The evolving cross-border payment landscape is witnessing noteworthy developments beyond traditional systems. One notable trend is the plan by BRICS countries (Brazil, Russia, India, China, South Africa) to establish their own currency. For over a decade, the BRICS nations have been seeking to reduce their reliance on the US dollar and SWIFT. However, recent geopolitical dynamics, triggered by the Ukraine-Russia conflict and subsequent sanctions, have accelerated this move. The sanctions imposed by the West on Russia have led to the exclusion of several Russian banks from the SWIFT network, impacting Russia’s bilateral trade. In this article, we explore how these events are driving the BRICS countries to seek alternative payment systems and reduce their dependence on Western systems and dollars.
The Impact of Sanctions:
Currently, nearly 88% of cross-border transactions are conducted in US dollars, and USD accounts for 58% of global foreign exchange reserves. However, following the Ukraine-Russia conflict, sanctions were imposed on Russia, effectively removing several Russian banks from the SWIFT network and denying them access to international trade in dollars. This resulted in an impact on bilateral trade and payments between Russia and other countries. To mitigate this situation and maintain trade relationships, Russia incentivized countries to bypass SWIFT and settle trade in national currencies like rubles through its messaging system SPFS (which is an alternative to SWIFT). To settle these transactions, special non-dollar-based nostro and vostro accounts were opened in the partner country’s bank.
BRICS Countries’ Response:
In response to the challenges posed by sanctions, BRICS countries are considering the establishment of their own currency and payment messaging systems. Although these systems may not match the standards and interoperability of SWIFT, they will offer a means to ensure continued trade and payment message transfer. These internal payment networks will allow for transactions to be conducted using local currencies, reducing dependence on SWIFT. Russia and China have been strategically preparing to mitigate the long-term impact and removal from SWIFT from past 2014.
China’s Cross-Border Payment System:
China has already made progress in this area, with the establishment of its own internal payment messaging system known as CIPS (Cross-Border Interbank Payment System). CIPS enables cross-border transactions denominated in Chinese yuan (RMB) and reduces reliance on SWIFT, especially in situations where sanctions impact bilateral trade.
Russia’s Cross-Border Payment System:
Russia, too, has taken steps to counter the impact of sanctions by implementing its own financial transaction messaging system called SPFS (System for Transfer of Financial Message). SPFS facilitates bilateral trade by enabling payment message exchange with other countries bypassing the need for SWIFT when dealing with sanctioned banks.
The Path Ahead:
The development of internal payment systems and new trade currency by BRICS countries signals a desire for greater autonomy and resilience in the face of geopolitical challenges. By creating alternative payment messaging networks, these countries aim to reduce their dependence on Western-dominated systems, ensuring smoother trade and payment flows even under adverse circumstances. While these discussions and initiatives are still in the news and not yet formalized, they underscore the shifting dynamics in the cross-border payment industry. South Africa is hosting the BRICS summit this year in August, where one of the items on the agenda is this joint BRICS currency.
The emergence of BRICS currency and newer payment systems within BRICS countries is a response to the challenges posed by sanctions and the exclusion of certain banks from the SWIFT network. By developing their own payment systems, these nations aim to enhance their trade capabilities and reduce dependence on external networks. While these initiatives are still in progress, they highlight the evolving nature of cross-border payments and the drive for greater self-reliance among emerging economies. As these trends continue to unfold, the cross-border payment landscape is set to witness further transformations in the pursuit of robust and resilient global financial networks.
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