Andrew Galbraith, Samuel Shen

SHANGHAI, (Reuters) – As western countries increase sanctions on Russia for its invasion in Ukraine, Moscow’s allies from emerging markets are looking at ways to trade and finance the process.

Brazil, India, and China are all cautious because of sanctions. But, the signs of an emerging parallel financial system centered on Beijing are beginning to be evident.

    The United States and Europe have banished big Russian banks from the main global payments system SWIFT and announced other measures to limit Moscow’s use of a $640 billion war chest.

So, the willingness of Russia’s emerging market titans to continue business relations highlights an open rift in Europe over Europe’s worst crisis since World War II. This could threaten to undermine the U.S. Dollar’s global dominance.

Chinese banks and businesses are looking for ways to minimize the negative impact of sanctions on Russia’s relations. Transactions in yuan have been rising while the dollar is losing ground. China and Moscow could be strengthened by the western sanctions, designed to remove Russia from the international financial system.

India’s concerns over Russian fertilizer supply are causing concern. Sources in the government and banks say that Russian companies and banks have a plan to create rupee accounts with some state-run bank branches to trade settlement under a barter system.

Jair Bolsonaro of Brazil, the President of Brazil, said that his country will continue to be neutral in this conflict.

    Deng Kaiyun, who heads Zhejiang’s chamber of commerce that represents Chinese private businesses that trade with Russia, said doing transactions without SWIFT was not a big issue, as the two countries both started de-dollarisation five years ago.

    “Yuan-rouble settlement has become a normal business at major banks nowadays … We business people are already accustomed to that,” Deng said, adding yuan is increasingly popular with Russians.

    SWIFT

    The sanctions are prodding Russian and Chinese companies to open accounts at Chinese banks that have subsidiaries in Russia, said a Moscow-based lawyer who represents Chinese businesses.

    “SWIFT is not the only payment system. Due to the sensitive nature of the matter, the lawyer declined to identify himself.

    A source at a Chinese state bank who declined to be identified says “exporters are now in favour of using yuan to settle their payments” with Russia. Some trades had been settled in dollars or euros until the last week.

    A source at another state lender said that, given a lack of details in the Western sanctions, the bank is closely monitoring the situation while encouraging clients to use yuan in trade settlements with Russia.

In the first half 2021, Chinese exports to Russia were 28% dominated by settlements, as compared to 2% in 2013. As both China’s and Russia intensify efforts to lessen their dependence on America, the two countries also develop their own cross-border payment systems.

    The current crisis could accelerate the trend.

    Dang Congyu, analyst at Founder Securities writes the SWIFT sanctions against Russia are “a milestone event that will accelerate the process of de-dollarisation.”

    “Although it’s hard to replace SWIFT in the short term, this incident is very beneficial to yuan’s globalisation over the long run.”

    DE-DOLLARISATION

    Efforts on de-dollarisation are not limited to trade.

Caderus Capital, an investment firm, stated that it is working hard to encourage cross-border investments between Russia and China.

Andrei Akopian, managing director of Russia Central Bank, praised Russia’s decision to invest in yuan assets more as “the best method to increase popularity for the Chinese among Russian Investors.”

    Yuan accounted for 13.1% of the Russian central bank’s foreign currency reserves in June 2021, compared with just 0.1% in June 2017. From 46.3%, dollar holdings fell to 16.4%.

“If we talk about trade and investment, it makes a lot of sense for both countries not to trade in the in U.S. dollars, because then you have double conversion, in addition to other difficulties recently,” Akopian said.

However, the immediate pain is felt by many Chinese companies as they lose their trade agreements and their volatile rouble.

    “Everyone is focused on maintaining or cutting existing business right now. Nobody is talking about creating new business. This is what I have heard from every quarter, including Chinese clients,” said the lawyer who chose not to be identified.

    Han-Shen Lin, senior advisor The Asia Group and an ex-banker, also cautions that Chinese banks could face tougher scrutiny in the face of western sanctions against Russia.

    “All the Chinese banks know that the U.S. dollar clearing global banks will be asking Chinese banks about involvement in sanctions-related counterparts transactions,” Lin said.

     “What will be of interest is how Chinese banks can segregate the sanctioned transactions versus non-sanctioned”, such as energy-related businesses.