- Some Russian banks have been banned from SWIFT, the cross-border messaging service for banks.
- India was reportedly considering a Russian proposal to use the SPFS for payments in rubles.
- Moscow is also working with Beijing to join the Chinese messaging system.
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Following Russia’s unprovoked invasion of Ukraine, some Russian sanctions were banned from SWIFT, the Belgium-based messaging service that lets banks around the world communicate about cross-border transactions. The embargo has disrupted cross-border transactions for Russia’s business and financial systems, leaving the country economically isolated.
Now, both Russia and China are looking to establish alternatives to the hegemony of the US dollar.
Russia is using an alternative ruble-based payment system called the System for the Transfer of Financial Messages (SPFS). The system was installed in 2014. In late April, the country’s central bank said it would begin keeping participants’ names secret.
China’s Cross-Border Interbank Payment System (CIPS) which processes payments in Chinese yuan also has the potential to replace SWIFT. Peter Keenan, cofounder and CEO of payments provider Apex, which works with Russia’s domestic Mir payment card, said the system has a wide network of 1,280 financial institutions. This is compared to SPFS’s much smaller network of 400 users.
SWIFT has few alternatives, Keenan told Insider: “It’s one of the reasons why Russia is looking to CIPS and specifically an option for Asian payments.”
Here’s how China and Russia’s SWIFT alternatives could cause disruption to the global payment system and dollar dominance.
How do China and Russia options work for SWIFT?
China’s central bank launched CIPS in 2015 with the aim of internationalizing the use of the yuan. PS Srinivas, visiting research professor at the National University of Singapore’s East Asian Institute, said CIPS still relies on SWIFT for cross-border messaging, but it has the potential to work on its own messaging system.
Russia’s SPFS, on the other hand, has been restricted to domestic use. Srinivas wrote in a March report that new members are now unlikely to join, as the move could be perceived by the US and its allies as an attempt to help Russia evade sanctions. But Moscow is working with Beijing to link it to the CIPS to work around the SWIFT ban, Reuters reported.
Anatoly Aksakov, head of the financial committee in Russia’s lower house of parliament, said: “To get rid of the risks associated with maintaining a trading business, there is a need to establish cooperation between the Russian and Chinese financial messaging systems.”
What does the SWIFT option mean for the US Dollar?
According to the Bank for International Settlements, the US dollar is the major currency used in 88 percent of the world’s trade.
But if CIPS is used to settle more trade, it would create a Chinese-yuan-powered alternative to the dollar-dominated SWIFT system. China has ambitions to make the yuan the most dominant reserve currency in the world, but it has a long way to go, mainly because Beijing still tightly manages its value. It is not yet fully convertible to other currencies in the global market.
Russia’s demand for energy payments in rubles is significant because the country is an energy powerhouse so the rise of an alternative currency for industry could impact a dollar-dominated world trading system. However, experts say the Russians will not allow themselves to be so dependent on the USD, and instead expect a pivot to China.
“The role of CIPS for bilateral trade settlement between Russia and China for the yuan transaction is likely to grow in the medium term,” said Rajeev Biswas, Asia Pacific economist at S&P Global Market Intelligence.
Bloomberg reported in March that the Indian government was considering a Russian proposal to use SPFS for payments in rubles. India’s Mint media outlet reported last month that it is also using the Chinese yuan as currency to refer to the rupee-ruble trade. Meanwhile, oil giant Saudi Arabia was also discussing paying China in yuan instead of dollars for its oil sales, according to a Wall Street Journal report from March.
Still, several factors hinder widespread use of the CIPS, as the yuan accounts for just 3% of global trade, while the greenback and the euro still account for 77% of total global payments, Biswas told Insider.
What will the change from the dollar mean for the US economy?
The US dollar is the world’s reserve currency and is widely used as the default base for foreign exchange. This position allows the US to borrow money abroad more easily and at a lower cost.
If the dollar loses its dominance, it will affect the US economy.
“This is likely to hurt the value of the dollar and create inflationary pressures on consumer goods prices,” Allianz Global Investors reported in a 2018 report. “Ultimately, the loss of the United States’ reserve currency status may only limit further declines in wages, and there’s a good chance it will make American consumers much poorer.”
According to the Bureau of Labor Statistics, US inflation rose 8.5% year-over-year in March — the fastest one-year price increase in nearly 40 years.
If the dollar weakens, imported goods will become more expensive. It will also become more expensive for Americans to travel to places where the dollar has weakened against the local currency.
