Punitive sanctions unleashed by the west leave Russia increasingly economically isolated. They may have the unintended consequence of drawing Russia and China closer together. This could be accelerated by the two countries’ efforts to create alternative payment systems. But fears that it will give rise to a powerful new economic bloc look overblown.
In theory, Beijing could provide the financial infrastructure needed to help Moscow bypass western sanctions. In practice, it is far from a straightforward process. The credit card payment sector is a case in point.
Over the weekend, Visa, Mastercard and American Express became the latest companies to suspend operations in Russia following its invasion of Ukraine. Cards issued by the three companies in Russia will no longer work outside the country. Those issued elsewhere in the world will not be usable in Russia.
Russian cardholders can still make domestic purchases, via the country’s homegrown card payment system, Mir. For international transactions, Russian banks say they are looking at issuing cards powered by China’s state-controlled card-payment monopoly UnionPay. But switching over to UnionPay will require the installation of new IT infrastructure and hardware. This will be difficult. More so if US technology companies continue to pull out of the country. UnionPay could become a target of secondary sanctions if it deals with sanctioned Russian companies.
Similarly, China’s Cross-Border Interbank Payment System — Cips — has been touted as a way for Russian banks to ameliorate ejection from Swift. But the two serve very different purposes. Swift is primarily a messaging system. It is used by more than 11,000 institutions across 200 countries and allows banks to communicate rapidly, securely and inexpensively. Cips was created by China’s central bank to promote the global use of the renminbi. It is mainly used for settling payments in the Chinese currency. More than 80 per cent of its transactions rely on Swift for information flow.
Cips is also a smaller network compared to Swift. It counted 1,159 participants as of February 2021. Russia’s own version of Swift, System for Transfer of Financial Messages, is even smaller, with just 400 users from countries such as Cuba and Belarus.
China may offer a way for Russia to keep its coffers filled. But it will be in renminbi. Long term that does not look like a viable alternative as long as the greenback maintains its omnipotence in global trade.
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