The recent conflict between Russia and Ukraine has prompted a shockwave throughout the global financial system. The United States and the European Commission have responded by excluding some Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system. This action is designed to isolate Russia from the international financial community. This article will delve deeper into the SWIFT system, the repercussions of sanctions on Russia, and its potential impacts on India.
Understanding the SWIFT Messaging System
The SWIFT messaging system is an essential component of worldwide monetary operations. This platform, used by more than 11,000 banks in over 200 countries, allows for secure information exchange regarding global transactions, such as money transfers. It is important to note that SWIFT does not move money; it acts as an intermediary, confirming transaction information. Widely established since 1973, SWIFT is overseen by central banks from numerous industrialized nations including Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, the United States, and Belgium.
The Potential Impact of SWIFT Exclusion on Russia
Russia’s exclusion from SWIFT could have significant economic repercussions. The country relies heavily on the platform, particularly for transacting natural resources trade payments, like oil and gas exports. Furthermore, the sanctions would freeze the assets of Russia’s central bank, preventing it from using forex reserves. The impact of these sanctions could be catastrophic for the Russian currency market. Previously, Iran experienced a roughly one-third reduction in foreign trade after being cut off from SWIFT.
Russia’s Response to SWIFT Sanctions
In response to the potential ramifications, Russia has been exploring alternatives to SWIFT. For instance, the Central Bank of Russia has developed the System for Transfer of Financial Messages (SPFS), an equivalent to SWIFT. Additionally, Russia is reportedly collaborating with China on a venture potentially rivaling SWIFT, involving integration with China’s Cross-border Inter-bank Payments System (CIPS).
Other Global Alternatives to SWIFT
Beyond Russia and China’s efforts, other alternatives to SWIFT exist globally. Financial technology companies like Ripple have proposed their interledger protocol-based platforms as replacements. Cryptocurrencies also provide an alternative avenue for cross border remittances. Russia itself has been developing a digital rouble, although it has not been officially launched.
The Impact of Sanctions on India
This financial conflict has potential implications for India as well. Following the 1991 collapse of the Soviet Union, India established a rupee-rouble trade arrangement with Russia to facilitate continuous imports, particularly in defense. A pilot project in 2018 allowed Indian importers to pay in roubles for diamond imports. In the face of current sanctions, Indian banks such as SBI and Canara Bank might play a crucial role in supporting Indians having business with Russia.
