The rise in geopolitical risks has notably accentuated the topicality of de-dollarization and the use of national currencies in financial transactions. One of the cases in point was the discussion between China and Saudi Arabia on the possibility of using Chinese Yuan for settlements in lieu of Saudi’s oil deliveries to China. Back in 2017 the Valdai Club advanced the R5 initiative that was meant to bolster financial settlements and transactions in the national currencies of BRICS members.
An extension of this initiative was the R5+ concept that involved the extension of the use of national currencies not only to BRICS members but also to the regional partners in regional integration arrangements and the respective regional development institutions. In the 5 years that passed since the Valdai club introduced the R5 initiative several developments have rendered its implementation more feasible.
As noted in the original Valdai article on the R5 concept, “the “R5 initiative” targets the use of the respective national currencies of BRICS countries – Rouble (Russia), Rand (South Africa), Real (Brazil), Rupee (India) and Renminbi (China) – within the BRICS+ circle and more broadly in the world economy. The elements of such a strategy may include measures to boost trade and investment among BRICS+ (cooperation between the respective RTAs to create more scope for the use of national currencies), cooperation between development institutions in using national currencies to fund investments and long-term projects, creation of common payment card systems and common settlement/payment systems, cooperation in promoting BRICS+ currencies towards reserve currency status”.
Perhaps the most important development throughout the past five years that favours the use of national currencies was the notable rise in the mutual trade amongst the BRICS economies as well as their regional partners. One of the most powerful drivers here is the rise in China’s share of global trade, most notably within the Global South. In Russia’s case there is the record-high level of trade turnover with China in 2021 at nearly 150 bn US dollars after a rise by more than a third compared to 2020. There is also a rising role of China in the world’s investment flows, with China’s development institutions actively funding the infrastructure expansion across the wide terrain of the Global South within framework of the Belt and Road Initiative (BRI).
Another crucial driver for the R5+ initiative is the significant progression of regional integration initiatives across the Global South. In particular there is the Regional Comprehensive Economic Partnership (RCEP) led by China and the ASEAN economies. In Africa the key integration initiative is the African Continental Free Trade Area launched in 2018. Another important development is the rising coordination among the regional integration blocks and the signing of the respective memoranda between the Eurasia Economic Union, MERCOSUR and ASEAN.
The possible scope for the use of national currencies within the R5 paradigm has also been broadened in recent periods via the expansion in the membership of the BRICS New Development Bank (NDB). In particular, among the new members of NDB is United Arab Emirates whose currency could be used in mutual settlements within the R5+ circle as well as transactions undertaken by NDB itself. There are other new members of the New Development Bank such as Egypt and Bangladesh with a significant weight in their respective regions that may also increasingly be involved in R5+ financial transactions.
This year the R5+ initiative should be underpinned by the BRICS+ platform launched by China in 2017 and expected to be rekindled this year during China’s BRICS Chairmanship. The BRICS+ initiative has the potential to expand the scope for using national currencies via strengthening the trade and investment cooperation between the BRICS economies and their regional partners. An important role in the nexus between the BRICS+ and the R5+ initiatives will be the cooperation platform for the regional development institutions where BRICS countries and their regional partners are members. Such development institutions may include regional development banks such as the Eurasian Development Bank and/or regional financing arrangements (RFAs) such as the Chiang Mai Initiative Multilateralization or FLAR.
The implementation of the R5+ initiative has the potential to expand not only the scope for the use of national currencies but also with time increase the number of reserve currencies coming from the developing world. It will also allow for a reduction in financial risks associated with “currency mismatches” and the fragilities associated with high levels of debt. The scope for de-dollarization in the global economy remains sizeable in view of the decades long “dollarization overstretch” and the imbalances that this has generated across the global economy.