Will we ever break free of SWIFT and dollar?
3 min read 31 Mar 2022, 05:30 PM ISTIt is being speculated widely that India’s Unified Payments Interface or UPI—the mobile-based real-time payment system—can be an alternative to SWIFT
PremiumBloomberg has reported that India is considering a Russian proposal to adopt its home-grown financial messaging system for bilateral rupee-ruble payments. The System for Transfer of Financial Messages (SPFS) was developed by Russia's central bank as an alternative to SWIFT, the internationally dominant messaging system for cross-border payments. SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunications, is a Belgian cooperative society, overseen by the 11 national banks of G-10 economies, and jointly owned by the more than 11,000 financial institutions and banks that use it.
It is a proposal that was mooted in the past too, after Russia developed the payment network, which, the Wall Street Journal reports, appears to have helped it overcome the challenge of Visa and Mastercard exiting the country following Western sanctions. The imposition of economic sanctions yet again as a potent tool to hurt an economy raises the spectre of some countries, especially non-Western ones, contemplating alternative systems that will be capable of beating such restrictions in the future. It is being speculated widely that India’s Unified Payments Interface or UPI—the mobile-based real-time payment system—can be an alternative to SWIFT.
But it may be too early. Linking Russia’s payment systems or of any other country, such as India’s UPI, will depend on interoperability. That would mean two systems “speaking to each other" or being compatible. And also conforming to certain global standards. Doing all of that will need some serious work.
On the back of UPI's success, India has already started moving on the cross-border payments front. In July this year, Singapore’s Pay Now and UPI will be linked, which will facilitate users in both countries to carry out fund transfers from one bank account to another through a mobile phone. Similar tie-ups have been forged with Nepal and Bhutan too. It does help that Singapore’s payment system resembles India’s to a fair degree. And yet, these are restricted to reciprocal or bilateral arrangements. And with limitations on transaction size, which are more aimed at retail now than large-ticket, which is what trade deals involve.
The other key hurdles to overcome in turning the payment systems into truly multilateral ones capable of rivalling SWIFT's sway on international financial flows are exchange rate conversions and controls, KYC (Know Your Customer) and anti-money laundering and fraud checks in the absence of a unified currency payments system based on dominant currencies such as the US dollar or the euro. Useful as they may be, especially if it is with major trading partners, these bilateral arrangements take time to settle down.
But that should not deter Indian policy-makers from looking beyond payment systems dominated by the West, given the multi-currency capability of UPI, its potential to lower costs, and an operating process which works 24/7.
Central banks and governments will also watch out for the growing risks to currency reserve management posed by the continuous refining of sanctions by western economies. More so, after the US Treasury and other G-7 countries banned transactions with the Central Bank of Russia which had stockpiled foreign exchange reserves of over $630 billion in preparation of sanctions that it no doubt anticipated before going to war with Ukraine. Large foreign exchange reserves provide comfort to a country, especially for protecting its currency. Impairing the ability to do that, as is the case now with Russia, would be a worry for many countries. Safety, liquidity and returns have been the guiding principles on which foreign exchange reserves management has been based. India’s policy on reserves follows the same objectives.
In the changed scenario post-Russia, diversification of reserves, especially in currencies and assets of major trading partners, is certainly an option for safeguarding our objectives. In fact, central banks of some countries are already holding their reserves more widely, including in the Australian and Korean currencies, as an IMF report indicated recently. But these options are limited and account for not more than 5-10% of the total reserves. The reason is obvious: The US dollar continues to enjoy huge weightage in global trade and finance.
Dalip Singh, deputy national security adviser for international economics in the Biden administration, who is on a visit to India, told The New Yorker recently that in the world of global finance, the dollar is still the operating system. He’s right. There’s no alternative as yet to the dollar.
And so, keeping options open on reserve management, and building on India’s payment systems for cross-border payments could help address the challenge of the modern economic weapon: sanctions. But it’s still early days.
