New BRICS development bank and economic multipolarity

By Sanja de Silva Jayatilleka

“There is a risk when we use financial sanctions that are linked to the role of the dollar, that over time it could undermine the hegemony

of the dollar.” 

– Janet Yellen, US Treasury Secretary (on CNN)

It was widely reported on the 17th of April that the US Treasury Secretary Janet Yellen had observed on Fareed Zakaria’s show that US sanctions on Russia and China could undermine the hegemony of the US dollar. The Economic Times reported from Washington that she had further said: “Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative…But the dollar is used as a global currency for reasons that are not easy for other countries to find an alternative with the same properties.”

This desire of the non-western economies to find an alternative was evident on Thursday 13th April this year at the New Development Bank (better known as ‘the BRICS bank’) in Shanghai, China, where Brazil’s President Luis Inacio ‘Lula’ da Silva added his voice to the call for an alternative to the US dollar, the dominant reserve currency.

‘Shackles of Conditionality’

In remarks widely reported around the world, Lula said: “Every night I ask myself why should every country have to be tied to the dollar for trade? Why can’t we trade in our own currency? Why can’t a bank like the BRICS bank have a currency to finance trade between Brazil and China and between Brazil and other BRICS countries?” (Hindustan Times)

President Lula was attending the inauguration ceremony of the newly appointed President of the New Development Bank (NDB), economist and Brazil’s former President Dilma Rousseff (Lula’s protégé and successor). A possible future alternative to the World Bank and the IMF for the Global South, the New Development Bank was created by the BRICS countries Brazil, Russia, India, China and South Africa in 2014 with the purpose of mobilizing resources for infrastructure and sustainable development projects in emerging markets and developing countries. It is reported that in 2022, intra-BRICS trade reached US$162 billion. (Silk Road Briefings)

President Lula suggested in his speech at the NDB that a new BRICS currency potentially “frees emerging countries from submission to traditional financial institutions.” (France 24)

Explaining the utility of such a currency for countries struggling with debt, Lula criticized the IMF’s imposition of austerity measures: “No bank should be asphyxiating countries’ economies the way the IMF is doing now with Argentina, or the way they did with Brazil for a long time, and every third-world country…No leader can work with a knife to their throat because [their country] owes money…”

President Lula da Silva, re-elected for the third time (non-consecutively) as President of Brazil making his first overseas visit to China this month after being elected, had tweeted in Portuguese that “The decision to create the NDB was a milestone in the joint action of emerging countries…The creation of this bank showed that the union of emerging countries is capable of generating relevant social and economic changes for the world… For the first time, a development bank with global reach was established without the participation of developed countries in its initial phase. It was free, therefore, from the shackles of conditionality imposed by traditional institutions on emerging economies.” (https://en.mercopress.com)

While a BRICS currency may take some time to evolve given the diversity of the 5 countries involved, President Lula’s impassioned intervention may indicate a strengthened resolve to work speedily towards its birth.

The R5 Project

When the original grouping consisting of Brazil, Russia, India and China was formed (its acronym BRIC coined by the chief economist of the multinational investment bank, Goldman Sachs in 2001) its opponents had said that the countries were “too diverse to be grouped together like this and that it was really just a Goldman Sachs marketing ploy.” (‘A new world order? BRICS nations offer alternative to West’, Astrid Prange)

Since then, the grouping has expanded, including South Africa in 2010, adding the “S” in BRICS. Several other countries have reportedly expressed a desire to join BRICS, including Saudi Arabia, Iran, Indonesia, the UAE, Bahrain, Egypt, Algeria and Argentina.

Today, BRICS countries account for 25% of the global economy, 18 % of global trade, and over 50 % of global growth. ( http://za.china-embassy.gov.cn). With BRICS open to other countries joining the group, the group’s share of the global economy is set to expand.

It was reported recently that this year (2023) would be a significant one for the BRICS grouping: “One of the clearest trends the world witnessed in 2022 was the accelerating eastward shift in global economic power… With significant progress being made by the BRICS …in terms of joint policy coordination and with several other economies showing clear signs of interest in joining the increasingly influential bloc, 2023 looks set to be the BRICS bloc’s most impactful year within the global economic and geopolitical landscape.” (Alexander Jones, International Banker).

There is already a working group within BRICS tasked with proposing a new reserve currency for the five BRICS countries that could be based on gold and other commodities. Since the local currencies of all five countries of the BRICS starts with the letter R (renminbi, rubles, reais, rupees, and rands) the project is called R5. This project is to enable these countries to trade with each other without dependence on the US dollar. (http://infobrics.org)

Yaroslav Lissovolik writes that the idea of a BRICS currency was mooted at the Valdai Club, Russia, in 2018. Since it wasn’t conceived to replace any national currencies, he says that in the short term the currency doesn’t have to be used in all trade transactions. “Initially, the new BRICS currency could perform the role of an accounting unit to facilitate transactions in national currencies. In the longer run, the R5 BRICS currency could start to perform the role of settlements / payments as well as the store of value / reserves for the central banks of emerging market economies.” He believes that the R5+ project could become “one of the most important contributions of emerging markets to building a more secure international financial system”. (Yaroslav Lissovolik, RIAC April 2023)

Non-Dollar Alternatives

Most of the BRICS countries are now trading in their national currencies. The yuan has overtaken the dollar in Russia and by the first quarter of 2020, the dollar’s share of bilateral trade between the two countries had fallen below 50 percent for the first time on record, from almost 90 percent just five years ago. (International Banker). Brazil has also agreed to trade with China in yuan.

India has agreed with 18 countries to trade in Indian Rupees. Indian Defense Review (IDR) reported that “In 60 cases, RBI approved the opening of Special Rupee Vostro Accounts (SRVAs) of correspondent banks from 18 countries, which are Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the United Kingdom.” (http://www.indiandefencereview.com/spotlights/brics-and-dollar/)

The findings of a recent scholarly study on the BRICS efforts to de-dollarize global trade, published online by Cambridge University Press on 24 February 2022 are significant with regard to the group’s commitment:

“We find that BRICS members have demonstrated an unambiguous consensus and a strong commitment to promoting the use of local currencies…and building a nondollar alternative global financial infrastructure…The group has also been planning the launch of a common payment framework that can be integrated with a BRICS digital currency to de-dollarize global financial infrastructure.

BRICS has…also created a nascent de-dollarization infrastructure that supports global de-dollarization in the long term. BRICS’ collective efforts to establish an alternative nondollar financial system have the potential to completely immunize participants from both exchange and sanction risks stemming from the dollar’s dominance and US hegemonic position. In the long run, the BRICS de-dollarization infrastructure may even serve as the basis for a broader de-dollarization coalition that includes regional organizations.

BRICS countries are in the process of developing a BRICS digital currency called BRICS Coin, which sets the stage for digital de-dollarization.” (‘Can BRICS De-dollarize the Global Financial System?’ Zongyuan Zoe Liu and Mihaela Papa)

The study found that even US allies are seeking greater financial autonomy to trade with countries under US sanctions and quotes the Governor of the Bank of England, Mark Carney, (2019) at a symposium for Central bankers, describing the dollar’s dominance as the “destabilizing asymmetry…at the heart of international monetary and financial system.”

The study reports that the renminbi is the 8th most actively traded currency globally and the1st within emerging markets:

“According to the latest Bank for International Settlements Triennial Survey (2019), the Chinese renminbi was the 8th most actively traded currency, ranking just after the Swiss franc. This is a significant increase from its ranking of 35th in 2001. Additionally, the renminbi is now the most actively traded emerging market currency. The Indian rupee was the second most traded BRICS currency, in 16th position worldwide and accounting for 1.7 percent of global trade. The Russian ruble, Brazilian real, and South African rand were in 17th, 20th and 33rd position…” (Ibid)

‘Financial Multipolarity’

This new tendency to move away from a single dominant reserve currency to increasing trade in national currencies is being called ‘financial multipolarity’. This is but a signpost on the path towards the multipolar world that the non-western countries have long been urging. This trend is not to everyone’s liking but the post-Ukraine US sanctions on Russia and earlier sanctions on China may have accelerated the very thing they wanted to avoid.

The 2023 Foreign Policy Concept Paper of the Russian Federation makes clear its determination to vigorously pursue an alternative world order. It believes that the changes already underway cannot be overturned and are moving inexorably towards its logical conclusion of a more equitable, multipolar world order, regardless of attempts to delay it.

“The formation of a more equitable multipolar world order is underway… The changes which are now taking place … are nonetheless not welcomed by a number of states being used to the logic of global dominance and neocolonialism. These countries refuse to recognize the realities of a multipolar world.”

It welcomes the circumvention of the dominance of the US dollar: “New national and trans-border payment systems are becoming widespread, there is a growing interest in new international reserve currencies, and prerequisites for diversifying international economic cooperation mechanisms are being created.”

It seeks to strengthen its relationships with China and India as leading countries of the Eurasian continent of which it is a part, in an effort to transform Eurasia into a “common space of…development and prosperity”. While it says that “Russia aims at further strengthening the comprehensive partnership and the strategic cooperation with the People’s Republic of China”, it is interesting to note that its relations with India is described as “particularly privileged strategic partnership”.

Sri Lanka’s Professor Mohan Munasinghe, a Nobel Laureate, interviewed by CNN International’s anchor Zain Asher in Miami said that “a multipolar world is more attractive to the Global South … The current world order is not doing too well, but the emergence of the BRICS countries gives the world more hope. They want a more balanced world order where their dignity and self-respect are restored”.

Professor Munasinghe said, and CNN’s Zain Asher concurred, that BRICS countries had overtaken the G7 countries in terms of their contribution to the global GDP. He said the new priorities for the Global South are “sustainability, economic development and raising the poor out of poverty” and they are less interested in military interventions and economic sanctions.

Provoking Multipolarity

An Observer Research Foundation (ORI) paper published in 2022 (Antara Ghosal Singh) explains the circumstances which prompted the expansion of the BRICS. “It was in 2017, in the first year of Trump’s presidency, that China, for the first time, proposed an expanded BRICS. Later, despite Joe Biden coming to power after defeating Trump, Chinese observers believe that US policy towards China has hardly changed, and that the ‘new Cold War’—initiated during the Trump era—has instead been taken to a higher level.” The paper points out how the ‘G2’ (USA-China) quickly collapsed as “cooperation” turned into “confrontation”, thus deciding China’s priorities towards a broader coalition of developing states.

The Russia-Ukraine war and the consequent consolidation of the Western bloc together with the sanctions on Russia have contributed to renewed interest in the calls for multipolarity. It is significant that none of the members of the BRICS countries took part in the US sanctions against Russia. In fact, both India and China have increased their trade with Russia.

Dimitri Trenin, head of Carnegie-Moscow, sees the current moment as fundamentally significant: “What is at stake here is not just the fate of Ukraine or the future of Taiwan. The issue is the existing world order itself and its current organizing principle – America’s global hegemony.” (RIAC March 2023)

Feelings have soured considerably in the Russian intelligentsia against what they see as attempts to “eliminate Russia as a major power”. Trenin sees multipolarity as the most effective response: “…a greater joint effort to help the world move faster toward multipolarity”. He recommends “reducing role of the US dollar in international transactions” and strengthening institutions such as BRICS and the SCO as steps towards achieving it.

BEAMS of Light

While the very diversity of the BRICS countries leaves much to be overcome including for the BRICS+ initiatives, recent geopolitical events have inspired unprecedented discussion, proposals and analysis of the different formats the project could take. While there is suspicion displayed by some Indian analysts of China’s motivation in promoting BRICS expansion which they speculate might be to “undercut the role and agency” of India, (Antara Ghosal Singh ORI) some Russian analysts see important and groundbreaking potential in it including possible trade liberalization within the platforms across the Global South:

“The BRICS+ regional format presents an opportunity to …encompasses the majority of the Global South…One proposal in this regard has been the BEAMS platform, which brings together the primary regional integration blocks of the BRICS countries, namely BIMSTEC (India), Eurasian Economic Union (Russia), African Union (South Africa), MERCOSUR (Brazil), and SCO (China)…. this format enables BRICS to progress with trade liberalization across the Global South and establish inclusive cooperation platforms in both the financial and real sectors.” (Yaroslav Lissovolik, RIAC April 2023)

With the recent high-profile appointment of Dilma Rousseff, a former head of state to lead the BRICS bank, the incentive to explore its potentialities and to accelerate implementation may have increased exponentially, with all its implications for the evolving world order. Dilma may soon begin to push TINA (‘There Is No Alternative’) off the stage. Such a development is not without momentous positive implications and potential for Sri Lanka.