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What is Swift Payment System? How will its ban affect Russia?

SWIFT payment system

According to Ukrainian media, preparations are underway to separate Russia from the SWIFT payment system. According to Ukraine’s Foreign Minister Dmitro Kuleba, the decision has not yet been officially issued, but technical preparations are underway.

This came as Hungary lent its support for the separation of Russia from Swift. Hungary was the last EU country to oppose the measure.

What is Swift?

full form of swift is Society for Worldwide Interbank Financial Telecommunications.

SWIFT is an important facilitator of international banking and is used by more than 11,000 financial institutions and companies in more than 200 countries and territories.

SWIFT Payment System: Five Key Facts

1. SWIFT is a Belgium-based cooperative that acts as an intermediary and executor of financial transactions between banks around the world.

2. SWIFT Transfer is also known as International Money Transfer. The SWIFT payment system does not facilitate money transfers, but it does send payment orders, which must be settled by correspondent accounts that institutions have with each other.

3. Simply put, SWIFT is an international system, similar to Gmail, for banks and international financial institutions, used for sending written messages, including orders and confirmations, for payments, trade, and currency exchange.

4. It oversees several government banking systems, including the European Central Bank, the National Bank of Belgium and the US Federal Reserve System. It is headquartered in La Hulpe, Belgium, near Brussels.

5. SWIFT ensures secure transportation of financial messages. It does not maintain accounts for its members nor does it undertake any clearing or settlement.

6. SWIFT Bank Systems also sells software and services to financial institutions, mostly for use on its proprietary “SwiftNet” and ISO 9362 Business Identifier Codes (BICs), popularly known as “Swift Codes”.

How will the SWIFT ban affect Russia?

  • If Russia breaks away from the SWIFT banking system, it could affect Russian business and make it harder for Russian companies to do business.
  • The move could potentially cause Russian companies to lose access to smooth transactions. Companies may face problems receiving payment for energy products such as gas and oil.
  • Without access to the SWIFT system, Russians would have to rely on fax and email for cross-border transactions. This could potentially disrupt Russian global trade.
  • According to some experts, stopping Russia from using the network would amount to a nuclear attack on the country’s economy.
  • Russia was threatened with similar sanctions after its annexation of Crimea in 2014. The proposal to separate Russia from the SWIFT network was then floated but was not implemented.
  • At the time, the Russian finance minister estimated that the country would face a potential GDP contraction of 5 percent if the US and its European allies cut Russia off the SWIFT network.
  • Russia accounted for 1.5 percent of total transactions on SWIFT in 2020.

Why won’t the SWIFT ban affect Russia much this time?

After facing economic sanctions in 2014, Russian President Vladimir Putin has transformed the country into an economic fortress over the past eight years. According to experts, sanctions will now only cause limited damage to Russia’s economy.

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.

SWIFT Banking System History

The SWIFT banking system was founded in Brussels on May 3, 1973, under the leadership of its inaugural CEO, Karl Reuterschild.

The system is supported by 239 banks in 15 countries around the world. Prior to this, international financial transactions were communicated over telex, a public system that involved manual writing and reading of messages.

SWIFT is overseen by G-10 central banks belonging to the 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 from other major economies also joined the G-10 central banks. Banks in other major economies include the Reserve Bank of India, the Reserve Bank of Australia, the Bank of Russia, the People’s Bank of China, the Hong Kong Monetary Authority, the Saudi Arabian Monetary Agency, the Bank of Korea, the Monetary Authority of Singapore, the Central Bank of Turkey and the South African Reserve. Bank.

 

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