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Russia Ukraine War and SWIFT sanctions are an unprecedented event in the history of conflicts. The Russia-Ukrainian war is impacting all corners of the world and the fintech industry has also succumbed to this geopolitical crisis. In order to penalize Russia for its full-scale invasion of Ukraine, many nations have imposed harsh sanctions on the country. Several economic and financial sanctions including the SWIFT ban, have been unveiled in the last few days, particularly by the western nations to punish Russian President Vladimir Putin and his country.

SWIFT sanctions aim to cut off Russia’s access to international payment and messaging systems, therefore the European Union, along with the US, UK, and Canada has banned some Russian banks from SWIFT. This eviction from SWIFT is so whopping, that it has been termed as a “nuclear move” or “nuclear options”. This move was a part of a series of severe economic penalties that the world’s biggest democracies devised to reprimand Russia. The purpose of imposing these sanctions is to incapacitate Russia to send and receive money and finance its military troops.

WIFT Sanctions

SWIFT Sanctions

What is SWIFT?

Founded in Belgium in 1973, SWIFT provides financial transaction and payment services between financial institutions worldwide. The National Bank of Belgium, the U.S. Federal Reserve System, the European Central Bank, and others oversee SWIFT. This is an acronym for, The Society for Worldwide Interbank Financial Telecommunication. It is a global messaging service that facilitates payments among 11,000 financial institutions in 200 countries. The scalability of this system allowed it to expand to a wide ecosystem of financial institutions. This includes banks, brokerage houses, asset management companies, clearinghouses, treasury markets, foreign exchange, and corporate business houses.

In simple words, SWIFT facilitates the movement of money and handles billions of messages each year. It is the most used system around the world.

SWIFT accounts for about 50% of all the high-value cross-border global payments. In 2020, more than 9.5 billion financial messages, or 37.7 million messages per day, occurred over the SWIFT network. In 2021, the average daily number of messages rose to 42 million.

Swift FIN Messages

Impact of SWIFT Sanctions on Russia

The banning of SWIFT will significantly hinder the movement of money in and out of Russia. Post this announcement by the White House, South Korea also joined hands with other major democracies to ban the country from SWIFT. Consequent to these sanctions, the Russian currency Ruble plunged to a record 30%. In an attempt to support its currency, the Russian Central bank raised its key rates from 9.5% to 20%.

These sanctions aim to trap the financial institutions of Russia and cripple their ability to finance the war machine. While this will impact the Russian financial system, it will also make it tough for Russian businesses and households to make and receive payments for exports and imports of goods and commodities. Russia exports all major commodities from oil & gas to metals and grains and therefore will be severely disrupted by Western sanctions.

The country produces 10% of global oil and supplies 40% of Europe’s gas. Moreover, it is the world’s largest exporter of grains and fertilizers, top palladium and nickel producer, third-largest exporter of coal and steel, and fifth-largest wood exporter.

This explains how difficult it would be to carry out this voluminous trade of goods and commodities with proposed sanctions.

SWIFT Sanctions and the Global Economy

The US decided the SWIFT sanctions to castigate Russia. However, the global economy will feel its impact. SWIFT is a global network. Hence, these sanctions will have a blow on countries around the world. Last week, the crude oil prices spiked to $100 a barrel due to concerns over potential supply disruption amid Russia’s invasion of Ukraine. Brent oil briefly touched $119 a barrel, hitting a 10-year high and gaining $20 in just a week, over the ongoing supply concerns. Many institutional players now believe that this price could go to $150. The cause is that around 70% of Russian crude oil exports disappear because of sanctions. According to EIA, Russia was the second-largest net exporter of crude oil and petroleum products to the United States in 2020, after Canada.

As per the data from Bank for International Settlements (BIS), foreign banks have around $121 billion owed to them by Russian entities. $14.7 billion of it belong to U.S. financial institutions. Therefore, expelling Russian banks from SWIFT would make it harder to collect that money and companies will undoubtedly face problems conducting trade with Russian counterparts.

To circumvent some of these challenges, certain exemptions will apply. The sanctions will be imposed on selective Russian banks, barring the others. Some Russian banks including Gazprombank, which services large oil and gas payments have been excluded from these sanctions. Also, the officials are trying to exempt energy transactions. However, SWIFT can still cause significant disruption to energy trade flows in the near term, at least until buyers switch to some less efficient and more expensive alternatives like Telex or other systems.

The SWIFT System

The SWIFT System

SPFS – Russia’s Alternative to SWIFT

Ever since Russia has been facing threats of removal from the SWIFT system after it invaded Crimea in 2014, the country has been actively working on developing its internal financial transfer system. This new system for the transfer of Financial Messages is called SPFS and has been in development since 2014. By March 2018, over 400 financial institutions were part of the network. The Russian government has been active in talks with emerging nations to expand SPFS. By end of 2020, there were 23 foreign banks connected to the SPFS from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan, and Switzerland.

The Russia-Ukraine War and the SWIFT Sanctions

The Russia-Ukraine Invasion and the Street SWIFT Movement

Limitations of Russia’s SPFS

While SPFS is relatively cheaper than SWIFT, it lags behind due to operational limitations. The SPFS network is only operational during weekday working hours and its messages are limited to 20kb in size. SWIFT, on the other hand, works 24/7 and allows 10MB to be transmitted across its network. However, the SPFS system mostly supports intra-Russian transactions, and therefore SWIFT sanctions can lead to an international disconnection. Moreover, it depends on how swiftly Russia is able to integrate SPFS with other systems. It also depends on whether the United States would also place sanctions on countries that are connecting to SPFS. Notably, Russia is also planning to integrate its SPFS network with the China-based Cross-Border Inter-Bank Payments System (CBIBPS).

Lastly, creating a counterfeit of SWIFT will not be enough for Russia to maintain its supremacy. It is also essential to establish a capital settlement and clearing system, backed by a prevalent settlement currency. The US dollar and the euro are currently the key settlement and reserve currencies across the globe. No other currency can bypass them in the short run. Consequently, it can make the settlement process more challenging for Russia. This further leads to its currency devaluation and its rising inflation.

Conclusion

Russia is the 12th largest economy in the world. And the Russia Ukraine War and SWIFT sanctions could have unintended consequences. This is certainly an unprecedented move and can promote alternative financial transfer systems like Russia’s SPFS and China’s CIPS. Many experts are referring to Cold War 2.0, with disconnected systems and the addition of a powerful China. Russia’s President Putin has already put its nuclear weapons on alert. Being in a war zone is always painful and expensive, impacting millions of lives, no matter where you belong to.

Authored by Ekta Bhatia

Fujn fuses learning with earning in a fun way. Fujn is made by women for women. Ladies, dare to reimagine your possibilities! Check us out at www.Fujn.us, Fusion spelled F. U. J. N

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