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SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a messaging system that connects over 11,000 banks in 200 countries.
The system does not transfer actual money between banks, but rather messages containing instructions to settle transactions.
Furthermore, this system is critical to the international trade system; without it, countries would be unable to settle trade transactions among themselves.
SWIFT is the world’s largest interbank messaging system; it benefits from the network effect, which means that if the majority of other banks are on the system, banks are encouraged to join.
The network is strengthened and expanded by a large number of members.
Other messaging systems, such as Telex, exist, and both Russia and China have their own payment systems.
However, messaging systems such as Telex are inefficient and costly.
According to the Wall Street Journal, the number of SWIFT messages will increase from 6.2 billion in 2016 to 9.5 billion in 2020. “SWIFT traffic by region – notably, 47.6 percent, or nearly half of all messages sent, were sent within Europe, the Middle East, and Africa.”
Seven Russian banks have been disconnected from SWIFT as part of the sanctions imposed on Russia. Russia’s own system only has 23 foreign banks connected, and China’s Cross-Border Interbank Payment System (CIPS), which has around 176 participants in 47 countries, is still a small player in comparison to SWIFT.
Furthermore, Russia (and China) have been working to change the interconnectedness of the banking system and reliance on US dollars.
The cutting Russia’s access to SWIFT altogether presents dilemmas:
Disconnect Russian banks from SWIFT but keep the channels open for purchasing Russian oil and natural gas, particularly in Europe, where prices have already risen over the past year.
Russia supplies 40% of Europe’s natural gas; if this supply is no longer available, prices will skyrocket.
The second issue is that if Russia is completely cut off from SWIFT, foreign banks will find it extremely difficult to collect money owed to them by Russian banks.
According to the Bank of International Settlements, Russian entities and banks owe foreign banks approximately $120 billion in assets, with approximately $15 billion owed to US banks and another $25 billion owed to Italian and French banks.
For many years, Russia has strategically ‘de-dollarized’ its official reserves.
In place of another central bank’s currency, Russia has increased its official gold holdings.
Recent events have highlighted the importance of maintaining legal control over your precious metals.