What is Swift Payment System? How will its ban affect Russia?
Japan has also joined its Western allies in ejecting selected Russian banks from SWIFT, a Belgium-based co-operative that serves as an intermediary and executor of financial transactions between banks worldwide. Check full form of SWIFT and other key facts here.
SWIFT Payment System: The European Union, along with the United States and other allies plan to cut off Russia from the SWIFT Payment System. The decision has not been officially issued yet but the technical preparations are ongoing, according to Ukrainian Foreign Affairs Minister Dmytro Kuleba.
This comes after Hungary extended its support to cut off Russia from SWIFT. Hungary was the last European Union country to oppose the measure. Japan has also joined its Western allies in ejecting selected Russian banks from SWIFT.
Japan’s Prime Minister Fumio Kishida announced on February 27, 2022 that Japan will impose sanctions on Russia’s dictator Vladimir Putin and extend $100 million in emergency humanitarian aid to Ukraine.
Kuleba thanked "thousands of people, including the Ukrainian diaspora, who are putting pressure on their governments to support this decision."— The Kyiv Independent (@KyivIndependent) February 26, 2022
"Ukrainian diplomats dedicate this victory to the defenders of Ukraine,” he said.
⚡️Hungary now supports cutting Russia off SWIFT.— The Kyiv Independent (@KyivIndependent) February 26, 2022
Hungary was the last EU country who opposed the measure.
What is SWIFT?
SWIFT full form is The Society for Worldwide Interbank Financial Telecommunication.
SWIFT is an important facilitator of international banking and is used by more than 11,000 financial institutions and companies in over 200 countries and territories.
SWIFT Payment System: Five Key Facts
1. SWIFT is a Belgium-based co-operative that serves as an intermediary and executor of financial transactions between banks worldwide.
2. Swift Transfer is also called International Money Transfer. SWIFT payment system does not facilitate funds transfer but it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other.
3. In plain and simple terms, SWIFT is an international system, similar to gmail for banks and international financial institutions, used to send written messages, including orders and confirmations for payments, trades and currency exchanges.
4. It is overseen by multiple government banking systems including the European Central Bank, the National Bank of Belgium and the US Federal Reserve System among others. It is headquartered at La Hulpe in Belgium, near Brussels.
5. SWIFT ensures secure transport of financial messages. It does not hold accounts for its members and nor does it perform any form of clearing or settlement.
6. The SWIFT bank system also sells software and services to financial institutions, mostly for use on its proprietary "SWIFTNet" and ISO 9362 Business Identifier Codes (BICs), which are popularly known as "SWIFT codes".
How will SWIFT ban affect Russia?
- If Russia is cut off from SWIFT banking system, it could hit Russian trade and make it harder for Russian companies to do business.
- The move could potentially result in Russian companies losing access to smooth transactions. The companies may face issues in receiving payments for energy products like gas and oil.
- Without having the access to SWIFT system, the Russians will have to rely on fax and email for cross-border transactions. This could potentially hamper Russian global trade.
- As per some experts, preventing Russia from using the network would be equivalent to a nuclear attack on the country's economy.
- Russia was threatened with a similar sanction even when it had annexed Crimea in 2014. The proposal to isolate Russia from the SWIFT network was floated then but it was not implemented.
- At that time, the Russian finance minister had estimated that the country would suffer a potential GDP contraction of 5 percent if US and its European allies cut Russia off from the SWIFT network.
- Russia had accounted for 1.5 percent of total transactions on SWIFT in 2020.
Why Russia won't be impacted much by the SWIFT ban this time?
After facing economic sanctions in 2014, Russian President Vladimir Putin has turned the country into an economic fortress in the last eight years. As per experts, the sanctions would only cause limited harm to Russia's economy now.
Russia has reportedly developed its own cross-border money transfer system, SPFS.
SPFS is the financial messaging system of the Bank of Russia. The system is not as advanced and secure as SWIFT.
Russia is also a major oil and gas supplier in the world.
Read More: Why did Russia attack Ukraine
SWIFT Banking System History
SWIFT banking system was founded on May 3, 1973 in Brussels under the leadership of its inaugural CEO, Carl Reuterskiöld.
The system is supported by 239 banks in 15 countries across the globe. Prior to it, the international financial transactions were communicated over Telex, which was a public system involving manual writing and reading of messages.
SWIFT is overseen by the G-10 central banks belonging to US, UK, Canada, Belgium, France, Germany, Italy, Japan, The Netherlands, Switzerland, and Sweden and the European Central Bank. The lead overseer is the National Bank of Belgium.
The SWIFT framework was reviewed in 2012 and central banks of other major economies also joined the G-10 central banks. The banks from other major economies include Reserve Bank of India, Reserve Bank of Australia, Bank of Russia, People's Bank of China, Hong Kong Monetary Authority, Saudi Arabian Monetary Agency, Bank of Korea, Monetary Authority of Singapore, Central Bank of Turkey and South African Reserve Bank.
Read Also: How will Russia-Ukraine impact India?
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