Sanctions against Russia fueling growth of de-dollarisation, SWIFT alternatives

With Western countries tightening the noose on Russia over its invasion of Ukraine, Moscow’s allies in the emerging markets have begun exploring channels for trade and finance.

Members of the erstwhile BRICs group, Brazil, India and China, are treading cautiously for fear of tripping Western sanctions on Russia, but already the beginnings of a parallel financial system centred on Beijing have become detectable.

The development comes after the US and Europe have banned large Russian banks from the global payments system SWIFT and have announced measures which limit Moscow’s ability to tap its $640 billion foreign currency reserves.

The manner in which Western countries have reacted to the Russian invasion of Ukraine stands in sharp contrast to similar such actions by the United States in the last few decades, which has spurred the willingness among emerging nations to sustain business relations with Russia.

Chinese banks and businesses are scrambling for ways to limit the impact of Western sanctions on their relations with Russia, with business settlements taking place in yuan rather than in dollars. As a result, Western sanctions aimed at cutting Russia from the global financial system, has ended up fuelling the creation of a parallel system to SWIFT, de-dollarization and increased business ties between Beijing and Moscow.

India, which depends on Moscow for its military armament, is concerned with sources saying Western sanctions could result in Russian banks and companies opening rupee accounts with a few state-run banks for trade settlement as part of trading system.

Brazil’s President Jair Bolsonaro has also made it clear that it wants to remain neutral in conflict.

According to Deng Kaiyun, who heads Zhejiang’s chamber of commerce that represents Chinese private businesses that trade with Russia, doing transactions outside of SWIFT is not a big issue; in fact both countries had started de-dollarisation five years ago.

“Yuan-rouble settlement has become a normal business at major banks nowadays … We business people are already accustomed to that,” said Deng while adding, the yuan is increasingly popular with Russians.

Impact of banning Russia from SWIFT

As a result of large Russian banks being kicked out of SWIFT, there has been a spur in the number of Chinese and Russian companies opening accounts in each other’s countries, said a Moscow-based lawyer who represents Chinese businesses.

“SWIFT is not the only payment system. If you block this channel, business people need to find alternatives,” said the lawyer on the condition of anonymity citing sensitivity of the topic.

According to a source at a Chinese state bank, “exporters are now in favour of using yuan to settle their payments” with Russia. Until last week, many of these trades were settled either in euros or dollars.

As per another source at a Chinese state bank, given the lack of details in the Western sanctions, Chinese banks are closely monitoring the situation while encouraging clients to use yuan in trade settlements with Russia.

In the first half of 2021, Yuan settlements accounted for 28% of Chinese exports to Russia, compared with just 2% in 2013. Both, China and Russia have stepped up their efforts to reduce their reliance on the dollar, while developing their own respective, cross-border payment systems.

Western sanctions could accelerate this trend.

According to Dang Congyu, an analyst at Founder Securities, the SWIFT sanctions against Russia are “a milestone event that will accelerate the process of de-dollarisation.”

He went on to add, “Although it’s hard to replace SWIFT in the short term, this incident is very beneficial to yuan’s globalisation over the long run.”

Increasing speed of de-dollarisation

While the impact of Western sanctions are squeezing the Russian economy, they are also fuelling the pace of de-dollarisation, and not just in trade.

According to investment firm Caderus Capital, it has been working to promote cross-border investment between Russia and China.

The move by Russia’s central bank to increase investment in yuan assets is “the best way to increase the popularity of the Chinese RMB among Russian investors” said Andrei Akopian, Managing director at Caderus Capital.

Yuan accounted for 13.1% of the Russian central bank’s foreign currency reserves in June 2021, compared with just 0.1% in June 2017. Dollar holdings dropped to 16.4%, from 46.3%.

“If we talk about trade and investment, it makes a lot of sense for both countries not to trade in the in U.S. dollars, because then you have double conversion, in addition to other difficulties recently,” said Akopian.

Sanctions targeted at the Russian economy has made the Rouble volatile, which has become painful for some Chinese businesses since this has led to some trade contracts not being honoured.

“All the Chinese banks know that the U.S. dollar clearing global banks will be asking Chinese banks about involvement in sanctions-related counterparts transactions,” said Han-Shen Lin, senior advisor The Asia Group and an ex-banker.

Chinese banks could face greater scrutiny in the face of western sanctions against Russia.

“What will be of interest is how Chinese banks can segregate the sanctioned transactions versus non-sanctioned”, such as energy-related businesses.

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