Monetizing BRICS+: Introducing The R5 Initiative

As the world prepares for the upcoming BRICS summit in Xiamen, there is an increasing focus on the new initiative launched by China called the BRICS-plus that aims to extend BRICS countries partnership with other developing countries and regional organizations.

Earlier this year the Valdai club in a series of publications advanced its vision on how a BRICS+ framework could evolve in the areas of economic integration among the RTAs led by BRICS economies as well as cooperation among the regional development institutions (see Valdai paper #69, July 2017). The RTAs within the BRICS+ circle would include such regional blocks as Mercosur, the Eurasian Economic Union, as well as the likes of the South African Customs Union, China-ASEAN FTA and South Asian Free Trade Area (SAFTA), while the group of regional development banks would comprise among others such institutions as the Eurasian Development Bank, FOCEM and SDF. But there is another key area of BRICS cooperation, which has experienced important advances in policy coordination in recent periods and that may become yet another pillar of a broader BRICS+ framework. 

This third pillar of coordination for BRICS+ could be collaboration in the financial sphere directed at ensuring macroeconomic stability and involving cooperation between the regional financing arrangements (RFAs) where BRICS+ countries are members. The corresponding RFAs with BRICS participation include the Eurasian Fund for Stabilization and Development (EFSD), BRICS Contingency Reserve Arrangement (BRICS CRA), CMIM – Chiang Mai Initiative Multilateralization. Among these RFAs a critical element in the BRICS cooperation in the sphere of financial and macroeconomic stability is the BRICS Contingent Reserve Arrangement that became operational in 2015. In line with Article 2 of the BRICS CRA Treaty the initial committed resources of the CRA stand at USD 100 billion, with individual commitments ranging from USD 41 bn for China to USD 5 bn for South Africa.

There may be several trajectories of BRICS+ cooperation in the financial sphere where the involvement of the relevant RFAs could prove instrumental. One such area is mutual policy coordination with respect to international financial organizations – in fact such coordination appears to be already taking place – in October 2016 a high-level dialogue on the role of regional financing arrangements (RFAs) in the Global Financial Safety Net (GFSN) has taken place in Washington DC with the participation of the representatives of the IMF as well as representatives of AMRO (the ASEAN+3 Macroeconomic research office), the BRICS Contingent Reserve Arrangement (represented by the Reserve Bank of India), the Eurasian Fund for Stabilization and Development, the Latin American Reserve Fund (FLAR), the European Stability Mechanism (ESM), as well as the Arab Monetary Fund.

How BRICS+ Format Can Become an Alternative Track for Globalization Club Events
As the developed world is increasingly leaning toward protectionism, the emerging nations seem to take the lead in shaping the contours of an alternative globalization with BRICS serving as the backbone of these processes. The BRICS+ paradigm, which can make the process of global economic integration more inclusive and comprehensive, was discussed at a Valdai Club event in Moscow on July 19.

Other promising areas of BRICS+ cooperation in the financial sphere (not necessarily pertaining to the RFAs) include those related to the use of national currencies in cross-country transactions as well as the creation of common payment systems encompassing the BRICS and their regional partners. In fact the BRICS+ format that includes BRICS’s allies in the respective RTAs creates more scope for launching such initiatives as BRICS members’ currencies as well as payment systems are already used to a varying degree among BRICS regional neighbours.

The potential for increasing the use of national currencies in the BRICS and their regional partners is still significant, given the high levels of dollarization in many BRICS+ countries. In the Eurasian Economic Union, for example, the use of the Russian rouble in cross-country transactions has increased to 75% in 2016 compared to 56% in 2010 at the expense of the US dollar, whose share declined from 35% in 2010 to 19% in 2016.

Hence there may be a case for what may be termed as the “R5 initiative” that targets the use of the respective national currencies of BRICS countries – Rouble (Russia), Rand (South Africa), Real (Brazil), Rupee (India) and Renminbi (China) – within the BRICS+ circle and more broadly in the world economy. The elements of such a strategy may include measures to boost trade and investment among BRICS+ (cooperation between the respective RTAs to create more scope for the use of national currencies), cooperation between development institutions in using national currencies to fund investments and long-term projects, creation of common payment card systems and common settlement/payment systems, cooperation in promoting BRICS+ currencies towards reserve currency status. Importantly, the R5 initiative (or alternatively the R5+ initiative to denote the national currencies of all BRICS+ members) needs to target greater use of all currencies in the BRICS+ circle, in order to provide additional incentives for developing nations to join the BRICS+ framework.

The launching of the R5+ initiative would allow the BRICS+ countries to “monetize” the increasing intensity of mutual economic cooperation through the use of national currencies and a substantial reduction in transactions/conversion costs associated with the use of other currencies such as the dollar or the euro in mutual transactions. Furthermore, the BRICS+ format appears to be particularly suitable for the implementation of the R5+ initiative. Firstly, the inclusion of the regional circle of partners facilitates the propagation of such an initiative and renders it more sustainable in time due to the relatively greater intensity of trade and investment across the respective regional integration arrangements. Also, the synergy from bringing together the cooperation between the regional development banks and the respective RFAs that form part of the BRICS+ framework creates additional instruments and possibilities to sustain the drive towards the use of national currencies in the regional as well as cross-regional domains.

One of the recent initiatives in this area focusing on the creation of a common payment card system for BRICS and their regional partners has been advanced by Oleg Preksin, High Commissioner for Finance and Investment, Eurasian Economic Cooperation Organization (ЕЕСО). A common payment card system would complement (not replace) the existing national payment card systems of BRICS+ countries and create the conditions for increasing the national market shares in servicing financial transactions in the domestic markets (Preksin and Kazartsev, 2016). The common payment card system project has been included into the working programme of the BRICS Business Council as well as into the draft report for the BRICS meeting in Xiamen in September 2017.

All in all, what emerges from the above discussion is a three-pillar system of an extended partnership of BRICS countries with other parts of the developing world, namely economic integration, regional development cooperation and regional financial stability. There is already almost a complete set of BRICS+ regional institutions that cover all these three areas, with the synergies from mutual cooperation across them still largely not exploited. Apart from mutual collaboration between the respective RTAs, regional development banks/funds and RFAs, there will also be a need for a framework of cooperation between these BRICS+ institutions and international economic organizations, namely with the WTO in the sphere of trade, the World Bank in the area of development institutions and the IMF in the sphere of financial and macroeconomic stability. 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.