Russia Lays Out Terms For Future Bilateral Trade & Investment

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Bilateral settlement in Rubles has doubled in 12 months, while SWIFT payment mechanism alternatives are developing fast     

By Chris Devonshire-Ellis  

Russian President Vladimir Putin has laid out the criteria for foreign countries and businesses who wish to develop trade and investment with the country, saying that Russia will emphasize mutual investments in the development of foreign economic ties.

Speaking at a meeting of the Council for Strategic Development and National Projects, Putin said that “For all the importance of the energy and food sectors, we will be emphasizing non-resource goods and mutual investments in the development of foreign ties.”

Russia sees the development of convenient and independent payment infrastructure in national currencies as a firm basis for strengthening international cooperation, essentially meaning that non-Euro and US Dollar payment mechanisms would be required to facilitate trade.

“We have already achieved good progress here. According to the latest data, the Russian Ruble’s share in our international settlements compared to December 2021 has doubled and totals one-third. Together with currencies of friendly countries, this share exceeds 50% (of all bilateral settlements)” Putin said.

This strategy spells out two major issues for dealing with Russia, which is a major global player in both energy, agriculture and related industries such as oil and gas refining, pipeline constructions and fertilizers, and is important to note that China has taken a similar stance.

For Russia, trade is increasingly conducted in Rubles and other currencies, the Chinese Yuan, as well as the Indian Rupee and other global currencies, including those from Central Asia and elsewhere. China for example has recently requested to pay in Chinese Yuan for oil it purchases from Saudi Arabia. While there are difficulties to overcome in making these arrangements, this will occur over time and will become a new trend.

The main underlying factor behind this is unhappiness with the manner in which the United States weaponized the global SWIFT payment network, which based the US dollar as the hub for global trade and instigated checks and balances for US banks to investigate the source of funds, originally intended to be a series of checks and balances against global money laundering and the drugs trade, which hurts all economies worldwide. Over time, it has turned into a tool for the United States to punish sovereign countries whose policies it does not agree with; Iran, cut off from SWIFT in 2012.

In hindsight, that was really an experiment to see if it worked, and only a matter of time before the same method was carried out on other countries – and this extended to Belarus and Russia ten years later – 2022.

This may have been a mistake. While Iran and Belarus are relatively small countries in terms of their integration with global trade, Russia is not. The action to expel Russia from SWIFT has therefore rung alarm bells with other nations who may feel they face political and trade pressures from the United States. This includes major global economies such as China, India, Turkiye, and major energy players such as Iran, Saudi Arabia, and Venezuela among many others. This means that all countries who feel that political and/or trade relations with the United States could later become problematic are now looking to alternative payment verification systems to the SWIFT network. Some are already well advanced, including China’s CIPS and Russia’s SPFS systems, which face technical and diplomatic (and potential sanctions) issues in spreading their networks to include additional countries. Progress is being made, in 2021, CIPS processed around 80 trillion yuan (US$12.68 trillion), with about 1280 financial institutions in 103 countries and regions having connected to the system. Russia’s SPFS is somewhat behind this, but again progress is being made: in April 2022, the Russian Central Bank said that most Russian financial institutions and 52 foreign organizations from at least 12 countries were successfully integrated with the SPFS. Hybrid solutions are also being developed: in March 31 this year, the Indian government offered Russia a new transaction system with the transfer of trade to the Ruble and SPFS, which will work through the Reserve Bank of India and Russia’s Vnesheconombank. That is also now operational although at present is working with relatively small volumes. Nonetheless, the trend towards SWIFT alternatives has become clear, with smaller countries banding together to develop payment groups, such as multilateral trading through the BRICS network – currently Brazil, Russia, India, China and South Africa, but with another 13 countries all officially negotiating membership.

There is far more. While the Western media continues to shout about how much its sanctions upon Russia have damaged the economy, they have tended to make the mistake of assuming only their trade with Russia matters. In fact, Russia’s borders with the East are 4.5 times longer than those with the European Union, and trade has been booming. Russia is getting very close to replacing the entirety of its 2021 EU trade by increasing its trade volumes with alternative markets while its 2022 trade with China and India, both significant global markets, has significantly increased. Both are using Yuan and Rupee to Ruble mechanisms to allow this to happen. Russia’s trade with its Eurasian Economic Union free trade bloc is also up, as it is again with the Commonwealth of Independent States.

Russia’s 2022 trade development in other markets also shows increases over the year. These include strategic agreements with Venezuela, the world’s largest oil producer, Brazil, Cuba, the UAE, Turkiye, Iran, as well as multiple deals across Africa. This also includes markets closer to home, such as Belarus, Azerbaijan, and Georgia. These countries are by no means a comprehensive list.

Looking ahead, one implication for the United States in weaponizing SWIFT and the subsequent pushing into motion of alternatives is a weakening of the global trading system and US oversight of this. In this manner, the United States, and to some extent Europe (many European banks use SWIFT) have diminished themselves. The reality of this may not become prevalent until 2024/25 – but the global call from the larger balance of global GDP and trade to utilise alternative payment systems will become the dominant factor in worldwide trade in coming years. BRICS alone as it is set to expand would create a bloc with a GDP 30% larger than the United States, over 50% of the global population and in control of 60% of global gas reserves.

In his statements concerning foreign country’s ability to trade with Russia, President Putin is giving notice that this is exactly what will happen. When it does, global trade and energy supply chain dynamics will completely change.

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