SWIFT alternative: China can provide reprieve from financial ‘nuclear option’

The United States and its allies have committed to expelling Russia from the SWIFT network.

Swift is an acronym for Society for Worldwide Interbank Financial Telecommunication. It is a critical network that connects global financial institutions and facilitates the settlement of trillions of dollars moved across the world every day.

In short, without SWIFT, banks and their customers, including the world’s biggest companies, would not be able to operate on a global scale.

On Saturday, a joint statement released by the White House on behalf of the United States, France, Germany, Italy, the United Kingdom, and Canada announced Russia’s access to SWIFT would be cut within days.

“As Russian forces unleash their assault on Kyiv and other Ukrainian cities, we are resolved to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies. We will implement these measures within the coming days,” the statement reads.

“First, we commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.”

Earlier in the week, French finance minister Bruno Le Maire, said cutting off Russia from SWIFT would be a “financial nuclear weapon”.

“The fact remains that when you have a nuclear weapon in your hands, you think before you use it. Some member countries have expressed reservations, we take them into account,” said Le Maire.

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But Russia has a SWIFT alternative

China is Russia’s biggest export and important partner, and also operates a legitimate SWIFT alternative.

China’s international payments system is called CIPS – an acronym for Cross-Border Interbank Payments System.

CIPS was first revealed in 2015 and facilitates the transfer and settlements of international payments in yuan.

It’s known that at least 23 Russia banks are currently connected to CIPS, and Russia will have no trouble doing business in the Chinese currency over CIPS.

It has been aggressively slashing USD held in reserve prior to the invasion of Ukraine and increasing its yuan reserves. The current USD held by the Russian Central bank is only around 16% of total reserves. Down from 40% in 2017.

Further, major Russian private and state-owned institutions have only been accepting yuan payments in recent years. For example, in September last year Russian oil and gas giant Gazprom (MCX: GAZP) switched from accepting USD payments to yuan payments for aviation fuel.

“We start from September and may switch to all the settlements on jet fuel to yuan,” Gazprom Neft’s CEO, Alexander Dyukov, told Reuters at the time.

The question is will Russia be able to interact with any countries other than China, through CIPS?

According to the latest update on the CIPS website, the platform is used by 1189 financial institutions in over 100 countries, with 47 as direct participants and 1142 as indirect participants.

Among indirect participants, 881 participants are from Asia (including 528 from Chinese Mainland), 153 from Europe, 42 from Africa, 26 from North America, 23 from Oceania, and 17 from South America.

A more recent update on the CIPS Linkedin page shows a further increase in CIPS users.

“As of November 2021, CIPS has 1253 participants, with 75 as direct participants and 1178 as indirect participants,” the post says.

Swift alternative

A Bloomberg article in September 2021 touted CIPS as a possible alternative to SWIFT.

“We hope to provide services all around the globe one day, and especially to facilitate services to overseas participants,” chief executive officer of CIPS, Xu Zaiyue, told Bloomberg.

The Chinese yuan has performed strongly against the USD in recent years, rising around 10% since the onset of the COVID-19 pandemic. So CIPS, as a SWIFT alternative. has become even more attractive for Russia and its biggest banks to do business.

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