21

China should consider using digital technology to develop an alternative to the SWIFT financial payments system as a way of insulating itself from being cut off from the US-dominated financial messaging service, according to Liu Xiaochun, deputy dean of the Shanghai New Finance Research Institute.

So, my question is: why hasn't either Russia or China done that already?

already is the keyword here as Russia is dealing with US sanctions for years now. And, China is dealing with US hostility from the start of Trump's presidency which signals that China is no longer safe from possible large scale US sanctions.

6
  • 7
    Swift and the USD aren't exactly synonymous. Your title q asks one thing and your body q another. Swift (as a company) is actually based in the EU. It's true that US sanctions (transitively) threatening EU companies often get them to comply to US wishes... but what exactly is your q here? Why don't Russia and China separate their banking from the US and the EU?
    – Fizz
    Jan 21 at 12:37
  • As the article linked says, both China and Russia have parallel systems for their own banks (CIPS and SPFS) already.
    – Fizz
    Jan 21 at 12:44
  • It may be based even on Sent Kits and Nevis, it is still a US instrument: blockonomi.com/swift-military Jan 21 at 13:12
  • 1
    @user2501323: to clarify: why aren't Russia and Venezuela exchanging USD over something other than Swift is one question. Why is Saudi Arabia not accepting payments in rubles (crypto or not) is a somewhat different question.
    – Fizz
    Jan 21 at 13:22
  • 2
    Yes. Questions seems to be a bit broad, but still interesting to not close. Jan 21 at 13:26
27

You can't bypass the dollar without having a comparably sized economy that is not dependent on the dollar. There are two big main factors that make replacing the dollar difficult. The practical one is you need a market that has the same volume as the dollar, moving billions of dollars is trivial (for moving billions). Secondly you need a market independent of the dollar, because the U.S. will fight a challenge to the dollar as it being the standard of international trade is massively beneficial.

China may have the economic size to compete, but they are far too dependent on U.S. trade to actually take on such a fight. They also have trust issues since they have shown in the past a willingness to manipulate currency to their advantage which encourages other countries to avoid holding any such currency for prolonged periods. Russia lacks the economy to truly challenge the U.S.

12
  • 13
    @user2501323 Yes. manipulating value is huge in an international currency. Not being able to do X with dollars can suck, but it's way better than Y dollars losing 20% of their purchasing power overnight.
    – Ryathal
    Jan 21 at 15:10
  • 1
    "You can't bypass the dollar without having a comparably sized economy" - emm, last China move about economical zone in pacific overweights US and making a place for China doing business. Closed place and without the US. "losing 20%" is still better than money being "freezed on accounts because we want it", like with Iran/Venezuela, isn't it? Jan 21 at 15:14
  • 12
    @user2501323 If you truly believe that whatever nation's money were to take over from the dollar, that that nation would never do the same thing eventually, you are naive. I understand that much of the rest of the world views America as evil for some of its practices, but I firmly believe that any national superpower would not be any better, and may very well end up being worse.
    – CGCampbell
    Jan 21 at 17:20
  • 4
    A significant factor in China's inability to set up an alternative system are capital controls. You can't take or transfer more than 20k RMB ($3k) out of China without a special permission.
    – dbkk
    Jan 21 at 20:00
  • 3
    @dbkk So you think the leaders of China sits and think "We could compete with the dollar if only someone would let use change the law to move money out. Wonder who could change that law!"
    – pipe
    Jan 21 at 20:46
10

Some reasons why a CDBC (be it called "digital rouble" or more improperly "crypto-ruble") might not actually be that effective at bypassing US sanctions-- basically because simply using it will raise red flags and possibly attract US investigations and sanctions:

the ability of a crypto-rouble to help Russia evade U.S. sanctions is limited. Prohibited transactions would be continue to prohibited regardless of the means of exchange. Theoretically, it would be harder to get caught if you’re using currency that cannot be detected by U.S. regulators. But it is unclear just how many world financial actors would accept Russian government crypto-rouble surveillance, in exchange for protection from scrutiny by U.S. financial regulators. For this reason, the primary user of the crypto-ruble might be the Russian state itself.

[...]

if a crypto-rouble were to be issued by the Russian central bank (or even by a commercial bank in Russia), then the very existence of that platform would lend itself to detection. Although the currency itself could be secure, exchanges denominated in the currency would likely flow in more predictable paths than standard crypto-currencies. Thus it would only be a matter of time before U.S. enforcement agencies could identify red flags and investigate potentially prohibited transactions.

An executive at Gazprombank, the state-run bank that is subject to U.S. sectoral sanctions, acknowledged that “[c]rypto isn’t the answer in a quick way.”

As was actually noted in the OP's article, both China and Russia have parallel systems [relative to Swift] for their own banks (CIPS and SPFS) already. The real issue/question is: why would some other country [not] use them. The Wikipedia article on the latter cites Russian state sources that interoperability deals have been reached with China, India, Iran, and some other coutries and that 15% of Russia's internal transactions use the system. But it's a little unclear how widely adopted it is outside. (The Wikipedia article on China's system lacks concrete data.) But for many other countries, the question is basically: why bother?

A somewhat subtle aspect here is (as explained in the CIPS article) is that the system itself only sends orders, but that actual settlement happens through correspondent accounts. And these are also on the target list of US sanctions.

As Wikipedia explains the concept:

A bank will typically require correspondent accounts for holding currencies outside of jurisdictions where it has a branch or affiliate. This is because most central bank settlement systems do not register deposits or transfer funds to banks not doing business in their countries. With few exceptions, the actual funds held in any foreign currency account (whether for a bank or for its customer) are held in the bank's correspondent account in that currency's home country.

So you couldn't exchange (bank) dollars in the usual manner if the US government puts your banks on their CAPTA list. (I'll also note that this list is rather new, and hasn't been used extensively insofar. Presumably it was added in view of possible bypass of Swift as by using different order messaging platforms like CIPS/SPFS.)

So you'd either have to pay with dollars in suitcases as Iran started to do and I think still does now to some extent (even with Russia) , or you'd have to use a different currency altogether... which gets to the bigger issue of whom accepts what currency as payment, which Ryathal's answer addresses already.

8
  • I think now "attract sanctions" seems a bit irrelevant - sanctions would be anyway. So... Jan 21 at 14:52
  • 2
    @user2501323: it's the 3rd party who would attract them. E.g. if some company in Mexico starts using digital roubles, the US might decide to sanction that company just for that, meaning the company would have to choose between doing business with Russia or with the US, but not both. Additionally, if the Mexican government chooses to obey US demands, they could fine the Mexican company etc.
    – Fizz
    Jan 21 at 14:53
  • Now I get it. But. US might decide to sanction any company in the world - for example for doing business with Russia (NS-2 is a good example). By any reason it may decide worth it. You may surrender, or try to dedollarize. At the moment when international payments would flow in crypto-smth, exchanged by gold - in that moment sanctions would be irrelevant Jan 21 at 14:57
  • 2
    @user2501323 Yeah, but getting to the point where EVERYONE (or at least large enough part) is using it the hard part. How many companies can seriously de-dollarize fast enough to not be hit by it and do it in a manner that would allow them to also have compatriots supporting them (who would be willing to take that risk) in it without folding? And what's their incentive? What pros does it have that are large enough that the risk is deemed woth it by conservative majority?
    – mishan
    Jan 21 at 15:08
  • 1
    (in which case the solution is obviously for Russia to design a currency that wildly fluctuates in value so that USAnians will pour all their dollars into it!)
    – user253751
    Jan 21 at 21:48
1

Because it's, obviously, a complex thing to do!

But process of "dedollarization" is in progress. In fact, developing projects of digital-yuan and digital-rouble crypto-currencies are part of that work.

EU is also partially edging from petrodollar.

US sanctions are boosting those processes, because more and more countries realizing its vulnerability. But dedollarization is still complex and hard to achieve.

Maintaining economical ties is also important for it, and here China is far above all others: enter image description here enter image description here

9
  • 2
    Not my DV since this answer is somewhat correct, but the crypto-yuan and the crypto-ruble have little in common despite their similar names. The latter was indeed created to make Russia-Venezuela transaction easier, but Russia's central bank has no plans for a cryptocurrency that can be used domestically. The crypto-yuan is exactly the opposite in these regards (if you read the article you've linked to).
    – Fizz
    Jan 21 at 13:16
  • 3
    I guess you don't understand the difference between a digital currency and a cryptocurrency.
    – Fizz
    Jan 21 at 13:25
  • 1
    Yeah you're right, the crypto-yuan is basically the same kind of instrument as the "digital ruble"; both are CBDCs. I don't know how the crypto-ruble used between Russian and Venezuela relates to the digital ruble (that's going to be used domestically. They could be completely different instruments.) By the way, CBR itself explains "Why a digital ruble is not a cryptocurrency" cbr.ru/eng/analytics/d_ok/dig_ruble
    – Fizz
    Jan 21 at 13:37
  • 1
    @user2501323 please explain "carrying lantern under the basket". It is not an English idiom.
    – user253751
    Jan 21 at 22:14
  • 1
    @user253751 I guess it is the same as "hiding its light under a bushel" (which is an English idiom at least 400 years old).
    – alephzero
    Jan 22 at 1:18

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .