The idea of establishing a multi-currency financial order, which reduces the authority of the U.S. dollar and euro in global transactions, has been unfolding within BRICS for some time. Taking this idea forward, the Ufa summit in Russia, on 8 and 9 July, 2015, will create a currency pool under the Contingent Reserve Arrangement (CRA) and officially launch BRICS’s New Development Bank (NDB).
The critical idea behind the NDB and CRA is to emerge from the shadow of Western financial clout and have direct transactions in local currencies. This also allows emerging economies to search for other avenues for financial loans and aids beyond the old troika of International Monetary Fund, Asian Development Bank, and the World Bank; besides generating a currency order that will be friendly to the developing world.
Jagannath Panda A broader balance of power will hopefully emerge amongst China, Russia and the U.S. Although the new order will originate in BRICS, the main gainer will be China, which will be the central driver and may finally see the yuan (basic unit of the Renminbi/RMB) emerge stronger. This is because Beijing is the biggest economy in the BRICS forum, and second, China’s bilateral understanding with Moscow has grown following Western sanctions after the Ukraine affair.
The NDB has an authorised opening capital of U.S.$100 billion, with the founding members sharing the subscribed opening capital of $50 billion equally. The proposed CRA has an opening capacity of $100 billion, which will be based on currency swap among member countries. The CRA is primarily intended as a buffer to overcome short-term liquidity pressure and meet unexpected risks or balance of payment burdens.
With the NDB headquartered in Shanghai, the yuan will have considerable influence on the bank’s daily transactions. Since the yuan is not a convertible currency, it is not in the IMF’s special drawing rights or SDR basket, as are the dollar, euro, yen and pound. To accelerate the process of convertibility, China has become flexible in its domestic approach and is giving emphasis to cross-border capital and orderly financial dealings. The yuan has considerably improved its standing as an international trading currency, reducing the influence of the U.S. dollar significantly in the last few years. Internationalising the yuan is part of the foreign policy priorities under President Xi Jinping’s leadership. China’s currency swap agreement with about 21 countries helps it push the yuan’s image globally.
BRICS can help the yuan emerge as this alternative in a few different ways. First, promoting the yuan for direct conversion among emerging markets weakens the supremacy of the U.S. dollar. Second, BRICS’ geographical spread can facilitate the promotion of the yuan as an inter-continental currency. Third, if China brings other BRICS members on board, it can counter Western dominance of the IMF and other financial bodies. And finally, BRICS helps China in countering Western allegations that the yuan is undervalued.
Significance of summit In this context, the Ufa summit assumes special significance. It comes two months after President Xi’s visit to Russia in May, where the two countries signed 32 bilateral agreements. Russia is hosting the BRICS leadership summit for a second time. But, markedly, Moscow is simultaneously hosting a BRICS/ Shanghai Cooperation Organisation (SCO) summit along with a coordinated meeting of leaders with the Russian-backed Eurasian Economic Union (EEU). Xi Jinping’s visit had already focussed on greater economic cooperation between China’s Silk Road Economic Belt and EEU. Meanwhile, talks of an SCO Development Bank are reviving between China and Russia, and there may be an announcement regarding this as well in Ufa. As with the NDB, direct conversion in local currencies could be the medium here too, further strengthening the yuan.
Finally, there is the Asian Infrastructure Investment Bank (AIIB) where China is the largest shareholder with a 30.34 per cent stake. India has 8.45 per cent and Russia 6.5 per cent.
To reduce transactions in the U.S. dollar, China and Russia have been managing local currency transactions since 2000. Bilaterally, the two countries began avoiding conversion of mutual payments into dollars and euro, testing the initiative first in the China-Russian border areas. As Western sanctions have made it difficult for Russian banks to operate with the U.S. dollar, and as the yuan-ruble trade platform has simultaneously become more stable and established, it has paved the way for the yuan to gain a foothold as an alternative currency for Russia. Beijing has permitted Russian commercial lenders and companies to invest in Chinese financial boards and organisations with the first line of credit in yuan. Sberbank, Russia’s biggest commercial lender, has teamed up with Export Import Bank of China with the first such credit product.
The new currency order that is likely to be born in Ufa, emerging from the China-Russia-U.S. triangular complexity, is certain to be averse to American interests. Given, however, the existing supremacy of the U.S. dollar, any new order may not necessarily be a full alternative but just a beginning in that direction.
(Jagannath Panda is a Research Fellow and Centre Coordinator for East Asia at the Institute for Defence Studies and Analyses (IDSA), New Delhi. Email: jppjagannath@gmail.com)
