BRICS, Currency Multipolarity and a New Global Financial System?
BRICS 2024 is meeting in Kazan. A big ticket item is the BRICS cross border payments system. I have written a short overview of the issues here. What follows is a more detailed and expansive discussion of the issues from which the shorter essay drew.
Just as the three decades of American Unipolarity have come to an end, so too has the era of US dollar (USD) hegemony. Albeit from a small base, a growing proportion of cross-border trade settlements are undertaken in currencies other than the USD and the Euro, and the proportion of central bank reserves held in USD is also decreasing. This is heralding the expansion of currency multipolarity. The outlier is the outsized quantity of USD-denominated financial assets and instruments that are traded globally, which will in due course come under pressure as real value production and circulation continues to drift away from a USD-dominated world.
The discussions at the BRICS summit in Kazan, Russia, about a payments system that supports intra-BRICS trade settlements in national currencies - rather than via a third party currency (eg., USD) - adds to an unfolding set of institutions and technologies that already underpin the evolution towards national currency-based trade settlements. These institutions and technologies are themselves anchored by the real economies of value creation and transfer of the BRICS member states.
At the BRICS summit in South Africa in October 2023, the leaders agreed that BRICS would investigate the development of a BRICS national currencies payments system, for consideration at the 2024 leaders’ summit. The Russian authorities, as the 2024 rotating chair of BRICS, have led a process of analysis and options review. A discussion paper prepared by the Ministry of Finance of the Russian Federation, Bank of Russia and Yakov and Partners, was recently made available publicly. Undoubtedly, other confidential documents have been prepared for circulation amongst the relevant authorities from participating nations.
What are we to make of the discussion paper and its contents? Based on the discussion paper’s content, what can we discern about the possible directions for BRICS in terms of a new payments system? How may such discussions contribute to the reform of global financial institutions? What are the medium to longer term implications for the international financial system as currency multipolarity expands for both trade and increasingly capital accounts?
Real Economy Drives Monetary System Transformations
Currency multipolarity is more an evolutionary process than a fixed state. Nations are expanding the use of national currencies to settle cross-border trade accounts, and increase the extent to which they finance development through the issuance of national currency-denominated credit for capital formation. The gradual and incessant reduction in the proportion of national reserves in countries’ central banks held in USD reflects the underlying changes in the contours of global economic dynamics and development.
Some Concepts
Sustained changes to the global real economy are the principal drivers of the tectonic transformations we are now witnessing in the financial superstructure. Geopolitical events have certainly spurred these changes in the past few years. To understand these global structures and dynamics, some preliminary concepts are helpful. The subsequent discussion draws on these foundational concepts. If the reader isn’t so interested in the theoretical or conceptual aspects, they can skip to the next section.
The main conceptual points are:
By real economy, we are talking about the processes of ‘use value’ creation, exchange and circulation. In this system, use values are circulated through the medium of exchange values. That is, resources are exchanged for money and money for resources, and so on.
Use values are products and services that can be utilised in production systems to create new products or services (eg., intermediate goods) or are used up by way of human end consumption as products or services. Real value can be for both tangible and intangible things. The real value system of production involves the mobilisation of energy and other resources (labour, know-how, natural resources, intermediate goods etc) through the deployment of money capital. Energy is the precondition for all production systems - it is food for people and fuel for machines. In this system, capital takes different forms and transforms through processes of production and circulation. Capital can be money capital, fixed capital or commodity capital, for example.
The real value economy contrasts with the parallel domains of fictitious capital - forms of capital that Are rights to future value flows. Fictitious capital is necessary for the real economy to expand; money capital in the form of credit backed by a legal security (ie., fictitious capital) is necessary to enable the expanded flows of production and value circulation. These future value flows could be by way of money revenues (eg., interest payments on loans or dividends on shares, fees on licenses or royalties), acquisition and sale of products (eg., exercise of options or futures contracts) or capital value growth in fixed assets.
Fictitious capital is an exchange value. Fictitious capital can take many forms, such as options agreements, futures contracts, derivatives, shares, bonds and other securities for example. Money capital itself is a form of exchange value. Money capital is an unconditional exchange value - it can be exchanged for any other value form. Fictitious capital is, however, conditional; they can each only be exchanged for a prescribed range of value forms, as they have specific rights attached to them.
Sui generis, an exchange value has no use-value creation capacity (it is neither energy nor materials). It cannot be consumed as part of production processes or in final consumption. Rather, an exchange value only has use value-in-potential insofar as it remains attached to the future potential of use value. However, once an exchange value is created, and is made available for market exchange, the monetisation of exchange values becomes detached from the processes of real use value creation. The expansion of the domains of fictitious capital has been described as financialisation, whereby the exchange of ‘exchange values’ for ‘exchange values’ draws resources away from the real economy and drives the expansion of money and asset wealth inequalities.
In this environment, currencies as money capital are necessary for the mobilisation of production resources by functioning as a means of payment. Currencies fulfil these functions because they are legally sanctioned and socially accepted, relatively stable units of account. Most nations have the ability to issue national currencies via the operations of central banks and commercial bank credit. The ability to do so is the hallmark of currency sovereignty. The extent to which different nations have currency sovereignty varies. The greater the extent of currency sovereignty the more capacity a national government has to control monetary and fiscal policy. Conversely, the more dependent a country is on foreign currencies, the greater the risk to national economic sovereignty.
Recent Trends
The changing contours of global trade underpin the need for a national currency-based payments system, particularly when the current USD-dominated system reinforces uneven development and extractive relations between the advanced economies (AEs) and the emerging markets and developing economies (EMDEs).
According to the BRICS discussion paper, over the past 30 years the share of intra-EMDE trade has grown from 10% to 26% of total global volume, and is expected to grow further to 32% by 2032. Intra-BRICS trade made up 8% of this in 2023, and is projected to increase to 19% by 2032. Trade between AEs and EMDEs has fallen from 37% in 1995 to 31% in 2023. This trend will continue as EMDEs grow at higher rates than the global average.
Conversely, however, while trade contours have progressively tilted towards the EMDEs, cross-border investment flows remain locked to historic patterns, with 63% of global portfolio and direct investments confined to AE markets with 13% flowing to AEs from EMDEs. At the same time, the share of investments from AEs to EMDEs has grown by 3 percentage points over the past decade. This asymmetric relation between trade volumes and the pattern of investment flows is reflected in the reality that the AEs continue to enjoy the privileges of dollar domination. This has, according to a recent study by Gaston Nievas and Alice Sodano at the World Inequality Lab (2024), resulted in an income transfer from the poorest to the richest nations equivalent to 1% of the GDP of the top 20% countries, and 2% of the GDP for top 10% countries, while deteriorating that of the bottom 80% by about 2-3% of their GDP.
Development Finance
The way that the institutions of the global financial system impinge on uneven development and enable expropriation from the peripherals to the centre is amplified and consolidated via the mechanisms of the International Monetary Fund (IMF) as the principal provider of last resort of credit to nations. The IMF provides finance denominated in USD to countries experiencing balance of payments problems. That is, the borrower country does not have sufficient foreign exchange reserves (usually USD) to settle their trade liabilities. IMF loans are heavily conditional, requiring borrower nations to implement policies that actually contribute to persistent developing world indebtedness, with debts denominated in USD. IMF loans have consistently failed to live up to their promises when it comes to poverty alleviation. For example, a recent study of loans to 81 developing countries from 1986 to 2016 by American researchers Glen Biglaiser and Ronald J. McGauvran (2022) concluded that “IMF loan arrangements containing structural reforms contribute to more people getting trapped in the poverty cycle...”
Greater national currency sovereignty is a critical precondition for effective economic development and poverty alleviation. The intersection between the trade settlement role of currencies, the risk of balance of payments problems and the need for liquidity can consign nations to cycles of retarded development and poverty that remain the hallmark of the post-colonial world. That is, dependence on third party currencies to settle trade exposes nations to indebtedness risks in currencies that they do not issue.
At Bretton Woods in 1944, British economist John Maynard Keynes proposed an international clearing union that settled trade accounts between nations by way of a clearing union ‘currency’ - the Bancor. The Bancor could be purchased with gold, but could not be sold for gold. Gold could be purchased with national currencies. Trading nations’ would have Bancor accounts with the clearing union, which would be adjusted as part of the trade settlements process. Keynes proposed rules as part of the governance architecture that would penalise both debtor and creditor nations; should nations be in persistent deficit, the exchange value of their national currency would be depreciated. Should nations have persistent surpluses above a defined threshold, they would be levied a penalty that would be channelled into a development fund to enable debtor nations to develop capacity.
Keynes’ proposal did not materialise. The US delegation preferred a system that revolved around the USD. At the time, the United States represented over 50% of global GDP and anticipated that post-war reconstruction would require nations to purchase materials from the US. The international monetary system we have today is the result of the success of the Americans at Bretton Woods in stymying Keynes’ national currency-agnostic proposal.
A New Payments System?
In recent years there has been a growing reaction to the legacy institutions of the Bretton Woods Agreement, and how they have been increasingly weaponised by the United States. BRICS’ consideration of an alternative payments system is a part of this reaction. The BRICS discussion paper points to a need for a new payments system to provide security for participating nations, and to mitigate the risk of capricious and unilateral prohibitions. How such ambitions can be operationalised remains to be seen, though there are some pointers as to the possible governance architectures and technologies that could be used to deliver such a system.
A distributed ledger or blockchain, operated by participating nations’ central banks, has the potential to fulfil the design aspirations of BRICS, reflecting the high-level ambitions laid out in the discussion paper.
The practical design, development and implementation experience of the mBridge project is instructive in this regard. The mBridge project is an initiative involving the Bank of International Settlements, working initially with the People’s Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand and the Central Bank of the United Arab Emirates (UAE). Recently, the central bank of Saudi Arabia has joined the network of participants. In addition to these participating banks, there are 31 observer banks. The mBridge project supports multi-currency settlements through a platform that operates on a distributed ledger. The infrastructure supports what are known as real-time gross settlements; that is, the instantaneous ‘transfer’ of funds. The system is ISO20022 compliant, enabling interoperability across most global banking systems.
Ledger updates are handled by the validating nodes operated by the participating central banks, with associated commercial banks running backups. The commercial banks do not have the ability to update the ledger. Visibility to data is controlled so that only relevant institutions have visibility to specific data sets. The platform is governed through a committee structure comprising representatives of the participating central banks. Changes to the system, including the deployment of new code, must be agreed by the committee.
Trials of mBridge were implemented in 2022. The project’s minimum viable product was released for use in 2024. Real value transactions are now supported and are being carried out. The technical architecture is currency agnostic, supporting settlements using CBDCs as well as non-CBDC based transactions.
The mBridge project is significant because in some respects it acts as a learning prototype for BRICS stakeholders. The technical architecture, including the code base, is open source to participating institutions. The bespoke blockchain for mBridge is EVM compatible (that is, it operates a system that is compatible with the dominant decentralised virtual environment that executes code consistently and securely). Developers familiar with the EVM environment can develop solutions that can readily interoperate with mBridge. Thus, while mBridge is not the BRICS solution, it would be surprising if many of its learnings did not inform the detailed deliberations of those involved in exploring the technical and governance parameters of the BRICS payments platform.
In this set-up, there is no need for a distinct BRICS currency. This has never been on the drawing board anyway, despite a large amount of speculation since last year’s BRICS summit. Over the past 12 months, many have conjectured that a new BRICS currency will be launched, either ‘backed by gold’, ‘backed by a basket of national currencies’, or backed by gold plus a basket of commodities. Some have suggested, misleadingly, that a cryptocurrency is in the offing. The brief for the present considerations by BRICS is for a payments system that supports settlements using national currencies; the leaders did not in 2023 envisage a need for consideration of a new currency.
A focus on national currencies is an incremental approach, reflecting the tempered style of BRICS and its focus on consensus-based decision making. A new currency raises many issues that would distract from the principal and immediate objectives of (1) reducing geopolitical risk from exposure to the USD-dominated system, (2) reducing transaction costs, and (3) increasing the speed of settlement. Even without geopolitical concerns, there have long been criticisms that existing systems have been too costly and too slow.
Furthermore, given that one of the major concerns about the USD-dominated system is the adverse impact on a nation's currency sovereignty and exposure to foreign currency-denominated debt risks, a move away from a system that would promote the use of national currencies would be oxymoronic.
BRICS members each have their own national currencies. Most are also well advanced in the development of some form of central bank digital currency (CBDCs). A blockchain-enabled payments platform can readily accommodate CBDCs, or work with existing national digital financial platforms that run Real Time Gross Settlement (RTGS) systems. A CBDC would not be a prerequisite. A payments platform does not need an intrinsic price discovery mechanism either, though the discussion paper flags this as an issue. Rather, the applicable exchange rate could be agreed by the transacting parties. This is the case with mBridge.
Sufficient reserves to settle trades remains an issue, but should not be insurmountable, particularly given the fundamental complementarity of the BRICS economies and the foundational strength in core products - that is food, energy and raw materials. In response to this issue, the discussion paper mentions that Russia has proposed what is in effect a ‘clearing union’ set-up, harking back to the proposals of John Maynard Keynes. Perhaps a non-currency numeraire will be part of the considerations, to support settlements.
Discussion and Implications
Value impacts of dedollarisation
In any event, annual global trade in goods is approximately US$46 trillion with 8% being intra-BRICS trade; this is the equivalent of US$3.68 trillion. In contrast, global finance in bonds is over US$307 trillions par value; global equities markets’ capitalisation value is over US$108 trillion; global derivatives has a notional value of over US$635 trillion; and annual settlements of foreign exchange trading is in the order of $1,900 trillion (Tyson, 2023). A shift to national currency-denominated settlement of trade in goods is not in the near future going to disrupt the world’s fictitious capital markets, denominated as they are mainly in USD. An alternative (new) currency to the USD for trade settlements is not, in this context, a major requirement. National currencies will do, and the preservation of currency sovereignty has other benefits in any case.
The sheer scale of the financial instruments market reflects decades of intensified financialisation, particularly in the US. The explosion in the foreign exchange and derivatives market since the 1980s has paralleled the hollowing out of real economy industries in the United States, as money supply growth was channelled into the burgeoning world of fictitious capital (see my recent essay Nostalgia: A Dangerous Dead End for elaboration). The progressive dilution of the USD-centric trade settlement world does, however, have implications for the long-term value of the USD as a global reserve. This also has implications for the US national economy as well.
Recall that fictitious capital holds value-in-potential so long as it remains relevant to and connected with the possibilities of use value in the real economy. An expanded and perpetual cycle of monetised trading of exchange values may create monetised profits, but if these monetised profits are disconnected from the real economy, the value foundations of fictitious capital begin to dilute. On the whole, when financial institutions are dominated by private finance capital, monetised profits are recycled into new markets for fictitious capital, or find their way into the property market. Financialisation thus generates substantial asset value appreciation and intensifies the concentration of asset wealth.
Financialisation coincided not only with the decline in American manufacturing employment - the source of much of the political complaints driving the current political cycle - it also enabled a massive concentration of financial wealth and economic power. The wealthiest 10% of Americans now own 93% of stock value according to Fed data. Rising stock prices benefits the few, but reinforces the deindustrialisation dynamics of capital accumulation in a highly financialised America. According to a recent Oxfam report, the top 1% of American corporations own 97% of corporate assets in the US. Economists Kwon, Ma and Zimmerman have shown the long-run tendency for the concentration of American capital across all industries, with manufacturing concentration dynamics taking place most obviously in the 1970s.
The concentration of money capital - denominated in USD - has accompanied the growth in private sector developing country debt provision, via bonds issued by private equity enterprises, and increased private equity buyouts. Private development finance has delivered net transfers out of developing countries, according to data from Brookings, which observed that:
In 2022, bondholders and commercial banks were already withdrawing $125 billion from developing countries. In 2023, they withdrew even more—$193 billion. Adding these together, private lenders have taken over $300 billion out of developing countries in just two years.
And broader still, let’s not forget the GDP impacts as noted earlier.
A drift away from the use of USD as the principal medium of exchange dilutes its value-in-potential as the denomination of fictitious capital. Money capital that is unnecessary for the exchange, and mobilisation of, resources in the real economy ultimately has limited use value potential. Effective development does not necessarily depend on the availability of USD. This is the basis upon which national currency-based development can be undertaken. Unsurprisingly, therefore, expanding the role of the BRICS New Development Bank as a provider of finance in national currencies features in the discussion paper as well.
Put plainly and in summary, while the value of global trade of goods and services is dwarfed by the value of the markets for fictitious capital, the underlying value foundations for fictitious capital are found in the relationship between fictitious capital denominated in one currency and the real economy, and the ability for a currency to be valorised as use value. If you don’t need a certain currency to secure and activate or use a particular resource, then that currency no longer has utility as a medium of exchange and payment. A currency with limited medium of exchange capabilities confronts use value valorisation limitations.
As currencies are nationally issued fiat instruments, the only jurisdiction in which a currency has unquestioned value as a unit of account and medium of exchange is in the jurisdiction in which that currency is issued. The stock of USD that now exists within the global economic system far exceeds the requirements of the processes of real economy activities, particularly those in the United States. That’s why the world of fictitious capital has ballooned over the past few decades as money capital seeks monetisation opportunities. This stock of USD will not disappear unless and until the US treasury taxes it out of circulation or exchanges USD for US treasuries. Doing so bleeds the system of USD. The mere trading of USD for other assets does not remove the dollars from the system; they are merely accounted for on someone else’s balance sheet. Meanwhile, as USD money supply continues to grow due to domestic monetary policy imperatives, the global stock of USD will persist as a dominant, if progressively diminishing feature, of the reserves of central banks around the world.
The stock of USD as a proportion of the total stock of monetary reserves globally has been declining for decades. This is a function of the fact that the rate of money supply growth of other national currencies is taking place at a faster rate than the rate of growth of the USD. But because both are growing, the change in proportionality tends to change only gradually.
As time goes by, however, as the USD has native value in the United States, and as nations progressively expand the use of national currencies to settle cross-border trade, the USD will need to ‘return home’. In its home jurisdiction the USD has unquestioned means of payment value-in-potentia. That is a very large stock of USD for the American national economy to absorb, and depending on the speed at which the repatriation takes place could be quite inflationary. This has led some analysts, like Philip Pilkington, to suggest that such a process could reduce Americans’ real living standards by between 20-50%.
Is a BRICS Payments System needed?
The BRICS discussion paper is light on detail and may be interpreted as a little underwhelming. This is particularly the case for those who had hoped for a new BRICS currency to directly challenge the USD, or for those who simply wanted more detail on what BRICS as a group will do.
However, I suggest that currency multipolarity is already taking place and the BRICS ethos is one that is less about ‘big bang’ approaches and more focused on ensuring all members buy into the solutions. This consensus model usually means a more incremental approach as the norm.
No doubt, the weaponization of the post Bretton Woods USD monetary system has highlighted the risks of reliance on this system for trading nations across the world. The capacity of a single nation to capriciously and unilaterally penalise other countries has doubtless spurred on the interest and need for alternative platforms. The recent experiences of Russia, Venezuela, Iran and Afghanistan provide prima facie evidence of what an alternative system needs to have as part of its design ethos and operational DNA.
Meanwhile, there are already a myriad of bilateral swap arrangements between the central banks of BRICS nations and those of others. 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. 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.