Western sanctions preventing Russia selling oil and other commodities on conventional US dollar denominated letter of credit (L/C) terms via the SWIFT messaging platform may be one factor accelerating the growth of international trade in other currencies and alternative cross-border payment systems.

China's determination to weaken the US dollar's grip on global trade is another factor, apparently underlined by the renminbi doubling its share of SWIFT transactions in the last year.

Heavily sanctioned jurisdictions are also looking for alternatives to conventional L/C transactions, and with the Covid pandemic widening Africa's trade finance gap, local currency solutions may yet displace US dollar denominated L/Cs where domestic banks struggle to maintain global correspondent banking relationships.

Arrangements with Russia

Earlier this month Iran claimed it had established systems capable of bypassing the SWIFT to conduct L/C and other trade operations with Russia over two interconnected national platforms (DC World News, 11 April 2023),

Pakistan is apparently following suit with the announcement last week that it has placed its first order for discounted Russian crude oil under a new commercial deal struck between the two countries. Sources in Pakistan's petroleum division say that Russia has agreed to receive payment in three currencies - Russian rouble, Chinese yuan, and UAE dirham - but the mode of payment has not been disclosed.

Renminbi market penetration

The latest data published by SWIFT show that the renminbi now accounts for 4.5 per cent of its market, more than double the Chinese currency's 2 per cent share just a year ago.

China's renminbi meanwhile has replaced the US dollar as the most traded currency in Russia, a year after the invasion of Ukraine precipitated a slew of western sanctions against Moscow.

Gulf states and Brazil

Efforts to accelerate the Chinese currency's growth in global trade are seen at the highest level.

Chinese President Xi Jinping told Gulf Arab leaders in December that China would work to buy oil and gas in yuan, a move that would support Beijing's goal to establish its currency internationally and weaken the US dollar's grip on world trade. Saudi Arabia, a major supplier of oil to China, is reportedly close to establishing renminbi-based deals.

Brazil meanwhile is now also allowing its exporters to be paid in the Chinese currency. A Rio-based Chinese bank will be connected to China's cross-border interbank payment system (CIPS), an alternative to SWIFT, to support trade settlements between China and Brazil in renminbi.

African solutions

Some non-bank financial institutions are developing products designed to help African banks unable to obtain confirmation or trade finance lines from foreign banks any longer.

London-based Artis for example says it is working on developing local currency securitisation-type structures that would work in the African investment and financing environment and enable it provide receivables-type trade finance solutions.

Development bank backing

While such innovation is attractive, it may be that the US-dollar denominated L/C will be sustained by support from development banks.

The African Development Bank for example is currently rolling out its trade finance transaction guarantee facility under which it will provide up to a 100 per cent guarantee to participating banks for the non-payment risk arising from the confirmation of L/Cs and similar trade finance instruments.

So far it has provide this facility for banks in Burundi (DC World News, 17 April 2023), Mauritius (DC World News, 4 January 2023) and Angola (DC World News, 23 December 2022).

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.