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Xu Wenhong

Ph.D. in Law, Associate Researcher, Institute of Russian, East European and Central Asian Studies, Chinese Academy of Social Sciences

The SWIFT system is an information exchange system among international financial institutions. The bank card payment function supported by the SWIFT system is the reflection of a country's financial security. In the Ukraine crisis in 2014, the United States and Europe imposed sanctions across multiple sectors, including financial sanctions against Russia. The goal of such an extreme measure was to cut off the Russian banks from the SWIFT system, thereby crashing the Russian bank card payment system and in turn disrupting domestic and foreign economic activities. Although this measure was not actualized in the end, its threat to the Russian financial system has become an urgent issue for the country to address. In order to counter U.S. and European sanctions and protect its financial security, Russia quickly established its own national card payment system as well as System for Transfer of Financial Messages (SPFS). In March 2019, political unrest broke out in Venezuela during which bank cards issued by Russia were frozen again. This article seeks to present a systematic analysis of the U.S.-Russia conflict surrounding the SWIFT system and its prospects.

After the end of the Cold War, the international pattern featuring the coexistence of "one superpower and multiple powers" remained. Whenever political turmoil breaks out on the international arena or within a certain country, the United States will use its hegemony to influence the development of the event in its favour, mainly by military and other means. However, due to the decline of its overall national strength and the domestic anti-war sentiment, financial sanctions have gradually become a favoured tool for the U.S. to pursue its foreign policy [1].

From the measures taken by the U.S. during the 2014 Ukraine crisis and the 2019 Venezuela turmoil, we can tell that using the SWIFT system to crash the bank card payment functions in the sanctioned countries has become the first choice for the U.S. in terms of financial sanctions. And to cut off the financial institutions of the sanctioned countries from the SWIFT system is considered an “extreme measure” in this regard. Therefore, the SWIFT system has become the focus of sanction and counter-sanction measures in the current international political and economic relations. As a matter of fact, Iran, North Korea, and certain other countries have been cut off from the SWIFT system, and Russia has been threatened with that sanction too. However, up to now, research articles on sanctions and the SWIFT system are still sparse. Even in Russia, a country seriously threatened by the SWIFT system, only a few scholars, such as V. Katasonov, have expressed views on this topic in the form of online comments, and academic articles that provide a systematic analysis are few.

As for Russia, under the U.S. and European financial sanctions in the aftermath of the Ukraine crisis, it took active measures to adapt to such a painful experience. In a short period of time, by means of legislation, setting up entities, developing systems, and strong action by the government, Russia put in place its own independent national payment card system, SPFS, which has made initial achievements in its resistance against the U.S. and European financial sanctions and also added guarantees to the country's financial security. Russia's counter-sanction measures have achieved positive results to a certain extent. In just over three years after the establishment of the Russian national payment system and the SPFS, the U.S. and Europe no longer targeted at the payment function of Russian bank cards in their further financial sanctions against Russia. The threat of U.S. and Europe to Russia’s bank card payment functions and SPFS has been preliminarily eliminated. However, political turmoil in Venezuela in March 2019 once again proves the U.S. hegemony in the international financial sector and Russia's dependence on U.S. financial technologies. In addition, MIR card can only be used freely in Russia without being affected by Western sanctions. But for economic activities outside Russia, the use of MIR card is limited.

The more frequently the U.S. launches similar sanctions, the harder other countries begin to work on alternatives. Once an alternative becomes successful, it will not only undercut the U.S. sanction itself but also weaken the U.S. hegemony. The United States is still the only superpower and the international community still has a long way to go before setting up a new political and economic order. Various alternatives are only just beginning to emerge; however, the counter-sanction attempt has started and has already achieved good results. Once set out, the endeavour will not stop easily.

The SWIFT system is an information exchange system among international financial institutions. The bank card payment function supported by the SWIFT system is the reflection of a country's financial security. In the Ukraine crisis in 2014, the United States and Europe imposed sanctions across multiple sectors, including financial sanctions against Russia. The goal of such an extreme measure was to cut off the Russian banks from the SWIFT system, thereby crashing the Russian bank card payment system and in turn disrupting domestic and foreign economic activities. Although this measure was not actualized in the end, its threat to the Russian financial system has become an urgent issue for the country to address. In order to counter U.S. and European sanctions and protect its financial security, Russia quickly established its own national card payment system as well as System for Transfer of Financial Messages (SPFS). In March 2019, political unrest broke out in Venezuela during which bank cards issued by Russia were frozen again. This article seeks to present a systematic analysis of the U.S.-Russia conflict surrounding the SWIFT system and its prospects.

After the end of the Cold War, the international pattern featuring the coexistence of "one superpower and multiple powers" remained. Whenever political turmoil breaks out on the international arena or within a certain country, the United States will use its hegemony to influence the development of the event in its favour, mainly by military and other means. However, due to the decline of its overall national strength and the domestic anti-war sentiment, financial sanctions have gradually become a favoured tool for the U.S. to pursue its foreign policy [2].

From the measures taken by the U.S. during the 2014 Ukraine crisis and the 2019 Venezuela turmoil, we can tell that using the SWIFT system to crash the bank card payment functions in the sanctioned countries has become the first choice for the U.S. in terms of financial sanctions. And to cut off the financial institutions of the sanctioned countries from the SWIFT system is considered an “extreme measure” in this regard. Therefore, the SWIFT system has become the focus of sanction and counter-sanction measures in the current international political and economic relations. As a matter of fact, Iran, North Korea, and certain other countries have been cut off from the SWIFT system, and Russia has been threatened with that sanction too. However, up to now, research articles on sanctions and the SWIFT system are still sparse. Even in Russia, a country seriously threatened by the SWIFT system, only a few scholars, such as V. Katasonov, have expressed views on this topic in the form of online comments, and academic articles that provide a systematic analysis are few.

At present, most of the academic articles on SWIFT systems in China introduce the SWIFT system from a technical perspective of applied finance. The Development and Application of the SWIFT in China [3] and An Analysis of the Characteristics of SWIFT Correspondence in Banks [4] are among them. And fewer articles focus on the role of the SWIFT system in financial sanctions as a case study in the context of international political and economic lives. Among the materials available, Chen Hang provided an analysis of a new channel in international settlement for Sino-Russian trade as an alternative to the current one that is highly reliant on European and American banks and the SWIFT organizations [5]. Li Ruihua conducted several analyses, viewing the SWIFT system as an essential component of the U.S. and European strategic trade control system [6].

In sum, the impact of the SWIFT system on the international political and economic pattern is a topic that is of considerable significance but lacks in-depth research. This article takes the SWIFT-related financial sanctions by the U.S. and European countries against Russia as the background and the countermeasures taken by Russia after 2014 as the case study to systematically examine the status, role, operating process and significance of the SWIFT system in current international relations, as well as its influence on the global political and economic pattern.

Global Influence of the SWIFT System

In modern life, bank cards are the media carrying bank information such as the account information of individuals, businesses, and financial institutions. Bank cards first appeared in the U.S. in the 1950s. The increasingly active international economic and trade activities after WWII promoted the development of international finance. Since the 1970s, with the rapid development of electronic science and technology, especially the wide-spread application of computer science, finance and technology have become increasingly integrated, soon making the use of bank cards popular worldwide. The emergence of bank cards enabled three basic forms of financial remittance: first, money transfer from card to card; second, money transfer to card via telex information; and third, fast remittance within a common system through short code. The popularity of bank cards not only reduces the circulation of cash and checks but also breaks the constraints of time and space, significantly improving the efficiency of the bank payment system. An advanced bank card payment system signals a country's economic prosperity, financial development, advanced technology, trade security as well as financial security.

On top of that, the U.S., Japan, and other countries with advanced financial systems and technology have developed their own independent card payment systems and financial information exchange systems. These systems, through continuous and expanded international cooperation, have gradually taken up a significant share of the global market, thus giving rise to the famous Big 5: MasterCard, VISA, American Express, JBC, and Dinner. These five groups are self-contained businesses that grew in developed countries such as the U.S. and Japan, which, with their respective strength, have been actively expanding their international business in international payments and the transmission of international financial information, and have gradually gained a monopoly in the international financial arena. To conduct international financial business, a country's financial institutions must establish business links with one or several of these groups to integrate into the international payment system and financial information exchange system.

It is in such a background that, as a non-profit organization featuring voluntary cooperation between international banks, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) was established in May 1973. After decades of development, it has spread to almost 215 countries and regions around the world. Around 11,000 financial institutions have joined the society as members. The SWIFT system is currently the most popular, safest, and most convenient remittance system connecting international financial institutions.

SWIFT is headquartered in Brussels, Belgium, and has two shifting centres in Amsterdam of the Netherlands and New York in the United States respectively. Its main facilities include an information platform, a computer coding system and a financial standard system. The SWIFT system has a national concentration for each member country, thus becoming a hub of information, data, transaction and clearing among international banks. The two centres are capable of sharing all data in real-time. After 2009, to strengthen the protection of European data centres, a third centre was established in Switzerland. Since then, European data has been stored in the Dutch and Swiss centres, and transatlantic data has been stored in the US and Swiss centres. The membership of SWIFT [7] not only reflects the international status of a financial institution but also enables the effective use of the global financial infrastructure or the financial infrastructure in a third country (other than the remitting country and the receiving country). Being cut off from the SWIFT system means total disconnection from the international financial system and direct disruption of fund transfers between governments, businesses and financial institutions, which will be an unbearable blow to any state, enterprise or financial institution.

Within the SWIFT system, the member banks communicate with each other accurately and efficiently through a standard language---SWIFT message. The way to distinguish different banks in the message is the SWIFT code which usually consists of 8 to 11 English letters and Arabic numerals. Being one of the core facilities of the organization, the SWIFT code is proposed by SWIFT and certified by the ISO as an identification code for a financial institution. Therefore, each branch bank has its own unique code.

In terms of membership composition, almost all the important financial institutions in the world are SWIFT members. Technically, SWIFT codes can be used to achieve fast “point-to-point” fund transfers worldwide; in terms of business volume, SWIFT is designed to transmit 11 million messages per day, and currently, it transmits 5 million messages daily, allocating trillions of dollars’ funds. The business activities of the SWIFT system have directly and indirectly contributed to the political and economic health of the international community. In nature, SWIFT is a private joint-stock company owned and managed through coordination by members according to its articles of association and related laws. The shareholders are composed of member representatives from all over the world, who elect 25 of them into an executive board of shareholders. The executive board of shareholders is the highest authority of SWIFT and is headed by a chairman. Headquartered in Brussels, Belgium, SWIFT is also registered in Brussels, whose activities must abide by the relevant laws of Belgium and the EU since Belgium is an EU member. The National Bank of Belgium (NBB) plays a leading role in the daily supervision of SWIFT assisted by central banks of the G-10 [8]. In theory, due to the factors mentioned above, the SWIFT system should be dominated by the European Union. However, due to the U.S. hegemony in international politics and the strength and a large number of U.S. financial institutions, the United States has been attempting to gain dominance over SWIFT. The U.S. Treasury tried but failed to control the SWIFT database in the 1980s. After the "911" incident, the U.S. financial security and intelligence organizations have gradually strengthened their control of the SWIFT system in the name of counter-terrorism, requiring SWIFT to comply with U.S. requirements and be subject to sanction in case of noncompliance [9]. Therefore, in 2011, the U.S. State Department began to monitor the data of the SWIFT system, and the US Treasury started to blacklist "abnormal" banks. Once a member is blacklisted by the U.S. Treasury, banks around the world will suspend fund transfers with that member. Since then, due to the increasing U.S. dominance over the SWIFT system, this financial information service platform initiated by international financial institutions has gradually become a tool to serve the U.S. foreign policy. The U.S. cut off Iran from SWIFT in 2012 for the first time [10]. Subsequently, the U.S. threatens not only the "hostile states" with this measure but also the EU member states found by the U.S. through monitoring the SWIFT system to have economic ties with Iran. In view of the continuing deterioration of U.S.-Russian relations after the collapse of the former Soviet Union, Russia has become the main potential target for the US attack using its dominance over the SWIFT system.

Connections of the Russian Banking System and the SWIFT System

The Russian banking system is developed from the former Soviet banking system, which consists of two levels: the Central Bank of Russia (Bank of Russia) as the administrative organ at the first level and all the commercial banks at the second level. Bank of Russia is mainly responsible for issuing Rubles, formulating financial and credit policies, monitoring inflation, supervising commercial banks and other businesses. Commercial banks are further categorized into specialized banks and general-purpose banks according to the nature of their business. Specialized banks only provide certain type or types of services; while the general-purpose banks are able to conduct all businesses, including lending, settlement and finance.

1. Central Bank of Russia. After the independence of Russia, the "State Bank of the Russian Federation" was renamed the "Central Bank of the Russian Federation", which is now the "Bank of Russia" [11]. On July 11, 2002, Russian President Vladimir Putin signed the "Russian Central Bank Law" passed by the State Duma on June 27 of the same year, which stipulates the status, rights, functions and terms of reference of the Russian Central Bank. The basic functions of the Russian Central Bank include: (1) issuing Rubles and maintaining the value of the Ruble and the stability of the Ruble's exchange rate against foreign currencies; (2) guaranteeing the currency circulation, clearing and currency supervision; (3) supervising the Russian banking system and formulating and monitoring credit policies; (4) establishing a deposit protection mechanism and building depositors' confidence in banks; (5) disclosing market operations; (6) refinancing commercial banks; and (7) managing foreign exchange, etc.

2. Commercial banks in Russia. In early 1992, Russia began a radical reform called the “shock therapy”, lifting restrictions on banks funded by private capital (including foreign capital), allowing banks of any ownership and significantly relaxing the entry requirements. This led to a rapid increase in banks. Since then, the banking system has experienced several crises, including the inter-bank market liquidity crisis in August 1995, the financial crisis that broke out in August 1998, the crisis of confidence in the banking system in May 2004, and the global financial crisis in 2008, etc. After the Ukraine crisis in 2014, the number of various Russian banks shrank from more than 3,000 in 1995 at the peak to about 438 in April 2019. At present, commercial banks in Russia are of the following types: (1) Banks owned or controlled by the state, such as the Sberbank (Сбербанк) and VTB Bank (ВТБ), etc., in which the Russian government holds more than 50% of the shares. After the privatization reform, the number of state-owned banks in Russia has been declining. As of present, there are still 17 state-owned banks under the Russian government [12]. Although small in number, they are all large-sized banks, way outweighing banks of other types in the Russian banking system.

(2) Foreign banks. In 1995, the EU delegation persuaded the then President Boris Yeltsin into lifting restrictions on foreign banks' access to the Russian market. In November 2002, the Russian central bank removed the requirement on the required percentage of foreign capital in a bank’s legal capital. In 2006, foreign capital was allowed to purchase shares in Russian credit institutions. Thereby, foreign capital has gained substantially more rights to operate legally in Russia. By 2019, foreign capital controlled 65 banks in Russia, occupying an important position in the Russian banking system.

(3) Large private banks. As of 2019, Russia has 322 private banks. The largest 200 banks (excluding state-owned banks and foreign-controlled banks) are all large private banks.

(4) Small and medium banks in the Moscow region: smaller banking institutions based in the Moscow region.

(5) Local small and medium banks: smaller banking institutions headquartered outside of Moscow.

(6) Non-bank credit institutions: credit institutions that cannot take deposits.

Among the above banks, the first three types can issue bank cards, and the remaining may issue some cards with unique functions which is negligible. Just like financial institutions in other parts of the world, to carry out international business, Russian commercial banks have established equipment connectivity and business cooperation with one or all of the Big 5. They have also joined the SWIFT system as members. By 2014, among the many financial institutions in Russia, more than 600 had joined the SWIFT system, which means that the Russian central bank and the above four types of financial institutions all had established close links with the SWIFT system.

U.S. Sanctions against Russia: the Use of the SWIFT System

After the Ukraine crisis in 2014, the West began to impose sanctions on Russia across various sectors such as economics, finance, defence, and energy. The financial sanctions in March 2014 targeted at bank cards issued by seven Russian banks. The sanctions were issued by means of Executive Order No. 13661 signed by the then U.S. President Barack Obama, and were announced and to be implemented by the Office of Foreign Assets Management (OFAC) of the U.S. Treasury [13]. The order was first issued to the headquarters of Visa and Master Card, and then through the internal process, to their legal entities registered in Russia to be implemented. Seven Russian banks connected with Visa and Master Card were then affected, [14] and about 500,000 credit cards and debit cards issued by these seven banks found their payment function frozen. These seven banks include four card-issuing banks in Russia, namely: the Bank Rossiya (the joint-stock commercial Bank) and its subsidiaries Sobinbank (Собинбанк), SMP Bank (СМП Банк) and Invest Capital Bank (Инвесткапиталбанк) as well as three other banks assisting in the settlement.

The SMP Bank (СМП банк) controlled by the Rotenberg brothers, confidant to Russian President Putin, was among the top 30 Russian banks and most vulnerable to the sanctions since it issued 170,000 bank cards connected to Visa and MasterCard organizations. When the Western sanctions against Russia were launched in 2014, without any prior notice, the Visa and MasterCard organizations, two of the Big 5, suddenly suspended the payment services for the bank cards issued by the SMP Bank, freezing their transfer and payment functions. Therefore, a panic run erupted on the SMP Bank, and within the first two days of the sanction, nearly 1 billion Rubles were withdrawn from the bank’s saving accounts, accounting for 23% of the bank’s deposit. Panic runs begun to appear on other major banks in Russia as well, and within a short period, all major banks in Russia were affected to various degrees.

The U.S. sanctions through Visa and MasterCard targeting the payment functions of some Russian bank cards directly hit Russians' economic activities both at home and abroad:

  • Russian customers were forced to reduce their travels abroad, which directly led to the stagnation of business activities;
  • The use of large amounts of cash in foreign transactions. It is neither convenient nor safe for Russian customers to carry large amounts of cash when going abroad because EU countries have certain restrictions on the amount of cash that tourists can carry into the EU. In Western countries, the idea that "Russians (both legal and natural persons) have “original sin" has become a stereotype, as if all funds from Russia are closely related to corruption, embezzlement, money laundry, financing of terrorism, subversion of the United States, acknowledgement of Crimea as Russia's territory, or support for Putin and so on. This makes it possible for European countries to confiscate Russian tourists' money upon their entry into Europe.
  • The use of foreign bank accounts to make payments. To help Russians with urgent needs for domestic and foreign economic activities to avoid these sanctions, the Russian Central Bank published a list of 11 branches of western banks operating in Russia that are not subject to sanctions, such as Unicredit, Raiffeisenbank and Rosbank etc. But legally speaking, these financial institutions are also legal entities registered in Russia, and the bank cards they issue are not exempt from U.S. sanctions. Only bank cards issued by pure foreign banks such as Barclays Bank of the UK and the JP Morgan Chase Bank from the U.S. [15] can be exempted from sanctions. However, these western banks require a larger amount of deposit and the proof of a clear and legitimate source of income to open an account. These requirements constitute a threshold difficult to meet for the Russian new rich that developed rapidly in the 1990s.

In this context, the safest resort for Russians is to reduce overseas travels. However, this has severely affected the domestic and international economic activities of Russians, and thus also affected Russia’s international economic exchanges and foreign trade.

In March 2014, only Visa and MasterCard among the Big 5 took sanction measures. What worries the Russians even more is that at the beginning of the sanctions, the U.S. wanted to pressure the SWIFT system into directly cutting off Russia from the system to intensify sanction. From the discussion earlier, we know that the SWIFT management has quite a big say in the organization’s decision making, so they withstood the pressure from the U.S. Most of the SWIFT members for the benefit of the long-term development of the organization. This is opposed to turning SWIFT into a tool for the U.S.-Russia confrontation and hoped to maintain its political neutrality and professionalism. In the end, SWIFT considered that the United States' proposal to "sever ties with Russian financial institutions" to be an "infringement upon the rights of members and will harm the interests of related parties", and did not take that action.

The idea of cutting off Russia from the SWIFT system has been reiterated many times since the Crimea incident. In August 2014, media reported that the UK had suggested Russia be banned from SWIFT, but this was not supported by other European counties. In March 2015, at a joint press conference in Warsaw jointly held with the British Foreign Minister Philip Hammond, the Polish Foreign Minister said, "There are many options for sanctions. To cut off the country’s connection with the SWIFT system would be a 'nuclear weapon' that harm all parties" and "is a very extreme measure to take." In April 2018, German Gref, CEO of the Russian Sberbank, indicated that he did not believe the international community will go thus far (as to cut off Russia's connection with the SWIFT system). In December 2018, when Russia and Ukraine disputed over the Kerch Strait, the U.S. ambassador to Ukraine, Kurt Douglas Volker, once again proposed to cut off Russia from SWIFT in a VOA commentary. But this did not receive support from other parties.

During the sanctions in March 2014, the extreme measure as to cut off Russian financial institutions from the SWIFT system had been repeatedly proposed. Although not implemented, this threat is like a Damocles’ sword hanging over Russia. How to prevent and avoid such a potential threat to Russian financial institutions is an urgent issue that Russia must seriously consider and resolve.

Russia’s Responsive Measures

In view of the importance of the SWIFT system in the international financial architecture and the fact that the West has repeatedly threatened Russia with the SWIFT system, Russia has actively adopted a series of measures to protect Russian banks and customers from sanctions by the U.S. and Europe targeting at the Russian financial payment system.

1. Establish a national payment system in Russia. In view of the above-mentioned potential threats, the Russian government decided to establish a national payment system with the Russian central bank at the core. On May 5, 2014, the Russian State Duma passed the National Payment Card System (NSPK) Act, which was subsequently signed off by President V. Putin. According to this Act, the National Payment Card System Joint Stock Company (АО "Национальная система платёжных карт") was to be established as the main operation and settlement centre of the National Payment Card System. On July 23, 2014, NSPK JSC was formally incorporated, wholly-owned by the Russian Central Bank. The key mission of this system is to establish an operation and payment centre to process bank card transactions in Russia. In July 2015, through public tender in Russia, "MIR" was decided to be its name and logo. By the first half of 2019, 312 banks in Russia had joined the system.

On December 15, 2015, the Russian international payment system started to issue the first batch of bank cards that complied with the standards of Russia's domestic payment system, namely "MIR cards" [16]. In order to promote MIR cards, the Russian government enacted relevant regulations requiring all Russian state government budgeted salaries, pensions, and other related funds be paid through MIR cards. With the strong support from the Russian government, the number of MIR cards increased rapidly in a short period of time. In April 2017, the number of MIR cards exceeded 5 million, and by July that year, the number was more than 10 million. By April 2019, the number of MIR cards has reached 54 million, having a market share of over 20%. At present, there are already 160 Russians Banks issuing MIR cards. It is expected that the number of MIR cards will reach 67 million by the end of 2019 with further expanded scope of application. Statistics from Russian banks also show rapid development of the "MIR" system, which handled the payment of 2.6 billion Rubles in 2015 and a soaring 11.8 billion in 2018.

2. Strengthen international cooperation and actively explore the international market. In addition to pursuing domestic development, NSPK also plans to cooperate with foreign financial institutions in issuing co-branded cards. As discussed previously, to have the newly issued cards connected with international financial institutions, it is necessary to establish links with the Big 5. In December 2015, Gazprom Bank of Russia (Газпромбанк) began issuing MIR-MasterCard. By now, several co-branded cards have been issued in Russia, including MIR-Master [17], MIR-EX, Mir-JCB and MIR-Unionpay, etc. [18] At the same time, NSPK also keeps pace with the times and actively adopts the most advanced technology. In April 2016, the first online purchase was completed through MIR card. In December 2017, the electronic payment function of the MIR card system was further strengthened, and it can now support Google Pay, among others.

Moreover, NSPK JSC continues to expand the international market. On November 12, 2015, NSPK JSC signed a memorandum with the Vietnamese payment system Banknet VN. At present, MIR card is already available in Armenia and Kyrgyzstan. Russia also plans to expand the MIR card payment system to all member states of the Eurasian Economic Union in the future. In addition, some banks in Turkey and Kazakhstan have also started to provide services to Russian MIR card. It is expected that by the end of 2019, MIR card will be available in 12 countries (including Uzbekistan, Tajikistan, Azerbaijan, Bulgaria, etc.) MIR card has officially become the main means of payment under the Russian payment card system.

3. Incorporate the conduct of international card issuers in Russia into the Russian national payment card system. While actively taking defensive measures, Russia has also been taking proactive offensive measures. The Russian government has no plan to ban various international bank cards currently used in the Russian market, rather, the Russian central bank is only taking measures to localize their transactions as much as possible. As for the bank cards of Visa, MasterCard and other international payment systems currently used in Russia, the Russian central bank, after having studied all the technologies and alternatives, considers it ok to allow their continued circulation but inappropriate to keep several businesses and clearing centres in Russia at the same time. In the first quarter of 2015, a unified Russian clearing centre was established. International card issuers must sign a new cooperation agreement with the Russian national payment card system and incorporate their transactions in this system before they can continue to trade. At the same time, cards issued by Visa, MasterCard and other international payment systems must be maintained through the Russian national payment card system. By these methods, the conduct of foreign card issuers in Russia is placed under the radar of the Russian international payment system.

4. Establish a domestic financial information exchange system. The SWIFT system is essentially an international financial information exchange system. In order to fundamentally address the threat of the SWIFT system to Russia, the Russian Central Bank launched its own System for Transfer of Financial Messages (SPFS) at the end of 2014. The operating principle of the SPFS system is kept similar to that of the SWIFT system so as to reduce the Russian customers’ concerns and need to change their usage habits. This system was put into use in 2015, and by 2018, there were 403 Russian companies using this system as an alternative to SWIFT in case Russia is cut off from the SWIFT. At present, the SPFS system is mainly used by financial institutions in Russia, and its international business has not been carried out yet. Russia is now vigorously promoting the system through various means, including reducing costs and strengthening the connection between Russian domestic financial institutions and SPFS through legislation, etc. Internationally, Russia is also gradually strengthening its ties with China, Turkey, Iran and other countries, hoping to promote the system to a larger extent. At the SCO Bishkek Summit in June 2019, during the meetings with leaders from China and Mongolia, the Russian leader also put this issue on the agenda. If the SPFS system can be widely used by international financial institutions, even when Russia is cut off from the SWIFT system, the impact on the Russian economy will not go beyond control.

5. Coordinate with other international cooperation mechanisms to jointly tackle challenges. As mentioned above, Russia seized the opportunities provided by U.S. sanctions in the financial sector and quickly established its own national payment system and financial information exchange system. To a certain extent, Russia strengthened the protection and security of its own financial system in response to the U.S. and European sanctions, and achieved significant initial results. Meanwhile, it also actively strengthened strategic coordination with other international mechanisms to jointly tackle the impact of U.S. and European sanctions in the form of cutting off Russia from the SWIFT system.

As the United States has frequently threatened to “cut other countries off from the SWIFT system”, and Iran, Russia, North Korea and Venezuela, etc [19] have in fact already suffered this, many countries have begun to explore ways to shed the shackles of the SWIFT system. Against such a backdrop, in addition to the Russian SPFS system, two other international alternatives to the SWIFT system also emerged:

The first is China ’s Cross-Border Interbank Payment System (CIPS), which started in 2015 and aimed to promote the internationalization of the RMB. By May 2019, the RMB has become the fifth most active international payment currency, next only to the U.S. dollar, euro, pound sterling, and yen. As of the first half of 2019, the CIPS system had a total of 31 direct participants and 847 indirect participants, including 650 in Asia (365 in China), 105 in Europe, 25 in North America, 18 in Oceania, 16 in South America, and 33 in Africa.

The second is the EU's Instrument in Support of Trade Exchanges (INSTEX). When the U.S. threatened to cut off from the SWIFT system, the countries that have trade relations with Iran, European countries also started to launch their own cross-border payment system. The European international payment system came to birth in 2018, which was originally called SPV (special purpose vehicle) and later changed its name to "INSTEX ". It was designed mainly for EU members to trade with Iran, however, currently it is no more than a barter trade platform [20]. The products traded on this platform are mainly humanitarian products, agricultural products, medicine and medical equipment, etc., not including oil. Any payment system excluding oil exports has little practical significance for Iran, since Iran depends heavily on oil exports. What’s more, as confrontation between the U.S. and Iran continues, Iran is likely to withdraw from the Non-Proliferation Treaty. If that happens, the fate of this system will be hard to tell. In July 2019, Russia expressed its willingness to join the INSTEX system and proposed the inclusion of Iran's oil export in the system, making the future of the system even more uncertain.

In addition, the BRICS countries have jointly established the BRICS Development Bank and the Foreign Exchange Reserve Fund, and are now beginning to lay the BRICS fibre-optic cables to ensure the security of network communication. The laying of BRICS fibre-optic cables signifies that developing countries have reached a new level of cooperation in finance, currency, communications, information, and networking based on a high degree of strategic mutual trust. This will certainly breathe new life into the new system of international financial information exchange.

The Venezuela Incident: A New Test on the Security of Russia’s Financial System

Through the efforts over the past five years, Russia has established its own bank payment system and financial information exchange system and has made considerable progress in protecting its financial security and preventing threats from the U.S. hegemony in international finance. Political turmoil in Venezuela in March 2019 again brought the security issue of the Russian national payment card system before the world.

In order to control Venezuela’s oil resources and combat the leftist forces in Latin America, the U.S. has gradually intensified its sanctions against Venezuela. To evade the sanction and address domestic inflation, Venezuela issued the cryptocurrency “Petro” in 2018, and Russia’s “Evrofinance Mosnarbank” [21] became its main financial supporter. Investors can remit money to Venezuela through this Russian bank’s Petro account. The Maduro government had hoped that the country's rich oil resources, Petro (cryptocurrency), and the endorsements of Russian banks (including Russian bank payment system and financial information exchange system) could tide it over the U.S. sanctions. However, the situation in Venezuela continued to deteriorate in January 2019 [22]. On March 11, the U.S. Treasury imposed unilateral sanctions on Russia’s Evrofinance Mosnarbank for its support for Maduro and Venezuela's state-owned petroleum corporation PDVSA. The sanction prohibits the bank’s transactions with the U.S. citizens or within the United States. On March 13, Visa and MasterCard revoked the membership of the Evrofinance Mosnarbank.

Although the U.S. sanction prohibits only the bank’s transactions with the U.S. citizens or within the United States, many U.S. allies, due to the U.S. influence and pressure, also joined the sanction and refused to recognize the Maduro government. Therefore, the actual result of the sanctions was that bank cards issued by the Evrofinance Mosnarbank could not be used both at home and abroad, not even on the bank’s own ATMs. In theory, the payment-card system of the Evrofinance Mosnarbank was part of the Russian national payment system established in 2015 and naturally should enjoy protection from the national system. So the NSPK management declared that “everything was normal” in the NSPK, and that it was the bank card contractor PSC CartStandard that stopped service. Relevant experts conducted an "unannounced inspection" on PSC CartStandard and claimed to have discovered "technical reasons" behind the service suspension. People might wonder why a fintech company which is a Russian legal entity would stand with Washington at this critical time due to “technical reasons”? In fact, PSC CartStandard is a company that cooperates with Visa and Mastercard and will have to stop service once these two organizations cease service. PSC Cart Standard, as a financial technology service company in Russia, provides fintech services for more than 100 banks. So if the U.S. attacks dozens of Russian banks at the same time, the impact on Russia's economy and finance will be incalculable.

On this particular incident, Roman Prokhorov, chairman of the Russian "Financial Innovation" Association, commented that the so-called Russian National Payment Card System was not actually managed by the Russian Central Bank, but by the U.S. Treasury through the financial centres and processing centres under its control. Alma Obayeva, Chairman of the Board of the National Payment Council of the Russian Federation, also acknowledged that half of the operating systems of Russian financial institutions belonged to companies that were associated with U.S. companies. If the United States imposed sanctions on the Russian banking system, half of Russia's bank card payment business would collapse. After hearing this, Vladislav Reznik, Member of Russia's State Duma Committee on Budget and Taxes, suggested that "sanctions be imposed on Russian companies that cooperate with the Western sanctions”.

Generally speaking, the Venezuelan incident shows that the United States’ hegemony in the international financial system remains stubborn. Compared with the SWIFT system that has been in operation for many years, Russia's national card payment system and System for Transfer of Financial Messages (SPFS) still have room for improvement. The threat of the United States leveraging the SWIFT system has not been completely eliminated.

Conclusion

In the current international context, the U.S. has initiated unilateral sanctions (especially financial sanctions) against other countries, mainly by virtue of the unique status of the U.S. dollar in the international reserve, transaction and banking system. The SWIFT system itself is a society formed by international financial institutions to adapt to scientific and technological development and improve efficiency. The United States has always been seeking to dominate the SWIFT system with its supremacy in the international political and economic arena. Although the SWIFT system maintains certain autonomy, under the U.S. pressure, it has no other choice but to become a tool from time to time for the U.S. to impose sanctions on other countries.

The ultimate purpose of economic sanctions is to cause damage to the sanctioned party, making it unable to resist, thereby forcing it to yield, accept the conditions offered by the imposing party and change its conducts accordingly. The U.S. threatened Russia with "cutting if off from the SWIFT system". However, this extreme measure was not implemented because of a boycott from the SWIFT. The U.S. manipulation of Visa and MasterCard to crack down on the Russian payment system not only failed to make Russia yield, but instead resulted in Russia’s "turning the crisis into an opportunity." Russia took the initiative to quickly establish Russia's national payment card system, SPFS and strengthen the protection of its financial system. The U.S. assault on the Russian bank payment system led to the loss of partial Russian market shares by the U.S. financial institutions and was no longer brought up in its subsequent financial sanctions against Russia.

As for Russia, under the U.S. and European financial sanctions in the aftermath of the Ukraine crisis, it took active measures to adapt to such a painful experience. In a short period of time, by means of legislation, setting up entities, developing systems, and strong action by the government, Russia put in place its own independent national payment card system, SPFS, which has made initial achievements in its resistance against the U.S. and European financial sanctions and also added guarantees to the country's financial security. Russia's counter-sanction measures have achieved positive results to a certain extent. In just over three years after the establishment of the Russian national payment system and the SPFS, the U.S. and Europe no longer targeted at the payment function of Russian bank cards in their further financial sanctions against Russia. The threat of U.S. and Europe to Russia’s bank card payment functions and SPFS has been preliminarily eliminated. However, political turmoil in Venezuela in March 2019 once again proves the U.S. hegemony in the international financial sector and Russia's dependence on U.S. financial technologies. In addition, MIR card can only be used freely in Russia without being affected by Western sanctions. But for economic activities outside Russia, the use of MIR card is limited.

The more frequently the U.S. launches similar sanctions, the harder other countries begin to work on alternatives. Once an alternative becomes successful, it will not only undercut the U.S. sanction itself but also weaken the U.S. hegemony. The United States is still the only superpower and the international community still has a long way to go before setting up a new political and economic order. Various alternatives are only just beginning to emerge; however, the counter-sanction attempt has started and has already achieved good results. Once set out, the endeavour will not stop easily.

1. Xu Wenhong: The Impact of the Financial Sanction against Russia by the West and some considerations, Academic Journal of Russian Studies, 2017 Vol. 5.

2. Xu Wenhong: The Impact of the Financial Sanction against Russia by the West and some considerations, Academic Journal of Russian Studies, 2017 Vol. 5.

3. YANG, Shihua: Development and Application of SWIFT in China, Financial Computerizing 2008 Vol. 10.

4. HE, Dong: Analysis of the Bank SWIFT Messages, Journal of Huazhong Agricultural University, 2006 Vol. 1.

5. CHEN, Hang: Mitigation of Risks of Sanctions on Russia, China Forex, 2017 Vol. 6.

6. LI, Ruihua: U.S. and Europe Enhance the Economic Sanction on Iran to Cut off Its Financial Lifeline, Economy, 2012 Vol. 5.

7. The SWIFT membership is granted on application and payment of fee. A member will be given a code and the corresponding share and expected to pay the transaction fee and annual fee thereafter. The members are classified into various levels based on their fees paid. The SWIFT headquarter provides various analysis data, reports and industry reports for members.

8. G-10 is a group of 10 countries that acceded to the General Agreements to Borrow in 1962, including Belgium, the Netherlands, Canada, Sweden, France, Switzerland, Germany, U.K., Italy, U.S. and Japan.

9. According to the «The International Emergency Economic Powers Act (IEEPA)», G.W.Bush administration empowered the Office of Foreign Assets Control of the US Department of the Treasury (OFAC) the access to information on financial transactions and capital flows "related to terrorist activities”.

10. In March 2012, over 30 financial institutions in Iran were cut off from the SWIFT system.

11. Russia’s Central Bank is the Bank of Russia.There is also a joint-stock commercial bank named the Rossiya Bank, headquartered in Saint Petersburg.

12. The 17 state-owned banks Сбербанк are: ВТБ, Промсвязьбанк, Траст, Россельхозбанк, ФК «Открытие», Связь-Банк, Российский Капитал, Почта банк, Крайинвестбанк, РНКБ Банк, МСП Банк, Росгосстрах Банк, Росэксимбанк, Дальневосточный Банк, ОИКБ «Русь», Новикомбанк.

13. Treasury Sanctions Russian Officials, Members Of The Russian Leadership’s Inner Circle, And An Entity For Involvement In The Situation In Ukraine https://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx

14. The seven banks include the Moscow Bank, VTB Bank and Russia Agricultural Bank

15. Barclays Bank was established in 1690, headquartered in London, England. It is one of the largest banking and financial institutions in the world. Barclays Bank is the first bank in the world that had ATM, and issued the first credit card in England in 1966. It issued the first debit card in England in 1987. JP Morgan Chase is a multinational financial services institution and one of the largest banks in the U.S. with businesses in over 60 countries, headquartered in New York, U.S.

16. The first batch of 7 card issuing banks includes Gazprombank, MDM Bank, Moskovskiy Industrial'nyy Bank, Rossiya Bank, Svyaz Bank, SMP Bank and then Sberbank joined later.

17. In December 2015, the Gazprombank issued the MIR-Master Card. Meanwhile, MDM Bank, Moskovskiy Industrial'nyy Bank, RNKB Bank, Rossiya Bank, Svyaz Bank, SMP Bank and Sberbank also started to issue the MIR card.

18. In July 2016, the MIR-JCB card was issued; and in June 2017, the MIR-BA card was issued with the China Unionpay.

19. In March 2012, over 30 financial institutions in Iran were cut off from the SWIFT system. In March 2014, Russia was cut off from the Visa and MasterCard systems. On March 8, 2017, Korea was cut off from the SWIFT system as it continued to implement its nuclear program. In March 2019, Venezuela was cut off from the Visa and MasterCard systems.

20. Suppose a French company wants to buy Iran's specialty saffron. INTEX will help find another German company that wants to export machine tools to Iran and merge these two transactions. So the French company buying the saffron can transfer the money to the account of the German company selling machine tools. Therefore, this system is considered to be a bartering platform to a certain extent.

21. Evrofinance Mosnarbank is a Russia-Venezuela joint venture headquartered in Moscow. At the end of 2003, it was formed by the merger of "European Financial Bank" and "People's Bank of Moscow", and then changed to its current name. It is mainly used to fund joint projects in 2009 during Ugo Chavez’s presidency of Venezuela (1999-2013). On October 1, 2018, in the Interfax-CEA ranking, Eurofinance Mosnarbank was ranked 591st among Russian banks in terms of assets (with 591 million Russian Rubles). The Venezuelan Development Fund (Fenden) owns 49 ~ 99% of the bank’s shares, and Gazprombank and its affiliated institutions (Novfintek) hold 25% +1 shares. Russia’s Foreign Trade Bank and its overseas branch, ITCC Holdings, holds 25% +1 shares. This bank has a representative office in Beijing and had IPO with the Industrial and Commercial Bank of China in the Hong Kong Stock Exchange.

22. On January 22, 2019, U.S. Vice President Pence called Venezuela's opposition leader Guaido, saying the United States supports Guaido to stand up as Venezuela's interim president, promising all kinds of assistance and the help to get him the international support. On January 22, 2019, Guaido declared himself "Venezuela's" Interim President".


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