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Aug 25, 2022
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Finally, Russia remembered currency clearing

The old proven way to bypass restrictions and prohibitions

In the conditions of the sanctions war, Russia is looking for ways to circumvent the prohibitions that the collective West has established regarding settlements for foreign trade 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?

Firstlysubstitution in international settlements of the US dollar and other toxic currencies for national currencies and / or friendly currencies.

Secondlyconducting 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 their transactions through the SWIFT system; at any time, such sanctions may be introduced against those Russian banks that still continue to use by this system).

I will mention some significant news related to the first direction. The Reuters news agency reported in August that transactions for at least 742 thousand tons of Russian coal were carried out by Indians in June of this year in currencies other than the US dollar. According to the agency’s estimates, this amounted 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 staked on the use of the monetary units of third countries belonging to the category of friendly states 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 one-sixth. It was also reported that according to the new rules of international trade adopted in Russia, the US dollar is excluded from the scheme of coal import purchases in our country.

Here is another piece of news. The Central Bank of India in July allowed importers and exporters to pay on international contracts in rupees. To do this, the foreign bank will need to open a vostro account (account opened by a foreign bank with a resident bank in local currency or in the currency of a third country) with an authorized Indian bank. Indian importers of various manufactured goods and commodities such as oil and coal will make payments to these accounts in rupees, and these accounts can be used to pay Indian exporters in the same rupees. The resulting surplus of funds in 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 of rupee international trade being possible.

And here is an interesting figure from an interview with the Deputy Foreign Minister of Russia Alexandra Pankina dated 23 August. The official spoke about the de-dollarization of trade and economic relations within the EAEU. Member countries of the Union have reduced to 21 percent the use of the dollar in mutual settlements. At the same time, the use of the national currency in trade 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 the EAEU participants is now used not only in mutual trade, but also in foreign trade, as well as in the distribution of collected customs duties between the budgets of the participating countries. “It is, of course, premature to talk about a complete rejection of the dollar within the framework of the unification,” he continued. – Unlike Russia, individual EAEU states are likely to use it in cases where it is appropriate and safe. At the same time, we see that in the current geopolitical situation, our partners in the “five” are aware of the risks of dependence on the dollar and are interested in promoting their currency.”

Now the news concerning the second direction. Alexander Pankin announced on August 23 that Russia is gradually moving from the SWIFT system of interbank payments to financial information transfer mechanisms protected from external pressure. As a Russian alternative to SWIFT, he named the Financial Message Transfer System (SPFS) of the Bank of Russia. Pankin expressed confidence that not only Russia, but also other states, of which there are many, are interested in the emergence of an unbiased international payment infrastructure that does not depend on the changeable mood of Western countries.

As an alternative to SWIFT when imposing sanctions against all Russian banks, in extreme cases, you can use e-mail, paper orders or old-fashioned telex communications. Of course, this is a last resort. Russia did not wait for such a scenario, and in 2014, when after the annexation of Crimea, talks about disconnecting Russia from the international SWIFT system for the first time began, it began to create SPFS. Let me remind you that SPFS is a platform through which banks transfer various payments very quickly, 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 organizations, as well as representatives of large businesses (for example, Rosneft). In 2020, approximately 20% of domestic transactions in Russia passed through SPFS. SPFS is designed to work with alternative currencies, i.e. 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 at the beginning of the year, SPFS had 331 participants, the vast majority of which were Russian users.

The first foreign bank joined the SPFS only in 2018. At the end of 2020, 23 foreign banks connected to the SPFS (from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland). In December 2021, the Bank of Russia announced that all banks in Belarus had joined the SPFS. In addition, by this time 38 participants from nine countries had 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 system of digital currency (cryptocurrency), which was originally created just for interbank transactions. She has one indisputable plus – Ripple is very fast. Transactions take place within seconds. (SWIFT processes applications for several days). But here a fundamental question arises: are banks ready to work with crypto? 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 states. Analogues of SWIFT are available in a number of states. So, in Europe there is a special payment system for working with Iran, which was once disconnected from SWIFT. But, firstly, the European counterpart is rather weak, focused mainly on Iran. And, secondly, today Europe is almost completely on the list of “unfriendly states”. Of the foreign analogues of SWIFT, the most interesting and promising is the Chinese system CRISPSwhich started in 2015. In March 2022, Chairman of the State Duma Committee on the Financial Market Anatoly Aksakov reported that the Bank of Russia and the People’s Bank of China are working on connecting the Russian and Chinese financial messaging systems.

After February 24, the SPFS system, which had previously been in a semi-frozen state, began to revive. The task of expanding the circle of foreign users of SPFS (naturally, from countries that are not included in the list of “unfriendly states”) has become especially urgent. In April, the Chairman of the Central Bank Elvira Nabiullinaspeaking in the State Duma, she said that 52 organizations from 12 countries have already joined the SPFS. At the end of June, as stated by the chairman of the Central Bank, 70 foreign organizations from 12 countries have already joined the SPFS. In April, the Central Bank decided not to disclose the list of foreign participants in the SPFS, so it did 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, Economiconce Published an article on August 12 .cms) LocalbanksNoenthusiasticon theplantoalignpaymentmessage exchangesystemWithRussia (Local banks are not interested in harmonizing the system of payment messages with Russia.) It refers to a meeting of Indian and Russian bankers, which took place on August 10, and was devoted to the discussion of bilateral “trade in rupees.” 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, in order to conduct a foreign trade operation in rupees, a foreign (including Russian) bank should open a vostro account with an authorized Indian bank. It looks like a nice diagram.

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 participants of the meeting noted, “the connection of SFMS with SPFS can be seen as a way to circumvent US sanctions in order to interact with a Russian bank that has fallen under the restrictions.” Even those Russian banks that have not been 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 fallen under sanctions may suffer losses due to the blocking of loro accounts. By the way, it was 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 settlements in national currencies and the development of correspondent relations between the countries. Bank VEB, representing Russia, put forward a proposal to switch to settlements within the framework of 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 part of it. It is desirable that this part of trade be formalized by an interstate agreement and be balanced (equality of exports and imports). Such countertrade would approach a barter scheme. In any case (if there is a non-zero trade balance), settlements are made in national currencies. And information on payments is transmitted through closed channels using SPFS or another well-protected communication system.

It is gratifying that at last in Russia they remembered the currency clearing, which was widely used by the Soviet Union. In April, I already wrote about this in an article “An old proven way to bypass restrictions and prohibitions on trading settlements in US dollars“.

Cover photo: REUTERS/Dado Ruvic

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