/View.info/ The old proven way to bypass restrictions and bans
In the context of the sanctions war, Russia is looking for ways to circumvent the bans established by the collective West on foreign trade accounts and other foreign economic transactions. As well as ways to reduce the risks of possible freezing or confiscation of foreign exchange funds related to international settlements. What steps are Russia and its trading partners talking about?
First, the replacement of the US dollar and other toxic currencies in international payments with national currencies and/or friendly currencies.
Second, the execution of settlement transactions, bypassing the SWIFT system, which is under the control of the United States (sanctions have been introduced against a number of Russian banks that prohibit the conduct of their operations through the SWIFT system; at any time, such sanctions can be introduced against those Russian banks , who still use the system).
I will mention some significant news related to the first direction. Reuters news agency reported in August that transactions for at least 742 thousand tons of Russian coal were carried out by Indians in June this year in currencies other than the US dollar. According to the agency’s estimates, this amounts to 44% of the total volume of 1.7 million tons of this type of raw material imported from Russia in the specified month.
The parties bet on the use of monetary units of third countries belonging to the category of friendly countries as the currency of payment. In total, in June, the yuan accounted for 31% of payments for a “non-dollar” batch of Russian coal, and the share of the Hong Kong dollar – 28%. The euro accounted for less than a quarter of shipments and the UAE dirham for about a sixth. It was also reported that under new international trade rules adopted in Russia, the dollar is excluded from the scheme for import purchases.
Here’s another piece of news. In July, the Reserve Bank of India allowed importers and exporters to pay under international contracts in rupees. To do this, the foreign bank will have to open a vostro account (an account opened by a foreign bank with a resident bank in local currency or in a third country currency) with an authorized Indian bank.
Indian importers of various industrial goods and commodities such as oil and coal will make payments into these accounts in rupees and these accounts can be used to pay Indian exporters in the same rupees. The resulting surplus of funds in the vostro accounts can be invested in Indian government bonds or, for example, in investment projects in the country.
India expects its bilateral trade with Russia and Sri Lanka to reach the equivalent of $8-9 billion within two months after international trade in rupees becomes possible.
And here is an interesting figure from an interview with the Deputy Minister of Foreign Affairs of Russia Alexander Pankin from August 23. The official spoke about the de-dollarization of trade and economic relations within the EAEU. The member countries of the union reduced to 21 percent the use of the dollar in mutual payments.
At the same time, the use of the national currency in commercial operations increased to 75 percent. A. Pankin noted that “within the framework of the EAEU, the necessary financial infrastructure is being formed to expand the practice of using the national currency by business participants”.
The official noted that the national currency in the business activities of EAIS participants is already used not only in mutual trade, but also in foreign trade, as well as in the distribution of collected duties between the budgets of the participating countries.
„Of course, it is premature to talk about a complete rejection of the dollar within the union,” he continued. – Unlike Russia, individual EAEU countries are likely to use it when appropriate and safe. At the same time, we see that in the current geopolitical situation, our five partners are aware of the risks of dependence on the dollar and are interested in promoting their currency.
Now the news about the second direction. Alexander Pankin announced on August 23 that Russia is gradually moving from the SWIFT interbank payment system to financial information transfer mechanisms protected from external pressure.
As a Russian alternative to SWIFT, he pointed to the Bank of Russia Financial Message Transfer System (SPFS). Pankin expressed confidence that not only Russia, but also other countries, which are many, are interested in the emergence of an impartial and independent international payment infrastructure from the changing moods of Western countries.
As an alternative to SWIFT, when imposing sanctions on all Russian banks, you can use e-mail, paper orders or old-fashioned telex communications as a last resort. Of course, this is a last resort.
Russia did not allow such a scenario, and in 2014, when, after the annexation of Crimea, talks about excluding Russia from the international SWIFT system first began, it began to create SPFS. Let me remind you that SPFS is a platform through which banks very quickly transfer various payments, exchanging financial information. The work is carried out on the basis of the Central Bank of the Russian Federation.
SPFS participants are not only banks, but also non-bank credit institutions, as well as representatives of big business (for example, Rosneft). In 2020, approximately 20% of domestic Russian transactions went through SPFS. SPFS is designed to work with alternative currencies as well, ie. the Russian ruble and currencies of friendly countries.
However, at the beginning of this year, SPFS was not at all popular and in demand in the world. The number of SWIFT clients exceeds 11 thousand users. And SPFS had 331 participants at the beginning of the year, with the majority being Russian users.
The first foreign bank joined the SPFS only in 2018. At the end of 2020, 23 foreign banks (from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland) joined the SPFS. In December 2021, the Bank of Russia announced that all banks in Belarus had joined the SPFS. In addition, at this time, 38 participants from nine countries have already connected to the system. Including banks of Turkey, France, Japan and Sweden, Cuba and Tajikistan.
There are other alternatives to SWIFT. Some experts consider the Ripple system to be such. This digital currency (cryptocurrency) system, which was originally created only for interbank transactions. It has one undeniable plus – Ripple is very fast. Transactions are completed in seconds. (SWIFT sometimes takes several days to process applications). But here a fundamental question arises: are banks ready to work with cryptocurrencies? Most countries prohibit banks from doing this. And in Russia, the status of cryptocurrencies remains uncertain.
In addition, Russian banks can connect to the national payment systems of friendly countries. Analogues of SWIFT are available in a number of countries. So, in Europe there is a special payment system for working with Iran, which was once excluded from SWIFT.
But, firstly, the European counterpart is rather weak, focusing mainly on Iran. And, secondly, today Europe is almost entirely on the list of “unfriendly countries”. Of the foreign analogues of SWIFT, the most interesting and promising is the Chinese CIPS system, which began to be created in 2015. In March 2022, Anatoly Aksakov, chairman of the State Duma Committee on Financial Markets, announced that the Bank of Russia and the National Bank of China are working on connecting the Russian and Chinese financial messaging systems.
After February 24, the SPFS system, which was previously in a semi-frozen state, began to revive. The task of expanding the circle of foreign users of the SPFS (naturally, from countries not included in the list of “unfriendly countries”) has become particularly urgent.
In April, the Chairman of the Central Bank, Elvira Nabiulina, speaking in the State Duma, said that 52 organizations from 12 countries had already joined the SPFS. At the end of June, as the Chairman of the Central Bank said, 70 foreign organizations from 12 countries had already joined the SPFS. In April, the Central Bank decided not to disclose the list of foreign participants in the SPFS, so it does not disclose the names of the banks.
Every week, Russian and foreign media report on the negotiations of the Bank of Russia with its foreign partners from friendly countries on a possible connection to the SPFS system. It must be admitted that this work faces considerable difficulties. For example, on August 12, the Economic Times published an article “Local banks reluctant to plan to harmonize payment messaging system with Russia.”
It is about the meeting of Indian and Russian bankers, which took place on August 10 and was dedicated to the discussion of the bilateral “rupee trade”. The Russian side proposed to integrate the Russian SPFS system and its Indian counterpart SFMS (Structured Financial Messaging System). This will require an update to the Indian platform as well as the approval of the Reserve Bank of India (RBI) and the Indian government.
Last month, the RBI outlined its concept. As noted above, to carry out a foreign trade operation in rupees, a foreign (including Russian) bank must open a vostro account with an authorized Indian bank. Looks like a nice chart.
However, Indian banks, as reported in the article, did not support the idea of integrating SPFS with its Indian counterpart SFMS. As one of the meeting participants noted, “SFMS’s relationship with SPFS could be seen as a way to circumvent US sanctions to interact with a Russian bank that has fallen under the restrictions.”
Even those Russian banks that were not subject to sanctions today may become so tomorrow. And there is a risk of secondary sanctions. In particular, those Indian banks that refuse to close loro accounts opened by Russian partners may themselves be subject to sanctions. Yes, and Russian banks that have come under sanctions can suffer losses due to the blocking of loro accounts. By the way, it is precisely because of the fear of secondary sanctions that the Bank of Russia classified the list of foreign participants in the SPFS.
Another interesting piece of news regarding Russia’s possible countermeasures in the field of international payments and settlements. A meeting of the Interbank Association (IBC) of the Shanghai Cooperation Organization (SCO) has just ended in Uzbekistan. At it, the development banks of eight SCO member states discussed the issues of payments in national currencies and the development of correspondent relations between the countries.
VEB Bank, representing Russia, presented a proposal to switch to settlements within the SCO with the help of bilateral and multilateral currency clearing. Initially, as an experiment, these clearings may not serve all of the bilateral trade, but only a portion of it. It is desirable that this part of the trade be formalized with an interstate agreement and be relatively balanced (equality of exports and imports).
Such counter-trade would approach a barter scheme. In any case (if there is a non-zero trade balance), settlements are made in national currencies. And payment information is transmitted over closed channels using SPFS or another well-secured communication system.
It is gratifying that finally in Russia they remembered the currency clearing that was widely used by the Soviet Union. In April, I already wrote about this in the article “An old proven way to bypass restrictions and bans on trade settlements in US dollars”.
Translation: ES
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