Another Brick
BRICS hustle against US-led Payment System.
“First BRICS Pay demo purchase” from the BRICS pay website. (Youtube) (Though note that this was five years ago).
Once again, China and Russia try to hustle against the West. It sounds all big and bad, but stick your hand out and it's just a lot of noise for not much rain.
In July, BRICS unveiled a new payment system designed to rival the Western-based SWIFT network, which makes easier international financial transactions by transmitting payment instructions between banks. A kind of messenger between banks, really.
Following its invasion of Ukraine in 2022, Russia faced severe sanctions. Banks were blocked, foreign assets frozen, and Russia was expelled from SWIFT, cutting off access to a global network of nearly 11,000 banks.
While Russia has managed to withstand this spanking, it has doubled down on its efforts to build alternative payment systems to rival those in the West. The proposed system would allow payments in the national currencies of BRICS countries, with BRICS Plus plans to extend this service to 186 countries.
Sounds like a big thing, right? Well, here’s where it starts to get a little wobbly.
1. Disunity
BRICS is a loose alliance of countries that oppose US dominance over the global financial system. Originally coined by a Goldman Sachs economist in 2001 as a marketing tool to sell bonds. So fertile was the idea that it grew legs and walked off on its own.
It started with the formation of an informal association in 2009, including Brazil, Russia, India, and China, with South Africa joining later. Together they represent more than 40% of the world’s population and a quarter of the global economy. Their activities include meeting up on a regular basis to discuss economic development, creating new financial institutions, and how to promote their own influence in the world. They basically chill at a barbecue, scheming to run the whole world.
Since they started this whole thing, their squad's been growing like a group chat you can't escape. Earlier this year, they added five new members—Ethiopia, Egypt, Iran, Saudi Arabia, and the UAE. And let me tell you, the barbecue is running out of space.
The unity of the many is a fragile thing.
For one, India and China are far from best buddies. They are strategic rivals. Ongoing tensions at the Sino-Indian border, which have led to fatal skirmishes in recent years, have intensified as India strengthens its political and economic ties with the US and other Western states.
In the context of BRICS, India and Brazil has been cautious in allowing China's attempts to use the organisation for its own designs. As a result, BRICS doesn’t have hard edges.
Noah Smith, of Substack fame, undid the whole BRICS thing in a post some time ago. (I highly recommend this and that). Here is a taste of what he had to say:
In 2009 [the BRICS] started meeting regularly and trying to think about how to create their own economic institutions — a New Development Bank to compete with the World Bank, a Contingent Reserve Arrangement to lend each other money in times of currency crisis (something the IMF usually does), a system of submarine fiber-optic cables, and so on.
This, too, did not end up working out. The New Development Bank has disbursed almost no loan money at all, causing Jim O’Neill to declare it a disappointment. When Russia invaded Ukraine in 2022, the NDB cut ties with it. The Contingent Reserve Arrangement has done basically nothing, and the BRICS Cable never happened.
Source: Noah Smith.
Second, aside from their shared opposition to US hegemony, there is minimal unity among the members. This lack of cohesion was evident in the vague objectives they stated for their “grand plans for 2024”
Long-Leaving Initiatives: Ensuring that the impacts of their efforts resonate through time.
…
Technology and Innovation: Charting the course of future technology trends and breakthroughs.
These sound like the mission statements for a company that manufactures seatbelts for old man rocking chairs.
Still, my personal favourite remains:
Charitable Endeavors: Displaying a deep commitment to giving back to society.
The 2023 Calendar Unveiled: From Dubai to St. Tropez
I’m not yet convinced that these are the convictions which will bring this rag-tag band to disrupt the world’s payment systems.
2. China
The other big issue is China's sheer size. It puts off its own allies who are reluctant to let it take over the alternatives they have built together.
China is the most powerful of the BRICS states, similar to how the U.S. dominates NATO. And it’s not just that China is aggressive in its diplomacy. It’s economy is so enormous that even the the US has been starting to feel a tad insecure. And if you want to know the pecking order at the barbecue, this 2021 chart gives you a good idea.
Among the BRICS, this shows with the who’s-got-the-biggest-stick situation. At last year’s annual meeting in South Africa, President Xi Jinping of China was welcomed with great fanfare by the host's President, who declared, "The people of South Africa salute you, President Xi Jinping." In contrast, India's Prime Minister Modi was greeted by the deputy.
This rivalry has significantly limited China’s influence in favour of the West. Many BRICS members fear that China aims to use the organisation to establish the dominance of its own currency, the yuan. And China’s intentions are not ambiguous: the leadership of the US dollar would be replaced, not eliminated, and we’ll just now be leaning on China instead.
These days, Russia and China are so close, it’s like Russia can’t tie its shoes without checking with China first. This year, the Governor of the Central Bank of Russia reported a significant rise in the use of the Chinese yuan in Russia's exports, increasing 86-fold over the past two years to reach 34.5%. More critically, China now accounts for approximately 90% of Russia's imports of high-priority goods, including electronic components, radars, and sensors.
A lot of the BRICS’ members are thinking that if this payment system actually takes off, it’s just going make China even stronger. So, they’re probably gonna do whatever they can to keep that from happening, even if it means messing up the whole thing.
3. Clearing House
It’s not just the messenger, there’s also the clearinghouse to account for.
Once a transaction message is received and validated, these institutions settle payments between banks throughout the day. The U.S. CHIPS system remains the dominant player in this, reinforcing the dollar's leading position. And without controlling this, the BRICS payment system will struggle to grow big.
China’s been messing about since 2015, trying to whip up their own financial network, resulting in the creation of the Cross-Border International Payment System (CIPS). This network now connects 1,300 institutions across 100 countries. However, its challenge to the Western financial order remains limited. Yeung and Goh (2022) estimate that 80 percent of payments through CIPS still rely on SWIFT messaging. You have to check out this take from the GOAT himself, Barry Eichengreen:
For the moment, it is hard to argue that CIPS constitutes a serious challenge to Western clearinghouses. CHIPS has nearly 10 times as many participants: Whereas CHIPS is used by around 11,000 financial firms worldwide, CIPS is used by just over 1,300. CHIPS also processes 40 times as many transactions: In March 2022, daily volume on CIPS was 385 billion yuan ($45.6 billion), compared to $1.8 trillion on CHIPS (Yeung and Goh 2022). [Italics his]
Source: CSIS.
I didn’t confirm if they’re using this clearing house for BRICS, but the Chinese case does shows how hard it’s gonna be for this new system to get big.
4. Conclusion
Clearly, there still remains a clear advantage in favour of the West’s payment systems. But the imposition of sanctions against Russia has accelerated the growth of parallel systems that seek to dethrone US financial dominance. This BRICS payment system is just another one of these.
There are internal constraints which will limit the success of this new projects. In addition to the lack of unity among the BRICS, there remains a deep suspicion of China. This will undermine the system’s success, just like the dominant US clearinghouse and other elements of western pressure.
But anyways, this October, the BRICS boys are firing up the barbecue in the Republic of Tatarstan—because why not plan global strategy with some pork snags on the side? Just check for thunder first.
In Other Good News
Fear that Venezuela’s Maduro might be able to survive the electoral uprising. (The Guardian)
Political tensions rise in Germany after knife attack claimed by Islamic State (Politico EU)
French Synagogue attacked in suspected terror attack (France 24)
Founder of Telegram arrested at French airport (BBC)
Biggest exchange of fire between Israel and Hezbollah in nearly 20 years (FT)