On January 22, it became known that Brazil and Argentina plan to create a common currency, and other Latin American countries will be offered to join the monetary union, which may become the second largest in the world. The Financial Times estimates that a monetary union covering all Latin American countries will represent about 5% of global GDP. The largest monetary union in the world is the euro, which accounts for 14% of global GDP. But a number of economists, such as former chief economist of the International Monetary Fund Olivier Blanchard, consider this plan insane. The main reason is the large gap in economic indicators between countries.
The inflation rate in Argentina in November 2022 was 92%, and in Brazil — 5.9%. In Argentina, inflation is higher in a month than in Brazil in a year. Since 2017, the Brazilian real has depreciated against the dollar by 39%, and the Argentine peso by 90%. In such different economic conditions, it is difficult and dangerous to build a single monetary union, primarily for Brazil.
3 days later, Russian Foreign Minister Sergei Lavrov said that the issue of creating a single currency of the bloc would be discussed at the BRICS summit in August 2023. But this is not the first talk about the creation of a new single currency for the BRICS countries.
Initially, the idea of creating such a currency was formulated by the Valdai club back in 2018. The idea was to create a basket of currencies like SDR (special drawing rights), consisting of the national currencies of the BRICS countries. It was proposed to name the new reserve currency R5 based on the names of the currencies of the BRICS countries, each of which begins with the letter R: real, rouble, rupee, renminbi, rand.
Special drawing rights, or SDR, is an artificial reserve and means of payment issued by the International Monetary Fund. SDRs are based on a basket of international currencies that includes the US dollar, Japanese yen, euro, pound sterling and Chinese yuan.
What is known about the creation of the BRICS single currency, how right it is from the point of view of the economy and what risks it carries for the participants, we will discuss in this article.
What is known about the new currency now
The main thing is that at the current stage of the discussion it is clear that the new currency will not replace national currencies, and this is good.
The example of the European Union shows that the transition to a single currency of countries with different levels of economic development creates more problems than it brings benefits.
In its decisions, the ECB relies on the average values for the union, but within the EU, the indicators can vary greatly. For example, in June 2022, inflation in the eurozone reached 8.6%, but at the same time in Malta it was at 6.1%, and in Estonia — 22%. And this is with the European Union’s inflation target of 2%.
EU countries cannot pursue an independent monetary policy and are forced to rely on EU decisions that are based on the “average temperature in the hospital”.
Due to economic inequality and the inability to pursue its own monetary policy, the European debt crisis broke out in the 2010s. In 2007, due to the slowdown in the global economy and the impending mortgage crisis in the US, the ECB began to raise the rate — and by the end of the year it reached 4%.
A long period of low rates has led to an increase in the debt burden mainly in the private sector. For example, in Greece, private sector debt increased from 83.2% of GDP in 2003 to 115% in 2007, and in Spain — from 202.8 to 276.1%.
The rising interest rate made refinancing this debt more expensive, and the slowdown in the global economy limited the possibilities for repayment: the country earned less money, and it became more expensive to service debts.
As a result, less money was left for budget execution — and the country had to borrow again. At the height of the global financial crisis, by January 2009, the Greek stock market had fallen by 71% since the peaks of 2007, and GDP by 6.8% year—on-year. As a result, Greece’s budget deficit reached 15% of GDP by 2009, and in 2010 the country was on the verge of default: there was not enough money of its own to repay the bonds, and Greece could not refinance the debt on its own. The International Monetary Fund and the European Central Bank came to the rescue.
The main task of creating its own currency within the framework of the BRICS is to simplify trade, finance projects of the member countries of the Union and reduce dependence on the dollar and the euro in international settlements. For example, South African Foreign Minister Naledi Pandor spoke about this in early January.
At the first stages of implementation, the new currency could play the role of a unit of account for settlements in national currencies and conversion without the participation of the dollar. In the long term, it could become a means of settlement and even get the status of a reserve currency not only for the BRICS countries, but also for other states.
The value of the new currency can be determined based on the basket of currencies of the member countries of the monetary union. The weight of a single currency in the basket can be determined depending on the level of GDP, the volume of gold and foreign exchange reserves, the trade balance and the size of the public debt. One of the reasons why the currencies of developing countries are not used as reserves is their high volatility. Creating a new currency based on a basket of other currencies could solve this problem.
Preparing the infrastructure for currency creation
BRICS and simplification of settlements in national currencies began back in 2014, when a New Development Bank was created. Later, in 2015, the finance ministers of the BRICS countries began consultations on the creation of a multilateral payment system similar to SWIFT.
Additionally, as a measure to accelerate and strengthen currency integration, it is proposed to create a platform for national currency and stock exchanges, which will increase the liquidity and trading volumes of BRICS currencies and expand opportunities for hedging currency risks.
The implementation of such measures would exclude American and European banks from the conversion chain. For example, currently, external settlements using non—cash transactions in the UnionPay payment system for the ruble – yuan pair require conversion into dollars, which makes it necessary to use correspondent accounts in US banks.
To solve this problem, since 2019, a single payment system BRICS Pay is being developed, which will operate on the territory of five states and unite the national payment systems of the participating countries. Thanks to BRICS Pay, conversion to dollars through American banks will no longer be required, since payments will be made using the national currencies of the BRICS countries.
The BRICS Pay system will also allow the members of the union to reduce their dependence on international payment organizations such as SWIFT, Visa and Mastercard. The pilot project was launched in South Africa in early April 2019. It is expected that BRICS Pay will be fully operational by 2025.
One of the main initiators of the transition to settlements in national currencies is Russia. By 2025, the government plans to increase the share of foreign trade settlements in rubles by 2 times — from 19.5 to 40%. The use of currencies of “friendly” countries over the same period should increase from the current 1.6 to 20%. Thus, the share of the dollar and the euro in foreign trade will decrease to 40% from the current 78.9%.
Is there a need for a new currency in physical form
Given the initiatives to launch the unified payment system BRICS Pay, the feasibility of issuing a new currency in physical form raises questions. If the payment system works as intended, then the conversion between the currencies of the BRICS countries will be fast and convenient. At the same time, the countries will retain sovereignty in monetary policy and independence in decision-making.
In the event of a transition to a single currency, countries would have to agree and develop common rules for conducting monetary policy. The experience of the European Union shows that it is impossible to create a fair monetary union taking into account the needs of all participants. Different levels of economic development will lead to imbalances and provoke crises.
Most likely, the new currency can become a means of payment for conducting foreign trade operations between the BRICS member countries or their trading partners. It will be possible to buy such currency on the exchanges of the Union countries and use it to pay for goods or services in cashless form.
How the launch of the BRICS currency will affect the ruble
If the idea of creating a new currency is implemented on the basis of a basket of BRICS currencies, then this should be a positive for the ruble.
Shifting the focus in foreign trade to the BRICS countries reduces dependence on sanctions pressure, and the transition to trade in national currencies will ensure stable demand for the ruble from trading partners.
Russia has had a consistently positive trade balance for 25 years. This means that an increase in the share of payments for Russian exports in rubles will support the exchange rate. On the other hand, a stable flow of income into the country may cause increased inflation, which will have to be fought by raising rates, which will limit economic growth.
The trade balance is the difference between the amount of exports and the amount of imports of a country’s goods. The trade balance reflects the economic situation in a particular country and the degree of dependence of its economy on foreign markets and the conjuncture on them, the Program director of the Valdai International discussion Club, macroeconomist Yaroslav Lisovolik is convinced that the creation of a new reserve currency based on the basket of currencies of the BRICS countries can bring national currencies closer to the reserve status. In this case, the demand for the ruble and other currencies of the BRICS countries will increase, which will make their exchange rate more stable.
When a new currency may appear
The process of launching a new currency is not fast. For example, the idea of creating a single currency for European countries appeared back in the 60s of the last century, but the euro appeared as a currency much later.
In 1999, non-cash currency circulation began, and banknotes and coins began to circulate in Europe since 2002.
According to experts, a single currency in the BRICS may appear no earlier than 2050.
Source: BRICS website
