SWIFT Sanctions on Russia Draws Renewed Attention to Possible e-CNY Growth

A decision to kick Russia out of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) could benefit China’s cross-border payment system and accelerate its digital currency development, market trends suggest.

According to reports, shares of leading Chinese companies involved in developing payment infrastructure for the digital yuan (e-CNY) have risen sharply on Monday Feb 28 following the SWIFT sanctions announcement. Reuters identifies companies like Newland Digital Technology Co, Lakala Payment Co and Client Service International Inc as among the beneficiaries.

Aside from the stocks of these payment-related Chinese companies rising, the report also points out that the removal could help with the acceleration of the process of de-dollarisation and is crucial to the yuan’s globalization agenda.

The European Union, as well as other Western countries like the US, over the weekend proposed that certain Russian banks be removed from SWIFT. “This would ensure that these banks are disconnected from the international financial system and harm their ability to operate globally,” says the EU’s Ursula von der Leyen in her announcement. 

As the world’s leading interbank system, Russian banks’ removal from the cooperation will stop them from being able to conduct financial transactions worldwide and also affect import and export processes in the country. The disruption will particularly affect payments for Russia’s energy and agricultural products as affected banks would have to deal directly with one another which takes time, costs more and eats into revenues for the Russian government.

e-CNY, CIPS and US dollar

Russia’s options would be the e-CNY and China’s Cross-Border Interbank Payment System (CIPS), which insiders say could raise the potential to break the dollar’s hegemony.

Latest CIPS update shows the platform is being used by 1280 participants – 934 of which are from Asia (including 541 from Chinese Mainland), 159 from Europe, 43 from Africa, 29 from North America, 23 from Oceania, and 17 from South America, covering 103 countries in all. It is not as global like SWIFT which has over 11,000 participants in more than 200 countries.

However, the CIPS still offers Russia a suitable alternative to fall back on especially considering that China and Russia are already working on a proposed independent trade network for both countries to rely less on the U.S.-led international financial system, SWIFT, for trades. 

Nonetheless, the developing situation has the propensity to accelerate e-CNY growth to serve Russia’s immediate interest as well. It could be recalled that a recent twist to e-CNY’s possible use for cross border transactions came last week as the Chinese province closest to Russia announced it is developing a platform economy that could see an  extended pilot of the e-CNY in Heilongjiang. Adding the e-CNY pilot plan to Heilongjiang’s existing connectedness to Russia strengthens the argument for the possibility of a cross border arrangement. 

China is Russia’s biggest trading partner especially for its oil – which makes up about 63% of its revenue – whose price has risen as a result of the sanctions. With these sanctions, countries like Iran, North Korea and now Russia are making the shift “to convert to e-CNY”, says a former World Bank consultant, Joel Shulman.

Long before now, though, the likes of the first US Treasury attaché to Qatar and Kuwait, Michael Greenwald, have maintained that the e-CNY offers hope “for an alternative financial narrative to countries like Russia and Iran” which he states have reportedly been interested in ways to break free from the US-centric global financial order. 

In the next few years, China could force partner countries in the Belt and Road Initiative – including Russia and some European countries – to use e-CNY, Greenwald notes in his analysis for the Belfer Center for Science and International Affairs of the Harvard Kennedy School.