Is the reformation of global payment systems inevitable?
The invasion on Ukraine by Russia is not confined in wars on arms. The war has warped the economy of entire world greatly. The big economic countries like US and allies have made many sanctions on Russian’s oil and gas companies. As a result, Russian economy has drastically fallen. About 40% of total revenue of Russia comes from exporting of oil and gas which is now under sanctions. The maximum amount of exporting oil and gas are made through SWIFT payment system. In the meantime, SWIFT cuts off relation from many banks of Russia which is as like as fuel to the fire.
This fire fires in human pocket. This kicking off Russia by SWIFT have made worried us about the price hikes of commodities and puzzled us that taking parts of USA or Russia is advantage or disadvantage. It is a great calculation for every country. Every country is connected to the global systems. The isolation from such connection increases cost of production and interest which propels livelihood. When people pay more for buying but income is constant or less than previous, the sentiment of mass people increases surely. This is a great fear for the ruling party for every country specially for the corrupted countries least they should lose the power or defame to the party.
Being connected to big economy countries is a very vital for everyone due to getting some special facilities. In the age of globalization, every country must have to depend on other countries to fill up needs. In this situation, countries are dependent everyone for export or import. As the export-import is made through cross border. There must have a payment settlement system. The most uttered and popular payment network system is known to us SWIFT. It is a unique and quick system and it is really swift. No one wants to deprive themselves from such swift and unique facilities. SWIFT was founded in May 03, 1971. It’s headquartered in Brussel, Belgium. Although SWIFT is located in European Union but the maximum payments are made via US dollars. Here, dollar play a dominant currency. The controller of dollar is USA but the controller of SWIFT is the national Bank of Belgium, the US Federal Reserve System, the European Central Bank and many more of G-10. It connects more than 11,000 financial institutions over 200 countries. Actually, SWIFT works as a messaging network and does not work with client accounts.
Now this messaging networks has become the embodiment of we aponization of finance by USA and EU. Payment system SWIFT expelled 30 Iranian Banks in March, 2012 from its messaging systems. As a result, Iran lost its 50% revenues from exporting oil and 30% of their foreign trade was wasted during the time. In 2019, SWIFT also cut off access all Iranian Banks. In response, Tehran connected its SEPAM domestic financial clearing system to Russia’s System for Transfer of Financial Messages (SPFS).
About 300 Banks of Russia is involved with SWIFT systems and more than half of credit organization covered under SWIFT. Even Russia has the users of SWIFT second largest after USA. Now the question is Russia has cut its own leg invading on Ukraine whereas, Western and its allies have kicked out from SWIFT? Reality is that Russia has been preparing itself for the development of new alternative system of SWIFT after occupied of Crimea in 2014. Finally, the System for Transfer of Financial Message (SPFS) has been developed by the central bank of Russia in 2014. More than 400 banks have joined in the System for Transfer of Financial Message (SPFS) by 2020. The Putin’s government also has inspired the banks to join in the System for Transfer of Financial Message (SPFF) and discouraged to join SWIFT by subsidizing the banks. But only 12 foreign banks have joined under SPFS including Chinese one. Another messaging network has been developed by China named Cross-Border Inter bank Payment Systems (CIPS) in 2015 which has processed 80 trillion yuan (12.80 trillion USD) in 2021 with 1280 financial institutions in 103 countries having connected to this system including 30 banks of Japan, 23 banks of Russia and 31 banks from African nations receiving Yuan fund via infrastructure projects under Beijing’s Belt and Road Initiatives. CIPS counts some foreign banks like HSBC, Standard Chartered, the Bank of East Asia, BNP Paribas, DBS Bank, Citi, Australia and New Zealand Banking group.
War is not now confined between Russia and Ukraine. Many calculations have been made. OPEC has said that world will be the constant without the Russian oil. Although OPEC produces 40 % of world’s crude oil. Saudi and United State of Arab Emirates, powerful member of OPEC did not respond to the Biden’s call. Here is a gaming and winning politics. Many of us long waiting about what the US policies would be in the Middle East after oath of Mr. Biden. We have observed that Mr. Biden criticized the attack on Yemen by Mohammed Bin Salman. Mohammed Bin Salman is widely known to the rest of the world as MBS. MBS has been defamed after murdered of Journalist Jamal Khashoggi and he is accused. Hearing is going in a court of USA against MBS on the matter of Jamal Khashoggi. Here, MBS wants to take retaliation against Biden. It might be a great chance for him. He also urges about the resume of Iranian nuclear program in the chance of world oil-politics and Yemeni Houthi Militia.
China is Russia’s biggest trade partner for both exports and imports. In 2020, 17.5% of the trade between the two countries were settled by yuan, an improvement from the 3.1% in 2014.
From such distraction or other matters, MBS pays silently heed to China. There are many reasons to make a big deal to sell crude oil to China with Petro-yuan. Many has considered that such perturbation of MBS. Besides, China has been purchasing oil from Iran with own currency since 2012. China is the highest importer of crude oil. It surpassed the USA importing oil since 2017 via dollar and yuan. US dollar’s dominance in oil markets may face challenge as Saudis reportedly eye yuan-based sales deal with China, if a Saudi-yuan deal were to be made, it would bolster China’s currency at the expense of the dollar as Beijing looks to challenge US leadership in financial markets. Whereas, about 80% of global oil sales are done in dollars, and Saudi Arabia has conducted its deals exclusively in the greenback since 1974.
World also has witnessed that US seized the US dollars reserves of Afghanistan and Russia. While seizing Afghan or Russian reserves may feel righteous and just, the immediate effect of such actions is to completely undermine the credibility of dollar debt as an international savings device. It is a great lesson to the other countries. Now other countries consider themselves that if they keep reserves in the form of US dollar, anytime they might face sanctions by USA and allies’ countries in future and fear grow that the lose of reserves. As result, many countries are trying to find out alternative payment networks for foreign trade settlement and safe currency. Questions may arise what might be the alternative of SWIFT and dollar. CIPS and yuan of China is repeated. There are many reasons for uttering CIPS and yuan. China is the biggest importer oil and dominating the world economy in commodity exports. Already Xinhua News Agency said, citing economist Guo Shengxiang, SWIFT will lose its credibility and influence and gradually decline in importance if it’s used as a sanctions tool.
Another virtual currency known as Bitcoin is used for transaction settlement. El Salvador, the first country legalized the bitcoin in September, 2021. Though many countries oppose to legalize it. But the research is going on to develop cryptocurrency as legal currency.
Now the situation is at the brink of replacement to SWIFT or hard competitor against SWIFT.
Analyst: Md. Badrul Millat Ibne Hannan, MPA, AIS (DU), ACCA (Final Level) & Officer, Islami Bank Bangladesh Limited.