If there is one key change in the global economy over the past several years, it is the progressive weakening of the belief in the indefinite supremacy of the US dollar. The international community is increasingly engaged in discussions on the likely changes in the configuration of the global financial system, with scenarios ranging from a bi-polar system dominated by the dollar-yuan duopoly and various multipolar scenarios, involving among other possibilities the creation of a BRICS reserve currency. And it is the prospect of the creation of R5 – the provisional name for the would-be BRICS currency (all BRICS currencies start with the letter “R”) – that is shifting into the epicenter of the increasingly heated global debate.
A lot of the arguments concerning the R5 currency are made on the grounds that BRICS do not form an optimal currency area (OCA) and that the intensity of intra-BRICS trade should be far higher in order to allow for the creation of a common currency. The trends observed in recent years point to a notable pick-up in intra-BRICS trade, with bilateral trade turnover across China-Brazil (exceeding USD 135 bn in 2021 and more than USD 150 bn in 2022, posting five years of consecutive records), Brazil-India (reaching 11.5 bn in 2021 (growth of more than 60%) and approaching the target of USD 15 bn set for 2022), Russia-India (exceeding USD 31 bn in 2022, a nearly 3-fold increase compared to 2021), China-Russia (close to USD 190 bn compared to USD 147 bn in 2021) all posting record highs in 2022 with sizeable year-on-year increases. Going forward, the share of South-South (intra-BRICS+) trade is likely to increase as the developing economies make use of the sizeable potential in mutual trade through trade liberalization. Furthermore, what is clear at this stage is that there are no plans to launch a common currency that replaces the national currencies. Rather than the somewhat misplaced fixation on the OCA “commandments”, it may be more pertinent to look at some of the less explored questions surrounding the future of the R5 project.
If there is one key change in the global economy over the past several years, it is the progressive weakening of the belief in the indefinite supremacy of the US dollar. The international community is increasingly engaged in discussions on the likely changes in the configuration of the global financial system, with scenarios ranging from a bi-polar system dominated by the dollar-yuan duopoly and various multipolar scenarios, involving among other possibilities the creation of a BRICS reserve currency. And it is the prospect of the creation of R5 – the provisional name for the would-be BRICS currency (all BRICS currencies start with the letter “R”) – that is shifting into the epicenter of the increasingly heated global debate.
A lot of the arguments concerning the R5 currency are made on the grounds that BRICS do not form an optimal currency area (OCA) and that the intensity of intra-BRICS trade should be far higher in order to allow for the creation of a common currency. The trends observed in recent years point to a notable pick-up in intra-BRICS trade, with bilateral trade turnover across China-Brazil (exceeding USD 135 bn in 2021 and more than USD 150 bn in 2022, posting five years of consecutive records), Brazil-India (reaching 11.5 bn in 2021 (growth of more than 60%) and approaching the target of USD 15 bn set for 2022), Russia-India (exceeding USD 31 bn in 2022, a nearly 3-fold increase compared to 2021), China-Russia (close to USD 190 bn compared to USD 147 bn in 2021) all posting record highs in 2022 with sizeable year-on-year increases. Going forward, the share of South-South (intra-BRICS+) trade is likely to increase as the developing economies make use of the sizeable potential in mutual trade through trade liberalization. Furthermore, what is clear at this stage is that there are no plans to launch a common currency that replaces the national currencies. Rather than the somewhat misplaced fixation on the OCA “commandments”, it may be more pertinent to look at some of the less explored questions surrounding the future of the R5 project.
Perhaps, the first and the most obvious question is why would a monopoly be superior to competition in the sphere of international finance? Would the global community not be far better off with greater optionality in choosing among a growing number of reserve currencies and with more countries competing and improving their economic policies to render their monetary units more attractive to other economies? A related question is the allocation of “reserve currency spoils” emanating from the “exorbitant privilege” of the dollar – if these (monopoly) proceeds cannot be taxed and reallocated back to the global community, then at the very least should there not be a policy of “benign neglect” with respect to efforts to build own payment and currency systems in the Global South that are free from sanction risks? And what is wrong from an economic point of view with countries creating a currency system that is not subject to politicization and sanctions – especially if the new currency carries explicit guarantees of the non-application of such restrictions?
Another area pertaining to R5 that has eluded attention so far has been the layer of BRICS-related financial institutions that could support the launching of such a currency, including via providing liquidity and market-making. At the center of this network of financial institutions is the tandem of the New Development Bank as well as the Contingency Reserve Arrangement (BRICS CRA) – it has the capability to design and implement coordinated de-dollarization strategies that involve the greater use of national currencies and R5 over the longer term. Then there are the national and regional development banks/funds in which BRICS countries are members such as the Eurasian Development Bank, FOCEM, SDF and others. There are also the Regional Financing Arrangements (RFAs) where BRICS+ countries are members – EFSD, FLAR, CMIM (Chiang Mai Initiative Multilateralization) – according to the estimates of the IMF the resources of the regional financing arrangements globally exceed those of the IMF itself1.
Finally, and perhaps most significantly the BRICS+ countries could also roll out a common platform of sovereign wealth funds (SWFs). According to the Sovereign Wealth Fund Institute 9 out of 10 largest sovereign wealth funds (by assets under management (AUM)) come from the developing economies of the Global South2. The leaders from the Global South include the China Investment Corporation (CIC) with USD 1.35 trn in assets under management and Abu-Dhabi Investment Authority (ADIA) with nearly 0.8 trn in AUM. The total amount of assets under management of the SWFs from the Global South that are in the top 10 exceeds USD 6 trillion3. The latter figure is greater than the combined GDP of UK and France in 2022.
One of the most frequent arguments made against the creation of a common BRICS currency is that it would increase the dependency of the developing economies on China. In fact, it is precisely the launching of a currency basket that is based on several rather than one sole currency that provides the Global South with a gateway to avoid dependency on any one single country. A BRICS currency will come together with the greater use of national currencies and through providing greater optionality it could be one of the few ways for developing countries to avoid the dependency trap – either on the US dollar or the Chinese yuan. China in this respect has a very important role to play within the BRICS grouping – along with pushing for the use of yuan as the settlement currency in trade transactions its support for the common BRICS currency project could benefit its economy together with other developing economies through more emphatic de-dollarization. To further diminish dependency risks the new BRICS currency could come with a collective (rather than single country) guarantee of the non-use of sanctions/restrictions associated with the newly created currency.
Admittedly, the creation of a common BRICS currency will not be a magic wand that solves all of the economic woes of the Global South. There will need to be more emphasis placed on the development of deep financial markets that provide favourable conditions for long-term investments; greater liberalization in terms of trade and investments, including in terms of capital account openness will also need to be prioritized. But the important point is that like with other countries and regions (including the EU), the launching of a common currency project may act as a disciplining mechanism that improves the quality of economic policy.
In delivering the final verdict on any topical issue these days it almost seems impossible to by-pass the opinion of Chat GPT and after the question was presented to this modernized version of the “oracle of Delphi” it appeared that AI took the side of the multipolar financial system4. Furthermore, if the 2022 sample period were added to Chat GPT’s dataset, that verdict would have likely been even more emphatic, given that it was in 2022 that discussions on the BRICS currency started in earnest. To be sure, if asked directly about R5 Chat GPT could turn out to be somewhat biased – if only because of the R5 robot analog that was designed to complete disaster-relief maneuvers5 (perhaps much like the future mission of the R5 in the financial world). And even if such an anthropoid digression were to befall upon Chat GPT, at least it would be a sign of something humane in the depths of its network – something that we humans need to keep rediscovering in ourselves.
[1] https://www.imf.org/en/Publications/Policy-Papers/Issues/2017/07/31/pp073117-collaboration-between-r...
[2] https://www.swfinstitute.org/fund-rankings/sovereign-wealth-fund
[3] Among BRICS apart from Russia and China that have a number of large SWFs, India also has a sovereign wealth fund called the National Investment and Infrastructure Fund (NIIF). Brazil discontinued the operations of its SWF in 2019 but is considering its relaunch.
[4] https://markets.businessinsider.com/news/currencies/chatgpt-openai-prediction-us-dollar-dominance-ch...
[5] https://www.nasa.gov/feature/r5/
Source: Modern Diplomacy
