The Economist March 12th 2022 Finance&economics 61card firm, is another powerful financial
network. It is set to gain marketsharein
Russia in the wake of the departuresofVisa
and Mastercard, which were announced
on March 5th. Several Russian bankshave
announced that they will move toUnion
Pay, which already has a significantpres
ence in the country.
This shift will not come easily,how
ever. Within Russia, UnionPay’s networkis
small; many banks have no existingrela
tionship with the company. For Russians
abroad the problem is that, despitebeing
in more than 180 countries, UnionPayisa
fringe service in America and Europe,ac
cording to Jason Ekberg of Oliver Wyman,a
consultancy.
cips, meanwhile, will not be themir
acle solution Chinese bloggers hopedfor.
In order to protect its capital account,Chi
na allows foreign banks to link to cipsonly
indirectly, through Chinese clearingbanks
and using swiftmessaging, notesEdwin
Lai of Hong Kong University of Scienceand
Technology. That means Western sanc
tions may still apply to any transfersbe
tween swiftbarred Russian banks and
foreign banks.
A final route for financial assistance
will come through backchannel banksthat
dodge sanctions. China has a longhistory
of turning a blind eye to smaller banksthat
finance trade with countries targetedby
America and the un. These activitiesusu
ally occur on a small scale. And manyare
caught in the act and hit with sanctions
themselves. In 2012 Bank of Kunlunwas
targeted by America for doing business
with an Iranian bank. Some smallChinese
banks may take the risk with Russia,but
they will be unable to provide thelarge
scale assistance it needs.
All told, SinoRussian financial links
appear weaker than Russia mighthope.
The situation is likely to raise questions
about the shortcomings in China’sefforts
to build global financial networks. For
cips, many of the problems are clear.Inor
der to maintain control over capitalflows,
China has not linked the systemdirectly
with banks outside mainland China,with
the exception of Standard Chartered,a Brit
ish bank with longestablishedlinks to
China. cips’s indigenous messagingsys
tem works only with Chinese banks.Toim
prove it, China must continue openingit
up and granting more direct links withfor
eign banks. The lack of such linksisre
flected in the system’s transaction vol
umes. It processes just 13,000 per day,
around onetwentieth of the numberhan
dled by America’s domesticpaymentssys
tem, known as chips.
China’s President Xi Jinping has re
ferred to Mr Putin as a “best friend”.The
Russian conflict is laying bare someofChi
na’s financial vulnerabilities. That may
make the relationship less amicable.n
FundingconditionsWarbonds
C
reditisthefinancialsystem’soxygen
supply.Whenitflowsfreely,itdoesso
unnoticed.When itstops,soon enough
everythingelsedoesaswell.Thehypoxic
episode thatfelled theAmerican invest
mentbankLehmanBrothersin 2008 un
leashedchaos,turninga subprimemort
gagecrunchintoa globalfinancialcrisis.
Eversince,centralbanksandmarketpun
ditshavefixeda hawklikegazeoncredit
conditions,waryofa repeat.
Today’s scramble for safe assets was
promptednotbya financialcrashbutby
VladimirPutin’sinvasionofUkraine.Ne
vertheless, there are similarities. Once
again,thedollarisascendantasinvestors
fleeriskiercurrencies.Hedgingcosts,par
ticularly for the waradjacent euro, are
spikingasvolatilityrisesandtradersbet
thata protractedconflictwillcontinueto
favourthegreenback.ArushintoAmeri
cangovernmentdebt—thesafestassetof
all—haspushedTreasuryyieldsdowneven
asinflationexpectationshaverisen.Priz
ingsecurityoverreturns,lendershavedri
vencorporatebondspreadsup.
Thisflightto safetycauses plentyof
problemsonitsown.A strongerdollar,for
instance, increases the debt burden on
countriesthatborrowinitanddentspro
fitsforAmericancompaniesthatearna lot
oftheirrevenuesabroad.Butthegreatest
threattofinancialstabilitycomesfromthe
pressureitexertsonthemoneymarket,
wherefirmsborrow tomeettheirshort
termfundingneeds.Thismarketseizing
upisthefinancialequivalentofa pulmo
naryembolism,quicklyforcingotherwise
healthyfirmsupagainstthewall.Adash
fordollarsisfineifitmerelypushesexchangeratesup.The realtroublecomes
whenit alsocreatesa shortageofthem.
That happenedin2008,asbanksbe
cameunwillingtolendtoeachotherand
thecostofborrowingforafewmonths
jumpedwholepercentagepointsabovethe
overnightrate.Eventswererepeatedina
muchmilderfashioninMarch 2020 asthe
worldwentintocovidinducedlockdown.
Oneverymeasureofmoneymarketstress,
from shortterm commercial borrowing
coststothedemandfordollarsrelativeto
othercurrencies,theimpactofMrPutin’s
warhasbeenmilderstill(seechart).
Thereare twomain reasonsforthis.
Thefirstisthatitfollowsa floodofliquid
ityfromcentralbanks.SinceMarch 2020
theFederalReserve,theEuropeanCentral
Bank,theBankofJapanandtheBankof
Englandhaveissued$9.1trn(11%ofglobal
gdp) innewreserves.Afterthatdeluge,
notesJonas Goltermann ofCapitalEco
nomics,a consultancy,it isalmostsurpris
ingthattherearestrainsonfundingatall.
Thedeeperreasonisthatmoneymar
ketsarenowfittedwitha comprehensive
ventilationsystem.Permanentswaplines
betweentheFedandfiveotherbigcentral
banksallowthemtoexchangetheirown
currencyfordollarsthatcanbedistributed
todomesticfirmsintimesofstress.A sec
ondfacilityallowsa biggergrouptosimply
borrowdollarsfromtheFed.
Meanwhile,banksnolongerrelyonun
securedloansfromeachothertoplugday
todaycashshortfalls.Forfundingindol
larsthereplacementistherepomarket,
where financial institutions and large
companiesborrowsome$2.5trnfromeach
othereverydayusingTreasuriesassecurAsFortressRussiacrumbles,WesterncreditmarketsareholdingupwellSteady pulseSources:Bloomberg;ICEDataIndices *Three-monthcross-currency basis swaps129630
2020 21 22High-yield corporate-bond spread over
sovereign debt, percentage points
0-50-100-150-200-250
2020 21 22Demand for US dollar relative to
other currencies*, basis pointsYe nEuro↓Greaterdemand
fordollarsEuro areaUnited States