China and Russia are developing alternatives to the SWIFT payment system
- Some Russian banks have been banned from SWIFT, a cross-border messaging service for banks.
- India reportedly considered a Russian proposal to use the PSSA for ruble payments.
- Moscow is also working with Beijing to connect to the Chinese messaging system.
In the aftermath of Russia’s unprovoked invasion of Ukraine, some Russian bans were banned from SWIFT, the Belgium-based messaging service that allows banks around the world to communicate about cross-border transactions. The ban hampered cross-border transactions for Russia’s commercial and financial systems, isolating the country economically.
Today, Russia and China seek to establish alternatives to US dollar hegemony.
Russia touts an alternative ruble-based payment system called the Financial Message Transfer System (SPFS). The system was set up in 2014. In late April, the country’s central bank said it would start keeping the names of participants secret.
China’s Cross-Border Interbank Payment System (CIPS), which handles Chinese yuan payments, also has the potential to replace SWIFT. The system has an extensive network of 1,280 financial institutions, said Peter Keenan, co-founder and CEO of Apexx, a payments provider that previously worked with Russia’s Mir payment card. This is compared to SPFS’ much smaller network of 400 users.
There are few alternatives to SWIFT, Keenan told Insider: “That’s one of the reasons Russia is looking to CIPS and an alternative for Asian payments in particular.”
Here’s how China and Russia’s SWIFT alternatives could disrupt the global payment system and dollar dominance.
How do the Chinese and Russian alternatives to SWIFT work?
Launch of the Chinese central bank CIPS in 2015 with the aim of internationalizing the use of the yuan. CIPS still relies heavily on SWIFT for cross-border messaging, but it has the potential to run on its own messaging system, said PS Srinivas, Visiting Research Professor at the East Asia Institute, National University of Singapore.
Russia’s SPFS, on the other hand, has been restricted to domestic use. New members are unlikely to join now because the move could be interpreted by the United States and its allies as an attempt to help Russia evade sanctions, Srinivas wrote in a March report. But Moscow is working with Beijing to connect it to CIPS to circumvent the SWIFT ban, Reuters reported.
“To get rid of the risks associated with maintaining trade turnover, it is necessary to establish cooperation between Russian and Chinese financial messaging systems,” said Anatoly Aksakov, head of the financial committee of the lower house of parliament. Russian, according to Reuters.
What do alternatives to SWIFT mean for the US dollar?
The US dollar is the dominant currency used in 88% of global trade, according to Bank for International Settlements.
But if CIPS were used to settle more trade, it would create a Chinese yuan-focused alternative to the dollar-dominated SWIFT system. China has ambitions to make the yuan the world’s most dominant reserve currency, but it has a long way to go, mainly because Beijing still tightly manages its value. It is also not fully convertible into other currencies in the global market at this time.
The demand for energy payments in rubles from Russia is significant because the country is an energy powerhouse. The rise of an alternative currency for industry could therefore have repercussions for a dollar-dominated global trading system. However, experts say the Russians will not allow themselves to become so dependent on the USD and instead expect a pivot to China.
“The role of CIPS in bilateral trade agreements between Russia and China for yuan transactions will likely increase in the medium term,” said Rajiv Biswas, Asia-Pacific economist for S&P Global Market Intelligence.
The Indian government was considering a Russian proposal to use SPFS for ruble payments, Bloomberg reported in March. He also plans to use the Chinese yuan as a currency to benchmark the rupee-ruble trade, India Mint Media reported last month. Meanwhile, the Saudi oil giant was also in talks to be paid in yuan instead of dollars for its oil sales to China, according to a Wall Street Journal. report from March.
Still, many factors limit wider use of CIPS, as the yuan accounts for just 3% of global trade while the greenback and euro still account for 77% of total global payments, Biswas told Insider.
What would a shift in the dollar mean for the US economy?
The US dollar is the world’s reserve currency widely used as the default base of exchange. This status allows the United States to To borrow money abroad more easily and at lower cost.
If the dollar loses its dominance, it will hit the US economy.
“This would likely hurt the value of the dollar and create inflationary pressure on consumer goods prices,” Allianz Global Investors explained in a 2018 report. “Ultimately, the loss of U.S. reserve currency status can only limit any further decline in wages, and it’s likely to make U.S. consumers much worse off as well. poorer.”
As it stands, inflation in the United States rose 8.5% year-on-year in March, according to the Bureau of Labor Statistics — the fastest one-year price spike in about 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.