what makes it so important

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The conflict in Ukraine is being waged on several fronts. Warfare on the ground is usually the most impactful, and also the one that grabs the most headlines, but it is by no means the only way to inflict damage on rival nations. In a globalized and hyperconnected world like the current attack the enemy’s pocket it can be just as effective as damaging your critical infrastructure.

The United States, the European Union and Great Britain are deploying a package of measures that precisely seeks to impose severe economic sanctions on Russia in response to the latest decisions taken by the government led by Vladimir Putin to strengthen its position against Ukraine. There are many ways to erode a country’s financial system, and one of the most effective requires block their banks and isolate it from the economies with which it has a greater relationship of interdependence.

This is the unquestionably warlike context in which Western countries have put on the table the possibility of expelling Russia from the SWIFT international banking system. Several experts have compared the destructive impact that this measure would have on Russia’s financial system with the launch of a nuclear weapon about a big city. This metaphor intuitively describes that Western economies would also be damaged by this measure, so it cannot be taken lightly.

According to Reuters the expulsion of Russia from the SWIFT banking system has been proposed by the Baltic countries, among which are Poland, Estonia, Latvia or Lithuania, but for the moment the United States and the European Union as a whole have stopped this measure due not only to the great impact it would have on the global economy; it could also seriously compromise the preponderant role of the dollar in international markets. That’s how important the SWIFT system is.

SWIFT: what is it and how does it work

Understanding what the SWIFT international banking system consists of is not difficult. This acronym comes from the English name Society for World Interbank Financial Telecommunicationand simply identifies the service provider who is responsible for securely manage transactions carried out by banks all over the planet.

This organization is also responsible for manage infrastructure that banking entities need to be able to carry out international operations between them.

Expelling a country from the SWIFT system is the equivalent of isolating it from the international banking system

What we have just seen allows us to intuit without effort that expelling a country from the SWIFT system is the equivalent of isolate it from the international banking system. And it is evident that a measure like this would have a profound impact both on its financial system and on those of those countries with which it relates. Everything we have seen so far seems to suggest that the SWIFT network is something heterogeneous and far removed from ordinary citizens, but nothing could be further from the truth.

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In fact, people who have a bank account may need the SWIFT code of our entity, also known as BIC (Bank Identification Code)to carry out international transactions.

This alphanumeric string (consisting of both characters and digits) unambiguously identifies bank and branch that are involved in a transaction, and can be eight or eleven characters long. If it has eight, it will only identify the central office of the bank, but if it uses eleven characters, it will also identify the branch.

This is the structure of the SWIFT code of a bank branch:

  • The first four characters identify the bank. For example, Banco Santander is assigned the characters ‘BSCH’, while ING Direct uses the string ‘INGB’.
  • The next two characters identify the country where the bank resides. Those used by Spanish banks are ‘ES’.
  • The next two characters, those that occupy the seventh and eighth positions in the SWIFT code, identify the location where the bank resides. As an example, Madrid is assigned the characters ‘MM’; Barcelona, ​​’BB’; and Valencia, ‘VV’.
  • The last three digits are optional, but if they appear they identify the office or branch in which the bank account that is involved in the international transaction resides.

As we have just seen, it is not difficult to interpret a SWIFT code if we are familiar with the bank to which it is linked. Banco Santander’s is ‘BSCHESMMXXX’; that of ING Direct, ‘INGBNL2AXXX’; that of BBVA, ‘BBVAESMMXXX’; and that of Caixabank, ‘CAIXESBBXXX’. We have chosen these banking entities to clearly illustrate the meaning of the SWIFT codebut any other Spanish or foreign bank is identified in international transactions using this same procedure.

Before we go any further, it’s worth looking at something important. We have just seen that the SWIFT code identifies both the bank and the office involved in a transaction, but does not refer to to a specific account number.

This is the reason why in some transactions users may also be forced to indicate an IBAN number, which, unlike the SWIFT code, identify a bank account concrete so that it can be used in international operations. In fact, the acronym IBAN comes from the English denomination International Bank Account Number (international bank account number).

Russia’s options: SPFS and cryptocurrencies

We already know what banks use SWIFT codes for, but we must not overlook the fact that this system is much more than a bunch of bank entity identification codes. The organization that manages them also provides protocols and mechanisms necessary to carry out international transactions safely, so excluding a country from this system would in practice prevent it from carrying out transactions with foreign entities that continue to use it.

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This measure, if the war escalation continues and the West finally decides to execute it, would dramatically hinder Russian exports, and, as is logical, the business of the companies that make a living from them would go under. The most obvious consequence would be that the Russian economy would be largely closed in on itself and without the possibility of intervening in international markets. However, in this area Russia has not stood idly by.

And it is that coinciding with the accession of the Crimean peninsula to Russia in 2014, and in anticipation that the United States and Great Britain could expel the country led by Putin from the SWIFT system, the latter launched its own banking transaction system, known as SPFS.

At the moment only just over 400 banks use the Russian SPFS network

The bad news for Russia is that at the moment only just over 400 banks use it. Most are Russian, but a few Swiss, German, Armenian or Kazakh banks, among other nationalities, have also joined this network. It is clear that SPFS has a lot of work to do and a lot of confidence to collect to be relevant.

However, the SPFS network is not the only asset that Russia has within its reach to counteract its exclusion from the SWIFT system. As we have explained to you today in another article, Russia can to a certain extent dodge the economic sanctions imposed by the West using cryptocurrencies.

These virtual currencies are already being used by North Korea and Iran to operate in parallel with the global financial system, and in time Russia could do the same. In fact, even China has been planning for months a virtual version of your yuan. Whatever happens, we better buckle up. curves are coming

Cover image | Evgenia Novozhenina/Reuters

The conflict in Ukraine is being waged on several fronts. Warfare on the ground is usually the most impactful, and…

The conflict in Ukraine is being waged on several fronts. Warfare on the ground is usually the most impactful, and…

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