BRICS Summit to be held in Johannesburg in 2023 (Ricardo STUCKERT | EUROPA PRESS)
The annual BRICS summit will be held in the Russian city of Kazan from October 22nd to 24th. Economic issues will weigh heavily at the summit, where a working group on payments was established following last year’s meeting in South Africa. Currently, in the financial field, BRICS has established a new development bank led by former Brazilian President Dilma Rousseff and is organizing a network of BRICS financial research centers.
The issuance of an alternative currency to the dollar has sparked a heated debate of great interest to countries in the Global South who are suffering from the painful effects of the current financial system based on the dollar. It is interesting to note that the countries that make up BRICS account for 36% of the global economy and 26% of all international trade. However, creating an alternative financial system poses several problems. In fact, the group’s statements on this point have always been moderate. They have diplomatically avoided contrasting their projects with the current system. They characterize the effort as an attempt to diversify payment systems.
Challenges posed by alternative financial systems
The interest in alternative systems also stems from some countries’ desire to avoid Western sanctions. Although this aspect is not mentioned in the group’s documents, it is very present. Russia and Iran are of special interest because they are subject to enormous sanctions, and in some ways so is China. From a national security perspective, having an alternative system at hand will always be welcome if the conflict with the United States continues to escalate. Brazil will be somewhere in between. Lula has repeatedly advocated preserving the dollar, not so much because of the impact of potential sanctions, but because of the onerous economic dependence it creates on countries in the Global South. While the remaining BRICS members are tightly integrated into the current system and this issue is not a priority, Russia’s expulsion from the current system is alarming.
Executive Order 14024 in December 2023 authorized the U.S. Treasury Department to impose financial blockade sanctions on foreign banks involved in transactions with the Russian military-industrial complex or products subject to U.S. export controls. As a result of this change, banks in countries that had been cautious in dealing with Russia have become even more cautious. According to Russia’s Central Bank’s September Regional Economy report, one in four exporting companies had difficulty paying their overseas customers in July. The main problems were blocked payments, refunds, and long delays in depositing funds.
Other issues related to alternative financial systems arise from the very composition of the BRICS as an unstructured group. This fluid nature provides participants with freedom of action, has few obligations, and avoids the calcification often associated with bureaucratic structures. However, along with its advantages come disadvantages as well. Financial arrangements require specific institutionalization and are complex in this context.
In the political field, the influence of relations between BRICS countries should be emphasized. Financial contracts require trust between the parties. Concerns between India and China, for example, have prevented the Chinese yuan from becoming the group’s reserve currency. While this is economically possible given the size of China’s economy, it would be politically unacceptable for New Delhi.
And the main problem in the economic field is the large imbalance in the balance of payments that exists between these countries. This problem was highlighted, for example, when sanctions increased sales of Russian oil to India. Payments in rupees became unfeasible as the Russian side could not spend its huge flow of Indian currency on imports from the country. This situation has been addressed by making payments in other countries’ currencies and exploring investment opportunities in India.
Main contents of Russia’s proposal
Recognizing all these problems, at the preparatory meeting of the Central Bank held in Moscow on October 11, the host country presented a report titled “Improving the International Monetary and Financial System” prepared by the Russian Ministry of Finance and the Central Bank of Russia. submitted. Federation and consulting firm Yakov and Partners. As the title itself suggests, this document is more than just a payment system and contains proposals for organizing an alternative financial system open to all countries that wish to take advantage of it.
The report analyzes the current international system, centered around the IMF, which is highly centralized by using several key currencies such as the dollar, yen, and euro to clear all payments. concludes. This monopoly is maintained thanks to currency exchange lines between the central banks of several countries, preventing it from being a “cheap, fast and reliable” currency for the rest of the international community.
To overcome this situation, the report suggests that cross-border remittances be made “between local banks in their own currencies,” which would significantly speed up transactions. To make these secure and agile, this document proposes the use of central bank digital currencies (CBDCs), a distributed ledger technology. In this way, serial systems are not only secure, but also efficient and transparent. All these operations are handled by the central banks of the participating countries. In this area, BRICS is already developing its digital payments platform BRICS Pay, created in 2018, which will allow participants to invest in any member currency. The platform being developed for electronic payments is called BRICS Bridge and will use the central bank’s digital currency at the same exchange rate as national currencies.
cross-border investment
Beyond currencies and payments, the report prepared for the summit proposes the creation of a separate system called BRICS Clear to manage investments between participating countries. “We want to create within our community a value accounting system similar to what exists in Western countries, but whose use is limited to Russia and other countries,” Russian Finance Minister Anton Siluanov said. The report emphasizes that although trade volumes between emerging countries are rapidly increasing, this situation is not reflected in the investment sector. The document points out that there are significant inequalities between developing and developed countries in the treatment of investments, resulting in risk premiums of up to 6% being paid for investing in projects in developing countries. are. Barriers that reduce the proportion of foreign investors in countries of the Global South by up to five times lower than in developed countries.
The BRICS Clear platform will act as an automated clearing platform without the need for authorities and will force clearing of trades based on accepted orders. The platform has an open program, and the rules will be changed by agreement of participants. In addition, the Russian Presidential Administration has created a national numbering agency with the authority to create international codes for stock numbering (ISIN code), securities and financial instruments (CFI code) and short names of all financial instruments (FISN code). He proposed the creation of an international association. All these codes are part of the infrastructure required to register and trade securities and to carry out international investment activities.
The document also includes proposals for mutual recognition of credit ratings by rating agencies in BRICS countries and the development of standards for harmonizing financial information reporting. The report also suggests diversifying the foreign exchange reserve portfolios of BRICS countries using the currencies of other BRICS countries. And on another level, the creation of exchanges for grain trading. In this regard, the St. Petersburg International Commodity Exchange and the Iranian Commodity Exchange have just signed a memorandum of understanding.
Ilya Ivaninsky, a specialist partner at Yakov & Partners, said during the presentation of the report that the effect of all these measures could save up to $30 billion, and the economies of participating countries could be saved by an additional 1 percent. He said there is a possibility of point growth.
Experts point out that this mechanism could start working with relevant countries. “I think this is the path we should take. There is no concrete deadline, but in some countries the interest is very high, in others it is low,” said Russian Deputy Finance Minister Ivan Cheveskov. said. Siluanov also admitted to the Vedomosti newspaper that “many of them do not face any external restrictions, so we are very cautious in our efforts.” That is why this report focuses on the Global South.
