National Council of Applied Economic Research
Opinion: Barry Eichengreen.
Expressions of dissatisfaction with the global dominance of the dollar go back at least to French finance minister Valéry Giscard d’Estaing in 1965. But even today, the euro is no challenger to the greenback, and no one should hold their breath waiting for the BRICS to unveil their own attempt at an alternative currency.
Last month’s BRICS summit in Kazan, Russia, was, like all summits, heavy on photo ops. And it yielded a second act that was similarly heavier on symbolism than substance: the release of a report by the Russian finance ministry and central bank on “improvement of the international monetary and financial system,” by which Russian officials obviously meant “finding an alternative to the weaponized dollar.”
Expressions of dissatisfaction with the dominance of the dollar over global money and finance go back at least to French finance minister Valéry Giscard d’Estaing in 1965, who famously lamented the greenback’s “exorbitant privilege.” Indeed, the desire for an alternative played no small part in the creation of the euro 34 years later.
Herein lies the rub for the BRICS (named for its founding members Brazil, Russia, India, China, and South Africa). Creating the euro took 34 years. It necessarily built on a half-century of other steps that deepened European integration and established shared political institutions. And the euro, in any case, has shown no signs of challenging the dollar, or even of modestly denting its global supremacy.
Policymakers in emerging markets have in fact offered a long list of possible substitutes for the dollar. None of their proposals has borne fruit. In 2009, People’s Bank of China (PBOC) Governor Zhou Xiaochuan suggested replacing dollar reserves with the International Monetary Fund’s Special Drawing Rights. It quickly became apparent that no one was particularly interested in holding, much less using, an artificial asset pegged to an arbitrary currency basket.
Chinese officials then embarked on a campaign to promote use of the renminbi in international payments. In fact, Chinese firms now settle a majority of their cross-border transactions in renminbi. Globally, however, the renminbi accounts for less than 6% of trade settlements, while Chinese capital controls and governance issues limit the currency’s utility for financial transactions. Despite having built a Cross-Border Interbank Payments System, Chinese banks clear barely 3% of the daily transactions, by value, of US-based clearing houses.
Then came proposals for a BRICS currency, constituted as a weighted average of existing BRICS currencies, or perhaps backed by gold or other commodities. But a BRICS basket currency was not a natural fit for any of its member countries’ exporters. With no BRICS equivalent of the European Central Bank, which manages the euro, or of the European Parliament, to which the ECB answers, fundamental questions – like who would manage it – remained unanswered.
A gold-backed currency would have obvious appeal to major gold producers like Russia and South Africa. But payments would be expensive, insofar as they involved actual gold shipments. If “gold-backed” meant convertible into gold at the prevailing market price, then the unit would not be stable. If it meant convertible at a fixed price, this would be tantamount to donning the straitjacket of the gold standard.
There have since been discussions of local currency settlement, like those occupying Russia and India for much of 2023. But this could work only if bilateral trade were perfectly balanced, with neither country having much appetite for accumulating the currency of the other. The benefits of multilateral trade would be lost. Predictably, these Russia-India talks led nowhere – except to Kazan.
The Russian report to the BRICS summit recommended a common platform for cross-border payments using a set of BRICS central-bank digital currencies. This could avoid having to go through the dollar, the US banking system, and the SWIFT interbank payment service. The Bank for International Settlements has helped to develop such a platform, known as Project mBridge, with the participation of five central banks, including the PBOC, which is said to be privy to the technical details, having designed many of them. The accession of additional emerging markets could provide for own-currency settlement while preserving a modicum of multilateralism. Participants might be happy about holding one another’s currencies now that these were usable at low cost throughout the bloc.
But if the technological problem has been solved, the governance problem remains. Participants would have to agree on who to license as foreign-exchange dealers on the platform, or on the exchange rate at which to execute trades algorithmically. They would have to agree on who was responsible for providing liquidity, and under what conditions. They would have to agree on a dispute-settlement mechanism. They would have to agree on privacy and data-protection laws and practices, and how to guard against cyber threats. They would have to agree on the enforcement of anti-money-laundering rules. They would have to agree on which central banks could join over time. They would have to agree on ownership and voting shares, analogous to ownership and voting shares in SWIFT.
In their Kazan Declaration, summit participants limply “recognized” the role of the BRICS in improving the international monetary and financial system, and “took note” of the Russian report. No one should be surprised that they failed to do more.
Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, is a former senior policy adviser at the International Monetary Fund. He is the author of many books, including In Defense of Public Debt (Oxford University Press, 2021).