Elected officials and financial analysts have been expressing concerns that China’s currency, the yuan, could become the world’s reserve currency, replacing the American dollar as the go-to currency when seeking out a safer haven of assets like U.S. Treasurys or American real estate. In response to Russia’s invasion into Ukraine last weekend, the United States and a number of its European allies announced an initiative to remove certain banks from the Society for Worldwide Interbank Financial Telecommunication, a financial communications network used by 11,000 financial institutions in 200 countries for the movement of financial transactions. The United States, as a leader of the effort, hopes to hasten Russia’s withdrawal from Ukraine by making it very expensive for Russia to maintain a military presence in the country.
It’s not like Russia has been opting for staying in reactive mode to such a move. Russia and the rest of the world watched as the United States was able to persuade other SWIFT members to give Iran the boot.
Russia has a number of alternatives, albeit slower in today’s world of digital communications including telex, phone, and email. Russia also has the Structured Financial Messaging Solution, a communications system similar to SWIFT but used inside the country.
But what about cross-border payments? SWIFT connected Russian banks to 11,000 other financial institutions in 200 countries. SFMS is not comparable. But suppose Russia was amenable to pricing and selling its oil in yuan versus rubles? That would facilitate the use of a neighbors cross-border payments system–CIPS.
CIPS, the Cross Border Interbank Payments System, facilitates international payments for the People’s Republic of China. Twenty three Russian banks are already connected to the network, connecting these banks with between 1,189 and 1,253 financial institutions in over 100 countries.
And I should mention that the world’s second largest country, India, is also exploring a cross border financial communications network where Russia could be incentivized to circumvent SWIFT by importing more India goods.
Politically, an aggressive move to implement these alternatives to SWIFT could serve to weaken President Biden’s weaponized finance option. If Russia is able to sell oil priced in yuan and China is able to persuade more countries to use yuan for payment of exports, Mr Biden may have to convince his “coalition of the willing” to put boots on the ground to end Mr Putin’s “war of choice.” Mr Biden would also be the president who governed during the dollar’s fall from reserve currency grace.