The value of the ruble has plummeted following access restrictions placed on several Russian banks to the SWIFT global bank payments system. But as this financial door closes, another door might be opening to keep the Russian economy afloat while it continues its invasion of Ukraine: The Chinese alternative to SWIFT, known as the Cross-Border Interbank Payment System (CIPS).
How CIPS Works: CIPS was launched in 2015 as a platform to globalize the use of Chinese currency through a clearing and settlement services system. CIPS is backed by the People's Bank of China and enables financial institutions to enable cross-border transactions in the Chinese currency.
CIPS processed approximately $12.68 trillion in 2021, a 75% year-over-year increase, according to a Reuters report citing data from China’s state-owned Jiefang Daily.
CIPS claims to have approximately 1,280 financial institutions in 103 countries and regions connected to its system, including 23 Russian banks, and its foreign shareholders include HSBC Holdings plc (NYSE:HSBC) and BNP Paribas (OTC:BNPQY). In comparison, SWIFT is used by 11,000 financial institutions in 200 countries and territories, including nearly 600 Chinese banks.
China has pointedly refused to condemn Russia’s invasion of Ukraine and has gone so far as to blame the Biden administration for the ongoing conflict. China has also become Russia's biggest trade partner, with 17.5% of the trade between the two countries settled in the Chinese currency.
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What Happens Next: CIPS is dependent on SWIFT for its cross-border financial messaging, and it is unclear whether Western nations would expand sanctions to the Chinese-operated platform for aiding Russian financial institutions. But as CIPS grows, it could move beyond its ties to SWIFT and operate independently as the connectivity between banks.
For the Russian banks cut off from SWIFT, options are limited. Russia has its own version of SWIFT called SPFS that was created in 2014 after it was threatened with sanctions in the wake of its invasion and occupation of Crimea. However, SPFS has only attracted the involvement of 14 foreign banks from countries sympathetic to the Russian government including China, Cuba, Belarus, Tajikistan and Kazakhstan.
There is also the option for Russia to rely more heavily on cryptocurrency, but that doesn’t necessarily create a successful sanctions evasion. On Monday, the crypto exchange Binance announced it would block the accounts of Russian individuals named in sanctions, although it would not go further in creating a full block on all Russian users.
“We are not going to unilaterally freeze millions of innocent users' accounts,” said a Binance spokesperson to Reuters. “Crypto was meant to provide greater financial freedom for people across the globe.”
Photo: Wikimedia Commons.
