China has helped Russia to use Renminbi based payments for its international payments in view of Russia’s exclusion from Society for Worldwide Interbank Financial Telecommunication (SWIFT).
The decision of the West to expel Russia from SWIFT has opened up the possibility of fast development of Renminbi as international currency.
The West decided to exclude Russia from SWIFT to cut off Russian financial institutions from the international financial system after February 24, 2022. SWIFT provides a trusted messaging platform that enables banks to send their counterparts instructions very fast on fund transfers.
Russia was excluded from SWIFT as a result of a ban on its banks by the West. The Russian banks mentioned in the Western sanction list were unable to use SWIFT. This was expected to cripple Russia’s external payments and transactions system. In addition to already economic sanctions from the West, the fresh sanctions were expected to cost the Russian economy dearly. According to an estimate Russia had already lost an estimated USD 170 billion due to financial sanctions by mid- 2016 due to existing sanctions.
On March 01, the European Union, United Kingdom, Canada and the United States finally agreed to remove seven Russian banks from SWIFT messaging system. The Russian banks banned after the Ukraine War included Bank Otkritie, Novikombank, Promsvyaz bank, Russia Bank, Sovcom Bank, VEB and VTB. However, EU ambassador’s had decided then not to impose restrictions on the country’s largest bank Sberbank, which is partly owned by Russian gas giant Gazprom. Gazprombank was also not sanctioned.
According to independent analysis by the World Bank, the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD), in 2022 Russian GDP was anticipated to drop by at least 3.4% in the best case scenario. A major part of the negative effect on Russian GDP is being attributed to its exclusion from the SWIFT. A European Council report alleges that figures are proving that economic sanctions are yielding results.
Russia tried to find ways to minimise the bite of sanctions. Russian businesses are using RMB to settle more of their trade. They are also borrowing more in the Chinese currency. Russia has got a currency in RMB that could allow it to settle its international payments without using dollars while China has got the opportunity to internationalise RMB at a faster pace.
Taking advantage of the Western sanctions, Moscow Branch of the Industrial and Commercial Bank of China (ICBC) has augmented its role in settling financial transactions denominated in RMB between China and Russia as it is connected to both the Chinese cross-Border Inter-Bank Payments System (CIPS) and Russian SPFS2. During the last 10 months, the total assets of the Moscow branch of ICBC increased by more than 200% in just three quarter of 2022 and customers deposits by 290%/. Besides, almost 48 financial institutions opened an account with the ICBC Moscow during this period.
According to a study by Promsvyazbank, the RMB was involved in 31% of all foreign exchange settlements of Russian SMEs in 2022 as against 28% transactions utilising Euros. The trend has also been confirmed in other large Russian banks including Tinkoff, Absolute Bank, Zenit, VTB and Tochka.
Settlement of Russia-China bilateral trade in USD has decreased from close to 100% in 2013 to about 15% last year. Keeping in view the efficacy of RMB in settling the international payments Russia has increased RMB in its foreign exchange holding and become one of the world’s top 15 RMB trading economies for the first time in 2022.
For China it is an opportunity to internationalise RMB at a faster pace. By the end of 2021, China had signed bilateral currency settlement agreements with Vietnam, Indonesia and Cambodia separately as well as currency swap agreements with Indonesia, Malaysia, Singapore and Thailand worth about 800 billion RMB. The RMB was the 8th most traded currency in the world in 2013 and now it is the 5th most traded currency in the world.
In February 2015, RMB became the second most used currency for trade and services and reached the 9th position in forex trading. Russia’s compulsion to use RMB would give a new fillip to internationalisation of RMB. As of end-2021 China had signed bilateral currency swap agreements with 22 economies along the BRI.
A new financial architecture is appearing as an alternative to the existing dollar based system and RMB is fast rising as the next currency after Dollar, Euro, Pound Sterling and Yen.
The sanctions would not only affect only Russia, but as highlighted by the IMF head in the ongoing World Economic Forum the global economic outlook continues to worsen and forecast has been downgraded to 2.4% for 2023.