BRICS and the new financial architecture
Jennifer Montoya[1] , Carlos Madrid[2] , OBELA[3]
In October 2008, following the instability and uncertainty caused by the U.S. financial crisis, the central banks of Brazil and Argentina signed a payment agreement in local currency. This was later extended to Mercosur countries. Since then, this mechanism has been replicated and extended by the BRICS. This article will analyze the alternatives that have arisen due to the instability of the dollar and the sanctions imposed by the US on 26 countries. It is an alternative to using the dollar as a means of payment and as a reserve unit.
In 2008, Argentina and Brazil set the standard when they agreed to trade in local currency. The advantages were that it would allow them to fix the export price in their currency, they would avoid being exposed to variations in exchange rates against the dollar, and they would have the certainty of receiving exactly the negotiated value.
Starting in 2009, China launched a pilot program for cross-border trade in Renminbi (RMB), and the program included 6 companies. Subsequently, Egypt, Pakistan, Nigeria, Yemen, Iraq, and Turkey joined the program.
With the increase of US sanctions on other nations, the Chinese currency became an alternative to the dollar. Iran, a country sanctioned by the US since 1979, began trading its oil in 2012 through Chinese banks in RMB, following the strengthening of sanctions. According to OFAC, sanctions are defined as restrictions on assets that restrict trade or financial activities to achieve foreign policy objectives.
Similarly, in 2017, Washington imposed financial sanctions on Venezuela, so it began to quote its oil in yuan as an alternative way to evade Trump's sanctions by using the petroyuan market. It was only in 2014 that formally talked about reducing trade with dollars at the BRICS summit in Ufa, Russia, as a result of the sanctions imposed by the US on the Kremlin after the occupation of Crimea.
At the BRICS summit in July 2014, in Fortaleza, Brazil, the heads of state signed the treaty establishing the New Development Bank and the Contingency Reserve Arrangement, as an alternative to the World Bank and the IMF, respectively. The fund was formed with $100 MMUSD, of which China contributed $41,000 MMUSD, Russia, Brazil, and India, $18 MMUSD, and South Africa the $5 MMUSD, with the use of the schemes developed for the Bank of the South.
Russia, fearing being excluded from the international financial system, promoted in the same year the development of the Russian digital payment system, MIR (peace in Russian), supported by its central bank. Subsequently, with the sanctions resulting from the special operation in Ukraine in 2022, the MIR system took hold. The system has enabled Russian citizens with Visa and Mastercard to access their accounts at a Russian bank via the internet or ATMs, despite the fact that these companies had suspended their services in the country.
MIR allows its users to pay for goods and services, withdraw money, and transfer funds through the central bank's own debit cards. The system since 2016, processed domestic payments and transfers on all cards issued by Russian banks.
Then, in 2015, the People's Bank of China worked on an international payment medium parallel to SWIFT called the Cross-Border Interbank Payment System (CIPS). This allows cross-border transactions in yuan, rather than through SWIFT controlled by Western countries.
In 2016, India launched its real-time instant payment system, UPI, analogous to MIR. The mechanism facilitates transactions between people and businesses, its main feature is the use of QR codes, which users generate or scan to send and receive money through an application.
In 2021, the mBridge project initiative was launched by the Bank for International Settlements in conjunction with the central banks of China, Thailand, the United Arab Emirates, and Hong Kong. The project consists of a platform for cross-border payments between central banks, which will be able to create their respective digital assets issued by the central bank (multi-CBDC). The project is in the MVP (test) stage as of October 2024.
In 2024, at the Kazan Summit, a BRICS cross-border payment system, called BRICS Pay, was proposed. This will directly connect commercial banks through their central banks. It stands out mainly because international trade will be in local currencies, and it uses UPI technology for cross-border payments by using QR codes in transactions.
In conclusion, the BRICS, together with other countries, have created their financial architecture through local currency trading, new institutions, and digital platforms, coordinated through central banks. This allows evading Washington's trade sanctions and facilitates the development of an international financial architecture anchored in the countries of the Global South and highlights the possible loss of importance of the dollar as a means of payment.
