One of the pertinent directions of work for the BRICS countries within their union is transitioning to settlements in national currencies. However, despite the increasing attention paid to this direction in recent times, countries face several challenges on the path to creating new financial mechanisms, as outlined by Ivan Timofeev, Director of the Russian International Affairs Council (RIAC).
There has been considerable emphasis on transitioning to settlements in national currencies lately. During the BRICS summit last year, there was a declaration regarding the necessity of preparing a report on payment mechanisms by the BRICS Payment Task Force (BPTF), including those based on cross-border payment systems. Furthermore, finance ministers and central bank governors of BRICS countries have been tasked with exploring the enhancement of correspondent banking relationships for settlements in national currencies by the next summit, Timofeev recalls.
Russia is one of the most interested countries in transitioning to settlements in national currencies due to the volume of sanctions imposed on it. Similarly, trading in national currencies within BRICS is advantageous to Iran for the same reason. In the long term, China may also be among the primary beneficiaries of diversifying global finance due to ongoing economic confrontation with the United States. Other BRICS countries are currently closely integrated into the existing U.S.-centric payment system. These include India, Brazil, South Africa, as well as new member states within the grouping, such as Egypt, Ethiopia, and the UAE.
Nevertheless, there is interest in addressing this issue. However, transitioning to such settlements is a lengthy and complex process. Several challenges are identified by experts along this path.
The first challenge is associated with the low degree of institutionalization within BRICS. The union lacks permanently functioning bodies such as a secretariat and other institutions.
"Any deep integration sooner or later requires an institutional base. The question is whether BRICS is ready for such institutionalization today. In the field of financial settlements, it is more likely not than yes," Timofeev believes.
The second challenge is the deep integration of the economies of some BRICS countries into U.S.-centric financial settlements, and breaking away from the dollar would be extremely painful for them. The New Development Bank of BRICS, for instance, utilizes the U.S. dollar for settlements, which jeopardizes transactions with countries like Russia or Iran, subjecting it to secondary sanctions from the U.S.
Another challenge is the relationships between member countries within the union. "Any deep integration of financial settlements requires a high level of trust among member countries. However, there are contradictions between them that hinder the technical implementation of large-scale projects in the field of settlements," — writes the expert.
Finally, an imbalance and fragmentation in the balance of payments during settlements in national currencies pose a challenge. One example of such imbalance is the surplus of Indian rupees in Russia due to Russian exports exceeding Indian imports.
Source: Valdai Club
