China’s CIPS Likely To Rescue Russia To Tide Over The SWIFT Ban

A cataclysmic moment is taking place in the great power rivalry between the West and the Russia-China financial alliance.

After its major banks were axed from the dollar-based SWIFT payment system in response to the Ukraine invasion, Russia is banking on China's Cross-border Interbank Payment System (CIPS) for its international trade. The sanctions and the ban on SWIFT have frozen nearly $1 trillion worth of Russian assets.

Chinese state media Feb. 28 described the SWIFT ban on Russian banks as a "financial nuclear weapon," but noted that the ban would create new opportunities for CIPS.

Chinese payment-related stocks put up a stellar show Feb. 28 as China's own cross-border payment system got more takers and accelerated the development of Chinese digital currency, the e-CNY.

Russia is trying to survive the recent round of western sanctions by reducing its holdings on the U.S. dollar assets but at the same time, it is hiking its stakes in gold, oil, and foreign currency.

Xinhua, the official Chinese news agency, said that Russia held only $5.43 billion of U.S. government bonds and less than $1 billion of U.S. stocks and corporate bonds at the end of 2021. The Russian apex bank has ordered private sector firms to sell 80 percent of their foreign currency revenues.

To tide over the SWIFT ban, the Central Bank of Russia raised its benchmark interest rates Feb. 28 to an unprecedented 20 percent from 9.5 percent. The move was to support the ruble, which depreciated about 30 percent on the same day.

Though Russia developed its own payment system -System for Transfer of Financial Messages (SPFS) - after the Crimea crisis in 2014, it is yet to make any headway in global trade.

But Russia had anticipated the SWIFT move by the west and had made attempts to de-dollarize its international trade eight years ago.

CIPS, backed by the People's Bank of China (PBOC) and launched in 2015 to internationalize yuan use, is a modern payment system that supports both domestic and cross-border payments of yuan and accelerates the currency's internationalization.

In May 2018 when the Trump administration initiated a trade war against China, the second phase of CIPS with more features, including intra-day yuan settlements for overseas participants and their local customers, became operational. On Feb. 28 this year, CIPS completed 15,225 cross-border transactions involving 463.97 billion yuan ($73.4 billion).

Last year, the total business volume of CIPS was 79.6 trillion yuan, posting a growth of 75 percent compared with 2020.

Currently, CIPS has 75 direct participants and 1,205 indirect participants. Russia's SPFS, on the other hand, has 400 users and covers foreign banks from countries such as China, Cuba, Belarus, Tajikistan and Kazakhstan. In comparison, SWIFT is now used by 11,000 financial institutions across 200 countries, including nearly 600 Chinese banks.

CIPS, which has direct participants in London, Frankfurt, Zurich, Paris, Luxembourg, Hungary, and Russia, could be a new choice for Russia while dealing with Europe.

Of course, CIPS and SPFS are still smaller compared with SWIFT in terms of the number of participants. But the duo or one of them can still grow into an important regional or even global payment system with vast influence over the long run.

It is not that CIPS is fully independent which still largely relies on SWIFT for cross-border financial messaging. Currently, the indirect CIPS participants still need to go through SWIFT to complete their payment settlements. However, it has the potential to stand on its feet anytime with its own direct communication line.

Interestingly, for Russian banks and corporates, CIPS can serve as a messaging system without the risk of exposing their transactions to the U.S.

China is Russia's biggest trade partner both in terms of exports and imports. In 2020, they managed to settle 17.5 percent of the trade by yuan.

However, the yuan is still far from a key global currency and foreign banks may sulk to adopt an alternative messaging network and part ways with SWIFT all of a sudden.

In any case, after the SWIFT ban, Russia's $1.5 trillion economy is at the mercy of CIPS, which will definitely profit from the presence of the 11th largest economy in the world at its disposal. De-dollarization by China and Russia has gathered steam.

Will China's homegrown mechanism enable Russia to cushion the impact of isolation from the world's biggest interbank payment messaging system?

At least to a greater extent.