The Shanghai Cooperation Organisation has evolved into the world’s largest regional organisation. Analysing the economic challenges lying ahead of the SCO, Valdai Club expert Ladislav Zemánek highlights the importance of alternative payment systems, digital currencies, and the use of national currencies for strengthening resilience, security, and strategic stability in Eurasia. The author is a participant of the Valdai – New Generation project.

       Independent payment systems

       One of the preconditions for successful and sustainable economic cooperation in the region is the development of payment systems. We face the risk of geoeconomic fragmentation due to the abuse of trade and financial restrictions, the weaponisation of economic relations, and economic nationalism, including trade protectionism, decoupling, and derisking. The US misuses its financial hegemony as a bargaining chip in geopolitical games. It requires the development of alternative, mutually complementary and integrated financial messaging systems to protect financial transactions from the intervention of external actors and reduce dependence on dominant financial institutions. These steps can lead to better connectivity, higher efficiency, higher productivity, and lower expenses.

       The SCO has a great advantage since several countries have robust independent payment systems. India launched the Structured Financial Messaging System in 2001, and others followed suit in the following decade. Iran launched its System for Electronic Payments Messaging in 2013, China began the operation of the Cross-Border Interbank Payment System two years later, and Russia made the first transaction via the System for the Transfer of Financial Messages in 2017. These decisions were particularly important in the case of Iran and Russia, because the two countries had already been cut off from SWIFT. The two sides succeeded in integrating their systems in 2023.

       In this regard, it seems desirable for the SCO to cooperate closely with BRICS, which has launched BRICS Pay, a digital payments platform, and is preparing BRICS Bridge, a multilateral digital settlement and payment platform plan, immune to political pressure, abuse, and external sanctions. The BRICS Bridge might use the digital currencies of the BRICS central banks, and no participant will be able to restrict the activities of the others.

       Development of digital currencies

       Aside from the payment systems, digital currencies, including central bank digital currencies (CBDC) and cryptocurrencies, constitute another pillar of the economic resilience of the SCO. China, India, Iran, Kazakhstan, and Russia have already launched CBDC operation and Belarus is in the pilot phase. The SCO is ahead of other regions, which can create a considerable comparative advantage. Central bank digital currencies might strengthen national sovereignty while mitigating the influence of transnational private actors. A relevant project to be considered is mBridge, a multi-CBDC platform based on an original blockchain. Central and commercial banks from China, Saudi Arabia, Thailand, and the United Arab Emirates are involved with more than 30 observing members.

       On the contrary, cryptocurrencies are a controversial topic. It finds expression in a variety of politico-legal approaches among the SCO countries. China and Pakistan have introduced a complete ban on the use of cryptocurrency, and a partial ban has been in force in Iran and Kazakhstan. In contrast, cryptocurrencies are legal in Belarus, India, Kyrgyzstan and Uzbekistan, while Tajikistan has not introduced any legal regulation. Despite a previous ban, Russia has recently started trials of cryptocurrency exchanges based on the SPFS and the use of digital tokens for cross-border transactions.

       Undoubtedly, the use of cryptocurrencies brings multiple security risks, but concurrently it is a possible instrument for countering economic sanctions. Cryptocurrencies are not a homogeneous group, which creates conditions for seeking a balanced approach to make them an available backup to strengthen financial resilience against undesirable external pressure while allowing for national security and financial stability.

       The use of national currencies

       The resilience and diversification of economic instruments are strengthened by the increasing use of national currencies in mutual transactions. The internationalisation of the renminbi is instrumental in democratising regional and global financial and economic ecosystems, strengthening immunity against the risk of dollar fluctuations, and the overall stability of financial markets and trade settlements. In July 2024, the share of the Chinese currency in global payments reached a record level, becoming the fourth most used currency with a share of 4.74%, almost double what it had been in November 2022.

       The rise in the use of the renminbi is desirable, but the renminbi is not to be perceived as the successor to the dollar in terms of global currency hegemony. Instead, the internationalisation of the renminbi should be seen as a diversification instrument and one of the tools for greater financial autonomy. The SCO countries agree that the future international financial system should not be based on the dominance of a single currency. This stance is common for both the SCO and the BRICS. Therefore, the SCO could participate in the project of a BRICS currency as a possible reference currency for payments in national currencies. Not only in this regard, the SCO might become one of the key players in the formation of a future global financial system.

       At the same time, it cannot be ignored that the democratisation of the international financial system will increase the risk of sanctions from the US and its allies. In July 2024, a prominent Republican senator presented a bill “to counter adversarial financial systems”, including the imposition of sanctions on any subject that uses the CIPS, SEPAM, or SPFS. Although it is an individual initiative, the new Republican administration might go tougher on the SCO countries. Similarly, the EU approved a new package of sanctions in June, banning the use of the SPFS by EU entities. Importantly, the measures allow the possibility of outlawing economic relations with any foreign subjects which use the Russian payment system.

       More autonomy for the “world majority”

       These actions show us the risks related to overdependence on SWIFT and the US dollar. The imposition of unilateral sanctions, whether primary or secondary, and the increasing acceptance of the confiscation of foreign assets, which are subsequently used in war efforts, are unprecedented and send a strong warning to the SCO. In light of these developments, it would be desirable to intensify cooperation and coordination with the ASEAN countries, which agreed on developing regional payment connectivity and using local currency transactions in 2023.

       All the above strategies and instruments are intertwined with the democratisation of the global governance system, and the imperatives of common prosperity and common security. They can help the “world majority” to achieve greater resilience and autonomy through diversification and set new rules and standards of multilateral cooperation and international relations. The potential of the SCO as an active player in these fields is enormous.

       Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.