What is the swift system | What impact it will have on Russia?

What is the swift system | What impact it will have on Russia?

This article comprises of Why was the SWIFT system set up, Why SWIFT is considered to be the leading payment messaging service, Why SWIFT Sanctions on Russian Banks, Which Russian banks are banned from SWIFT, What impact it will have on Russia, What impact it will have on India, What impact it will have on other countries?

What is the swift system?

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) system is responsible for many international money transfers and security transfers.

SWIFT is a network used by banks and other financial institutions for sending and receiving information, such as money transfer instructions, quickly, accurately, and securely.

What is the swift system | What impact it will have on Russia?
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Why was the SWIFT system set up?

Initially, SWIFT was set up to facilitate communications about Treasury and correspondent transactions only. The sturdy message format of the SWIFT network allowed for huge scalability, enabling the SWIFT network to gradually expand to the following areas such as:-

  • Banks
  • Brokerage institutes and trading houses
  • Securities dealers
  • Asset management companies
  • Clearinghouses
  • Depositories
  • Exchanges
  • Corporate business houses
  • Treasury market participants and service providers
  • Foreign exchange money
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Why SWIFT is considered to be the leading payment messaging service?

Despite other message services such as Fedwire, Ripple, and CHIPS. SWIFT maintains its leading position in the market by continually investing in innovation, adding new message codes to further facilitate funds transfers, and increasing transparency across borders.

One of the more recent initiatives introduced by SWIFT is the Global Payments Innovation (GPI), which is designed to do just that by improving the speed, predictability, and transparency of cross-border payments.

Why SWIFT Sanctions on Russian Banks?

In a move to halt the ability of Russian banks to transact business across borders, the United States (US), Canada and Europe have imposed an outright ban on seven Russian banks using SWIFT, the global message system that allows bank transactions.

In his State of the Union address, Joe Biden made it clear that sanctions were intended to hurt Russia and to support the Ukrainian people. “Putin is now isolated from the world more than ever,” he said.

Earlier this month, leaders from the U.K., EU, U.S., and Canada announced that selected banks in Russia would be disconnected from SWIFT over its February 2022 invasion of Ukraine.

In a surprising move, on Saturday, Canada, the European Union, the United Kingdom, and the United States announced plans to disconnect “selected Russian banks” from SWIFT. The severe economic sanction caused hesitation in some European countries due to the risks of disrupting energy services in Europe and hampering Russia’s ability to pay its debts.

After Russian forces waged attacks across Ukraine, the coalition ultimately decided to retaliate by banning Russian SWIFT accounts altogether.

Which Russian banks are banned from SWIFT?

The institutions that have been expelled are VTB Bank, Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank and Sovcombank, along with VEB, Russia’s development bank.

What impact it will have on Russia?

Rubble falls 30% against the dollar, inflation is up from 9%, GDP and stock exchange frozen, the ruble dropped 30% against the dollar

In terms of agricultural exports, the Russian Federation ranks first. Ukraine supplies about 12% of global wheat exports and 13% of global corn exports

It is the world’s second-largest exporter of defence hardware after the United States, and accounts for 20 percent of global weapons sales, selling to around 30 countries in total.

Russian oil exports are the world’s largest, approximately 7 million barrels per day of crude oil and petroleum products – the majority now go to countries supporting sanctions. The international oil market has been thrown into disarray and prices have climbed more than 30% since February 24. In 2020, Russia produced 10% of world oil and 12% of world natural gas.

Palladium and neon are rare metals and minerals, both of which are vital for semi-conductors, with Russia providing over 40% of the world’s palladium supply and Ukraine producing 70% of the world’s neon production.

Defending the country’s interests: Russia is currently the second-largest defence hardware exporter in the world, behind the United States, and accounts for roughly 20 percent of global weapons sales, or about 30 countries in all.

What impact it will have on India?

Interruption and delay in India’s arms import due to the sanctions against Russia.

Bilateral trade between India and Russia stands at $9.4 billion so far this fiscal year, up from $8.1 billion in 2020-21 due to sanctions on Russia.

Russia is India’s main arms supplier, providing as much as 60-70% of its military supplies. Apart from crude oil, petroleum products, coal, fertilisers, gold, precious stones, and precious metals, Russia is also a major source of fertilizers, gold, and precious stones.

India’s recent $375 million BrahMos cruise missile export contract with the Philippines may be risked by sanctions on Russia.

Among other Asian economies, analysts say India is in trouble due to the geopolitical crisis between Russia and Ukraine.

As a result of higher oil and food prices, Asia’s economies could face a squeeze on economic growth, higher inflation, and weakened current account and fiscal balances,” wrote Nomura analysts in the coauthored report.

What impact it will have on other countries?

Russian hydrocarbon exports are denominated in dollars, making SWIFT a vital component of the country’s international transactions. The cutoff would stop all internationally-delivered goods, trigger currency volatility, and cause massive capital outflows.

With more than 300 Russian financial institutions part of the system, Russia has the second-most users behind the United States. More than half of Russia’s financial institutions use SWIFT.

An embargo on Russia could hurt other countries’ economies by making international trade more difficult. European countries will not be able to import the goods they need – oil, gas, metals, and other important components.

If Russia were disconnected, exporters would have a hard time selling goods to Russia, and German and US banks would be the most affected, as they communicate with Russian banks heavily using SWIFT.

Taking into account its dependence on Russia for oil and gas, the EU is wary. Approximately 40% of its gas needs come from Russia.

Still, some European leaders support cutting Russia off from SWIFT, including in the United Kingdom. On Thursday, the US and EU opted not to cut off Russia from SWIFT while leaving the door open to revisiting the possibility.

Who is Putin?

Vladimir Vladimirovich Putin is a Russian politician and former intelligence officer who is the president of Russia, a position he has filled since 2012, and previously from 2000 until 2008. He was also the prime minister from 1999 to 2000, and again from 2008 to 2012.
 

What is the full form of SWIFT?

The full form of SWIFT is Society for Worldwide Interbank Financial Telecommunications.

Where is the headquarters of SWIFT?

The headquarters of SWIFT is in La Hulpe, Belgium, near Brussels.

Which Russian Banks are not sanctioned from the SWIFT?

As the main institutions receiving gas payments from Europe, the central bank and Gazprom’s financial arm, Sberbank, are exempt from the SWIFT removal because they are the main Russian institutions that use SWIFT for gas payments. However, they cannot be banned from using SWIFT for other purposes than gas payments.

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