Will we ever be free from Swift and Dollar?

It’s a proposal that has also been put forward in the past, reports the Wall Street Journal, after Russia developed a payments network that helped overcome the challenge of Visa and Mastercard exiting the country following Western sanctions. is of. Once again imposing economic sanctions as a powerful tool to hurt an economy, some countries, especially non-Western countries, are considering alternative systems, Will be able to defeat sanctions. It is widely speculated that India’s Unified Payments Interface or UPI—mobile based real-time payment system—could be an alternative to Swift.

But it can happen very quickly. Linking to another country like Russia’s payment system or India’s UPI will depend on interoperability. This would mean that the two systems are “talking to each other” or compatible. And some are even in line with global standards. Making all this happen will require some serious work.

After the success of UPI, India has started moving forward on the cross-border payments front. In July this year, Singapore’s Pay Now and UPI will be added, allowing users in both countries to transfer funds from one bank account to another via mobile phones. Similar tie-ups have also been made with Nepal and Bhutan. It helps that Singapore’s payment system is very similar to that of India. And yet, these are limited to reciprocal or bilateral arrangements. And with transaction size limits that are now more targeted at retail than big-ticket, that’s what trade deals involve.

Other major barriers to turning a payment system into a truly multilateral one that is able to rival SWIFT’s impact on international financial flows are exchange rate conversion and control, KYC (Know Your Customer) and non-money laundering and fraud investigations. In the absence of a unified currency payment system based on major currencies such as the US dollar or the euro. These bilateral arrangements take time to settle down, especially if it is with major trading partners.

But this should not deter Indian policy-makers from looking beyond payment systems dominated by the West, given UPI’s multi-currency capability, its ability to reduce costs and an operational process that works 24/7.

Central banks and governments will also keep an eye on the growing risks of money reserve management arising from the continued amortization of sanctions by Western economies. In addition, the US Treasury and other G-7 countries banned transactions with the Central Bank of Russia, which had accumulated foreign exchange reserves of more than $630 billion in preparation for sanctions, leaving no doubt that This was anticipated before going to war with Ukraine. Large foreign exchange reserves provide comfort to a country especially to protect its currency. Lack of ability to do so, as is now the case with Russia, will be of concern to many countries. Safety, liquidity and returns have been the guiding principles on which foreign exchange reserves management is based. India’s policy on reserves follows the same objectives.

In the post-Russia changing scenario, diversification of reserves, especially in currencies and assets of major trading partners, is certainly an option to safeguard our objectives. In fact, some countries’ central banks are already holding their reserves more widely, including Australian and Korean currencies, as a recent IMF report noted. But these options are limited and do not exceed 5-10% of the total reserves. The reason is clear: the US dollar continues to be of great importance in global trade and finance.

Dalip Singh, deputy national security adviser for international economics in the visiting Biden administration, recently told The New Yorker that in the world of global finance, the dollar is still the operating system. he is right. There is no dollar option yet.

And so, keeping options open on reserve management and building on India’s payment systems for cross-border payments can help address the challenge of the modern economic weapon: sanctions. But it’s still early days.