With the so-called “Special Military Operation” in Ukraine, some major world economies including the U.S., U.K., Japan, and EU had imposed sanctions on Russia. Consequently, leading to some international services stopping operations in the invader country.
After President Vladimir Putin started a military operation on Ukraine on Feb 24, U.S. President Joe Biden imposed economical and diplomatic sanctions on Russia. As a result, some companies are exposed to complying with the boycotts and must discontinue operations in Russia, including the money transfer service provider, SWIFT.
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“Everyone who now doubts whether Russia should be banned from Swift has to understand that the blood of innocent Ukrainian men, women, and children will be on their hands too. BAN RUSSIA FROM SWIFT,” tweeted Dmytro Kuleba, Ukraine’s minister of foreign affairs.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a Belgium-based cross-border money transaction service founded in 1973 and is connecting more than 11,000 banks and 200 countries.
Although Russia has an alternative to SWIFT, called the SPFS, which has been in development since 2014, it still can’t operate as effectively as the Belgian firm. This caused slower and more expensive transactions, even with some of Russia’s friendly countries, like China.
“On SWIFT, the allies committed to remove “selected” Russian banks from SWIFT. This is a good move. It means that the allies will couple blocking sanctions with targeted SWIFT bans,” said Eddie Fishman, an economy expert and member of Atlantic Council’s Eurasia Center. “Only banks that are sanctioned will be blocked from SWIFT. It will not be a blanket SWIFT ban.”
Crypto as the best alternative
The U.S. is still concerned with Russia’s pivot to cryptocurrencies. Although some major centralized crypto exchanges — including Coinbase, Gemini, and Binance — have told Bloomberg to comply with the international sanctions, Russians can still use decentralized exchanges and non-custodial wallets.
Since the U.S. dollar is the reserve currency of the world, these sanctions will have a strong effect on Russia’s international trade. Hence, the only path to evade sanctions is using crypto without the U.S. dollar.
Russia, in addition, has been developing its own central bank digital currency (CBDC), called digital ruble, that will operate as a cryptocurrency but in a more centralized manner. The project was announced in Oct 2020.
The digital ruble pilot is expected to launch soon after its prototype was completed in Dec last year. According to the Russian media, Tass, the pilot for the Russian digital currency will launch with 12 banks participating in early 2022. The CBDC project will allow Russia to be less dependent on the U.S. dollar, or even evade sanctions.
The Chinese leader, Xi Jinping, has already mentioned that his partnership with the Russian president has “no limits.” China, however, is one step ahead of Russia when it comes to a national digital currency.
China launched its digital currency pilot, digital yuan, in January with a mobile app called e-CNY — available for both iOS and Android. The most populous country banned crypto mining to open the doors for its centralized digital currency.
According to the SCMP, the e-CNY app had more than $13.8 billion in transactions with 261 million unique users.
One of the main reasons for the early rollout of digital yuan is the transaction facilitations before the Beijing Winter Olympics. The 1 billion WeChat app users can now purchase and use digital yuan, according to Investopedia.
Russia, however, can use China’s Cross-border Interbank Payment System (CIPS) along with the digital payment app, e-CNY, to run away with the sanctions. The main goal of CIPS was to help the yuan be used in international transactions.
According to Reuters, CIPS saw a 75% increase in total transactions in 2021, reaching 80 trillion yuan (around US$12.8 trillion). CIPS is used by “30 banks in Japan, 23 banks in Russia, and 31 banks in African nations.”
Not to forget, China and Russia have a very friendly relationship, and it’s not surprising if Putin goes all in for the Chinese payment system. Although the CIPS is relying on SWIFT, the numbers show its potential to “operate independently.”
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