After Russia attacked Ukraine, Western countries have banned Russia’s central bank and removed its several commercial banks from the SWIFT global payment system.
The intention behind this action is to isolate Russia from the international financial system. This action against Russia is only partially implemented, covering only a few Russian banks. The US and its allies are currently withholding the option of expanding it as a nationwide sanction as a step forward.
Through SWIFT, instructions related to financial transactions are delivered to 200 countries and 11,000 financial institutions. It is a reliable and secure system for such transfers. Before Russia, countries like Iran and North Korea have been excluded from it. In this context, let’s understand the significance of SWIFT.
What is SWIFT?
SWIFT stands for Social for Worldwide Interbank Financial Telecommunication. It provides a reliable messaging platform that enables financial institutions to exchange information about global monetary transactions such as money transfers. It was established in the year 1973 and is located in Belgium.
In addition to Belgium, it oversees the central banks of 11 industrialized countries such as Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.
While SWIFT does not physically conduct monetary transactions, it acts as an intermediary to verify transaction information by providing secure financial messaging services to over 11,000 banks in over 200 countries. Most of the world trade happens with the sending of financial messages via SWIFT.
Before SWIFT, Telex was the only reliable means of message verification for international fund transfers. It was discontinued due to several issues such as low speed, security concerns and a free messaging format.
Working of SWIFT:
Under the SWIFT system, organizations and banks using it are given a code of 8 to 11 digits, which is also known as the SWIFT code to conduct transactions. Let’s understand this with an example, Suppose you live in India and your account is in SBI and you want to send money to a person in the UK. When you transfer money through your SBI account, a SWIFT code will be generated for the transaction. Now, SBI will send this code to a UK bank, in which that person holds his account. Now, the bank of the UK will verify the message and after that, the transfer will be cleared.
Russia is working on alternatives such as the System for Transfer of Financial Messages, a financial message transfer system developed by the Central Bank of Russia. Besides, Russia is also cooperating with China, which will be a potential challenger to SWIFT. Russia is planning to integrate its system with China’s Cross-Border Inter-Bank Payment System.
Aside from that, Financial technology companies such as Ripple are offering their platforms based on the Inter-ledger Protocol, the same technology behind cryptocurrencies, as an alternative. Cryptocurrencies are another method for cross-border remittances.