SPFS – Russia’s Alternative To SWIFT

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By Chris Devonshire-Ellis

The Size Of The Ukrainian Economy Is Only Slightly Smaller Than The EU’s Trade With Russia

With increasing talk in the United States and European Union about cutting off Russia from the global SWIFT network in what is seen as a military buildup threatening Ukraine, the question then turns to the alternative networks Russia can employ.

Perhaps in advance warning of further trouble ahead, Belarus, which borders both Russia and Ukraine, has begun the process of disconnecting its own financial systems from the SWIFT network and connecting them instead to Russia’s System for Transfer of Financial Messages (SPFS) alternative.

While Russia’s SPFS can be three times cheaper than SWIFT, the network itself is only operational during weekday working hours and its messages are limited to 20kb in size. SWIFT, meanwhile, works 24/7 and allows 10mb to be transmitted across its network.

The SPFS is the Russian equivalent of SWIFT and was developed by the Central Bank of Russia since 2014, after the United States government threatened to disconnect Russia from the SWIFT system.

The first transaction on the SPFS network involving a non-bank enterprise was executed in December 2017. As of March 2018, over Russian 400 institutions (mostly banks) are part of the network. That means that the SPFS system supports intra-Russian transactions, however the problem with any SWIFT disconnection would be the absence of international connectivity. That then becomes a question as to how quickly Russia is able to integrate SPFS with other systems, and whether or not the United States would also place sanctions on countries connecting to SPFS.

In fact, there are plans to integrate the Russian SPFS network with the China-based Cross-Border Inter-Bank Payments System (CBIBPS), while the Russian government is also in talks to expand SPFS to developing countries such as Turkey and Iran. Since 2019 many agreements have also been reached to link SPFS to other countries payment systems in China, India, Iran, as well as the countries within the Eurasian Economic Union (EAEU) which includes Armenia, Belarus, Kazakhstan, Kyrgyzstan. The EAEU also has Free Trade Agreements with Serbia, Singapore and Vietnam with multiple other deals pending. At the end of 2020, 23 foreign banks connected to the SPFS from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan, and Switzerland.

A Russian disconnect from SWIFT would almost certainly mean Russia would invade Ukraine and gradually bring its economy into the Eurasian Economic Union. With the Ukrainian GDP currently at US$156 billion, it would add another 8% (assuming matters remained stable) to the Russian economy.

That compares to combined annual Russian trade with the EU and United States of about US$226 billion. This means that the risk to the EU in terms of lost Russian trade would be more significant, accounting for about 5% of all EU exports. Although it would be foolish to directly compare the Ukrainian GDP with EU trade as just one measure, it does illustrate that the damage a SWIFT disconnection imposed on Russia can be partially absorbed by the Ukrainian economy.

An additional unknown is exactly how fast and how extensively the Russian SPFS system can be integrated with other systems such as China’s CBIBPS. US intelligence – based on their lack of awareness in Afghanistan, may have underestimated the ability of SPFS to adapt.

The stakes in disconnecting Russia are high. It would usher into place a new Cold War with mutually disconnected systems. EU trade and energy from Russia would need to be replaced by the United States instead, meaning EU consumer prices would significantly increase. SWIFT would be seen as untrustworthy by emerging nations and would cease to be global. The sensible thing to do would be for the West to agree not to place NATO troops and military hardware in Ukraine or Georgia. For the US to instigate a divided world spells the end for globalisation and the end of US influence over large areas of the planet that would feel abandoned – such as Asia. That would occur just at a time when the Asian economies now represent the larger share of global wealth development. Choosing which side to be on may not be such a black and white decision.

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Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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