Author: Alessandro Chen
In the early morning of February 24, Putin declared the beginning of “a special military operation” in Ukraine. Minutes later, explosions in Kharkiv and Kyiv followed. To penalize Russia for its invasion of Ukraine, the US and EU imposed sanctions aimed at crippling its military and economic capabilities.
Financial measures included removing Russian banks from the SWIFT financial messaging system. This move is likely to accelerate the expansion of China’s own cross-border payment and settlement system – CIPS, the Chinese Swift equivalent.
CIPS offers clearing and settlement services for international yuan payment and works as a bridge connecting onshore and offshore clearing markets with participating banks. CIPS, however, only involves 1,200 financial institutions in 100 countries, far less than SWIFT with more than 11,000 institutions across 200 countries.
The trade friction between China and US in the last years and the recent sanctions on Russian banks nudge closer together. According to Chinese analysts, reducing reliance on SWIFT provides countries greater financial security and allows China to promote the yuan as an alternative. This is based on three important facts.
Firstly, more than 20 Russian banks are already connected to CIPS, contributing to a surge in digital payments between China and Russia in recent years, and the renminbi represented one-fifth of all trade between the two in 2020.
Secondly, to cut its exposure to the US and western Europe, Russia invested in Chinese assets through its central bank, with the final aim to secure financial security.
Finally, SWIFT sanctions also affected Iran, another significant oil producer as Russia. Furthermore, this could rev the decline of the petrodollar system and enhance the use of the yuan at the international level.
To conclude, the current SWIFT sanctions on Russia represent a tool to expand CIPS across the globe and a further step to boost the use of the Chinese Yuan.