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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.
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Its going to require a really strong joint push by Russia/China ( France/Germany) to get this across the line. Its an act of faith as much as economics.
The benefits for actual trade , physical and financial, are potentially huge for the BRIC+ States. And in itself it doesn’t much affect the USD global position as so much of that is about financial derivatives and investment, albeit it does increase the divorce of financialisation and physical reality which must over time make the position of the USD weaker and riskier.
China has made clear that they want any new system to be dominated by the renminbi. I have not seen anything that indicates their position has changed.
Does China really want yuan internationalisation if it means they’d find themselves responsible for managing a global reserve currency? This would presumably conflict with their use of capital controls and currency management to benefit domestic industries
A good question. I have not followed the discussions that closely but China seems to favor yuan or yuan-centric solutions to “And what do we do about the dollar” without wanting the obligations that go with being a reserve currency. Perhaps they can find a half way house but I have not heard any concrete ideas as to how that could work.
If they do, I guarantee the West, and if not, reality, will engineer the necessity for a mechanism to implement sanctions, ultimately involving projection of the ‘full-spectrum’ of power outside their borders. Any egalitarian structuring will be to their immediate detriment; however, nobless oblige? Will they pursue global social health, at the expense of their competitive wealth, and the tangible benefits of zero-sum security? Governance is hard, and collapse cyclical. I imagine diplomacy is harder.
A bancor system would elevate BRICS to world domination until all countries would be forced to join, since countries would be massively incentivized to fulfill their needs within the block, for the most parts. Giants like China, would need to continue to sell outside the block but to purchase from within. It could, however, be penalizing to both huge players, like China, who would be limited in how much they could sell and to whom; and tiny players who might not be able to acquire enough of a valuable resource since they have nothing to offer. The price increases necessary to offset the penalties would need to be quite steep. It would be interesting to see something like that play out in real life.
Sorry, you are missing the problems with China. China will not sign up to a scheme where it is punished for running trade surpluses. The current BRICS members have a GDP greater than the G7. They will not hurt themselves this way, particularly since they and everyone else expects BRICS to get larger.
I sure hope China sees the light and moves towards more balanced trade. When a country runs trade surpluses its trading partners end up deeper in debt to that country, eventually the trading partners have to cut costs or increase tariffs to balance trade because they will need trade surpluses to pay down their debts.
When I read Keynes, it was clear to me that the only way his general theory worked was when a country had balanced trade. Fiscal policy is less effective when a country runs a trade deficit because net imports are a drain on the economy.
Look at the US, it ran a $2.6 trillion fiscal deficit in 2023, along with a $773 billion trade deficit and the economy grew by 1.9% – less than $600 billion. Imagine that – pumping all that money into the economy and getting such little growth. If all the BRICS countries have trade deficits with China, it is going to cause similar problems.
Of course in 1944 Morgenthau and White crushed Keynes’s bancor proposals: the US had generated a massive surplus on the back of the vast transfer of capital from Europe to the US during WW2. This was not only a case of “what we have we hold” but that the surplus would also give the US strategic leverage to force trade liberalisation and so prevent a relapse of the US into Depression conditions (a great fear at the time).
Now the boot is on the other foot. It is China which has large surpluses, and which notes the US postwar experience in which heavy overseas military spending eviscerated surpluses by 1959, led to the US spending well beyond its means, with its industrial base being hollowed out. Why would it repeat the US experience (of course, per Triffin, the US surplus also ran down as a function of it having to supply liquidity to the rest of the World as a function of its reserve status).
The US is now like the UK in the late 18th and early 19th century. Then, India’s chronic deficits with China (due to the East India Company’s predilection for Chinese tea to satisfy the British market), led to a remorseless drain of silver bullion from India to China, pushing the Company into crisis. Neither India nor Britain had anything to export which interested China. Hence India/Britain pushing opium – a good which sells itself – in order to bring the Indian current account back into equilibrium.
The US cannot resolve its deficits with China by persuasion, or by offering a remedy like bancor. Therefore, it has, perforce, shifted its position to coercing China back into equilibrium, whether by means of tariffs or threats of military encirclement. The surplus is a key part of China’s defensive rampart against the West, needed to prevent a repeat of the ‘century of humiliations’. The more obdurate the Chinese, the more bellicose the US.
That is perhaps why the US is so keen to use Ukraine in order to force Europe to purchase LNG at a premium, and also to wind down its surpluses by purchasing greater quantities of US military hardware. The inability of the US to resolve its deficits with China means that European surpluses must be targeted by way of offset, especially to preserve dollar hegemony and so that the US will not drown in its liabilities. In this game of musical chairs, it is Europe which seems likely to be left standing.
A well-tried uber-practical idea from the days when the European Economic Community had a few grownups running it who wanted it to work for the benefit of all it’s members by helping to insulate them from the financial vagaries of a dollar no longer backed by gold. Worked well once, and will probably work well again for BRICS. And who knows? Reverting to the ecu might help get the EU out of the crumbling super state model the globalists imposed on it and start working for the citizens of it’s member states again.
The digital platform for trade settlement in domestic currencies, mBridge, uses blockchain. Thailand and several other countries have been using it for 2 years and it works smoothly. It will be open to all BRICs members this coming January 1. Expect a stampede.
Do you have a source for this?
This is false and is an example why you are banned and I don’t know how this comment got through.
The system is ONLY in the development phase. It is NOT operational. It sounds as if it is in an advanced testing stage, so yes, some trades are being done. But your representations about where it stands are highly misleading.
And it’s a Bank of International Settlements project, and has absolutely nada to do with BRICS or promoting multipolarity. The ECB, IMF, World Bank, and the Federal Reserve Bank of New York are among the “observing members,” which I take to mean they are positioning themselves to be early adopters once the development stage has been completed.
https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm
Take your snake oil elsewhere.
Maybe we are looking at this whole thing in the wrong way. Take the war in the Ukraine. Some analysts have been frustrated that there has not been any Big Arrow movements by the Russians like western armies would try. Instead, Russia has settled on a slow, steady attrition of the Ukrainian armed forces so after two and a half years has put the Ukraine on the point of collapse. So perhaps this is what is happening with the BRICS and dedollarization. They have a good idea of what they want and are content to move slowly rather than trying to rush into some sort of plan that could blow up in their faces in a few years time. So they are Swiss cheesing the problem with an arrangement here, an agreement there and maybe a general understanding all round. For what they want to do there must be an enormous amount of moving pieces to change over so they are just replacing those pieces a few at a time.
Noticed this clip on YouTube the other day.
The BRICS trading system is already wiping out US farmers, as global price discovery is destroyed
Imo The west manufactures at high prices wrt row, though I thought Ag was the exception. Higher trade barriers are being erected to protect west manufacturers from low cost imports. Massive infra in row will continue driving down price and raising living standards as west reverses, spending on destructive but high profits wars instead of infra. Costs seem likely to continue rising in the west, driving down living standards.
So, what can the west sell row? And if they have little to sell at prices row wants to pay, can they steal raw materials now that gunboat diplomacy has ended? Beyond patents/copyrights etc that might become poor protection in the absence of treaties that the west thinks are flexible.
I have seen the stat that it takes 7-10 calories of petroleum to produce 1 calorie of USA food at the consumer level.
This suggests the vaunted productivity of USA agriculture is based on energy consumption not on efficient use of resources.
In my view, The USA is good in the entertainment business.
To repeat my previous comment: The US is a movie studio with an attached casino. And nukes.
Us makes very good money on world wide movies/streaming, but this depends on foreigners respecting western copyright laws. But west doesn’t honor reserves earned by, say, Russia providing valuable goods, so why should foreigners respect west copyrights?
I’ve been following this channel for a while, he has some interesting ideas regarding the main topic of discussion. I haven’t determined yet how highly his analysesis’s ought to be regarded, and often it seems as though the topics he covers I’ve already seen, weeks or months ago, on this particular site.
He does keep it brief, and posts his sources in his video descriptions, which I appreciate at least.
No way out. So, it remains the dollar by default in the face of limited, if growing, bi-currency exchange…until the dollar defaults. China may then have to face the music. As Yves frequently says, the worlds reserve currency must run a deficit. Exorbitant privilege has its downside.
Imo if BRICS succeeds China will eventually have to shift to balanced trade. For now it seems china just plows surplus into foreign infra, but eventually that sink will become counter-productive just as it has at home. Perhaps they think there’s ample time to allow their workers to enjoy the full fruits of their labor… the party is more sensitive than the west to keeping their pop happy.
This seems relevant to Brics currency discussion and the ongoing questions about what Russia will do with all the rupees. From Financial Times yesterday:
Russia built covert trade channel with India, leaks reveal
It’s unclear to what extent this was executed and to what extent it is merely plans and ideas, but even so it’s interesting, I think.
The BRICS settlement currency is probably better understood as a common Russia/Chinese secondary currency for international transactions. It is entirely based upon that trading relationship which has a stable resource/goods backing and long term stability. The value of the third-party object is determined by the exchange rate between Rub/Yuan. All other member currencies are then priced against that. The bi-lateral trade flows in the last two years done by Russia and China individually has been about discovering the true demand for these other currencies, to set their rate against the coming 3rd unit. Russia’s trade imbalance with India makes more sense here – they acquired Rupees for their oil and found little to spend it on. India must find ways to increase demand for those Rupees if it wants to lift the exchange rate against the 3rd unit.
Resource sales – the saudi, etc, oil markets, can be done in the national currencies such as Yuan in order to boost supply and demand for the domestic currency against the third unit if that is beneficial to the parties. The core benefit of the third unit is to provide a stable tentpole – built on digital infrastructure to reduce transaction costs and time (significant factor) and political safety against the USD system. For Russia and China the benefit of offloading to the third party currency limits “reserve” impacts upon their domestic market and they can continue to compete with it via bilateral trade in their domestic currency if that is deemed a good idea for a particular transaction.
Contracts between most member states will be set in the price of the 3rd currency – trusted and stable due to its basis in the russia/china currency relationship.
Ultimately people need to reframe their understanding of BRICS as being based in the Russia-China partnership. Other members are cooperating parties who contribute and benefit but at the core it is about using this new power alliance to replace what we have become accustomed to under the American empire system. BRICS is about providing stable platforms to maintain the world trade/economic system as the American system falters and becomes increasingly dysfunctional.