BRICS and Payments Systems
Interview (by email) with Kirill Krasilnikov, Sputnik News Agency
17 October 2024
I was pleased to be invited by Mr Krasilnikov to provide some comments in relation to questions and issues about the BRICS payments system. The interview was by way of written email response to questions. The questions and answers for the interview are provided below in full.
KK: The group developing multiple de-dollarization initiatives to reduce currency risks? What is the current state of these efforts from your perspective, in your opinion? Should we expect any progress in that direction sometime in the near future?
WP: Reviewing the discussion paper, it appears that the research team has focused on consolidating an agreed problem definition, and scoped out implementation challenges and design / progress parameters or principles. The problems are well-defined and clearly articulated. Global trade volumes and patterns have been and will continue to veer towards the developing economies, but monetary flows remain dominated by a third party currency (mainly the USD), with implications for the availability of money capital for development purposes. This consolidates uneven economic development globally. Tackling payments is an important step in addressing the inequities in the capital accounts.
BRICS by its nature is a consensus driven group. There are no formal decision making rules, but an ethos of conduct that member nations understand. This means there is a need to focus on dialogue and diplomacy so as to identify common concerns and aspirations, scope the workable or agreeable parameters to move forward and then take the next step. Designing a new payment system is a complex issue that requires careful consideration, particularly given the differences in the economic / sectoral structures of the member states, their respective trading relationships and balances etc.
The discussion paper provides some clear hints as to the key design principles and technological parameters. In short, it is likely that whatever and whenever a platform is fully scope and developed, it will be premised on a distributed ledger technology accompanied by a consensus-based off-chain governance framework. The lessons from the mBridge project seem to be particularly relevant here. I would be surprised if these lessons and much of the effort committed over the past 36 months or so to mBridge does not find its way into a BRICS payments architecture.
The discussion paper also flags issues around the capital accounts. While in a sense related to the underlying value foundations of currencies as means of (cross border) payments, resolving a national currency-based payment system does not presuppose resolving the institutions related to national currency based investment regimes. No doubt, one will follow the other, and the work of the New Development Bank in terms of providing national currency based finance, and expanding this capacity into the future, will play an important role.
KK: While the question of the single BRICS currency is not currently being discussed, do you expect that eventually the group will move to create a shared currency? What are the main obstacles to achieve that?
WP: I doubt that there is any serious impetus from the central banks of each member state for a so-called BRICS currency. To begin with, the remit from the 2023 BRICS leaders summit was to explore a national currency based payments system; it was not to explore a new currency. Secondly, the problems of the Bretton Woods and post-Bretton Woods financial system have in large part been a result of the dominance of a single currency over others. This undermines national currency sovereignty, and exposes nations to assorted risks and costs. Risks are well-known, but have been exacerbated in recent years by the weaponisation of the USD system. Costs are also well-known: transaction fees are exorbitant and time delays in payments settlements are chronically inefficient. BRICS members value their sovereignty; the ability to maintain sovereign control over the issuance of the principal means of payment and unit of account operable within their respective jurisdictions is key to national economic sovereignty. The lessons of the EU and the Euro are a stark reminder of how a single currency environment involving divergent economic structures can create large problems and impose costs on the poorer countries. This is not something that BRICS wants to repeat.
A national currency based payments system can include a non-national or neutral numeraire. Keynes’ Bancor was an example as is the IMF’s Special Drawing Right. Such a numeraire can facilitate exchange rates coordination and also support the provision of liquidity for timely settlements. This is not, however, a retail currency in the sense of a Euro.
KK: Russia is pushing for the creation of a new cross-border payment system for BRICS countries. Should such system be implemented, do you think it could be effective in lessening the members’ reliance on SWIFT? Would it be attractive to other non-members, including in the Global South?
WP: there are already a range of national systems that support national currency based trade settlement. These are also supported by an array of institutions that have emerged over the past decade or so, such as currency swap agreements on a bilateral basis. Furthermore, a number of alternative inter-bank messaging and payments systems already exist and operate making it possible to bypass the US-dominated systems where necessary or appropriate. These include China’s CIPS and Russia’s SPSF. Many BRICS nations are well advanced with CBDC projects, though a BRICS payments platform design doesn’t necessarily have to presuppose digital currencies. And last but not least, the maturation of blockchain technologies for supply chains and ledger operations makes distributed governance possible, together with data-driven smart payments.
In other words, this currency multipolarity fabric is already operational to varying extents across the BRICS states. That over 90% of Russia-China trade today is denominated in either RMB or Ruble and that over 50% of China’s trade is now settled in RMB is testament to the capacity of non-USD denominated trade settlements to take place. There is no turning back. A BRICS payment system adds to the existing currency multipolarity fabric, with the potential over time of replacing this patchwork quilt. In doing so, such a payments system is likely to be more efficient with lower transaction costs. In this context, BRICS can take its time to ensure consensus across its member states, knowing that a national currency-enabled cross border trading world is already in operation.