Brics+ Unit: Is it a bridge too far amid shifting global dynamics?

With global economic shifts underway, India should keep its options open on emerging alternatives to the dollar

One has been writing on Chinese financial and currency-related issues regularly in the columns of this newspaper. There are notable developments taking place in China’s bid to promote alternatives to the US dollar-dominated international financial and currency systems. This is proceeding on parallel tracks. China has been a pioneer in developing and deploying a central bank digital currency (CBDC) domestically and in promoting cross-border digital payment systems, rivalling the dominant and entrenched Swift (Society for Worldwide Inter-Bank Financial Telecommunications) system.

 

The early track, now reaching maturity, is the mBridge project, a digital cross-border payment arrangement using CBDCs, initially promoted by the central banks of China, Thailand, Hong Kong (through its Monetary Authority), and the United Arab Emirates (UAE), and supported by the Bank for International Settlements (BIS). The mBridge project has several partner central banks. The Reserve Bank of India and the US Federal Reserve are among them. It was further strengthened by Saudi Arabia joining as a full member in June 2024. The BIS is no longer part of the project, claiming that with the pilot phase of the project ending successfully, it was no longer required to extend support. However, there is widespread speculation that the US pressured the BIS to abandon the project, fearing it could challenge the international role of the US dollar.

 

More intriguingly, the mBridge has been followed by a similar initiative within the Brics+ grouping (now comprising the original members Brazil, Russia, India, China, and South Africa, along with recent entrants Iran, the UAE, Saudi Arabia, Egypt, Ethiopia, Venezuela, and Indonesia). The Brics Bridge proposal has not found mention in the official documents and declarations of the various Brics+ meetings, including the recent summit at Kazan (October 2024). It was first mentioned in a Russian readout of the first meeting of the Brics+  finance ministers and central bank governors in Sao Paulo in February 2024. Since then, it has been discussed somewhat coyly in informal and side meetings of the grouping. An initiative related to this is the Brics Clear, which has been mentioned in official documents. It relates to the setting up of a payment and clearing system among Brics+ countries “on a voluntary basis.”

 

The link between mBridge and Brics+ Bridge is obvious — one will likely fold into the other over time.

 

These developments should be linked to the steady growth of the petro-yuan market at the Shanghai International Energy Exchange, established in 2018. In 1974, after the oil crisis, Saudi Arabia and the US reached an agreement under which Saudi Arabia agreed to denominate its oil trade in US dollars and reinvest its dollar holdings in US treasuries, banks, and financial entities.

 

This led to the birth of the petro-dollar market, which greatly enhanced the role of the US dollar as both a reserve and medium of exchange currency. Other Opec members soon followed the Saudi example. Recently Saudi Arabia has begun to settle its oil account in currencies other than the US dollar. The UAE has followed suit. 

 

The nascent petro-yuan market has received a boost. India itself has bought oil from the UAE in rupees. The Shanghai International Energy Exchange now handles 10.5 per cent of the global volume of oil trade. Oil futures quoted at Shanghai now account for 14.4 per cent of the global volume, with Brent accounting for 29 per cent, and West Texas Intermediate 56 per cent.

 

Against the backdrop of Saudi efforts to diversify away from the petro-dollar, its membership of the mBridge and of the Brics+ begins to make sense. The Brics Bridge initiative will gain traction with Saudi participation and the decline of the petro-dollar market.

 

What about the proposal to launch a Brics currency? At the Kazan Brics summit, the president of the Brics Development Bank, known as the New Development Bank (NDB), said that an agreement in principle had been reached to use a new settlement currency called the “Unit”. This would be backed by 40 per cent gold and 60 per cent local currencies of member countries. The gold in the basket of currencies underpinning the Unit, would be minted in the member countries. It would not figure in the balance sheets of the participating central banks, but taken on the Brics Bridge ledger and held in an escrow account. This will stay within national borders and would not need to be sent to a central authority.

 

This proposal responds to concerns that, due to its sheer economic weight, the Chinese yuan could replace the US dollar, replicating its downsides. The link with gold is important as it adds credibility to the Unit.  Central banks across the world are buying gold to augment their reserves. They are repatriating their gold bullion currently held in custody abroad. India, for instance, has repatriated the $800 billion it had kept in the custody of the Bank of England. This trend reflects growing doubts about the US dollar and fears of foreign reserves being blocked for political reasons. This would not happen with the Unit because the basket of local currencies and gold will remain within national borders. While this arrangement sounds very innovative, it has not yet found reference in official Brics+ documents. This reflects the caution among several Brics+ countries that are also worried over  Donald Trump’s threats to sanction countries attempting to downsize the role of the dollar. However, the disruptions in the US economy and the weaponisation of trade by Mr Trump may do more to hasten the decline of the dollar than what the Brics may be able to achieve.

 

While India has been participating in the discussions on Brics+ currency and finance initiatives, it has remained cautious. In a recent Chatham House conversation, External Affairs Minister S Jaishankar declared that India “has absolutely no interest in undermining the US dollar and views it as a source of international economic stability.”

 

But what if the US itself is responsible for undermining the dollar just as it is wrecking other pillars of the global economy?

 

India would do well to keep its options open on the alternatives being developed or it may find itself even more marginalised from the global economy than it is already. Betting on the US and its currency may prove to be costly.

The author is a former foreign secretary