Still too early to talk about geopolitics of payments infrastructures?

The Ukrainian crisis brings us East-West block politics. It is time we talk about the geopolitics of payment systems: listing some facts about China's and Russia's payment systems.

China

In 2012 China decided to establish its own international payment system with the declared purpose of purpose of encouraging international use of the yuan. In 2015 the Cross-border Interbank Payments System (CIPS) began its operations. Although SWIFT and CIPS have been cooperating for years on integration of the two systems, it's clear that CIPS has been launched as an alternative to SWIFT as it features reduced costs and processing times. Though China is almost as wide as the continental United States, the whole country runs on Beijing time, easying the operation of its payment infrastructure.

China's RTGS has proven especially popular with banks from countries exposed to US sanctions, such as Russia and Turkey, as well as African states which are benefiting from infrastructure projects under China’s Belt and Road Initiative.?

Russia

In 2014 Bank of Russia launched its Financial Messaging System SPFS providing banks and other legal entities with a secure and protected environment for financial messages exchange.? The SPFS also provides the message exchange service to the Russian Federal Treasury. Launched as a national alternative to SWIFT, in 2020 SPFS still handled a little more than 20% of the domestic SWIFT traffic. Compared to CIPS, SPFS has a smaller international coverage, probably as a consequence of the US sanctions. While interoperability with CIPS has been announced, operational status has not yet been reached.?

SPFS is the widest RTGS in the world, spanning 11 time zones. As a comparison, there are only four time zones in the Continental part of the United States, and the full country spans six of them.

The Renminbi and its onshore and offshore circulations

Renminbi is the official name of China’s national currency and it actually means “people’s currency” in Mandarin. However, Chinese people call their currency the Yuan ￥, which is actually the unit of measure of the Renminbi. The circulation of the Renminbi is segmented into two different regions, and the currency takes two different names:

• CNY is the name of the onshore RMB currency, that is the currency circulating inside Mainland China. The value of CNY is tightly managed and controlled by the Chinese government. CNY payments must comply with the restrictions imposed by the Chinese government.
• CNH is the name of the offshore RMB currency, that is the currency circulating outside Mainland China. CNH can be traded freely against other currencies in the international exchange markets, without any interference from Mainland China’s capital controls.

For a Chinese subject abiding currency controls, 1 CNH = 1 CNY. However, CNH and CNY are worth different amounts when compared to a foreign currency, and they both have their own sell, buy, and mid-market rate. To make things worse, the distinction between CNY and CNH is only used by Banks that are actively arbitraging between those two. All other banks have adopted the symbol CNY to denote the Renminbi circulating in the offshore market.?

Rouble circulation in Russia

Generally, foreign currency operations between residents are prohibited. While lending activities and contracts may refer to foreign currencies, the actual payments must be executed in roubles. Payments in any currency are permitted without restriction between non-residents, provided that payments in Russian roubles within Russia are executed between accounts opened with Russian authorised banks. Payments in cash are allowed under the threshold of 1,000,000 Rubles. Settlement for rouble transactions is also permitted, subject to compliance to Russian securities market regulations.?

The ISO 20022 Standard

Traditional payment order formats like ISO 15022 (the Swift’s MT FIN messages) support a very limited character set (uppercase and lowercase latin alphabet + digits + a few special characters). As ISO 20022 supports Unicode, both Russia and China were among the first to adopt the new standard, opening the way to Cyrillic alphabet and Mandarin ideograms. Also, regulators like the ISO 20022 because it enables better transaction screening and tracing, as it includes more information about transaction parties.

The Chinese internal payment system

The China National Advanced Payment System (CNAPS) handles internal payments and is composed by many subsystems.??????

• High Value Payment System - launched in 2005, is the national internal RTGS system, handling inter-city and local credit transfers. Payment instructions are sent in real time and cleared transaction by transaction.?
• Bulk Entry Payment System - launched in 2006, deals mainly with local and non-local paper-based debit payments as well as low-value credit transfers below a given value. The system sends payment instructions in bulk, nets in real time and settles at regular times.
• Internet Banking Payment System - launched in 2010, is an instant payment system handling interbank retail payment retail transactions via the Internal Internet.
• Cheque Image System - launched in 2007, is an image-based cheque truncation system supporting the use of cheques nationwide.

The Russian internal payment system?

• Bank of Russia Payment System - operating as a Real-time gross settlement, the BRPS handles nearly 93% of payments, processing a daily average of 7 million payments. It is the key element of the national payment infrastructure driving fiscal and monetary policy operations, government payments, and interbank settlements.
• NSD Payment System - ensures uninterrupted real-time settlements between its participants as part of the post-trading infrastructure of the Moscow Exchange. In 2020, transfers through NDS totalled nearly 120 trillion rubles, with over 65% transfers happening under deals made in organised trading.
• Faster Payments System - launched in January 2019, instant payment system. Since 2019, FPS has handled transfers worth of over 1 trillion rubles.
• National Payment Card System - processes all domestic transactions with bank cards. As of early 2021, approximately 95 million Mir cards had been issued, which are accepted inside the Russian Federation.

Diffusion of CIPS (2020 data published by BOFIT- Bank of Finland Institute for emerging economies)

Over 800 banks from about 90 countries participate in CIPS, either as direct or indirect participants. Most CIPS traffic happens between Hong Kong and mainland China.

Banks in ASEAN countries account for 8 % of CIPS payment transfers (15 % of value). Usage of CIPS in Africa, Latin America and Europe accounts for only about 0.5 % of payment transactions and less than the 0.1 % of their value. In North America, only 26 banks have a CIPS connection and many of them are foreign subsidiaries of Chinese banks. CIPS handled 2.2 million payment transactions last year with a total value of 45.2 trillion yuan.

Diffusion of SPFS (2020 data published by Bank of Russia)

About 400 credit institutions and other users are connected to the SPFS, with more than 70 thousand messages transmitted on a daily basis. During the same year, 21 foreign organisations have concluded agreements on the provision of SPFS services, 12 of which are already connected to the system.