China and Russia are drafting a pact to boost the use of their national currencies in bilateral and international trade, underscoring their intent to cut their reliance on the US dollar.

The development of a new international financial payments system aims to address rising concerns over additional US sanctions and trade tariffs.

Russian Prime Minister Dmitry Medvedev, during his visit to China earlier this month, said the two nations were discussing the launch of a new cross-border system for direct payment of trade invoices in the yuan and the rouble.

He also said discussions were underway to allow the use of China's UnionPay credit card in Russia and Russia's Mir card in China.

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The impetus for creating a new financial infrastructure is the continued deterioration in both countries' relations with the United States and the threat that Washington will impose more economic sanctions on one or both of them.

Chinese President Xi Jinping, left, and Russian PM Dmitry Medvedev wave as they pose for a family photo with leaders and their spouses at the Apec summit in Papua New Guinea on Saturday. Photo / AP
Chinese President Xi Jinping, left, and Russian PM Dmitry Medvedev wave as they pose for a family photo with leaders and their spouses at the Apec summit in Papua New Guinea on Saturday. Photo / AP

"The Chinese should protect their system while Russia should protect its own system," Medvedev said earlier this month, ahead of the 22nd regular meeting of Russian and Chinese heads of government.

Bilateral trade set to double

"In this respect, this kind of co-operation is very useful because in this situation no one will be able to block the development of financial traffic," he said, predicting that China-Russia bilateral trade would reach US$200 billion in 2020, double the US$100 billion level in 2014.

The US, European Union and other western countries imposed sanctions on Russia officials and businessmen after its forceful annexation of Crimea in 2014.

Many Russian and Chinese firms have also been fined or put on a blacklist by US authorities for violating US sanctions law.

For instance, Chinese telecommunications equipment maker ZTE Corp was fined US$1.4 billion fine in June for shipping goods to Iran and North Korea in violation of those sanctions.

Medvedev made clear the payment system initiative was an attempt move away from the current dollar-dominated financial system.

Russian Prime Minister Dmitry Medvedev said some of US President Donald Trump's sanctions are good or useful
Russian Prime Minister Dmitry Medvedev said some of US President Donald Trump's sanctions are good or useful "because they forced us to do what we should have done 10 years ago". Photo / AP

"No one currency should dominate the market, because this makes all of us dependent on the economic situation in the country that issues this reserve currency, even when we are talking about a strong economy such as the United States," Medvedev said.

'Some of these [US] sanctions are good'

"I want to say something that may raise a few eyebrows, but I think some of these [US] sanctions are good or useful because they forced us to do what we should have done 10 years ago," he said.

"But it is unclear to me why we have been trading oil and gas for dollars and euros all of these years without trying to involve the rouble.

"Trading for roubles is our absolute priority, which, by the way, should eventually turn the rouble from a convertible currency into a reserve currency.

"Since some 42 per cent of transactions on the Swift international payments system are in US dollars, exclusion from the current system is a powerful weapon Washington could use to punish sanctions violators.

The development of a new cross-border payments system could allow China and Russia to avoid using Swift for many transactions, potentially allowing them to circumvent any US sanctions.

For example, China, Russia, and many European countries might be able to use a new payments system to achieve their stated goal of finding a way around the US-imposed limitations on Iranian oil exports and preserving the international agreement to halt Iranian nuclear weapons development.

Circumventing Swift trouble

"If the trade war escalates, using Swift to make financial payments becomes a potential channel to sanction a country," Nathan Chow, economist at DBS Bank said.

"So starting a new payments system will help avoid such a situation, on top of other uses such as yuan internationalisation and Russia-China trade development.

"China's share of Russia's international trade increased to 15 per cent last year from 11 per cent in 2013, largely reflecting increased Chinese purchases of Russian oil and gas, according to Dmitry Dolgin, Russia chief economist at ING Bank.

Russian imports from China replaced some of the EU imports that were cut off by Western sanctions, which increased China's share of total Russian imports to 22 per cent from 17 per cent five years ago.

However, ING's Dolgin said several hurdles would need to be overcome before the full benefits of a new payments system could be realised.

China's heavy integration into global manufacturing supply chains means it has limited power to set prices in its own currency.

And US dollar-denominated payments have long been used by oil exporters for their convenience as well as for their faith in the greenback as a safe store of value, Dolgin said.

- South China Morning Post