Has Russia and Iran’s Financial Messaging Link Up Sped Up The Demise of SWIFT and Ushered In a Global Payments Revolution?

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Asset-backed crypto, unsustainable debt ceilings and the emergence of SWIFT alternatives are all en route as the emerging world flexes its financial, credit capability and productivity muscles      

By Chris Devonshire-Ellis

Like all significant conflicts, an uptick in technological advances always delivers wins, as the pressing need for resolutions in times of combat brings pressures to bear on hurrying up and even changing the path of new technical developments. So it is proving once again, with Russia and Iran, both SWIFT sanctioned nations, announcing they have just connected their financial payments networks.

Russia and Iran’s New Connectivity

This new connectivity bypasses SWIFT and connects 52 Iranian banks with 106 Russian ones. Full integration of the entire network allowing Russian and Iranian bank account holders to transfer money between them should be available from June this year once further testing is completed and bugs ironed out. Some Belarus banks will also be coming along for the ride.

It may be a small step in the grand volumes of global trade processed daily, with bilateral trade between the two countries standing at about US$3 billion, although this can be expected to boom, not least because of the financial payment aspect but also because the two countries have a free trade agreement and both are involved in developing Iran’s energy capacity and its logistics and transport network via the INSTC. Russian projects in Iran involve energy as well as railways, auto manufacturing, and agriculture among multiple smaller sectors.

The financial payment connectivity was achieved by linking Russia’s System for Transfer of Financial Messages (SPFS) with Iran’s local interbank telecom system (SEPAM), suggesting that the two systems had been developed with technical connectivity in mind. The Shahr Bank of Iran and Russia’s VTB Bank will be heading up the initial pilot program, while other lenders will come on board once the pilot works through any bugs which might arise.

The question is now not whether this is feasible, but will this trend spread?

New Emerging Financial Payment Networks

Russia and China have been working on interfaces between their two systems for several years. The Chinese overseas interbank payment system, known as the China-based Cross-Border Inter-Bank Payments System https://en.wikipedia.org/wiki/Cross-Border_Inter-Bank_Payments_System (CBIBPS), is regarded as a superior system, however work between engineers from both sides mean that there is already existing capability. The problem here is the United States, who has threatened China with SWIFT disconnection https://www.silkroadbriefing.com/news/2022/03/20/us-threatens-chinese-banks-with-swift-disconnection/ should it connect with Russia. Given that the US has just imposed further trade sanctions on China and semi-conductors, the threads of patience in Beijing will be wearing thin, especially with the perceived loss of sovereignty of how China can send and receive money that belongs to it.

The BRICS – Brazil, Russia, India, China and South Africa, have also been developing both mutual financial payments system interoperability as well as reserve currency (non-Dollar and Euro) mechanisms and a cryptocurrency. Given that the BRICS grouping has had an additional 13 countries wishing to join it, the desire to develop alternative trade networks with Russia and China is quite apparent.

That itself can be seen as a reluctance to further expose economies to Western influence. Given that the thirteen include powerful emerging economies such as Saudi Arabia, Pakistan, Indonesia, and Egypt, it remains to be seen whether Washington can really afford to threaten the BRICS and China with SWIFT termination given the US trade volumes involved. It also means that the balance of trade power is shifting.

That doesn’t mean though that the West will take the emergence of alternative systems with a shrug of the shoulders. While they may be powerless to prevent a series of bilateral – later evolving into multilateral regional trade blocs emerging, they may still have a say over sovereign cryptocurrency usage. Global financial centres such as New York, London, Frankfurt and Tokyo, all allies, could refuse to handle certain currencies and extend bans from the Ruble to include other currencies in retaliation. Such a move though would merely usher in new financial hubs – with Dubai for example positioning itself already as a global cryptocurrency exchange, a signal that for the UAE at least, evolution is coming.

These changes may manifest themselves in three ways:

Sovereign, Asset Backed Cryptocurrencies

State controlled, yet asset backed. Russia has been discussing the establishment of a gold backed digital token. That is essentially a digital technology reverting to the gold standard and would be measured against the daily price of gold. Other commodities though could also be used. That is a major step away from the debt-backed US dollar, successful over many years as Washington could borrow money very cheaply to support that. But this run of cheap credit could be coming to an end. The rise of gilt and other backed sovereign securities can be expected to grow during the coming years.

Credit Based On Sovereign Assets, Not Debt

It has been hushed up somewhat, but for the seventh time in 20 years, the US has hit its legally permissible debt ceiling. Washington now wants to borrow even more. This current issue will get solved, but looking ahead, the US position is unsustainable, and it has very serious implications for the value of the US dollar going forward. The United States currently has a debt to annual GDP ratio of 129%, with the European Union at 93%. Current economic wisdom states that anything above 77% is problematic and leads to economic decline as debt repayments begin to interfere with productivity.

Russia’s debt to GDP ratio is 17% while China’s is 77%. The BRICS currently average (without Russia) 78% debt to GDP, while the proposed expanded BRICS+ (including Russia) averages in total 55% debt to GDP.

There are obvious productivity problems ahead in the West that a re-aligned BRICS would be well placed to take advantage of, especially if an asset-backed currency and payment system can be devised. Which it almost certainly is.

SWIFT Alternatives

There are four main drivers to this. The first are the sanctions and SWIFT disconnection threats now coming from the United States and partially the EU; no-one wants to be under this possibility, meaning alternatives to negate this are being sought. Secondly, the United States banks charge a processing fee, which a common network can avoid. It makes no commercial sense for intra-BRICS transactions to go via US intermediary banks.

Thirdly, there is a global move towards regional trade blocs, with BRICS one of the largest, especially now another 13 countries have applied to join. Fourth, it is a natural digital evolution now we are moving into a digital age.

What has started between Russia and Iran is in fact, the harbinger of a huge change in global banking, and the way payments are made. The emergence of bilateral payment messaging systems is almost a given, while the organization of those into a globally-reaching network will take time, it appears to be on the cards. Dubai could well be the central hub within that development.

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