Can Russia break the stranglehold of the West’s SWIFT money transfer system?

(The Saker) – by Kakaouskia for the Saker blog

Greetings to the Saker community and readers.

For some time now, US and its vassal states and Russia are engaged in an economic war. The first salvo was when VISA and MasterCard – which are US based banking institutions – were forced to stop accepting transactions performed by cardholders of certain Russian banks. The latest indication, as Saker has mentioned in the near past is that the US government is thinking to block Russian access to the SWIFT system.

What is SWIFT

SWIFT is basically a cooperative message exchange system. It is targeted at banks, investment companies, money brokers, basically anyone which needs to transfer money from A to B. To use it you apply for membership; once accepted you get your SWIFT code plus some shares of the SWIFT cooperative, pay a one-off signup fee and from then on you pay per message (aka transaction) or per file sent, other processing / services fees plus an annual support fee. The value of fees and other charges depends on the membership level. Profits are distributed in a similar way. SWIFT also provides reports and other analytic features to help members generate more business.

The reason behind SWIFT’s success is the fact that it provides a standardized, secure and reliable way of moving money around. Regulatory compliance is expensive as it requires constant, dedicated, high quality manpower to monitor, develop, implement, test and deploy changes to IT systems and networks as well as business processes. Thus, banks and other financial institutions prefer to have someone else take care of all such requirements.

Impact of kicking Russia out of SWIFT

The immediate effect will be the inability to exchange SWIFT messages between Russian members of the SWIFT system and the rest. Note that SWIFT itself does not facilitate the actual money transfer; all it does is exchanging money orders – the fund transfer must take place using mechanisms and under the agreements that the two exchanging institutions already have in place. As such, while it will become more risky and difficult to transfer money – not to mention more expensive – money transfers cannot be completely stopped. Such difficulties will drive Russian investors to seek other more investor-friendly destinations for their money; this will probably hit the EU quite hard as it is a favourable place for Russian investment. Consider this scenario: you have 1 million which you like to invest. You go to your bank, tell them you like to transfer said million to country X and the teller comes back and says “we can do that, however it is deemed high-risk and as such please sign a waver that if something happens to your million, bank bears zero responsibility”. Of course you can insist to proceed with the transfer, however a safe bet is that the majority of people will chose a less risky destination.

SWIFT also stands to lose. Communication is a two-way street which means messages go from and to Russia. If one assumes 10,000,000 daily Russia-related messages per day between SWIFT members, at the rate of €0,01 per message that is €36,500,000 per year in transaction fees alone. There is a good chance that a number of Russian institutions will either be removed or otherwise decide on their own that there is no more meaning in being a SWIFT member therefore there will be a loss of other fees, not to mention the cost of all the legal battles to sort out the contractual agreements.

Can Russia build an alternative to SWIFT?

Technically speaking – yes. In response to VISA’s and MasterCard’s boycott, Russia has launched NSPK as a replacement bank card scheme.

Allow me a few points on NSPK:

– As it stands now it is a card payment system and a direct response to the coercion by US government to VISA and MasterCard not to honour their agreements with Russian banks and stop accepting their own cards for which Russian banks paid licensing fees for the privilege of issuing them. The first six digits on any of your bank cards are called the BIN number; the logo on the card (VISA, AMEX, MasterCard etc) shows which scheme owns the BIN. Your bank – the issuer – pays said scheme a license fee to exclusively use that particular BIN and as such the scheme has to honour their end of the deal; that is ensure the card is accepted by all terminals brandishing the same logo. Few people know that VISA et al are in reality banking institutions.

– NSPK scheme has been active for a couple of years now; already a number of Russian banks use it. For the time being it operates only within Russia.

– The first iteration is a “Russianised” clone of China Union Pay scheme, which in itself is based off VISAs specs (properly licensed). I always laugh when thinking of the irony; instead of VISA making money out of card transactions made by Russians, they lose money while Russia is using their own design.

Russia can choose to repeat this by enhancing NSPK to function as a SWIFT alternative. NSPK could use the same file formats and mechanisms with SWIFT with different headers to allow proper identification, thus minimising needed system modifications on behalf of users. A big plus in this effort is that SWIFT messages are using an ISO standard, namely ISO20022. This will make development a whole lot easier and since ISO20022 is an open standard, no one can use any copyright claims to stop the alternative solution.

Next comes the question of the actual communications between the users of the new system. While everybody is using the Internet these days, few people realise that it relies on a backbone of backbones; a series of high-capacity cables – usually underwater – and satellites linked to extremely high-end routers utilising the BGP protocol to setup the paths for intra-county linking. While quite a few business entities can own a satellite or an underwater cable, only a handful have the technical know-how and expertise to create such infrastructure. US can go full retard and force the owners of such backbone elements (say AT&T) to block certain messages originating from Russia. Thankfully Russia is quite capable of building and deploying its own satellites and cables. It will be costly and time consuming, but it can be done. At first, existing infrastructure can be used for establishing communications between important business partners, most likely in Asia.

Finally, the big question is who will be accepting any SWIFT alternative? Here is were things get tough. US is certain to try and bully other countries into “either use SWIFT exclusively or else!”. This can even be achieved via the “ethical way” like it was attempted way back when Google cited pressure from society and people “to promote democracy and freedom of speech” in an effort to try to avoid following Chinese legislation while doing business in China. While users in countries like China probably will not be intimidated – who would like to lose Chinese investments – or can be allowed to work around the limits (example: keep the main business entity SWIFT only and set up a subsidiary for Russia only communications. The subsidiary is as such expendable and if one complains can be dissolved and replaced within a matter of days), smaller or vassal states (hello EU) can be bullied enough to go against their own interests. This has happened in the past between VISA and China Union Pay, and it took years of WTO litigation to resolve. Russian diplomacy will have to be very efficient and creative to overcome a global monopoly.