Will China Go Further in Its Support of Putin’s Russia by Moving Its Payment System Closer to MIR?
Russia needs more support from China than ever.
A few days before the beginning of the Russian invasion of Ukraine in February 2022, Xi Jinping and Vladimir Putin announced with great pomp to the whole world the “no limits partnership” between China and Russia. As Western sanctions continue to tighten against his country, Vladimir Putin now needs more than ever for these announcements to materialize into facts.
The big question that will soon be discussed between the Chinese and Russian central banks is whether the payment systems of the two countries can be brought together. Consultations will soon take place to see if the Russian MIR system and the Chinese UnionPay system can be brought together in both countries.
This rapprochement could allow Russia to partially circumvent the sanctions imposed by Western powers in the context of the conflict in Ukraine. The West has excluded several Russian banks from the international payment system SWIFT, which makes their cross-border transactions particularly complicated. A new major Russian bank, Sberbank, is expected to be excluded from SWIFT shortly.
MIR and UnionPay are the national payment systems of Russia and China. MIR was built starting in 2014, in the wake of the Crimean War, after Washington forced Visa and Mastercard to block certain transactions during the conflict. Before that, Russia did not have a domestic system and the two American giants handled the majority of the country's domestic transactions.
Although MIR and UnionPay are national systems, a rapprochement would greatly simplify transactions between China and Russia. A trend that is already underway. In the context of the war in Ukraine, China was one of the few countries that did not officially denounce the Russian invasion and speak out against Western sanctions measures aimed at excluding Russia from the international financial system.
China is reluctant to give Russia full support
However, China has not yet given Russia its full support. And for good reason: it would then expose itself to secondary sanctions by the United States, which would have the consequence of cutting China off from access to the American dollar in particular. Nearly 80% of the world's transactions are made in dollars today. It is not certain that Russia is a sufficiently important economic partner for China to agree to cut itself off from international trade.
By comparison, the share of the yuan in international transactions is only about 3%, according to the latest figures from Swift. Several Chinese financial institutions, such as the Industrial and Commercial Bank of China and the Bank of China, have reduced their trade with Russia for fear of American reprisals.
For its part, Russia wants to make China its new privileged partner while many Western companies are turning away from Moscow and EU countries could agree to do without Russian oil and gas. The Kremlin wants to increase trade between Russia and China, from 100 to 200 billion dollars between 2020 and 2024. Moscow is also counting on a rapprochement with India.
However, if the central banks decide to bring MIR and UnionPay together, it will not happen overnight. The pipes need to be connected, a protocol needs to be defined, and a common language needs to be agreed upon that can be understood by all financial institutions. This cannot be done in a few days.
The MIR system took several years to fully replace Visa and Mastercard in Russia.
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