The IMF apprehends “fundamental” changes in the global economic and political order resulting from the ongoing conflict in Ukraine. These changes would include revamping existing global payment networks. The reorganization will likely be accompanied by a surge in the use of digital currencies and the growth of global geopolitical identities around their use.
The exclusion of several Russian banks from SWIFT’s largest global payment network and the suspension of Visa and Mastercard operations in Russia have prompted Russia to seek other real-time settlement options to do business with the rest of the world. world. These options, for the foreseeable future, would mean integration with non-Western, more specifically, non-US-dominated financial systems.
One such alternative is the Cross-Border Interbank Payments Systems (CIPS) operated and managed by the People’s Bank of China. CIPS uses the same standards as SWIFT and the two have an operational agreement. However, the volume of transactions processed by CIPS is hardly comparable to that of SWIFT. This is because CIPS transfers yuan-denominated transactions across borders. Only financial institutions that have significant relationships with mainland China and Hong Kong are actively engaged with CIPS. CIPS cannot offer Russia – or its trading partners – a healthy alternative to SWIFT.
There are few options in the current global financial space dominated by the US dollar and other Western-backed currencies like the euro, Japanese yen and British pound that Russia can cling to. to avoid the blow of Western sanctions. However, its options and prospects are better in digital currencies.
Private digital currencies, or cryptocurrencies, are already widely used following the conflict in Ukraine. Ukraine has used crowdfunding through cryptocurrencies to raise resources to fight the conflict. Such options could even be explored by sanctions-crippled Russian businesses. However, the volatility of most cryptocurrencies could make many companies reluctant to trade them. In this respect, trading stablecoin sovereign digital currencies would clearly be a much preferred option.
The current global landscape of sovereign digital currency advancements places Asia, Africa and the Caribbean far ahead of Europe and America. Seven Eastern Caribbean countries, the Bahamas and Nigeria, have already launched sovereign digital currencies. Fifteen countries are at the pilot stage. These include leading 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 like China, South Korea, Russia, Saudi Arabia and South Africa. From the Russian point of view, it should be noted that apart from China and Hong Kong, Saudi Arabia, the United Arab Emirates and South Africa have not yet joined the West in financially sanctioning the Russia.
This does not mean that countries that have not joined the West in sanctioning Russia, including India, would necessarily subscribe to alternative payment frameworks to stay engaged in business with Russia. For most of these countries, such an option entails additional complications in their international strategic relations. China, however, is a distinct exception. Indeed, the Ukrainian dispute could mark the beginning of greater Sino-Russian cooperation on sovereign digital currencies.
Operationally, Russia and China have made significant progress on sovereign digital currencies. Earlier this year, the Central Bank of Russia launched the Digital Ruble Pilot Program involving twelve Russian banks. Some banks have started testing customer-to-customer (C2C) retail transactions with the digital ruble. These should be extended to business-to-customer (B2C) and business-to-business (B2B) transactions. China has also launched e-CNY (Chinese Yuan) for retail on a trial basis. e-CNY wallets have become available for public download via smartphones running both Android and iOS systems. In what is perhaps the most comprehensive indication yet of China’s plans to introduce e-CNY in cross-border transactions, it made the digital currency available to overseas visitors during the Olympics in winter held recently in Beijing.
For Russia and China, closer integration on digital currencies and cross-border payment networks is a “win-win” outcome. Integration will help Russia mitigate some of the long-term negative effects of exclusion from Western global payment networks. Interoperability with e-CNY will bypass potential third-party roles (eg SWIFT, credit cards) in international cross-border transactions. These are currently 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 e-CNY as the dominant global digital currency and internationalize the Chinese Yuan. The ultimate goal of such positioning will be to challenge the current pre-eminence of the US dollar, a challenge it has not yet been able to meet effectively in the traditional global monetary space. A weaker US dollar will lead to the marginalization of Western-dominated payment systems like SWIFT in the long run.
It is still too early to ask whether sovereign digital currencies will be one of the main distinguishing features of a world order that takes a fractured form. Other conflicts like Ukraine will speed up the process by accelerating the use of digital currencies.
The author is Senior Research Fellow and Head of Research (Business and Economics), Institute of South Asian Studies, NUS