De-Dollarization: Alternative Trade and Payment Systems

There was some success, trade between Russia and China, as well as Russia and India, which continued until recently. Now, even Chinese banks – buckling under the pressure of tightening US sanctions – are pushing back on processing transactions for Russian companies.

But Russia and its partners have also sought other ways to do business outside the Western-led order, in part because technology makes it easier to process payments and circumvent the global financial order dominated by the U.S. dollar.

As Brookings researchers Sam Boocker and David Wessel explained in an August post, “innovations in payment technology could reduce the dollar’s role in the global economy.”

To be sure, the dollar king is entrenched in the world financial system, so it is unlikely to be dethroned, most experts say. However, new platforms are emerging that could destroy its dominance.

These are some of the alternative trading and payment systems that are trying to break the US-led trading and payment order:

Russia set up SPFS and Mir years ago, citing “risks”

Russia braced for even more sanctions years ago, following trade restrictions after it annexed Crimea in 2014.

“There are risks in using global financial networks,” Elvira Nabiullina, the governor of Russia’s central bank, told CNBC in 2018. “Therefore, since 2014, we have been developing our own systems.”

Some Russian banks have been banned from the SWIFT messaging system for banking transactions following Russia’s large-scale invasion of Ukraine. Moscow promotes its ruble-based payment system – the Financial Message Transfer System, or SPFS – which was established in 2014.

At the end of 2023, SPFS users included 556 organizations from 20 countries. Of those, 159 — about a quarter of all participants — were foreigners, and their use of the messaging system doubled from 2022, according to Russia’s central bank, on Interfax.

In July, Russia and Iran – another heavily sanctioned country – finalized details to connect the two countries’ banking systems, Iran’s Mehr news agency reported.

This means that Russia’s Mir payment system would work with Iran’s Shetab banking system, allowing both pariah states to transact more easily.

CIPS in China is growing rapidly

The China Cross-Border Interbank Payment System, or CIPS, is an alternative system that processes payments in Chinese yuan.

Launched in 2015, CIPS has around 2,000 participants in July, compared to 11,000 for SWIFT.

CIPS “has grown rapidly in recent years,” the Brookings researchers wrote.

In 2023, CIPS processed more than 6.6 million transactions totaling 123 trillion Chinese yuan, or $17.3 trillion, up nearly 30 percent from a year ago, according to China’s central bank .

India’s UPI is already widely used

India – now a key trading partner of Russia – also has its own system.

The country’s Unified Payments Interface, or UPI, was developed in 2016 and is widely used in India today, even among ordinary consumers.

The payment system has become so big that it is not only limited to India. The National Payments Corporation of India, which runs the platform, has partnered with financial institutions in other countries, including France, the United Arab Emirates and Singapore.

If the UPI footprint expands to more countries, it could be a way to bypass the SWIFT banking system, wrote Evan Freidin, an international relations analyst for the Lowy Institute, an Australian think tank.

“It is significant that UPI can also be used to bypass the SWIFT banking system, allowing payments with sanctioned countries such as Russia, thereby weakening US financial hegemony,” Freidin wrote in July.

Central banks are looking at digital currencies

Countries are also increasingly looking to build central bank digital currencies, or CBDCs. These coins are similar to cryptocurrencies, but they are issued and backed by central banks.

The Bank for International Settlements, an organization of central banks, is overseeing the testing of a CBDC platform for wholesale cross-border payments.

Participants in the project, called mBridge, include China, Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia. It is dominated by Beijing, which has already launched the digital Chinese yuan.

Brookings researchers wrote that these CBDCs could “overturn the dollar’s role as a currency ‘middleman’ by reducing settlement times, making it cheaper and easier to trade non-dollar currencies.”

CBDCs integrate messaging and payments, unlike current systems like SWIFT and the main US dollar clearing system, CHIPS.

Russia rushes into crypto

As the doors to fiat transactions close, Russia is now looking to trade cryptocurrencies.

It is in such a hurry to get the system up and running that it plans to start crypto exchange tests as soon as September 1, anonymous sources said. Bloomberg in late August.

The creation of this payment method has become more pressing, as even banks in China reject most transactions with Russian entities.

Russian President Vladimir Putin he himself said in July that Russia must “Enjoy the moment” to create a legal framework for digital assets as they are increasingly used to settle international payments.

Returning to the barter

If all else fails, there’s also the old barter method.

In August, Reuters reported that Russia and China plan to revive the practice of barter trade to avoid Western sanctions.

The deals could involve agriculture and could come as soon as this fall, the news agency reported, citing unnamed trade and payment sources.

The two countries are no strangers to barter.

It was practiced during the soviet era and in the years after the collapse of the bloc. At the time, China was a key trading partner.

In August 2022, The Taliban regime in Afghanistan also discussed barter trade with Russia, which could involve trading Russian petroleum products in exchange for raisins, minerals and medicinal herbs, according to RIA Novosti, a Russian state news agency.

Last year, no cash Pakistan authorized barter trade in certain commodities with Russia.

In 2019, China traded $150 million worth of palm oil of Malaysia for a wide range of products and services, including natural resources and defense equipment.