iran was banned from using SWIFT.
Russia has been bracing itself for a no-SWIFT scenario since 2014. In response to Russia's invasion of Crimea, the United States first proposed unplugging Russia from the SWIFT network. This would cause a run on its foreign-funded firms and capital flight. Banks would then resort to other methods of communication, such as email or phone, to continue their transactions. This would eventually lead to the development of an alternative system called SPFS.
After the EU imposed sanctions in 2014, several Russian banks were kicked off SWIFT. However, this did not affect payments relating to energy. Energy is the largest export from Russia and accounts for more than 25 percent of the country's total. By using a different system for payments, Russia would have no need to pay for gas or oil. It is not yet clear what kind of financial losses would result if SWIFT were shut down.
Although Russia has launched its own alternative to SWIFT, this is a long-term solution and will only be temporary, with the goal of connecting more financial institutions with the global network. Russia is likely to face a severe lack of communication with the rest of the civilized world without SWIFT. In addition, with its annexation of Crimea, the world has threatened to cut Russia off from SWIFT.
Long-term impact of removing Russia from SWIFT
Despite attempts by President Barack Obama and Vice President Joe Biden to block Russia from SWIFT, the consequences of a partial ban would be far worse than a partial rout. While a partial SWIFT ban could affect the economy of the targeted country for a short period of time, the long-term effect on Russia would be far more devastating. In addition to hurting the U.S. economy, the Russian financial system is integral to its overall operation.
The problem is that the SWIFT network does not move money; instead, it helps financial institutions communicate. This means that a German company could pay a Russian gas supplier by entering its SWIFT code. The resulting rift would hurt the economy for years to come. But if Russia were to cut itself off from SWIFT, there would be a ripple effect across the globe.
While the EU does not control SWIFT directly, it has previously partnered with the European Commission and the United States to block the Russian banking system. On Feb. 26, the United States announced it would restrict Russian banks' access to SWIFT and block transactions between them. While the EU and the UK had previously acted in the same way, the ban is likely to be similar to the one imposed in the past.
With the US and EU continuing to rely on Russia for energy, a complete cut-off of Russia from SWIFT could leave the country's oil tankers unpaid. In this case, US and EU banks may have to bear the burden of these unsettled purchases. But how would the purchases be settled? In addition to the immediate impact, it would be extremely difficult to gauge the long-term effects of a unilateral decision to obstruct Russian banking and energy sector access.
While it is possible for Russia to transition away from SWIFT without a crisis, it is not likely to be a smooth transition. Russia's payment system has grown to more than 400 members, but it remains small in comparison to SWIFT's 1.3 billion users. China, however, is already developing an alternative to SWIFT and is launching its own Cross-Border Interbank Payment System (CIPS) in 2015. In 2016, some Chinese officials have called for the adoption of CIPS instead of SWIFT.