SWIFT Ban: A Game Changer for Russia?

[GoldCore]

As part of the sanctions against Russia, seven Russian banks have been cut off from SWIFT.

We start by discussing what SWIFT is, and then the implications of completely cutting Russia out of SWIFT.

What is SWIFT and Why Russia is Being Excluded

SWIFT – The Society for Worldwide Interbank Financial Telecommunication is a messaging system that links more than 11,000 banks in 200 countries.

The system doesn’t move actual money between the banks but transmits messages between banks with instructions to settle transactions.

Additionally, this system is crucial to the international trade system – without it, countries wouldn’t be able to settle trade transactions between countries.

The bar charts in the graphic from the Wall Street Journal below illustrate the growth in SWIFT messages from 6.2 billion in 2016 to 9.5 billion in 2020.

Also, the right side of the graphic shows “SWIFT traffic, by region – notably 47.6%, nearly half, of the messages sent was within Europe, the Middle East, and Africa. 

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Global Payment Network Chart

Two key factors underlie the dilemma of cutting Russia’s access to SWIFT altogether:

• The first is how to cut the Russian banks completely off SWIFT but keep the channels open to purchase Russia’s oil and natural gas, especially in Europe, where prices have already surged over the past year.
  In our January 20 post “European Energy Crisis: 4 Things You Must Know!” the 4^th point was that Russia supplies ~40% of Europe’s natural gas. If this supply is no longer available prices will surge even higher! 

• The second is if Russia is completely cut off of SWIFT it would be incredibly difficult for foreign banks to collect money owed to them from Russia’s banks. 
  
  According to the Bank of International Settlements Russia-based entities and banks owe foreign banks approximately $120 billion in assets, of this amount about $15 billion is owed to U.S. banks with another $25 billion of this owed to Italian and French banks.

Why SWIFT Ban is Significant for Russia?

SWIFT is the largest interbank messaging system – it benefits from the network effect, if most other banks are on the system, then banks are encouraged to join.

A large number of members reinforces and expands the network.

There are other messaging systems such as Telex, and Russia and China both have their own payment systems.

However, messaging systems such as Telex are less efficient and more expensive.

 

Russia’s own system only has 23 foreign banks connected, and China’s Cross-Border Interbank Payment System (CIPS), with around 176 participants in 47 countries is still very small in comparison to SWIFT.  

Additionally, the interconnectedness of the banking system and reliance on U.S. dollars has been an issue that Russia (and China) have been working to change.

Moreover, Russia has strategically ‘de-dollarized’ its official reserves for many years.

And instead of a currency issued by another central bank, Russia has increased its official gold holdings.

Russia Holdings of US Treasury Securities

Russia Official Gold Holdings

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