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Is China’s CIPS the Solution to Russia’s SWIFT Ban?

In: Finance

First, you may wonder what is CIPS? CIPS stands for Cross-Border Interbank Payment System, which was created in October of 2015. It is a settlement and payment clearing system for transactions that use the yuan, also known as the renminbi, or “people’s currency.” The system is supervised by China’s central bank but is run by CIPS Co. Ltd in Shanghai. Its use has steadily increased, with an average daily transaction value of 388.8 billion yuan ($61.3 billion) as of February according to data from the company, about a 50% increase from a year ago.

The People’s Bank of China last year set up a joint venture with SWIFT to offer local network services and store message information in China. By size, CIPS is miniscule compared to SWIFT, which has more than 11,000 members and handles more than 42 million transactions a day. As of February CIPS had about 1,300 participants, primarily in China, and processed about 13,000 transactions a day.

CIPS was created as part of China’s strategy to encourage global usage of the renminbi, which remains small compared to the size of China’s economy. The yuan was only about 3.2% of global transactions in January, according to SWIFT.

China is seeking to decrease its dependence on the Western financial system and use of the dollar, especially after the U.S. extended economic sanctions on Iran in 2010 and then sanctioned Russia for its invasion of Crimea in 2014.

In order for CIPS to help Russia overcome the sanctions imposed by The U.S. and its allies, It would only work if the transactions are in renminbi which is likely only when Russia and China are settling direct trades and both parties were CIPS members. Such payments remain small: They increased to around 6% of transactions in 2020, compared to 2% in 2013. In reality, even as the two countries have sought to move away from using the dollar in trade, that would mean largely switching over to the euro, which is also now sanctioned.

Russian lenders are looking to start using China’s UnionPay system for credit cards after Visa Inc. and Mastercard Inc. suspended operations in Russia. That could allow Russians to make some payments overseas, with UnionPay operating in 180 countries and regions.

CHIPS, or the Clearing House Interbank Payments System could be a more appropriate option for Russia to circumvent the sanctions. CHIPS is the largest privately owned U.S. dollar clearing system, according to its website. It handles close to 30 times the daily transaction value for CIPS, or about $1.8 trillion in payments a day.

Two of the biggest financial institutions in China, Industrial & Commercial Bank of China Ltd. and Bank of China Ltd., have already restricted financing for purchases of Russian commodities, especially in dollars.

Despite pressure from allied nations, China hasn’t joined western countries in sanctioning Russia and has vowed to continue normal trade relations with Russia, which is seen as a strategic partner.

U.S. Treasury Secretary Janet Yellen said that she hadn’t seen “evidence that China is providing Russia with any significant workaround for our sanctions.”

It’s unlikely that China’s largest state-owned banks would seek to bypass Western sanctions, considering that their international operations require access to dollar transactions, which could be cut off if they were caught via secondary sanctions.

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