Within two weeks of Russia’s invasion of Ukraine, the United States and its allies have collectively imposed a series of sanctions to isolate Russia’s financial system. Recent stringent Western sanctions are a stress test of Russia’s de-dollarization initiatives and an emerging nondollar financial system. Besides de-SWIFTing Russian banks, Western sanctions have targeted the assets of the Russian central bank and sovereign wealth funds, the Russian Ministry of Finance, and Russian oligarchs. These punitive measures effectively wiped out the thirty-year post-Cold War Western financial engagement with Russia. I have discussed a Russia-China de-dollarization partnership in the Foreign Affairs article titled The Anti-Dollar Axis. It seems that Putin’s Russia has more partners for de-dollarization in Asia, such as India.
So far, Putin has not been completely isolated, at least in Asia. Asian countries’ response to President Putin’s war in Ukraine has been far from unified. Japan and South Korea, two key U.S. allies in East Asia, have slapped severe sanctions on Russian entities. Although not a treaty ally, Singapore has also imposed sanctions on Russia. In contrast, the Philippines, a U.S. treaty ally, has decided to proceed with its purchase of 17 Russian military transport helicopters worth $249 million. India, a major U.S. ally, has neither condemned Russia’s invasion of Ukraine nor imposed sanctions, although it abstained from the UN Security Council vote. Similar to India, China has not called Russia’s military action against Ukraine an invasion but abstained from the UN Security Council vote. China’s abstaining rather than casting a veto has been considered a diplomatic victory by the West.
An unintended consequence of Western punitive sanctions could be strengthening a Russia-China de-dollarization partnership. Joining such a partnership may also appeal to India. India has reportedly expressed interest in jointly exploring with Russia and China an alternative to SWIFT that would allow it to trade with countries under U.S. sanctions. While India currently does not have its own domestic financial messaging system, it plans to link a service currently under development with Russia’s SPFS (System for Transfer of Financial Messages, Russia’s equivalent of SWIFT), which could connect with China’s CIPS (Cross-Border Interbank Payment System, the Chinese version of SWIFT). Once materialized, the linked systems would cover most parts of the world. The global coverage of this alternative system could appeal to countries that are either vulnerable to U.S. sanctions or discontent about the U.S. dollar’s dominance. China’s CIPS currently has three direct participants in Europe and none in the United States.
Although India has not been an enthusiastic advocate for such a de-dollarization partnership, it has developed ways to trade with Russia while bypassing sanctions. India has been exploring a rupee-ruble trade arrangement with Russia following Western sanctions on Russia. India is no stranger to such an exchange arrangement. In the 1953 Indo-Soviet Trade Agreement, India and the Soviet Union inked a similar exchange scheme in which the two sides agreed to settle all bilateral payments in rupees. Although this Soviet-era arrangement ceased to exist in 1992, the Russian state and the Indian state have been developing new mechanisms, such as the use of rupee debt for joint investment to promote Russian-Indian strategic partnership. Between 2014 and 2019, bilateral trade between India and Russia settled in rupee-ruble exchanges surged by five times during Prime Minister Modi’s tenure, increasing from 6 percent of the total bilateral trade to 30 percent.
India and Russia have already arranged a rupee-ruble exchange mechanism to settle Russian arms sales to India to avoid sanctions under Countering America’s Adversaries Through Sanctions Act (CAATSA). India is the biggest customer of Russian arms. According to data from the Stockholm International Peace Research Institute, between 2016 and 2020, Russia accounted for about 49.4 percent of Indian arms imports, whereas India consumed about 23 percent of Russian arms exports. In 2019, Russia and India agreed to settle India’s purchase of more than $5 billion worth of Russian S-400 air defense systems through a rupee-ruble transfer precisely to avoid sanctions under CAATSA. In 2021, the two countries abandoned the dollar when conducting arms sales. Rosoboronexport, Russia’s sole state intermediary for arms exports and the primary target of CAATSA’s sanctions, has almost entirely moved away from dollar settlement. Anatoly G. Punchuk, deputy director of the Russian Federal Service for military-technical cooperation, observed that the “dollar is no longer the universal currency for trade in defense.”
Other actors besides governments have an incentive to develop alternative mechanisms to bypass sanctions. Corporate entities want to hedge the risk as well. Russian companies that are not directly impacted by U.S. sanctions have also been actively seeking to develop alternative payment mechanisms as a hedge against the dominance of the U.S. dollar. Since 2018, Russian state-owned miner Alrosa PJSC, the world’s largest producer of rough diamonds in carat terms, has successfully tested ruble payment with foreign clients from India and China.
Russia’s best hope is that its de-dollarization mechanisms developed with China and India could provide immunization against Western sanctions. China and India now both have their Russian dilemma. Should they choose to help Russia skirt sanctions, their financial entities will face severe consequences of secondary sanctions in addition to reputational damage if exposed. Should they choose not to provide Russia with relief, the bankruptcy of Putin’s government could cause a major setback to their attempt to build an alternative global financial system. A failure to save Russia from Western sanctions would suggest that the aspirational de-dollarization partnership cannot withstand the stress test imposed by the United States and its allies.