What is the 5R currency in BRICS?

The creation of a BRICS common currency is one of the key themes that is expected to be discussed at the BRICS 2023 summit, but the issue of the feasibility of this R5 project (all five BRICS national currencies start with the letter R) is still seen as being unresolved. Most recently, the founding father of the BRIC concept Jim O’Neill spoke disparagingly about the possibility of creating a BRICS common currency. And while there are straight-forward ways of introducing the R5 currency first as an accounting unit with no technical difficulties in the implementation of such a project, there still appears to be uncertainty and divergence over how to proceed with the creation of a common currency that is to service international transactions of the BRICS economies. One of the recent proposals advanced by a former Vice President of the BRICS New Development Bank (NDB) serves to fill this void.

In his recent article written for the Brazilian Jornal do Brasil Paulo Nogueira Batista Jr., formerly Vice President of the NDB and an Executive Director for Brazil and a group of economies in the IMF presented a framework that may serve as an important guideline in efforts to design the common BRICS currency[1]. In this article Dr. Paulo Nogueira Batista starts with the observation that the stage of the R5 as an accounting unit that is used to price contracts and international transactions is a relatively easy one that does not require significant resources. One of the few decision points will have to be the determination of the relative weights of the respective national currencies in the R5 currency basket – these shares may be broadly in line with the relative economic weights of the respective BRICS core members: 40% for the Chinese yuan, 25% for the Indian rupee, 15% for the Russian rouble and Brazilian  real and 5% for the South African  rand. This R5 currency basket according to Dr.  Paulo Nogueira Batista can be initially pegged to the SDR basket, with subsequent R5 exchange rate dynamics reflecting the fluctuations in the basket components.    

The really big question is how to proceed from that starting point  to the stage of the R5 currency as a means of payment for cross-border settlements. What Dr.  Paulo Nogueira Batista suggests is that for the R5 to serve that role it does not have to be issued in physical form – it could be digital. And there is no need to replace the national currencies of the BRICS economies with the R5 – it can be created in parallel to the circulation of national currencies. Accordingly, no BRICS Central Bank is needed – all that is needed is a bank to issue R5 that in the first stages could be used for transactions among the BRICS national central banks. According to Dr.  Paulo Nogueira Batista, during these initial stages R5 could perform a savings role as well as a reserve currency function.  

One of the most debated questions concerning the R5 is the possibility of the use of commodities such as gold for backing its value. The logical view coming from the Brazilian expert is that such an approach is unlikely to work partly due to the need to hold rising amounts of gold reserves to back up the increasing issuance of the R5 currency. What may be preferable is an approach to back the currency with bonds issued by the bank that also issues the R5 – the common BRICS currency will be freely converted into these bonds essentially in line with the pattern that is observed currently with the US dollar.