The BRICS R5 project: is it feasible?

The creation of a BRICS common currency is one of the key themes that is expected to be discussed at the BRICS 2023 summit, but the issue of the feasibility of this R5 project (all five BRICS national currencies start with the letter R) is still seen as being unresolved. Most recently, the founding father of the BRIC concept Jim O’Neill spoke disparagingly about the possibility of creating a BRICS common currency. And while there are straight-forward ways of introducing the R5 currency first as an accounting unit with no technical difficulties in the implementation of such a project, there still appears to be uncertainty and divergence over how to proceed with the creation of a common currency that is to service international transactions of the BRICS economies. One of the recent proposals advanced by a former Vice President of the BRICS New Development Bank (NDB) serves to fill this void.

In his recent article written for the Brazilian Jornal do Brasil Paulo Nogueira Batista Jr., formerly Vice President of the NDB and an Executive Director for Brazil and a group of economies in the IMF presented a framework that may serve as an important guideline in efforts to design the common BRICS currency[1]. In this article Dr. Paulo Nogueira Batista starts with the observation that the stage of the R5 as an accounting unit that is used to price contracts and international transactions is a relatively easy one that does not require significant resources. One of the few decision points will have to be the determination of the relative weights of the respective national currencies in the R5 currency basket – these shares may be broadly in line with the relative economic weights of the respective BRICS core members: 40% for the Chinese yuan, 25% for the Indian rupee, 15% for the Russian rouble and Brazilian  real and 5% for the South African  rand. This R5 currency basket according to Dr.  Paulo Nogueira Batista can be initially pegged to the SDR basket, with subsequent R5 exchange rate dynamics reflecting the fluctuations in the basket components.    

The really big question is how to proceed from that starting point  to the stage of the R5 currency as a means of payment for cross-border settlements. What Dr.  Paulo Nogueira Batista suggests is that for the R5 to serve that role it does not have to be issued in physical form – it could be digital. And there is no need to replace the national currencies of the BRICS economies with the R5 – it can be created in parallel to the circulation of national currencies. Accordingly, no BRICS Central Bank is needed – all that is needed is a bank to issue R5 that in the first stages could be used for transactions among the BRICS national central banks. According to Dr.  Paulo Nogueira Batista, during these initial stages R5 could perform a savings role as well as a reserve currency function.  

One of the most debated questions concerning the R5 is the possibility of the use of commodities such as gold for backing its value. The logical view coming from the Brazilian expert is that such an approach is unlikely to work partly due to the need to hold rising amounts of gold reserves to back up the increasing issuance of the R5 currency. What may be preferable is an approach to back the currency with bonds issued by the bank that also issues the R5 – the common BRICS currency will be freely converted into these bonds essentially in line with the pattern that is observed currently with the US dollar.

As rightly pointed out by  Dr. Paulo Nogueira Batista the New Development Bank can play a crucial role in the de-dollarization process. One of the possible venues in this respect is more active issuance of bonds and lending in national currencies of BRICS economies. Another track is to support research and conferences on the reform of the international monetary and financial system and the possible creation of the R5 currency. And then, at a later advanced stage, the Bank can start to use the R5 in its lending operations. From my side, I would only add that some of these steps in the direction of de-dollarization and the use of R5 could also be undertaken by the regional development banks, in which BRICS countries are members and with which the NDB is working closely to co-finance projects. The scope of countries using the R5 can then extend also to the regional partners of the core BRICS economies as well.

As for the 2023 BRICS summit,  Dr. Paulo Nogueira Batista expressed the hope that the leaders of BRICS economies ask their finance ministers and the respective think-tanks to explore the possibility of the introduction of a common BRICS currency with the results presented at the 2024 BRICS summit in Russia. He also argues that they could create a group of experts to assess the expediency of the creation of a common BRICS currency. According to Brazilian expert, in such a scenario in 2024 the BRICS could decide on the start of discussions related to the launching of the new currency, with the eventual decision on the creation of the R5 likely taken at the 2025 BRICS summit in Brazil.

Even if the above blue-print is not realized fully in the coming years, the important contribution from Dr.  Paulo Nogueira Batista is that it presents a realistic pathway to launching the new currency and provides further impulse to the debate around the expediency of such a development track for the BRICS. What is “embarrassing” (in the words of Mr. O’Neill) about the BRICS currency is not the discussion that is unfolding in the academic community about the project, but rather the lack of such discussions in the preceding years and the extreme dependency of the world economy on a currency that increasingly rests on a sky-scraping debt load.


Originally published in Modern Diplomacy:

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