The BRICS nations have been discussing the possibility of building alternatives to the US dollar and the Western payment system for some time now. The current order – more accurately described as disorder – of the international monetary and financial system, dominated by the United States and its allies, is increasingly dysfunctional and insecure. The system has been turned into a geopolitical weapon for sanctions, punishments, and seizures.
I was recently in Moscow and participated in three debates on this topic, at events leading up to the BRICS leaders’ summit, which will take place in Kazan, Russia, from October 22 to 24. I will try to summarize my takeaways from these events here.
The challenge for BRICS is, above all, political. The Americans have always been attached to what De Gaulle, in the 1960s, called the United States’ “exorbitant privilege” – essentially, the ability to pay its bills and debts simply by issuing currency. The US does not hesitate to activate its allies and clients in other countries to undermine initiatives of this kind.
China, Russia, and Iran are likely not very vulnerable to this type of pressure. But the same cannot be said of other BRICS countries. Even Beijing might hesitate to take on this confrontation with Washington.
The challenge is also technical. Building an alternative monetary and financial system requires hard and specialized work, as well as prolonged and difficult negotiations. Are we capable of achieving this? I believe so. But have we made progress since the issue hit the headlines? Yes, but less than one might expect.
Under Russia’s BRICS presidency in 2024, there have been partially successful attempts to move forward. For example, an independent group of experts was created, of which I am a part, that discussed the reform of the international monetary system and the possibility of a BRICS currency. The well-known American economist Jeffrey Sachs is part of this group. More importantly, Russia has prepared a detailed proposal for an alternative cross-border payment system based on national currencies—an important step toward a new international monetary and financial arrangement.
So far, however, little progress has been made on the more fundamental issue, which would be the creation of a new currency as an alternative to the dollar. And even the discussion of Russia’s proposal for a new payment system is still in its early stages. Brazil will hold the next BRICS presidency in 2025 and will have the opportunity to coordinate the discussion, deepen Russia’s proposal, and prepare new steps.
Limits to transactions in national currencies and alternative payment systems
The SWIFT payment system, controlled by the US and its allies, is systematically used as an instrument to punish and threaten countries and entities seen as hostile or unfriendly. Banks in these countries are summarily excluded from the system, as happened with Russia. Even other countries can face secondary sanctions when they try to transact with sanctioned countries or entities. Therefore, the progress made during the Russian presidency in developing alternatives to SWIFT is, without a doubt, a very welcome initiative that moves us closer to freeing ourselves from excessive dependence on Western currencies and paymentsystems. Bilateral transactions in nationalcurrencies between BRICS countries and between BRICS and other countries are also advancing. Additionally, bilateral currency swaps between central banks, primarily with China’s central bank, are growing.
However, it must be acknowledged that transactions in national currencies and alternatives to SWIFT have their limitations. The essential issue, not always well understood, is that the existence of an alternative reserve currency is ultimately a precondition for de-dollarization to function fully. The reason lies in the fact that bilateral transactions in national currencies will only accidentally balance out. An alternative international reserve currency is necessary to allow countries to register surpluses and deficits over time. Without it, countries have to resort to costly schemes akin to bartering—or revert to the US dollar and other traditional currencies, which would defeat the entire purpose of the effort.
On example of this is Russia’s substantial surplus with India. Trade and other transactions between the two nations are primarily conducted in national currencies. As a result, Russia has been accumulating large stocks of rupees. The Russian central bank may not want to permanently hold this currency in its reserves, perhaps because the rupee is not fully convertible and there are doubts about its stability. What are its options? Russia can try to dispose of these rupee surpluses by seeking investment opportunities in India or making an additional effort to purchase Indian goods and services. But this may be difficult and time-consuming. It can also use these rupees in third countries that have an interest in obtaining Indian currency due to economic proximity to India. But this too may be challenging, leading to discounted sales of rupees. These alternatives are clearly second-best or third-best options, and they harken back to the outdated bartering system, where economic agents exchanged goods and services bilaterally and sought third parties to offload unwanted commodities in exchange for desired ones. Money was precisely created to avoid this inefficient system, serving as a medium of payment, a common standard of value, and a means of holding reserves. For the same reasons, BRICS needs a new reserve currency as an alternative to the US dollar and other traditional reserve currencies.
A new reserve currency – the NRC
What could this new currency look like? There are several possibilities. I’ll try to briefly outline a path that seems promising to me. For a slightly more detailed explanation, I refer to the work I prepared for one of the events in Moscow (“BRICS: Geopolitics and monetary initiatives in a multipolar world – how could a new international reserve currency look like?”, September 23, 2024, https://www.nogueirabatista.com.br/).
Let’s call this new currency the NRC, short for “new reserve currency.” An interesting earlier name was R5, proposed by Russian economists when the BRICS had five member countries, and all their currencies started with the letter “R.” However, this name has lost relevance since some of the four new members have currencies whose names do not begin with “R.” This isn’t a major issue, of course. Could we call it the BRICS currency or BRICS+ currency? Unfortunately, no. And this point is important: some BRICS countries seem opposed to the idea, with India being a notable example. This represents a significant obstacle, but it can be overcome, as we will see later.
The NRC could have the following characteristics. It would not be a single currency that replaces the national currencies of the participating countries. Therefore, it would not be a currency like the euro, issued by a common central bank. Instead, it would be a parallel currency, designed for international transactions. National currencies and central banks would continue to exist in their current forms. There would be no loss of sovereignty or even a need to coordinate monetary policies.
The NRC would not exist physically in the form of paper money or coins. It would be a digital currency, analogous to CBDCs (central bank digital currencies) that are being created in various countries.
It’s worth noting that the digital format largely replaces the traditional role of banks as intermediaries and creators of payment means. Both CBDCs and the NRC would reduce the role of banks, as long as their use is not tied to the possession of a bank account.
The participating countries could establish an issuing bank—let’s call it the NAMR, the New Reserve Monetary Authority—that would be responsible for creating NRCs and also for issuing bonds—we could call them NRBs, new reserve bonds—in which the new currency would be freely convertible. The NRBs would, in turn, be fully backed by the national treasuries of the participating countries.
A first step towards the NRC could be the creation of a unit of account in the form of a basket of currencies, where the weight of each participating country’s currency would correspond to its share of the group’s GDP. The Chinese renminbi would have the largest weight in the basket, say 40%; Brazil, Russia, and India, 10% each; and the remaining 30% could be divided among South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates—assuming all BRICS members participate. This new unit of account would serve as a bridge to the new currency.
Well, this relatively simple step, proposed many years ago by Russian economists, could have already been taken. The reason for the slow progress seems to be a lack of consensus. There are reports that India and South Africa, presumably for political reasons, are against the idea. India—and this is just speculation—might not want to upset the US on such a crucial issue. Perhaps because it feels it might need American support if relations with China, already tense, deteriorate further. Brazil, I should note, is also not invulnerable to similar problems. In Brazilian society, including within Lula’s government, there are many who identify with the US and have ties to American business and government circles.
I hope these vulnerabilities and the tensions between China and India can be overcome. In the meantime, it is worth asking whether we could move forward with a coalition of willing and able countries. The NRC could easily be created by a subset of BRICS members, with the others joining later. This is advisable, in my opinion, but it runs up against the deeply rooted tradition of consensus in BRICS, which has guided the group’s actions since its inception in 2008. However, if we cling to this tradition, my fear is that we may not get anywhere.
The alternative to something like the NRC would be the gradual replacement of the US dollar by the Chinese renminbi, the currency of the emerging power. This is already happening to some extent. But it seems doubtful that much progress can be made in this direction. It’s important to keep in mind that this emerging power is a middle-income country. It has vulnerabilities and concerns that are not necessarily present in the US and other high-income nations.
What I mean is that, in the case of China, the “exorbitant privilege” could become an “exorbitant burden.” In other words, China would likely face difficulties in meeting certain prerequisites for the renminbi to establish itself as an international currency on a large scale. For instance, would China be willing to make the renminbi fully convertible? Would it consider abandoning capital account restrictions and exchange controls that protect the Chinese economy from the instability of international finance? Would it accept the currency appreciation that would result from increased demand for the renminbi as an international asset? Wouldn’t this appreciation harm China’s international competitiveness and economic dynamism? Of course, the tendency toward appreciation could be curbed by selling renminbi and accumulating additional international reserves. But where would China invest these additional reserves? In dollar-, euro-, or yen-denominated assets? Back to square one.
Therefore, the BRICS, or a subset of BRICS countries, should prepare to create a new reserve currency, which could be a game-changer in global monetary and financial affairs. At the same time, they should continue expanding international transactions in national currencies and begin building an alternative payment system to SWIFT.
The BRICS will disappoint the entire Global South if they remain in the realm of speeches, communiqués, and proclamations without advancing innovative, practical initiatives.
*Paulo Nogueira Batista Jr is a Brazilian economist, a former Executive Director at the International Monetary Fund and a founder and former Vice President of the New Development Bank in Shanghai.
This article has been translated from Portuguese by Kawsachun News. Read it in its original Portuguese here.
