By PAULO NOGUEIRA BATISTA JR.*
The BRICS will cause disappointment across the Global South if they remain in the realm of speeches, communiqués and proclamations without moving forward with innovative practical initiatives.
The BRICS have been discussing for some time the possibility of building alternative arrangements to the US dollar and the Western payments system. The current order — more accurately, it would be disorder — The international monetary and financial system, dominated by the United States and its allies, is increasingly dysfunctional and insecure. The system has been transformed into a geopolitical weapon for the application of sanctions, punishments and confiscations.
In recent weeks, I have been in Moscow and participated in three debates on this topic, in events preceding the BRICS leaders' summit, which will take place in Kazan, Russia, from October 22 to 24. I will try to summarize the conclusions I reached.
The challenge for the BRICS is, above all, political. The Americans have always been attached to what De Gaulle, in the 1960s, called the “exorbitant privilege” of the United States — understood, in short, as the ability to pay its bills and debts simply by printing money. The US does not hesitate to use its allies and clients in other countries to undermine such initiatives.
China, Russia and Iran are probably not very vulnerable to such pressure. But the same cannot be said for other BRICS countries. Even Beijing may be hesitant to pick a fight with Washington.
The challenge is also technical. Building an alternative monetary and financial system requires hard, skilled work, as well as prolonged and difficult negotiations. Can we do it? I believe we can. But have we made any progress since the issue first hit the headlines? Some progress has been made, but less than one might have hoped.
Under the Russian presidency of the BRICS in 2024, there have been partially successful attempts to move forward. For example, an independent expert group was created, of which I am a member, which discussed the reform of the international monetary system and the possibility of a BRICS currency. The well-known American economist Jeffrey Sachs is a member of this group. Most importantly, Russia has prepared a detailed proposal for an alternative cross-border payments system based on national currencies — an important step towards a new international monetary and financial arrangement.
So far, however, little progress has been made on the most fundamental issue, which would be the creation of a new currency as an alternative to the dollar. And even the discussion of the Russian proposal for a new payments system is still in its infancy. Brazil will hold the next presidency of the BRICS in 2025 and will have the opportunity to coordinate the discussion, deepen Russia's proposal and prepare new steps.
Limits on transactions in national currencies and alternative payment systems
The SWIFT payment system, controlled by the US and its allies, is systematically used as a tool to punish and threaten countries and entities that are seen as hostile or unfriendly. Banks from these countries are summarily excluded from the system, as happened with Russia. Other countries can also face secondary sanctions when they try to transact with sanctioned countries or entities. Therefore, the progress made during the Russian presidency in developing alternatives to SWIFT is undoubtedly a very welcome initiative, which moves us forward in the direction of weaning us from excessive dependence on Western currencies and payment systems. Bilateral transactions in national currencies between the BRICS and between the BRICS and other countries are also increasing. Bilateral swaps in national currencies between central banks, primarily with the central bank of China, are also increasing.
However, it must be acknowledged that transactions in national currencies and alternatives to SWIFT have their limitations. The essential point, not always well understood, is that the existence of an alternative reserve currency is ultimately a precondition for de-dollarization to work fully. The reason is that bilateral transactions in national currencies will only accidentally balance out. An alternative international reserve currency is necessary to allow countries to run surpluses and deficits over time. In the absence of one, countries must resort to costly barter schemes—or else revert to the US dollar and other traditional currencies, which would defeat the whole purpose of the exercise.
One example. Russia has a substantial surplus with India. Trade and other transactions are conducted mainly in the national currency. Therefore, Russia has been accumulating large stocks of rupees. The Russian central bank may not want to hold this currency permanently in its reserves, perhaps because the rupee is not fully convertible and there are doubts about its stability. What are its options? Russia can try to dispose of these surpluses in rupees by seeking investment opportunities in India or by making an additional effort to purchase Indian goods and services. But this may be difficult and time-consuming. It can also use these rupees in third countries that are interested in obtaining Indian currency because of their economic proximity to India. But this too may be difficult, leading to sales of rupees at a discount. These alternatives are clearly second best ou third-best and refer to the old-fashioned barter system, in which economic agents exchanged goods and services bilaterally and then sought out third parties to dispose of unwanted goods and obtain desired goods in exchange. It was precisely to avoid this inefficient system that money was created to serve as a means of payment, a common standard of value and an instrument for maintaining reserves. For the same reasons, the BRICS need a new reserve currency as an alternative to the US dollar and other traditional reserve currencies.
A new reserve currency — the NMR
What could this new currency look like? There are several possibilities. I will try to present, in a concise manner, one path that seems promising to me. For a more complete explanation, I refer to the paper I prepared for one of the events in Moscow (“BRICS: Geopolitics and monetary initiatives in a multipolar world — how could a new international reserve currency look like?”, September 23, 2024, (https://www.nogueirabatista.com.br/).
Let’s call this new currency NMR, which stands for “new reserve currency.” An interesting previous name was R5, which was proposed by Russian economists when there were five BRICS member countries and all their currencies began with the letter R. However, this name has been compromised, since some of the four new members have currencies whose names do not begin with the letter R. This is not a big deal, of course. Should we then call it a BRICS currency or BRICS+? Unfortunately, no. And this is an important point: some of the BRICS countries seem to be opposed to the idea, India being a notable example. This represents a major barrier, but it can be overcome, as we will see later.
The NMR could have the following characteristics. It would not be a single currency, replacing the national currencies of the participating countries. It would not, therefore, be a euro-like currency issued by a common central bank. It would be a parallel currency, designed for international transactions. National currencies and central banks would continue to exist in their current formats. There would be no loss of sovereignty and no need to coordinate monetary policies.
The NMR would not exist physically in the form of paper money or metal currency. It would be a digital currency, analogous to the MDBCs (central bank digital currencies) that are being created in several countries.
It is worth noting, in passing, that the digital format largely replaces the traditional role of banks as intermediaries and creators of means of payment. MDBCs and NMR would reduce the role of banks, as long as it is not established that their use would be linked to the possession of a bank account.
The participating countries could set up an issuing bank—let's call it the NMR, the New Reserve Monetary Authority—which would be responsible for creating NMRs and also for issuing bonds—let's call them NTRs, new reserve bonds—into which the new currency would be freely convertible. The NTRs would in turn be fully backed by the national treasuries of the participants.
A first step towards NRM could be to create a unit of account in the form of a basket of currencies in which the weight of the participating countries’ currencies would correspond to their share of the group’s GDP. China’s renminbi would have the largest weight in the basket, say 40%; Brazil, Russia and India, 10% each; and the remaining 30% could be divided between South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates — assuming that all BRICS countries eventually participate. This new unit of account would be a bridge to the new currency.
Well, this relatively simple step, suggested many years ago by Russian economists, could have been taken already. The reason for the slow progress seems to be the lack of consensus. There are reports that India and South Africa, presumably for political reasons, are against the idea. India — and this is just conjecture — may not want to displease the US on such a crucial issue. Perhaps because it feels that it may need American support if there is a deterioration in already tense relations with China. Brazil, I would like to point out in passing, is not invulnerable to similar difficulties either. In Brazilian society, including within the Lula government, there are many who identify with the US and have ties to American business and government circles.
I hope that these vulnerabilities and the tensions between China and India can be overcome. In the meantime, it is worth asking whether we could move forward based on a coalition of willing and able countries. The NRM could very well be created by a subset of the BRICS. The others could join later. This is commendable, in my view, but it clashes with the deep-rooted tradition of BRICS consensus, which has marked the group’s activities since its inception in 2008. However, if we cling to this tradition, I fear that we will get nowhere.
The alternative to something like the NMR would be to gradually replace the US dollar with the Chinese renminbi, the currency of the emerging power. This is already happening to some extent. But it seems doubtful that much progress can be made along these lines. It should not be forgotten that the emerging power is a middle-income country. It has vulnerabilities and concerns that are not necessarily present in the US and other high-income nations.
What I mean is that in China’s case, the “exorbitant privilege” could become an “exorbitant burden.” In other words, it would probably have difficulty meeting certain prerequisites for the renminbi to establish itself as an international currency on a large scale. Would China, for example, be willing to make the renminbi fully convertible? Would it consider abandoning the capital account restrictions and exchange controls that protect the Chinese economy from the instability of international finance? Would it accept exchange rate appreciation resulting from increased demand for the renminbi as an international asset? Wouldn’t such appreciation harm the international competitiveness and dynamism of the Chinese economy? Of course, the trend toward appreciation could be contained by selling the renminbi and accumulating additional international reserves. But where would China invest these additional reserves? In assets denominated in dollars, euros, or yen? Back to square one.
Therefore, the BRICS or a subset of BRICS countries should prepare to create a new reserve currency, which could be a game-changer in global monetary and financial affairs. In parallel, they should continue to expand international transactions in national currencies and start building an alternative payment system to SWIFT.
The BRICS will cause disappointment throughout the Global South if they remain in the realm of speeches, communiqués and proclamations without moving forward with innovative practical initiatives.
*Paulo Nogueira Batista Jr. is an economist. He was vice-president of the New Development Bank, established by the BRICS. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa) [https://amzn.to/44KpUfp]
Extended version of article published in the journal Capital letter, on October 18, 2024.
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