Last week, Iran’s IRNA news agency published a report entitled “Russian SWIFT: An Alternative to European SWIFT”. The report posited that Iran's access to Russia's home-grown interbank messaging system could be a major step forward for Iranian trading relations.
So, what’s the story? This is not the first time the “Russian SWIFT” has been mentioned in the Iranian media. This is a Russian software pack known by its acronym SPFS, which was created in 2014 to rival the international interbank financial messaging system SWIFT. All the Iranian media reports have a running theme: the suggestion that Russia’s new exchange network is a reasonably secure way to circumvent financial sanctions on Iran.
For instance, in an article dated October 23, 2018, two weeks before the second implementation date for US sanctions against Iran, Donya-e Eqtesad newspaper wrote: "Iran has two options. On the one hand, Iranian banks can use Russia's offer to use the Russian financial information network and make SWIFT unnecessary, as Russian banks are also seeking to circumvent SWIFT sanctions. On the other, Iran intends to internationalize its own “domestic financial messenger” so that some foreign banks can also send financial messages through this channel."
Neither of these has apparently happened so far. Or if it has, it did not have a significant impact on Iran's financial transactions. But what is the Russian interbank exchange system? Can it replace SWIFT, at least for Iran’s purposes? And is Iran's financial messaging system even capable of connecting with Russia?
What is SWIFT, and Why is Iran Interested in a Competitor?
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It was launched in 1973 with the co-operation of 239 banks from 15 European and North American countries. SWIFT aimed to replace non-standard paper or Telex communication methods with an electronic system that allows banks worldwide to securely share information about financial transactions.
The issue of Iranian banks joining SWIFT began in the mid-1980s. The satellite was finally installed at the Central Bank in 1990, and a year later the first Iranian banks connected to the messaging system.
But in the spring of 2012, with the agreement of all 27 EU member states and brought about by a European Council ruling, SWIFT removed all Iranian banks from its international network. After the JCPOA was signed, most Iranian banks returned to the network. But since the withdrawal of the United States from the JCPOA and the return of sanctions, Iran's connection to SWIFT was cut off again in November 2016.
Transactions without SWIFT are extremely difficult, costly and time-consuming. SWIFT is now the largest financial messaging network in the world, which even terrorist groups are not willing to give up despite the possibility of being tracked. But Iran has only been connected to the network for a couple of years in a row. Throughout its time in the wilderness, Iran has had to conduct its financial affairs through intermediaries or, in cases where a foreign financial institution is willing to accept the risk of doing business with Iran, to manage its affairs through interbank agreements.
How Significant is "Russian SWIFT" Really?
Iran's access to the Russian-built exchange system is considered a form of interbank agreement. Although in the past few years the media has published exaggerated articles about "Russian SWIFT" and positioned it as a real competitor, the fact is that both in terms of facilities and volume of activities, the two systems are still worlds apart.
Currently more than 11,000 banks and financial institutions from more than 200 countries are members of SWIFT. About 8 billion financial messages are transferred through this system every year. The volume of financial transactions made through SWIFT last year amounted to $77 trillion.
The situation of the Russian service is markedly different. In 2018, the total volume of messages exchanged on the Russian platform was about 5 million. In other words, its total output in one year was less than a quarter of SWIFT's activity in one day. The SPFS service is not even particularly popular inside Russia; althoughthe Russian government is trying to force domestic banks to use SPFS, in 2018 only 18 per cent of financial messages were reportedly transferred via this system.
That said, reports from Russia indicate the country has a strong desire to keep developing and growing SPFS. It was launched in 2014 following the US threat of sanctions against Russia. The prospect of Iran-style sanctions against Russia are highly unlikely because of the sheer volume of Russian economic exchanges with the wider world. But launching a national system that has both the ability to communicate with banks externally is both a tool for Russia to demonstrate power a means to create a backyard “moneyland” hidden from the United States and European countries.
The United States and Europe can track financial transactions under certain circumstances. But when the messaging center is located in Russia, it becomes much more difficult to do this. It creates the risk that money-laundering networks, gangs and terrorist-financing institutions will use this platform instead in an attempt to evade scrutiny from Western powers.
The key question remains: which foreign banks, from which countries, are willing to openly become members of Russia's financial messaging system? Last September sources quoted the head of the Central Bank of Russia as saying that eight foreign banks had so far joined the SPFS. It is not clear which countries these banks belong to, but they are said to be members of the Eurasian Economic Union: a body created in 2014 whose members currently include Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan.
In the same period, Iranian media outlets quoted Russian officials as saying that Iran's internal financial exchange system had joined the Russian network. But since then no other reports have been published, and there is no sign of any solution to Iran’s international money transfer problems.
In recent years, Russia has made agreements with China and India to connect the countries' internal systems. But these agreements seem to be more of a political commitment than a practical one, and as yet there is no evidence that this has happened.
The fact remains that most banks – even Russian ones – are reluctant to give up the safe, quick, cheap, and secure SWIFT system and send information on financial transactions through a labyrinthine and as-yet untested Russian imitator.
Iran's Home-Grown Attempt to Circumvent SWIFT
Iran’s domestic attempt at the same, known as SPAM, was set up by the Central Bank of Iran to digitize banking transactions and create an integrated service infrastructure. It aims to bring all correspondence and communications between Iranian banks and the Central Bank under one roof, so that the Central Bank's in-house monitoring tools can track these communications.
The Central Bank of Iran has also been explicit in positioning SPAM as a response to SWIFT sanctions: "The SPAM,” it said in a statement, “is a messaging infrastructure and a national financial unit in the country for all major financial transactions of banks such as foreign currency and Rial letters of credit, foreign currency and Rial guarantees, foreign exchange remittances, correspondence, inquiries, and negotiations, through a single messaging network. But it also creates the possibility of connecting to foreign banks in such a way that financial transactions can be made in a common and familiar language using the latest technologies, without using the facilities of SWIFT and going through the related concerns.”