Swift’s Russian board director is not a political decision

With the Society for Worldwide Interbank Financial Telecommunication (Swift) under pressure to throw Russia off the system as part of western sanctions against the country, the news that Russia has been given a seat on the Swift board is open to misinterpretation.

But, the promotion of Russia from being represented under one of three amalgamated seats on the 25-seat board to having its own director has nothing to do with politics and nothing to do with the tensions over Russia’s involvement in Ukraine. Board seat allocation is a purely mechanical process based on traffic volumes.

Swift, as every banker knows, is a non-political utility, which connects up 10,500 banks in more than 200 countries and territories. It provides the messaging that makes trillions of dollars of international payments possible. It literally makes the world of global trade and payments go round.

The whole system could be blown up, however, if politicians from the US and Europe start to drag Swift into their sanction armoury against this or that country with which they are currently having problems. Regrettably this has already happened in respect of Iran. Back in March 2012, the EU passed a regulation prohibiting Swift from providing services to EU-sanctioned Iranian banks. As Swift is headquartered in Belgium, it was obliged to comply with Belgian law.

Since the Swift cut-off measure almost certainly played a part in pushing Iran to the negotiating table over its nuclear programme, the temptation is to use the same means against other countries at odds with the west, such as Russia.

Poland’s foreign minister, Grzegorz Schetyna, has described this as the nuclear option, which hopefully means that he understands the risks of such an approach. For, while the immediate outcome is to cause chaos in Russian finance and disrupt trade, the long-term result is for major powers, such as Russia, China and India, to build their own messaging systems. The advantages of having a global politically neutral system would be lost and would be replaced by competing systems all with their own political agenda.

One can imagine a situation, a few decades hence, in which US financial institutions are thrown off a new Chinese system amidst a dispute between the two countries. US banks then find their requirements cannot be met by the truncated Swift system that has resulted from its repeated use as a sanctions tool and which now only serves a proportion of the world. The US’s trade would suffer as a consequence.

That is why it is important that there is no misunderstanding about why Russia has been given a board seat. Swift’s board is reconfigured about every three years with shares, and subsequently, seats allocated on the basis of network usage. On this basis, in 2015, Russia gains a seat and Hong Kong loses one; Belgium gains an additional seat giving it two and the Netherlands loses a seat giving it one.

Changes in traffic volumes could be due to a change of business hub by an international bank or the location of infrastructure, such as Euroclear in Belgium. But mostly, it reflects changes in economic growth and trade. Unsurprisingly, China gained a board seat in the last reallocation back in 2012.

As economic power shifts to the east, more such changes can be expected. As long as institutions such as Swift can continue to provide a framework with open access and even treatment, all parties will benefit. The alternative is to misuse the global financial architecture as a sanctions tool and end up with a more factional and divided world economy.  

Swift’s board with effect from June 2015

Belgium – 2 seats

France – 2 seats

Germany – 2 seats

Switzerland – 2 seats

UK – 2 seats

US – 2 seats

Australia –1 seat

Canada –1 seat

China – 1 seat

Italy – 1 seat

Japan – 1 seat

Luxembourg – 1 seat

Netherlands – 1 seat

Russia – 1 seat

Spain – 1 seat

Sweden – 1 seat

Amalgamated seats –3

Brian Caplen is the editor of The Banker.