By Swann Collins, investor, writer and consultant in international affairs. Eurasia Business News – March 2, 2022

View on Moskva City, the Moscow International Trade Center, where billions of dollars are made every day. The disconnection from SWIFT will force Russian companies and banks to find alternatives.

Photo credit : Swann Collins, January 2022

The European Union officially disconnects seven Russian banks from the SWIFT international payment system. They were given 10 days to wind down SWIFT operations.

VTB Bank (the second largest in Russia), Otkritie Bank, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank and VEB should close their operations within 10 days.

Banks from this list are selected based on ties to the Russian state. State-owned banks have long been under sanctions. 

Sberbank and Gazprombank were not included in the list as they are the main payment channels for Russian oil and gas, needed for the European economy.

What is SWIFT, how does it work?

SWIFT is an international system for transferring interbank payments. It is named after the Society for Worldwide Interbank Financial Telecommunication of the same name, which is its operator.

SWIFT allows you any bak to quickly and securely exchange data on transfers of funds, payments and the exchange of securities over a special SWIFTNet network, which operates on the same principle as the Internet. Unlike payment systems (Visa or MasterCard), it only transports transfer messages and is used at the interbank level.

International transfers can be made using remote banking systems or telex (a type of telegraph communication with subscriber identification), supplemented by facsimile or postal messages. However, such transfers are not protected, they take longer than messages via the SWIFT system (up to several hours instead of several seconds). In addition, many banks have abandoned telex, considering it an obsolete system.

What impact on the Russian economy ?

Since 1995, the interests of Russian network users have been represented by the Russian National SWIFT Association (“Rosswift”). As of April 29, 2021, almost 300 banks in Russia use the SWIFT system (more than half of the total number of credit institutions registered in Russia) – in terms of the number of users of the Russian Federation, it is second only to the United States. By the mid-2010s, Russia accounted for about 0.8% of the total number of transactions in the system. At the same time, the share of SWIFT in domestic settlements five years ago exceeded 80%, but by now it has fallen to 20%.

In 2014, the Bank of Russia launched the Financial Messaging System (SPFS) in test mode, which can transmit data in the SWIFT format, but does not depend on its channels. In 2017, SPFS started working in full, transmitting messages about transactions in any currency. Initially, it was intended only for domestic Russian users, but by April 2021, more than 20 Belarusian banks, the Armenian Arshidbank and the Kyrgyz Bank of Asia were connected to it. Subsidiaries of large Russian banks in Germany and Switzerland also have access to it. Negotiations are underway on SPFS settlements with China. To date, 399 users are participating in the system, including banks from Belarus, Armenia, Kyrgyzstan, Kazakhstan, Tajikistan and Cuba. 

In 2020, the monthly traffic of SPFS amounted to 2 million messages, the share of the system in the domestic exchange of financial data was 20.6%, ahead of SWIFT. At the same time, more than half of domestic financial messages were transmitted using other channels, including Sberbank Finline.

The disconnection of large Russian banks from SWIFT will fuel the Russian move to free its economy from dollards and strengthen partnership with China. Both China and Russia have been steadily purchasing gold bars since 2014 and have been voicing for an alternative global monetary system, built on regional currencies and not anymore on the US dollar.

Banning the main Russian banks from the SWIFT payment system is an attempt to cut Russia off from international trade, not so much with Asia and China with which alternative payment systems have been set up, but certainly with Europe, which trades a lot with Russia unlike the USA. By the way, this sanctionswill therefore make a certain victim, the European economies, heavily relying on Russian gas and oil.

Read also : How to invest in gold

Since 2014 Russia has more than doubled the amount of gold in reserves. Also, the Bank of Russia was the largest consumer of gold in the country. Russia was the second largest producer in the world in 2020 and accounted for 9.88 per cent of total global production, with 331.1t of mined gold. Russia’s international monetary reserves rose by $3.6 billion from February 21 to 24, reaching a new all-time high of $643.2 billion. 

Which countries have already been disconnected from SWIFT?

In 2012, there was the first and only case of disconnection from SWIFT as a sanction measure. At the time, the US Senate Banking Committee threatened to impose sanctions on SWIFT if it did not turn off the main banks in Iran, which the United States accused of servicing the Iranian nuclear program: Mellat, Post, Saderat and Sepah banks were among them. On March 15, 2012, similar measures were approved by the Council of Europe. 

Read also : Ukraine’s gold and foreign reserves reached highest since 2012

Update to come.

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© Copyright 2022 Swann Collins, investor, writer and consultant in international affairs.