IMF Calls for New Payment System to be Developed to Iron Out 'Payment Blocs' Amid Sanction on Russia

The US and some of its allies have launched an "economic war", as the Kremlin put it, in response to Moscow's special military operation in Ukraine. Aside from different sanctions on Russia's politicians and firms, seven Russian banks have also been disconnected from the SWIFT electronic payment system network.

The International Monetary Fund (IMF) has warned the international community of a worsening situation if "payment blocs" come into force to mitigate the potential risk of economic sanctions.

Kristalina Georgieva, the Bulgarian-born managing-director of the IMF, said that the present international payment system is not perfect, facing challenges of fragmentation in the wake of the recent geopolitical crisis in Europe.

"Some countries may consider developing parallel, disjointed payment systems to mitigate the risk of potential economic sanctions. These 'payment blocs' would only worsen the impact of broader 'economic blocs' — creating new inefficiencies and imposing new costs," Georgieva said at the Swiss National Bank event on Tuesday.

The IMF boss has urged countries to work harder to design and build a new public infrastructure to connect and regulate various payment systems, countering fragmentation of the international monetary system.

Georgieva also highlighted the costly transfer of remittances, saying the average transfer cost is 6.3 percent. "Which means that some $45 billion per year are diverted into the hands of intermediaries and away from ultimate beneficiaries," she added.

Countries such as India, Russia, and China are exploring an alternative to SWIFT to smooth trade with countries such as Iran, which are saddled with American sanctions.

Some experts believe that weaponisation of the US dollar against Russia will force several countries to accelerate their de-dollarisation efforts, including exploration of an alternative to the Society for Worldwide Interbank Financial Telecommunications (SWIFT).

The Governor of the Reserve Bank of India, Shaktikanta Das, had said that countries would give a thought to diversification from the US dollar as a reserve currency in response to sanctions imposed by the West against Russia.

Economists believe that China's Cross-Border Interbank Payment System (CIPS), the international payment system China launched in 2015, will expand its reach in the years ahead.

According to IHS Markit, CIPS had 1,304 participants, compared with more than 11,000 of SWIFT's participating institutions at the end of March 2022.