The Russian Finance Ministry has reported that BRICS, an association that includes ten countries since January 2024, is developing platforms for cross-border payments in national currencies. Why is it necessary to re-direct trade to national currencies and what challenges and risks exist? Invest Foresight talked to Alexander Abramov, Head of the Laboratory of Institution and Financial Market Analysis of the Applied Economic Studies Institute, Russian Academy of National Economy and Public Administration (RANEPA).
– Why does BRICS need payments in national currencies and a dedicated payment system?
– If the BRICS countries are involved in active mutual trade, this is a good idea. Having an internal system will simplify payments between the countries, enabling them to bypass using the US dollar and the euro.
– Will this really make things easier?
– At the very least, trade in national currencies is more technology-intensive. In fact, many countries today feel that they have to drop the US dollar. And it is understandable. Russia, China and some other BRICS countries are considering this as well.
If they do that, their next step would be to make a choice of the currency to use instead. How will they pay for imported goods? A system like this would be useful in cases where we want to pay India in Chinese yuan, for example. Let’s say, we are not interested in rupees, but India needs yuan. This system will definitely help in this hypothetical – or perhaps real situation.
Technically, having a system for cross-border trade payments in local currencies in place should facilitate mutual settlements and exchanges between countries. At present, such deals have to be literally negotiated by telephone, so a dedicated payment system will eventually make things easier.
– The national currencies’ exchange rates are still based on the dollar. Isn’t this a bit of a stretch?
– This does not affect the exchange rate mechanism in itself. On the one hand, BRICS national currencies are indeed pegged to the dollar, and we have to peg the ruble to the American currency as well.
Today, more than 50% of transaction with China are executed in rubles. And in order for rubles to be accepted, the ruble has to be stable, relative to something in any case.
In this sense, the ruble is playing the same game as the yuan. It is semi-convertible, but it is pegged to the dollar. The sole purpose of this policy is to ensure that the Russian ruble can be used in international transactions. If the ruble is volatile, it will be very difficult to pay our foreign partners in rubles.
The exchange rate is a different story, and it is pegged to the dollar for stability, so that the parties to cross-border transactions with national currencies do not assume foreign exchange risks.
—It is believed that a mutual payments system will give the BRICS countries a stronger competitive advantage. Is this true?
– I would argue that this initiative is more like minimizing the technical issues that a number of countries face today when trying to use dollars in their export or import operations.
Will this help make them more competitive? It probably will, inasmuch as this helps them avoid or minimize any conflicts over the dollar or risks associated with their national currencies’ fluctuations (you want to get more yuan, and India has rupees, but India can use the system to pay you in yuan).
But in the long run, yes, this can contribute to bolstering exports and trade between developing markets. In this sense, the BRICS group will indeed be more competitive.
– Recently, there has been increasing discussion on the BRICS group’s plans to create an alternative to the dollar. How realistic is this project? Why do they need another unit of account?
– I think the main potential obstacle to these plans is China’s reluctance to support any proposals that might weaken the role of the yuan. I am not sure the country will readily agree to this.
I assume the common currency debate will be increasingly dominated by “yuanization” ideas as opposed to the creation of a new, single, common monetary unit for settlements between the BRICS member states.