For most of the previous decade, questions regarding the future of globalisation had become commonplace. Several commentators suggested that a process of de-globalisation or at least ‘slobalisation’ had set in.
The COVID-19-induced economic crisis reinforced these downbeat expectations by dealing a crippling blow to the global supply chains, and to the economies that were dependent on them.
Although most economies have rebounded in 2021, the on-going Russia-Ukraine crisis has not only raised serious doubts about the sustainability of the recovery process, but has also brought into sharp focus issues that have implications for the future of globalisation.
The most significant of these questions have arisen from the use of sanctions by the United States-led alliance of Western countries against Russia — something that the alliance has routinely used against its Cold War adversary. In early March, the alliance stopped seven Russian banks from using the SWIFT financial messaging system, regarded as the lifeline of global financial transactions.
However, since the Crimea crisis in 2014, Russia has been trying to develop its own financial messaging system, namely SPFS, which roughly translates as ‘System for Transfer of Financial Messages’. However, the SPFS has not been able to establish a global footprint, having been used only for domestic transactions. But importantly, plans are afoot to integrate it with the China’s answer to the SWIFT, the Cross-Border Inter-Bank Payments System (CIPS).
At the same time, the Russians are using bilateral currencies to continue trading with its willing partners, especially its two key partners: India, and China.
These possibilities of bypassing the US dollar, including using the CIPS, could have implications for the future of globalisation, the rules of which were written in Washington. The emerging situation could, in fact, be used by China to fuel its ambitions of enhancing renminbi-denominated transactions globally. Renminbi has been in focus since 2016 when it was included in the basket of international currencies for the determination of the value of IMF’s currency (the Special Drawing Rights, or SDRs), in recognition of “China’s expanding role in global trade and the substantial increase in the international use and trading of the renminbi”, according to the IMF.
Subsequently, the Chinese authorities have taken several steps for the internationalisation of the renminbi, and have underlined the objective of internationalisation of the currency “in a steady and prudent manner” in the 14th Five Year Plan (2021-25) endorsed in 2021.
Functionally, one of the major initiatives for increasing the use of renminbi has been the bilateral currency swaps concluded by the People’s Bank of China’s with 41 countries until 2020, including a 150 billion Renminbi ($24 billion) bilateral swap line Russia. As a result, Russia has settled more of its growing bilateral trade with China in renminbi, from 3.1 percent in 2014 to 17.5 percent in 2020.
Simultaneously, Russia has reduced the share of the US dollar in its reserves (to 21.2 percent) while raising the share of other major currencies including the Euro (to 29.2 percent), and the Renminbi (to 12.8 percent).
Would the isolation of Russia from the Western financial systems, and its initiatives to bypass the dollar in its transactions, trigger a move towards scaling down of the use of the dollar, and an increasing use of the renminbi? This possibility seems unlikely to happen soon, as China’s trade transactions denominated in its own currency is currently estimated at below 20 percent. However, there are indications that this figure could push upwards in the near future as in the midst of the uncertainties caused by the Ukraine crisis, the Kingdom of Saudi Arabia (KSA) announced that it could work out future deals with China wherein the latter could purchase its oil using the yuan, instead of the US dollar. This was a significant announcement given the historically close relations between the KSA and the US. Whether this sets in a move towards de-dollarisation would be watched with interest.
There are, thus, distinct signs that Chinese currency is gaining strength in globally. According to the SWIFT, renminbi was the fifth-most active currency for global payments by value in February 2022, with a share of 2.23 percent, and was closely following the Japanese Yen, whose share was 2.71 percent. But more importantly, the SWIFT has also been engaged in promoting internationalisation of the renminbi, providing further legitimacy to the efforts being made by the Chinese authorities in this regard. In 2019, the SWIFT signed a letter of intent with the CIPS to deepen co-operation in cross-border payment services and support the renminbi’s further internationalisation. Whether this happens at the expense of the dollar will be watched with interest.
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