The international settlement and payment system involves the transmission of international financial information and transfer of funds, and is the key link in all international economic cooperation. However, the abuse of financial hegemony by the U.S. has seriously threatened the economic security of many countries such as China and Russia, triggering and accelerating the process of “de-dollarization” of the world, which has rapidly increased the demand for local currency settlement in China and Russia. Under the trend of accelerated internationalization of RMB, RMB has the advantageous conditions and good prospect to become the main currency for settlement and payment between China and Russia.
Background of the “de-dollarization” of the settlement and payment system of Russia and China
The Sino-Russian settlement and payment system is deeply influenced by complex international political, economic and technical factors. The abuse of world financial hegemony by the US poses a great threat to the settlement and payment system of Russia and China, while the accelerated pace of RMB internationalization creates an opportunity for the settlement and payment system of Russia and China to use RMB on a larger scale.
(i) Abuse of world financial hegemony by the United States
Financial hegemony is the core pillar for the U.S. to acquire monopoly interests in the world economic order. The U.S. abuses world financial hegemony in four main ways.
First, to obtain excessive economic benefits. The U.S. dollar is the world’s most important denomination, payment currency and reserve currency, and the monetary system of most countries is highly dependent on the U.S. dollar, which allows the U.S. to earn high “minting tax” by issuing dollars and create economic turmoil or even crisis by manipulating the exchange rate of the U.S. dollar and the contradiction between supply and demand, thus reaping huge speculative benefits.
Second, the external transfer of the economic crisis. In order to get rid of the increasingly serious U.S. debt crisis, the Federal Reserve launched an unlimited quantitative easing policy, resulting in a serious over-issuance of the U.S. dollar and a significant shrinkage of global dollar assets, which brought imported inflationary pressure to many countries.
Third, access to international trade and economic intelligence. The U.S. Clearing House Interbank Payment System (CHIPS) guarantees the traceability of the U.S. dollar and the global clearing control of the U.S. The Society for Worldwide Interbank Financial Telecommunication (SWIFT), established in 1973, is the most important, secure and convenient platform for international interbank financial information transmission, connecting more than 11,000 financial institutions in more than 200 countries, transmitting about 1.8 billion messages per year and A total of approximately $6 trillion worth of payment orders are transmitted daily. The U.S. has strong control over SWIFT, and is able to grasp SWIFT transaction information in a timely manner and make it comply with the U.S. “long-arm jurisdiction” policy. The vast majority of the world’s international settlement payments in U.S. dollars go through SWIFT and CHIPS, so the U.S. has control over the flow of most U.S. dollars and receives important economic intelligence from them. Military transactions using U.S. dollars are also difficult to escape U.S. surveillance.
Fourth, foreign financial sanctions are imposed. The majority of the world’s financial institutions are deterred by the U.S. financial hegemony and have to comply with the U.S. policy of “long-arm jurisdiction” and freeze the assets of the sanctioned countries according to the U.S. instructions. The U.S. can isolate sanctioned countries from the international dollar system by simply imposing certain sanctions on financial information transmission systems, thereby severely damaging their international financing and trade. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has introduced six types of financial sanctions lists: Specially Designated Nationals and Blocked Persons List (SDNs), Sectoral Sanctions Identifications List, the Foreign Sanctions Evaders List, the NON-SDN Palestinian Legislative Council List, the Non-SDN Iran Sanctions Act List, and the Non-SDN Iran Sanctions Act List. SDN Iran Sanctions Act List, and The List of Foreign Financial Institutions Subjectto Part 561 List. The Specially Designated Nationals List and the Sectoral Sanctions Identification List have the greatest impact on Russia. U.S. companies are required to freeze the assets of, and not conduct any transactions with, natural and legal persons included on the Specially Designated Nationals List without obtaining OFAC approval. The Industry Sanctions Identification List includes four directives: Directive 1 requires that U.S. persons may not engage in new interests or new obligations of natural or legal persons subject to this directive that exceed a 14-day period, and all transactions, financings or other transactions relating to their property or interests in property, without a policy exemption or authorization from OFAC. The term of debt under Directive 2 is set at 60 days, and there is no requirement for the term of new interests, the rest is the same as in Directive 1. The term of debt under Directive 3 is set at 30 days, and there is no requirement for the term of new interests, the rest is the same as in Directive 1. Directive 4 prohibits U.S. persons from directly or indirectly providing any services, technology and science to the Russian oil and gas industry, but exempts natural or legal persons with less than 33% ownership of the project from the sanctions.
After 2000, the U.S. imposed harmful “smart sanctions” in the financial sector against Iran, North Korea, and other countries.After the Crimea incident in 2014, the U.S. and other Western countries launched multi-disciplinary sanctions against Russia, with financial sanctions being the focus.In September 2014, the European Parliament passed a resolution banning the provision of In September 2017, Finastra, SWIFT’s software provider, suspended its services to two Russian banks. in November 2018, the U.S. Treasury Department announced that SWIFT would be subject to U.S. sanctions if it provided services to Iran, and SWIFT was forced to cut off its interface with Iranian financial institutions. in 2020 In December, the U.S. announced sanctions against 14 vice chairmen of the Standing Committee of the National People’s Congress of China in order to interfere with the Hong Kong issue, and the Chief Executive of Hong Kong became the target of U.S. financial sanctions. After taking office, the Biden administration pushed for new Western sanctions against Russia, citing the Navalny affair as the reason for placing a number of senior Russian officials on the financial sanctions list.
(ii) The world’s “de-dollarization” process is accelerating
The abuse of financial hegemony by the United States seriously threatens the stability of the world monetary system, leading to the escalation of international conflicts and the acceleration of the process of “de-dollarization”, mainly manifested in the regionalization of currencies, internationalization of local currencies, currency swaps, digitalization of currencies and monetization of gold and silver. More than 40 countries, including China, Russia, Europe and Japan, have started the process of “de-dollarization”. The United States was once the largest oil importer, so many oil-exporting countries are willing to maintain the dollar status. However, now that the United States has become an oil exporter through shale oil exploration, other oil exporting countries will become an important force in the “de-dollarization” process. The world’s “de-dollarization” process is manifested in three main ways.
First, shrink dollar foreign exchange reserves and U.S. debt. The share of the U.S. dollar in global reserves has been declining at record low levels. China, France, Germany, Russia, Iran, India and Turkey have reduced their dollar reserves, and the size of currency swaps between central banks and the Federal Reserve has fallen sharply, leading international investors to cut back on dollar assets such as U.S. debt and reduce the use of the dollar in economic and trade investments. Russia’s central bank has also shifted its foreign exchange reserves from mainly U.S. dollars to mainly euros, renminbi and gold, and has sold and cut U.S. debt significantly since the beginning of 2018, bringing its decline to 85%.
Second, reduce the use of the U.S. dollar in international economic cooperation. In 2015, nearly 90 percent of Russian-Chinese trade settlements used the U.S. dollar. in the first quarter of 2020, the share of U.S. dollar settlements in Russian-Chinese trade fell by 5 percent to a new low of 46 percent. At the same time, the share of local currency settlement between the two countries accounted for 24% of the total settlement, a record high, while the share of RMB settlement rose to 17%, the share of Euro rose to 30% and the share of ruble settlement was 7%.
Third, getting rid of the U.S. control of global clearing. Getting rid of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which is subject to the U.S., has become a multinational consensus. Russia launched the Bank of Russia Financial Messaging System (SPFS) within its borders in 2012 and has promoted its adoption in a number of ways, including reducing fees and passing legislation to strengthen the links between domestic Russian financial institutions and SPFS. in early 2018, SPFS was extended to member countries of the Eurasian Economic Union. As of October 2018, SPFS has 413 bank clients, including Chinese banks. Russia strives to strengthen cooperation with China, Turkey, Iran and other countries in the hope of promoting the system’s widespread use internationally. To protect Russian citizens from having their personal funds frozen, Russia has also created its own national payment system.
The China RMB Cross-Border Payment System (CIPS), which was officially put into operation in October 2015, is used for cross-border RMB settlement by financial institutions within and outside China, allowing for real-time transfer of funds. The conditions for participants to use the system, as well as the account management and operational requirements, are clearly defined in the People’s Bank of China’s 2018 No. 72 Business Rules for RMB Cross-border Payment System.CIPS has direct and indirect customers. Direct customers can open accounts and receive transaction numbers in CIPS to settle cross-border RMB payments directly. Indirect customers do not have the right to open an account with CIPS, but have a business number to instruct direct customers to settle cross-border payments in RMB through CIPS. To ensure customer reliability, CIPS has established an admission and exit mechanism for direct customers. As of the first half of 2019, there are 31 direct participants and 847 indirect participants in the CIPS system, including 650 in Asia (including 365 within the country), 105 in Europe, 25 in North America, 18 in Oceania, 16 in South America and 33 in Africa, covering 148 countries and regions around the world, and the opening hours have been extended from 12 hours to 24 plus 4 hours, covering Financial markets in all time zones of the world, eliminating the “time gap” between internal and external transactions. The China Foreign Exchange Trade System (CFETS) has launched a Payment-to-Payment (PVP) system between the RMB and the Russian ruble, and plans to launch PVP systems with other foreign currencies in the framework of the “One Belt, One Road” project.
The Instrument for Trade Support and Assistance (INSTEX), established by Germany, France and the UK for oil and commodity trade with Iran, is essentially a barter document aggregation system that works in such a way that Iran supplies oil and other products to Europe, but instead of remitting payments to Iranian banks, the payments are remitted to European companies that supply Iran with commodities such as industrial manufactures, pharmaceuticals and foodstuffs. The goods travel to and from Iran, but all the money stays in the EU. Iran also has a Special Trade and Finance Institution (STFI) similar to INSTEX, which brokers payments between two Iranian companies, again without the money leaving Iran. 2012 saw all Iranian banks disconnected from the SWIFT system and switched to the Unified Regional Payment Clearing System (SUCRE). Russia, China and India are developing a way to conduct emergency electronic settlements in the event of a SWIFT disconnection. The central bank financial information transfer systems of the three countries will be interfaced through gateways to transfer transaction information from one payment system format code to another payment system format code.
(3) Accelerated pace of RMB internationalization
China is the world’s second largest economy, the number one trading body, the largest consumer market with more purchasing power than the United States, and the only major world economy to achieve positive growth in the post-epidemic period. However, the international status of the RMB does not match China’s global economic status, and the internationalization of the RMB is an inevitable trend.
Since the launch of the pilot cross-border trade settlement in RMB in 2009, the cross-border use of RMB has gradually expanded and the pricing function of RMB in the international market has steadily improved.In October 2016, RMB was included in the SDR1 currency basket of the International Monetary Fund, ranking second after USD in cross-border payment currencies in mainland China, becoming the fourth largest currency in international settlement after USD, EUR and GBP and the third largest currency in the SDR weight ranking, and continues to develop in the direction of international trade currency, cross-border investment currency, international credit currency, reserve currency, etc. By the end of 2018, nearly 30 countries and regions, including Turkey, Pakistan, Russia, Nigeria, Iran and Algeria, have used RMB as settlement currency. China has also signed local currency swap agreements with Russia, Japan, South Korea, Argentina, the United Kingdom, Switzerland, Brazil and other countries. Russia announced the issuance of RMB bonds and the inclusion of the RMB as a reserve currency. the RMB share of Russia’s foreign exchange reserves increased significantly from 2.8% to 14.4% in 2018. in 2019, the People’s Bank of China renewed a bilateral local currency swap agreement with the European Central Bank with a size of 350 billion RMB/45 billion EUR. Data released by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) on July 23, 2020, showed that in June 2020, the RMB rose to fifth place in the ranking of global payment currencies based on monetary statistics, with a share of 1.76%. Previously, the RMB had been ranked sixth in the global payment currency ranking for two consecutive months.
China’s cross-border RMB use policy and macro-prudential management framework are basically established, the related financial infrastructure is gradually improved, market participants are rapidly expanding, and cross-border business channels are gradually smooth, which creates important conditions for China’s economic and financial deepening reform and expanding openness, and the improvement of RMB cross-border settlement and payment capacity is also strongly guaranteed.
At the beginning of 2019, the PBoC emphasized the focus of RMB internationalization and pointed out the direction for RMB internationalization, namely, “to further improve the policy on cross-border use of RMB with the orientation of serving the real economy and promoting trade and investment facilitation; to optimize the framework of currency cooperation among central banks; and to improve the framework of liquidity services in the offshore RMB market.” As China’s comprehensive national power and international economic status continue to grow, the RMB’s function as an international settlement currency and reserve currency will be enhanced accordingly. The launch of the central bank’s digital RMB will provide a new impetus to the internationalization of the RMB and create an opportunity for China and Russia to expand RMB settlement.
(4) The settlement and payment system of China and Russia is highly restricted by the United States
1. China-Russia cross-border settlement payments rely on SWIFT
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has been applied in the world for nearly 50 years, supporting the majority of cross-border settlement and payment operations, with strong customer stickiness, and its dominant position in the global settlement and payment system is difficult to shake in a short period of time. Cross-border settlement payments between China and Russia in local and foreign currencies are mainly done through inter-bank accounts and correspondent bank accounts using SWIFT as the channel.
ICBC is the only Chinese bank that has opened a RMB clearing center in Russia, and its China-Russia settlement and payment business is highly representative. When a Chinese or Russian commercial bank accepts RMB cross-border settlement payments from an enterprise, it needs to open an account at both ICBC Moscow Branch and ICBC Head Office, and the Russian commercial bank exchanges settlement payment information with ICBC Moscow Branch through the Russian Financial Information Transmission System (SPFS) or SWIFT, while the Chinese commercial bank exchanges settlement payment information with ICBC Head Office through the China Modernized Payment System (CNAPS) or CIPS with the head office of ICBC, and the head office of ICBC exchanges settlement and payment information with ICBC Moscow branch through SWIFT. In other words, the cross-border exchange of settlement and payment information between China and Russia can only be carried out through SWIFT, even if the exchange of settlement and payment information can be carried out in the territory of the country bypassing SWTFT.
ICBC’s business process of cross-border ruble settlement payment between China and Russia is similar to that of RMB settlement payment, the differences are: (1) In China, ICBC and the recipient bank are account banks, and ICBC needs to apply for ruble quota from the central bank. (2) When exchanging payment information between Russian commercial banks and ICBC Moscow Branch, they need to use the Central Bank of Russia Payment System (BRPS) or SWIFT, which is the core system for interbank payment activities operated by the Central Bank of Russia and is one of the two most important national payment systems in Russia. Depending on the coverage area, transaction amounts, transaction rules, daily settlement hours, types of participants, payment instruments, transaction rates and technologies, the BRPS can be further divided into the large-value payment system – the Bank Electronic Express Payment System (RTGS, also known as BESP), the large-value payment system -regional electronic payment system (VER), interregional electronic payment system (MER) and payment systems using letters. The most important of these is the Bank Electronic Express Payment System (BESP), which came into operation in October 2007. The Russian regulator requires the system to be used for all payments exceeding 100 million rubles.
ICBC’s China-Russia cross-border US dollar settlement payment business process is fully under US supervision, and US dollar settlement payments must be made using the SWIFT system, whether in China or in Russia. USD cross-border settlement payments must not only go through SWIFT, but also through USD clearing banks.
2. China and Russia rely on the United States for settlement payment services
The ruble to RMB exchange rate is still an arbitrage rate and must be linked to each other through the US dollar. The Renminbi Cross Border Payment System (CIPS) relies not only on U.S. technology and software, but also on SWIFT, which is controlled by the U.S. and has all its settlement payment information under U.S. monitoring. China’s UnionPay card payment system depends on U.S. companies and has to use the services of U.S. BMC Software, which borrows software from U.S. companies to monitor the settlement payment system and produce bank cards. 2015 saw the creation of a national payment card system in Russia, but the Russian bank payment system is also technically constrained by the U.S. company “PSC CartStandard “The company is a financial technology services company. This company is a financial technology services company, which serves more than 100 banks in Russia. As a result, the loss of U.S. financial services would deal a heavy blow to the international settlement and payment business of Russian and Chinese financial institutions. All Russian and Chinese financial institutions are trying to avoid being placed on the U.S. financial sanctions list for violating the U.S. “long-arm jurisdiction” policy.
II Prospects of RMB settlement in the settlement and payment system of China and Russia
Russia has a strong market demand for RMB, the mechanism and channels for cooperation in local currency settlement between the two countries are improving, legal protection is gradually strengthened, the mode of local currency settlement for border trade is becoming more and more mature, the proportion of RMB in local currency settlement between Russia and China is increasing, the scope of use is expanding, and the development prospects are good.
(A) Market demand analysis
The demand for RMB in the Russian-Chinese settlement and payment system is on a rapid rise, mainly due to the following reasons.
1. The RMB exchange rate has stability
The stability of exchange rate is an important factor affecting the choice of settlement payment currency. The exchange rate of RMB is relatively stable against the US dollar and the euro and other major common currencies in the world, while the exchange rate against the ruble is more volatile, mainly because the ruble exchange rate is unstable and the RMB has to be adjusted against the ruble. Most Chinese enterprises and financial institutions are reluctant to bear the exchange risk caused by the unstable ruble exchange rate and prefer to use RMB in local currency settlement.
On November 22, 2010 and December 15, 2010, the ruble and the renminbi entered the China Interbank Foreign Exchange Market and the Moscow Foreign Exchange Trade Center, respectively, creating a precedent for interbank currency spot trading between the two countries. The average daily trading volume at the Moscow Forex Exchange reached USD 200 million. The Moscow Stock Exchange of Russia has more than 170 banks and brokerage firms engaged in RMB trading. Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China also trade in RMB on the Russian trading platform.
2. Renminbi accounts for a large share of Russia’s foreign exchange and state welfare funds
In 2016, the Russian Central Bank included the RMB in the country’s foreign exchange reserves.In March 2020, the RMB’s share in the Russian Central Bank’s gold foreign exchange reserves was 12.2%, making it the third largest reserve foreign currency in Russia.On February 24, 2021, the Russian Ministry of Finance decided to lower the share of the USD and EUR in the currency structure of the Russian National Welfare Fund (NWF) from 45% to 35%, and to the share of the RMB to 15%.
3. Huge demand for RMB in China-Russia trade
China and Russia have set the goal of raising bilateral trade volume to 200 billion U.S. dollars by 2024. 2020 Sino-Russian trade and economic cooperation has withstood the epidemic and shown strong resilience, and the fundamentals of cooperation between the two sides, which are highly complementary and long-term positive, have not changed. 2020 bilateral trade volume of goods between China and Russia will be 107.77 billion U.S. dollars, exceeding the 100 billion U.S. dollar mark for the third consecutive year. China’s share in Russia’s foreign trade has further increased, and for the 11th consecutive year it has steadily become Russia’s top trading partner.
In addition to the traditional energy and minerals sectors, which still have great potential for cooperation, agriculture, investment and engineering contracting, and science and technology cooperation are developing rapidly and are expected to become the new pillars of Sino-Russian economic and trade cooperation. 2020 saw a record high of $5.55 billion in agricultural trade between China and Russia, with China jumping to become the top export market for Russian agricultural products and meat. The “home economy” has driven the rapid growth of electronic products exports to Russia, with laptop and tablet PC exports increasing by 39% and 29% respectively, and Chinese brand smartphones topping the sales list in the Russian market. Investment and engineering contracting grew against the trend, with the amount of new contracts signed between China and Russia accounting for nearly 30% of the new contracts signed with Europe. Cooperation in science and technology innovation has deepened comprehensively, and the Sino-Russian Joint Science and Technology Innovation Fund with a total amount of USD 1 billion has started operation, and the two sides have made positive progress in cooperation in 5G, cloud services, smart mobility and other fields.
The development of Sino-Russian economic and trade cooperation has driven the growth of Sino-Russian settlement and payment business. in 2020, the cross-border payment business between China and Russia was more than 330,000 transactions, up 19.61% year-on-year, and the cleared amount was USD 106.986 billion, up 33.67% year-on-year. The settlement currency between the two countries is mainly RMB and Euro settlement, accounting for 93.89% of all currencies. The number of payments in USD and EUR increased more, 45.08% and 38.63% respectively, and the amount of EUR settlement increased nearly three times. In terms of payment message types, the number of customer-type remittances was 306,400, accounting for 92.66% of the cross-border payment business between China and Russia, with a year-on-year increase of 5.35%. The amount of customer-type remittances cleared was USD 43.928 billion, accounting for 41.06% of China-Russia cross-border clearing, up 135.17% year-on-year. Funds-based remittances amounted to 24,300, accounting for 7.34% of the cross-border payment business between China and Russia, a decrease of 9.77% year-on-year. The amount of funds-based remittances cleared was USD 63.058 billion, accounting for 58.94% of the cross-border clearing amount between China and Russia, up 31.64% year-on-year.
In 2020, the total number of Chinese expenditures in all currencies was more than 41,000, while the number of Russian payments was more than 289,500, but the total amount of bilateral clearing was basically equal. This shows that the Chinese side’s transaction expenditures are mainly focused on large purchases with high concentration, while the Russian side’s transaction expenditures are more reflected in small and medium-sized transactions. In terms of trade concentration, large transactions in China-Russia trade tend to use RMB and EUR transactions, with RMB settlement amounting to USD 48.062 billion in value and EUR settlement amounting to USD 40.531 billion in value, accounting for 44.92% and 37.88% of total trade clearing respectively. The US dollar accounts for only 14.42% of the bilateral trade volume between Russia and China, totaling $15.429 billion, while the ruble accounts for a very small share. This shows that Russia and China are methodically “de-dollarizing” large transactions. Renminbi is basically stable in Russian-Chinese payments, from the number of transactions to the value of goods. Thus, the growth of the euro represents a gap in demand for RMB in large transactions. The salient feature of the euro in China-Russia settlement payment business is the high concentration of single transactions. 441 euro transactions paid by Russia to China totaled $18.683 billion, with an average single transaction of $42.365 million, while 266 euro settlement transactions paid by China to Russia totaled $21.848 billion, with an average single transaction of $82.135 million. This shows that the euro-settled China-Russia trade is basically purchases by large enterprises, while large Chinese and Russian enterprises have a high degree of cooperation with the policies of both countries. Therefore, in the case of full coordination between the two countries, there is a realistic possibility that the RMB will crowd out the Euro in the short term to complete the settlement of a considerable portion of transactions worth $40.531 billion.
4. Rapidly increasing demand for RMB investment in Russia
As a result of multiple factors such as long-term low international energy prices and Western economic sanctions, Russia’s budget deficit is growing, and Russian companies are finding it increasingly difficult to obtain financing from the West.
In 2019, China’s net outward FDI amounted to US$136.91 billion, with a total of 44,000 outward FDI enterprises established by 27,500 Chinese investors abroad in 188 countries (regions) around the world, and total assets of overseas enterprises amounting to US$7.2 trillion at the end of the year, with China’s outward FDI accounting for 10.4% and 6.4% of the global flow and stock of the year, respectively, with the flow China’s outward FDI accounted for 10.4% and 6.4% of the global flow and stock respectively, with the flow ranking 2nd and the stock ranking 3rd in the world. China has become a key country for international financing in Russia, and the scale of RMB financing to Russia has been expanding. Heilongjiang Branch of China Development Bank signed five interbank financing agreements with Russian commercial banks totaling RMB 40 billion. By the end of April 2019, the actual financing of RMB 31.6 billion was completed, mainly for 35 Sino-Russian trade cooperation projects involving metallurgy, mining, transportation, oil and gas, etc. The interbank credit agreement signed between Harbin Bank as the lead bank and the Development and Foreign Economic Bank of Russia with a total amount of RMB 10 billion entered the drawdown stage. As of the end of April 2019, RMB 556 million was actually withdrawn, mainly for thermal and hydro power projects. The expansion of RMB financing is bound to increase the demand for RMB settlement payments. And, with the operation and growth of RMB investment and financing projects, the scale of RMB investment and financing and settlement payment will further expand.
5. Significant improvement of local currency settlement conditions in Russia and China
In 2017, ICBC launched its RMB clearing bank operations in Moscow. A number of Russian banks joined the Renminbi Cross Border Payment System (CIPS) launched by the People’s Bank of China. Russian and Chinese gas, oil and gold transactions can be settled in RMB as settlement currency.
The simultaneous settlement of RMB to ruble transactions is an important initiative to implement the “One Belt, One Road” strategy, which was first proposed in October 2015 at the 16th meeting of the Financial Cooperation Sub-Committee of the Sino-Russian Prime Minister’s Regular Meeting Committee. The foreign exchange market formally established the simultaneous settlement mechanism of RMB to foreign currencies, thereby eliminating settlement risks caused by the time difference between the two currencies in the settlement of foreign exchange transactions and improving the timeliness of local currency fund flows between Russia and China. In 2020, the number of simultaneous settlement of rubles increased by 136% year-on-year and the amount of settlement increased by 88.84% year-on-year.
Chinese and Russian financial institutions are strengthening cooperation in issuing and accepting UnionPay cards. Agricultural Bank of China cooperated with the Russian side in 2009 to launch a debit card that allows users to withdraw cash in RMB, rubles and US dollars from Russian ATMs. in 2014, China UnionPay cooperated with the Russian side to issue ruble and RMB UnionPay cards. As of the end of April 2019, Russian card issuers have issued more than 2.3 million UnionPay cards, and over 100,000 ATMs of a number of large commercial banks, such as Sberbank of the Russian Federation and VTB Bank of Russia, can accept UnionPay cards.
The local currency settlement channel of China-Russia border trade is becoming increasingly smooth. Heilongjiang provincial banks have carried out various forms of banking agency business with Russian banks, and cooperation in areas such as product innovation, local currency trade financing and quality customer promotion has been deepening, with steady development of local currency settlement business. As of the end of April 2019, banks in China and Russia had set up 98 correspondent bank accounts. from January to April 2019, USD 410 million of local currency settlement business was handled, of which USD 240 million was settled in RMB, accounting for 57.4%. on June 13, 2019, Bank of China Heilongjiang Branch established the first cross-border financial service center for Russia in Heilongjiang Province in Harbin New District. As the Chinese sponsor of the China-Russia Financial Union and a market maker in rubles in the interbank market, Harbin Bank took the lead in launching an online payment platform for cross-border e-commerce, covering the main regions of Russia with its correspondent bank network, and building a “one-stop” comprehensive financial service platform for Russian enterprises in Harbin New District. From January to April 2019, Heilongjiang Province received and paid a total of RMB 1.85 billion yuan in cross-border RMB business to Russia.
(II) Policy and legal analysis
The expansion of RMB settlement in the settlement payment system is strongly influenced by policy and legal factors, which depend on political factors. Promoting the continuous development of China-Russia relations is not a stopgap measure, but a consensus reached at the top level of both countries on the basis of historical experience and lessons learned, which is in line with the fundamental interests of both countries and the law of historical development. China and Russia are each other’s largest neighbors, permanent members of the Security Council and emerging powers, with similar strategic situations, shared strategic concepts, complementary strategic advantages and a solid basis for cooperation. If the two countries fight, they will lose, but if they cooperate, they will win together. As a result, China-Russia relations have continued to develop healthily and have entered the stage of “new era of comprehensive strategic partnership”, which is the “best period in history” and has become a model of new type of major power relations. Thanks to the high level of bilateral relations, the policy and legal environment for RMB settlement continues to improve.
1. Smooth government policy coordination mechanism
The Chinese and Russian governments have a close communication and coordination mechanism for financial cooperation. Since its establishment in 2000, the subcommittee on financial cooperation between Russia and China led by the People’s Bank of China and the Central Bank of Russia has led the practical financial cooperation between the two countries. The seventh meeting of the Commission was held by video. Han Zheng proposed to encourage financial innovation, support the expansion of local currency payments and settlements, and play the role of financial services in supporting investment cooperation.
2. Improved policy and legal environment
In the 1990s, China and Russia signed an agreement on local currency settlement for border trade. in November 2010, then Chinese Premier Wen Jiabao and Russian Prime Minister Vladimir Putin announced the start of local currency settlement for trade between China and Russia. in June 2011, the People’s Bank of China and the Central Bank of Russia signed a new agreement on local currency settlement, which expanded local currency settlement from border trade to general trade and expanded the geographical scope. The agreement stipulates that subjects of economic activities of the two countries can use freely convertible currencies, RMB and rubles for settlement and payment of goods and services at their own discretion. on December 17, 2015, the central banks of China and Russia signed a memorandum of understanding on cooperation, which includes promoting bilateral local currency settlement, strengthening cooperation in areas such as payment, bank cards and credit rating, and helping each other to issue local currency-denominated bonds in their countries. in 2019 In June, Harbin Bank, Chinese members of the Sino-Russian Financial Union and Russian banks signed a number of cooperation agreements, including the Interbank Loan Agreement, the Cooperation Agreement on Cross-border Cash Transfers, and the Trade Finance Cooperation Agreement, providing new guarantees for Sino-Russian economic and trade cooperation.
3. Sound policy support for local currency settlement of border trade
In February 2010, RMB foreign direct investment in Russia was piloted in Heilongjiang Province. The foreign exchange management department of Heilongjiang Province has formulated the implementation plan of RMB direct investment in Russia, risk prevention guidelines and investment effect evaluation methods and other systems, and actively built a platform for docking between banks and enterprises. Suifenhe became a pilot city for the use of ruble banknotes. The Harbin Central Sub-branch of the People’s Bank of China instructed banks in Heilongjiang to strengthen mutual cooperation with Russian banks and simplify procedures for signing correspondent bank agreements. The cross-border transfer system of local currency banknotes between China and Russia was established, and the Chinese side simplified the customs clearance procedures for foreign currency banknote transfers and no longer required to issue documents certifying the entry and exit of foreign currency banknotes transfers. By the end of April 2019, a total of RMB 100 million yuan in cash was transferred by land and RMB 140 million yuan by air.
(iii) Analysis of technical conditions
The Chinese Foreign Exchange Trading System (CFETS) has established a new payment-to-payment (PVP) system for ruble and RMB settlement, which reduces settlement risks and the risk of conducting transactions in different time zones and increases the efficiency of the foreign exchange market. Most importantly, it is able to bypass SWIFT in local currency settlement between Russia and China, thus ensuring confidentiality of settlement information and avoiding financial sanctions from the US.
Harbin Bank China-Russia cross-border e-commerce online payment platform is a simple and efficient integrated online gateway system, multi-channel, multi-scene, multi-currency to solve the problem of difficult, long and costly online settlement of export e-commerce to Russia, has been continuously included in the “national major construction projects library”, won nearly 20 awards. The platform has successfully opened the first “Ruble Online Quick Settlement Channel” and the online channel of Russian “World Card” in the industry. From the launch of the platform in 2014 to July 2020, a total of 39.45 million transactions have been processed, with a cumulative transaction settlement volume of 15 billion yuan.
Digital technology leaps are triggering changes in the way international settlements are paid for. Digital currencies can accelerate local currency settlements, establish a partial replacement for SWIFT and promote internationalization of payment systems. More than 30 countries are currently working on digital fiat currencies, and China has taken the lead in launching a central bank digital currency (DCEP). China and Russia have a wide scope for cooperation in the research and application of digital currencies. The Russian Parliament started working on a bill on digital financial assets in 2018, which clarifies the legal concept of digital currencies, increases the public appeal of crypto-digital currencies, and studies the improvement of the tax system based on digital currencies. in October 2020, the Bank of Russia released a report analyzing the feasibility of issuing digital rubles, describing various development models and scenarios. The Governor of the Bank of Russia, Alexei Zapotkin, emphasized that the central bank will introduce digital currency in the domestic settlement system. If everything goes well, it will be used for international settlements. Anatoly Aksakov, Deputy Chairman of the Financial Markets Committee of the Russian State Duma, noted that Russia is closely following the experience of testing the digital yuan and hopes that Russia and China will coordinate their policies on digital local currency settlement in the future. According to Aksakov, national digital currencies can significantly speed up local currency settlements, but for this it is necessary to achieve technical compatibility and sign interstate agreements.
Blockchain technology is already used in China in finance, lending, smart manufacturing and logistics. There are 456 blockchain companies in China, and over 80% of global blockchain patents are in China. in 2018, China accounted for 82.1% of global blockchain patents. Statistics from the Sadie Blockchain Research Institute show that the number of Chinese blockchain patents in the first half of 2019 was 3,547, ranking first in the world. The absolute advantage in blockchain technology will boost China’s digital RMB will enter a new track of internationalization. China and other countries are accelerating the research of decentralized system based on blockchain technology, which can be an alternative to SWIFT. Compared to centralized systems like SWIFT, distributed blockchain systems increase the speed of real-time transactions and can protect international settlements from third-party disruptions. “A new form of electronic settlement has now been developed in Russia, China and India. According to the plan, the financial information transmission system of the Russian Central Bank will be interfaced with the payment infrastructure of China and India through a gateway, i.e., the transaction information will be transformed from the format code of one payment system to the format code of another, a move that will be able to cope with the situation when the international bank settlement system SWIFT, of which the U.S. is the de facto leader, breaks the chain, thus further reducing the possibility of risk. According to the plan, the future Russian financial information transmission system will be interfaced with the Chinese RMB cross-border payment system (CIPS), which means that the internationalization of the RMB has taken another step forward.”
(IV) Analysis of Constraining Factors
As the center of gravity of the Russian economy is in Europe, Europe has always been the largest destination of Russian exports and source of imports. 41.3% of Russia’s total foreign trade in 2020 was traded between Russia and Europe. The euro is Russia’s main foreign exchange reserve currency and international settlement payment currency. In the case of long-term tied economic and trade relations between Russia and Europe, Russian-European trade will remain at a certain level in the long term, although it is deeply affected by Western sanctions. Russia’s exports to Europe are mainly energy, mineral and other resource-based products, and the resulting euros are mainly used to pay for imported European goods. It still takes a long time for the foreign trade volume of China and Russia to exceed the EU’s total foreign trade, which limits the scale of RMB use in Russia’s foreign trade settlement.
In the local currency settlement payments between China and Russia, the Russian government has introduced preferential policies to encourage its enterprises to use ruble as the international trade settlement currency. In contrast, the Chinese government does not have corresponding preferential policies, and using RMB settlement therefore requires paying more than ruble settlement, which inevitably affects the motivation of enterprises in both countries, especially Russian enterprises, to use RMB settlement.
The approval procedures of the Central Bank of Russia for commercial banks to open interbank depository accounts in China are cumbersome, resulting in the slow development of the correspondent bank network in Russia. Most of the Russian account banks of financial institutions in Heilongjiang Province are located in the Far East of Russia, with fewer branches and narrower coverage, and limited mutual credit lines of correspondent banks, making it difficult to meet the demand for RMB payments and financing in border area cooperation. Russian UnionPay card-issuing banks are mainly concentrated in Moscow, St. Petersburg and other major cities. There are few CUP cardholders in the Russian Far East, and many merchants cannot accept CUP card payments.
There are obvious seasonal characteristics of China-Russia trade: Russia is prone to surplus in the first half of the year, and China is prone to surplus in the second half of the year. To ensure that local currency exchange rates and settlement payments are not disturbed by seasonal factors, both governments need to buy RMB or rubles in a timely manner. However, the current local currency swap and transfer mechanism between the two sides cannot fully meet the seasonal demand for foreign exchange. The cross-border transfer of Russian and Chinese local currency cash funds is still carried out by commercial banks on their own initiative, with high clearing costs, which shackles the scale development of banks’ cross-border cash transfer business. Due to efficiency and risk control considerations, banks restrict the growth of real inventory of positions, which restricts the use of large credit lines and the development of new settlement products on both sides and affects the development of cross-border RMB settlement business with Russia.
In general, the constraints on RMB settlement are basically technical in nature and do not create substantial obstacles to the expansion of RMB settlement and can be eliminated by strengthening coordination between the Russian and Chinese governments and cooperation among financial institutions.
The path of “de-dollarization” of the settlement and payment system of China and Russia and the expansion of RMB settlement
De-dollarization of the Sino-Russian settlement and payment system and expansion of RMB settlement is a move to enhance the security and convenience of bilateral trade and economic cooperation between Russia and China, and is also important for promoting the internationalization of the RMB and enhancing China’s position in the world financial system. In view of the fact that the dollar hegemony will not collapse completely in the near future and the trade volume between China and Russia has only exceeded 100 billion dollars, it is necessary to take a prudent approach to the “de-dollarization” of the Sino-Russian settlement and payment system and the expansion of RMB settlement, focusing on improving basic conditions and building alternative channels for international settlement and payment.
(A) construction of settlement payment alternate channels
To avoid triggering strong U.S. resentment, Europe’s Trade Support and Support Instrument (INSTEX) has a limited number of successful international trade documents, mainly as an alternate channel to escape the “long arm” of U.S. jurisdiction. However, the tool can also serve to balance international trade, reduce transaction costs, expand the local currency settlement, the protection of international settlement secrets and other multiple benefits.
China and Russia are under much greater pressure from the U.S. financial sanctions than the EU, so the two countries should refer to the experience of INSTEX to jointly build an “international trade clearing support tool” and apply it to the Eurasian Economic Union, SCO, ASEAN and BRICS countries for the aggregation of trade documents, which can eventually be dovetailed with INSTEX. The RMB can be sought as the main currency of denomination and settlement, and the difference of trade document aggregation can be settled in RMB. A unified unit of account and its issuance and settlement center can also be established. The exchange rate between the Uniform Unit of Account and other currencies should be adjusted in real time according to changes in the purchasing power of the corresponding countries, but should remain stable in general. At the same time, the “International Trade Clearing Support Tool” should be made distributed through the use of blockchain technology to improve the security, confidentiality and efficiency of international clearing. In the future, the data from the International Trade Settlement Support Instrument can be used to improve the RMB international credit system.
In addition, both the Chinese RMB Cross Border Payment System (CIPS) and the Ruble and RMB Payment-to-Payment System (PVP) of the China Foreign Exchange Trading System are capable of realizing cross-border settlement payments in RMB between China and Russia under SWIFT disconnection conditions, and they should be continuously improved to enhance the scale and efficiency of their cross-border RMB settlement.
(2) Optimize the spatial layout of RMB business
Renminbi settlement payments are closely related to the scale of bilateral investment and trade. The expansion of Chinese investment in Russia will strongly boost bilateral trade. However, the center of gravity of China’s economic development and the main financing platform are in the eastern region, which has multiple constraints in terms of business information asymmetry and poor docking channels for economic and trade cooperation with Russia. Most importantly, financial institutions in the eastern region work closely with Western countries and are unable to withstand U.S. financial sanctions, so they are very cautious about cooperating with Russia, which is under U.S. sanctions. From the perspective of rational distribution of economic factors, the focus of China-Russia bulk trade and China’s financing business to Russia should be placed on the first-tier cities in the eastern region, as these cities and their surroundings are very developed in manufacturing and have rich financial resources and financial management experience, as well as strong financial products and financial technology research and development capabilities, which can support the innovation of China-Russia project financing and settlement and payment systems. Hong Kong’s unique advantages as a world financial center and trade center should also be brought into play to promote the expansion of Hong Kong’s economic and trade cooperation with Russia and RMB business. From the perspective of avoiding the risk of U.S. financial sanctions, Harbin Bank can be built into a specialized bank specializing in settlement and payment to Russia, and while strengthening its role as the main channel for settlement and payment for border trade with Russia, it can be connected to the financing network to Russia in the first-tier cities in the eastern region and Hong Kong, so as to better serve enterprises in the eastern region and Hong Kong in conducting business with Russia while creating more opportunities for its own development.
In Russia, Russian banks should be encouraged to increase the number of correspondent bank accounts, expand the geographical scope of correspondent bank accounts, encourage Chinese banks to set up additional branches in Russia, focus on the layout of regions with more Chinese enterprises’ investments, and provide localized financial services for the development of enterprises investing in Russia.
(C) strengthen government coordination and policy guidance
Good government coordination and policy guidance can effectively promote the expansion of RMB settlement. The objectives of government coordination should be: in terms of currency swap, to make an accurate and dynamic assessment of the demand for RMB in Russia, to adjust the local currency swap quota in time to make up for the demand gap, and to solve the problem of RMB cash transfer and deposit in conjunction with Russian customs and other departments. In terms of RMB clearing channel construction, the relevant Russian institutions will be connected to the CIPS system as overseas direct participants, and Chinese banks will be supported to set up RMB clearing banks in Russia and acquire Russian banks to develop correspondent banks for the RMB clearing network. In terms of financial technology research and development, strengthen joint research and development of settlement and payment technologies between Russia and China, take advantage of digital RMB in settlement and payment, promote the realization of financial technology compatibility between Russia and China, coordinate digital currency settlement policies of both countries and sign interstate agreements. In terms of facilitating the use of RMB in Russia, promote the Russian side to simplify the approval process for the purchase and use of RMB in its territory, and set and expand the area for the use of RMB cash.
The objectives of policy guidance should be: in terms of incentive policies, to give preferential treatment to enterprises adopting RMB cross-border settlement in terms of tax rebates, subsidies and incentives to enhance their enthusiasm to use RMB settlement. In terms of trade policy, to help Chinese enterprises increase their bargaining power with Russia, their ability to choose settlement methods, their ability to apply foreign trade policies and their ability to improve their competitiveness; to promote the construction of cross-border e-commerce payment platforms with Russia and support their settlement in RMB; to enrich the variety of Chinese export goods to Russia and cultivate Russian people’s consumption demand for using RMB. In terms of investment policies, Chinese enterprises are encouraged to participate in the construction of large-scale projects in Russia and use RMB to invest in Russia by taking advantage of their comparative advantages in investment in Russia; forming interest rate compensation programs, reducing the financing costs of key projects introduced by the government, supporting cross-border financing in RMB, attracting Russian enterprises to use RMB to invest in China, and guiding them to use RMB to repatriate their profits.
(D) deepen the cooperation of commercial banks
Chinese commercial banks should strengthen information exchange and credit dynamic assessment of Russian commercial banks to improve the standardization and security of transaction behavior. Commercial banks of both countries should strengthen investment and financing cooperation, promote new cooperation models such as industrial funds and investment-lending linkages, expand the number and coverage of local currency accounts in China and Russia by establishing comprehensive correspondent bank relationships, enrich local currency settlement tools in China and Russia, expand cooperation areas through product combinations and innovations, and strengthen the promotion and use of settlement tools such as letters of credit, letters of guarantee and bank cards. China UnionPay should promote the construction of UnionPay card acceptance network in Russia, support the deployment of financial machines in the border areas of the Russian Far East, promote more small and medium-sized Russian border trade merchants to join UnionPay card POS special merchants, expand the scope of RMB payment and settlement in Russian Far East port areas, and encourage Chinese banks to carry out credit card financing under trade under risk-controlled conditions. It should better play the role of the China-Russia Financial Union as a bridge to promote cooperation between Russian and Chinese commercial banks, promote more commercial banks from both sides to join the Union, improve the internal cooperation mechanism, and focus on promoting more use of RMB by Union members in major project investment and financing, etc.
Credit: Wang Xiaoquan. Publication: Read China. Published: February 1st 2022. Source Link: https://readchina.info/en-US/articles/566687877463801944
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