Is the BRICS Serious about a De-dollarized System?

In the context of the increasing instability and unfairness of the transatlantic-dominated financial system, the Valdai Discussion Club of Moscow held a discussion on March 18 on the subject of new mechanisms for financial settlements that the BRICS could implement. One of the speakers was Brazilian economist Paulo Nogueira Batista, who was Vice President of the BRICS New Development Bank from 2015 to 2017, and has been an active participant in the discussions about de-dollarization and a new BRICS currency since then.

There is a “tectonic geopolitical and geoeconomic shift taking place in the world. This is often referred to as multi-polarization”, Nogueira stated. This shift is inconsistent with “the indefinite continuation of a basically unipolar world monetary system”, so the question arises as to what the BRICS, as a group, can do to bring about a new system. “The whole world is watching us”, he pointed out.

There has unquestionably been progress within the group on using national currencies in bilateral transactions between member countries, instead of the dollar, thus reducing political risks as well as transaction costs, he explained. However, that de-dollarization process has “limitations that can only be overcome by creating a common reference currency. Why is this so? If there are bilateral surpluses and deficits, as is normal, the surplus countries will accumulate currency of the deficit countries. This accumulation may not be desirable if there are doubts about the stability of the currencies of deficit countries.”

(Although Nogueira doesn’t touch on this, a partial solution to this particular problem can be found by using the surplus funds coming from non-dollar trade, for long-term productive investment in the deficit country — much along the lines of what Russia and India are working on today. But such pair-wise arrangements do not constitute a new financial system to replace the current bankrupt order.)

The former NDB Vice President went on to explain that if a BRICS reference currency existed and was trusted by all, surplus countries could accumulate reserves in that reference currency. “Please notice that I am not speaking of a euro-like unified currency”, he emphasized. “That would not be thinkable among the BRICS. National currencies and national central banks will continue to exist and perform their usual functions. A BRICS reference currency would be used for international transactions and as a reserve currency in lieu of the U.S. dollar and the other currently existing reserve currencies.”

One possibility raised by Nogueira, that has been proposed by Russian economists, is the creation of a basket similar to that for Special Drawing Rights, perhaps called the R5 (the first letter of the currencies of the five original BRICS members), and have this serve as a unit of account, with weights based on the size of the participating countries’ economies.