BRICS Bridge.. How does Putin plan to defeat the dollar? | economy

During the BRICS summit, which begins today, Tuesday, Russian President Vladimir Putin hopes to build a new global system for financial payments to attack the United States’ hegemony over global finance and protect Russia and its friends from sanctions, according to a report by the British newspaper The Economist.

“Everyone realizes that anyone may face American or other Western sanctions,” Russian Foreign Minister Sergei Lavrov said in a press conference last month, adding that the BRICS payments system would allow “economic operations without relying on those who decided to convert dollars and euros into… weapon”.

This system, which Russia calls the “BRICS Bridge,” is scheduled to be built within a year and will allow countries to conduct cross-border settlement using digital platforms managed by their central banks, according to The Economist.

Controversially, this system may borrow concepts from a different project called M-Bridge, which is partly managed by the Bank for International Settlements based in Switzerland, one of the strongholds of the Western-led system.

According to the British newspaper, discussions during the summit will focus on the race to reshape money transfer routes. China has long bet that payment technology would reduce America’s power because it is at the center of global finance (by controlling money transfer systems), and the BRICS plan may provide cheaper and faster transactions, and these benefits may be enough to entice emerging economies, according to the newspaper.

In a sign that the plan has real potential, Western officials fear the planned system is designed to evade sanctions, while some are frustrated about the unintended role played by the Bank for International Settlements, a Swiss-based organization known as the central bank for central banks.

The basis of American hegemony

America’s dominance of the global financial system was the basis of the post-World War II order, and reflects its economic and military weight, but it also reflects the fact that dollar-denominated assets – such as US Treasury bonds – are safe from government confiscation and inflation and are easy to buy and sell, according to the newspaper.

Although central banks have worked to diversify their holdings, including gold, about 58% of foreign exchange reserves are in dollars, and the effects of the dollar network place American banks at the center of global payment systems.

According to the newspaper, sending money around the world is somewhat similar to traveling on a long flight; If there is no direct connection between the departure and arrival airport, passengers will need to change flights (transit), preferably through a crowded hub connected to many other aircraft.

In the world of international payments, the largest center is America, where many of the world’s banks exchange foreign currencies from those who pay in dollars, and then in the currencies in which payments are received.

Given that almost all banks that transact in dollars must do so through a correspondent bank in America, they are able to monitor flows for signs of terrorist financing and evade sanctions, providing America’s leaders with significant power that they were eager to use as an alternative to going to war. The newspaper.

The number of people subject to US sanctions rose by more than 900% (to about 9,400 people) in the two decades until 2021, and America demanded that some foreign banks be separated from SWIFT, a messaging system based in Belgium used by about 11,000 banks in 2000. A country for cross-border money transfer, and in 2018 SWIFT was cut off from Iran.

Tsunami Russia

But this is nothing compared to the ferocity of the financial attack on Russia after the outbreak of war with Ukraine in 2022. The West froze $282 billion in Russian assets held abroad, separated Russian banks from the SWIFT system and prevented them from processing payments through American banks, as Washington threatened. Imposing “secondary sanctions” on banks in other countries that support the Russian war effort, and even European policymakers who support the sanctions were dismayed at the speed with which Visa and MasterCard (two American companies that the eurozone relies on for payments) closed their doors in Russia. retail).

The “tsunami” that struck Russia prompted America’s opponents to accelerate their efforts to move away from the dollar, and it also prompted many other governments to consider their dependence on American financing, and China considers this dependence one of its greatest weaknesses, according to the Economist.

Putin hopes to capitalize on this dissatisfaction with the dollar at the BRICS summit, and for him, creating a new plan is an urgent practical priority, as well as a geopolitical strategy. Now, Russia’s foreign exchange markets deal almost exclusively in the yuan, and because it cannot get enough of the currency. The Chinese had to pay for all their imports, reduced to barter.

This October, Russia agreed to buy tangerines from Pakistan in exchange for chickpeas and lentils, and according to some reports, these pressures on liquidity are increasing.

Putin hopes to make life outside the US system more bearable by controlling some means of money transfer. BRICS officials held a series of meetings before the summit in Kazan, and discussed creating a credit rating agency to rival the main Western agencies that Russia sees as “vulnerable to politicization.” They also considered creating a reinsurance company to avoid Western agencies being barred from reinsuring some tankers carrying Russian oil, and a payments system to replace Visa and MasterCard.

Putin pushed for the creation of a common BRICS currency based on a basket of gold and other non-dollar currencies, but Indian officials have objected to this in recent weeks.

Digital Amol

The newspaper pointed out that the most serious initiative of all is a plan to use digital money backed by paper currencies, which would place central banks – and not correspondent banks that have the ability to access the dollar clearing system in America – as intermediaries in cross-border transactions.

By decentralizing the financial system, the proposal would mean that no country could disconnect from other countries, and since commercial banks would transact through their central banks, they would not need to maintain bilateral relationships with foreign banks, bypassing the network effects of the current correspondent banking system.

According to the Economist, the new BRICS plan, which focuses on digital currencies run by central banks, appears to be at least partly inspired by an experimental payments platform called mBridge, which the Bank for International Settlements developed alongside the central banks of China and Hong Kong. Kong, Thailand, the UAE and Saudi Arabia, in addition to 31 other observer members.

Chinese state media say the new BRICS plan is “likely to build on lessons learned” from the M Bridge project.

The newspaper pointed out that the BRICS group’s foray into the payment networks race reveals the new geopolitical challenges facing multilateral organizations. At the G20 meeting of major economies in 2020, the Bank for International Settlements was entrusted with improving the current system and experimenting with digital currencies based on China’s proposal.

Earlier this year, bank president Augustin Carstens called for “completely new structures” and a “radical rethinking of the financial system.” But with competing goals for different members of the organization, staying above the fray has become more difficult.