India Weighs Russia’s Alternative to SWIFT: Pros and Cons

India Weighs Russia’s Alternative to SWIFT: Pros and Cons

Sub: Eco

Sec: External sector

• Russia’s Proposal:
  • Russia has proposed that India use its own financial messaging mechanism as an alternative to the SWIFT global network.
  • This proposal is aimed at facilitating rupee-rouble trade settlement between the two countries.
• RBI’s Assessment:
  • The Reserve Bank of India (RBI) has scrutinized the proposal and found it to be “doable”.
  • However, discussions are ongoing, and a final decision has not yet been made.
• Diplomatic Considerations:
  • The decision will consider diplomatic aspects, given the sensitive nature of the issue.
  • Prime Minister Modi and Russian President Putin agreed to promote trade settlements in national currencies and introduce digital financial instruments into mutual settlements.
• Ongoing Discussions:
  • Meetings have been held between senior officials from the RBI, some public sector banks, and their Russian counterparts to discuss Moscow’s proposed alternative messaging system for banks.
  • The RBI’s view is that the proposal is feasible, but more consideration is needed due to its diplomatic sensitivity.
• SWIFT System Background:
  • Prominent Russian banks have been banned from using the SWIFT system as part of the West’s sanctions against Russia following its war against Ukraine, which began in February 2022 and continues.

SWIFT (Society for Worldwide Interbank Financial Telecommunication)

The SWIFT (Society for Worldwide Interbank Financial Telecommunication) global network is a highly secure messaging system used by financial institutions around the world to exchange information about financial transactions.

What is SWIFT?

• Founded: 1973, in Belgium.
• Purpose: SWIFT is designed to facilitate secure, standardized communication between financial institutions, enabling them to send and receive information about financial transactions in a reliable and secure manner.
• Members: Over 11,000 financial institutions in more than 200 countries use the SWIFT network.

How SWIFT Works

• Message Types: SWIFT provides a standardized format for various types of financial messages, such as payment instructions, trade confirmations, securities transactions, and treasury transactions.
• Network: The SWIFT network does not transfer funds but rather sends payment orders between institutions’ accounts using the SWIFT code, also known as a Bank Identifier Code (BIC).
• Security: SWIFT is known for its high level of security and reliability, which is crucial given the sensitive nature of financial transactions.

Importance of SWIFT

• Global Standard: SWIFT is the standard for international financial transactions, making it integral to the global banking system.
• Efficiency: It allows for fast, secure, and reliable communication between banks, reducing the risk of errors and fraud in international transactions.
• Sanctions Tool: Because of its central role in global finance, access to the SWIFT network is crucial for countries and banks. As a result, the network is often used as a tool for enforcing international sanctions. For instance, when a country or financial institution is banned from SWIFT, it significantly hampers its ability to engage in international trade and finance.