BRICS Advances Towards Dollar-Free Payment System

The BRICS nations have intensified efforts to reduce reliance on the US dollar in global finance. The 2024 Kazan Summit marked a milestone with the launch of a BRICS banknote and progress on BRICS Pay, a cross-border payment system designed to bypass Western-controlled networks like SWIFT. This move reflects a strategic push for financial sovereignty and resilience against sanctions.

Historical Steps Towards Financial Independence

Since 2014, BRICS has steadily built institutions to challenge dollar dominance. The New Development Bank and Contingent Reserve Arrangement were early initiatives to support developing countries financially. Following Western sanctions on Russia in 2015, BRICS members began promoting trade in their own currencies. By 2017, they agreed on currency swaps and local currency settlements to deepen cooperation.

BRICS Cross-Border Payments Initiative (BRICS Pay)

BRICS Pay aims to create a payment system independent of SWIFT, which is controlled by G-10 central banks. The system would facilitate direct currency transactions within BRICS, reducing exposure to US sanctions. A prototype was demonstrated in Moscow in October 2024, signalling tangible progress. This platform seeks to integrate existing national payment infrastructures for seamless cross-border payments.

National Payment Systems and Interoperability

Each BRICS country has developed strong domestic payment systems. Russia’s SPFS, China’s CIPS, India’s UPI, and Brazil’s Pix are technologically advanced platforms. The challenge lies in making these systems interoperable to form a unified BRICS network. China’s CIPS currently connects over 120 countries, but India’s UPI is yet to be fully integrated within BRICS. Brazil’s Pix has regional reach but limited global presence.

Political and Economic Challenges

The idea of a single BRICS currency remains unlikely. National interests and ambitions to promote individual currencies complicate coordination. China’s push for the RMB as a global currency is stronger than others’ efforts. Macroeconomic alignment, required for a common currency, is difficult given diverse economic conditions. The Euro’s complex evolution offers lessons on these challenges.

Geopolitical Implications

The inclusion of Iran in BRICS in 2024 puts stress on the group’s stance against Western sanctions. The unveiling of a BRICS banknote drew sharp criticism from former US President Donald Trump, who threatened severe trade penalties. Such tensions may accelerate BRICS members’ resolve to establish alternative financial systems, enhancing their economic independence and geopolitical influence.

Future Prospects

BRICS Pay is poised to become a key tool for financial de-dollarisation. Success depends on harmonising national systems and overcoming political divergences. The project could reshape global finance by providing an alternative to Western-controlled payment networks. However, balancing national ambitions with collective goals remains a critical hurdle.

Questions for UPSC:

1. Critically analyse the significance of financial sovereignty for emerging economies in the context of global sanctions and dollar dominance.
2. Explain the challenges and benefits of creating a common currency among diverse economies, with suitable examples from the Eurozone and BRICS.
3. What are the implications of alternative payment systems like BRICS Pay for the current international financial architecture? Discuss with examples.
4. With suitable examples, comment on how geopolitical tensions influence economic alliances and financial cooperation among developing countries.

Answer Hints:

1. Critically analyse the significance of financial sovereignty for emerging economies in the context of global sanctions and dollar dominance.

1. Financial sovereignty reduces dependency on the US dollar and Western-controlled systems like SWIFT, minimizing vulnerability to sanctions.
2. Enables emerging economies to conduct trade and financial transactions in their own currencies, enhancing economic autonomy.
3. Helps circumvent geopolitical pressures and economic coercion, as seen in Russia and Iran’s experience with sanctions.
4. Promotes regional financial integration and cooperation among developing countries through initiatives like BRICS Pay.
5. Fosters resilience in global financial crises by diversifying away from dollar-based instruments and networks.
6. Challenges include building alternative infrastructure, interoperability, and overcoming domestic political-economic interests.

2. Explain the challenges and benefits of creating a common currency among diverse economies, with suitable examples from the Eurozone and BRICS.

1. Benefits include reduced transaction costs, enhanced trade integration, and monetary policy coordination (Eurozone example).
2. Challenges involve aligning macroeconomic policies, fiscal discipline, and political will across diverse economies.
3. Eurozone’s experience shows risks of asymmetric shocks and lack of fiscal union causing crises (e.g., Greece debt crisis).
4. BRICS face greater diversity in economic size, development, political systems, and currency ambitions (e.g., China’s RMB vs others).
5. National interests and sovereignty concerns hinder agreement on a single currency or monetary union in BRICS.
6. Successful common currency requires strong institutional frameworks and shared economic goals, currently absent in BRICS.

3. What are the implications of alternative payment systems like BRICS Pay for the current international financial architecture? Discuss with examples.

1. Alternative systems reduce reliance on SWIFT, limiting Western dominance and control over global finance.
2. Enhance financial sovereignty and reduce exposure to sanctions for member countries (e.g., Russia’s SPFS, China’s CIPS).
3. Facilitate direct currency settlements, lowering transaction costs and increasing efficiency in cross-border trade.
4. May fragment global financial networks but also promote multipolarity in international finance.
5. Could encourage other regional blocs to develop similar systems, challenging dollar hegemony.
6. Interoperability and political coordination remain challenges to fully replace existing systems.

4. With suitable examples, comment on how geopolitical tensions influence economic alliances and financial cooperation among developing countries.

1. Sanctions and geopolitical conflicts push countries to form alliances to bypass Western restrictions (e.g., BRICS including Iran, Russia).
2. Economic cooperation becomes a tool for political solidarity and strategic autonomy against dominant powers.
3. Geopolitical rivalry (e.g., US-China tensions) accelerates development of alternative financial infrastructures like BRICS Pay.
4. However, geopolitical differences within alliances (e.g., competing ambitions among BRICS members) can limit cooperation.
5. Examples include Western sanctions on Russia prompting BRICS to deepen currency cooperation and financial integration.
6. Geopolitical tensions can both unify and divide developing countries, shaping the scope and effectiveness of economic alliances.