Financial system sanctions… If the geopolitical situation accelerates, it is clear that there will be an escape from Russian assets and indirect effects from the EM basket. The main factor, on the other hand, has to be evaluated on the extent to which the current situation can be improved. In the previous analyzes, while evaluating the risks in the axis of asset distribution and financial market, here we will look at the effects of sanctions that can be applied over the global financial system.
SWIFT option in sanctions… It is considered that Russian banks will be removed from the SWIFT global payment system. Western countries will consider which economic and financial sanctions will affect the Russian economy without any repercussions if there is an invasion. The most effective is considered to be SWIFT, which in 2014, when it came to the similar Ukraine crisis and sanctions, Russia had worked with some countries on a system called SFSP, which is an alternative to SWIFT. Bordering both Russia and Ukraine, Belarus, perhaps forewarning of further problems ahead, embarked on the process of separating its financial systems from the SWIFT network and linking it instead to Russia’s alternative to the Russia’s Transfer of Financial Messages System (SPFS).
What is SWIFT? SWIFT, short for Society for Worldwide Interbank Financial Telecommunication; A code system that provides a standard for electronic funds transfer in foreign currency “especially in international transactions” in banking transactions. Thanks to this system, “electronic fund transfer standard” is provided between banks all over the world. SWIFT enables interbank payment transfers to take place in a very short time. SWIFT payment system, in which foreign account correspondents work, is used for foreign currency transfers made abroad or in the country. The system also identifies each bank thanks to its BIC (Bank Identifier Codes) code.
SPFS alternative to SWIFT, its differences and technical infrastructures… Although Russia’s SPFS is three times cheaper than SWIFT, the network itself only works during weekday working hours and its messages are limited to 20 kb. Meanwhile, SWIFT works 24/7 and allows 10mb to be transmitted over its network. SPFS is the Russian equivalent of SWIFT and has been developed by the Central Bank of Russia since 2014 after the US government threatened to separate Russia from the SWIFT system. As of March 2018, more than 400 Russian entities (mostly banks) are part of the Güllük escort network. This means that the SPFS system supports intra-Russian transactions, but the problem with any SWIFT disconnections will be the lack of international connectivity. It then becomes a question of how quickly Russia can integrate SPFS with other systems and whether the US will impose sanctions on countries that adhere to SPFS as well. When transactions are made with dollars in the SWIFT system, these transactions must automatically go through the US system. This paves the way for the US to monitor transactions and interfere with money transfers.
In fact, there are plans to integrate the Russian SPFS network with the China-based Cross-Border Interbank Payments System (CBIBPS), while the Russian government is also in talks to expand SPFS to developing countries such as Turkey and Iran. Since 2019, many agreements have been reached to connect SPFS to the payment systems of other countries in China, India, Iran, as well as to countries within the Eurasian Economic Union (EAEU), which includes Armenia, Belarus, Kazakhstan, Kyrgyzstan. The EAEU also has Free Trade Agreements with Serbia, Singapore and Vietnam, and many other agreements are pending. At the end of 2020, 23 foreign banks from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland were connected to SPFS.
An additional unknown is how quickly and how extensively the Russian SPFS system can be fully integrated with other systems such as China’s CBIBPS. US intelligence – Based on the lack of awareness in Afghanistan, it may also have underestimated the SPFS’s ability to adapt. This is possible, of course.
Conclusion? The sanctions, which focused on the financial and economic field in 2014, did not pull Russia back much, and Russia is in a more advanced position than it was in those days. If we recall, there were some restrictions on both the assets and monetary movements of a few government officials and oligarchs at that time. We can expect the introduction of a similar systematic, but being excluded from SWIFT may actually cause Russia to consider entering an alternative system such as SPFS, which is similar to the countries that are in conflict with the United States and do not want to undergo the supervision and control of the American financial system. Against such a situation, the US can be expected to consider an option such as imposing sanctions on countries that choose SPFS.
In fact, many countries, especially Russia and China, are trying to integrate alternative financial system payments in terms of commercial relations, and even the shift of many countries to trade in local currencies is actually a motivation issue in terms of reducing the dollar circulation and convertibility in the system. In fact, the event may manifest as a new financial system movement or a financial system crisis that will involve many countries. In my opinion, separating all payment systems would be like a sharp knife. The global financial system is sufficiently integrated, and such a sanction will complicate the business and trade relations of not only Russian banks, but also Western financial system players, but will also reduce the conversion of local currencies to dollars by reducing the circulation of dollars in the system through alternative means. After all, the use of hard currency is still dominant in global trade, and this hard currency is mostly dollars. There is a possibility that the dollar will see more demand due to the cyclically still changing Fed expectations.
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