China, Russia Agree to Belt and Road Alternative Payments Systems
Op/Ed by Chris Devonshire-Ellis
As we commented recently, in order to avoid the United States increasingly using the US dollar as a trade weapon to impose sanctions, China and Russia are drafting an agreement to increase the use of their national currencies in bilateral and international trade, and highlighting their intent to cut their reliance on the US dollar.
To do this, the development of a new international financial payments system as a counterbalance to the United States SWIFT and similar networks, is aimed at addressing rising concerns over additional US sanctions and trade tariffs. This is partially down to the United States as being seen as a non-reliable trade partner under the current political climate, something that began as an undercurrent at the St. Petersburg International Economic Forum at the beginning of the year and has now been gathering steam.
Russian Prime Minister Dmitry Medvedev, apart from his announcing that China-Russia bilateral trade was expected to hit US$200 billion during his visit to China earlier this month, has also said that the two nations are discussing the launch of a new cross-border system for direct payment of trade invoices in the Chinese yuan and the Russian ruble. He said discussions were already underway to expand the use of China’s UnionPay credit card in Russia and Russia’s Mir card in China.
China’s UnionPay system is already a familiar sight in Russia, starting from its initial launch in Murmansk it is now a nationally accessible facility in many shops and tourist attractions. Russia’s own Mir card is somewhat less developed internationally; however Sberbank is partnering with Ingenico to enable international online merchants to accept the national Mir Card Payment System, providing competition to the dominant Visa and Mastercard schemes in Europe.
Since the introduction of the domestic card scheme in 2015, some 45 million Mir cards have already been issued, with more than half issued by Sberbank. From January to August 2018, upwards of 58 million online transactions were performed using the national card scheme. According to MasterCard, since January this year, contactless payments with cards or smartphones have accounted for more than half of all transactions in Russia.
The political impetus for creating a new financial infrastructure is the continued deterioration in both countries’ relations with the United States and the threat that Washington will impose additional economic sanctions on one or both of them.
“The Chinese should protect their system while Russia should protect its own system,” Medvedev said in Beijing. “In this respect, this kind of cooperation is very useful because in this situation no one will be able to block the development of financial traffic,” he said, predicting that China-Russia bilateral trade would reach US$200 billion in 2020, double the US$100 billion level in 2014.
The US, European Union, and other western countries imposed sanctions on Russia officials and businessmen after the annexation of Crimea in 2014.
Many Russian and Chinese firms have also been fined or put on a blacklist by US authorities for violating US sanctions law. Chinese telecommunications equipment maker ZTE Corp was fined US$1.4 billion this June for shipping goods to Iran and North Korea in violation of those sanctions.
Medvedev reiterated that the Union Pay / Mir payment system initiative was an attempt move away from the current dollar-dominated financial system.
“No one currency should dominate the market, because this makes all of us dependent on the economic situation in the country that issues this reserve currency, even when we are talking about a strong economy such as the United States,” Medvedev said.
“I want to say something that may raise a few eyebrows, but I think some of these [US] sanctions are good or useful because they forced us to do what we should have done ten years ago,” he said. “But it is unclear to me why we have been trading oil and gas for dollars and euros all of these years without trying to involve the ruble. Trading in rubles is our absolute priority, which should eventually turn the ruble from a convertible currency into a reserve currency.”
The logical development of these systems over the longer term can be expected to become a Eurasian payments network mechanism, offering alternatives to US and EU banking networks. The development of the RMB Yuan as a viabe global currency is a long term aim for Beijing, while Moscow also wishes to develop the Ruble as another currency to add to the global basket. They are also keen on challenging the US credit/debt financial model, and have ambitions to see currencies based at least partially on real assets. Both China and Russia have recently been buying up gold reserves, while both countries have also been selling off US treasury bonds. Russia dumped US$77 billion of US bonds earlier in the year, while China followed suit and sold up US$3 billion last month. While relatively small beer in the grander scheme of things, the move is seen as a warning from China, which remains the largest holder of US debt – a situation that has somewhat limited China’s ability to loosen the grip of the US treasury on its own economy. Extricating the country from that remains a headache for Beijing and a problem to solve. The development of non-US payment systems that can later be rolled out across the Belt and Road will assist with project financing, trade, and ultimately bring the region closer to Chinese and Russian influence.
Silk Road Briefing is produced by Dezan Shira & Associates. Chris Devonshire-Ellis is the practice Chairman. The firm has 26 years of China operations with offices throughout China, Asia and Europe. Please refer to our Belt & Road desk or visit our website at www.dezshira.com for further information.