Russia payments bid unlikely to be swift

By:
Paul Golden
Published on:

While irked by western dominance of Swift and determined to assert its monetary independence, the prospect of Russia going it alone on payments and messaging remains remote.

Russia’s resentment of the US and EU for sanctions imposed after the crisis in Ukraine can’t be underestimated.

Calls from some European politicians in 2014 to remove Russia from the financial messaging system used by just about every country on the planet were met with predictable hostility.

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Andrey Kostin, VTB

Andrey Kostin, the chief executive of VTB – Russia’s second-largest bank – said such a move would effectively be a declaration of "war", while prime minister Dmitry Medvedev warned it would elicit an "unlimited" response.

Strikingly, Russia received a seat on the board of the Society for Worldwide Interbank Financial Telecommunication (Swift) in March – the first time it has had such representation since joining the system in 1989.

However, at the time of the board’s decision, the domestic financial sector was cautious on the prospect Russia would remain part of the system, which covers most of the world and includes around 10,000 financial institutions processing tens of millions of transactions every day.

Russian media outlet RBC cited Alma Obaeva, the chairman of Russia’s National Payment Council, who argued any decision to disconnect from Swift is independent of the board’s composition.

Obaeva did, though, acknowledge that a seat on the board would enable Russia to influence decisions made by Swift in terms of the introduction of the new standards, service improvements and tariff systems.

Despite a relative thawing of icy relations with the west, Central Bank of Russia (CBR) governor Elvira Nabiullina told Euromoney in September that an equivalent to Swift had been created and was in the early stages of testing.

With the crisis in Ukraine highlighting once again that international finance is a key weapon of war, Russian policymakers are keen to develop an alternative to Swift as a part of their financial security strategy.

The CBR has launched an alternative messaging system for domestic payments, enabling credit institutions in Russia to transmit messages in a standard format through the bank to all parts of this vast country.

When contacted by Euromoney in early December, a spokesperson for the CBR revealed 348 credit organizations have signed contracts to become connected to the Russian transfer of financial messaging system and that a further 517 are undergoing the testing process for admission to the system.

Earlier this year, CBR deputy chairman Olga Skorobogatova said the monetary authority was working on a replacement for its real-time gross settlement system, the Banking Electronic Speed Payment System. The replacement system is expected to go live in 2017.

Strictly limited

Developing a new payment system is feasible from a technical perspective – Nabiullina was quick to point out that the domestic transfer of financial messaging system was developed largely by Russian technology firms.

However, without connectivity to the US and EU, its scope would be strictly limited given that Russia’s most important trading partner is Europe.

For example, approximately 95% of payments – in value terms – involving Russian banks are made outside the country, with Russian oil companies reliant on the Swift network protocol to process their dollar payments.

Russian efforts to-date are either focused on establishing a domestic payments network or one that is linked with emerging market (EM) partners. In June, the CBR said it would discuss the concept of a payment messaging system that operated between Brazil, Russia, India, China and South Africa (Brics).

Russian deputy foreign minister Sergey Ryabkov referred to negotiations to create a multilateral payment system that would provide greater independence from current systems.

Skorobogatova, in an interview with Russia Today, said some changes have to be made to the legislative framework of Swift to make the company "supranational". However, she also acknowledges there is no alternative to using a financial messaging system with coverage of most of the world.

"The only topic that may be of interest to all of us within Brics is to consider and talk over the possibility of setting up a system that would apply to the Brics countries, used as a back-up," she said.

However, suggestions that Russia is ready to ditch Swift in favour of a new platform developed in conjunction with other Brics members ignore the harsh economics of the global payment system.

Lenders face reputational risks if they subscribe to an alternative financial and payments system seen as opaque and untested in the eyes of the US and Europe.

An intra-Brics payment push also belies the fact that intra-EM trade is small fry, with South Africa accounting for a small percentage of Russia’s total international payments compared with the EU.