The punishment of Russia can act as a boomerang against the US, the dollar and its European partners. That’s why, . To the initial reluctance of the US is added a Germany that until the last minute has not given its approval. The fear seems more than justified. Not only because Russia has several channels through which to circumvent these sanctions and China has a lot to do with it, but because the Asian giant could take advantage of the situation to promote its own systems and leave the ‘green ticket’ hard hit.
Moscow has been polishing its own system for some time to alleviate the possible effects of an exclusion like the one suffered by Iran: the SPFS (System for the Transfer of Financial Messages). The SPFS is an alternative channel for the transmission of electronic messages about financial transactions and guarantees the uninterrupted transmission of financial messages both within the country and abroad.
According to the official TASS agency, the Bank of Russia launched SPFS in test mode in 2014 and can transmit data in SWIFT format, but does not depend on its channels. In 2017, SPFS went live in its entirety, transmitting messages about transactions in any currency.
Initially, it was intended only for Russian users, but by April 2021, more than 20 Belarusian banks, the Armenian Arshidbank and the Kyrgyz Bank of Asia were connected. In addition, subsidiaries of large Russian banks in Germany and Switzerland have access to it, and negotiations on SPFS deals with China are underway, TASS claims. According to the same source, to date, 399 users participate in the system.
In 2020, SPFS monthly traffic amounted to 2 million messages and the system’s share of Russia’s internal financial data exchange reached 20.6%, ahead of SWIFT. In December 2021, Denis Baryshkov, head of the Bank of Russia’s Department of Development and Regulation of the National Payment System, stated that 38 foreign participants from nine countries were among the users connected to the financial messaging system. At the same time, he reported that all Belarusian banks were connected to the Russian financial messaging system.
The head of the Central Bank of Russia, Elvira Nabiúlina, has invited the participants of the foreign financial market to the SPFS on Monday. “We have a financial messaging system, SPFS, which can replace SWIFT within the country. Foreign participants can join,” she said in a statement to the media after a board meeting of the Russian monetary entity.
The Chinese CIPS
In addition to this ‘homeland’ SWIFT, Russia is close to the Beijing government, which has the alternative of the China International Interbank Payment System (CIPS), created in 2015. Putin could also turn to the cryptocurrency market.
The CIPS system, which some Russian banks already joined in 2019, as confirmed by Vladimir Shapovalov, a Bank of Russia official, could become strong enough to allow the two neighboring powers to circumvent the Western system.
In addition to reducing the need for dollars (Russia-China trade can be settled in yuan), the transactions they carry out through the Chinese payment system make it difficult for the US and its allies to monitor the transactions and, therefore, interrupt them, he stresses to the WSJ Eswar Prasad, former Chief China Economist at the International Monetary Fund.
The point is that the exclusion of Russia from the Western hegemonic system in this field may give China the perfect excuse to go further. As long as 40% of the world’s international payments are in dollars, a yuan clearing facility like CIPS – whose fee is 3% – cannot be a global alternative. That is where the digital yuan comes into the picture.
As Bloomberg reports, the token is “technically ready” for cross-border use, according to a white paper published last year by the Chinese central bank, although “it is currently primarily designed for domestic retail payments.” That could change. If a Chinese company or individual were threatened with not being able to send money abroad because SWIFT did not pass on their instructions, an intermediary in a friendly country could always be convinced to accept the digital yuan and forward a dollar stablecoin payment to the counterparty of the Chinese buyer abroad.
The broker does not face any credit risk because it is dealing in sovereign money, backed by the taxpayers of the world’s second largest economy. There will also be no liquidation risk. The blockchain will make all transactions “atomic”, meaning that money will change hands – in the form of tokens – without exposing either counterparty to a limbo where they have parted with something of value without receive the agreed compensation.
If the Chinese buyer does not have valid yuan to spend, the seller will not receive payment; the intermediary will not run out of money. And to convert your digital yuan back into dollars – or into a stablecoin like Tether or USD Coin that mimics the US dollar – the intermediary just needs people in the rest of the world to want to buy Chinese goods and assets, for which they will be asked to send digital yuan.
SWIFT will never see the transaction and a Western bank may not be needed to move funds across borders. Even if the US bans stablecoin companies from doing business with Chinese residents, it will not be able to stop third-country entities from buying dollar tokens on a cryptocurrency exchange to pay US-regulated companies. The sphere of US economic dominance could shrink, not in a year or two, but perhaps in a decade or more.
boomerang effect
Kicking Russian banks out of SWIFT will hurt Vladimir Putin and leave Russia on a financial cliff. However, the damage could come back on the punishers. For example, leaving Russia out of the system would make it difficult for European creditors to recover the money they have in business in the country.
Former Treasury officials polled by the Wall Street Journal warn it would also seriously harm Western business interests and encourage a move away from dollar-denominated transactions and Western financial markets.
From the German Ministry of Foreign Affairs they have stressed that the reason why SWIFT remains operational for some Russian financial institutions is not only due to the need to guarantee the supply of raw materials and energy. “These are transactions in all areas, including humanitarian aid, legitimate trade, civil society,” argues spokeswoman Susanne Sasse.
A complete exclusion of Russia from the SWIFT system could have led to a complete collapse of trade between Russia and Germany, as importers would not be able to pay their invoices and exporters would not be able to collect their invoices. The solution that was found, after Germany was one of the most reluctant countries to expel Russia from SWIFT, was a partial exclusion, affecting above all Russian banks that had already been affected by previous sanctions.
The German Executive admits that the sanctions will also affect German companies, which will not be entitled to compensation, although they indicate that in the case of specific companies that are badly hit, the State will provide “support.”
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