Not easy to make Brics draft on international payment systems work

Astute businessmen and finance executives would have taken note of four initiatives the leaders of Brics, a grouping of 9 countries, proposed, when they met last week at Kazan, Russia – more trade between the Brics member countries, payments in national currencies of Brics member countries, an electronic platform for settlement of inter-bank transactions and a new currency to facilitate transactions and build up of reserves. They would have perceived such proposals are easy to conceive and talk about rather than made to work in practice. 

Brics, originally a grouping of Brazil, Russia, India, China and South Africa, admitted 4 new member countries Iran, Egypt, Ethiopia and the United Arab Emirates (UAE) this year, and more countries are expected to become part of this grouping in the coming years, including some who attended the Kazan conference this year as invitees.  Their political motivations apart, all of them share a grievance that the United States and its allies abused their dominance in global trade and finance institutions and monopoly in inter-bank payment settlement mechanisms. The ideas floated last week at the 16th annual Brics conference intend to challenge the primacy of the US dollar in which most international payments are settled and reserves held. 

At Kazan, some leaders suggested a deviation from the ‘most favoured nation’ treatment that each World Trade Organization (WTO) member gives to every other. The idea seemed to be to accord ‘more favoured nation’ treatment to other Brics member countries by offering them lower tariffs and fewer non-tariff barriers in a bid to incentivise more trade with them without having a formal free or preferential or regional trade agreement. The suggestion is unlikely to get very far because  China dominates the Brics grouping with its GDP as well as trade more than the GDP and trade of all other Brics member countries put together, and countries like India are wary of cheaper imports of goods from China seriously harming their domestic producers. 

On payment settlements in national currencies, Russia and Iran, the main targets of economic sanctions from the United States and its allies, have had some success in trading with UAE and China. However, as India discovered, the mechanism for settlement of trade transactions in non-convertible rupees hasn’t succeeded because the rupee balances 

cannot be used to trade with other countries. 

Developing an alternative to the present SWIFT (Society for World Wide Interbank Financial Telecommunications), a secure messaging network that allows financial institutions to send and receive information and international payments, may not be difficult but getting all the banks to get on board will be quite a challenge.  

The US dollar has evolved over several decades as a major currency in settlement of international transactions because, amongst other reasons, most innovations in financial markets have originated in the United States and it is the speculative transactions that account for more than 90 per cent of the global transactions in currencies with trade in goods and services, capital account transactions and private remittances accounting for the rest. So, it is difficult to see a new currency gain much acceptance, except for trade and sundry transactions between some countries.  

Hopefully, the Brics’s demand to reform the present financial system and global institutions and attempts to develop different payment mechanisms will get suitable support.  

Email : tncrajagopalan@gmail.com