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Besides the spectacle of a UN secretary-general obsequiously paying respect to a Russian president indicted for abducting children, last month’s Brics summit in Kazan featured the more technical, but geopolitically more consequential, push “to make the international financial architecture more inclusive and just”.
Brics finance ministers specified three aspirations. One: a cross-border payment system, separate from that comprising Belgian-based Swift, western correspondent banks, and the Federal Reserve and allied central banks. Two: securities settlement and depositary services. Three (which the UK as a global insurance centre should heed): an alternative reinsurance system.
All three reflect urgent Russian priorities. After Vladimir Putin’s full-scale assault on Ukraine, Russian banks were kicked out of Swift and many correspondent banking relationships. Moscow’s central bank reserves in Euroclear have been blocked. Sanctions on the Russian oil trade get their efficacy from western dominance of insurance.
This urgency is a compliment to the west. It proves western financial sanctions work and should encourage their tightening. But should we worry that the quest for alternative financial cross-border connections could be achieved?
In one sense China has already done so with its cross-border interbank payments system. Cips does for renminbi transactions what the US’s Chips system and the Fed do for dollar payments. But while Cips activity has increased, it has not proved particularly attractive for those who can easily transact in dollars.
Technical solutions aside, the governance questions confronting an alternative financial architecture are massive. For example, Cips is as exposed to the whims of the government in Beijing as Chips is to Washington, Euroclear to Brussels and Swift to both — indeed more so, given China’s weaker rule of law and its greater controls on capital flows.
Then there are economic challenges. Many countries seeking alternatives to dollar dependence are structural net exporters, have non-convertible currencies or both. In the absence of perfectly balanced bilateral trade, the lack of a common convertible medium of exchange — the dollar or euro today — would lead to ever-growing lopsided claims in one another’s currencies. Making it simpler for Russia to be paid directly in Indian rupees, for example, does not help Russia’s headache of what to do with the rupees it has built up.
But the west cannot be complacent. The technological and geopolitical races are two sides of one coin. If some countries adopt technology that makes cross-border exchange cheaper and more efficient, the race is on for the business of the non-aligned part of the world.
Such technology is there for the taking. Central banks are developing digital currencies and testing distributed ledgers for clearing and settlement. The Bank for International Settlements has worked to modernise or supersede old-style cross-border practices, in part with digital technology that gives central banks a direct role.
Conceivably, the Brics may use one such project, mBridge, which has China’s central bank as a partner, as a blueprint. The BIS’s withdrawal from mBridge last week shows the political sensitivity (both it and partner central banks deny it is designed for sanction-busting). But this is a red herring. If China, or the Brics collectively, want smarter cross-border transfer technology, they will not find it hard to build. To attract users, they must overcome the governance problems mentioned above.
If they do, they could create economic incentives for a geopolitically profound shift of financial activity. In turn, the west could intensify the cost of switching by denying any financial institution the ability to be linked to both systems at once. But this would be costly, splitting the global economy into separate blocs with few financial connections.
Much better would be to retake the technological lead and upgrade the dollar-centred system to something as quick, cheap and efficient as anything anyone else can offer. This would blunt the advantage a rival bloc could offer, while maintaining the attraction of access to the richest, most liquid and open economic blocs in the world.
The EU has a special responsibility in this regard. The US’s willingness to lead a defence of democratic multilateralism is unreliable. And the European Central Bank has embraced innovation — including work on a digital currency and cross-border connectivity — more than the Fed. But unlike the ECB, Europe’s politicians do not fully grasp the geopolitical import of the digital euro and its international use. Instead, they wring their hands over Europe’s lagging competitiveness and limited strategic autonomy. Here is a way to improve both.
