The creation of a BRICS currency has become one of the main themes throughout the last year, not only related to BRICS but also to global financial markets. In addition to the skepticism from most experts in the developed world, there are also a huge number of misconceptions and unsubstantiated claims about the rapid “death of the dollar” and the collapse of the global financial system with the creation of the common BRICS countries. currency. In fact, the actual scenario and modality of the introduction of such a currency has not yet been determined, and it is quite possible that the first stage of the introduction of the BRICS currency will take the form of a unit of account rather than a full currency. there is. – Full-fledged international trading currency. But even in the guise of a unit of account for economies in the Global South, the R5 (its name is taken from the initials of each of the BRICS currencies) has a significant impact on the international financial system and is a major contributor to the global economy. It can bring important benefits. developing world.
The first foray into the R5 common currency project and the use of BRICS as a platform for de-dollarization was carried out by Y. Risovolik in a series of publications for Valdai Club 1 and South Africa's Joburg Post in 2017-2018. I did. and “The Thinker” 2. Subsequent discussions around R5 largely revolved around the creation of a full-fledged euro-like currency for international transactions, although alternatives such as a reserve currency or unit of account were also addressed. . In fact, the latter would be the simplest and probably the most realistic scenario for the first stage of an R5 project. According to leading experts in the field, the creation of a BRICS unit of account can be realistically undertaken with minimal resources and can be implemented in a relatively short period of time.3
Rather than rushing to create physical units to accommodate international transactions, a step-by-step approach, including the creation of units of account, would help track volatility and stabilize expectations regarding the future operation of BRICS currencies. can. The introduction of a new BRICS currency in the form of a physical medium of exchange is likely to be greeted with speculative attacks and attempts to test the resilience of the new currency against the full forces of global capital markets. Therefore, regarding the order of BRICS currencies, it may make sense to prioritize the creation of a unit of account first and parallel this effort with the development of market infrastructure in the major financial centers of the Global South that can support this project. do not have.
Apart from the simplicity of implementation, this mode of R5 is in line with international best practices, especially with financial instruments such as the euro and the SDR. Furthermore, the “unit of account” route is flexible, allowing one or more BRICS countries to independently launch such a currency format without requiring the participation of all BRICS members. There are advantages. The resulting balance of advantages and disadvantages suggests that creating R5 as a unit of account minimizes risks while retaining many of the advantages associated with a common currency. In other words, it is the easiest way to create a BRICS world currency. The unit of account is also optimal in the short term.
In terms of the impact on R5, perhaps the most important aspect of how the BRICS currencies will change the global economy is a change in the mindset and mentality of economic agents and businesses that are currently very focused on the dollar. This “psychological dependence” on the dollar stems from the fact that the dollar is central to pricing, accounting, and statistics around the world, whether in developed or developing countries. The introduction of the BRICS unit of account to replace the dollar in major developing economies will provide a different reference point for emerging markets and a different lens for companies to track the BRICS+ economy. As the world market pays more attention to the monetary policy decisions of BRICS countries, instead of being too fixated on the slightest signals from the Fed, economic agents will increasingly focus their expectations on the new BRICS currency.
Another reason why the issuance of a BRICS currency is considered so important is the credibility and status it brings to BRICS as a bloc with global influence. So far, the main achievements of BRICS have mainly been related to the creation of new development banks and have not resulted in major changes in global governance or the international financial system. It will be the creation of a new world currency by the BRICS bloc, symbolizing real innovation and transformation of the world economy due to the qualitatively different heights achieved by the grouping on the international stage.
From a qualitative perspective, the introduction of a BRICS currency could affect the direction and quality of macroeconomic policies pursued by BRICS member countries. My sense is that the advent of R5 will somewhat reduce the tolerance of BRICS monetary authorities to large fluctuations in the exchange rates of their national currencies. It is also likely that macroeconomic policy coordination for BRICS and BRICS+ economies will be strengthened to ensure a smoother trajectory for the implementation of the next phase of R5 implementation. The overall quality of macroeconomic policy will also improve to ensure a secure macroeconomic foundation for the future operation of the common currency. Indeed, recent developments may signal such a trend in the monetary policy arena, with some emerging markets better able to avoid inflationary pressures than the Fed and other developed world central banks. We took earlier and more decisive action.
And, of course, there is also the reaction of global financial markets to the introduction of the BRICS currency. The introduction of R5 as a unit of account may itself raise expectations for future demand growth for BRICS currencies as the R5 project progresses to the stage of being a reserve currency and/or a physical unit of exchange. The creation of R5 could also facilitate the use of national currencies (including those of BRICS countries) in international trade. At the same time, the dollar could start to lose ground due to expectations of lower stocks in global foreign exchange and commodity trading. Overall, therefore, the emergence of R5 is likely to be favorable for emerging market currencies, especially the renminbi, and negative for the US dollar. The magnitude of these effects will depend on the exact modality of the BRICS currencies. The impact on the US dollar is unlikely to be significant in the short term as uncertainty regarding the future of BRICS currencies remains high. The impact on the renminbi is likely to be higher than others due to the likely high weight of the Chinese currency in the R5 basket and the relative importance for China of the resulting geoeconomic changes in the global financial system. This will be relatively noticeable compared to emerging market currencies. .
There may also be risks associated with the introduction of a BRICS common currency, such as the scenario of overzealousness in introducing an “advanced modification” of R5 in the form of a physical unit of exchange. There is a somewhat perplexing tendency on the part of many market participants to support the creation of such a BRICS currency in digital form, with many subsidies such as oil and gold used as backing for this currency . This may be due, in part, to a large amount of speculative appetite surrounding the creation of new currencies, favoring rising prices of Bitcoin, gold, or other dollar competitors. However, the ultimate purpose of the BRICS common currency is not to serve the interests of market speculators, but to increase the wealth of households and businesses in the Global South. In this regard, it may be desirable to keep things transparent and simple in the early stages of an R5 project to increase its credibility. Another risk is the volatility issue of the R5 basket and its underlying national currencies. This requires preliminary work to be done regarding the depth and quality of supporting market infrastructure.
Overall, even a minimalist approach of initially choosing the R5 unit of account path could yield important benefits for BRICS. The impact of the creation of such a currency on the global economy, business activity, and international economic policy debates could also be significant in the short term. Going forward, the creation of a new BRICS currency will no longer focus solely on creating an alternative to the dollar, but rather that a key priority of the R5 project at an early stage will focus on building greater confidence in the BRICS currency. It is important to guess. Strengthen the financial systems and monetary instruments of the Global South and foster greater South-South trade and investment, as well as the development of deeper capital markets. The BRICS currency also needs to serve as a reliable anchor for developing countries that are increasingly redirecting trade and investment flows towards the Global South. In the long term, as it advances to the reserve currency stage, R5 will contribute to a more balanced global monetary system and compete for a greater presence alongside the US dollar and other major reserve currencies. Become. After all, as Western economic thought says (compliments of Vilfredo Pareto), fair competition is one of the cornerstones of efficient and wealth-increasing markets.
Author's Note: First published on BRICS+ Analytics
1 Y. Lisovolik. Monetizing BRICS+: Introducing the R5 Initiative. Valdai Club. August 30, 2017. https://valdaiclub.com/a/highlights/monetizing-brics-r5/
2 https://eng.globalaffairs.ru/articles/boosting-the-use-of-national-currency-among-brics/
3 https://tass.ru/interviews/17281219
