The move to ban Russia from SWIFT will hasten in a new era for global monetary flows. Getty
By Sandra Sieber, professor of Information Systems at IESE Business School.
Over the last week, we’ve seen some Russian banks barred from using SWIFT, the global messaging system that connects thousands of financial institutions around the world.
The move, taken in response to the invasion of Ukraine, is significant. In the short-term, it means Russia’s participation in the global economy will be more difficult, adding severe pressure to the Russian economy. It also sends an important signal, combined with other sanctions, that the global community is opposed to Russia’s actions.
Given the current circumstances, of course the focus now should be on using all financial tools available to send the right signals. Signals that could help aid the negotiations required between Russia and Ukraine for a peaceful resolution to the terrible conflict. Yet we must also be wary about how this extraordinary measure could shape the financial landscape over the following decades, and start thinking and planning now for what may arise.
The move to ban Russia from SWIFT will likely hasten in a new era for global monetary flows, one where the ability to use SWIFT to impose economic sanctions with severe consequences may be severely curtailed. An era where at least Russia and China will have fully developed–and most probably interconnected–their own alternative systems. In sum, an era where the idea of one secure, universal messaging system will no longer be viable.
A new era of competing global payment systems?
SWIFT, which stands for “Society for Worldwide Interbank Financial Telecommunication,” was initially created by a group of American and European banks in response to their need to have a single standardized communication system.
Today, SWIFT connects more than 11,000 financial institutions in more than 200 different countries and territories. It is estimated that more than 40 million messages a day are sent through SWIFT, enabling the exchange of trillions of euros between companies and governments around the world.
Cutting a bank from SWIFT is like cutting a person off from the internet. While monetary flows would be possible in theory, without complementary information (where the money comes from, where it goes, what it is for) a bank would not be able to operate. And, as we have seen with Russia this week, partially or entirely cutting a country’s banks off from SWIFT has serious economic consequences.
This is precisely why it is so important that banks around the world have access to a system that is agnostic, secure and one of which they are a part of no matter what.
And for more than four decades, this has largely been the case. Since its initial creation in 1973 and later launch in 1977, SWIFT has held strong as the universal messaging system, ensuring safe, international transactions for any bank across globe.
Headquartered in Belgium, SWIFT is jointly owned by more than 2,000 banks and financial institutions. It is governed by the National Bank of Belgium in conjunction with the central banks of Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. As it is jointly owned, SWIFT has been keen to stay out of any sort of dispute.
It takes genuinely extraordinary events–such as what we have seen in recent days–for so many of the different actors involved in SWIFT to decide to cut off a bank. Yet the ability to impose such a sanction is only possible thanks to SWIFT being essential to the global economy.
And this looks set to change soon.
SWIFT has only been used to sanction twice in its history. First, in 2012, excluding Iran due to its nuclear program. It hit their economy and international trade very hard. And it triggered something else. In 2012 China started the development of their own financial messaging system. CIPS (which stands for Cross-border Interbank Payment System) was in 2015. Administered by the People's Bank of China, its international use as of today is mainly restricted to transactions between Hong Kong and China.
In 2014 Russia was threatened to be excluded from SWIFT during the Crimea crisis. While the sanction did not happen, something else did. The Russian Central Bank started the development of SPFS (Financial Message Transfer System), using the same technology available to both SWIFT and CIPS. Launched in 2017, it currently has a high degree of local adoption, as well as access to SPFS from the subsidiaries of the large Russian banks in Germany and Switzerland.
In absolute terms, the international expansion of both systems is still minimal. However, the current sanctions will no doubt accelerate the development of these alternative systems, and also their desire to interconnect them.
How quickly they could be connected to other systems–or how easy a theoretical interconnection of Russian and Chinese systems would be in the face of a crisis–is something that can only be speculated on. But it is a scenario that we should fear. Not only because it limits our future ability to use it to sanction, but also because the lack of a single, global and agnostic system, may have consequences for the world economy.
Suppose SWIFT is no longer the global messaging system of choice. If that is the case, we will need to think carefully about how international monetary flows will be managed in the future, and what will happen to the cost of any financial transaction. The decision of 1973 to develop one global and open system has had the extraordinary consequence of limiting the cost of international transactions, hence maximizing its number. Competing systems will imply increased costs, and hence–comparatively speaking–a lower amount of transactions. Unless of course, we find new ways to come up with a truly global and agnostic system.
All eyes will be on a new technology blockchain. In theory, it has all the required ingredients to allow for such a system. But, as in 1973, it will depend on the willingness of the relevant players–a.k.a. Central Banks–to give away local power to foster a genuinely global solution. This seems to be an almost impossible job. But if we want to avoid the creation of permanent (technological) barriers in the global payment system, we will have to start working now to safeguard a globally united financial future.
