BRICS Considers Mutual Settlements Similar to the Early EU

This is Naked Capitalism fundraising week. 142 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in the financial realm. Please join us and participate via our donation page, which shows how to give via check, credit card, debit card, PayPal. Clover, or Wise. Read about why we’re doing this fundraiser, what we’ve accomplished in the last year,, and our current goal, strengthening our IT infrastructure.

Yves here. This is one of the few proposals I have seen regarding how to advance the BRICS aim to reduce its members’ use of dollars in trade transactions. Note the crypto-blockchain whiz bangery is not a part of this, although it could be grafted on for sex appeal. This is still effectively a bilateral trade scheme, but the use of an intermediate accounting currency is expected to lower transaction costs, as it did with the ECU. As this article indicates, the ECU came to be traded and even used as central bank reserves. The private sector trading not on a large scale but apparently sufficient to provide for pricing seen as reliable, but that did not happen quickly. I spent the summer of 1984 (the ECU had been launched in 1979) consulting to Citibank’s London treasury operation, which including its foreign exchange trading, then the largest in the world. ECU trading was so de minimus as to not even be worth thinking about then.

Mind you, there’s a fundamental conflict here seldom acknowledged. A big rallying cry of BRICS is increasing national sovereignity. This article points out that the ECU is now seen as a stepping stone toward a common currency, which any MMT advocate or observer of EU fiscal rules or watcher of the ECB will tell you would represent a substantial loss of national sovereignity were BRICS to go there. Even though Micheal Hudson has highlighted a bancor-type scheme as an alternative, that too entails a loss of national soverignity. A big aim of a bancor system is to force balanced trade by imposing penalties on both trade surplus and trade deficit nations. But the trade surplus country faces more severe sanctions. Mercantilism has long been a very popular economic strategy since it amounts to taking demand from trade partners. Countries like China that see their surpluses as the result of technical prowess and investment will almost certainly reject this sort of curb.

By Nicholas Shubitz, an independent BRICS analyst. Originally published at BusinessLive; cross posted from InfoBRICS

The deputy foreign minister of the Russian Federation, Sergei Ryabkov, has stated that under Russia’s chairmanship of Brics in 2024, the bloc should consider creating a form of mutual settlements similar to the European currency unit (ecu) that served as the precursor to the euro.

He clarified that he was not proposing a common currency but rather a unit of account for clearing trade that would lower the costs associated with converting foreign exchange.

The ecu was a basket of currencies used as the unit of account for the European Community before it was eventually replaced by the euro in 1999. Apart from its official role in the European Monetary Union, a private market for the ecu developed, allowing its use in monetary transactions and for denominating financial instruments, including bonds.

Unlike the euro, the ecu was simply an electronic unit of account without any official coins or notes that could be used for cash transactions (though some commemorative tokens that could be used as legal tender were produced in Gibraltar). The value of the ecu was based on a weighted basket of European currencies, the weighting of which was determined by the relative size of each member state’s economy.

The ecu attracted bond investors because bonds denominated in the currency were better diversified than other European sovereign debt, which came with individual currency risk. The adoption of a similar system within Brics could similarly increase demand for Brics securities.

Another benefit of the ecu was that it helped reduce currency risk for European businesses. By using a single currency for financial transactions businesses could avoid some of the costs and risks associated with currency exchange. This could benefit Brics as forex transaction costs can account for as much as 3%-5% of global trade.

Cost reductions associated with currency volatility (including the need to purchase derivative contracts to hedge against currency fluctuations) could help boost inter-Brics trade. Combined with the ability to denominate bonds in a diversified joint unit of account, these benefits make a Brics currency based on the ecu an intriguing suggestion.

Trade Balance

At the Bretton Woods Conference in 1944, British economist John Maynard Keynes proposed the adoption of a new currency he hoped would address imbalances in global trade relations. Though his suggestion was ultimately rejected, the idea is of particular relevance today, with trade imbalances emerging as a source of geopolitical tension.

Keynes suggested a supranational unit of account (the bancor) be used within a multilateral clearing system for settling international trade. While individuals would not hold or trade the currency, all international trade would be valued and cleared in bancor, with surpluses and deficits accruing penalties so as to encourage balanced trade.

The economist’s scheme may have been somewhat extreme, favouring balanced trade over all other considerations. Nevertheless, if a portion of trade between Brics states were conducted under such a system it could encourage states such as China to purchase more goods from nations with which it runs a trade surplus, with obvious benefits for the other Brics members.

This would certainly resolve one issue with SA’s Brics membership in that the country has trade deficits with most of the Brics states while running a surplus with the West. Under a bancor style system, if SA runs a trade deficit with Saudi Arabia because we import Saudi oil, Saudi Arabia would have an incentive to spend those earnings purchasing goods from SA to avoid the penalties charged by the clearing house.

Alternatively, adjusting the weighting of the Brics currency basket offers another way in which trade imbalances can be addressed within the grouping. Basing the weighting of the basket on export volumes within inter-Brics trade could strengthen the currencies of Brics states that run trade surpluses, improving the balance of trade between the respective member states.

On the other hand, an equal weighting, which ignores economic output or trade volumes, would allow a Brics unit of account to be used without influencing trade dynamics. This may appeal to countries such as China and Russia, as their inter-Brics trade surpluses would be unaffected by the use of the new currency, while still offering obvious benefits for smaller countries in the Brics by increasing demand for their currencies.

Suggestions that the Brics could adopt a system similar to the ecu become particularly interesting when one considers that before the introduction of the euro, the ecu already had international status as a global reserve currency, with central banks holding ecus within their forex reserves.

The adoption of a similar mechanism within Brics would give central banks the opportunity to diversify their reserve holdings with the Brics reserve currency (BRC). Based on a basket of Brics currencies, the BRC would be more stable than any individual Brics currency, making it attractive to central banks, while the New Development Bank could issue BRC-denominated bonds to raise development capital for infrastructure projects within the member states.

With a balance between food and energy importers and exporters within Brics and modest trade relations between many of the members, there is a relatively low degree of correlation between the Brics currencies. This would potentially make a Brics unit of account (based on a weighted basket of Brics currencies) even more stable than the ecu, which still came with geographic risk concentrations due to its exposure to Europe and inter-European trade. The Brics unit’s stability would be further supported by China’s exchange rate controls and Saudi Arabia’s dollar peg.

Increased trade efficiencies, reduced currency risk and greater access to development finance offer benefits to the Brics that make the adoption of a joint unit of account similar to the ecu an exciting prospect. That such a currency may be used as an alternative global reserve currency is another advantage.

While trade imbalances between members make a joint unit more attractive than a switch to trade in domestic currencies, it is unlikely this important issue will be resolved, and it remains to be seen whether the bloc will be able to implement its ambitious proposals.