Russia has alternatives to circumvent SWIFT exclusion and China has a lot to do

The punishment of Russia by excluding the country’s banks from the SWIFT interbank payment system may act as a boomerang against the US, the dollar and its European partners. That is why the Western powers have taken so long to make the decision. 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 with 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’ very affected.

Moscow has been polishing its own system for some time to mitigate the possible effects of an exclusion like the one Iran suffered: the SPFS (System for the Transfer of Financial Messages). The SPFS is an alternative channel for the transmission of electronic messages on financial transactions and guarantees the uninterrupted transmission of financial messages both within the country and abroad.

According to the official agency TASSel Bank of Russia launched SPFS in test mode in 2014 and it can transmit data in SWIFT format, but it does not depend on its channels. In 2017, SPFS became fully operational, 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. What’s more, subsidiaries of large Russian banks in Germany and Switzerland have access to it and negotiations on agreements on SPFS with China are underway, says TASS. 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 Department for the Development and Regulation of the National Payment System of the Bank of Russia, 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, invited foreign financial market participants 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 meeting of the Russian monetary entity’s council.

The Chinese CIPS

In addition to this ‘homeland’ SWIFT, Russia is close to the Beijing government, which has the alternative of China International Interbank Payment System (CIPS)created in 2015. Putin could also turn to the cryptocurrency market.

The CIPS system, to which some Russian banks already joined in 2019as confirmed by Vladimir Shapovalov, head of the Bank of Russia, could become strong enough to allow the two neighboring powers to bypass 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, stresses 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 clearing facility for the yuan like CIPS – whose fee is 3% – cannot be a global alternative. That’s where the digital yuan enters the scene.

as collected Bloombergthe token it is “technically ready” for cross-border use, according to a white paper published last year by the Chinese central bank, although it is “currently designed primarily for domestic retail payments.” That could change. If a Chinese company or individual is threatened with not being able to send money abroad because SWIFT does not pass on their instructions, they will always could convince an intermediary from a friendly country to accept the digital yuan and forward a payment in stablecoin in dollars to the counterpart of the Chinese buyer abroad.

The broker faces no credit risk because it is dealing with 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 any of the counterparties to a limbo in which they have shed something of value without receiving the agreed compensation.

If the Chinese buyer does not have valid yuan to spend, the seller will not receive the payment; the middleman will not run out of money. And to convert their digital yuan back into dollars – or into a stablecoin like Tether or USD Coin that mimics the US dollar – the middleman only needs people from 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 no Western bank may be needed to move funds across borders. Even if the US bans companies from stablecoin doing business with Chinese residents, you may not prevent third-country entities from purchasing tokens in dollars 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.

Effect boomerang

Leaving Russian banks out of SWIFT will hurt Vladimir Putin and leave Russia on the 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 consulted by the Wall Street Journal warn that separating Russia from SWIFT would also severely harm Western business interests and would encourage a move away from dollar-denominated transactions and Western financial markets.

The German Foreign Ministry has highlighted 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 the humanitarian aidthe legitimate tradethe civil society,” argues spokeswoman Susanne Sasse.

A total exclusion of Russia from the SWIFT system could have led to a total 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 them. The solution that was found, after Germany was one of the most reluctant countries to expel Russia from SWIFT, was a partial exclusion, affecting first and foremost Russian banks that had already been affected by previous sanctions.

From the German Executive they admit that the sanctions will also affect german companieswhich will not be entitled to compensation, although they indicate that in the case of specific companies that are severely hit, the State will provide “support”.