Bypassing the SWIFT messaging system

Cross-border payments are not settled in banknotes. Settlement is effected through netting agreements entered into by overseas peer banks where resident banks maintain accounts to which incoming proceeds are credited. Outgoing payments are settled by debit on the same accounts. Executed through a messaging system, payments are settled simply by accounting entries – debit and credit.

Historically, messaging was initiated manually – by snail mail. Later, the telephone exchange facilitated the transfer of money between the two sides of the Atlantic in the mid-90s of the 19th century. This is called the Telex (TT) system. In the last century, SWIFT (Society for Worldwide Interbank Financial Telecommunication) has established itself as the best solution to the messaging system managed by electronic means. Even today, it dominates the interbank messaging networks.

Along with the SWIFT messaging system, the US dollar plays a major role in the global payment system.

Currently, financial sanctions operate as invisible weapons of war. Sanctions are implemented by shutting down financial messaging networks. The Russian invasion of Ukraine unwittingly caused innocent countries to face payment settlement problems with Russian banks and trading companies. The imposition of sanctions led to the deactivation of the messaging system. A search for alternative payment methods is underway in order to circumvent the sanctions.

Russia is a trading partner of Bangladesh with a trade volume of approximately US$1.0 billion. According to reports, Bangladesh’s trade with Russia and some new export destinations are settled with third countries, including through global trading hubs like Singapore, Hong Kong, Dubai, Zurich, etc. Such an arrangement suits the current situation. There are alternative courier systems for payment settlement – INSTEX, CIPS, SPFS, INSTEX, which facilitate legitimate trade between Europe and Iran. CIPS is a Chinese payment system for settling domestic and international payments in RMB (Chinese currency). On the other hand, SPFS is a Russian payment system that claims to be a substitute for SWIFT. SPFS can be a settlement platform for its network partners, without covering international interbank transactions.

Bangladeshi banks are used to working within the SWIFT network. Most external transactions are in US dollars, which are settled through bank accounts opened in the main cities of Europe and the United States. Since the accounts are held in these places, the resident banks are under their control. Bangladeshi banks, according to insiders, fear unknown challenges arising from the use of messaging networks other than SWIFT. The current situation does not seem conducive to the use of alternative messaging. Besides SWIFT, Bangladeshi banks use international card channels for settlement of travel and small value payments, exchange houses for repatriation of salary income, online payment gateway services and different mobile wallets for repatriation income from ITES services, freelance income. These networks are based in Europe and the United States.

Since Bangladesh’s cross-border transaction income and payments are in US dollars, China, as input sourcing stations worth billions of US dollars, can be an alternative settlement destination through the RMB.

This option can be exercised on the condition that our receipts, received via China in their currency, from countries in difficulty can be used to make payments to China and others concerned as import payments. Despite this, we have to use the US dollar to buy RMB to settle payments in the event of a deficit.

There are other options as observed in a neighboring country. The options are to settle cross-border payments in non-convertible local currencies. Resident banks must maintain accounts with peer banks in partner countries in their currencies and vice versa. Revenues from the home country must be deposited in accounts held with the host country. Payments from the host country must be deposited in their accounts held in the home country.

At the end, the position is compensated. The imbalance, like the payable position, must be settled otherwise via third countries. Another option available is counter trading. Under the system, permissions must be granted to exporters, importers or traders to voluntarily enter into agreements with their overseas counterparts for settlement of the value of imported goods in the country of origin (e.g. Bangladesh) compared to the value of goods exported from Bangladesh.

Foreign counterparts must maintain escrow accounts in convertible currencies with banks in Bangladesh. The same accounts will also be maintained by Bangladeshi parties abroad.

In case of imports into Bangladesh, escrow accounts will be credited in equivalent convertible currencies against payments from importers in local currencies. Balances held in the accounts will be used to make payments to exporters shipping goods through countertrade and service charges to Bangladeshi parties acting as facilitators.

Bangladeshi export proceeds will be deposited in escrow accounts maintained by Bangladeshi parties abroad.

Funds credited therein are to be used for settlement of payments on imports into Bangladesh and payment of service charges to overseas counterparts.

The counterparty swap agreement must be monitored by banks that maintain escrow accounts for periodic settlement. The imbalance can be settled by remitting funds to legitimate recipients in a third country against underlying transactions through the normal banking channel. Similarly, our claims, if any, may be arranged from third countries by counterparties. According to the agreements, the banks simply keep records without executing any actual transactions. Only periodic counting is performed.

Transactions are executed by exporters, importers or traders under a countertrade model, for which banks will be free from invisible risks.

A small part is processed in local currency through the banking channel.

Thus, exporters and traders can explore, with government assistance, various alternative options, including countertrade to maintain cross-border trade and circumvent financial sanctions.

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