Follow us on social


How is Russia's parallel currency system going?

Efforts to avoid sanctions by promoting an alternative to US-dominated financial networks has its challenges. But that could change.

Analysis | Europe

The West’s response to Russia’s invasion of Ukraine in February 2022 was swift and decisive.

Shortly after the Russian invasion, the United States barred Russia from making debt payments using foreign currency held in U.S. banks, increasing the risk for Russia to default on its debts.  In addition, seven Russian banks have been excluded from the SWIFT international messaging system, which facilitates financial transactions and payments.

These sanctions were the “largest sanctions package in [the] Union's history,” according to Ursula Gertrud von der Leyen, the president of the European Commission. 

To remedy the impact of sanctions on its economy, Russia has expedited cooperation with its partners, including China, India, and the Islamic Republic of Iran, to create a parallel financial system to the Western-dominated institutions. In doing so, Russia is pursuing two main objectives. In the short term, Moscow’s goal is to replace Western markets by expanding its petroleum exports to India and China, which are seemingly more reliable trade partners.  The ultimate objective, however, is to create a system in which Russia and its partners can circumvent Western economic dominance.

The practicality and effectiveness of such a system remains to be seen. 

The creation of a new financial system has been on Russia’s agenda for years. In fact, from the early days of the post-Soviet Union, Moscow has been trying to establish a common market with the USSR's former republics. In this vein, the 1991 “Commonwealth of the Independent States,” an intergovernmental organization between eastern European and Central Asian nations, was created to encourage financial cooperation and mutual trade. This resulted in the establishment of the Eurasian Economic Union, or EEU, in 2014, a supranational institution that integrated the market of five countries  – Russia, Belarus, Armenia, Kazakhstan, and Kyrgyzstan – into a single market.

Nevertheless, during this period, Russia remained more interested in creating a “financial hub” of its own rather than creating a “financial zone” parallel to the Western  system. However, the U.S.-backed sanctions on Russia that followed the annexation of Crimea in 2014 demonstrated Moscow’s vulnerabilities. It is noteworthy that as a result of sanctions, the Russian currency, the rouble, depreciated by 100 percent. 

This helps explain why, shortly after the annexation of Crimea, Russia began adopting its  “Fortress Russia” strategy designed to detach its economy from the Western-dominated financial system and diversify its economy. Two important measures bear noting here. The System for Transfer of Financial Messages (Sisteme Peredachi Finansovykh Soobshchenii) was devised in 2014 as a Russian equivalent of the SWIFT system and was designed to reduce the risk of sanctions imposed on Russian businesses and banks. 

Despite Russian declarations on the effectiveness of this system, however, SPFS has suffered from a number of shortcomings, including high transaction costs, system availability, and security requirements, which have undermined its reliability and usefulness.

Meanwhile, the MIR payment system initiated by the Russian Central Bank in 2017 is meant to serve as an alternative to the U.S.-based Visa and MasterCard. MIR has already been accepted in 11 other countries. In addition, Russia has accelerated its efforts to de-dollarize bilateral trade with friendly countries such as China, Iran and India, and has been actively redirecting its petrol exports from West to East to turn Asia into the “default market” for Russian oil. 

A number of regional powers have also sought to detach their economies from the Western financial system. Since 2014, Russia and China have been strengthening their partnership.  To shield their financial cooperation from potential U.S. sanctions, both nations have sought to eliminate the U.S. dollar from their trade with considerable success. It is noteworthy that in 2020, only 41.5 percent of bilateral trade has been settled in Dollars, while in 2015, 91 percent of bilateral exchanges were settled in U.S. currency. 

Meanwhile,  Sino-Russian cooperation entered a new stage in December 2021 when Russian President Vladimir Putin and China’s Xi Jinping held a video conference and jointly pledged to escalate bilateral efforts to set up an independent trade network to reduce their reliance on the U.S.-led international financial system. The Putin-Xi commitment was followed by the Bank of China’s decision to join the Russian SPFS  in 2022. However, the Bank of China is the only  non-Russian member of the SPFS, and China has not encouraged other banks to join it. 

India is another potential candidate for the Russian initiative. In fact, since 2019, New Delhi has been expressing its interest in joining the SPFS and replacing the dollar with rupee-rubles transactions. The evidence suggests that both nations have made significant progress in achieving this goal, given that the use of rupee-rubles in bilateral transactions has quintupled.

The other prospective candidate for the Russia-proposed financial system is Iran, whose economy has been subject to suffocating sanctions for a decade. Iranian banks were cut off from the SWIFT system in 2012 as a result of U.S. sanctions. While Iranian banks briefly rejoined the system in the aftermath of the 2015 signing of the JCPOA (the Iran nuclear deal), they were disconnected again as a result of President Donald Trump’s withdrawal from the agreement two years later.

It is therefore no surprise that Tehran would also be interested in joining the Russian-led initiative. In this context, Mehdi Safari, Deputy Foreign Minister for Economic Diplomacy, told Sputnik in July 2022 that the two countries should de-dollarize their trade and build a similar system to SWIFT. 

Notwithstanding the efforts to circumvent Western financial institutions, the Russian system has yet to prove effective, due to a number of factors. The number of countries willing to join or cooperate with the Russian led financial system is limited. It is noteworthy that while Turkish banks had previously adopted the MIR, they have since dropped it under pressure from the U.S. and European authorities. The Egyptians, just a few days ago, did too.

Additionally, some of the prospects for increased Russian cooperation on the financial side have more trade with the U.S. than Russia. It bears noting that China is a top trade partner for the U.S. with $521 billion worth of exports headed to the U.S. market in 2021. Meanwhile, the Chinese exports to Russia stood at $59 billion. Similarly, India’s top trade partner is the United States, and about 18.1 percent of India’s exports in 2021, worth $71 billion, were purchased by Americans, while Russia is not even among India’s top 25 trade partners. 

Therefore, it would neither be practical nor feasible for India or China to trade with Russia, at the cost of antagonizing the U.S. In the Iranian case, notwithstanding the growing political and military ties between the two countries, Iran and Russia not only don’t have a compatible economy, but they are natural competitors. Both nations are oil exporting countries, seeking to grow their markets. In fact, Russia is already competing with Iran over the Chinese and Indian markets by offering oil at a discounted price.  

Given the challenges discussed, and ongoing uncertainties over the readiness of other major powers to implement the Russian system, the future and effectiveness of the “fortress Russia” strategy remains unclear.

For the moment, the weaponization of sanctions as a tool of punishment has indeed created incentives for some nations to cooperate with the West. But while American dominance over the financial markets have stymied the Kremlin’s efforts to establish a parallel system, evidence suggests that dynamics are shifting as more countries are conscious of their vulnerabilities.

As the world moves toward a multipolar reality, there may be a time when alternatives are much more preferable to the U.S. dominated system. Indeed, the West should be concerned about China’s future actions, as Beijing is expanding its gigantic industrial and commercial capabilities at home and abroad. If it chooses to move closer to Russia in its quest to forge a new path, the U.S. may soon feel its own vulnerabilities in this realm.

Oil pump on background of russian rouble
Analysis | Europe
Diplomacy Watch: Ukraine risks losing the war — and the peace

Diplomacy Watch: Ukraine risks losing the war — and the peace


This week, Ukrainian President Volodymyr Zelensky offered his starkest warning yet about the need for new military aid from the United States.

“It’s important to specifically address the Congress,” Zelensky said. “If the Congress doesn’t help Ukraine, Ukraine will lose the war.”

keep readingShow less
Biden should not follow Netanyahu into war with Iran
photo : U.S. President Joe Biden attends a meeting with Israeli Prime Minister Benjamin Netanyahu, as he visits Israel amid the ongoing conflict between Israel and Hamas, in Tel Aviv, Israel, October 18, 2023. REUTERS/Evelyn Hockstein

Biden should not follow Netanyahu into war with Iran

Middle East

The U.S. and Israel have been raising the alarm of a possible Iranian retaliatory strike in response to last week’s Israeli attack on an Iranian diplomatic facility in Damascus. The president once again pledged “ironclad” U.S. support for Israel in the event of an Iranian response, and the head of Central Command, Gen. Erik Kurilla, was reportedly headed to Israel Thursday to coordinate with Israeli leaders ahead of the expected strike. The administration is moving in the wrong direction. The U.S. ought to be distancing itself from Israel’s illegal attack, but instead the Biden administration is moving to shield Israel from the consequences of its own actions.

Israeli forces have routinely struck Iranian and other targets in Syria for more than a decade, but the attack on the consulate in Damascus was a major escalation both in terms of the location and the rank of the Iranian officers that were killed. The Israeli government appears to want to goad Iran into a military response to divert attention from the slaughter and famine in Gaza and to trap the U.S. into joining the fight. The president has made it that much easier for Israeli Prime Minister Benjamin Netanyahu by volunteering to walk into the trap.

keep readingShow less
House Armed Services Committee Chair Rep. Adam Smith (Photo: VDB Photos /
House Armed Services Committee Chair Rep. Adam Smith (Photo: VDB Photos /

Top House Dem blasts 'nothing about Ukraine without Ukraine' approach


Rep. Adam Smith (D-Wash.) offered a rare Democratic rebuke of the Biden administration’s rhetoric on the war in Ukraine during a House Armed Services Committee hearing on Wednesday.

Smith, the ranking member on the committee, was following up on questions from Rep. Matt Gaetz (R-Fla) to Celeste Wallander, assistant secretary of defense for international security affairs, on whether the administration considered the repatriation of Crimea and the Donbas as necessary for a Ukrainian victory.

keep readingShow less

Israel-Gaza Crisis