SWIFT system option

Reference 

Russia has proposed using its own financial messaging mechanism as an alternative to the SWIFT global network to help India advance the rupee-ruble trade settlement mechanism.

What is SWIFT system

• The SWIFT (Society for Worldwide Interbank Financial Telecommunications: SWIFT) system is a network that allows financial institutions to exchange electronic messages about international transactions enabling secure payments.
• It is used by financial institutions to send and receive information such as money transfer instructions quickly, accurately and securely.
• It provides each financial organization with a unique code of 8 or 11 characters, known as Bank Identifier Code (BIC).
  • First four characters : Institute code
  • Next two characters : Country code
  • Next two characters : Location/City code
  • Last three characters : This is optional but organizations use these to assign codes to different branches.

Alternative system proposed by Russia

• Major Russian banks were banned from using the SWIFT system due to the outbreak of the conflict against Ukraine in 2022.
• Banned from using the SWIFT system, Russia now wants its major trading partners, including India and other BRICS countries, to join its own alternative mechanism for transferring messages.
• Like the SWIFT system, the system proposed by Russia is also designed for seamless transmission of financial messages between financial institutions of countries connected to the network.
  • However, it may take time for new entities to join the network. It is also a highly sensitive issue diplomatically.

Benefits of an alternative system

• India and Russia want a national currency settlement system as it will reduce their dependence on hard currencies like the US dollar.
• Under this mechanism, the two central banks will determine direct exchange rates between their currencies instead of the US dollar.
• Direct settlement in national currencies will help in de-dollarisation and enable cheaper, faster and more efficient transactions.
• India-Russia trade is estimated to reach $65 billion in 2023-24 (most of it Russian oil purchases by India) and is likely to reach $100 billion by 2030. Both countries are keen to explore the possibility of national currency trade settlement.