US dollar banknotes next to China's yuan bills. Photo: AFP

Russia can use China’s Cross-border Interbank Payment System (CIPS) for its international trade after its major banks were removed from the US dollar-based SWIFT payment system in response to the Ukraine war, according to Chinese state media reports.

Several Chinese researchers were quoted by Xinhua and the Communist Youth League Central Committee’s website as saying Russia would not be seriously hurt by the Western world’s SWIFT ban as it had developed its own payment system – the System for Transfer of Financial Messages (SPFS) – since the Crimea crisis in 2014.

They said CIPS together with SPFS would continue to grow and become an important global interbank payment system.

Some Chinese commentators speculated Russia would be able to survive the recent round of sanctions imposed by the West over the Ukraine issue as it was not holding a lot of US dollar assets, but mainly gold, oil and foreign currency.

European countries would also be hit by the SWIFT ban as the cost for them to buy Russia’s energy would increase, they said.

On Saturday, the European Commission announced it was committed to ensuring that selected Russian banks were removed from SWIFT as it supported the Ukrainian people to resist Russia’s invasion.

It said the decision would disconnect the targeted Russian banks from the international financial system and harm their ability to operate globally. The commission also said it would impose restrictive measures to prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of global sanctions.

On Monday, Chinese state media described the SWIFT ban on Russian banks as a “financial nuclear weapon,” but they added that the ban would create new opportunities for CIPS.

China’s CIPS payment system is still in its infancy and small compared to SWIFT. Image: Facebook

Tan Yaling, director of China Forex Investment Research Institute, was quoted as saying in a Xinhua report that due to the close trading relationship between Russia and Europe, the SWIFT ban was a double-edged sword as it would hurt both sides.

Tian Dewen, the deputy director of the Institute of European Studies of the Chinese Academy of Social Sciences, said many European countries relied heavily on SWIFT to purchase Russian energy and they would be affected by the SWIFT ban on Russian banks.

Yang Xiyu, a researcher at the China Institute of International Studies, said in an article published by the Communist Youth League Central Committee that in the short run Russia would be able to survive the SWIFT ban as it had established its own cross-border payment system since the Crimea crisis in 2014 and started “de-dollarization” in 2018.

Yang said the SWIFT ban was a protracted war between Russia and the US and Europe, and that they would suffer from inflationary pressure as they could not buy cheap energy from Russia.

Xinhua said Russia held only $5.43 billion of US government bonds and less than $1 billion of US stocks and corporate bonds at the end of 2021.

According to the website of the yuan-based payment system, CIPS (phase 1) was launched in October 2015. There were 19 commercial banks in mainland China in the first batch of direct participants and 176 indirect participants from more than 50 countries and regions over six continents. 

Swift code bank logo is displayed on an iPhone 6s on top of Euro banknotes in this picture illustration made in Zenica, Bosnia and Herzegovina, January 26, 2016.   REUTERS/Dado Ruvic/File Photo
The SWIFT logo on an iPhone on top of Euro banknotes. Photo: Reuters / Dado Ruvic

Beijing said CIPS was a milestone in financial market infrastructure development in China, marking major progress in the building of a modern payment system that supports both domestic and cross-border payments of renminbi and accelerates the currency’s internationalization.

In May 2018, CIPS (phase 2), which supported more features including intra-day renminbi settlements for overseas participants and their local customers, was made fully operational. On Monday, CIPS completed 15,225 cross-border transactions involving 463.97 billion yuan ($73.4 billion).

Last year, the total business volume of CIPS amounted to 79.6 trillion yuan, up 75% from 2020.

At present, CIPS has 75 direct participants and 1,205 indirect participants. In Europe, the system’s direct participants are in London, Frankfurt, Zurich, Paris, Luxembourg, Hungary and Russia. Russia’s SPFS, on the other hand, has 400 users and covers foreign banks from countries such as China, Cuba, Belarus, Tajikistan and Kazakhstan.

In comparison, SWIFT is now used by 11,000 financial institutions across 200 countries or regions, including nearly 600 Chinese banks.

Due to the SWIFT ban, the Central Bank of Russia on Monday raised its benchmark interest rates to an unprecedented 20% from 9.5%, aiming to support the ruble, which depreciated about 30% on the same day. It also ordered companies to sell 80% of their foreign currency revenues.

The SWIFT ban did not mean Russia would not be able to continue its international trade and clearance as SPFS or CIPS could be a new choice, Dong Xiaopeng, deputy editor-in-chief of China’s Securities Daily, wrote in a commentary.

The symbol used for Russia's Kolion. Photo: iStock
Russia faces US and Western sanctions for its invasion of Ukraine. Photo: iStock

Since Iran’s central bank and financial institutions were cut off from SWIFT in late 2018, Iran lost half its income from oil exports and 30% of its external trade, he said.

However, a new payment system called the Instrument in Support of Trade Exchanges (Instex) was set up in January 2019 to facilitate transactions between Europe and Iran to avoid breaking US sanctions, he said.

“In terms of inclusiveness and adaptability, CIPS is comparable to SWIFT,” Dong said. “Of course, CIPS and SPFS systems are still smaller than SWIFT in terms of the number of participants and users, but over the long run, it is not impossible that the duo or one of them will grow into an important regional or even global infrastructure with considerable influence.”

Dong added that Russia could also use currency swap tools to settle its external trade without SWIFT, although such a method was complex.  

Read: China censors criticism of Russia’s Ukraine war

Follow Jeff Pao on Twitter at @jeffpao3