As is known, the EU, the US, the UK, Canada and other countries have decided to disconnect Russia’s banking and financial institutions from SWIFT.
Society for Worldwide Interbank Financial Telecommunication, legally S.W.I.F.T. SC, is a Belgian cooperative society providing services related to the execution of financial transactions and payments between banks worldwide. Operated from Brussels, the SWIFT platform brings together more than 10,000 banking institutions from 209 countries.
The main feature of SWIFT is that international financial exchange is provided on the basis of all information transmitted through participating banks. Transactions with money transfers, interbank payments, securities, traveler’s checks, promissory notes, etc. worth more than 1.5 billion euros are carried out through SWIFT daily. In this system, the main type of currency of transfers is usually the US dollar.
SWIFT is such a huge financial network that it is impossible to conduct money and other financial transactions without this system in the current economic climate.
Following the military operations in Ukraine, it was decided to exclude Russia from the SWIFT system. Well-known journalist Eynulla Fatullayev made a post about it and in the end made a remark “Russia’s demise is near.”
Faktyoxla Lab. has explored the essence of this system, and found out whether this is true in Russia’s case.
First of all, it should be noted that Russian banks used to transfer dozens of billion dollars with SWIFT, and now it is necessary to return to the use of fax machines as it was 50 years ago to make payments.
What losses can Russia's withdrawal from SWIFT cause?
One of those who gave the most accurate answers to this question was Russian economy expert Alexei Kalmykov. According to Kalmykov, the fact that Russian banks are left without SWIFT is like cutting off international telephone lines and Internet cables to which banks are connected. “However, this doesn’t mean the end of the world. If you do not have internet or telephone, you can send information by letter or fax. It will only take a lot of time, physical losses and costly operations. Of course, long and complicated financial transactions mean a serious blow to business and the economy,” he said.
However, in no case is it possible to freeze the accounts of both businesses and citizens in foreign currency, or to put pressure on the conversion of money in their foreign currency accounts into rubles. These funds will remain in the same manner as before, in the same type of foreign currency invested. That’s because SWIFT doesn’t prohibit the closure, conversion or withdrawal of funds from bank accounts, this system simply eliminates the need for Russian banks to pay for correspondent accounts in foreign banks in dollars, euros, pounds and yuan. The money in the accounts can be used for other traditional postal orders and so on.
One of the most important factors here is the tarnishing of the image of the world banking and business family. Russia's international reputation will inevitably be damaged. Until now, Iran and North Korea have looked as weak and dull in the world economic elite without SWIFT, but Russia, with an economy three to four times larger, will be even grayer. (Source)
Disconnection from SWIFT will play a special role in the Russian economy in non-oil exports and imports. According to the Russian Federal Customs Service, in 2021 the country's exports grew by 45.7% to $493.4 billion. Fuel and energy products (54.3%) occupy the main place in exports. Some 13.1% of total exports fell to the CIS countries and 86.9% to other countries. This means that $425 billion of exports go beyond the CIS countries to Europe, America and Asia. The main trading partners in exports were China, the Netherlands, Germany, Belarus and Turkey. Importers include China, Germany, the US and Italy. (Source)
As the above-mentioned countries are mainly considered to have a special share in SWIFT, the physical pace of dozens of trade transactions will decrease, there will be no problems with payments, but Russian companies will face serious difficulties in making non-cash payments and receiving money for goods and services. In any case, this will have an impact on the reduction of trade turnover. For example, when Iran was excluded from SWIFT, the volume of foreign trade decreased by 30 percent.
This will isolate Russia from the global banking community, but will citizens within the country be able to make payments with debit and credit cards and open a currency account?
Prior to Russia, Iran and North Korea were expelled from SWIFT. North Korea is a very weak country and has no role in the global market, so its share in global settlements is less than 0.006. Iran has a significant share of the world energy market, and as a result, after the sanctions, the country was able to persuade its oil and gas partners, as well as some EU members, to establish the INSTEX system to conduct operations, albeit limited. Also, despite being excluded from SWIFT, Iran has conducted bank exchanges with China, Africa, the Middle East, Armenia, Syria, Yemen and other countries. Within the country, there were no problems with correspondent settlements and exchange operations. Hundreds of thousands of citizens in Iran open correspondent accounts within the country, transfer money from one bank to another, and so on.
In this sense, SWIFT is not the end of life for Russia, but the need for a new and very difficult search. In this regard, it should be noted that Russian citizens will also be able to pay in rubles. The point is that Russian banks, like many others in the world, have personal financial communications with other banks. For example, Russia has a national payment system "Mir", which has a multimillion-dollar payment architecture, and the exchange of money within the country is easy. So far, more than 400 banks have joined the system. (Source)
Also, under the agreement with Visa and MasterCard, both payment systems are obliged to make processing and clearing payments to all bank card holders in Russia. However, it should not be forgotten that it is not possible to perform all types of payment orders in foreign currency through intra-Russian systems, but it is possible to exchange a limited amount of money.
What is the way out?
The Russian government is likely to consider all these scenarios and launch Plan B. Currently, an architecture for the creation of an alternative payment system to SWIFT among member countries is being established within the Shanghai Cooperation Organization. Mir and China's Cross-Border Interbank Payment System (CIPS) are particularly active in this project. In this context, Russia will specify the harmonization of mutual financial exchange systems with all its close trading partners. In particular, the implementation of agreements on the establishment of a network of mutual settlements with China, Malaysia, Vietnam, Belarus, Iran and other countries, the interaction of credit and banking organizations, the establishment of direct correspondent relations among banks of other partner countries will be launched.
Thus, Russia will face losses due to the SWIFT sanctions, being left out of the international payment family. However, the main sanctions that will have a serious impact on Russia’s economy are the expulsion from the market of energy, industry, technology and other essential goods and services. It is the exclusion of Russian companies and financial holdings from global investment projects. Russia has $1.8 trillion in GDP and 2 percent of global value added. If sanctions and economic isolation lead to a 10 percent drop in GDP, it means an annual loss of $180 billion, or 28 percent of the country's strategic foreign exchange reserves. Moscow is now in a real economic war with the West on all sides.