The disconnection of Russian banks from the system of global financial communication has always been seen as a last resort. Even now only seven banks are banned from accessing SWIFT. But at any time, a decision can be made to completely block access to SWIFT for Russian financial institutions. How does this threaten citizens and companies?
Why SWIFT is so important
SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a global financial cooperative headquartered in Belgium with 3,500 banks as shareholders. The main task of SWIFT is to quickly make payments both between banks in different countries of the world and within individual states by providing financial communication.
In simple terms, official information is a global interbank messenger that helps you make payments quickly. “Banking Whatsapp” encrypts and transmits short service messages for which banks carry out transactions. But not everything is so simple. Apparently, the functionality associated with SWIFT helps to build the best route for the transaction as quickly as possible and check the availability of funds on the accounts of counterparties along the route. That is, in fact, it performs a function similar to routing when transmitting information on the Internet, says Evgeny Nadorshin, chief economist at PF Capital.
The system has been operating since 1977 and is used by banks in almost all countries of the world. Now more than 11 million financial institutions from 200 countries are connected to SWIFT. More than 5 billion messages are sent via SWIFT per year.
Some countries are trying to create local systems for the exchange of financial information. For example, SUCRE operates in Latin America, and CIPS operates in China. In Russia, there is also an analogue of SWIFT – this is the “Financial Message Transfer System” (SPFS). But its role in transactions even within Russia is only 23%. SPFS is not able to provide cross-border payments, and even, as it turned out, transactions in foreign currency within the country.
Many market participants have criticized SWIFT for its technological backwardness, slow transformation, and high cost. But no one created a global competitor to SWIFT – everything worked anyway. Until recently.
What will happen after SWIFT is disabled in Russia
“Before, when [SWIFT] was not, such information was transmitted by faxes, telephones, they carried bills in folders and suitcases. Who benefits from switching off SWIFT? Nobody. Only this is what is called if you annoy yourself, ”said Finance Minister Anton Siluanov at the end of 2021.
The official also recalled that Russia supplies raw materials and hydrocarbons to Europe. And so the parties will have to find tools for the exchange of transactional information.
Since there is no replacement for SWIFT yet, at first all international payments between foreign and Russian companies, or between foreign and Russian citizens, will take quite a long time and their cost will increase, experts are sure. But this will not lead to a complete collapse and rupture of all financial chains.
Payments in rubles within the country will be credited without any problems. It is possible to increase the duration of transactions. Payments in foreign currency within the country will slow down to several days and possibly weeks. SFPS, as experts say, for some reason did not provide currency transactions even within Russia.
“Currency payments within the country are also still going through SWIFT. For some companies, payments within the country in foreign currency are already “hanging”. Clients are advised – if you want to quickly transfer currency, and the addressee is nearby, withdraw cash and carry it in your suitcase, ”says Evgeny Nadorshin.
With cross-border transfers, things will be much worse.
“Essentially, the global banking system is a system of correspondent relations. And SWIFT is its most important part. It was SWIFT that allowed banks not to open a correspondent account with every foreign partner bank. Therefore, now, in order to make international transfers, it will be necessary to actually re-build a network of correspondent accounts, ”Nadorshin emphasized.
What does this mean in practice? To replace SWIFT, Russian financial institutions will have to open many correspondent accounts in foreign banks in order to make payments to them directly. It’s not easy, it’s not fast, and it’s more expensive. Plus, on such accounts it is necessary to ensure that there is an amount sufficient for making payments.
“And most importantly, these accounts will need to be replenished or withdraw money from them on their own. But how to do it? It is almost impossible to carry money by plane, for example, to Europe. But you can still bring a truckload of cash there. But how to deliver the same suitcase somewhere in Venezuela, how expensive will it be, how long will it take? ”Nadorshin asks. Similar problems will arise for Western partners, who will still trade with Russia.
Probably, large Russian banks will build a correspondent network around the world, distributing certain countries among themselves, Nadorshin believes. For example, Sberbank will take on 10-15 countries, VTB will take on the same number, and other large financial institutions will take on several countries. And everyone will work with each other to provide wiring. Naturally, this will lead to an explosive increase in the administrative and financial burden on banks. As a result, the speed of making payments will decrease.
“Everything will slow down a lot, payment orders will be executed for weeks. A mountain of encrypted messages will fall on employees, they will have to be sorted out, ”says Fedor Naumov, managing partner of PFL Advisors.
Banks, in turn, will try to shift part of the costs to customers, so the commission for transfers will increase.
A similar situation will be observed for payments to individuals. Now not all Russians can make currency transfers abroad. Foreigners can no longer send funds to all Russian banks and not all recipients. But in the event that Russian organizations are disconnected from SWIFT, people both in Russia and abroad will have to look for a specific pair of foreign bank-Russian bank, which have established correspondent relations with each other. And information about this is unlikely to be laid out in the public domain.
“It will be a quest – find a way to send money to or from Russia,” says Nadorshin. It is clear that there will not be many who want to go through it.
In addition, many banks already have a block for transferring funds to Russia.
“It’s not even about SWIFT. Some Western banks simply do not execute payments if the addressee is in Russia. And it doesn’t matter to whom, for what, why the money is transferred. If you insist, they promise to block the account, ”Fyodor Naumov talks about a specific situation.
However, another option is also possible, which was used by Iran during the blocking of SWIFT in 2012. Local banks began to use intermediaries and send transfers first to neutral banks that are connected to SWIFT, and those to transfer money to recipients. Whether such a scheme will work in the new realities, when Russian banks become pariahs in the global financial arena, is unknown.
How will the problem be solved
In the short term, the banking system will return almost 30 years ago (SWIFT has been operating in Russia since 1995). The ban on SWIFT stimulates the development of a new system of interbank relations. And the most natural way is to make blockchain-based transfers. Moreover, examples of this already exist.
Santander Bank launched a blockchain-based money transfer service back in 2018. American Express uses blockchain to conduct international transactions.
“For the first time, they will come up with some kind of “crutch” for making vital payments. Then they will create a more modern system based on the blockchain and with smart contracts,” Naumov is sure.
Although the “crutch” has already been invented. Demand for USDT is growing.
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The disconnection of Russian banks from the system of global financial communication has always been seen as a last resort. Even now only seven banks are banned from accessing SWIFT. But at any time, a decision can be made to completely block access to SWIFT for Russian financial institutions. How does this threaten citizens and companies?
Why SWIFT is so important
SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a global financial cooperative headquartered in Belgium with 3,500 banks as shareholders. The main task of SWIFT is to quickly make payments both between banks in different countries of the world and within individual states by providing financial communication.
In simple terms, official information is a global interbank messenger that helps you make payments quickly. “Banking Whatsapp” encrypts and transmits short service messages for which banks carry out transactions. But not everything is so simple. Apparently, the functionality associated with SWIFT helps to build the best route for the transaction as quickly as possible and check the availability of funds on the accounts of counterparties along the route. That is, in fact, it performs a function similar to routing when transmitting information on the Internet, says Evgeny Nadorshin, chief economist at PF Capital.
The system has been operating since 1977 and is used by banks in almost all countries of the world. Now more than 11 million financial institutions from 200 countries are connected to SWIFT. More than 5 billion messages are sent via SWIFT per year.
Some countries are trying to create local systems for the exchange of financial information. For example, SUCRE operates in Latin America, and CIPS operates in China. In Russia, there is also an analogue of SWIFT – this is the “Financial Message Transfer System” (SPFS). But its role in transactions even within Russia is only 23%. SPFS is not able to provide cross-border payments, and even, as it turned out, transactions in foreign currency within the country.
Many market participants have criticized SWIFT for its technological backwardness, slow transformation, and high cost. But no one created a global competitor to SWIFT – everything worked anyway. Until recently.
What will happen after SWIFT is disabled in Russia
“Before, when [SWIFT] was not, such information was transmitted by faxes, telephones, they carried bills in folders and suitcases. Who benefits from switching off SWIFT? Nobody. Only this is what is called if you annoy yourself, ”said Finance Minister Anton Siluanov at the end of 2021.
The official also recalled that Russia supplies raw materials and hydrocarbons to Europe. And so the parties will have to find tools for the exchange of transactional information.
Since there is no replacement for SWIFT yet, at first all international payments between foreign and Russian companies, or between foreign and Russian citizens, will take quite a long time and their cost will increase, experts are sure. But this will not lead to a complete collapse and rupture of all financial chains.
Payments in rubles within the country will be credited without any problems. It is possible to increase the duration of transactions. Payments in foreign currency within the country will slow down to several days and possibly weeks. SFPS, as experts say, for some reason did not provide currency transactions even within Russia.
“Currency payments within the country are also still going through SWIFT. For some companies, payments within the country in foreign currency are already “hanging”. Clients are advised – if you want to quickly transfer currency, and the addressee is nearby, withdraw cash and carry it in your suitcase, ”says Evgeny Nadorshin.
With cross-border transfers, things will be much worse.
“Essentially, the global banking system is a system of correspondent relations. And SWIFT is its most important part. It was SWIFT that allowed banks not to open a correspondent account with every foreign partner bank. Therefore, now, in order to make international transfers, it will be necessary to actually re-build a network of correspondent accounts, ”Nadorshin emphasized.
What does this mean in practice? To replace SWIFT, Russian financial institutions will have to open many correspondent accounts in foreign banks in order to make payments to them directly. It’s not easy, it’s not fast, and it’s more expensive. Plus, on such accounts it is necessary to ensure that there is an amount sufficient for making payments.
“And most importantly, these accounts will need to be replenished or withdraw money from them on their own. But how to do it? It is almost impossible to carry money by plane, for example, to Europe. But you can still bring a truckload of cash there. But how to deliver the same suitcase somewhere in Venezuela, how expensive will it be, how long will it take? ”Nadorshin asks. Similar problems will arise for Western partners, who will still trade with Russia.
Probably, large Russian banks will build a correspondent network around the world, distributing certain countries among themselves, Nadorshin believes. For example, Sberbank will take on 10-15 countries, VTB will take on the same number, and other large financial institutions will take on several countries. And everyone will work with each other to provide wiring. Naturally, this will lead to an explosive increase in the administrative and financial burden on banks. As a result, the speed of making payments will decrease.
“Everything will slow down a lot, payment orders will be executed for weeks. A mountain of encrypted messages will fall on employees, they will have to be sorted out, ”says Fedor Naumov, managing partner of PFL Advisors.
Banks, in turn, will try to shift part of the costs to customers, so the commission for transfers will increase.
A similar situation will be observed for payments to individuals. Now not all Russians can make currency transfers abroad. Foreigners can no longer send funds to all Russian banks and not all recipients. But in the event that Russian organizations are disconnected from SWIFT, people both in Russia and abroad will have to look for a specific pair of foreign bank-Russian bank, which have established correspondent relations with each other. And information about this is unlikely to be laid out in the public domain.
“It will be a quest – find a way to send money to or from Russia,” says Nadorshin. It is clear that there will not be many who want to go through it.
In addition, many banks already have a block for transferring funds to Russia.
“It’s not even about SWIFT. Some Western banks simply do not execute payments if the addressee is in Russia. And it doesn’t matter to whom, for what, why the money is transferred. If you insist, they promise to block the account, ”Fyodor Naumov talks about a specific situation.
However, another option is also possible, which was used by Iran during the blocking of SWIFT in 2012. Local banks began to use intermediaries and send transfers first to neutral banks that are connected to SWIFT, and those to transfer money to recipients. Whether such a scheme will work in the new realities, when Russian banks become pariahs in the global financial arena, is unknown.
How will the problem be solved
In the short term, the banking system will return almost 30 years ago (SWIFT has been operating in Russia since 1995). The ban on SWIFT stimulates the development of a new system of interbank relations. And the most natural way is to make blockchain-based transfers. Moreover, examples of this already exist.
Santander Bank launched a blockchain-based money transfer service back in 2018. American Express uses blockchain to conduct international transactions.
“For the first time, they will come up with some kind of “crutch” for making vital payments. Then they will create a more modern system based on the blockchain and with smart contracts,” Naumov is sure.
Although the “crutch” has already been invented. Demand for USDT is growing.
Subscribe to the Cryplogger channel at YouTube!
Found a mistake in the text? Select it and press CTRL+ENTER
