The creation of a BRICS currency has become throughout the past year one of the headline themes related not only to BRICS, but also the global financial markets. Along with the skepticism coming from most of the pundits from the developed world there is also an enormous number of misconceptions and unsubstantiated claims of the speedy “demise of the dollar” and the crumbling of the global financial system due to the creation of a common BRICS currency. In reality the actual scenario and the modalities of the introduction of such a currency are yet to be determined and it could well be that in the first stages of the launching of the BRICS currency it could take the form of an accounting unit rather than a full-fledged international transactions currency. But even in the guise of a unit of account for the economies of the Global South the R5 (taking its name from the first letters of BRICS respective currencies) could have a significant effect on the international financial system and deliver important benefits to the economies of the developing world.
The first forays into the R5 common currency project and the use of BRICS as a platform for de-dollarization, were undertaken by Y. Lissovolik back in 2017-2018 in a series of publications for the Valdai club1 as well as the South African Joburg Post and “The Thinker”2. The subsequent discussions around R5 while mostly revolving around the creation of a full-fledged euro-like currency for international transactions also featured such alternative paths as a reserve currency, or an accounting unit. The latter would in fact be the easiest and perhaps the most realistic scenario for the first stages of the R5 project. According to the leading experts in the field, the creation of an accounting unit for BRICS could be realistically undertaken with minimal resources and could be implemented in a relatively short period of time3.
Rather than rushing to create a physical unit to service international transactions, a staged approach that involves the creation of an accounting unit allows for tracking the volatility and stabilizing expectations around the operation of the future BRICS currency. The launching of the new BRICS currency in the form of a physical medium of exchange may well be greeted with speculative attacks and attempts to test the resilience of the new currency to the full force of global capital markets. Accordingly, in terms of the sequencing of the BRICS currency it may make sense to prioritize the creation of an accounting unit first and to accompany this effort with the development of market infrastructure in the main financial centers of the Global South that can support this project.
Apart from the simplicity of its introduction this mode of R5 is also in line with international best practice – in particular with such instruments as the Euro and the SDR. Furthermore, the “accounting unit” route has the advantage of being flexible, with one or several BRICS countries having the capability to launch such a currency format on their own, without the need for participation from all BRICS members. The resulting balance of pros and cons suggests that the creation of R5 as an accounting unit would minimize the risks, while retaining a lot of the benefits associated with a common currency, i.e. the easiest way to create the BRICS global currency – via the introduction of an accounting unit – is also the most optimal in the near term.
As for the R5 impact, perhaps the most important aspect in which the BRICS currency changes the world economy is the change in the mindset and the mentality of economic agents and businesses that is currently centered very much on the greenback. This “mental dependency” on the dollar arises from the fact that it is central in pricing, accounting and statistics across the globe – whether in advanced or the developing economies. The introduction of a BRICS accounting unit that replaces the dollar in the major economies of the developing world would provide a different reference point for emerging markets and a different lens through which businesses track the BRICS+ economies. Expectations of economic agents would be increasingly geared towards the new BRICS currency with greater attention accorded by global markets to the monetary policy decisions in BRICS countries rather than being overly fixated on the minutest of signals from the Fed.
Another reason why the issue of a BRICS currency is seen as being so critical is the credibility and stature that it delivers to BRICS as a block with a global reach. Thus far, the main achievements of BRICS have largely been associated with the creation of the New Development Bank – something that falls short of sizeable transformation in global governance or the international financial system. It is the creation of a new global currency by the BRICS bloc that would represent a veritable innovation and a transformation of the global economy with a qualitatively different stature attained by the grouping on the international arena.
In qualitative terms the introduction of a BRICS currency could impact the direction and the quality of macroeconomic policy pursued by BRICS members. My sense is that the emergence of R5 would somewhat reduce the tolerance of BRICS monetary authorities to sizeable swings in the exchange rate of their respective national currencies. There may also be greater coordination of macroeconomic policies of BRICS and BRICS+ economies to ensure a smoother trajectory towards implementing the subsequent stages of the introduction of R5. The overall quality of macroeconomic policies is also likely to improve to ensure a secure macroeconomic foundation for the operation of the future common currency. In fact, recent developments may be suggestive of such trends in the monetary policy sphere as some of the emerging markets acted earlier and more decisively in warding off inflationary pressures compared to the Fed and other Central Banks from developed economies.
And then there is of course the reaction from global financial markets to the introduction of the BRICS currency. The very introduction of R5 as an accounting unit could feed expectations of greater future demand for BRICS currencies as the R5 project advances to the stage of reserve currency and/or physical unit of exchange. The creation of R5 could also fuel the use of national currencies (including those of BRICS) in international trade. At the same time, the dollar may start to lose ground due to expectations of lower shares in global FX and commodity trade transactions. Accordingly, on balance the emergence of R5 would likely favor EM currencies, most notably the yuan, with some negative effect for the US dollar – the scale of these effects will depend on the exact modalities of the BRICS currency. The impact on the greenback is unlikely to be sizeable in the short-term as uncertainty concerning the future of the BRICS currency will remain significant. The effect on the yuan will be relatively more pronounced compared to other EM currencies due to the higher weight that the Chinese currency may have in the R5 basket and the relative importance for China of the resulting change in the geo-economics of the global financial system.
There could also be risks associated with the introduction of a common BRICS currency such as the scenario of the excessive zeal in introducing “advanced modifications” of the R5 in the form of a physical unit of exchange. There is a somewhat disconcerting predilection on the part of many market participants to advocate the creation of such a BRICS currency in digital form with lots of supplements such as oil or gold to be used to back this currency. This may be due in part to the abundance of speculative appetites around the creation of the new currency that favor a price boost to bitcoin, gold or other dollar competitors. But the end purpose of the BRICS common currency is greater wealth creation for the households and businesses of the Global South rather than servicing the interests of market speculators. In this regard, it may be preferable to make things transparent and simple during the early stages of the R5 project for the sake of its credibility. Another risk is the volatility issue of the R5 basket and its underlying national currencies – this calls for preparatory work to be done with respect to the depth and quality of supporting market infrastructure.
Overall, there may be important dividends for BRICS even with a minimalist approach of opting at first for the path of an accounting unit for R5. The impact of the creation of such a currency for the global economy, business operations and the international economic policy debate could also be significant in the near term. Going forward, it is crucial that the creation of the new BRICS currency is not centered solely on the creation of an alternative to the dollar – rather at an early stage the key priorities of the R5 project need to be focused on building greater trust in the financial systems and currency instruments in the Global South, to facilitating greater South-South trade and investment as well as the development of deeper capital markets. The BRICS currency will also need to serve as a credible anchor for those developing economies that will be increasingly re-orienting their trade and investment flows to the Global South. In the longer term as it advances to the stage of a reserve currency the R5 will contribute to a more balanced global monetary system and will compete for greater prominence alongside the US dollar and other leading reserve currencies. After all, as Western economic thought has it (compliments of Vilfredo Pareto), fair competition is one of the cornerstones of efficient and wealth-enhancing markets.
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