As BRICS nations gather in Kazan, Russia, for a groundbreaking summit, the focus turns to alternative payment systems and de-dollarisation. This pivotal meeting could reshape the global financial landscape, offering new opportunities for developing nations and challenging Western economic dominance.
BRICS positions itself as a voice for the developing Global South and mandates itself with achieving a multipolar world, shared humanity, and equality. Recognising the emptiness of words alone, the group aims to make a real-time impact on global financial systems, offering substantive financial freedoms. The BRICS payment system proposal has become a topic of great importance for some and concern for others. As BRICS prepares for its summit in Kazan, Russia, this month, we reflect on the payment system and de-dollarisation initiatives and the ongoing conversations surrounding these topics.
The proposed payment system
The simplest starting point for BRICS was the decision to encourage trade using local currencies, easing reliance on the US dollar. This move enables both economic integration and financial independence within BRICS nations. Creating a unified BRICS digital currency or a regional payment system, like SWIFT (the global financial messaging network), would not only serve as an alternative gateway but could, if successful, change the global financial system entirely. By nature, the proposed payment system and de-dollarisation are intrinsically linked. Herbert Poenisch, Senior Fellow at Zhejiang University and a former Senior Economist at the Bank for International Settlements, identified the October Kazan meeting as significant for two main reasons:
- A major issue is oil/petroleum/natural gas trade, which is predominantly conducted in US dollars, benefiting the US even when it has no direct involvement in global fuel financial transactions. Project mBridge, which encourages alternative transactions to the dollar, has been joined by Saudi Arabia, the world’s main supplier of oil. Initial comments signalled Saudi Arabia's willingness to move from dollar-based oil payment systems to the petroyuan.
- The new currency needs to fulfil three major functions: (1) denomination; (2) the ability to store value; and (3) facilitating payments. Failure to meet these criteria could result in the initiative's collapse. Additionally, the difficulty of undercutting the petrodollar should not be understated, largely due to inefficiencies with the yuan. There is an absence of a mechanism to recycle yuan surpluses generated by oil-producing nations back to countries needing currency to buy oil, mainly because global banks manage currency transfers within the dollar system. The summit is expected to explore alternative solutions to these challenges.
The New Development Bank
BRICS expansion signals promise and increased potential within the global financial system for the group. One key institution is the BRICS Bank, now the New Development Bank (NDB). The NDB occupies an awkward position in the global financial system. It operates through the dollar system and is vulnerable to the threat of sanctions and political malfeasance from the West. For instance, the bank had to sanction Russia, suspending its ability to provide loans to the country for about two years. The expansion of BRICS presents a significant financial opportunity for the bank. Currently, the NDB pays higher interest rates when borrowing money from other international institutions, as the reduced number of countries in the bank is seen as a financial risk. Although expansion appears positive for the bank (within the dollar system), the Russian summit is expected to address these issues, with a focus on integrating the bank into alternative financial systems.
The road to financial inclusion through alternative systems and de-dollarisation is not easy, but it is important and necessary to achieve substantive financial inclusion and address global financial discrepancies, which result in unequal distribution and ownership of financial resources in favour of the West. In the short term the alternative payment system and alternative to the dollar will likely occur with an accelerated digital payment system.
The Kazan meeting is an opportunity to provide more specifics. The summit in Kazan is expected to be a "ground-breaking" event, marking a pivotal moment for the future of the global financial order.
Written by
* Dr Iqbal Survé is a past chairman of the BRICS Business Council and co-chairman of the BRICS Media Forum and the BRNN.
* Cole Jackson, Associate, BRICS+ Consulting Group
** The views expressed do not necessarily reflect the views of IOL or Independent Media.