Both Russia and China have "their own SWIFT" and what is SWIFT?

The main "weapon" against Russia was supposed to be disconnecting local banks from SWIFT, the global payment system. However, the affected Russian banks have various options to circumvent the financial isolation. Moreover, the largest of them remains in the system.

The situation in Ukraine continues to escalate, and Russia's disconnection from the global payments system SWIFT is one of the key sanctions at the moment. However, not all Russian banks are affected by the disconnection from the system -seven banking institutions have been affected, and the largest of them, Sberbank, is not on the list of those cut off, according to Bloomberg.

"Apparently, the cut-offs didn't apply to those banks through which gas and oil payments could go from Europe to Russia," said Michal Skořepa, an economist at Česká spořitelna. Not even a bank partly owned by Russian gas giant Gazprom will be disconnected.

The ban thus affects VTB Bank, Bank Rossiya, Bank Otkritie, Novikombank, Promsvyazbank, Sovcombank and VEB.RF

What is SWIFT ?

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a member-owned cooperative that provides secure financial transactions for its members. Founded in 1973, SWIFT uses a standardized proprietary communications platform to facilitate the transmission of financial transaction information. Financial institutions securely exchange this information, including payment orders, with each other.

Society for Worldwide Interbank Financial Telecommunication (SWIFT)

SWIFT does not itself hold funds or manage external client accounts. The Society began operating in 15 countries in 1973 and now operates in more than 200 countries, connecting more than 11,000 financial institutions. In 2014, the cooperative delivered more than 5.6 billion messages, up from 10 million in 1979.

SWIFT is headquartered in Belgium and has offices in Australia, Austria, Brazil, China, France, Germany, Ghana, Hong Kong, India, Indonesia, Italy, Japan, Kenya, Malaysia, Mexico, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, South Korea, the United Arab Emirates and the United Kingdom.

Russia and China both have "their own SWIFT"

From the perspective of banks and institutions, the charm of the system lies primarily in simplicity, security and reliable archiving. At the same time, the system is transparent for back-checks due to audits, banking regulations or perhaps police investigations.

Russian bankers and politicians are aware of these advantages. That's why back in 2014 -when Russia was threatened with disconnection from SWIFT because of the annexation of Crimea -the Russian central bank started building its own version of it. This is now known as SPFS and is currently linked to several banks in other countries, including Switzerland and Germany.

In addition to SPFS, there is also a SWIFT equivalent in China - known as CIPS. Something like two dozen banks from Russia are involved, by the way. Thus, Skorepa said, the Russian banking sector has several options to largely avoid the impact that cutting off some Russian banks will bring.

"Banks that have lost the ability to make payments via SWIFT, for example, can negotiate the opening of an account in their favour with Russian institutions that have not lost this option," Skorepa said. According to him, this is the most attractive solution from the point of view of Russian banks. It is relatively easy and safe. 

"The main and probably quickly solvable constraint will be the capacity of Russian banks that will continue to be involved in SWIFT to process instructions from Russian banks that find themselves outside SWIFT," Skorepa adds.

Another possible way to circumvent Western sanctions is to conduct transactions through the aforementioned Russian SPFS or Chinese CIPS. Last but not least, it is possible to organize payments via email or other correspondence services. However, the above-mentioned ways show that cutting off only selected banks does not mean a definitive "isolation of Russian financial institutions" from the global payment system.

"If access to SWIFT is maintained for at least one major Russian bank, this will not be a real 'nuclear' sanction, but just a play on it. The audience in this case is mainly European voters, to whom their governments seem to want to show belligerence on the one hand, but on the other hand do not want to deprive them of heat in their living rooms and jobs in companies importing important inputs from Russia," says an economist at Česká spořitelna.

Before SWIFT was introduced, the only reliable means of message confirmation for international funds transfers was telex. However, Telex was plagued by a number of problems, including low speed, security concerns and loose message formats. The uniform code system for naming banks and describing transactions introduced by SWIFT was a welcome change.

Understanding SWIFT transactions

For money transfers, SWIFT assigns each participating financial organisation a unique code of eight or eleven characters. The code has three interchangeable names: the bank identification code (BIC), the SWIFT code, the SWIFT ID or the ISO 9362 code.

For example, the Italian bank UniCredit Banca, based in Milan, has an eight-character SWIFT code UNCRITMM. The first four characters represent the institution code (UNCR for UniCredit Banca), the next two are the country code (IT for Italy) and the last characters identify the location/city code (MM for Milan). If an organisation chooses to use an 11-character code, the last three optional characters may reflect individual branches. For example, the UniCredit Banca branch in Milan uses the code UNCRITMMXXX.

Suppose a customer of the T.D. Bank branch in Boston wants to send money to a friend who has an account at the UniCredit Banca branch in Venice. The Boston customer can walk into the T.D. Bank branch with his friend's account number and a unique UniCredit Banca Venice SWIFT code. T.D. Bank will send a SWIFT message over its secure network to transfer the payment to the specific UniCredit Banca branch. Once UniCredit Banca receives the SWIFT message of the incoming payment, it will clear and credit the money to the friend's account.

SWIFT versus IBAN

Both SWIFT and international bank account numbers are useful in identifying the parties to a money transfer. However, while the SWIFT code is used to identify a specific bank, the IBAN code is used to identify the individual account involved in an international transaction.

Source: bloomberg.com, seznamzpravy.cz