Can BRICS Pay become a challenger to SWIFT?
While BRICS Pay may not replace SWIFT outright, its development marks a shift towards diversified global payment networks that could reshape international finance in the coming years
The Russia-Ukraine war prompted the US and its allies to impose numerous sanctions on Russia's oil and gas companies. As a result, the Russian economy has fallen drastically. About 40% of Russia's total revenue comes from oil and gas exports, which are now under sanctions.
Countries in today's globalized economy are increasingly interdependent, relying on international payment networks to facilitate cross-border transactions. SWIFT, headquartered in Brussels, Belgium, is the most widely used payment network, processing transactions predominantly in US dollars.
Although it operates from Europe, SWIFT is influenced by the US Federal Reserve, the European Central Bank, and other G-10 financial authorities, which allows the US considerable sway over the system. This influence has been described as the "weaponization" of SWIFT, as control over global payments can have strategic consequences.
SWIFT's dominance and susceptibility to sanctions have had far-reaching effects. In 2012, SWIFT removed 30 Iranian banks from its network, costing Iran approximately 50% of its oil revenues and disrupting 30% of its foreign trade.
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This exclusion was repeated in 2019, prompting Iran to connect its SEPAM domestic financial clearing system with Russia's System for Transfer of Financial Messages (SPFS), circumventing SWIFT's control.
Approximately 300 Russian banks remain connected to SWIFT, making Russia the second-largest user of the system after the United States. The question arises: by invading Ukraine, did Russia effectively sever its access to this crucial network?
In reality, Russia has been working to insulate itself from SWIFT dependency since it annexed Crimea in 2014. This initiative led to the development of the System for Transfer of Financial Messages (SPFS), an alternative platform created by Russia's central bank. Currently, SPFS connects 557 banks and companies, including 159 foreign entities, with 160 banks worldwide participating in the system.
China has similarly developed its own alternative with the Cross-Border Interbank Payment System (CIPS), launched in 2015. By 2021, CIPS had processed a significant 80 trillion yuan (approximately $12.8 trillion), connecting 1,280 financial institutions across 103 countries. Among these are 30 Japanese banks, 23 Russian banks, and 31 African banks, marking its wide international reach.
The origins of BRICS Pay
Events like the US's recent seizure of Afghan reserve funds and frozen Russian assets have highlighted the vulnerability of dollar-denominated reserves, undermining trust in dollar debt as an international savings tool. This experience has prompted many nations to seek alternative trade settlement and currency security systems.
In response to this shifting landscape, the announcement of BRICS Pay from Kazan, Russia, marks a significant milestone in the ongoing efforts to diversify global payment networks beyond the established US dollar-dominated systems.
The BRICS Plus Summit of heads of state was held in Kazan, Russia, from October 22 to 24, 2024. The Kazan summit marked the first post-expansion gathering for BRICS, highlighting initiatives like the introduction of "BRICS Pay," which aimed to fortify economic and trade ties within the group.
The introduction of BRICS Pay aims to challenge SWIFT's global monopoly and reduce dollar dominance, positioning it as a significant step towards financial autonomy for BRICS nations.
However, BRICS Pay cannot yet replace SWIFT entirely unless BRICS members agree on a unified or common currency—a challenging task given the economic disparities among member countries.
A new alternative for global transactions
At the BRICS Business Forum in Moscow, in a gesture of commitment, forum participants received BRICS payment cards loaded with 500 Russian rubles (approximately $5.20), symbolizing the group's intention to launch this alternative payment messaging system.
Designed as a decentralized platform, BRICS Pay aspires to be an independent system akin to Europe's SWIFT, aiming to give BRICS countries greater financial autonomy in a US-dominated financial landscape.
Efforts to establish a unique BRICS payment system have been underway since 2019. The idea is to create a digital currency-based platform to facilitate trade and remittances within the BRICS bloc.
This new system is positioned as a counterweight to SWIFT. It strives to "de-weaponise" global financial transactions by reducing reliance on US-dollar-based payment channels, thus promoting financial sovereignty for BRICS nations.
Why BRICS Pay Matters
Currently, BRICS consists of Brazil, Russia, India, China, and South Africa. From January 1, 2024, the group will formally welcome new members, including the UAE, Iran, Egypt, Ethiopia, and Saudi Arabia.
Additionally, Algeria, Belarus, Bolivia, Cuba, Indonesia, Kazakhstan, Malaysia, Nigeria, Thailand, Turkey, Uganda, Uzbekistan, and Vietnam are official BRICS partner countries.
The enlarged BRICS collective encompasses a population of approximately 3.5 billion people, representing 45.2% of the global population and 33.9% of the world's geographical area. Together, BRICS economies contribute over $28.5 trillion—about 28% of the global economy, accounting for 36.7% of the world's GDP, 24.5% of export volume, 39.3% of industrial production, and 44.7% of global wheat output.
Individually, the economic standings of member nations reveal impressive metrics. According to the World Bank/OECD, China's GDP is $17.96 trillion, followed by India at $3.39 trillion, Russia at $2.24 trillion, and Brazil and Saudi Arabia at $1.92 trillion each. Other new members, such as the UAE ($0.51 trillion), Egypt ($0.48 trillion), South Africa ($0.41 trillion), Iran ($0.39 trillion), and Ethiopia ($0.31 trillion), add considerable value to the group.
With the inclusion of oil producers Iran, Saudi Arabia, and the UAE, BRICS countries now account for approximately 44% of the world's crude oil production. Middle Eastern members, including Iran, Saudi Arabia, Egypt, and prospective partner Turkey, collectively represent a significant portion of Gulf production and contribute to what will soon become a bloc controlling nearly 60% of the global consumer market.
The challenges of BRICS Pay
By the end of 2022, SWIFT handled nearly 50 million payment messages daily, although growth showed signs of slowing. Compared to December 2021, the volume of daily messages in December 2022 was only about 2% higher.
Despite the increase in alternative currencies, the US dollar still holds its position as the dominant reserve currency worldwide. However, data from the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) reveals a gradual decline in the dollar's share of allocated reserves among central banks and governments.
Interestingly, this decline hasn't corresponded with a rise in the shares of other major currencies, such as the euro, yen, and pound, but rather with an increase in nontraditional reserve currencies like the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and Nordic currencies.
In essence, BRICS Pay represents a strategic step toward financial independence for BRICS nations. Its success, however, will depend on the adoption rate among BRICS members, alongside continued technological development to make the system robust and competitive.
For BRICS Pay to become a true rival to SWIFT, it will require a strong infrastructure, a commitment from member states to use the system actively, and perhaps even expansion beyond BRICS nations.
Md Badrul Millat Ibne Hannan, CPA (UK), CFC (IFC, Canada), currently working at Islami Bank Bangladesh PLC.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
