Russian Banks Excluded from SWIFT | 28 Feb 2022

For Prelims: Society for Worldwide Interbank Financial Telecommunication (SWIFT), System for Transfer of Financial Messages, Cryptocurrencies.

For Mains: Bilateral Groupings & Agreements , Russia’s war over Ukraine,Impact of sanctions on Russia, SWIFT and its Significance.

The intention behind this action is to further isolate Russia from the international financial system.
The move against Russia is only partly implemented for now, with only some Russian banks being covered.
The option of expanding it further to a pan-country ban is something that the US and its allies are holding back as a further escalatory move.

SWIFT provides the trusted messaging platform that enables financial institutions to exchange information about global monetary transactions such as money transfers.
While SWIFT does not actually move money, it operates as a middleman to verify information of transactions by providing secure financial messaging services to more than 11,000 banks in over 200 countries.
- Most of the world trade takes place with financial messaging passing through SWIFT.
It was established in 1973 and is based in Belgium.
It is overseen by the central banks from eleven industrial countries: Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, besides Belgium.
- India’s financial system has access to the SWIFT.
Prior to SWIFT, the only reliable means of message confirmation for international funds transfer was Telex.
- It was discontinued due to a range of issues such as low speed, security concerns, and a free message format.

Russia is heavily reliant on the SWIFT platform for its key natural resources trade, especially the payments for its oil and gas exports.
- It will freeze the assets of Russia’s central bank, which would stop Russia from “using its war chest”, referring to its forex reserves.
- Further, the curbs on Russia’s central bank will prevent it from dipping into its forex deposits to limit the effect of sanctions.
Targeting only some Russian banks seems to be aimed at both keeping the option of further escalation open.
- it also envisages that the sanctions have the maximum possible impact on Russia, but prevent a major impact on European companies dealing with Russian banks for payments for their gas imports
There is going to be a catastrophe on the Russian currency market.
Prior to this, only one country had been cut off from SWIFT — Iran. It resulted in it losing a third of its foreign trade.

Russia has worked on alternatives, including the SPFS (System for Transfer of Financial Messages) — an equivalent of the SWIFT financial transfer system developed by the Central Bank of Russia.
Russia is reported to be collaborating with the Chinese on a possible venture which will be a potential challenger to SWIFT.
- There are plans to integrate it with China's Cross-border Inter-bank Payments System (CIPS).

There are financial technology companies like Ripple, which has been offering its platform based on interledger protocol (the same technology behind cryptocurrencies) as an alternative.
Cryptocurrencies are another avenue for cross border remittances. Russia has also been working on a 'digital' rouble, which is still not launched.

Following the collapse of the Soviet Union in 1991, India had entered into a rupee-rouble trade arrangement with Russia to ensure that defence and other imports could continue.
In 2018, a pilot project was run where Indian importers paid in roubles for diamond imports.
These payments were made to the Indian branch of Russia's Sberbank. SBI and Canara Bank have a joint venture (The Commercial Indo Bank), which might be able to help Indians there.