Ruble-yuan trading is up over 1,000% since Russia's invasion of Ukraine. Image: Facebook

Finance

China can break SWIFT sanctions but at a high cost

By David P Goldman

February 28, 2022

China’s Cross-Border International Payments System (CIPS) can replace SWIFT for Russian trade financing, a Chinese academic told the Shanghai-based Observer news site (guancha.cn) in a February 27 interview.

Over the weekend, the United States and its allies excluded a list of Russian banks from the SWIFT, or Society for Worldwide International Financial Telecommunications, network that clears interbank payments in US dollars and other Western currencies, although Russia has not yet been subject to a blanket exclusion.

Asia Times first reported on February 25 that China’s alternative payments system could help Russia bypass Western sanctions.

In the past, exclusion from SWIFT meant complete isolation from global markets and normal trade financing, as in the case of American sanctions against Iran. But the CIPS system, which China began to develop in 2015, is now fully operational.

China might be reluctant to help Russia circumvent SWIFT sanctions, said Professor Chen Xi of the Shanghai Advanced Institute of Finance at Jiaotong University in an “Observer” interview because the United States might retaliate by imposing sanctions on Chinese banks. That would have disastrous consequences, Chen added.

Risks to the financial system cut both ways, the German daily Die Welt wrote on February 27. “CIPS already handles US$50 billion of daily transactions. That is considerably less than the $400 billion of transactions that pass every day through SWIFT, but CIPS volume has increased rapidly,” the German newspaper reported.

“If Russia and China linked their systems and offered an alternative to other authoritarian states, this could threaten American domination of financial markets,” Die Welt concluded.

SWIFT sanctions on Russia put the financial ball in Beijing’s court. Photo: AFP / Demyanchuk/Sputnik

Jiaotong University’s Chen also warned that sanctions on individual banks present a risk to the Chinese payment system. “The RMB cross-border payment system still relies on banks as nodes, and these nodes can be sanctioned and pressured,” the Chinese academic said.

“For example, the payment system built by China may be independent of the SWIFT system controlled by the United States, but the intermediate nodes are all banks. The United States can sanction these banks. If no one is allowed to do business with Chinese banks, and other countries cooperate with these measures, then this system will not work.”

“Russia also built its own independent payment system,” Chen said. “It also could adopt the cross-border payment system established by China as a potential replacement for SWIFT. But the key point is that these international cross-border systems all require the participation of actual banks.

“The United States is likely to threaten all financial institutions. If anyone deals with Russia, it might sanction them. If this is the case, the big Chinese banks may not dare to deal with Russia. In this case, Russia would only be able to do business with some small banks.”

But “if the United States sanctioned Chinese banks in this way, the damage to the global economy would be too great for anyone to bear,” Chen said.

Clearing systems like SWIFT and China’s CIPS provide secure data transmission for banks that clear customer payments. They do not deal directly with goods in trade, but only with bank payments for goods in trade.

Although CIPS is under the control of the Chinese government, the Chinese banks that it serves could be subject to sanctions, at least in theory. The financial consequences of such sanctions would be enormous.

China has a net foreign asset position of $4 trillion and holds $2 trillion of US Treasury securities. It is also by far the largest exporter in the world, with 15% of global export trade compared to 8% for the United States.

“In the final analysis,” Chen explained in the Observer article, “ the game between major powers depends on strength. If the United States doesn’t need Russian resources at all, and it doesn’t need Chinese products, it certain could impose severe sanctions.

“However, given the current level of international exchange, if trade between China and Russia were cut off completely, it would  take a long time for the United States to adjust to it, and the damage to supply chains would cause damage to the entire global economy.”

“A drastic measure probably would trigger a long-term financial and economic crisis, so the United States is also very hesitant to do this,” Chen concluded.