LONDON.– Facing the horrors of Russia’s invasion of Ukraine, and aware of the limited military options available to them, Western governments understandably deployed their economic and financial arsenal. Such sanctions have been imposed on rogue countries before, of course, with mixed success, but never to the same extent as Russia is today.
Specifically, the United States and its allies seized much of the Russian central bank’s foreign currency reserves, and cut off some Russian banks’ access to the SWIFT financial messaging system for international transactions. The world has learned a new word – “dewifting” – and the financial system has been used as a weapon like never before.
It is too early to assess the impact of the sanctions against Russia; There is still no sign of a decisive effect on President Vladimir Putin’s regime or his policies. But the longer-term damage to the Russian economy is likely to be considerable.
At the same time, the consequences of the current Western-led sanctions will not be limited to Russia and Belarus, their direct targets. Other countries are wondering if they, too, could be squeezed out of the dollar-based financial system if their governments cross a US red line. Policymakers in Saudi Arabia are concerned, and China has long been anxious about its vulnerability to US financial sanctions.
I don’t know if there is a Mandarin ideogram to dewift. But Zhou Xioachuan, the former governor of the People’s Bank of China, has spoken of the risk to China of possible US sanctions, and defended defensive measures to increase the use of the renminbi in global markets. Others have openly asked whether any Chinese move against Taiwan would trigger similar sanctions from the West.
In recent years, China has taken steps to mitigate this risk. For example, it has created its own Cross-Border Interbank Payments System (CIPS), which has the same messaging format as SWIFT, to offer cross-border Renminbi payments between its members. CIPS has grown rapidly, with some active participation from major Western banks, although the volume of transactions processed there before the Ukraine war was less than 1% of SWIFT’s volume. While that number is likely to rise as non-SWIFT Russian banks try to use CIPS as a substitute, their transaction volumes will be too small to make a significant difference.
While CIPS has so far not seriously threatened the global hegemony of Western payment systems, China’s development of the digital renminbi could have a bigger impact. Many central banks are exploring the possibility of introducing a digital currency (Sweden, where cash is rapidly disappearing, is further along than most); but among the largest economies, China leads. The Bahamian “sand dollar” may aspire to be the world’s first fully digital central bank currency, but it is doubtful that it can become a serious rival to the dollar.
Western central banks are moving cautiously into the digital currency arena. There are technical issues to resolve, as well as serious privacy concerns. Citizens may not welcome the idea that the central bank can monitor every penny they spend. Those considerations don’t have much to do with the People’s Bank of China. A recent Hoover Institution report on the outlook for the digital renminbi describes it as “a stunning extension of authoritarian control.” But, from a Western perspective, the international implications are more serious than questions of internal control.
Chinese leadership in the field of digital currencies could significantly increase the cross-border use of the renminbi, and countries participating in the Belt and Road Initiative or New Silk Road today are being “encouraged” to use it. The Hoover Institution report, written just before the invasion that led to the war between Russia and Ukraine, argues that the ability of the United States to implement financial sanctions effectively would be reduced if China were able to promote, through its digital currency, , the “yuanization” (another new word for me) of global trade flows.
The United States is well advanced in developing and promoting private cryptocurrencies – speculative vehicles with high transaction costs that offer the prospect of higher returns for astute speculators. China, on the other hand, leads in cheap payment systems that lower the costs of cross-border transactions for individuals and businesses in the real economy. There could be a lesson there.
The death of the dollar was often predicted, of course, and while the US dollar’s share of global foreign exchange reserves has fallen from 71% in 2000 to just under 60% today, there is currently little sign of his death. But the increased use of financial sanctions as a weapon of war has created a new incentive for China and other countries to explore ways to minimize the impact should similar measures be applied against them. The longer-term consequences for the global financial system could be far-reaching.
*The author is president of NatWest Group.