What is the SWIFT system and how negative would Russia’s isolation from it be?

SWIFT system and how negative would Russia

When it is said that Russia can be expelled from the Swift system, we must first understand what this system really is to see if it is so important or if it is just words and headlines.

Swift system, what is it?

Its translation by its acronym is: Society for World Interbank Financial Telecommunication, that is, Society for International Interbank Financial Communications.

It was founded in 1973 in Brussels as a mechanism to help establish a common language for financial transactions, a shared data processing system and a global telecommunications network. Its members include the ECB, the US FED, the Bank of England, the Bank of Japan and financial institutions.

There are currently more than 11,000 financial institutions spread over more than 200 countries that use this system seven days a week, 24 hours a day. We can say that it is the mechanism that makes the payment system work worldwide.

How does it work?

This system works as a clearinghouse for transactions between countries. When a person or company buys abroad, what we must understand is that the money does not really travel from their bank account to another bank account. It is the system that “looks” for another person or company that wants to make an opposite transaction, (a foreigner who wants to make a sale in the country) in such a way that both actions are compensated, the outputs with the inputs.

Now you can see the importance that the role of the Swift system is having in the reality of international trade. It is a kind of barter between purchases and sales.

Consequences of not being in the Swift system

In case there is a country that is expelled, it is that it is left out of the largest network of compensation seekers in the world. It would make it difficult or very difficult for that country to be able to make or receive payments from abroad. The curious thing is that this blockade if the members agree, is effective and cheap to carry out.

If Russia is left out, won’t it be able to trade with other countries?

The answer is yes, but it will be difficult to do it, it is not impossible and perhaps with higher costs. The first thing will be to look for countries that are not aligned with the sanctions and trade with them, in this case, and from the first, China has already told you that it can do so with them.

In case of making exchanges with countries in which the Swift does operate, those exchanges must be in a direct barter, it is no longer that the system seeks that compensation, now the two countries, their financial systems must begin to negotiate and it is more complicated and expensive.

In 2014 Russia was threatened for its actions and the former finance minister even estimated that if this action were to be carried out, the gross domestic product could be reduced by 5%.

The rest of the countries that want to negotiate with Russia would also have the problem, since we must cut back, since it is an important energy supplier for some European countries, Germany among them.

Although the issue of energy is perhaps the first thing that comes to mind, let’s not forget that many companies have investments in Russia and that being able to recover the money or inject more capital is complicated.

Are there alternative mechanisms to the Swift system?

Since the events that you name before 2014, Russia has been working on its own payment system, which is perhaps less powerful than Swift but which can be an alternative to which many countries join today and can help Russia. Today it has 400 users.

Another alternative is China, with its international interbank payment system (CIPS) and, let’s not forget, it tries to be the first power in the world. The last alternative would be the world of digital currencies and the underlying technology, cryptocurrencies.

Like any “controlled” business, this sanction can open up ways to use one of these three elements as alternative systems and reduce the dominance of the Swift system in the future, so there is some caution with taking the step of sanctioning a country as important as Russia. .

So what are the repercussions of the sanctions on Russian banks?

One of the first sanctions was that the five largest Russian banks will not be able to use American banks for clearing, but they have not been removed from the Swift system. Therefore, Russia is still today as the article is being written, inside the system and that it only has fewer counterparties for the payment system.

Actually, this sanction does not make much sense, since the rest of the world’s banks can also make transactions in dollars and therefore a bank that is based in the US is not necessary.

It is complicated in something that Russia can trade with the US, but what any importer or exporter residing in the US will have to do is open a bank account in dollars in Europe and at this moment they would have it solved.

As seen by experts, it is rather an action to fill a headline than a sanction with great consequences. We will see with the passing of days if the threat ends up being fulfilled.