The IMF apprehends ‘fundamental’ changes in the global economic and political order arising from the ongoing Ukraine conflict. These changes would include reorganisation of existing global payment networks. The reorganisation is likely to be accompanied by sharp increase in use of digital currencies and the growth of global geopolitical identities around their use. Exclusion of several Russian banks from the largest global payment network of SWIFT, and suspension of operations by Visa and Mastercard in Russia, has made Russia hunt for alternative real time settlement options for doing business with the rest of the world. These options in the foreseeable future, would mean integrating with non-Western, more specifically, non-US dominated financial systems.
The cross-border interbank payment systems (CIPS) run and managed by the People’s Bank of China is one such alternative. The CIPS uses same standards as the SWIFT and the two have an operational agreement. However, the volume of transactions handled by CIPS is hardly comparable to that of the SWIFT. This is because the CIPS moves yuan-denominated transactions across borders. It is only those financial institutions that have large dealings with mainland China and Hong Kong that are actively engaged with CIPS. CIPS cannot offer Russia—or its trade partners—a wholesome alternative to the SWIFT.
There are hardly options in the current global financial space dominated by the US dollar and other West-backed currencies like the euro, Japanese yen and the British pound that Russia can latch on to for avoiding the hit from Western sanctions. However, its options and prospects are better in digital currencies.
Private digital currencies, or cryptocurrencies, are already in extensive use following the Ukraine conflict. Ukraine has resorted to crowdfunding through cryptocurrencies for raising resources to battle the conflict. Such options might even be explored by Russian businesses crippled by sanctions. The volatility of most cryptocurrencies, however, might make many businesses wary of trading in them. In this regard, trading in stable sovereign digital currencies would clearly be a much-preferred option.
The current global landscape on progress in sovereign digital currencies puts Asia, Africa and the Caribbean far ahead of Europe and America. Seven countries from the Eastern Caribbean, the Bahamas and Nigeria, have already launched sovereign digital currencies. Fifteen countries are in the pilot stage. These include prominent economies like China, Russia, Hong Kong, South Korea, Thailand, Saudi Arabia, United Arab Emirates, South Africa, Singapore and Malaysia. Many of these economies are members of the G20 group of countries such as China, South Korea, Russia, Saudi Arabia and South Africa. From a Russian perspective, it is noteworthy that apart from China and Hong Kong, Saudi Arabia, United Arab Emirates and South Africa are yet to join the West in financially sanctioning Russia.
It doesn’t mean that countries that haven’t joined the West in sanctioning Russia, including India, would necessarily subscribe to alternative payment frameworks for staying engaged in business with Russia. For most of these countries, such an option entails further complications in their international strategic relations. China, though, is a distinct exception. Indeed, the Ukraine conflict might mark the beginning of greater Sino-Russian cooperation on sovereign digital currencies.
Operationally, both Russia and China have made significant progress on sovereign digital currencies. Earlier this year, the Central Bank of Russia launched the digital ruble pilot programme involving twelve Russian banks. Some banks have begun testing customer-to-customer (C2C) retail transactions with the digital ruble. These are to be extended to business-to-customer (B2C) and business-to-business (B2B) transactions. China too has experimentally launched the e-CNY (Chinese yuan) for retail use. The e-CNY wallets have become available for being downloaded by the public through smartphones running on both Android and iOS systems. In what is perhaps the most comprehensive indication so far of China’s plans to introduce the e-CNY in cross-border transactions, it made the digital currency available for use by overseas visitors during the recently held winter Olympics at Beijing.
For Russia and China, closer integration on digital currencies and cross-border payment networks, is a ‘win-win’ outcome. The integration will help Russia in mitigating some of the long-term adverse impacts of exclusion from Western global payment networks. Interoperability with the e-CNY will enable bypassing potential third-party roles (e.g. SWIFT, credit cards) in international cross-border transactions. These, at present, are dominated by Western financial intermediaries.
China, on the other hand, will be able to greatly expand the use of its digital currency by working with Russia. It will be able to position the e-CNY as the dominant global digital currency and internationalise the Chinese yuan. The eventual objective of such positioning will be to challenge the current prominence of the US dollar—a challenge that it has not yet been able to mount effectively in the traditional global currency space. A less prominent US dollar will lead to marginalisation of Western-dominated payment systems like SWIFT in the long-run.
It is still too early to reflect on whether sovereign digital currencies will be one of the major distinguishing characteristics of a global order that is acquiring a fractured shape. More conflicts like Ukraine will hasten the process by accelerating recourse to digital currencies.
(This article was originally published in Financial Express, reprinted here with the author’s permission)
Amitendu Palit is Senior research fellow and research lead (trade and economics), Institute of South Asian Studies, NUS, Singapore