This blog is about Swift, I don’t use it but you may – so skip the explanation if you do – it’s for the non-bankers among us!
With the rapid deterioration of the Russia/Ukraine situation, you’re going to hear a lot about SWIFT in the coming days…
Here’s a quick breakdown of what it is and why it matters:
— Sahil Bloom (@SahilBloom) February 24, 2022
Today, SWIFT connects more than 11,000 financial institutions across 200+ countries.
Think of it like a simple email system enabling secure messages across its members.
An average of 40 million messages a day—including orders, payment confirmations, FX exchanges, and trades.
— Sahil Bloom (@SahilBloom) February 24, 2022
This happened in 2012 with the sanctions package on Iran in retaliation for it’s nuclear program.
It was looked at in 2013-14 in response to Russia’s actions in Crimea.
Cutting off SWIFT access is viewed as a VERY significant move, so the consideration alone is material.
— Sahil Bloom (@SahilBloom) February 24, 2022
It is a key energy supplier to Europe and the world.
It is an exporter of materials critical to the manufacturing of jet engines, semiconductors, automotives, electronics, and fertilizers.
Cutting off Russia from SWIFT would impact the flow of payments for these industries.
— Sahil Bloom (@SahilBloom) February 24, 2022
A cutoff from SWIFT may also have longer-term second-order effects on Bitcoin and non-fiat currencies.
The base logic: Russia may seek to circumvent the impact of the restrictions via a combination of its in-house system and a push away from the USD-reserve currency hegemony.
— Sahil Bloom (@SahilBloom) February 24, 2022
For more:https://t.co/3m24Ck1Twm https://t.co/ftoENoeBEP
— Sahil Bloom (@SahilBloom) February 24, 2022
The decision the world has to take
I am pleased to see the strong position that Britain seems to be taking on this.
It seemed that Swift wasn’t on Joe Biden’s shopping list of US sanctions . My contacts tell me that it is Germany and Italy who are resisting expulsion from SWIFT not Biden. They also tell me that the Russian banks can work around it now using the Chinese CIPS system – but expulsion would none the less make things a lot more difficult (and probably expensive – the Chinese won’t do it for free).
Biden’s speech last night was, as I expected, as much about reassuring Americans they would not feel pain from sanctions as assuring the Russian authorities they would. Which sent out mixed messages to the world about just how committed the USA is to isolating Russia and making their continued occupation of Ukraine uncomfortable.
War is a pretty harsh business and it’s consequences are felt by markets. The German , Italian and American people may feel that it has no reason to suffer economically to prevent Russia’s expansion. The price at petrol pumps seems to have become a benchmark of sentiment as much as the price of gas in Europe.
Let’s hope that the message Russia gets is unified and that Biden puts his foot down on Swift. Half-hearted responses to what is going on in Ukraine will be seen as weakness, and that will fan the fires of Vladmir Putin’s intent.
It may be a mistake to describe CIPS as Chinese (the C stands for Cross-Border) with costs only being levied one-way.
SPFS (System for Transfer of Financial Messages) is said to be a Russian equivalent of the SWIFT financial transfer system, developed by the Central Bank of Russia since 2017. The system had been in development since 2014, after the United States government threatened to disconnect Russia from SWIFT after Russia invaded “Ukrainian” Crimea.
Russia’s SPFS could link up with the Chinese cross-border interbank payment system CIPS.
Meanwhile, although India still does not have a domestic financial messaging system of its own, it may have plans to link the Central Bank of Russia’s platform with an Indian service under development.
The BRICS nations are said to be separately exploring trade among themselves in national currencies. It was reported in 2019 that, to bypass the threat of US sanctions, India had decided to pay in euros for defence equipment purchased from Russia. India and Russia have also been trading through rupee-rouble mechanisms.
The EAEU (Eurasian Economic Union) countries are also said to be working with the Bank of Russia on technical options for connecting to the SPFS. Iran, which has agreements with this Russia-led free-trade zone (EAEU) since 2019, may also be developing a joint alternative to SWIFT. SWIFT cut off Iranian banks from its messaging system in 2018.
Thanks Byron