Can Russia’s payment alliance with China circumvent banking sanctions? | PaymentsSource

Russia is working with China to shut down Western payment systems, a move that will likely take more than just transaction technology to significantly ease the economic stress on Russian banks.

VTB, a state-controlled Russian bank with around $280 billion in assets, this week began supporting transfers to China in yuan, bypassing international payments messaging system SWIFT, which banned russia after its invasion of Ukraine in February. While the proliferation of payment technologies in recent years offers Russia a plausible way to execute transactions without access to Western payment systems, it is the lack of access to Western capital that poses the greatest threat. .

“Almost any official government agency can set up a payment platform in conjunction with another government agency in another jurisdiction,” said Robert Hockett, a law professor at Cornell University.

FAST is designed to facilitate payment flows between nationsand the organization has added technology in recent years to support faster settlement to accommodate the growth of e-commerce. But since SWIFT is not a financial institution, access to SWIFT members is more important for banks seeking credit from other banks.

“What SWIFT provides is access to the global dollar payment system, which of course also implies access to the global dollar-denominated credit system,” Hockett said, adding that what VTB announced does not provide this access. “And it is this access to credit that the withdrawal of SWIFT has taken away from Russian entities.”

VTB, Sberbank and most major Russian banks are on the List of US sanctionspart of a series of measures against Russia that includes bans on Visa, Mastercard and most major American and European payment companies, as well as hundreds of Western companies outside of finance. For Western companies, costs have so far included compliance and securitywhile the war contributed to rising energy costs in Europe and the United States

Russia’s gross domestic product is expected to decline by around 10% in 2022, according to the BBC. Inflation is around 17%, and Russian businesses and consumers are increasingly looking to do business in Chinese yuan to hedge against ruble volatility, with Russian yuan purchases jumping 800% in 2022 , according Reuters.

Russia also has courted UnionPay, China’s national card network, to compensate for the loss of Visa and Mastercard, which controlled about 75% of the Russian card market before the war. Russian payment network Mir, set up in response to earlier Western sanctions following Russia’s incursion into Crimea in 2014, controlled about a quarter of Russia’s card market before the invasion of Ukraine.

“VTB will not be able to nest transactions through China in any volume to replace what they have lost access to,” said Brian O’Toole, nonpartisan senior researcher at the Council of the Atlantic, a nonpartisan research organization “Russia of course is looking to China, perhaps with less success than they claim,” O’Toole said. there was a massive shift in the cross-border use of the US dollar because of this change.”

Russia has a system equivalent to SWIFT, called the Financial Message Transfer System. Before the war, STFM handled about 20% of messaging for Russian payments, although its reach and scale were limited compared to SWIFT. In recent years, Russia has tried to recruit countries such as China, India, Iran and Turkey to STFM, although its level of success is limited.

“STFM can process all local transactions, but few non-Russian banks are registered to use it,” said Elina Ribakova, deputy chief economist at the Institute of International Finance. “Theoretically, if there is concern that transactions with sanctioned Russian banks in euros or dollars could amount to violating Western sanctions, an alternative could be to use the Russian messaging system and transact in other other currencies.

China has implemented a central bank digital currencylaunching an e-wallet app that allows consumers to spend a digital yuan, putting China years ahead of the United States and most European countries in developing CBDCs.

China developed its CBDC in part to counter the influence of the US dollar, and it could work with Russia, which is piloting its own CBDC. “A next step could be to link these systems directly,” Ribakova said. “It would remove the need for additional messaging or payment and settlement systems and be instantaneous.”

Beyond geopolitics, distributed ledger technology companies such as Ripple have built digital payment messaging systems to rival SWIFT. The underlying blockchain technology could provide some traction for Russia as it tries to build payment networks outside of American and European influence.

“New payment technology has made it easier for groupings of like-minded countries to establish their own payment systems,” Hockett said, adding that these networks can facilitate trade and credit flows between these countries. “But again, because it is the dollar system that gives SWIFT its primary clout, no such development will do wonders for countries seeking to emerge from Western financial sanctions.”