BRICS vs. Swift: Russia spearheads payments plan to guard against U.S. sanctions

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Russia and its BRICS partners are developing cross-border alternatives to U.S.-dominated payments systems such as Swift, driven by the rise in cross-border trade and a desire to find non-dollar alternatives to international payments systems vulnerable to sanctions by the U.S. government.

The U.S. can use its might to exclude sanctioned banks and corporations from the global banking infrastructure, as international banking transactions involving multiple currencies require conversion into U.S. dollars. This necessitates the use of U.S.-based intermediary banks and Swift, which countries such as China, Russia, Iran and Turkey argue enables countries targeted by the latest U.S. foreign policy to be excluded from international trade.

In March, the Lower House of Russia’s Parliament approved the use of Bank of Russia’s SPFS (System for Transfer of Financial Messages) system for international transfers. The likeliest partners for this system are among the BRICS nations — Brazil, Russia, India, China and South Africa.

Russia began developing SPFS as a Swift alternative in 2014 after the introduction of Western sanctions against Moscow for annexing the Crimea. SPFS’ purpose was to prevent Russia from being cut off from the global financial system, as has happened with Iranian banks. So far, SPFS has been used just for domestic interbank financial messaging within Russia, and some 500 companies including major Russian banks are participants in the system.

However, Russia has talked to China, India, Iran and Turkey about joint use of SPFS, according to Reuters. Bank of Russia Gov. Elvira Nabiullina said in June that “banks from several countries are going to join (SPFS) and that test connections already exist.”

China has effectively developed a dual banking system, enabling one set of banks to work with the U.S. and another to deal with countries subject to U.S. sanctions. Also, the People’s Bank of China allows currency swaps between partner banks to support non-dollar-based trade in the Asian region, and China has developed the China International Payments System (CIPS) to enable clearing and settlement for cross-border renminbi-based trade. RT reported in March that several Russian banks have joined CIPS to facilitate payments transactions with China.

The BRICS initiative faces an uphill struggle, as banks participating in a potentially sanctions-busting alternative to Swift could risk retribution.

“Establishing an alternative payment system to bypass U.S., EU and UN sanctions would be seen as provocative,” said U.K.-based consultant Bob Lyddon. “No bank would participate if it felt at risk of being taken off Swift or excluded from U.S. dollar correspondent banking services. The big Chinese and Turkish banks, especially Turkish banks controlled by European banks, have far more diverse businesses than just trading with other BRICS countries, and wouldn’t participate in the BRICS system if they risked losing their access to Swift — without these banks, the BRICS system cannot fly.”

Also, there is risk of further straining what are already difficult trading relationships between the U.S. and China and other countries.

“Countries like Turkey and China have reason to not antagonize the U.S., as their interests in U.S. dollar and financial system transactions are, now and in the near-term, more compelling than any interests served by a Russia-built alternative payments platform limited to a handful of countries,” said Hdeel Abdelhady, principal attorney at MassPoint Legal and Strategy Advisory in Washington, D.C. “But, ultimately, these countries’ long-term goals might be decisive. If BRICS countries and other nations see long-term systemic benefits in alternative payments infrastructure, they may be more willing to endure any near-term costs.”

Other analysts interviewed for this article said it is realistic to expect Russia can build an alternative to Swift to facilitate trade with countries subject to financial sanctions.

“The technology for non-U.S.-dollar cross-border payments exists, and Swift isn’t the only option for these transactions,” said Erika Baumann, senior wholesale banking analyst at Aite Group. “We’re seeing technology vendors emerge that have the ability to fill the niche of serving emerging regions.”

The technical tools for building alternatives to Swift are in place, agreed Steve Murphy, commercial and enterprise payments analyst at Mercator Advisory Group.

“These include blockchain-based cross-border networks such as IBM World Wire, the JPM Chase IIN (Interbank Information Network) and JPM Coin as well as RippleNet,” he said.

The search for an alternative to the U.S. dollar also extends to mobile payments. The BRICS nations are developing the cloud-based BRICS Pay mobile payment service, which will use a mobile wallet similar to Apple Pay and link the BRICS countries’ own payment systems.

With the exception of South Africa, the BRICS nations have their own independent domestic card schemes — China UnionPay, India’s RuPay, Brazil’s ELO and Russia’s Mir system.

BRICS Pay would enable Brazilians, Russians, Indians, Chinese and South Africans to use their own national currencies as a direct basis of exchange for foreign payments.

Russian, Indian and Chinese consumers have already strongly adopted digital P2P payments in their home countries, as seen with the success of Alipay, Paytm and WeChat Pay. So being able to make cross-border mobile payments is a natural extension of the functionality they are used to.

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