A BRICS currency project shows dedollarisation in its making
An unexpected lesson in institutional development of money
Triggered by new international trade trends and the weaponization of the USD through sanctions, a new inter-national trade settlement architecture is under development among the BRICS countries including China, Russia, India and Brazil.
According to Pepe Escobar’s interview with Sergei Glazyev,1 an academic with a prominent role within the Eurasia Economic Union (EAEU):
“The idea of the currency is that there are two baskets: one basket is national currencies of all countries involved in the process, like the Special Drawing Rights (SDR), but with more clear, understandable criteria. The second basket are commodities. If you have two baskets, and we create the new currency as an index of commodities and national currencies, and we have a mechanism for reserves, according to the mathematical model that will be very stable. Stable and convenient” (Sergei Glazyev).
In contrast, the currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi), according to the IMF.
The main problem with issuing currency is to get people trusting and using it. This settlement project imagines achieving this goal by establishing an international unit of account - what the IMF calls an international reserve asset - whose benchmark value is indexed on a basket of national currencies and commodities.
Once central banks of undertaking countries approve it, its digital payments platform may help by-passing the current USD-based international infrastructure based on intermediary banks and currency markets.
This proposal may be included in the BRICS Summit agenda to be held in Kazakh next October 2024.
So far, BRICS countries have already decided to use national currencies in their mutual trade. For instance, “Russian ruble is the main currency in the EAEU, trade with China is conducted in rubles and renminbi, trade with India and Iran and Turkey also switched to national currencies”, Glazyev said.
If BRICS central banks introduce central bank digital currencies (CBDC) and allow them to be used in international transactions, this may provide yet another alternative platform to settle international trade among those countries. The BIS mBridge project provides an illustrative experiment for this platform.
But money and payment is only one side of this international currency issuance project. Glazyev further addressed the commodity price formation which constitutes the second pillar of this proposal.
We produce these commodities, we consume them, but we do not have our own price mechanism, which will balance supply and demand. During the Covid panic, the price for oil fell to nearly zero. It’s impossible to make any strategic planning for economic development if you do not control prices of basic commodities. (Sergei Glazyev)
As a matter of fact, commodity price formation does not need to pass through commodity exchanges, and those exchanges may be organised differently.2 An alternative mechanism may pass through long-term agreements which establish a contractual price formula over long-term horizons of ten or twenty years, Glazyev explained. These contracts are well-known and used to be the benchmark practice for extractive industries such as oil and gas.
In parallel, and quite surprisingly, he claimed for a commodity market mechanism which delivers a price fixed through the actual balance of demand and supply between producers and final consumers.
The main problem is that the major producers of commodities, first of all the oil companies, they don’t like to trade through exchanges. They like to trade personally, so you need a political decision to make sure that at least half of production of commodities should go through exchanges. A mechanism where supply and demand balance each other. (Sergei Glazyev)
Glazyev went further into details, criticising non-producing private intermediaries:
If you trade oil and gas in dollars, a large part of profits is stolen, there are a lot of intermediate companies which manipulate prices. Prices are only the first step. The price for natural gas in the first deal is about 10 times less than the final demand. There are institutional barriers. A majority of countries do not allow our companies to sell oil and gas to the final customer. Like you cannot sell gas to households. Nevertheless, even in the open market, quite competitive, we have intermediates between producer and consumer – at least half of the revenues are stolen from government control. They don’t pay taxes.” (Sergei Glazyev)
In order to develop a new international trade settlement architecture, an organisation would be required to coordinate this project, and the New Development Bank - NDB was suggested for this role, while the BRICS Business Council has working groups considering the various dimensions of this project.3
Recently, political leaders from Russia, South Africa and Brazil have publicly argued in its favor. But institutional change is not easy.
“[bureaucrats and experts] assume the current status quo is the best one. If there are no sanctions, everything will be good. The international financial architecture that was created by the United States and Europe is convenient. Everyone knows how to work in the system. So it’s impossible to move from this system to another system. For businesses it will be very difficult. For banks it will be difficult. People have been educated in the paradigm of financial equilibrium, totally libertarian. They don’t care that prices are manipulated by speculators, they don’t care about volatility of national currencies, They think it’s natural (…) It’s a kind of religious sect. Religious sects don’t create innovation.” (Sergei Glazyev)
But, Glazyev said, five years ago international trade in national currencies was deemed impossible in Russia, and it was done in few months after sanctions took place, two years ago…
His last remarks concerned the evergreen problem with recycling foreign currency reserves. Accordingly, localized international trade agreements are working well in local currencies, but foreign capital investments do not flow yet, especially between Russia and India:
“The Central Banks are not doing their job. The ruble-renminbi exchange is working well. But the ruble-rupee exchange doesn’t work. The banks that keep these rupees, they have a lot of money, accrue interest rates on these rupees, and they can play with them. I don’t know who’s responsible for this, our Central Bank or the Indian Central Bank.” (Sergei Glazyev)
Students of monetary and financial regimes may profit from this quite unexpected lesson in institutional development of money and payment infrastructure.
Omarova, Saule T., "The Merchants of Wall Street: Banking, Commerce, and Commodities" (2013). Cornell Law Faculty Publications. 1013.
Biondi, Yuri. "Central Banking in Perilous Times: An Open-Ended Chronicle" Accounting, Economics, and Law: A Convivium, vol. 13, no. 2, 2023, pp. 49-102. https://doi.org/10.1515/ael-2023-0007