26.10.24 Review

BRICS Minus: Why and how Russia failed in its attempt to create a parallel financial reality at the Kazan summit


The BRICS+ summit in Kazan was a major PR success for Vladimir Putin, demonstrating to the general public his inclusion in global discussions, but it also confirmed Russia's marginal position in the processes of global economic integration.

The Russian report prepared specially for the summit proposing the creation of a financial infrastructure entirely independent of the West was merely ‘noted’, and its key element, a decentralised payment system, was not even mentioned in the final document. Such a system, which would imply a rejection of reserve currencies and correspondent accounts, would allow Russia to bypass Western sanctions in foreign trade.

However, in reality, the development of settlement systems based on digital currencies is following an entirely different trajectory and without Russia's involvement. These projects do not envision abandoning reserve currencies, which ensures high liquidity for the settlement system. The two most advanced projects – the Western Agora and the Asian mBridge – are built around the dollar and yuan. Although they are technologically quite advanced, it will take years to develop and agree upon their legal framework.

In this context, the radical Russian project not only had no chance of success but appears to be an attempt to create, under the guise of BRICS+, a parallel reality where the organisation acts as an alliance of countries challenging the ‘hegemony of the dollar’.

In reality, the process of dollarisation in BRICS+ economies is underway, but it is progressing very slowly due to natural causes rather than a desire to sever ties with the West. In open confrontation with the West, only Russia and Iran among the organisation’s member countries are interested in creating an autonomous financial infrastructure. For the same reason, they have not even been invited to participate in mBridge, which is backed by their political ally, China.

The BRICS+ summit in Kazan was undoubtedly a major PR success for Vladimir Putin, demonstrating to the general public his ‘handshake’ and inclusion in global discussions, but it simultaneously confirmed Russia's marginal position in the processes of global economic integration. The holding of the 16th summit of the organisation in Kazan was determined by the rotation of chairmanship among the founding countries of BRICS: Russia opens each successive five-year cycle. At the same time, topics particularly important to Moscow were not mentioned in the final declaration, and the key Russian report on improving the international monetary and financial system was merely ‘noted’.

Two weeks before the summit, Russian Finance Minister Anton Siluanov stated in an interview with RT that one of the main tasks of BRICS+ at this stage is to create its own independent financial system, which has been under development for a year. ‘This is to enable trade settlements outside the Western infrastructure’, he explained. According to Siluanov, the alternative system should include three elements: a payment infrastructure based on blockchain, a depository for securities similar to the European Euroclear and Clearstream, and a joint reinsurance company.

The interview was timed to coincide with the meeting of finance ministers and central bank governors of BRICS+ countries, at which Siluanov presented a special report prepared for the summit by the Russian Ministry of Finance, the Central Bank, and the consulting company Yakov and Partners (formerly the Russian office of McKinsey), outlining the framework for such a system. The new infrastructure is proposed to be built on distributed ledger technology (DLT), with transactions conducted in wholesale central bank digital currencies (CBDCs) – for instance, in digital yuan and rubles intended for wholesale trade. The report describes a fully decentralised system. The absence of the need to resort to intermediaries (particularly correspondent banks in the US) not only protects trading partners from sanctions but also significantly reduces costs, the report emphasises. If all cross-border settlements between BRICS+ countries are conducted in this manner, savings on transaction costs could reach $30 billion per year, and the overall GDP of the participating countries could increase by 0.5-1 percentage points, the authors claim.

However, the summit's final document, the so-called Kazan Declaration, states only that the participants ;noted the Analytical Report of the Russian presidency in BRICS on improving the international monetary and financial system’, and in the corresponding section dedicated to economic cooperation (points 57-118), the depository and reinsurance company are mentioned (the participants agreed to explore the possibility of their creation), but not the payment system, even though it is the key element of the infrastructure described by Siluanov. Moreover, Vladimir Putin was forced to disavow the initial Russian proposal, saying that ‘we are not inventing a separate common system alternative to SWIFT – what we have is, in principle, sufficient’. 

According to Bloomberg, representatives of the central banks of BRICS+ countries have agreed to discuss this topic in December (the final declaration includes a corresponding mandate). It seems that by that time, the working document will undergo changes, shedding the radicalism and confrontational nature of the Russian report. The authors of the Russian report describe the modern system, which is based on the use of reserve currencies (primarily the dollar) and correspondent accounts (usually in American banks), as outdated. They note that thanks to the development of modern technologies like DLT, the issue of different levels of access to information for participants in global trade has largely been resolved. Consequently, the necessity of using intermediaries and reserve currencies has diminished.

This bold hypothesis has a serious flaw, as pointed out by blockchain publication Ledger Insights. While increased transparency will indeed make the global financial market more efficient, the equally important question of liquidity in the financial system remains. There are approximately 180 currencies in the world. If currency pairs were created for each of them with all the others, it would result in more than 16,000 pairs. The use of a single reserve currency reduces the number of pairs to 180, making such a market inherently more liquid. The smaller the economy, the more important it is for it to focus on one or two currency pairs to achieve more favourable rates. The reserve currency does not necessarily have to be the dollar; it could be, for example, the Special Drawing Rights of the International Monetary Fund or other instruments.

In fact, existing platforms for transactions in CBDCs are built around reserve currencies. In September, the Agora platform began pilot operations, involving the Federal Reserve Bank of New York, the central banks of Europe, Korea, and Japan, as well as several dozen commercial banks from these countries. The primary goal of Agora is to reduce transaction costs. However, the project is built around the dollar. A few months earlier, the developers of a similar project, mBridge, announced that they had reached the ‘minimum viable product’ (MVP) level. This project is being developed by the Bank for International Settlements, registered in Switzerland, which brings together the central banks of China, Hong Kong, Thailand, the UAE, and Saudi Arabia. In this project, the Chinese central bank plays a key role, with the digital yuan as the primary currency. Russia is not participating in mBridge, or in Agora, of course.

Although all the necessary technologies for projects like Agora or mBridge already exist, they will not exit the testing phase anytime soon – this will take years, warns Teunis Brosens, head of regulatory analysis at ING Financial Group. Central banks must license these platforms to allow the use of tokens fully backed by their reserves. Commercial banks need to provide liquidity to these platforms. Additionally, a legal framework must be developed and agreed upon for all participants. According to Broesens, the fact that developers are not rushing the process is evident in mBridge, the most advanced project to date, which has taken more than three years to reach the MVP stage.

The process of dedollarisation of the BRICS+ economies is gradually progressing but rather slowly, as it is driven not by a desire to sever ties with the West but by a set of natural factors, write experts from ING in their report. BRICS+ countries are actively increasing mutual trade. While in 2008, its share in their total trade turnover was 22%, by 2023 it has risen to 28%. Even more noticeable during the same period is the increase in the share of BRICS+ in the trade turnover of developing countries as a whole – from 19% to 31%. Slow dedollarisation is also evident in the external debt of BRICS+ countries. The share of cross-border lending in dollars has decreased from 67% in 2016 to 55% in the first quarter of this year, while the share of international debt securities denominated in dollars has dropped from 83% to 75%. Nevertheless, in both segments, the level of dollarization remains above the global average (around 47% for each).

In other words, the projects aimed at ‘improving the monetary and financial system’ and creating platforms for transactions in CBDCs are developing along a completely different trajectory, without Russia's involvement, and are at a significantly more advanced stage than the Russian proposals for the Kazan summit. The reason is that almost all BRICS+ countries simply do not need to create an isolated payment system or abandon reserve currencies, which renders the Russian vision of this infrastructure practically meaningless to them (according to the Financial Times, finance ministers from China, India, and South Africa did not even attend the meeting where Siluanov presented the Russian concept on the eve of the summit).

Russian developers of ‘financial infrastructure’ should likely understand this, but they are being forced to create a ‘parallel reality’ in which BRICS+ appears as an alliance of countries challenging the ‘hegemony of the West’. According to Meduza, the presidential administration recommended that state and state-loyal media emphasise in their summit coverage that Vladimir Putin is the ‘informal leader of the global majority’, while Western elites are ‘in panic and alarm’ observing the proceedings of the meeting. At the same time, the summit website advised participants to bring cash dollars or euros on their trip, as even China's UnionPay cards might not work in Russia, let alone Visa and Mastercard. This anecdotal detail serves as a reminder that only one of the five founding BRICS countries is in an open confrontation with the West, along with Iran, which is part of BRICS+. And only these two countries are essentially interested in creating a financial infrastructure characterised by complete independence from the West.