Russia sees Chinese financial deepening to keep money flowing

NRational blogger China has a new fascination: the global payment system. Vladimir Putin’s invasion of Ukraine, following Western sanctions on Russia, has prompted Internet pundits to praise the merits of the cross-border interbank payment system.CIPS), On which Chinese banks transfer and clear yuan-default payments around the world. Some have even used abusive language SwiftBelgium-based financial messaging system that has begun to exclude Russian banks from international payments.

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CIPS And Swift Far from being a family name in China. But widespread sanctions have been imposed on Russia Swift Some of its banks, and its central bank – have shed light on China’s indigenous financial networks and could use them to help Russia. There are three primary Chinese financial channels to help – two valid, one not. None of these are remotely adequate alternatives to the Western financial system that Russia has lost.

First, consider the direct connection between the central banks of the two countries, which is not required Swift Messaging to make transactions. Russia has about ৯ 90 billion worth of mainly yuan-denominated deposits in China’s central bank. It has also signed a 150 billion yuan swap line agreement with China. Analysts at investment bank Natixis believe the funds could be used to finance imports from China if other trade-financing routes to the dollar are blocked.

However, the trade will remain largely in yuan, limiting what Russia can buy. Chinese regulators are still keen to avoid American “secondary” sanctions. Initial sanctions target Russian companies and American companies that work with them. The secondary selection has not yet been used, but will target third parties outside the United States who communicate with Russian companies, even if the transaction is permitted by local law. Allowing Russia to sell yuan-denominated assets to boost the dollar could scrutinize it, and Chinese officials could go beyond what they would like to do for their friends in Moscow.

Since then, there have been several complex and extensive financial networks that China has built over decades. Take, for example, the web of state-owned banks that have been set up in commercial centers around the world. China’s banking regulator may have said on March 2 that the country would not join Western sanctions, but that most of its major banks would abide by them, especially those that have the most contact with the Western financial system and have legal entities residing in the United States. These large corporations, which handle the bulk of trade financing between the two countries, are less likely to be blocked from dollar clearing in order to conduct dollar-directed trade with Russia. According to Neil Shearing of Capital Economics, a consultant, maintaining full access to global financial markets is “more valuable than anything Russia”.

UnionPay, a Chinese state-owned bank-card firm, is another strong financial network. It is set to gain market share in Russia following the departure of Visa and MasterCard, which was announced on March 5. Several Russian banks have announced that they will move to UnionPay, which already has a significant presence in the country.

However, this change will not come easily. In Russia, UnionPay’s network is small; Many banks have no existing relationship with the company. The problem for Russians abroad is that, despite being in more than 180 countries, UnionPay is a frontier service in the US and Europe, according to Jason Eberg of Oliver Weiman, a consultant.

CIPSMeanwhile, Chinese bloggers hope that the miracle will not be solved. To protect its capital account, China allows foreign banks to link CIPS Only indirectly, through and using Chinese clearing banks Swift Messaging, notes Edwin Lai of Hong Kong University of Science and Technology. This means that Western sanctions can still apply to any of these transfers SwiftRussian banks and foreign banks are banned.

A final route for financial support would come through backchannel banks that would avoid sanctions. China has a long history of turning a blind eye to small banks financing trade with US-targeted countries. A. These activities usually occur on a small scale. And many are caught up in the law and banned themselves. Bank of Kunlun was targeted by the US in 2012 for doing business with an Iranian bank. Some small Chinese banks may take risks with Russia, but they will be unable to provide the large-scale support they need.

As everyone has said, Sino-Russian financial relations seem to be weaker than Russia had hoped. The situation could raise questions about the flaws in China’s efforts to build a global financial network. For CIPSThe problem is very clear. In order to maintain control over capital flows, China has not directly linked the system to banks outside mainland China, Standard Chartered, a British bank excluding long-established links with China. CIPSIts domestic messaging system only works with Chinese banks. To improve it, China must launch it and provide more direct connections with foreign banks. The lack of such links is reflected in the amount of transactions in the system. It processes only 13,000 per day, which is close to twenty percent of the number operated by America’s internal-payment system, as it is known. Chips.

Chinese President Xi Jinping has described Putin as his “best friend.” The Russian conflict reveals some of China’s financial weaknesses. This can make the relationship less friendly. 3

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This article is published in the Finance and Economics section of the print edition under the title “Pipe Dream”.

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