After the Russian invasion of Ukraine, some Russian banks were excluded from SWIFT, a Belgian communications service that allows banks around the world to communicate about cross-border transactions. The embargo made it difficult to conduct cross-border transactions in the Russian trade and financial system, and isolated the country from an economic point of view.
Currently, both Russia and China are looking for alternatives to the hegemony of the US dollar.
Russia is promoting an alternative payment system based on the ruble, called the Financial Message Transfer System (SPFS). This system was created in 2014. At the end of April, the Central Bank of Russia announced that it would begin to hide the names of the participants in the system.
Chinese System of Cross-Border Interbank Payments (CIPS) (Interbank Cross-Border Payment System), Which processes Chinese yuan payments, it can also replace SWIFT. “The system has an extensive network of 1,280 financial institutions,” said Peter Keenan, co-founder and CEO of Apexx, a payment service provider that has worked with the Russian Mir payment card. In comparison, the SPFS network is much smaller and has 400 users.
There are quite a few alternatives to SWIFT: This is one of the reasons Russia is looking at Cross-Border Payments (CIPS) and alternatives to Asian payments, Kennan says in an Insider interview.
Here’s how SWIFT alternatives in China and Russia could disrupt the global payment system and the dollar’s dominance.
See also: Not only raw materials. Russia also wants to pay in rubles for other goods
How do Chinese and Russian alternatives to SWIFT work?
China’s central bank launched the CIPS system in 2015 to internationalize its use of the yuan. CIPS still relies heavily on SWIFT for cross-border communication, but It has the ability to work based on its own communication system – Mold. s. Srinivas is a visiting professor at the National University of Singapore’s East Asia Institute.
On the other hand, the Russian Special Program for Food Security is limited to domestic use. In a March report, Srinivas wrote that new members are unlikely to join the SPFS now, because such a move could be interpreted by the United States and its allies as an attempt to help Russia avoid sanctions. As reported by Reuters, Moscow is working with Beijing to merge with CIPS to circumvent the SWIFT ban.
Anatoly Aksakov, Chairman of the Finance Committee of the Lower House of the Russian Parliament, said that to eliminate the risks associated with maintaining trade, it is necessary to establish cooperation between Russian and Chinese financial messaging systems.
What do alternative regimes mean for the US dollar?
According to the results of the triennial study of the Bank for International Settlements, which was last conducted in 2019.The US dollar is the dominant currency with 88 percent. Global trade.
However, if the CIPS system is used to settle more business transactions, it will create an alternative to SWIFT in US dollars, but based on the Chinese yuan. China aspires to make the yuan the world’s most dominant reserve currency, but they still have a long way to go, mainly because Beijing still manages their value tightly. Currently, the yuan is also not fully convertible into other currencies in the global market.
Russia’s demand for energy payments in rubles is great because the country is an energy superpower – so the emergence of an alternative currency for this industry could have a detrimental effect on the dollar-dominated global trading system. Experts say, however, that the Russians will not allow themselves to rely on the dollar too much and rather expect a shift towards China.
“The role of CIPS in bilateral yuan trade settlements between Russia and China is likely to grow in the medium term,” said Rajiv 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 the Special Program for Food Security in ruble payments. The Indian government is also considering using the Chinese yuan as a reference currency for the circulation of the rupee and the ruble. In turn, according to a March report by the Wall Street Journal, Saudi Arabia is studying the possibility of paying in yuan instead of dollars to sell oil to China.
However, there are several factors that limit the broader use of CIPS, with the yuan accounting for only 3% of the total. world trade, while the dollar and the euro still account for 77 percent. Of all the global payments, Biswas told Insider.
What does moving away from the dollar mean for the US economy?
The US dollar is the world’s reserve currency and is commonly used as a virtual currency exchange base. This status allows the United States to borrow money from abroad more easily and at lower cost.
If the dollar loses its dominant position, it will hit the US economy.
Allianz Global Investors in a 2018 report explains: “This is likely to hurt the value of the dollar and put inflationary pressure on consumer prices. And there’s a good chance that this will make American consumers even poorer.
In the current climate, US inflation rose 8.5 percent in March. On an annual basis, according to the US Bureau of Labor Statistics, this is the fastest one-year price increase in nearly 40 years.
If the dollar weakens, imported goods will be more expensive. It will also be more expensive for Americans to travel to places where the dollar has lost value against the local currency.