BRICS vs G7: The Financial Lab

Experiments to Exchange Currencies and In/Ensure Trade

Nov 01, 2024

[Qolşärif Mosque, Kazan, by Alexxx1979 - CC BY-SA 4.0]

Published: 2024-11-01

The Kazan Laboratory

Following the 2024 BRICS Heads of State meeting in Kazan under the Russian presidency, Pepe Escobar has provided an update on the financial experiments being conducted in the BRICS laboratory. The nature of what the now 22 member and partner states of BRICS are trying to achieve is simple to state: a new non-Western dominated financial architecture. A collection of complex puzzles must be solved to achieve the goal.

One Currency to Rule the All

A single currency for global trade is the ultimate oil for the machine of international commerce. It shrouds the complexity which must emerge at its removal.

After WWII the US represented 50% of global GDP. Its dollar was quickly became the most stable and available currency of the era. At the time the US dollar (USD) was backed by gold. One could convert dollars into gold at a fixed rate. The currency was ubiquitous and, because of the exchange rate, equivalent to gold. It was the most perfect solution to resolving the currency imbalances which are the inevitable by-product of international trade, a topic to which we shall return.

In 1971 the US converted its dollar (USD) into a fiat currency. It removed the fixed conversion rate to gold. Of the many reasons it chose to do this, perhaps the most important is that it could. World trade was locked into the USD. Every nation needed it to conduct business. The majority of central banks used it as the core of its asset pool. Converting other currencies into other assets could be done via the USD, usually in US or European located market exchanges. Banks and financial management companies registered in these jurisdictions were the facilitators of the use of those exchanges. A specialized messaging system between these financial institutions, SWIFT, was developed by the US to smooth the operation of the system.

Since the end of Cold War I, this financial architecture has dominated international trade, forcing all nations to rely on it for the majority of their trade. During the last two decades the US government has increasingly used this international trade architecture to impose its political will on other nations. Warnings against this abuse of the dominante international financial architecture have repeatedly been made by the leading Western financial institutions to the US, and lately European, political leadership. The protesting institutions included the (private) US Federal Reserve and the European Central Bank. The basis for their complaints is that trade systems require confidence, just as fiat currencies do. If those exchanges or currencies are abused for political purposes traders will be motivated to find or create other mechanisms to pursue their trade. Currencies and exchanges have come and gone throughout history. Trade is the constant.

In the Kazan declaration one can find repeated statements protesting unilateral economic coercive measures (or war, if you like). These have been directed at BRICS states via it citizens, banks or companies by the US and other members of the G7. A consequence of BRICS states' use of the international financial architecture based on the USD and its exchanges and institutions is that their trade is vulnerable to attack. The end goal of the financial experiments which BRICS is undertaking is a new financial architecture in which they can find refuge from this financial warfare.

The 22 BRICS nations wish for a stable field of international relations and finance based on laws which can be arbitrated. In the Kazan declaration can be foun reference to the WTO (World Trade Organisation), a office of the U.N. which has played a role in this arbitration.

The current behaviour of the West is based on its "rules" which it makes up at one time and ignores at the next. BRICS are not "anti-Western". The member and partner states are calling for exactly the principles which the West has advocated for decades since the Charter based U.N. system was consummated after WWII. BRICS wants arbitration rather than arbitrary.

The Quadratic Nature of International Trade Complexity

The U.N. has 193 member states of the 200 odd states which exist on our one planet. Lets approximate the number of national currencies at 200. The number of connections between N points is: (N * (N - 1)) / 2.

A simple way to visualize this is with the four points of a square. Draw the 4 the border lines between the points to make the square, and then add the two diagonals, to make six. (4 * 3) / 2 == 6. Convert the square into a pentagon, hexagon and onwards extend until you almost have a “circle” with 200 points on its edge.

There would be 79 800 “international trade relations” between 200 nations with national currencies on that figure. With a single global reserve currency, that complexity gets reduced to 199, because everything is resolved, connected, through and to it. Take the US, put it in the middle, and draw all of the other 199 edge points to it, in a star.

One of the problems of complexity which is contained within the simple idea of a "new international trading architecture" is that 200 exploding into the thousands. Thus, the creation of the new architecture must not only be trialed, but also trialed on a small set which limits the explosion. Interestingly, with 22 participants, the BRICS trade relations graph has 231 connections ((22 * 21) / 2). This loose correlation with the number of global states is happenstance, but restricting the size of the group is purposeful.

Consider a single nation's trade relations with one other nation. In a perfect world they would be in balance. Nation A would trade a collection of items with B at a value equal to the different collection of items B traded with A. Both would make profits and/or satisfy necessities. Any profits would result in an increase in the volume of currency held by each nation in its own currency with no residual in the other nation’s currency.

Of course, nothing is perfect in the messy affairs of humanity. The result is that one nation will hold an excess of the other's currency. The Central Bank of that nation will have a policy of the types of assets it is to retain to preserve asset value. This necessitates the conversion of excess assets of foreign national currencies into other forms of assets (often gold, its own currency or other international currencies). For BRICS to succeed in creating a new, international trading architecture it is imperative that a mechanism exists to perform these excess asset conversions outside of the existing Western dominated architecture.

BRICS Clear

We now meet the first "experiment" declared after the Kazan meeting: BRICS Clear.

It is a "clearing house", which means a regulated market for selected asset exchange. Regulations will include the verifiable nature of transactions. This fundamental property is being implemented with a "stablecoin". This is a horrid term derived from the BitCoin ecosystem. What it means is a cryptographically secure, append only transaction log. It has nothing to do with "BitCoin". It is about verifiable, tamper-proof, permanent, append only, trustworthy, transaction recording. Other regulations will likely also include some form of "anti-dumping", to prevent currency attacks. The choice of these regulations will be for participating nations and their central banks to decide. That process will essentially be a WTO type role being performed by the participating nations outside of the WTO, which is an interesting consequence in itself. The assets to be available for trade in the exchange (clearing house) will also be chosen by the participating institutions. One can expect all of the national currencies of the participating nations and probably gold.

BRICS Clear facilitates trade in national currencies by providing a mechanism for excess assets to be converted into more desirable assets so that central banks can preserve the value of their asset pools.

Confidence

Before moving on to the second major "experiment" approved at Kazan, the foundational importance of "confidence" deserves consideration.

A fiat currency, as most are today, has no intrinsic value. It cannot, by law, be converted into anything. What it can be converted into depends on markets and exchanges. Its value is fundamentally based on its use, which in turn is based on confidence in it. Interestingly, exchanges hold a similar property. Their value is in their use: their reliability and availability.

The new financial "experiments" being trialed by BRICS need to deliver these properties. They need to be reliable, such that their use can grow. This, in turn, will build the confidence in them which will cement their existence. Because these experiments are designed to create an alternative to the existing US/G7 dominated institutions, the BRICS partners expect all manner of destabilization efforts from those opposing states and institutions to their "experiments".

Insuring Transport to Ensure Trade

The second "experiment" is another piece of bedrock. The area in which it operates is one which contains an ideological irony which you will hopefully enjoy.

The political leadership of the United States of America has been suppressing political expressions of collective approaches to government and organisation since the 19th century. The repression of the labour movement in the US in the late 19th century marks one episode. The Cold War against the communist Soviet Union is another. To this day, despite overwhelming analysis that the current healthcare system in the US is outrageously overpriced, a socialized national healthcare scheme has never been introduced. However, one of the most powerful financial groups in the US is its insurance industry.

Insurance is no more than collective protection against risk. Insurance companies themselves insure amongst one another to spread that risk. Collectivism is fundamental to insurance.

While BRICS Clear is designed to resolve imbalances in assets from international trade, the BRICS (Re)Insurance Company will be an insurer for transport companies which move the goods of BRICS international trade. Because of the high capital cost of container cargo ships, or oil tankers, and the value of cargoes they carry, international transport companies require insurance. The rather cleverly titled Brics Re(Insurance) Company (BRIC) serves as an insurer outside of the political control of the US/G7 block. It will service international transport companies and protect them from attack by its G7 registered equivalents.

While consumer services like BRICS Pay (an inter-BRICS nation state credit-card settlement facility) are important, they are not fundamental to the experimental, non-US/G7 financial system being trialed. BRICS Clear and BRICS ReInsurance are.

These projects by the BRICS group are introducing competition into the existing market for exchanges and insurers dominated by the US/G7 block. Nobody is expecting the nation state block which professes capitalism and competition to play fair and allow these competitors into the market.

The mother of all finance and insurance wars is beginning, from the ground up.

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Sources

BRICS Post-Kazan: A Laboratory of the Future, Pepe Escobar, The Unz Review, 2024-10-30

BRICS Grows, Adding 13 New 'Partner Countries' at Historic Summit in Kazan, Russia, Ben Norton, ScheerPost, 2024-10-30

Will a BRICS Bretton Woods Take Place in Kazan?, Pepe Escobar, The Unz Review, 2024-09-23

BRICS: The Kazan Declaration, YesXorNo, 2024-10-24

Currencies: Kazoo, Kazan!, YesXorNo, 2024-09-27

Culture

Money For Nothing (Official Music Video), Dire Straights (from their 1985 "Brothers in Arms" album), uploaded 2010-02-23