By PAULO NOGUEIRA BATISTA JR.*
The background of this possible BRICS currency is the growing dysfunctionality of the international monetary system
The possible creation of a currency by the BRICS (Brazil, Russia, India, China and South Africa) has frequently appeared in the international media and in the declarations of some leaders of the group's countries, notably Vladimir Putin and Lula. On the initiative of Russia, the idea has been under discussion since 2022, still in its infancy. The theme was not officially launched, but it should be present, in some form, at the summit of the BRICS leaders that will take place in South Africa from the 22nd to the 24th of August.
The background of this possible BRICS currency is, as is well known, the growing dysfunctionality of the international monetary system which, since the Second World War, revolves around a hegemonic currency – the US dollar. The fundamental contradiction is that the international system depends predominantly on a national currency, managed according to the interests of the State that created it.
The dollar fulfills international functions, as a currency of exchange, currency of denomination of contracts and prices, reserve of value and means of payment. However, it is a national currency managed by a national central bank. Nothing guarantees that US priorities coincide with the broader interest of the international system that depends on the US currency.
This problem has always existed and has been the object of severe criticism, including from countries allied with the US. In the 1960s, Charles de Gaulle and his Minister of Finance, Valéry Giscard d'Estaing, denounced the “exorbitant privilege” of the dollar and proposed, with great repercussions, but without success, a return to a system based on gold.
The US has always tenaciously resisted any attempt to reduce its currency's international role. They never allowed, to remember just one example, that the special drawing right (SDR), the currency created within the scope of the International Monetary Fund in 1969 (in a meeting that took place, by the way, in Rio de Janeiro), to grow and consolidate itself as a full currency.
They always resorted to their right of veto in the institution to prevent the special right of drawing from threatening, even remotely, the dollar as the hegemonic currency. Over the years I served on the IMF board, from 2007 to 2015, our attempts to give some emphasis to the special drawing right met with resistance from the US. And we can do little. I mention the IMF currency here because, as I will argue, it may give some clues to the construction of an eventual BRICS currency.
The Dollar's Biggest Enemy
The problems of the international monetary system are well known. What has been new in recent years is that the US has been using its currency more and more aggressively to pursue political and geopolitical goals. The militarization of the dollar took place, that is, the use of the national/international currency and the Western financial system to target hostile countries or countries seen as such. Venezuela, Iran, Afghanistan and, to a large extent, Russia were targets of sanctions and punitive measures that could only be enforced because the dollar and the US financial system occupy the position they do in the world.
Russia's case is unprecedented. After the invasion of Ukraine, the US and its European allies decreed a freeze on Russian reserves applied in dollars and euros, which reached about US$ 300 billion, more or less half of Russia's net international assets! Evidently, the use and abuse of the dollar's privileged position leads to a loss of legitimacy of the prevailing international monetary system. It has caused an erosion of confidence in the dollar – and confidence is an indispensable requirement for any currency. In one sentence: the United States is today the main enemy of the dollar as a world currency.
Thus, an environment conducive to discussions on the reform of the monetary system and the de-dollarization of international transactions was created. It was in this context that reflection began in the BRICS on the convenience of moving towards a monetary association and eventually a common currency.
Possible paths towards a BRICS currency
What paths could be taken? The issue is complex, at the same time economic-financial and political. The terrain is new, still unexplored. I will try to address just a few aspects here, without intending to exhaust the subject or even formulate its general lines in a comprehensive way, not least because it is too early to present specific proposals, which would require careful consideration.
A curiosity: the Russians came across the following happy coincidence – the currencies of the five BRICS countries all start with the letter “R” – real, ruble, rupee, renminbi and rand. They then proposed that the new currency be called R5.
The R5 would start as a unit of account, taking the form of a basket of five currencies, constructed in a manner analogous to the Special Drawing Right (SDR). The weights of the five currencies would roughly reflect the relative weights of the five economies. The renminbi would be heavily weighted in the basket, followed by the rupee, then the real and the ruble, with the rand underweight. The Chinese currency could, to give an illustrative example, take 40% of the basket; the Indian currency, with 25%; Russian and Brazilian currencies, with 15% each; and South Africa, with 5%. The R5 could start at unit par with the SDR and fluctuate from there, reflecting changes in its currency basket relative to the SDR basket.
In this first stage, the R5 could be used as a unit of denomination for certain transactions and official accounting records, in addition to being adopted to replace the dollar in the accounting of the financial mechanisms created by the BRICS – the New Development Bank and the Contingent Reserve Arrangement. This step is relatively simple and, if there is consensus among the five countries, it could be implemented quickly and without significant costs.
The Russian proposal, as far as I know, does not go much further than this initial step. From there, there is vague talk of creating, at a later stage, a gold-backed coin.
As is known, a currency itself has to exercise not only the functions of a unit of account and denomination of prices and contracts, but also those of a store of value and a means of payment. How to ensure that the R5 can fulfill all these functions? And who would be responsible for issuing the R5 and putting it into circulation? Would the R5 have a physical existence or would it only be digital? Would it be necessary to create a BRICS Central Bank and unify monetary policy?
For a currency to perform all monetary functions satisfactorily, it is essential that it inspire confidence and thus be widely accepted. In order for it to arouse trust and have credibility, its issuance must be solidly regulated. And it needs to be put into circulation in an orderly manner.
All these questions would, I repeat, require reflection and planning that have not yet begun. I offer, as a contribution to the debate, some preliminary observations.
First, it is not necessary for R5 to have a physical existence. It could just be digital. Nor would it be necessary or recommendable to create a Central Bank of the BRICS, responsible for conducting the monetary policy for the five countries – something impracticable for several reasons. In other words, it is not about creating a single currency that would replace the five national currencies. It would be enough to create an issuing bank, in charge of issuing R5 according to predetermined rules, in a kind of automatic pilot, without interfering with the actions of central banks that would continue to perform all the typical functions of a monetary authority, that is, the definition of the rate interest rates, foreign exchange and open market operations, management of international reserves, in addition to financial regulation and supervision tasks.
The R5 would only be a virtual currency for international transactions, initially between central banks. It could, for example, serve as a store of value to allow surplus BRICS countries to maintain accumulated balances in transactions carried out between them. As it was accepted, it would function more widely as a store of value and a means of applying international reserves. In this sense, the R5 would be similar to the proposal for the creation of the Bancor, formulated by Keynes in the early 1940s, in an unsuccessful attempt to prevent the domination of the dollar in the post-war international monetary system.
The backing of the new currency
How to ensure wide acceptance of R5? The Russians mentioned, as I indicated, the alternative of a gold backing. It wouldn't work, in my opinion. It may seem like an attractive option at first sight, but it is, in reality, a regressive idea – a return to what Keynes called a “barbaric relic”.
Ballast, in the monetary sense, is a solid, reliable and relatively stable asset, which forms the basis on which a currency achieves wide acceptance and circulation. For this backing to have real meaning, it is necessary, strictly speaking, that the backed currency is freely convertible into the backing asset at a fixed exchange rate. Throughout the 1971th century, gold performed this ballast function with increasing difficulty. This became more and more evident over time, so much so that its role was progressively reduced until it was completely abandoned by the suspension of the convertibility of the dollar into gold, unilaterally decreed by the USA in XNUMX.
Today, the gold-backed option would be even less defensible, not to say unfeasible. Adopting this path, the BRICS would be obliged to retain a high amount of gold reserves, the greater the greater the issuance of R5. The price of gold fluctuates sharply, which would cause unpredictable variations in the value of the BRICS international reserves. The R5 would fluctuate depending on the countless circumstances that affect the world gold market and that have little relation with the movement of the real economy of the BRICS and the rest of the world. The R5 would fluctuate along with gold and lose any ability to serve as a benchmark.
Not by chance, gold has no function in the IMF's currency. The SDR is backed not by gold or other precious metals, but by dollars and other major currencies. That is, SDR holders have the right to convert them, freely and at any time, into dollars and other currencies with international liquidity. The IMF ensures this convertibility and relies on its reserves and, if necessary, on the commitment of countries issuing internationally liquid currencies to provide additional funds. Confidence in the SDR is high and countries do not hesitate to hold the IMF currency as an integral part of their official reserves.
This convertibility model would not, of course, be a solution for the R5. Theoretically, nothing would prevent it from backing it in currencies with international liquidity and, based on the high international reserves of the BRICS, ensuring its conversion into dollars, euros or yen. But of course that would defeat the entire purpose of the exercise (would defeat the whole purpose of the initiative) – a currency created as an alternative to the dollar would have its acceptance assured by its free convertibility into… dollars, euros, yen.
How to do it then? How to ensure trust and widespread acceptance in R5? One possibility would be to make the R5 convertible into bonds guaranteed by the five countries. The R5 Issuing Bank would also be in charge of issuing R5 bonds, R5 bonds, with different maturities and interest rates. The R5 would be freely convertible into R5 bonds. “Backed” by assets created by the Issuing Bank itself, the R5 would actually be a fiduciary currency, of the same nature as the dollar and other currencies with international liquidity. The R5 bonds would be the concrete financial expression of the guarantee that the five countries would give to the new currency.
The entry into circulation of the R5
The entry into circulation of the new currency would occur through the action of the five national States. Circulation could start between central banks and gradually extend to other government operations and transactions with extra-BRICS central banks. The New Development Bank (NBD), the group's main concrete initiative so far, could play a role, as highlighted by Vladimir Putin in a recent meeting with the bank's current president, Dilma Rousseff.
The NDB could contribute in at least three ways to the process of de-dollarization of the world economy. First, and most obviously, to accelerate the de-dollarization of its asset and liability operations, issuing bonds and making loans in the national currencies of the bank's member countries. Second, through its research department, support studies and conferences on the reform of the international system and the eventual creation of the R5. Third, at a more advanced stage, help put the new currency into circulation, making loans and borrowings in R5.
A 2023 summit and beyond
To advance this complex discussion, it would be interesting if the leaders of the BRICS, at the summit that will take place in a few weeks, ask their finance ministers and their research institutes to study the issue in a coordinated way and present the results of this work at the summit to be held in 2024 in Russia. They could also recommend setting up a group of experts to assess the convenience and feasibility of creating a BRICS currency.
I don't know if the discussion has advanced enough and if there is consensus among the countries to try to examine the subject. Soon we will know. Ideally, the BRICS leaders would now give a first general signal to launch an evaluation process. If all goes well, at the next summit, in 2024, the BRICS would make the decision to start formally discussing the viability of a new currency. The decision to create the R5 could be taken at the 2025 summit, under the Brazilian presidency.
*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).
Extended version of article published in the journal Capital letter, on August 11, 2023.
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