China and Russia are working on homemade alternatives to the SWIFT payment system. Here’s what they would mean for the US dollar.
China and Russia are working on homemade alternatives to the SWIFT payment system.  Here’s what they would mean for the US dollar.

China and Russia are working on homemade alternatives to the SWIFT payment system. Here’s what they would mean for the US dollar.

  • Some Russian banks have been excluded from SWIFTa cross-border messaging service for banks.
  • India reportedly considered a Russian proposal to use the SPFS for payments in rubles.

In the wake of Russia‘s unprovoked invasion of Ukrainesome Russian banks were banned from SWIFT, the Belgian-based messaging service that lets banks around the world communicate about cross-border transactions. The ban has hampered cross-border transactions for Russia’s trade and financial systems, isolating the country economically.

Now both Russia and China seeking to establish alternatives to US dollar hegemony.

Russia is announcing an alternative ruble-based payment system called the System for Transfer of Financial Messages (SPFS). The system was set up in 2014. In late April, the country’s central bank said it would launch secrecy of the names of the participants.

China’s cross-border interbank payment system (CIPS) – which processes payments in Chinese yuan – also has the potential to replace SWIFT. The system has an expansive network of 1,280 financial institutions, said Peter Keenan, co-founder and CEO of Apexx, a payment provider that used to work with Russia’s domestic Mir payment card. This is compared to SPFS ‘much smaller network of 400 users.

There are few alternatives to SWIFT, Keenan told Insider: “This is one of the reasons why Russia is looking at CIPS and specifically an alternative to Asian payments.”

Here’s how China and Russia’s SWIFT alternatives can cause disruption to the global payment system and the dominance of the dollar.

How do China’s and Russia’s alternatives to SWIFT work?

China’s central bank launched CIPS in 2015 with the aim of internationalizing the use of the yuan. CIPS is still largely dependent on SWIFT for cross-border messaging, but it has the potential to operate on its own messaging system, he said. PS Srinivas, a visiting research professor at the National University of Singapore’s East Asian Institute.

Russia’s SPFS, on the other hand, has been restricted to domestic use. New members are unlikely to join now as the move could be seen by the US and its allies as an attempt to help Russia evade sanctions, Srinivas wrote in a March report. But Moscow is working with Beijing to link it with 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 the Russian and Chinese financial messaging systems,” Anatoly Aksakov, head of the finance committee of Russia’s lower house of parliament, told Reuters.

What do the alternatives to SWIFT mean for the US dollar?

The US dollar is the dominant currency used in 88% of world trade, according to the results of a three-year Bank for International Payments survey most recently conducted in 2019.

But if CIPS were used to settle more trade, it would create a Chinese-yuan-driven 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 one long way to go, primarily because Beijing still controls its value tightly. It is also not fully convertible to other currencies in the global market right now.

Russia demand for energy payments in rubles is significant because the country is an energy powerhouse – so the emergence of an alternative currency for industry could cause a spillover impact on a world-trading system dominated by the dollar. Experts say, however, that the Russians will not allow themselves to become so dependent on the USD, and instead expect a pivot for China.

“CIPS’s role in bilateral trade agreements between Russia and China for yuan transactions is likely to grow in the medium term,” said Rajiv Biswas, Asia-Pacific economist for S&P Global Market Intelligence.

The Indian government is considering a Russian proposal to use the SPFS for payments in rubles, Bloomberg reported in March. It is also considering using the Chinese yuan as a currency to refer to the rupee trade, India Mint media outlet reported last month. Meanwhile, oil giant Saudi Arabia was also in discussions about being 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 a broader use of CIPS, as the yuan accounts for only 3% of global trade, while the dollar and the euro still account for 77% of total global payments, Biswas Insider said.

What would a change from the dollar mean for the US economy?

The US dollar is the world’s reserve currency, widely used as the default base for foreign currency. This status enables the United States borrow money abroad easier and at a lower price.

If the dollar loses its dominance, it will hit the US economy.

“It would probably hurt the value of the dollar and create inflationary pressures on consumer prices.” Allianz Global Investors explained in a 2018 report. “Ultimately, the U.S. loss of reserve currency status can only limit any further decline in wages, and there is a good chance that it will also make U.S. consumers much poorer.”

As it is, Inflation in the US rose 8.5 per cent. year-to-year in March, according to Bureau of Labor Statistics – the fastest one-year price increase in about 40 years.

If the dollar weakens, imported goods will become more expensive. It will also be more expensive for Americans to travel to places where the dollar has weakened against the local currency.

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