Elon Musk challenges Vladimir Putin to ‘single combat’ against Ukraine
Western nations have sought to punish Russia for invading Ukraine by imposing economic and financial sanctions and excluding certain Russian banks from the ubiquitous SWIFT messaging system, known as the World Bank’s Gmail.
It raised questions about whether China – which before the war signaled it wanted closer ties with Russia – could offer its neighbor a financial lifeline.
In particular, many have focused on what a Chinese payment system, known as CIPS, could do. The answer seems to be not much, so far.
What is CIPS?
The cross-border interbank payment system was set up in October 2015 as a payment settlement and clearing system for transactions using the yuan. The system is supervised by the Chinese central bank but is managed by CIPS in Shanghai. Ownership is divided among dozens of shareholders, including state-owned Chinese financial institutions, stock exchanges and Western banks.
Its usage has steadily increased, with an average daily transaction value of 388.8 billion yuan ($85 billion) in February, an increase of around 50% from a year ago. according to company data.
Is it a SWIFT rival?
They are not direct competitors. SWIFT is a messaging system for global banks to communicate, but CIPS is primarily a settlement system for renminbi transactions that also provides some communication functions.
Most banks that use CIPS still communicate via SWIFT, either out of habit or because they haven’t installed the CIPS-specific messaging tool, or both, according to the Cross-Border Finance Research Institution, a consultancy consultancy based in Shanghai. Last year, the People’s Bank of China actually formed a joint venture with SWIFT to offer local network services and store message information in China.
By size, CIPS is tiny compared to SWIFT, which has over 11,000 members and handles over 42 million transactions per day. In February, CIPS had about 1,300 participants, mostly in China, and was processing about 13,000 transactions per day.
And the CHIPS?
That might be a better comparison, although he handles a lot more money. CHIPS, or Clearing House Interbank Payments System, is the largest private US dollar clearing system, according to its website. It handles approximately $1.8 trillion in payments per day, nearly 30 times the daily value of transactions for CIPS.
Could CIPS be used to circumvent Western sanctions?
This would only work if transactions are in yuan – probably only when Russia and China settle direct exchanges – and both parties were members of CIPS.
These payments remain low: they increased to about 6% of transactions in 2020, from 2% in 2013. In reality, even as both countries sought to move away from using the dollar in trade, this meant largely switch to the euro – which is also now sanctioned. And there are other problems:
It is unclear to what extent non-Chinese importers or exporters doing business with Russia would be willing to accept payment in yuan. For CIPS to help Russia circumvent the US financial system, Russia would need to be part of a yuan-centric financial system. This seems unlikely given China’s capital controls on its currency, which restrict the flow of funds in and out of the country.
Are there other ways China could help Russia?
Some Russian lenders plan to start using China’s UnionPay system for credit cards after Visa and Mastercard suspended operations in Russia. This could allow Russians to make certain payments abroad, with UnionPay operating in 180 countries and regions.
Other potential leads include: About 13% of Russia’s reserves, or about $77 billion, were in Chinese assets in June 2021, according to the most recent figures from the Bank of Russia. Selling these assets would give Russia much-needed cash.
China’s central bank has a multi-billion dollar currency swap with Russia’s central bank, potentially allowing both countries to provide liquidity to businesses so they can continue to trade.
Small Chinese banks that do not have international operations could also continue to do business with Russia; they would have less to lose if they were hit with secondary sanctions from Western nations.
A research note from Natixis noted that China’s nascent digital yuan is unlikely to be of much use because it “does not yet offer cross-border transactions of any relevance, and Russia does not is not yet committed” to using it.