As the world economy was recovering from the COVID-19 pandemic, the Russia-Ukraine war has once jolted the entire system. The Western countries have imposed heavy economic sanctions against Russia. One of the major sanctions which attracted attention was the Western central banks asking the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system to block some Russian banks from international payments.
Finance relies immensely on flow of information, and hence the history of finance and communications go hand-in-hand. The financial sector is usually an early adopter of whichever new communication technology that promises to deliver information faster. So from pigeons or telegraph or web technology, finance is pretty much at the centre of using it. SWIFT is a similar communication technology.
In 1973, SWIFT was established in Belgium when 239 banks from 15 countries joined hands to solve a major problem of communicating about cross-border payments. SWIFT started functioning in 1977 by replacing telex with a computer-based system to transmit messages. Since then communication technology has transformed, and so has SWIFT. SWIFT is a financial co-operative used by more than 11,000 institutions across 200-plus countries and territories, and services. SWIFT transmitted 10 million messages in 1979, and crossed nearly 10 billion messages by 2020.
SWIFT is owned and controlled by 3,500 shareholders, which are mainly financial institutions. The shareholders elect a 25-member board representing banks across the world.
In 1983, the central banks became members of this network. Overtime, the central banks were not just its members but ‘overseers’ too. The G10 central banks, which governed the system, were led by the Central Bank of Belgium, and included Canada, France, Germany, Italy, Japan, The Netherlands, the United Kingdom, the United States, Switzerland, and Sweden.
In 1999, the European Central Bank was established, and was made an overseer of SWIFT. In 2012, the SWIFT Oversight Forum was established to share SWIFT-related information with other central banks. The forum included the central banks of 10 countries: Australia, China, Hong Kong, India, Korea, Russia, Saudi Arabia, Singapore, South Africa, and Turkey.
It is these G10 central banks which have asked the SWIFT to bar some Russian banks. These sanctions raise three major issues facing the world economy.
First, it is not surprising to see that the majority of the central banks which oversee the SWIFT system are from developed economies. In several ways SWIFT governance resembles the governance of the United Nations, the World Bank, the International Monetary Fund, etc. These institutions are meant to serve the global community, but are primarily run by and for developed countries. These institutions are ‘global’ for namesake as developed countries use these to serve their goals. This is evident in the ongoing Russia-Ukraine crisis as well.
Second, while Russian attacks on Ukraine are deplorable, the West is equally responsible for the ongoing war. The US and Western Europe have been pushing Ukraine to join NATO, which is a major reason for the current crisis. So should there have been sanctions on the G10 banks for their part in the conflict? If invading a country was the grounds to impose these sanctions, why haven’t such sanctions been taken against the US for its highhandedness over the past few decades?
Third, we need to think of alternatives to the SWIFT system. The sanctions are affecting every country that has trading ties with Russia, including India. In the wake of these sanctions, authorities are trying to revive a Rupee-Ruble payment line. Some countries have been experimenting with Central Bank Digital Currencies for cross-border payments. Going forward, these experiments will likely become more mainstream.
Centralisation is not limited to SWIFT payments alone. In the last 15 years, the world economy has faced three major crises: the 2008 global financial crisis, the 2020 COVID-19 pandemic, and now the Russia-Ukraine war. The three have pointed to a paradoxical aspect facing the world economy. While the technological forces should have decentralised and created more choices, we actually see more centralisation and less choices. The 2008 crisis showed the centrality of US financial system, the pandemic showed the centrality of the Chinese trading system, and the Ukraine crisis shows the centrality of SWIFT and the US Dollar in the payment systems. The centralisation of these systems has meant that when there is a crisis, it spreads like wildfire across the world economy.
At the turn of the century it was thought that humans had overcome most of the problems it faced in the 20th century. Two decades into the 21st, and it seems like a re-run of the previous century with a financial crisis, pandemic and now war. In addition to these, there is a climate crisis, which could be the mother of all crises. So much for the human hubris, but will we ever learn?
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