Caracas exploring Chinese, Russian payment systems

Venezuela's government is holding talks with Russian and Chinese central banks on adopting alternative financial services systems that would facilitate evasion of US sanctions aimed at removing Venezuelan president Nicolas Maduro.

Caracas is currently hampered from carrying out international financial transactions because they are routed through Belgium-based financial services provider Swift, which is the standard global system.

The sanctions have dealt a sharp blow to Venezuela's national oil company PdV as it struggles to buy and sell oil and equipment.

The US started levying financial sanctions on Venezuela in August 2017, and since then Washington has gradually tightened them. In April 2019, the US sanctioned Venezuela's central bank, a move that took full effect for US banks on 17 May. In late January 2019, the US also imposed oil sanctions on PdV.

According to Venezuelan government officials, the central bank parties are currently discussing the advantages of adopting China's CIPS and Russia's SPFS systems as potential alternatives to Swift.

The discussions seek "to neutralize the impact of US financial sanctions that are hindering PdV's ability to export and import oil, and conduct financial transactions including collecting and paying debts, and transferring funds internationally without fear of seizure by the US government," a presidential palace official told Argus.

CIPS and SPFS are designed to operate autonomously without the need for US corresponding banks or pass-through accounts. The more established CIPS system was set up in 2015 to facilitate Chinese banking activities abroad and promote the rise of the yuan. The less advanced Russian system works mostly within Russia.

The two alternative payment systems are seen as immune to US government pressures aimed at forcing US and non-US banks to stop doing business with Venezuela and other sanctioned countries, including Iran and Russia, a central bank official in Caracas said.

If the US expands sanctions, Venezuela will "probably will quickly adopt both the SPFS and CIPS payments systems because most of PdV's oil exports and imports are now with Russian and Chinese clients and suppliers," the palace official said.

Venezuela's effort to bypass the western banking system is likely to face the same obstacles as did Iran, a fellow sanctioned Opec member that has tried and failed to establish steady and reliable alternative channels for financial transactions, which are mostly carried out in US dollars.

Government in exile

The central bank talks are taking place as Venezuela's US opposition sets up a parallel central bank board in exile in anticipation of eventually taking power in Caracas. Juan Guaido, the National Assembly speaker whom the US and over 50 other countries recognize as interim president, is campaigning for Maduro to step down and make way for a transition government. Maduro, who is supported by Russia, China, Turkey and Cuba, has refused to leave so far. Negotiations brokered by Norway in Barbados this week have not broken the impasse, although a tentative deal to hold elections in nine months is on the table.

The new five-member ad hoc central bank board of directors appointed by Guaido includes economist and former central bank president Ruth de Krivoy, current Harvard University research fellow Ricardo Villasmil, veteran private banking executive Manuel Rodríguez, and former central bank managers Nelson Lugo and Guaicoima Cuius.

The parallel board has been tasked with administrating Venezuelan international assets, mainly PdV's US refining subsidiary Citgo, which is already managed by a parallel board appointed by Guaido. The new bank board will also advise Guaido's ad hoc solicitor general Jose Ignacio Hernandez in preparing to restructure more than $150bn of foreign debt owed by the Venezuelan government and PdV.

Local Russian and Chinese diplomatic officials confirmed official contacts between their respective central banks and Venezuela's central bank, but declined to comment on any discussions.

The US administration prevailed on Swift last year to stop providing services to the Iranian central bank and private banks in Iran that were placed on the US sanctions list. Iran is working with the EU to develop an alternative financial intermediary system.

Washington has vowed to block attempts by Iran and other countries to find ways to bypass the effect of US financial sanctions, except for trade in food and medicine. There is no such exception for Venezuela so far.