Russia-Ukraine War: Should India Be Worried About the ‘SWIFT’ Freeze?

Indian markets have been edgy and nervous around the conflict in Ukraine. Is SWIFT another bugbear?

6 min read
Russia-Ukraine War: Should India Be Worried About the ‘SWIFT’ Freeze?

It is being seen as one of the harshest measures imposed to date on Russia following its invasion of Ukraine. The European Union, the US and their allies in joint sanctions have agreed to cut off a number of Russian banks from the main international payment system, SWIFT. The assets of Russia's central bank will also be frozen, limiting Russia's ability to access its overseas reserves. As the world watched events in Ukraine in shock and dismay, Twitter, the melting pot for all that is news, quickly started showing a trend for #SWIFT. What is SWIFT, why does it matter, and does this impact India at all? Here’s a run-through of it all.


What Is SWIFT?

First, a bit of history. Born in the 1970s, SWIFT was created in Belgium. SWIFT is a neat acronym for ‘Society for Worldwide Interbank Financial Telecommunication’. It packs a financial punch today as it links 11,000 banks and institutions in more than 200 countries. In its own words, SWIFT is “the backbone of the international financial transfer system”.

Some more numbers for perspective. As a key water pipe, SWIFT doesn’t work as a bank to carry out transfers or park your funds. What it does is send more than 40 million messages a day, orders, payment confirmations, forex exchanges, and trades. In 2014, SWIFT says it transmitted more than 5.6 billion messages. Cutting off a nation’s banks from SWIFT access restricts flows into and out of that nation, resulting in real economic pain. Russia, for one, is heavily reliant on the SWIFT system for its key oil and gas exports.

So, while it isn’t a political organisation, it is often looked at – and used as – a geopolitical tool within sanctions packages. It was used in 2012 with the sanctions package on Iran in retaliation for its nuclear programme and again in 2013-14 in response to Russia’s actions in Crimea.

Where Does India Fit in?

As Padmanabhan G, Executive Director at the Reserve Bank of India, points out, SWIFT is fundamentally a messaging channel. The integrity of the financial messages is high, so controls and trust need to be very high in a platform carrying these vital messages. But the disruptions are more currency-sensitive.

The EU may announce sanctions (as they have) and that hits Euro trades. It is then the same for the Japanese Yen and other currencies. Here’s the important bit for India, as he lines out:

“If a Russian bank has to get repayment of an ECB [External Commercial Borrowing], then we have to think of an alternate mechanism. But we have had a history of doing trades outside the system from the Ruble-Rupee trade. Unless India sanctions Russia, which is unlikely, I don’t see any disruption happening.”

Founded in 1953, the seed of the rupee-rouble exchange was laid in the Indo-Soviet Trade Agreement. The agreement provided that all payments between India and the USSR (described in Article VII of the Agreement) may be made in Indian Rupees. Interestingly, the Rupee-Rouble route has grown five-fold since the Narendra Modi government took over. A large part of the jump has ostensibly happened because of a jump in India’s purchases of defence systems and other military equipment from Russia.


What About Commodity Prices?

In the early part of 2022, crude crossed the $100-per-barrel mark and metals are seeing all-time highs. The fear is that with harsh SWIFT sanctions, commodity prices may rise further, especially given the dependence of European countries on Russia for oil. For India, however, this is being seen as less of a problem. Once sanctions kick in, it means you can’t have any dealings with the entities concerned. Though it doesn’t mean the supply channel will be disrupted, it does mean that the payment will be hit.

Padmanabhan G recalls that India probably had a tougher run when sanctions were imposed against Iran. In 2012, Iran lost access to SWIFT as part of sanctions over its nuclear programme. At that point, India was the world’s fifth-largest net oil importer and imported 70% of the oil it consumed. About 10% of these oil imports came from Iran.

Scrambling to find a solution, Indian refiners began directing oil payments through Turkey’s state-owned Halkbank.

Should We be Worried?

Indian markets have been edgy and nervous around the conflict in Ukraine. Is SWIFT another bugbear? Deepak Shenoy, Founder and CEO of Capitalmind, observes, “Stock markets will react primarily to stocks that are directly impacted. But to be honest, we might soon see alternative payment and verification systems come up. I believe India might sign up on Russia's interbank payment system called SPFS – and we might get nostro accounts in India for Russian banks for temporary payments in INR until the situation changes. We don’t have massive trade with Russia but there is enough to worry.”

There’s also been chatter around remittances being hit and individuals being unable to transfer money. On that, Padmanabhan is more sanguine. “For individual remittances, SWIFT plays very little role. Think of a Western Union etc. Unless they are also sanctioned, saying you cannot deal with a Russian individual, remittances will move along. Even with the restrictions on the Russian Central bank, it has no role in individual remittances. But it will also depend upon whether entities in a particular country are totally stopped from sending remittances Then they cannot send money anymore.”

Winners and Losers

SWIFT, on its own, is adopting a stance of caution and wait-and-watch. SWIFT responded to my queries with this statement, “SWIFT is a neutral global cooperative set up and operated for the collective benefit of its community of more than 11,000 institutions in 200 countries. Any decision to impose sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators.”

From India’s point of view, Iranian sanctions 10 years back probably bit us harder given our deep dependence on them for oil import. At this point, financial experts believe the impact on India is much less. Bilateral settlements have created alternatives in cases where currencies like the Euro may shut down trades.

There could even be some surprise winners. UCO Bank was first designated by India’s government as the payment bank for Iranian oil in 2012. The bank was picked because of its limited international presence, thus making it less vulnerable to any repercussions from its involvement in the oil trade that was being processed in euros and rupees to avoid exposure to the US banking system. But when sanctions were lifted in 2015, UCO Bank’s profits dropped sharply as other Indian banks entered the business.

Renewed US sanctions on Iran’s oil exports in 2019 gave UCO bank some of its zing back, and its CEO, Atul Kumar Goel, even guided to an expectation that more than $110 million would be added to the banks’ annual earnings, with privileged status for processing refiners’ payments for Iranian oil shipments.

All eyes then on The Commercial Indo Bank, a joint venture between the public sector State Bank of India (SBI) and Canara Bank, the only Indian bank with a presence in Russia with a small balance sheet of $100 million. SBI holds 60% in this joint venture, while Canara Bank holds 40%.


The Cryptocurrency Question

Predictably, crypto supporters have sounded the bugle on how these financial sanctions will provide further fillip to the ‘free and fluid’ world of cryptocurrency. Then again, as Deepak Shenoy points out, crypto has been disappointing. Prices have actually fallen through this crisis – more than 10% – even though crypto is legal in Ukraine. In fact, he says, if Russia makes it legal, you can bet that the US will make crypto entirely illegal. Russia could, of course, make its own coin (CBDC) or use other countries’ CBDC for trade (India, too), but that is not strictly crypto.

In recent times, this is the first war the world is witnessing where financial strikes and developments are moving as fast as action on the ground. Ultimately, the pressure and the pain is for the forex market to bear.

As long as tensions continue, there will be high volatility in forex markets. Volatility will have to be monitored for those who may have undertaken non-hedged payments in the Russian Ruble. The SWIFT curveball is certainly another trial India and its markets will need to face. But it’s not a position we haven’t been in before. Experience, if nothing else should help us get through this one.

(Mitali Mukherjee has been a business journalist for the last 18 years. She is Consulting Editor, Business at Editorji. She tweets @MitaliLive. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)

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