By Alexey Dolzhenkov and Evgenia Obukhova
The likelihood and prospects of the BRICS single currency is one of the most discussed topics in the world of finance. If you believe the world media and the statements of politicians from different countries, proposals for creating a currency union will be presented at the end of August at the BRICS summit in South Africa. Confidence in the dollar continues to decline, de-dollarization of world trade is gaining momentum. Developing countries are racing to announce the transition to national currencies in bilateral trade, at the same time there is a search for a replacement for the main current currency of international settlements - the dollar. The BRICS currency is just being considered as such an alternative.
In recent months, several articles have appeared in major Western media at once saying that, they say, there is no substitute for the dollar in world trade, and de-dollarization, if it happens, will be very slow. US Treasury Secretary Janet Yellen herself promised in June that the dollar would remain the world's key reserve currency for a long time to come, perhaps forever. “There are countries that would like to invent a dollar-free system, but I believe it will be a very long time, if any, when the dollar is replaced as the key reserve currency,” Yellen said, and explained that there is no alternative to the dollar due to “the strength and role of the United States economy, [their] economic system.” But the flood of news about de-dollarization casts doubt on that.
According to the Director of the Institute for Economic Forecasting of the Russian Academy of Sciences, Corresponding Member of the Russian Academy of Sciences Alexander Shirov, the events that took place in 2022 radically changed the situation in the financial markets: the actions of developed countries in relation to Russian assets reduced the quality of reserve currencies. “If until now it was believed that the use of a reserve currency makes it possible to exchange one quality asset for another, now it has become clear that, depending on the holder of the currency, the method of obtaining it and other factors, the possibility of its free exchange for other assets can be severely limited,” says Shirov. — Thus, a certain precedent has taken place, which has not gone unnoticed by large developing economies.
Unfortunately, only SWIFT has statistics on the currencies of international transactions. And in it, especially recently, not all international operations are reflected. It is not surprising that in this system the total share of transactions in dollars and euros has been stable in the region of 80% in recent years.
However, even in SWIFT this spring, one could observe how the volume of transactions in euros sank sharply from the standard 33-38% to 22.4% in March and to 11.5% in April. What is important, the replacement of the euro share occurred not only at the expense of the dollar, but also at the expense of other currencies, including the yuan. The decrease in the share of transactions in euro, most likely, was due to a sharp decrease in imports (-11.9%, April 2023 to April 2022) and, to a lesser extent, exports (-3.6%) of the euro area countries. True, it is not very clear why this jump took place only in the spring of 2023: the decrease in imports of the euro area countries, and indeed the entire EU, has been observed since September 2022, and a significant share of this decrease is accounted for by imports from Russia. However, the decline episode itself was short, after the collapse of the share of euro transactions in the spring in June, everything returned to the previous level.
The statistics on foreign exchange reserves of countries is more accessible and more accurately reflects the real situation. It shows that the share of the US dollar in world reserves decreased from 71.5% in the first quarter of 2000 to 59% in the first quarter of 2023. But the share in the reserves of the British pound sterling (from 2.92 to 4.85%) and the yuan is growing - from zero in the first quarter of 2000 to 2.58% in the first quarter of 2023. And in general, the structure of reserves is becoming more and more variegated in terms of currency, besides, the share of gold in them, a universal and proven reserve instrument, is growing rapidly and strongly. 2022 was a record year for gold purchases by world central banks, Russia has been the most active in buying gold for reserves over the past twenty years - during this period it bought almost 2,000 tons of this metal. In second place was China (1500 tons). Turkey, India, Kazakhstan, Uzbekistan, Saudi Arabia are actively buying gold. It is worth clarifying that reserves are needed not only as reserves for a rainy day, they, especially their liquid part, also reflect the country's need for currency. And as for gold, it is not surprising that, having lived for almost a century in a financial system tied to the dollar with its insane emission, the world yearned for something more reliable and tangible. We will talk about the possible role of gold further. the world longed for something more reliable and tangible. We will talk about the possible role of gold further. the world longed for something more reliable and tangible. We will talk about the possible role of gold further.
Parade of national currencies
The first step in de-dollarization was numerous attempts to transfer cross-border trade to local currencies, and there are already first successes.
US Treasury Secretary Janet Yellen has vowed that the dollar will remain a key reserve currency, possibly forever. But the flood of de-dollarization news casts doubt on that.
Russia and China have long been working on reducing the share of payments for foreign trade operations in dollars and switching to payments in national currencies - but until recently, the matter was limited only to good wishes. According to the Bank of Russia, receipts for the export of goods and services under foreign trade contracts in currencies that were later recognized as “unfriendly” in January 2019 amounted to 86% (13.1% in rubles) of the total amount, in February 2022 - 85.8% (13.4% in rubles). But by May 2023, the share of "unfriendly" currencies decreased to 34.1%, the share of the ruble increased to 39.1%, the share of "friendly" and neutral currencies increased to 26.9%.
There is one incomprehensible point in these statistics: how is the sale of gas to Europe “for rubles” taken into account? If it is accounted for as ruble exports, then in fact this is not entirely true, since the payment for gas enters the country in the form of currency, which is already converted into rubles on our exchange, so that later it can be credited to a bank account in rubles.
Nevertheless, the process of abandoning "unfriendly" currencies is underway. In September 2022, Gazprom, after a meeting between its CEO Alexei Miller and CNPC Chairman of the Board of Directors Dai Houliang, reported that a transition to payments for Russian gas supplies to China in national currencies — rubles and yuan — had been recorded. In addition to China, Russia has an agreement with India on trade in rubles and rupees, but these calculations run into problems: on the Russian side, because of a large surplus in bilateral trade in favor of Russia and difficulties with converting rupees, on the Indian side, because of the fear of Indian banks to fall under sanctions.
India simply does not have the goods Russia needs in sufficient quantities. Bloomberg estimated the accumulation of excess rupees from the Russian Federation at $1 billion per month. However, detailed data on Russian exports and payments for it are closed, Bloomberg also does not disclose its calculation method, so this figure should not be taken seriously.
The expansion of payments in yuan - and not only for raw materials exports, but in general for foreign trade operations - is also indicated by small Russian banks, to which a part of international payments passed after large Russian banks fell under sanctions. Thus, according to Agroros Bank, the total number of foreign exchange transactions passing through it, as of May 2023, increased by 3.3 times compared to May 2020. Moreover, up to 80% of settlements are made in Chinese yuan, the second most demanded currency for payments is Kazakhstani tenge.
The yuan is generally the main contender for wresting the chair from under the dollar. Thanks to the strength of the Chinese economy, this is quite real.
Thus, the PRC has agreements on trade in yuan with Brazil and a number of other countries. At the end of March 2023, Brazil and China entered into an agreement on trading in yuan and announced the creation of a joint clearing house. For the past 13 years, China has been Brazil's largest trading partner, according to Folha de Sao Paulo, and trade between the two countries reached a record BRL 775.9 billion ($150 billion) in 2022. Brazil's surplus was BRL 150 billion ($29 billion). In this case, the presence of "extra" yuan will not become a problem for Brazil - China firmly holds the title of the factory of the world. There is always something you need.
China has long been buying oil from Iran for yuan, and in December 2022 there were reports in the media that during a visit to Saudi Arabia by Chinese President Xi Jinping, a non-public agreement was reached to pay for Saudi oil in yuan. And if this was not officially announced, then the conclusion of the first credit agreement in yuan between the Export-Import Bank of China and the Saudi National Bank was announced publicly. It is quite possible that the financial infrastructure is being developed to pay for Saudi oil in yuan.
India is trying to keep up with China, even though the rupee still cannot circulate outside the country. The abandonment of the dollar in bilateral trade follows from the joint statement of India and Malaysia dated April 1, 2023. Trade will be conducted in rupees. As early as April 2, Union Bank of India was the first to announce the opening of a special vostro account in rupees with India International Bank of Malaysia. Bilateral trade between India and Malaysia for 2021-2022 reached $19.4 billion. According to Bloomberg, citing an anonymous official, India and Indonesia also plan to conduct bilateral settlements in national currencies and connect their fast payment systems to encourage cross-border transfers.
Cement for "bricks" was not delivered
And what about the BRICS currency? Brazilian President Luiz Inacio Lula da Silva has repeatedly proposed to think about its creation. The fact that the issue of creating an international reserve currency based on the basket of currencies of the BRICS countries is being worked out was discussed in June 2022 at the last BRICS summit by Russian President Vladimir Putin. And in the early summer of 2023, the BRICS foreign ministers instructed the NDB to work out how a potential new common bloc currency could work, including how it could protect member countries from Western secondary sanctions when interacting with sanctioned partners like Russia (for more details, see Bricks in the BRICS Tower: New Members and a Common Currency, Expert No. 23, 2023).
At the same time, in early July 2023, Indian media broadcast a statement by Foreign Minister Subramanyam Jaishankar that the country has no plans for a single BRICS currency - India is focused on strengthening its national currency, the rupee, and this will be a priority of the Indian government. Moreover, according to him, there are no plans to discuss the BRICS currency at the BRICS summit. True, just the other day the Russian Foreign Ministry announced that the issue of a new common currency would still be discussed at a meeting in August.
So, the BRICS currency is being worked out, but there is no specifics yet. It can be presented for discussion, but rather in the format of an idea, rather than a formal discussion of a ready-made draft, which needs to be voted on within the framework of an agenda agreed in advance. Moreover, there are already potential evaders in the BRICS in the form of India.
Let's try to figure out what the BRICS currency can be and what are the reasons for its implementation, in addition to the general desire of the members of the association to de-dollarize, which in theory can be satisfied through bilateral trade in national currencies.
Let's start with the economic base. According to the IMF, the total GDP (at PPP) of the BRICS countries in 2020 exceeded 31% of the global one, overtook the total GDP of the G7 countries and does not plan to decline, unlike the G7 indicator. For comparison: in 1980, a year after the official adoption of the ECU (ECU), the share of GFP (according to PPP) of the EU countries amounted to 25.85% of the world. It is worth noting that it is more correct to compare the potential BRICS currency with the ECU, and not with the euro that came to replace it. Alternatively, one can draw analogies with the “transferable ruble” of the Council for Mutual Economic Assistance, but it will no longer be possible to compare numerical indicators due to the difference in the structure of the world economy at that time.
The picture can be supplemented by the growth rates of the real GDP of the economic leaders of these blocs. In 2022, according to the IMF, the growth rate of the Chinese economy was 3%, the forecast for 2023 is 5.2%, Indian GDP in real terms grew by 6.8% in 2022, the forecast for 2023 is 5.9%. For comparison: the US GDP growth rate will be 2.1 and 1.6%, respectively, Germany - 1.8 and -0.1%. No comment here: BRICS will continue to overtake the G7 more and more.
The share in world trade will have to be looked at at current prices. There are no statistics on purchasing power parity, and even in constant prices there is no data on the key BRICS player - China. According to the World Bank, the share of BRICS in world exports of goods and services for 2021 was 18.6%, G7 - 30.3%. The share of BRICS in world imports is 17%, G7 is 33.85%. Already not so impressive, if not for two moments. First, the economies of the G7 countries are mainly service-oriented. Secondly, the level of consumption of imported goods and services, including premium ones, is higher in developed countries.
As we can see, there is an economic basis for introducing our own world currency, which can become a reserve and be used for making international payments. There is also interest in de-dollarization. As Alexander Shirov notes, the creation of new units of account, protected from the political decisions of developed countries, is in the interests of almost all major developing economies, except for the BRICS countries, this should include the countries of the Middle East, North Africa, and Latin America.
What is the snag?
Economists interviewed by "Expert" believe that the same terms apply to the new currency, in which the projects of currencies of other associations (for example, the euro) were implemented - which means that we will talk about a very slow process.
As Elsa Shirgazina, Scientific Secretary of the Center for the Indian Ocean Region, IMEMO RAS, explains, even within the current Eurozone, the currency was created and put into circulation for about thirty years, but here the level of economic integration was much higher, up to the presence of supranational structures. “The BRICS countries are characterized by a fundamentally different approach to cooperation within the association. And this approach implies the preservation by the participating countries of great autonomy in decision-making while striving to develop friendly ties at the national level, as well as humanitarian interaction at the level of peoples, she explains. - The currency of the BRICS countries at the present stage, rather, is a potential project and is considered as one of the options for ensuring the normal functioning of the system of mutual settlements.
Sergei Ryabukhin, First Deputy Chairman of the Federation Council Committee on Budget and Financial Markets, Director of the Research Institute for Innovative Financial Instruments and Technologies (NII IFIT), recalls that BRICS is, in fact, an integration union that does not have the functions of customs and currency unions, without which it is impossible to create a single supranational currency. Therefore, it would be more correct to talk about the creation of a supranational settlement and clearing instrument. This requires non-trivial algorithmic and political solutions based on consensus principles for the formation of rules and regulations for the issuance (issue), circulation and redemption of a payment instrument that has the characteristics of a supranational means of payment (currency), says Ryabukhin.
He also recalls that it took the European Union more than twenty years to create mechanisms for the functioning of the supranational currency of European countries (the euro), and this despite the fact that there was already a financial platform for the creation of such a supranational currency in the form of the ECU.
“The CMEA countries spent more than fifteen years creating a supranational settlement and clearing instrument for mutual settlements (transferable ruble), while there was already a settlement and clearing system for non-monetary settlements based on bilateral and multilateral barter, as well as compensatory transactions,” says Sergei Ryabukhin. “The International Monetary Fund has been trying for fifty years to give the status of a supranational tender (currency) to special drawing rights, SDR, while such a system is based on the Bretton Woods and Jamaica international agreements.”
The yuan is the main contender to take the chair out from under the dollar. Thanks to the strength of the Chinese economy, this is quite real.
Support for BRICS+
Let's say a new currency is really difficult and time consuming, but both information and financial technologies today have accelerated many times over compared to the 1970s and 1980s. Yes, and the road will be mastered by the walking one - there would be a desire. But with this there are difficulties. Let's start traditionally, by spelling the name of the organization, from Brazil. With it, everything is just simple: there is a desire, backed by economic necessity. Recall that the trade balance of Brazil in recent years is traditionally positive. Accordingly, in order not to engage in lending to buyers of its resources, it needs either a trading partner such as China, which can fully meet Brazil's import needs, or an internationally recognized currency of payment, or mechanisms for the free and, most importantly, inexpensive exchange of buyers' currencies for suppliers' currencies. However, specific proposals for the BRICS currency from Brazil are not yet visible. Perhaps they will be presented at the August summit.
Russia. With us, too, everything is clear. Trade surplus with all major trading partners. The needs are similar to those in Brazil, but the problems are even more pronounced, and there are also very tough sanctions from above. The proposal seems to be being prepared, but more on that below.
In India, the situation is much more complicated. Firstly, it has a trade balance deficit, respectively, when making payments in national currencies, countries that are importers for India are simply forced to buy from India at least something that is not even really needed, or lend to India, which is of little interest to anyone. Moreover, the representative of the Indian Foreign Minister has already stated that there are no plans to participate in the BRICS currency. Do not forget about the traditional multifactorial nature of India.
“This decision is due to a number of considerations: India's GDP growth rates are stable, so at the moment it does not need support from the BRICS countries; a multilateral orientation obliges New Delhi to maintain good relations with the US and EU countries and not risk its trade, economic and political ties with them; there are concerns about the internationalization and strengthening of the Chinese yuan and the position of China when introducing the BRICS currency against the backdrop of continued active competition between the two countries,” explains Elza Shirgazina.
China's position is also clear. He is, of course, interested in de-dollarization, but his currency is quite strong in itself. Resource providers agree to accept it anyway. In addition, despite all the trade wars with the United States, China does not plan to finally break the pots and remove itself from the Western financial system. As we wrote above, he is gradually promoting the yuan, developing his digital currency and his digital currency exchange project, actively lending to other countries in yuan - and expanding this lending. As Xinhua reported last week, the People's Bank of China and the State Administration of Foreign Exchange Control of China have loosened the regulation of cross-border financing of enterprises and financial institutions. The multiplier for the cap on outstanding cross-border funding has been increased from 1.25 to 1.5, which will allow Chinese lending institutions to issue more loans to foreign companies. At the same time, the previous increase from 1 to 1.25 occurred only in October 2022. It looks like China is promoting the yuan through credit expansion.
However, unlike India, he has not yet dissociated himself from the very idea of the BRICS currency.
The situation with South Africa is the most incomprehensible. As Elza Shirgazina explains, there is some uncertainty in the country's position: there is an understanding of the need to abandon the dollar, but the leadership has not yet put forward its proposals.
There is no unity within the BRICS about a common currency. Russia and Brazil are in favor, India is against, China and South Africa have not yet expressed themselves unambiguously. Pictured from left to right: Chinese President Xi Jinping, Russian President Vladimir Putin, Brazilian President Jair Bolsonaro from 2019 to 2023, Indian Prime Minister Narendra Modi and South African President Cyril Ramaphosa
There is no unity within the BRICS about a common currency. Russia and Brazil are in favor, India is against, China and South Africa have not yet expressed themselves unambiguously. Pictured from left to right: Chinese President Xi Jinping, Russian President Vladimir Putin, Brazilian President Jair Bolsonaro from 2019 to 2023, Indian Prime Minister Narendra Modi and South African President Cyril Ramaphosa
Research Institute "Innovative Financial Instruments and Technologies" is developing a prototype of financial instruments, provided with dual goods (having commodity and monetary properties at the same time), on the basis of which it is possible to create a new means of
payment
Gold standard? commodity standard
As for the options for the BRICS currency, there are not many of them: commodity security (a special case is gold), peg to a basket of currencies (it is possible to one, for example, to the yuan), and finally, a currency without security and without peg. It makes no sense to even consider the last case: the world is so fed up with the dollar, backed only by military force and gradually losing economic power, that this option will not interest anyone at all.
The gold standard is mentioned by some Western and Russian commentators. There are some grounds for this idea. According to the World Gold Council, Russia and China have doubled their gold reserves over the past ten years. India's reserves have officially increased by 42%, but do not forget that in India the population has a huge amount of gold in the form of jewelry, so this country is also not deprived of gold.
However, most economists do not seriously consider the option of mono-commodity security in the form of gold, that is, the new gold standard embodied in the BRICS currency. “I don’t think that gold or other commodity security can underlie such a unit of account,” says Alexander Shirov. - The main mechanism for ensuring should be a fairly large market for mutual trade, included in the orbit of the new currency. The quality of a currency should be determined by the possibility of an effective exchange of quality resources with its use. There are still some problems with this. For example, settlements in the national currency with India are associated with the presence of significant trade imbalances, which hinders the development of trade operations in alternative reserve currencies.”
If one gold does not fit, then a more complex structure of commodity supply can already be seriously considered. According to Sergey Ryabukhin, on behalf of the President of the Russian Federation and on the instructions of the temporary interdepartmental working group of the apparatus of the Security Council of the Russian Federation, scientists from the IFIT Research Institute, in cooperation with scientific and educational organizations in Russia and a number of friendly states (Myanmar, Venezuela, Brazil and China), are developing a prototype of financial instruments, provided with dual goods (possessing commodity and monetary properties at the same time). These goods make it possible to expand the gold base (collateral) when forming a provisional measure of a new means of payment (currency) of the countries of integration unions, such as the EAEU, SCO, BRICS and BRICS+.
Further, the director of the IFIT Research Institute recalled that in the total world volume of dual goods, which include oil, gas, precious and rare earth metals, grain, tin, titanium, chromium, uranium, lithium and others, the BRICS countries own a share of at least 60%, and the BRICS + countries - at least 80% of world reserves.
“The developed prototype of financial instruments, which can be supported by dual goods, due to the created unique algorithm for calculating the index of the multi-commodity value of price stability (MTZ-index) to the anchor commodity gold, allows expanding the gold base,” explains Sergey Ryabukhin. “In addition to the assets of the BRICS and BRICS+ countries, which exist in tangible form and can be used in the formation of the MTZ index, there are also significant amounts of financial assets of the countries of the integration union, which can also be used to create a new security measure for issuing a supranational means of payment.”
Such assets, according to the IFIT Research Institute, may include the IMF Special Drawing Rights (SDR), the volume of which in the assets of the countries of the integration union is more than $200 billion in dollar terms. Accordingly, all of the listed assets, as well as the national currencies of the BRICS and BRICS+ countries, could become the basis for the formation of commodity and foreign exchange reserves. The currency could be issued in the form of digital financial assets, in the form of an aggregated (synthetic) currency, while the New Development Bank could act as an issuing center for issuing and controlling the circulation of a new means of payment.
What does the queue at the BRICS gate want?
With a basket of currencies, the situation is a bit simpler: many economists consider this option to be the most probable. “The most likely option for creating such a currency is a basket of digital currencies issued by the central banks of the BRICS countries, and the weight of each country in the basket will be determined based on economic parameters. Such a mechanism will certainly increase the role of central banks in the financial system, possibly by reducing the importance of commercial banks,” Alexander Shirov is sure.
Elza Shirgazina also believes that at the current stage, the best option for creating a potential currency is pegging it to a basket of national currencies of the countries participating in the association with fluctuations in its value in accordance with changes in the exchange rate of national currencies. Moreover, she believes that it is inappropriate to consider the inclusion of other currencies at the moment.
An important point to keep in mind is that any distribution of the weights of national currencies in the basket will be dissatisfied either with India, which will never recognize the greater economic weight of China, or China, which will naturally disagree with allocating India a larger share than that which corresponds to the size of its economy. As for providing a large set of dual goods in the form of a complex index, it will be difficult to coordinate it with other BRICS members and solve all the organizational tasks associated with the complex structure of the instrument.
“So far, the new BRICS currency is more of a political wish than a real development,” states Alexander Galushka, Deputy Secretary of the Civic Chamber of the Russian Federation, in 2013-2018 - Minister of the Russian Federation for the Development of the Far East. — We have to admit that the existing financial system has firmly ingrained itself in the minds of financial authorities around the world, including the BRICS countries, all of them were brought up in it, and, according to my personal observation, they lack professional subjectivity, some kind of financial creativity — and this is necessary if we want to build an alternative model, not copying the one that was created on the basis of the dollar. The same BRICS bank has not yet become a real alternative to the IMF and the World Bank, since, in fact, it simply copies them. The whole world is sitting on the dollar needle, although this creates huge risks - and strengthens the well-being of the United States.
Nevertheless, the new currency really has a chance, and here's why. Firstly, there is a feeling that the world is no longer so easily ready to change the currency of one giant country to the currency of another giant country. Countries in the global South that are trying to assert their sovereignty will fear that any one country's currency used as a reserve can be used as leverage.
Secondly, the expansion of the BRICS may be a plus. The fact is that for developing countries (as well as for developed ones), China is often the main trading partner, while the trade turnover of these countries with each other is usually quite small. Now 22 new states want to join the BRICS, and for them, it is likely that using the new currency of association in mutual trade will be a more attractive option than paying for everything in yuan. Especially if the new currency is tied to a basket of goods - and many developing countries have serious reserves of certain minerals or export agricultural products to the world market.
Thirdly, the chances of a new BRICS currency will increase if a global debt market is organized in parallel, where countries and companies can borrow in this currency. The debt market is the most important support for the US dollar, and now for the yuan. But the entire joint debt of the BRICS countries now barely exceeds $4 trillion; by comparison, the US owes $32 trillion and a quarter of its debt is held by foreigners. The gradual but persistent development of bonds in the new BRICS currency will strengthen its role.
Finally, now, thanks to the efforts of China, we are witnessing an epoch-making process - the change of the petrodollar to the petroyuan. But why should oil be traded for yuan at all? The United States is at least the largest player in the global oil market, while China is only a buyer. In global oil trade, it is not necessary to switch to the yuan - you can switch to the new BRICS currency.
This article originally appeared in Russian at expert.ru