The recent meeting of the BRICS in South Africa, or to give its full title – The BRICS Partnership for Global Stability, Universal Security, and Innovative Growth – witnessed its substantial enlargement, from the initial five countries of Brazil, Russia, China, India, and South Africa to 12 countries. The enlarged BRICS now includes the UAE, Egypt, and Bangladesh (already members of the BRICS Development Bank), and also Iran, Argentina, Ethiopia, and Saudi Arabia. Saudi Arabia was perhaps a slight surprise. In terms of GDP the enlarged bloc now represents well over 25% of global GDP. The enlargement indicates the BRICS positioning as BRICSPlus and the desire to attempt to reset the set of international institutional structures may mean, however, as suggested below that some of the developing BRICS specific structures discussed below may need to move away from consensus, equal-weight voting decision-making if they are to be effective as well as equitable.
The addition of Saudi Arabia, the UAE, and Iran would see the BRICS group make up almost 42% of global crude oil output. In terms of oil invoicing, it is not clear that there will be an immediate move to invoicing in BRIS currencies. The fact that the Saudi riyal is pegged to the US dollar might mean a reluctance to move from dollar invoicing.
On trade generally, the core BRICS countries control around 23% of global exports and 19% of global imports, and the new members would add 3.7% and 3.0% to that, respectively, with Saudi Arabia being the biggest individual new member in terms of exports and the UAE the biggest new importer.
Much has been made in media comment about the advent of this enlarged BRICS – increasing its global GDP weight by over 11% and in trade terms representing a 16% increase – strengthening a drive by the BRICS to “dethrone the dollar”. This suggestion raises three large areas of questioning. What are the economic and monetary implications of the enlargement? What is the likely international political development and impact of this growing cooperative entity encompassing a variety of country economies and monetary jurisdictions? What future prospect is there for BRICS ensuing monetary initiatives replacing the current US global monetary hierarchy and hegemony?
Indeed, these questions represent three main research agendas that need to be followed before any definitive scenarios may be established. However, there are some clues as to the empirical evolutionary paths that the now enlarged BRICS may take if the progress already made in terms of institutional economic and monetary development is examined.
Political Decision-Making
Before looking at the four main economic and monetary developments already observable (see below), it is worth considering the political structure and modus operandi of the BRICS that the enlargement to the BRICS amplifies. Currently the structure is similar the G7, in that it is a cooperative structure between the countries involved. It is neither a federal nor a confederal institutional structure, as is the EU for instance. Hence, it must develop policy only by consensus. The closest parallel is with the successful ASEAN (and related institutions) cooperative dialogue approach to policy-making.
There is however a problem with this consensual political approach to decision-making. It may well be an efficient mechanism for moderating and resolving foreign policy conflicts (the ASEAN methodology), but it is not necessarily suitable for structured monetary reform decision-making.
This deficiency can be illustrated the slow lending progress within the BRICS New development Bank (NDB), operating since 2015. The voting procedure in the NDB gives equal weight to each of the country members. This put a premium on achieving consensus and renders effective decision-making problematic (Luo and Yang 2021).
A position in which weighted voting would be preferable is likely to be discussed, given the larger the number of members of disparate size (and interests) now involved. The EU, for instance, has a weighted voting procedure for most issues. We can now look at the NDB in a little more detail.
BRICS: Institutional Progress
New Development Bank (2015)
The New Development Bank (NDB) is a multilateral financial institution established in 2015 by the initial BRICS countries (Brazil, Russia, India, China, and South Africa). Its purpose is to fund infrastructure and sustainable development projects among the BRICS and other emerging market economies and developing countries. The Bank had an initial authorized capital of 100 billion dollars, and an initial subscribed capital of 50 billion dollars. While NDB officials have stated that they want to do something different than the traditional Western-controlled development banks, like the World Bank, they have also stressed that the NDB is not meant to challenge the Western banks, but rather to complement them. The Bank has its headquarters in Shanghai, China and an Africa Regional Centre is being established in Johannesburg, South Africa. (ESCR-Net 2015). Its objectives were reiterated at the 2023 meeting by its President.
“We will do this by expanding our network of partnerships, always placing great emphasis on the relevance of the development projects we finance. To this end, we are seeking to work ever more closely and directly with our members to better identify their most significant needs and focus our support on their most critical and strategic projects. In this same sense, the NDB intends to increase its participation in co-financing operations with other multilateral financial institutions, national development banks, and with the private sector.” (Rousseff 2023)
However, it has been suggested (ESCR-Net 2019) that:
“If the NDB is going to break from this history, it must commit itself to a different path – supporting transparent, participative, and accountable development that is socially and environmentally sustainable, respects human rights, and meets the needs of poor and marginalized communities.”
One advantage the NDP is able to bring is that it has a credit rating of AA+ from S&P and Fitch, which is higher than any individual BRICS member, China included. This rating allows several BRICS members to borrow from global capital markets at much cheaper rates through the higher-rated NDB than they could on their own.
The NDB’s high credit rating also allows it to raise capital relatively cheaply from the bond markets and lend onward at interest rates lower than what could be obtained by some BRICS sovereign borrowers themselves.
One key governance difference between the Bretton Woods Institutions is that the World Bank, the IMF, the Asian Development Bank, and even the Asian Infrastructure Investment Bank (AIIB) all have weighted voting systems and majority voting rules. The NDP, as indicated above, has an equal-weight system instead of a weighted voting. All five BRICS countries (now increased to eight and presumably more after the 2023 enlargement) have equal shares and voting weights regardless of the major differences in their economic weights, and use consensus for making decisions. (Luo and Yang 2021) Some form of adjusted weighting is required, though not necessarily GDP as this would give China effective control, something they would not want to exercise Perhaps a variation on the EU weighted voting system may be appropriate. Given the dominance of China, in terms of both GDP and trade, this is a problem still to be solved, so as to achieve both equity and efficiency.
Contingent Reserve Arrangement (2014)
In 2014, the BRICS countries established the Contingent Reserve Arrangement (CRA) purportedly to compensate for the BRICS’ frustration over the non-materialization of reforms in the International Monetary Fund (IMF) that had been blocked by the United States. The reforms eventually occurred in late 2015 and included the addition of four of the initial BRICS members (excluding South Africa) to the top 10 countries of the IMF and ensuring the election of all the IMF Executive Directors (IMF 2016).
The CRA makes pooled dollar reserves of USD100 billion available to provide liquidity support for members in times of a modest-sized balance of payments crisis Yet, the CRA is not a lender of last resort; rather, it provides the members with the first line of defence before they have to seek conditional help from elsewhere, possibly the IMF. The governance issue is again an issue but appears to have been resolved in this case.
A contractual analysis of the CRA (Wurdemann 2018) suggested that:
…though all BRICS countries enjoy equality for strategic decisions, the CRA strongly resembles the IMF’s quota-based voting distribution where operational decisions are taken. It nevertheless provides a more balanced voting system, as it does not provide one single party with a veto position.”
Although set up by a Treaty the legal form of the CRA does not establish an institutional framework which would enable macro-economic research and decision-making to have a substantive basis, such as has the IMF. Hence, though it does have the potential to become a viable alternative to the IMF, any such transformation appears a long way off.
BRICS Pay (2018)
The BRICS Pay project represents a new payment mechanism based on up-to-date technology, which significantly contributes to the economic security of participating countries while reducing their dependence on external payment systems. Following its implementation, cross-border card, and mobile payments interoperable across BRICS Plus countries.
BRICS Pay links the credit or debit cards of BRICS citizens to online wallets, which will be accessible 24/7 for payment via a mobile application installed on their smartphones. The BRICS Pay system is part of BRICS’ collective effort to establish a common system for retail payments and transactions between its members. However, BRICS is willing to expand its scope, and non-BRICS countries will also be able to use the platform. The pilot project started in South Africa in early April 2019. In 2020, the Russian BRICS Presidency proposed the idea of a commercial “BRICS Pay” for “BRICS Plus” countries for the consideration of the BRICS Business Council. (BRICS Business Council 2020: 67).
The biggest advantage of BRICS Pay is that the proposed integrated payment system would make possible the use of BRICS members’ national currencies as a direct basis of exchange for external payments. Currently, external settlements between BRICS members still require a conversion into US dollars, which requires the engagement of US banks. For example, a yuan-ruble non-cash settlement using China’s UnionPay cannot happen directly; it must be converted into US dollars first. Through BRICS Pay, the conversion to US dollar and US banks would no longer be necessary because payments would be settled using the national currencies of the BRICS members. The BRICS Pay system will also allow the members to reduce their dependence on international payment organizations such as SWIFT, Visa, and Mastercard.
So far, the only individual payment system with a global presence is China UnionPay. It is among the largest card payment organisations (debit and credit cards combined) in the world. It offers mobile and online payments based on the total value of payment transactions. It is also the only interbank network in China that links all ATMs of all banks throughout the country, as well as the EFTPOS network. UnionPay, in partnership with more than 2300 institutions worldwide, has enables card acceptance in 179 countries and regions, with issuance in 61 countries and regions, and serves one of the world’s largest cardholder bases.
It remains to be seen how rapidly BRICS Pay will develop a global presence, and how this will be accommodated with China’s already extensive UnionPay. This potential competition the other political issue facing the BRICS, that is in accommodating the dominance of China, and eventually India, as large economies with the BRICS.
Central Bank Digital Currencies
China was the first country to explore and then launch a CBDC, in 2014. Its motivation was two-fold, to launch a domestic retail CBDC and externally to launch a wholesale CBDC that could serve as a vehicle currency for trade with China’s regional partners, representing an effective digital currency area for the e-CNY.
Notwithstanding the fact that, at this point in time, the potential for the development of wide-ranging digital currency areas (DCAs) is speculative, the effort being put into cross-border CBDCs by the BIS and several central banks, suggests some examination of how potential supra-regional DCAs might possibly develop over the next decades to support reduced dollar invoicing of trade. A digital euro, establishing a digital currency area would strengthen, and enable its extension, across the 36-country Single European Payments Area (SEPA). Equally, a digital dollar could be used to strengthen adherence in the 13 monetary jurisdictions where the US dollar is already the main trade currency (plus 10 others where it is the secondary currency), creating a digital dollar currency area. A digital e-CNY area could potentially extend along its BRI routes. (Lloyd 2023)
It should be understood that the above speculative scenario is only related to trade invoicing and subsequently trade finance payments. Currently, some 40% of international trade is denominated in US dollars. Of, course, it is also possible that a large number of countries, including smaller emerging market countries mat themselves attempt to establish their own digital currencies for trading purposes. In connection with the enlarged BRICS the immediate intention is to expand the use of their own individual currencies for trade between themselves. One problem here is that each country will have to hold other countries’ currencies, as opposed to using the US dollar as now. This problem suggests that eventually there will be a preference for large DCA, including perhaps the e-CNY, a digital Indian rupee, and a digital Brazilian real, covering the BRICS.
These potential digital currency area scenarios lead on the potential wider global monetary system reform and a possible future challenge to the US dollar in its wider use in the global monetary and financial system.
De-dollarization: A Future Prospect?
As the title of this section implies any progress on de-dollarisation is likely to be slow and measured in decades. However, this does not mean that there will not be incremental change. There are various dimensions of currency usage within the global monetary and financial system. Nonetheless, change will be slow and less radical than might be envisaged, especially following BRICS enlargement and the traditionally cautious approach of China to such initiatives. For instance, as argued by Bishop and Payne, in relation to trade, investment, and supply chains:
it is difficult to envisage a decisive decoupling of West from East, or a definitive process of ‘deglobalisation’. The sheer volume of trade in goods and services, the flows of capital, data and people across borders to facilitate it, the extent of economic interdependence and the complexity of global value chain-based production, which relies on inputs sourced from around the world, all militate against it.(Bishop and Payne 2021)
Moreover, from a monetary viewpoint it is worth remarking that 90% of foreign exchange payments are made in US dollars. Almost 80% of publicly traded debt is dollar denominated. The US dollar is also the main reserve currency, representing 58% of foreign reserves held by global central banks. It may be suggested that there has been a gradual decline if the use of the US dollar as a reserve currency, but there is no evidence of any severe reduction in its use to cover liabilities. Hence, for the time being the BRICS countries, including China. are also reliant on use of the US dollar. One example is China’s international payment system (CIPS) Although, significantly, CIPS is a clearance and settlement system, it still uses the SWIFT messaging system to provide integration with the overall international payments system.
It is important to recognize that in terms of “unseating” the US dollar it is not simply the above indicated wide use of the dollar, but the hierarchical structure of the global monetary system that relies, especially since the 2008 global financial crisis, on the US Federal Reserve. The Federal Reserve acts not only as the US central bank, but as an effective global central bank, providing enhanced global financial stability. This is achieved by a system of permanent credit/currency liquidity (swap) arrangements with the Federal Reserve and five other major Western central banks and nine other temporary central banks. These arrangements provide a substantial support mechanism for the globally-pervasive dollar-zone and hence the international role of the US dollar.
It is of course correct to indicate that with the Chiang Mai Initiative, and other bilateral arrangements, similar swap lines and reserves; provision have been established including China. However, these two pillars represent a moderately stable, if fractious, functioning global monetary system. For the time being there is no sign that this bipolar system will not persist for some time to come.
Another suggestion is that of the BRICS creating a BRICS currency, similar to the Euro. This is not a realistic prospect. It took the EU many years to establish a viable common currency and set of relevant institutional structures such as the ECB and the underlying Eurosystem of national central banks in the member states that adopt the euro. Moreover, two of its remaining weaknesses are the lack of a functional banking union and the absence of a Eurozone fiscal authority. Nor is the creation of a BRICS currency currently on the agenda of the group. There have been some suggestions, mainly emanating from Russia, of linking the BRICS currencies to either a basket of commodities or even gold. There is no evidence of such ideas becoming a realistic proposition to be considered by the group. With enlargement such an agenda appears even less likely.
Any potential de-dollarization will be an incremental process, hopefully culminating in the fullness of time in a global monetary system, based on a global unit of account, obviating the reliance on a single country, however large and powerful, or tendentious or open-minded. There may or not be a specific inflection point when it may become clear that such an outcome is a genome possibility, rather is progress likely to be gradual or even the product of a future global financial crisis.
Conclusion
There is little doubt that the recent enlargement of the BRICS is a significant global event. Combined with the progress that has been made since their inception on the three main initiatives taken by the BRICS – the NDB, the CRA, and BRICS Pay – the leading Western nations in the G7 will need to pay regular attention to further progress.
However, the situation should not be seen as a competition. What we are witnessing is a rational evolution of the global economy and the global polity. Unfortunately, the attitude of the US in the last decade has been unhelpful for any attempt to achieve a degree of consensus on the need to reform the global monetary system. It is worth noting the remarks of former US Treasury Secretary Jack Lew. In 2016, he warned that “the more we condition the use of the dollar and our financial system on adherence to US foreign policy, the more the risk of migration to other currencies and other financial systems in the medium-term grows” (Lew 2016).
The attempt of the US to maintain a multi-factorial hegemony in this manner will ultimately prejudice the essential need to reform the global monetary system, to the benefit of all countries, including the US. China is careful to avoid any suggestion that it wishes to replace the US in terms of challenging the US international position and instead emphasizes the need for international reform of the monetary system. (Zhou 2009).
It is clear from this positioning on monetary and currency issues that care is taken by the BRICS in connection with geopolitical issues. China and India are placed in different positions in relation to the US and the West. It should also be noted that despite evidence of growing technological progress in India, especially in the digital area, its economy is only one fifth the size of China’s. Some of the added countries have similar ambiguous relations with the West. The so-called Global South is not a cohesive bloc in terms of geopolitical positioning. Moreover, tensions over the conflict in Ukraine have led to displeasure being expressed by China over the Russian position (Lau 2022).
BRICS Plus expands the BRICS platform to bring in other countries and regional integration institutions, such as the Mercosur, EEU, South African Customs Union, South Asian Association for Regional Cooperation, ASEAN, and the SCO. BRICS-Plus is intended to form an expanded platform that can coordinate policies with BRICS’ regional partners across the four continents. Already some 40 countries have expressed an interest in joining BRICS Plus.
The 2023 meeting of the BRICS, its enlargement, and its initiation of a wider dialogue, represent a signposting to a more cooperative future, not only for the BRICS members, but for the global community. The opportunity for global dialogue should be grasped by the G7 – perhaps through the G20. It is an opportunity, as with the climate change agenda, to establish meaningful and productive dialogue across the supra-regions and continents of the world, whatever the interests of individual nation states.
References
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