The combined strength of heavy-weight emerging markets and developing countries would reinforce BRICS' ongoing efforts for a more stable and just international financial system and raise the representation and voice of developing nations in global governance.

Photo taken on June 17, 2022 shows the headquarters building of the New Development Bank (NDB), also known as the BRICS bank, in east China's Shanghai. (Xinhua/Fang Zhe)

by Yi Xin

BRICS, a cooperation mechanism of leading Global South countries, has held its first summit after a historic membership enlargement. Leaders of the grouping, which accounts for nearly half of the world's population and over 30 percent of global GDP, were joined by 20-plus other countries in Kazan, Russia, to explore ways of strengthening multilateralism for global development and security. A key consensus was to push the reform of the international financial system.

A FLAWED SYSTEM

While the collective rise of the Global South makes the world increasingly multipolar, the international financial order remains centralized -- trade is denominated almost solely in the U.S. dollar and transactions mainly done through SWIFT.

To be fair, this structure had facilitated trade for decades and provided the financial stability needed for global revival after the end of WWII, thanks to the fixation of the value of the dollar to gold, and then the petrodollar system introduced in the 1970s after the United States abandoned the gold standard.

On the downside, however, dependence on the dollar has exposed economies around the world to as many, if not more, vulnerabilities. This is especially true of the underdeveloped economies of the Global South, who often find themselves at the mercy of arbitrary, sometimes volatile, monetary policy adjustments by the United States. For one thing, aggressive Fed interest rate hikes, intended to bail out the American economy in troubling times, have time and again caused capital flight elsewhere and exacerbated debt pressure on developing countries.

The United States also readily uses its dominant position in the system to punish those who dare to disagree. According to The Washington Post, the United States imposes three times as many sanctions as any other country or international body, targeting one-third of countries with some kind of financial penalty. These sanctions cripple national economies, and quickly spill over to non-target markets.

Former Brazilian President Dilma Rousseff, who is now president of the New Development Bank (NDB), a multilateral development bank launched by BRICS, warns that the dollar has been used as a political tool, which undermines its reliability in global finance.

CHANGES UNDERWAY

A photo of Russian President Vladimir Putin reportedly waving a BRICS banknote, later clarified as a symbolic one, at the Kazan summit, triggered a media debate on currency alternatives, highlighting the growing anticipation for changes to the status quo.

With stronger solidarity and cooperation among BRICS countries, a viable path is emerging. In a joint declaration issued at the summit, in addition to welcoming "the use of local currencies in financial transactions between BRICS countries and their trading partners," BRICS leaders encouraged the advancement of a BRICS Cross-Border Payments Initiative, designed to strengthen banking networks within BRICS to facilitate trade settlements among member countries.

In fact, BRICS members have already made significant progress in the use of local currencies. The RMB, for instance, is used as the currency of choice for China-Russia trade, and increasingly for Russia's transactions with other countries -- a shift partly driven by American sanctions and asset seizures following the start of the Ukraine crisis.

Changes are also taking place in financing. The NDB has been promoting local currency lending as a key mission. In August, on top of the 5.8 billion dollars in concessional loans to South Africa, the bank approved a 5-billion-rand loan to a South African transport company to support the modernization of its freight rail sector, one of the first to be made in the South African currency. To date, more than 28 percent of the NDB's financing is provided in member currencies, and the bank has pledged to raise the figure to 30 percent by 2026.

MUCH TO BE EXPECTED

No doubt the dollar will remain a key currency in the global system in the foreseeable future. Instead of rejecting the dollar altogether, a more viable solution is to mitigate the shocks from America's monetary and political decisions and, as Chinese President Xi Jinping puts it, to make "the international financial system more effectively reflects the changes in the global economic landscape."

BRICS is readily taking the lead in this process, with more countries of the Global South joining the quest. The Russian presidency has announced agreement on a new BRICS partner country model. The combined strength of heavy-weight emerging markets and developing countries would reinforce BRICS' ongoing efforts for a more stable and just international financial system and raise the representation and voice of developing nations in global governance.

There is much to be expected.

Editor's note: Yi Xin is a Beijing-based observer of international affairs.