Yves here. I’m overdue for a post on the latest BRICS and why they like to underestimate the obstacles that member countries need to overcome for BRICS to work effectively….just like the Global South UN.
Let’s count one. Multipolarity is taken to mean greater national sovereignty in states subject to greater US/EU interference/”rules-based order”. But effective international organizations require a certain degree of sovereignty, such as dispute resolution bodies (such as courts or arbitration panels) that sit above national states and can issue decisions that are binding on participants. Look at how the UN looks like a joke because ICC resolutions are ignored by non-ICC states like Mongolia (admittedly one political stunt against Putin, so the ICC asked for its authority to be challenged). Similarly, does anyone expect any action as a result when the ICJ finds that Israel has engaged in genocide and refuses to cease and desist? Granted, this would pave the way for UN sanctions, but what if the US and other EU states might defy it?
The post below provides some more practical reviews on the cheapest dollar withdrawal programs. But here, the BRICS developers have reduced themselves to the extremes they need to achieve in order to be free from the risks of American sanctions. The biggie engages in bilateral trading using currency pairs of trading partners. This is messy as merchants and their banks (and central banks) have to trade in so many currencies. But this is a much more attainable goal than a new monetary regime.
The main obstacle in the medium term is that some countries will always have trade deficits with other countries (think Turkiye v. Russia) and the exporting country will not be happy with all the (probably declining) revenue it accumulates from that trade. partner. That’s why Keynes proposed bancor, as a way to force countries in the long run to conduct a well-balanced trade.
Now it is admitted, in China, as everyone knows that it is a major exporter to the US, even if it has started to stop the double payment systems in 2015, the threat of strong US sanctions has made the Chinese banks to reduce the Russian transactions. August. Note, the main method was to improve the payment, as in finding cutouts. This creates friction and increases costs, but for all but the small fry it seems to be a deal-breaker in the end. From Reuters:
Some Russian companies are facing increasing delays and rising costs in payments with their trading partners in China, leaving transactions worth tens of billions of yuan in limbo….
Russian companies and officials have for months reported delays in transactions after Chinese banks stepped up compliance following Western threats of a second round of sanctions for dealing with Russia….
China’s state-owned banks are closing transactions with Russia “en masse” and billions of yuan in payments are being held back…
China is Russia’s largest trading partner, accounting for a third of Russia’s foreign trade last year and providing items such as key industrial machinery and consumer goods that help Russia withstand Western sanctions. It also provides a lucrative market for many of the Russian exports that China relies on, from oil and gas to agricultural products.
One viable solution was to buy gold, take it to Hong Kong and sell it there, depositing the cash into a local bank account, the person said.
Sources told Reuters that some Russian businesses were using intermediary chains in third countries to manage their transactions and circumvent compliance checks run by Chinese banks. As a result, transaction processing fees have risen to 6% of transaction fees, from close to zero previously, they said.
This also suggests that the US advantage, at least as far as China is concerned, comes less from the dollar but also from China’s desire to continue exporting more to the US. China needs to keep banking channels open to the US for payments.
Written by David P Goldman. First published in Asia Times; Cross posted to InfoBRICS
Russian President Vladimir Putin has disappointed anti-colonialists and Western alarmists by admitting that members of the bloc “have not and will not” build a payment system to challenge the world banking system based on the US dollar.
The leaders of the two economic giants who were present at the BRICS summit, Xi Jinping of China and Narendra Modi of India, did not mention other payment plans in their speeches.
The technical requirements of other payment systems are not a problem. The SWIFT system that manages other banks’ payments in dollars and other major Western currencies simply transmits secure messages. The challenge, rather, is an economic one: US demand for imports fuels much of the economic growth in the Global South. China’s exports to the US amount to only 2.3% of its GDP, but almost half of its increase in exports to the Global South from 2020 depends on re-exports to the United States. While China’s exports to the Global South more than doubled from US$60 billion per month to $140 billion per month, US imports from the Global South increased from about US$60 billion per month to $100 billion per month in and four years ago.
Dependence on the US market varies greatly across developing countries. Vietnam and Mexico, two favorite destinations for so-called “friendly fishing,” that is, transferring production away from China to friendly countries, registered a large increase in exports to the US as a share of GDP.
Vietnam’s exports to the US in 2023 were about 27% of the country’s GDP, compared to only 10% in 2020, while US exports to Mexico rose to 27% of GDP in 2023 from 20% in 2010. Singapore and Malaysia, in contrast, showed a slight increase in US exports as a share of GDP. Indonesia and Brazil export less to the United States.
Some Asian countries, especially Malaysia and Thailand, export more than 60% of their GDP, mainly to other Asian countries. Brazil, Indonesia and China are less dependent on other countries.
Today, China exports only 19 percent of its GDP compared to 27 percent in 2010, meaning that a growing portion of GDP growth depends on domestic consumption and investment.
What makes the United States so important to the economies of the Global South is its huge current account deficit. The table below ranks the current account surpluses and deficits of the 20 largest economies from largest deficit to largest surplus. With a current account deficit of $80 billion a month, or $1 trillion a year, the US appetite for excess imports over exports is the least of the rest of the world.
China is the largest or second largest economy in the world, depending on whether we calculate GDP in US dollars or adjust for purchasing power parity, but China’s imports from the South have been stagnant for three years.
China will not replace America’s huge import demand yet, if Beijing focuses on high-tech investment rather than consumer demand. In the end, that leaves the Global South heavily dependent on the US.
Forecasting current trends in the future suggests a continued increase in consumer spending in the Global South, especially in East Asia, and the emergence of stronger domestic markets and less dependence on imports.
Below is a chart published by the Brookings Institution think tank last year, which shows that the total consumer market in East Asia will surpass the US consumer market by 2028.
Developing countries, however, do not pay their debts in the balance. Organizing the payment of goods in international trade is a trivial matter. The biggest challenge is financing the long-term deficit.
India, for example, used to run an annual trade deficit with Russia of less than $3 billion. Reduced Russian oil sales to India after the start of the war in Ukraine raised this to more than $60 billion.
What will Russia do with an Indian rupee worth 60 billion dollars? It would be far preferable to have another currency, for example, the UAE dirham, which can be used to buy goods in third markets.
The Global South does not yet have the financial markets or currency stability to convince a country with a trade surplus to simply hold the deficit country’s goods in exchange for goods.
That’s what the United States does best: Its $18 trillion negative foreign exchange position is consistent with the past 30 years of current account deficits.
America sells its goods to foreigners. The Global South does not have commodities, or at least not as much as the rest of the world would like it to have.
That helps to explain why the final announcement of the BRICS Summit withdrew the issue of payment systems from feasibility studies:
We reiterate our commitment to developing financial cooperation within the BRICS. We recognize the widespread benefits of fast, cost-effective, efficient, transparent, secure and inclusive payment tools built on the principle of reducing trade barriers and non-discriminatory access.
We welcome the use of local currencies in financial transactions between the BRICS countries and their trading partners. We encourage the strengthening of intra-BRICS banking networks and the enabling of payments in local currencies in accordance with the BRICS Cross-Border Payments Initiative (BCBPI), which is voluntary and non-binding, and we look forward to further discussions in this area, including the BRICS payment function. Force.
BRICS central banks do not hold each other’s currencies as reserve assets, with limited exceptions. Just 2.3 percent of the world’s major banks’ reserves are held in China’s RMB, up from 1.1 percent in 2016 but down from 2.8 percent in 2022. Most of them buy gold. If the myth of US currency is, “In God We Trust,” gold says, “Trust no man.”
Major changes across the Global South will be needed to make their currencies more attractive instruments—transparency and risk management of financial markets, development of the local middle class, infrastructure, and education.
Much of this is happening in stages in many developing countries but progress is slow and uneven. We can now see situations where the Global South may declare independence under the dollar system. But we are not there yet and will not be for years under any circumstances that may appear.
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