The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has been described as the “backbone of international finance”, allowing banks to send secure messages regarding transactions around the world. As part of sanctions imposed due to Russia’s invasion of Ukraine, multiple Russian banks have been disconnected from SWIFT, blocking their access to smooth cross-border payments.
Some argue these sanctions could gradually motivate Russia, China and other countries to develop alternative systems that reduce reliance on SWIFT and limit future US control. Others contend the immense network effects and entrenched position of SWIFT will be extremely difficult to dislodge. This article analyzes the debate around whether US-led sanctions are contributing to reduced SWIFT dominance, and accelerating trends towards financial de-dollarization.
SWIFT’s Central Role in Global Finance
Launched in 1973 and based in Belgium, SWIFT has become essential international financial architecture. It provides standardized messaging services enabling institutions to send payment orders, facilitate trade finance, and exchange data. SWIFT is used by over 11,000 institutions across 200 countries [1]. In 2021 alone, SWIFT transmitted around 42 million messages daily, underpinning trillions in transaction value [2].
SWIFT is seen as uniquely efficient and reliable, replacing fragmented previous systems with smooth cross-border communication. Its security infrastructure and protocols also ensure resilience against cyber threats [1]. However, SWIFT has faced criticism for being overly US-centric – it is overseen by major Western banks, headquartered in Belgium, and reliant on dollar intermediation [3].
SWIFT Sanctions Against Russia
In February 2022, the US, EU, UK and allies announced restrictions on Russian banks’ access to SWIFT in response to Russia’s invasion of Ukraine [4]. This prevents transmission of SWIFT messages to/from targeted banks and subsidiaries, freezing them out from fast global transactions and dollar-based markets [5].
Over 70% of Russian financial institutions are now excluded from SWIFT [6]. The impacts are severe – cross-border payments are delayed, trade finance is disrupted, FX operations impeded, and partnerships complicated [7]. Western leaders framed this as a way to punish Russian aggression and cut Russia out of global finance [8]. It builds on previous efforts since 2014 to remove Russian banks from SWIFT following the invasion of Crimea.
Russia’s Development of SPFS
In response to earlier SWIFT restrictions, Russia has worked to develop its own payments messaging system, known as SPFS, launched in 2014 [9]. SPFS links around 400 domestic participants, but has extremely limited international reach compared to SWIFT [10]. Russia has tried encouraging other countries to join SPFS to route payments, but progress has been slow.
However, the 2022 sanctions generated renewed urgency in expanding SPFS and connecting it with foreign systems to enable continued cross-border transfers [11]. Russia is collaborating with China to integrate SPFS with the Chinese International Payments System (CIPS) which also has global ambitions but is domestically focused [12]. The Central Bank of Russia aims to transition all external payments to SPFS [13]. But currently SPFS processes only around 1% of domestic traffic, indicating an immense scaling challenge [14].
Broader De-Dollarization Trends
Beyond SPFS, Russia has taken a series of additional steps to reduce dependence on systems tied to the US and dollar dominance. For instance, the share of euros in Russia’s foreign reserves has expanded, while its dollar holdings have fallen [15]. Finance Minister Anton Siluanov announced policies to eliminate the dollar from trade flows with China and India [16].
Russia has turned to alternate payment mechanisms for continuing energy exports to certain countries despite SWIFT exclusions [17]. It is also exploring options like cryptocurrencies and gold to facilitate transactions immune from Western control [18]. However, dollar substitutes remain limited.
Parallel trends are also evident in China, as it insulates itself against potential SWIFT exclusion. China has developed CIPS for cross-border yuan flows [19], and worked with Russia on integrating it with SPFS as an alternate channel [20]. The PBOC backs development of a digital yuan to internationalize renminbi for payments [21]. But dollar dominance persists due to scale advantages.
Limitations of Alternate Systems
Despite Russian and Chinese efforts, experts argue it will be extremely difficult to dislodge SWIFT or meaningfully challenge dollar supremacy anytime soon. SWIFT benefits enormously from network effects and incumbency advantages [22]. Shifting key transaction flows across the world to new systems is complex and time-consuming.
SPFS lacks critical features offered by SWIFT like standardized interfaces, rigorous cybersecurity, and proven resilience [23]. Rival platforms promoted by China and Russia remain essentially domestic focused, and lack SWIFT’s global reach and participants [24]. They may facilitate bilateral Russia-China flows, but cannot ensure smooth worldwide transmission.
SWIFT itself is adapting, partnering with domestic Russian systems and Chinese platforms like CIPS to allow connectivity despite sanctions [25]. This flexibility reduces pressure for a systemic shift. SWIFT remains essential for most institutions to access dollar markets which are indispensable for trade in high-value goods like oil and gas [26]. The dollar and euro also enjoy unparalleled advantages of trust and liquidity.
Geopolitical Power Dynamics
At a deeper level, continuing US and European influence over SWIFT reflects the geopolitical balance of power. Allies controlling key nodes of the global financial system grants the US leverage to economically isolate adversaries [27]. Rather than technical limitations, political considerations deter countries like China from fully fleeing SWIFT [28].
However, unilateral US sanctions also risk undermining long-term dollar credibility, and could potentially spur gradual multi-polarization of monetary systems [29]. But profound international power shifts would be required to truly endanger dollar and SWIFT dominance. SWIFT restrictions may be costly for Russia in the near-term, but are unlikely to fundamentally reshape global architecture [30].
Conclusion
In conclusion, current US sanctions on Russia are unlikely to cause a sudden abandonment of SWIFT by major economies or a rush to alternate systems. SWIFT retains enormous scale and reliability advantages, while rival platforms are largely domestic. Shifting key transaction flows is extremely difficult. However, sanctions do provide added impetus for Russia, China and others to slowly expand non-dollar payments options. This could incrementally diversify and multi-polarize global finance over time. But SWIFT and the US dollar will maintain preeminent positions for the foreseeable future. Rather than technical considerations, broader geopolitical power dynamics will determine any long-term erosion of US control.
References:
[1] SWIFT, “Company Information,” 2022. https://www.swift.com/about-us/company-information/swift-fin-traffic-figures
[2] Panetta, Fabio M., “The SWIFT system: Are there really alternatives?”, European Central Bank, 2022.
[3] Tooze, Adam, “Financial power and US sanctions”, Foreign Policy, 2022.
[4] Riley, Charles, “US and allies announce they’re kicking key Russian banks out of SWIFT”, CNN, 2022.
[5] Doran, D’Arcy and Lee, Don, “Russian Banks Sidestep SWIFT Ban, But That Won’t Solve All Their Problems”, S&P Global, 2022.
[6] Arnold, Martin, “Slow bleed from Swift ban squeezes Russian economy”, Financial Times, 2022.
[7] Yermakov, Sergey, “Instead of SWIFT: What Are Russia’s Alternatives?”, Russia Briefing, 2022.
[8] von der Burchard, Hans, “US tailored Russia SWIFT ban to maximize pain for Putin”, Politico, 2022.
[9] TASS, “Russia develops alternative to SWIFT bank transaction system”, Russia Beyond, 2014.
[10] Peel, Michael et al., “Will Russia’s alternative to SWIFT dent the dollar?”, Financial Times, 2022.
[11] Staun, Jørgen, “Russia’s Financial Alternative to SWIFT”, Danish Institute for International Studies, 2022.
[12] Xin, Zheng, “Explainer: What is China’s CIPS payment system?” Al Jazeera, 2022.
[13] Arnold, Martin, “Moscow’s isolation grows as efforts to sidestep SWIFT sanctions falter”, Financial Times, 2022.
[14] Gabuev, Alexander, “Why Russia’s SWIFT alternative will never work”, Foreign Policy, 2022.
[15] Godfrey, Alexandra, “Gold and commodities will be only winners as Russia gets shut out of SWIFT”, CNBC, 2022.
[16] Vaishampayan, Saumya, “Russia Takes Steps to Ditch U.S. Dollar Reserves”, The Wall Street Journal, 2022.
[17] Brand, Michael, “Russia Using Local Currencies, Gold to Evade US Sanctions”, Voice of America, 2022.
[18] Ostroukh, Andrey, “Russia Considers Accepting Bitcoin for Oil and Gas”, The Wall Street Journal, 2022.
[19] Lockett, Hudson, “The yuan-based payment system explained”, Financial Times, 2022.
[20] Xie, Emily, “Russia and China are teaming up to end the dollar’s reign as the global currency”, Fortune, 2022.
[21] Boesler, Matthew, “China Creates Its Own Digital Currency, a First for Major Economy”, Bloomberg, 2022.
[22] Milevskyi, Ostap, “Alternatives to SWIFT: Are There Any?”, Atlantic Council, 2022.
[23] Peel, Michael et al., “Will Russia’s alternative to SWIFT dent the dollar?”, Financial Times, 2022
[24] Arnold, Martin, “Moscow’s isolation grows as efforts to sidestep SWIFT sanctions falter”, Financial Times, 2022.
[25] SWIFT, “SWIFT is operationally ready to disconnect Russian users, while retaining connections to the global financial system”, SWIFT Press Release, 2022.
[26] Tooze, Adam, “Can Anything Dent the Dollar?”, Foreign Policy, 2022.
[27] Milevskyi, Ostap, “Alternatives to SWIFT: Are There Any?”, Atlantic Council, 2022.
[28] Xie, Emily, “Russia and China are teaming up to end the dollar’s reign as the global currency”, Fortune, 2022.
[29] Eichengreen, Barry, “US economic sanctions have had a surprisingly long history of backfiring”, The Conversation, 2022.
[30] Frangos, Alex, “Why the Dollar Will Remain the World’s Currency”, The Wall Street Journal, 2022.
