All about SWIFT - what it is and why it matters.

With the rapid deterioration/invasion of Russia into Ukraine, you may have already heard about EU nations, US and Canada announcing expulsion of Russia from SWIFT system.  

I wanted to give a quick breakdown of what it is and why it matters.

What is SWIFT system

SWIFT is short for the Society for Worldwide Interbank Financial Telecommunication. You can think of it as a global financial messaging service like WhatsApp but for banks. It was founded in 1973 when 239 banks from 15 countries came together to establish a way to handle cross border payments.

Today, SWIFT connects more than 11,000 financial institutions across 100+ countries. Think of it as simple email or messaging service that is very secure enabling banks to settle payments.

An average of 42 million messages a day, that includes orders, payments confirmation, currency exchange and trades. Money moving from one account to another account often passes via multiple banks before landing in the destination, especially if it involves foreign currency. SWIFT infrastructure allows banks to know where the money should ultimately land and how much. What’s more Interesting is that SWIFT doesn’t do any money transfer or hold funds but still is a critical part of the communication infrastructure that enables cross border money flow like plumbing system.

Cutting a country’s national banks out of global payment system could hit Russia hard but could also have repercussions for West and EU. Restricting the flow into and out of Russia , can result in real economic pain and would greatly limit their ability to do business beyond its borders.

Why was there initial reluctancy to cut Russia off from SWIFT?

Cutting Russia off from SWIFT will have ramifications for other nations too, particularly for EU nations which depends on Russian energy supply and these countries rely on the SWIFT to pay for fuel. EU needs to heat its homes and power factories, a ban could threaten supplies in the middle of the winter heating period, adding to an already heightened cost of living crisis in the region. The EU is the largest importer of natural gas in the world, with the largest share of its gas coming from guess who ? Russia (41%). Where is EU going to get oil and gas from??

Russia is the biggest exporter of

Palladium 45.6 %, used for surgical instruments and electronics.

Titanium 13.5%, Russia is the second largest exporter after china ($680M), shortage of titanium will shut down manufacturing of Boeing and aircrafts.

Platinum 15.2% - 2nd largest exporter in the world.

Nickle 5.3% – 12th largest exporter, Nickel is the most important metal in the lithium-ion battery cathodes used by EV car manufacturer.

Oil – Russia is 2nd largest oil exporter accounting for 29% global export.  

Natural gas -17% global

Wheat – 18%, Russia is the world largest wheat exporter and together with Ukraine , both account for 29% of total global wheat export market.

Aluminum 4.2%

Another concern is USD hegemony is everything! We have played this card so many times, kicking out Russia means huge chunk of dollar denominated commodity trade would need to find alternative mechanism…

Which brings to is there an alternative to SWIFT?

Yes, Russia created an alternative network called SPFS (system for transfer of financial messaging) equivalent to SWIFT. The system has been in development since 2014, when US government threatened to disconnect Russia from the SWIFT system. Similarly, in 2015 China also launched its own version of payments system called Cross-Border Interbank Payment System (CIPS) to use of Yuan.

As of 2020, SPFS include participants from 23 countries including Germany. This is a greater concern since Russia but particularly china is the second largest economy in the world and any adoption of alternative payment system will greatly erode the current dollar- dominated global financial system, undermining western power.  

Who controls SWIFT?

SWIFT is run by member banks which includes the national bank of Belgium, the US federal reserve system, the bank of England, the European central bank and the bank of Japan. With Russia’s most recent actions in Ukraine, all the above entities have decided to cut off Russia from SWIFT but its SWIFT with a twist. Europeans still get to buy energy from Russians….the recent agreed upon agreement sanctions Russian companies , oligarchs and government officials from using the SWIFT system not energy and oil sector which accounts for 63.9% of Russia’s export revenue.

The challenge is that it is a real double edge sword.

Russia is a massive economy with impact reaching all around the world. It is the key energy supplier to EU and around the world.

It is the key exporter of materials critical to the manufacturing of jet engines, semiconductors, automotive, electronics, and fertilizers.

A cutoff from SWIFT can also have long term impact on bitcoin and non-fiat currencies, whatever the case maybe Russia will seek to and may already have prepared to circumvent the impact of the sanctions via alternative systems and getting away from USD reserve currency hegemony.