Occasional Paper 8/2023
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AUGUST 2023
by Prof William Gumede
Former Programme Director, Africa Asia Centre, School of Oriental and African Studies (SOAS), University of London; former Senior Associate Member and Oppenheimer Fellow, St Antony’s College, Oxford University; and author of South Africa in BRICS (Tafelberg).
Introduction
The Russia-Ukraine war is likely to increase the de-dollarisation of the world. Russia, which is trying to circumvent Western economic sanctions against it as a result of its war with Ukraine, is increasingly pushing the Brazil, Russia, India, China and South Africa (BRICS) alliance – to increase the use of BRICS currencies in trade between members, reduce the use of the US dollar and, ultimately, to speed up the formation of a common BRICS currency.
BRICS makes up more than 40% of the global population and a third of global economic output, and some of its members – such as India, more recently – have notched up high growth rates. The BRICS economies surpassed the Group of Seven (G7) in 2020, if using purchasing power parity. However, US GDP is still close to 25% of the global economy – which underpins the demand for US dollars.
BRICS countries also see the formation of a BRICS currency as a way to protect member countries from similar Western sanctions to those that Russia is under (Cele & Bowker, 2023). The domination of the US dollar often means that US monetary policies to tackle domestic economic crises, disproportionately negatively impact on emerging market economies (Rajan, 2014; Ahmed, Akinci & Queralto, 2022).
Raghuram Rajan (2014), the former governor of the Indian Reserve Bank, has warned in the past that because the dollar is the globe’s reserve currency, one-sided domestic monetary policy in the US – which does not take into consideration its impact on the global economy – is a “source of substantial risk” to many developing-country economies. For example, the US Federal Reserve, its central bank, increased interest rates in 2022, which caused negative spillovers in developing economies across the globe (McNamara, 2023). The recent US interest rate hikes have increased the value of the dollar and the commodities priced in the currency, plunging many developing countries’ economies into turmoil.
China has for years prior to the Russia-Ukraine war agitated for an alternative to the dollar-backed international financial system and has in the past pushed its own strategic goal of increasing the power of its own currency, the yuan (Gumede, 2014). Following the acceleration of the move towards a multipolar world unleashed by the Russia-Ukraine war, China is now pushing for a common BRICS currency to rival the US dollar (Wheatley & Smith, 2022).
New Brazilian president Lula da Silva has already loudly called on BRICS to step up efforts in finding an alternative global currency to the US dollar for use in international trade (Bloomberg, 2023). Lula recently expressed his determination to work toward de-dollarising international trade, during a visit to the Shanghai-based New Development Bank, a financial institution created by BRICS countries as an alternative to the Western-dominated World Bank and the International Monetary Fund (IMF). “Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries?” Lula asked (Bloomberg, 2023). “Who decided that the dollar was the [trade] currency after the end of gold parity?”
BRICS have tried to set up alternatives to Western-dominated global financial, trade and political institutions. This includes wanting to replace the dollar as the world’s reserve currency – ending over-reliance on the US dollar in the global financial system has been one of the major objectives of the BRICS trade alliance.
The BRICS countries argue that the global use of the dollar gives the US unequal economic, market and political power. Domestic uncertainty in the US often brings dollar volatility, which then also spills over to economies around the world that hold dollars in their foreign reserves. Some BRICS strategists have been calling for a BRICS global reserve currency, with the idea of a BRICS common currency similar to the euro, the common currency of the European Union, being floated.
Although up until now, BRICS’ efforts to reduce the global use of the dollar have been slow going, one of the outcomes of the Russia-Ukraine war is very likely to be that the BRICS countries’ activities to increase the use of their own and other currencies, rather than the US dollar, are likely to accelerate (Wheatley & Smith, 2022).
The BRICS bloc will discuss a proposal on whether to work towards a common currency at its next meeting in South Africa, on 22 August 2023. The proposal for a BRICS common currency envisages that such a currency would over time become similar to that of the euro and would be used in transactions by countries outside of BRICS.
De-dollarisation key to the economic survival of Russia following Western sanctions
A number of BRICS countries are exploring ways to de-dollarise their trade. Close to half of Russia’s international reserves in Western countries – which stood at US$607bn in mid-April 2022 – have been frozen, and its foreign trade transactions – including those with some emerging markets – have been blocked (Reuters, 2022a). Seven of Russia’s banks have been excluded from the world’s leading international payment messaging system, SWIFT (Society for Worldwide Interbank Financial Telecommunication), which is responsible for conveying messages on how payments should be made and received. A SWIFT ban means Russian banks cannot do digital cross-border transactions.
The Russian banks managing energy – oil and gas – related transactions were exempted from the SWIFT ban, giving the country’s faltering economy a critical lifeline (Blenkinsop, 2022). For example, Gazprombank, which handles the bulk of oil, gas, and coal transactions, are exempt from the ban. This is good news for Russia, considering that while the country is the world’s third-largest oil producer, it is the world’s largest exporter of oil.
BRICS countries have been buying Russian resources, offering the country vital support amidst its isolation by the US and the European Union (Verma, 2023). For example, India imports of Russian oil in May 2023 reached record levels of about 1.95 million barrels per day (Verma, 2023). According to the International Energy Agency, China and India bought 80% of Russia’s oil in May 2023, with China buying 2.2 million barrels per day (PTI, 2023).
For Russia, isolated from the international financial system over the war, it has now become more urgent for its own economic survival to integrate its payment systems with those of BRICS and other developing countries, and to bypass the US dollar and expand the use of its own and BRICS and developing-country currencies in global transactions. So far, Russia has stockpiled US$77bn of foreign reserves – or 13.1% of its reserves – in RMB since Western sanctions started in 2014 (Harper, 2023). Russia’s Finance Minister, Anton Siluanov, told a finance ministerial meeting of BRICS countries in 2022 that it is urgent the “existing international monetary and financial system based on the US dollar” must be changed (Reuters, 2022b).
Following Western sanctions against Russia after the country’s invasion of Crimea in 2014, Russia, in 2015 already, set up its own banking messaging system, called System for Transfer of Financial Messages (SPFS), in competition with SWIFT, and in anticipation of future exclusion from the SWIFT system by Western countries. The Russian SPFS includes countries who were members of the former Union of Soviet Socialist Republics (USSR). Russia also started its own card payment system, MIR. “This pushes us to the need to speed up work in the following areas: the use of national currencies for export-import operations, the integration of payment systems and cards, our own financial messaging system and the creation of an independent BRICS rating agency,” Siluanov told the BRICS finance ministers last year (Reuters, 2022b).
Increased currency integration between BRICS following Russia-Ukraine war
Russia is proposing that the New Development Bank (BRICS Bank) should become a clearing centre for a BRICS common currency. Russia’s Finance Minister, Anton Siluanov, said: “The idea of creating a common currency, although I would probably call it a payment unit inside BRICS countries, is floating around and is being discussed. We also have proposals about using digital financial assets supported by real assets, for example gold – stablecoins” (TASS, 2023).
“Nevertheless, we are ready to discuss them within the New Development Bank framework that may become a kind of clearing centre. This is not the core business for the bank now, but this is [also] not the main obstacle to solve the task,” according to Siluanov (TASS, 2023).
Despite China’s global trade expansion, the country’s currency, the RMB, is not very convertible (Sguazzin, 2023). It lacks the capital markets, market transparency and the supporting financial institutions. China has also set up its own payment system, the Cross-Border Interbank Payment System (CIPS) in 2015, linked to its trade, loans, and investments in developing countries. China has reported that 103 countries are now linked to its CIPS (Reuters, 2022c). However, very few Western banks have joined China’s CIPS and the international transactions of the CIPS are still done through SWIFT. In fact, international transactions of the CIPS only make up 3.2% of global transactions (Reuters, 2022c).
Russia started in negotiations with China in 2016 to integrate its SPFS with that of China’s CIPS (Wu & Isjwara, 2022). Russia also has a bilateral currency swap agreement with China’s People’s Bank that allows the two countries to exchange currencies at a fixed interest rate – to reduce currency volatility impacting on trade between the two countries. About 70% of trade payments between Russia and China are done in the national currency of each country (TASS, 2023).
As the Russia-Ukraine war rages on, BRICS members India, China and Brazil have been buying oil, gas, and fertilizers from Russia. Both China and India have progressively increased their oil purchases from the Russian bear as the Russia-Ukraine war has progressed, with China paying its oil purchases in yuan, the Chinese currency.
Russia has asked India to use its SPFS system for bilateral payments for the oil, weapons, and goods the two countries trade. The proposal involves India making rupee-rouble-denominated payments using Russia’s messaging system, SPFS (Srivastava & Beniwal, 2022). According to the Russian proposal, rubles would be deposited into Indian banks and changed to rupees and vice versa. If the Russian proposal is accepted by India, a decision would be made whether to fix or float the exchange rate in the transactions.
India has a unified payments interface (UPI) system, an interface through which one can transfer money between accounts across a single window. The Indian UPI was launched in 2016 by the National Payments Corporation of India (NPCI), the organisation that manages retail payment systems in India, and governed by the Reserve Bank of India, the central bank. Russia wants India to link the UPI system to the Russian MIR payments system, which would make it easier between the two countries with regards to bank cards issued by Indian and Russian banks.
India has also moved over the past few years to diversify its foreign reserves. Reserve Bank of India (RBI) governor Shaktikanta Das has said: “Our reserves are distributed in various foreign currencies and not just concentrated in just one currency” (TNN, 2022). India does not release the currency composition of its foreign reserves, but it is estimated that between 30-40% of India’s foreign reserves are non-dollar currencies (IMF, 2023). In its diversification strategy, the RBI has been concentrating on buying the euro, pound sterling, yen, and the Swiss franc. However, data from the International Monetary Fund (2023) showed that by the end of 2021, the US dollar share stood at 59.15%, the euro at 20.48%, the Japanese yen at 5.83% and the Chinese yuan at 2.66%.
In late 2022, Brazil’s central bank quadrupled its foreign reserves in Chinese yuan (Ayres, 2022), and reduced holdings of US dollars and euros. Until 2018, Brazil had no yuan in its foreign reserve holdings, whereas now its holdings of yuan stand at 4.99%, making it the third largest behind the euro, which was reduced to 5.04%. Brazil also reduced its dollar reserves from 86.03% to 80.34%. China has long overtaken the US as Brazil’s largest trading power, having 28% of its trade, and the US having 14%. Brazil has also increased its reserves of other countries’ currencies, such as the Japanese yen, British pound, and Canadian dollar. “We sought greater diversification in the allocation of currencies, without prejudice to the countercyclical profile of the portfolio as a whole,” Brazil’s central bank said in its report on its foreign reserves (Ayres, 2022).
Expansion of BRICS will accelerate de-dollarisation
One significant impact of the Russia-Ukraine war will be the accelerated expansion of the BRICS trade alliance, from its current members of Brazil, Russia, India, China, and South Africa. This will hasten the shake-up of the United States-European Union-Japan-led post-Cold War consensus, which dominates global political power, multilateral institutions, and prevailing ideas. Both China and Russia are particularly keen for a rapid expansion of BRICS.
Many large developing countries are eager to join the BRICS alliance, which they see not only as alternative trade partners to the West, but also in some cases as a bulwark against what they see as developed global hegemony in markets, ideology, and culture. A BRICS Expansion dialogue meeting was held in May 2022, with the Finance Ministers of many countries attending and expressing their formal interest to join BRICS. In March 2023, Mexico applied to become a member of BRICS. Argentina, Indonesia, Saudi Arabia, and Iran have already applied to join. Turkey, United Arab Emirates, Iran, and Egypt are also keen to join.
A larger BRICS alliance will likely increasingly rival the Group of Seven (G7) large industrial economies of the US, EU, UK, France, Japan, Italy, and Canada – which together are home to 16% of the world’s population and account for 62% of the global economy. The BRICS countries, on the other hand, consist of 41% of the world’s population and account for 26% of the global economy. The average per capita GDP of G7 economies is six times that of BRICS economies. However, a swift expansion of BRICS will increase the trade bloc’s share of the global economy much faster than earlier predictions, which did not take into account that BRICS will expand its membership very quickly. A larger BRICS will mean that the world would increasingly use US dollars less.
Currently, only Russia is a large oil producer amongst the BRICS countries. If large oil producers such as Saudi Arabia, United Arab Emirates and Egypt join BRICS, it would result in the group dominating the world’s energy supply. The strength of the US dollar is also partially based on the currency as underpinning oil trade – the so-called petrodollar – and members of OPEC (Organisation of the Petroleum Exporting Countries) settle their accounts in US dollars. Therefore, enlarging BRICS to also include the oil producers and persuading them to use a new BRICS currency, rather than the US dollar, to settle their accounts, will be a game-changer – not only will it be a vote of confidence in a new BRICS currency, but such a move is also likely to accelerate the de-dollarisation of the world.
Rise of new regional currency blocs
There has been a rise in calls by trade regions to align their currencies, to minimise their trading in US dollars. Gita Gopinath, the IMF’s first deputy managing director, has already warned of the emergence of new currency blocs based on trade between separate groups of countries (Wheatley & Smith, 2022).
Brazil and Argentina – South America’s two biggest economies – have announced they are starting preparatory work on a common currency, and plan to invite other Latin American countries to join them. In a joint letter, Brazilian President Luiz Inácio Lula da Silva and Argentina’s President Alberto Fernandez said they planned to “advance discussions on a common South American currency” (Ayres, 2023). Lula and Fernandez called for the envisaged Latin American currency union to extract the continent from the use of the US dollar.
Lula more realistically envisaged that such a common South American currency would not be like the European Union’s euro, which is used as a currency for transactions within the EU bloc. According to Brazilian and Argentinian government officials, the South American currency would only be used for trade purposes (Ayres, 2023), while the individual currencies of the countries would remain in existence. The proposed Latin American common currency could be a digital currency, which is pegged to major currencies or to gold. Nevertheless, the challenge is that digital currencies are unregulated, more volatile, and unstable – and it will not be simple to create a digital-based common trade currency for Latin America.
Although geographically close, having a large volume of inter-regional trade and institutional familiarity, an attempt by Brazil and Argentina in the 1980s to launch a shared currency for trade, called the ‘gaucho’, collapsed because of divergent monetary policy regimes, economic institutions, and political systems, amongst others.
In Francophone Africa, countries who were former colonies of France use the colonial-era CFA franc currency. The CFA franc was established in 1945 and was at the time called “Colonies françaises d'Afrique” (French colonies of Africa). The CFA franc is used in 14 West and Central African countries. Countries using the CFA franc must keep 50% of their currency reserves with the Banque de France – which pegs the African franc to the euro. This, in fact, means that the monetary policy of the CFA franc members is conducted by the French central bank in Paris.
In 2020, the Economic Community of West African States (ECOWAS) members of the CFA franc currency zone resolved to replace the currency in time with a new local one, called the eco (Africanews, 2019; Bahgat, 2021). Only the West African countries of Benin, Burkina Faso, Guinea Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo – all former French colonies, except Guinea Bissau – will be part of the new currency. The remainder of countries – Cameroon, Chad, Central African Republic, Congo Republic, Equatorial Guinea, and Gabon, also all former French colonies, except Equatorial Guinea – will continue to use the CFA franc. However, ECOWAS postponed the launch of the new planned common currency because of economic challenges caused by Covid-19, and because of economic and political instability in many of the member countries. It will now launch the new single currency in 2027.
BRICS common currency not immediately practical – other options available
At the core of the proposal to create a common BRICS currency, is for members to initially use a common currency for trade settlements between the members, while the countries continue to use their domestic currencies for home use. Over time the currency is envisaged to be used in trade with non-members. A BRICS currency, if launched, will likely be backed by gold (and other commodities) – meaning such a currency will be convertible into gold.
However, the reality is that a common currency between BRICS (Brazil, Russia, India, China, and South Africa) countries is not – in the short-term, at least – practical, feasible or implementable, given the divergent monetary regimes, the poor convertibility of the individual country currencies, and that inter-trade areas between the countries are not large enough to sustain a common currency.
India has now stated it may oppose the BRICS common currency idea, with its leadership saying it wants to rather strengthen its own currency, the rupee. India is currently the most dynamic economy – with the highest annual economic growth rates – within the BRICS alliance (Gumede, 2023c). For another, India’s foreign strategy is to trade with both the US and BRICS, rather than one or the other. India’s trade with the US and Europe brings it billions in income, which it does not want to risk by dismissing the US dollar for an untested BRICS currency (Despande, 2023). India is also worried that China wants to use the idea of a BRICS currency to essentially turn its own currency into the BRICS currency (Despande, 2023). Nevertheless, opposition from India may slow down the BRICS currency formation.
In an interview with Bloomberg, South African Reserve Bank Governor Lesetja Kganyago also cautioned about the challenges of establishing a BRICS common currency regime (Sguazzin, 2023). Kganyago wondered how practical it would be to attempt to establish a common currency in a trade bloc where the members are spread over vastly different geographical locations.
Common currencies also need to be underpinned by stable political regimes. As seen by Russia’s invasion of Ukraine, there are structural weaknesses in the political stability of the BRICS countries, which also undermines the stability of their currencies – and will undermine a common BRICS currency. Although China has experienced high growth over the past decades, growth has slowed down. China has structural inefficiencies; its political stability depends on continuous high growth levels. In addition, there is the ever-present threat that China could copy Russia’s invasion of Ukraine, to invade Taiwan.
Brazil has also experienced regular political and economic upheavals and its currency has been prone to volatility. Brazil is deeply divided between supporters of new leader President Lula da Silva and the supporters of his predecessor, former President Bolsonaro. Similarly, the ANC government in South Africa has been mired in corruption, mismanagement, and inefficiency, which has also undermined the stability of the rand.
It is instructive that individual BRICS countries do not have large foreign exchange holdings of the currencies of fellow BRICS members. Rather, most of the BRICS countries have traditionally stocked stable currencies – supported by stable governments – such as the yen, Swiss franc, and the euro. However, the major challenge is that trade within BRICS countries is too small – the phenomenon of needing an “optimal currency area (OCA)” – to sustain a common currency (Mundell, 1961).
The reality is that switching from the US dollar as global reserve currency to any new currency will not happen overnight. US GDP is still close to 25% of the global economy, which underpins demand for US dollars, whilst BRICS countries together only account for 26% of the global economy. When the dollar overtook the British pound as the global reserve currency, it took 50 years for a full switch to take place. Although expanding BRICS membership will help to secure an optimal currency area to make a common BRICS currency possible, it is highly unlikely that the Russia-Ukraine war will topple the dollar as the global reserve currency. However, it will reduce its power, and may foster currency blocs either between countries or between trading blocs of countries.
As important, BRICS countries presently do not have the capacity to replace the US dollar. For BRICS countries to wean themselves overnight from the US dollar, it would unleash massive economic shocks in BRICS countries. A BRICS common currency will require a central bank, which will require commonality in monetary policy, alignment of fiscal policies, and synergy between political regimes across the trade bloc. But the BRICS countries have vastly different central banking regimes – not easily convertible, unlike, say, the European Union when they established a common currency, the euro. China and Russia’s central banks are state controlled. South Africa, India, and Brazil have independent central banks. A big question is whether China or Russia would surrender sovereignty over their national currencies – crucial to the success of a common currency.
It seems that the most practical step to reduce the use of the US dollar – and therefore reduce trade transaction costs – in trade between BRICS countries, is for the members of the group to use their bilateral trade, using methods such as credit receipts. A case in point, in March this year, China and Brazil worked out an agreement with each other to settle the foreign trade between the two countries in Chinese yuan or Brazilian real, to eliminate the US dollar as a third currency in trade between them and reduce the costs of trade.
Conclusion
The global challenge remains that using the US dollar as the world’s only reserve currency makes developing countries prone to negative spillovers from US monetary policies, economic and political crises – even if the developing countries had no say in the US policymaking which impacts on them.
What is not in question is that the likelihood of the Russia-Ukraine war toppling the US dollar as the global reserve currency is very slim. But given the added structural weaknesses in the US economy, institutions, and politics, the power of the dollar is likely to decline, although only gradually, and may foster currency blocs either between countries or between trading blocs of countries.
Similarly, given the structural weaknesses in the economies, institutions, and politics of developing countries, it is very unlikely that an envisaged BRICS common currency would replace the US dollar. However, it is very likely that the BRICS alliance will create a trading currency pool, which may not replace the dollar, but will offer an alternative to it (Wheatley & Smith, 2022).
Leslie Maasdorp, the CFO of the New Development Bank, said the BRICS countries are pushing to conduct with each other in domestic currencies, but they are not yet ready to issue a common currency that could challenge the US dollar. Maasdorp said rightly that the creation of a global alternative currency to the US dollar is a medium- to long-term ambition, rather than an immediate possibility. He said that even the Chinese renminbi is a “long way from becoming a [global] reserve currency” that can challenge the US dollar (Sguazzin, 2023).
The supporting institutions of the dollar-based economic system, such as the International Monetary Fund, are also likely to lose their global influence, as new institutions to support alternative global currency pools, such as the BRICS institutions, emerge.
South African International Relations and Cooperation Minister Naledi Pandor warned in an interview with Bloomberg: “I don’t think we should always assume the idea will work, because economics is very difficult and you have to have regard to all countries, especially in a situation of low growth when you are emerging from crises” (Sguazzin, 2023).
Gita Gopinath, the first deputy managing director of the International Monetary Fund, has rightly said that one ripple effect from the Russia-Ukraine war, will be countries gradually decreasing the dominance of the US dollar and increasingly including currencies other than the dollar in their foreign reserves, ultimately leading to the rise of currency blocs based on trade between separate countries (Wheatley & Smith, 2022).
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This report has been published by the Inclusive Society Institute
The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.
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