Can Swift weather the sanctions storm?

Anastasia Nesvetailova

What Swift has achieved is hard to replicate. For one thing, the financial messaging network is global: dealing with the regulatory cross-border complexities that this entails would be a significant undertaking for any competitor.

Swift connects more than 200 countries and territories, 11,000 members and, in the first half of 2019, exchanged an average of more than 33 million messages every day, according to its latest data. While Swift doesn’t move or manage money, its messages facilitate transfers and payments worth trillions of dollars.

The communication network is also viewed by the industry as reliable and secure. It could be faster, according to some users, but work has been done to improve this. Importantly, it is known for its political neutrality, an attribute that recent geopolitics is putting at risk. Does it matter?

“From a network perspective, Swift is superior [to others] in terms of reach, and reach is super important if the network is neutral enough: not taking a specific perspective [on a] region, country  [or individual],” says one senior banker. “If Swift gets too affected by sanctions, that could potentially change. The neutrality of the system is crucial.”

In the 46 years since its creation by a consortium of banks, Swift has traditionally resisted diplomatic pressures. Based in Belgium, it is overseen by the national central bank and is subject to EU law. But in recent years, its neutrality has been undermined by decisions to comply with demands other than that of the EU and Belgian policy-makers. 

From North Korea to Iran 

In 2017 Swift responded to Belgian authorities’ prohibition to serve UN-sanctioned North Korean banks by kicking them off the network, including those that were not directly sanctioned by the EU. Being outside the Swift messaging network means the banks can’t send or receive money transfer information which enables transactions.

Reuters quoted ex-Swift CEO, Leonard Schrank, as saying the only previous occasions he could recall of banks not subject to EU bans being cut off was when they had lost their banking licence or when a country’s central bank had stopped functioning. He added that this action could lead to pressure from other countries, which until then Swift had resisted.

It would be natural to expect wide support for a UN ban. But since then, Swift has been caught in the middle of a diplomatic dispute between the US and Europe, which led not only to questions on its claim to neutrality but also gave a boost to alternatives to the network.

In 2018, Washington reinstated sanctions on Iran and unilaterally withdrew from the Joint Comprehensive Plan of Action (JCPOA), which three years earlier had set out a nuclear non-proliferation course for Iran, allowing the country to re-engage in international trade. (Signatories include Russia, China, France, Germany, the UK and the EU.) Previously, Swift had resisted taking part in sanctions against Iran, agreeing only when the EU took measures in 2012 and relaxing them after the JCPOA was agreed.

However, the US warned there would be repercussions for anyone dealing with Iran and put pressure on Swift to comply. Despite the EU’s commitment to the JCPOA, the network eventually gave in and cut off Iranian banks. “Swift had to take a political risk,” says Anastasia Nesvetailova, director of City University of London’s Political Economy Research Centre. This was perfectly logical, she adds: while the dollar remains the dominant world currency for transacting financial products, the US will be able to wield power over international finance.

Alternative workarounds

In response, France, Germany and the UK, the so-called E3, created a barter system for Iran and the EU, where no money would cross jurisdictions to reach trading counterparties. The system, called the Instrument in Support of Trade Exchanges (Instex), is formed by two special purpose vehicles. The European one, based in Paris, matches receipts of European companies selling goods to Iran with receipts of others in the region buying from Iran. The Iranian entity replicates the process. No payments are denominated in dollars and no money crosses the Iranian border, technically avoiding US sanctions.

The system “is therefore designed to protect European companies from US sanctions while allowing lawful trade with Iran as provided for under the JCPOA”, says Nathalie Tocci, special advisor to Federica Mogherini, the EU’s high representative for foreign affairs and security policy. At a JCPOA meeting in June 2019, the EU said the first Instex transaction had been completed. The system is open to all EU members with the idea to expand it to other countries.

In addition, Russia announced plans to bypass sanctions imposed by Washington by expanding its national network, System for Transfer of Financial Messages, or SPFS. As part of the expansion plan, Russian banks are joining China’s international payment system, CIPS, created in 2015 to internationalise the yuan.

Stronger ties between the two financial systems does not come as a surprise. “Any time a sanction hits Russia, trade between Russia and China picks up,” says another senior banker. “We’ve seen it in the market. I have memory of specific deals that died after [US or other Western] sanctions and then you see them resurface with [a counterparty from] China.”

In 2018, the value of transactions that went through CIPS grew by about 80% for a total amount of Rmb26,000bn ($3770bn), according to findings published in the Nikkei Asian Review. As of the end of 2018 there were 23 Russian banks on CIPS, and the use of the yuan by Russian buyers to pay for Chinese goods grew between 2014 and 2017.

Industry unconvinced

Many remain sceptical of non-US dollar alternative payment networks. Both Instex and SPFS, in particular, might appear more like political posturing than viable international financial solutions, say experts. “Neither will work, that’s the bottom line,” says Ms Nesvetailova. “Anything that wants to bypass the dollar is a hollow project.”

In the case of Instex, the idea lacks ambition, says Mohsen Tavakol, a Swedish-Iranian investor and entrepreneur, and non-resident senior fellow at Washington-based think-tank Atlantic Council. “In my opinion, [centring Instex on Iran] is where the E3’s short-sightedness can be observed. It missed the bigger issue of creating a mechanism where the EU itself should have been in the centre in order to protect its own sovereignty against the US dominance by creating a mechanism covering the EU’s both domestic and international financial networks. Iran could become just one of the users – not the user.” He adds that Instex users could still risk consequences from the US government.

The second senior banker adds: “European authorities have taken decades to realise that we’ve lost sovereignty to the US, and the US does whatever it wants. [Our bank is] very much committed to Russia [but] we are also international – we would not do anything to annoy the US.”

As for SPFS, the system does not appear particularly efficient, says Ms Nesvetailova. And even if Chinese finance might replace that of international banks, it would obviously subject Russia to a currency that is no match to the US dollar in terms of store of value and rule of law. “As a method of isolation, it might work; as a [way] to be subject to the Chinese currency, it might work,” she says, adding that wealthy Chinese individuals and Russian oligarchs keep their assets in dollars in offshore centres. When they start holding assets in their national currencies, then “we can start talking about a geopolitical revolution”.

Network, not patchwork

The issue of geopolitical influence is complex, and any alternative to Swift is still likely to be subject to some diplomatic pressure. “One has to be mindful that [any new solution] may also become politicised,” says Mr Tavakol. “Governing bodies may decide to exclude specific financial institutions, companies and countries from their payment services, like the way Swift is prone to under the demands of the US.”

So where does this leave Swift? Asked to comment on the matter, in a written statement by head of banking Harry Newman, Swift says it welcomes competition and remains at the forefront of cross-border payments.

A global network is clearly preferable to a patchwork solution, where international users would need to deal with multiple systems, protocols and reconciliations. It would be inefficient. “It would cost us a fortune if we [banks] had to divide things up,” says the first senior banker.