For the last two weeks, Russia and Ukraine have been at furious war. Following Russia’s military actions, Europeans and Americans have escalated their economic sanctions on Russia.
Prior to and after Russia’s annexation of Crimea in 2014, Europe and the United States imposed severe economic sanctions on the Kremlin. Sanctions were imposed on many Russian banks, the oil and gas sector, and the military industry. According to the European Union, the United Kingdom, the United States, and Canada, with the launch of Russia’s special military operation in Ukraine, agreed to impose severe and unprecedented measures aimed at further isolating Russia’s economic and financial system.
These sanctions included the expulsion of many Russian banks from Swift’s financial network, as well as moves designed to cripple Russia’s central bank. According to the European Commission’s president, the exclusion of Russian banks from Swift is meant to restrict Russian exports and imports. However, since 2018, Russia’s official interbank exchange system has been the SFSF, or Russian Swift.
Russia sought to broaden its foreign currency reserves after the events in Crimea in 2014 by developing the SPSF system. According to the Russian Central Bank, just around 16% of its currency is still held in dollars.
Around a third of Russia’s foreign exchange reserves are kept in Chinese Yuan, with the rest in Yen, Canadian dollars, Australian dollars, and Singapore dollars.
Despite the diversification of Russia’s FX reserves, Chinese bonds and the Yuan are currently Russia’s sole overseas assets to evade Western sanctions by using its Yuan assets and China’s international payment system. In such a scenario, China shall provide a vital financial lifeline to Russian firms. Due to the Chinese central bank’s multibillion-dollar exchange rate with its Russian counterpart, the two countries are able to provide liquidity to businesses
Following the withdrawal of international credit card firms from Russia, major Russian banks will adopt China’s “Union Pay” system, which enables new cards to be used to pay for and withdraw money in other countries.
Union Pay is a global payment system that was launched in 2002 and received formal UN recognition in 2005. The company is based in Shanghai and has operations in over 180 countries, including Switzerland, Greece, Italy, Spain, and Germany.
