West cuts off Russian major banks from the SWIFT

Context: Recently, West’s announcement about cutting off Russian major banks from the SWIFT payment system which brings an opportunity for both India and China to deploy their indigenous systems they had prepared for such an eventuality.

About SWIFT

• The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.
• It is a secure platform for financial institutions to exchange information about global monetary transactions such as money transfers.
• Established in 1973, SWIFT uses a standardized proprietary communications platform to facilitate the transmission of information about financial transactions.
• The messages are encrypted to protect confidentiality.
• SWIFT neither holds funds on its own nor manages external client accounts.
• SWIFT is headquartered in Belgium.
• 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.

Key Issue

• US and European Union (EU) have decided to partially exercise the nuclear-weapon option as far as economic sanctions are concerned: cutting off a number of Russian banks from the main international payment gateway, SWIFT. 
• The assets of Russia’s central bank are also expected to be frozen, constraining Moscow’s ability to access its overseas reserves.
• Prior to this, only one country had been cut off from SWIFT — Iran. It resulted in it losing a third of its foreign trade. 

What does the move aim to achieve?

• The intention of the moves is to “further isolate Russia from the international financial system".
• With the ban, the country won’t be able to make profits from international sales of its oil and gas production.
• Cutting off a country from SWIFT in the financial world is equivalent to restricting Internet access of a nation.
• 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.

Key Consequences of such move
Officials in Europe noted that the loss of SWIFT access by Russia could be a drag on the broader global economy. Russia has also equated a SWIFT ban to a declaration of war. 

• And because the system cements the importance of the U.S. dollar in global finance, outright bans also carry the risk of pushing countries to use alternatives through the Chinese government or blockchain-based technologies.
• India, Russia and China have also decided to explore an alternative to the US-dominated Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment mechanism to smoothen trade with countries facing American sanctions. 
• The new system is expected to work as a gateway model when messages on payments are trans-coded in accordance with a certain financial system.
• They will connect their financial messaging systems to bypass the SWIFT international money transfer network.
• In it, Russia’s financial messaging system SPFS will be linked with China’s CIPS (China International Payments System).  
• Since, India  does not have a domestic financial messaging system, it plans to link the Central Bank of Russia’s platform with a service that is under development.