Putin’s Alternative Financial System Ambition Counts on China

A Review of the International Currency System After WWII

At the Bretton Woods Conference in 1945, the U.S. dollar became the world currency with an overwhelming advantage. However, this status came at a price. According to the Bretton Woods Agreement, the United States made a commitment to the world: any holder of dollars could exchange them for gold at a rate of $35 per ounce at the Federal Reserve Bank. This attractive promise elevated the dollar’s status in the international monetary system, allowing it to become synonymous with “money,” gaining a status equivalent to gold.

On August 15, 1971, President Nixon unexpectedly announced the suspension of the dollar’s convertibility into gold, leading to the instantaneous collapse of the Bretton Woods system. This scene has been replayed countless times in movies, television shows, and documentaries. The collapse of the Bretton Woods system revealed how the United States could undermine international rules.

(1) The Jamaica System—Current International Monetary System

After three years of chaotic disorder, during which the world economy experienced stagflation, the International Monetary Fund (IMF) organized a “Temporary Committee on the International Monetary System” in September 1974, with representatives from 20 countries. After another year and a half of discussions, the committee reached the “Jamaica Agreement” in January 1976 in Kingston, the capital of Jamaica. In April of the same year, the IMF Board of Governors voted to approve the Second Amendment to the Articles of Agreement of the International Monetary Fund. Thus, the Jamaica System was established.

The Jamaica System is essentially an unrestricted and unregulated framework, meaning that any country can choose an external monetary strategy that suits its national conditions, including aspects like exchange rates, exchange rate regimes, and the openness of capital markets. In this free, unrestricted, and unregulated system, countries must compete according to the “law of the jungle.”

It is important to note that the collapse of the Bretton Woods System did not weaken the dollar’s status as the world’s currency. Driven by inertia and power dynamics, countries—particularly developing nations—continued to view the dollar as the primary reserve currency. This situation was closely linked to the United States’ shift to a “petrodollar” strategy following the dissolution of the Bretton Woods System. While discontinuing its promise to exchange dollars for gold, the U.S. reached an agreement with Saudi Arabia, the largest oil producer at the time, stating that the dollar would be the only currency used for purchasing oil. This agreement was subsequently endorsed by other members of the Organization of the Petroleum Exporting Countries (OPEC). Thus, after the dollar was decoupled from gold, it was immediately linked to oil: transactions in the international oil market had to be conducted in dollars. The “petrodollar” became a crucial pillar supporting the dollar’s continued role as a global currency and maintaining its hegemony after the collapse of the Bretton Woods System.

In 1974, Richard Nixon agreed with Saudi King Faisal that in return for denominating the kingdom’s oil sales in dollars, the US would provide weapons and protection.

Under the Bretton Woods System, the dollar was constrained by the “Triffin Dilemma,” preventing its unlimited issuance. However, the Jamaica System marked the official entry into the era of fiat currency. Consequently, as the world’s currency, the dollar was finally able to transcend the “Triffin Dilemma” and be issued without limits. The birth of the Jamaica System signified the arrival of the era of “dollar hegemony.”

(2) The Dollar Hegemony

The current international monetary system is characterized by the dominance of a single sovereign currency—the U.S. dollar—as the world currency, without any power (such as international agreements) to regulate its issuance. This status of the dollar as a world currency gives the United States various advantages in accessing global resources, strengthening its own power, competing with other countries, and even undermining and destroying the economies of others. These advantages of the dollar are reflected in several key aspects:

First, “the U.S. produces dollars—while the world produces goods.” Since the establishment of the Jamaica System, the United States has maintained a long-term trade deficit that has only grown larger. For example, in 2021, the U.S. trade deficit in goods reached $1.0784 trillion globally (with a deficit of $355.3 billion in goods with China), accounting for approximately 4.7% of GDP. This means that the U.S. can easily print money to acquire goods worth $1.0784 trillion from the world and $355.3 billion from China.

Second, when facing domestic crises, the United States can launch a currency war against the entire world to address its issues. For example, in response to the financial crisis of 2008, the U.S. initiated an unprecedented currency war through large-scale quantitative easing.

Different U.S. currencies as a share of U.S. nominal GDP since 1990 (Source: Federal Reserve)

As shown in the figure above, during the 2008 financial crisis, the U.S. M0 (currency in circulation) even surpassed M1 (narrow money), indicating that a substantial amount of the Federal Reserve’s issued base money flowed overseas. Several years before, the COVID-19 pandemic brought U.S. quantitative easing to new heights. This quantitative easing did not lead to hyperinflation in the U.S.; instead, it caused the dollar to flood the global market, impacting the economies of other countries significantly.

Third, there is the periodic “shearing of sheep” regarding the assets of countries around the world. Since Biden took office, this practice has reached new heights. On one hand, the Russia-Ukraine war has created turmoil, and on the other hand, interest rate hikes have prompted global capital and wealth—especially from Europe—to flow into the United States.

Fourth, the weaponizations of the dollar involves the United States using the dollar to strike against hostile (or perceived as hostile) countries to achieve its political objectives. Countries such as Venezuela, Iran, Afghanistan, North Korea, and Russia have all become targets of dollar sanctions and penalties. For example, since the outbreak of the Russia-Ukraine conflict, the U.S. and its European allies have ordered the freezing of approximately $300 billion in Russia’s official reserves held in dollars and euros, amounting to about half of Russia’s international liquid assets!

In summary, the world has suffered under the dollar for a long time!

(3) The Birth of The Euro

On January 1, 2002, after a three-year transition period, the European single currency—the euro—was officially introduced. The birth of the euro was less about challenging the dollar and more about dividing economic interests. Nevertheless, the introduction of the euro provided the international community, particularly developing countries, with an additional option for holding international currency.

It is important to note that the euro is a supranational currency, meaning its issuance is not controlled by any single sovereign state. The advantage of a supranational currency lies in its credibility, which is backed by the collective economic strength of the eurozone countries, thus challenging the dollar’s dominance to some extent.

However, despite the euro’s emergence posing a certain level of threat to the dollar, it was still insufficient to shake the dollar’s dominance. From 2000 to 2009, buoyed by its new currency status, the euro’s share of global foreign exchange reserves increased from 18.29% to 27.70%, while the dollar’s share dropped from 71.14% to 62.15%. However, since then, the euro’s share has not risen again, and by 2020, it had decreased to 21.29%.

Moreover, despite the eurozone’s historically low inflation rates and stable currency value, the economic development and macroeconomic stability of eurozone countries have struggled due to the lack of independent monetary policy. When a country lacks an independent monetary policy, its central government operates like a local government, unable to issue bonds according to its own needs. Additionally, the stipulations of the Maastricht Treaty severely restrict the fiscal policy independence of eurozone countries. If a country lacks both independent monetary and fiscal policies, its ability to respond to crises and promote economic growth will be significantly hampered. In fact, in recent years, the economic growth rates of core eurozone countries like Germany, France, and Italy have been notably lower than those of the United States.

In summary, the birth of the euro has not led to a balanced competition between the euro and the dollar, nor can it replace the dollar as the world’s currency.

(4) The Internationalization of The RMB and A Tripartite System

After more than 40 years of development following the Reform and Opening-up, China’s economic strength has transformed dramatically. Over the past four decades, the average annual growth rate of China’s economy has reached an astonishing 9%. This sustained high growth has brought about profound changes in a once impoverished and underdeveloped China: the income and material living standards of the people have significantly improved, comprehensive national power has greatly strengthened, and China’s international status has continuously risen. At the same time, as surplus labor gradually diminishes, the low-cost competitive model of promoting exports and attracting foreign direct investment through currency depreciation (commonly known as the “Asian model”) will become increasingly constrained.

This means that, both in terms of economic strength and the need to transform its mode of openness, China is now equipped with the capability and conditions for RMB internationalization. It is not far-fetched to say that the RMB could achieve a status of being one of the three dominant currencies, leading to a tripartite situation involving the U.S. dollar, euro, and RMB. Many scholars believe that this “tripartite situation” will create a more stable international monetary system, which is an ideal scenario: the three currencies will compete with one another, and whichever currency appreciates and presents lower risks will attract investment. This could, to some extent, curb the motivations for the three parties to engage in currency wars, thereby potentially achieving stability in the international monetary system.

However, the “tripartite situation” in the international monetary system still faces many uncertainties. Firstly, this system continues to uphold existing unfair rules. As the world currency under the current framework, the U.S. dollar enjoys unique advantages, and the United States holds a veto power on significant issues within the International Monetary Fund (IMF), making it unlikely to relinquish its financial hegemony. Beyond the three major currencies, many developing countries’ currencies remain disadvantaged, and the inequality among currencies has not been resolved. Moreover, in the long term, as competition among nations intensifies, the “three poles” of the tripartite situation will inevitably experience fluctuations, making it difficult to ensure long-term stability.

Calls for The BRICS Currency

As the GDP of the BRICS nations historically surpasses that of the G7 group and with the expansion of BRICS, the BRICS currency mechanism has become a focal point for gathering the rising powers of the Global South. The ability to establish a stable and equitable monetary system that can compete with the euro and dollar while addressing the interests of the Global South will determine the evolution of the future global order.

The concept of “BRICS” currency was initially proposed by me 10 years ago, and this concept has recently sparked enthusiastic discussions among BRICS nations and the New Development Bank.

After the 2023 BRICS summit in South Africa, a special working group was established to explore how to promote trade and use local currencies for settlement in the international payment system, as well as the feasibility of establishing a “BRICS currency.” This working group is expected to submit a preliminary report at the BRICS summit in Kazan in October 2024.

At the BRICS summit in Kazan in October 2024, Russian President Vladimir Putin demonstrated a 100-value mock-up “BRICS banknote” gifted from enthusiasts.

Although we have not seen any official reports on the internal mechanisms of the BRICS currency system, relevant research has already begun. According to statements made by Paulo Batista, former Vice President of the New Development Bank of BRICS countries (2023), the BRICS currency will have at least the following characteristics:

a. The BRICS currency will not follow the path of the euro; it will not eliminate the existing sovereign currencies of the participating countries.

b. The BRICS currency will not be pegged to gold.

c. The BRICS currency is expected to represent the interests of countries in the Global South. This not only means that the BRICS currency system will bear the responsibility for de-dollarization but also that it will require a fair and equitable international monetary system that benefits developing countries and emerging economies.

The Challenges to Address for the BRICS Currency to Transition from Concept to Reality

Although we understand that the BRICS currency will not follow the path of the euro, will not be pegged to gold, and will lean toward the Global South, it remains in the conceptual phase. To transition from concept to reality, several issues must be addressed. These include the operational mechanisms of the BRICS currency system, the corresponding currency settlement mechanisms, regulatory frameworks tailored to the operational model, and the determination and commitment of the BRICS countries.

1) The Transaction Rules of the BRICS Currency

The operational mechanism of the BRICS currency system includes, but is not limited to, the transaction rules, issuance rules, pricing mechanisms, and expansion rules for the BRICS currency system. So far, there has been no official reporting on the internal operational mechanisms of the BRICS currency system, and publicly available academic research is even scarcer. However, these internal mechanisms are fundamental to the construction of the BRICS currency system.

Therefore, it is necessary to delve deeper into the operational mechanisms of the BRICS currency system based on existing research. First, let us discuss the transaction rules of it.

As mentioned earlier, the BRICS currency will not follow the path of the euro, which means it will not eliminate the existing sovereign currencies of the participating countries. This effectively implies that the BRICS currency system is a dual currency system, where the “BRICS” currency is considered the upper currency, and the other sovereign currencies within the system are referred to as lower currencies.
The basic operational rules of this dual currency system are as follows:
1. Lower currencies are used for domestic transactions, while the upper currency is used for exchanging sovereign currencies.
2. When countries within the BRICS system engage in currency exchange with countries outside the BRICS, direct conversion using their sovereign currencies is prohibited. Instead, they must use the “BRICS” currency to exchange with the sovereign currencies of non-BRICS countries (such as the U.S. dollar).
3. When transactions occur between BRICS countries, lower currencies cannot be exchanged directly. Instead, they must be converted using both lower and upper currencies.

Here, we must emphasize the importance of prohibiting the exchange of BRICS sovereign currencies with those of other countries (both within and outside the BRICS) as a key principle.

First, the greatest advantage of the BRICS currency lies in its ability to unite the strengths of member countries to collectively counterbalance super currencies like the U.S. dollar and euro. To leverage this advantage, it is essential that the lower currencies within the system do not directly exchange with super currencies like the dollar.

But why should lower currencies within the system also avoid direct exchange with one another? This is because there are inherent inequalities in strength among these lower currencies, especially as the BRICS currency system expands in the future. More currencies (theoretically even the euro and dollar) may join, exacerbating the inequalities among lower currencies. Therefore, to maintain equality among lower currencies within the system, it is crucial to avoid direct exchanges among them.

Thus, this rule underscores that the “BRICS” currency represents the hopes of the countries in the Global South.

Some may argue that currency exchange typically occurs only in large capital movements within the capital markets. Clearly, prohibiting the direct exchange of lower currencies can significantly mitigate the impact and exploitation of super currencies like the dollar on domestic economies through capital markets. However, does this rule affect trade?

In fact, whether for exports or imports, only one currency is involved, and there is no need for exchanges between currencies. For example, a Chinese exporter may allow an American importer to pay in dollars. However, as long as the Chinese exporter continues to live and operate in China, after receiving dollars from exports, they will need to convert those dollars into the local currency (lower currency or RMB). This means they must first convert the dollars into “BRICS” currency, and then exchange the “BRICS” currency for RMB.

Thus, it is clear that this rule can effectively harness the collective strength of BRICS countries to unite against super currencies like the U.S. dollar and euro in international trade and capital markets. This framework also implies that BRICS countries do not need to accumulate foreign currencies but can focus on accumulating “BRICS” currency instead. For countries that frequently engage in trade with BRICS nations, accumulating “BRICS” currency could indeed be a meaningful choice.

2) The Issuance Rules of the BRICS Currency

The issuance of any currency must be carried out by a financial institution, such as a bank. Within the BRICS currency system, the founding countries (China, Russia, Brazil, India, and South Africa) jointly established a supranational central bank—the BRICS Bank—to issue the “BRICS” currency. This bank will utilize blockchain technology to issue a supranational digital currency known as “BRICS,” which will be distributed annually to member countries based on specific rules.

Here, the concept of issuance encompasses two aspects: the initial “BRICS” currency received upon joining the BRICS system and the annual allocation of “BRICS” currency according to established rules. We will first discuss the rules governing the annual distribution of “BRICS” currency after joining the system.

We believe this is a relatively open question that warrants further research. One possible option is to issue “BRICS” currency in the form of interest. Theoretically, holders of “BRICS” can visit a local branch (or sub-branch) of the BRICS Bank to receive interest based on their holdings, with the interest also paid in “BRICS” currency. In practice, such interest could be automatically generated using blockchain technology.

The advantage of this currency issuance rule is the currency can earn interest, thus automatically providing an investment function. Undoubtedly, once “BRICS” currency has the capability to accrue interest, it will become more attractive and better positioned to compete with currencies like the U.S. dollar and euro.

However, this is just one possible channel for issuance. As the BRICS system develops, an increasing amount of “BRICS” currency may be accumulated by countries outside the system. This could lead to a significant outflow of “BRICS” currency to non-BRICS countries through this channel. Additionally, member countries may, for various reasons, deplete (or come close to depleting) their holdings of “BRICS” currency, making it impossible for them to acquire additional “BRICS” through the aforementioned means.

Therefore, in addition to automatic interest generation, there must be other channels for issuing “BRICS” currency. For instance, member countries within the BRICS system could apply for emergency assistance or design alternative issuance rules to ensure that the circulating supply of “BRICS” currency maintains a relatively stable proportion to the economic scale of the BRICS system.

3) The Pricing Mechanism of the BRICS Currency

As mentioned earlier, the BRICS currency should not be pegged to gold. So, how should the pricing of “BRICS” currency be determined? The pricing of “BRICS” has two layers of meaning: first, the exchange rate between “BRICS” and its lower currencies; second, the exchange rate between “BRICS” and external currencies (such as the U.S. dollar and euro).

Regarding the exchange rate between “BRICS” and its lower currencies, one possible option is for each sovereign country within the system to determine the rate independently. For instance, each country could establish its own exchange rate or auction “BRICS” currency on domestic markets. Additionally, central banks could buy and sell “BRICS” currency using their issued lower currencies to influence its pricing.

From the perspective of national interests, there should be a reasonable exchange rate between each country’s lower currency and “BRICS.” An excessively high value of the lower currency would be detrimental to a country’s exports, while an excessively low value would harm the welfare of its residents. Therefore, the pricing of “BRICS” relative to each lower currency can be set by the respective sovereign countries. Each country should determine the exchange rate based on its unique circumstances, such as its development stage and foreign trade strategy (e.g., whether it is export-oriented). In this sense, it remains an open question that requires individual research and determination by each nation.

Furthermore, regarding the exchange rate between external currencies (such as the U.S. dollar and euro) and “BRICS,” it should, in principle, be determined by the market. For example, a foreign exchange market for “BRICS” could be established at the location of the BRICS central bank, specifically for transactions between “BRICS” and external currencies.

Of course, the BRICS central bank also has the authority to influence the exchange rate by buying and selling “BRICS” using the “BRICS” currency it issues and the foreign exchange reserves it holds (such as dollars and euros). This dual mechanism allows both market forces and central bank actions to shape the pricing of “BRICS” currency in relation to external currencies.

4) The Expansion of The BRICS Currency System

The core elements of the BRICS currency system are as follows: it prohibits the direct exchange of a member’s sovereign currency with the currencies of other countries (both within and outside the BRICS). In return for adhering to this obligation, BRICS countries can annually receive “BRICS” currency from the BRICS Bank according to specific rules.

Furthermore, if a country is found to be lax in enforcing the prohibition on its sovereign currency being exchanged for other currencies, the BRICS Bank has the authority to reduce or revoke that country’s allocation of “BRICS” currency based on the severity of the infraction.

With such straightforward rules, the BRICS currency system can expand rapidly. In fact, any country that commits to prohibiting the direct exchange of its sovereign currency with other countries (including both BRICS and non-BRICS nations) can apply to join the BRICS currency system. In return for this commitment, the country would receive “BRICS” currency from the BRICS Bank annually, according to established guidelines.

Here, it is necessary to discuss the issue of the initial issuance of “BRICS” currency. Both the expansion of the BRICS system and its initial establishment face the challenge of how to initially issue “BRICS.”
One possible approach is to base the issuance on market principles, distributing “BRICS” according to the amount of gold and foreign exchange (dollars and euros) contributed by member countries to the BRICS central bank. In fact, once a country joins the BRICS currency system, the foreign exchange (dollars and euros) becomes largely irrelevant to BRICS nations; they only need to accumulate “BRICS” currency. Consequently, submitting foreign exchange reserves (dollars and euros) imposes no burden on BRICS countries, as they can exchange these reserves for “BRICS” currency. A portion of the submitted gold could serve as collateral for joining, while the remainder could be exchanged for “BRICS.” This means that member countries must at least contribute a minimum amount of gold as collateral for membership. If a member country fails to uphold its obligation to prohibit the direct exchange of its sovereign currency with other countries, the BRICS Bank can (after several warnings) require the country to exit the “BRICS” system, and the pledged gold will not be returned.

However, while the market-based principle may seem fair, it carries an ethical tendency to favor the “strong” over the “weak.” Therefore, under conditions based on market principles (where collateral also imposes certain constraints on member countries), it is worth considering alternative options, such as distributing “BRICS” currency based on population size.

It is anticipated that such a straightforward and practical rule will quickly attract an increasing number of countries to join the BRICS currency system. As more countries join the BRICS currency system (even compelling nations like the U.S. to engage in negotiations with BRICS countries), a new international monetary system—the BRICS system—will emerge.

5) The Global Payment System and Regulation of BRICS Currency

The mentioned rules can be viewed as the intrinsic operating mechanisms of the BRICS currency system. Once these rules are established, the BRICS currency system can theoretically function. However, in practice, there are significant technical challenges to ensure the system operates effectively, particularly concerning the payment system and the associated regulatory framework.

Currently, the vast majority of global currency payments are processed through the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Established in May 1973 by 239 banks from 15 countries, including the U.S., Canada, and Europe, SWIFT is headquartered in Brussels, Belgium.

Due to the substantial investment from the U.S. in SWIFT’s development, it is effectively under U.S. control, despite its Belgian headquarters. This has led to concerns that SWIFT could be used as a tool for financial sanctions, compromising its supposed neutrality. Such examples have occurred multiple times, prompting more countries to seek alternatives. Therefore, the BRICS currency system clearly cannot rely on SWIFT as its payment system.

To promote the internationalization of the RMB, China has established its own cross-border payment system. The Cross-Border Interbank Payment System (CIPS) began construction in 2012, with its first phase successfully launched on October 8, 2015, and the second phase fully operational by May 2, 2018. The system covers financial markets across all global time zones. Currently, CIPS includes participation from 182 countries and nearly 4,400 financial institutions. Undoubtedly, CIPS is a crucial component of China’s financial market infrastructure, and the global payment needs of the BRICS currency can be effectively facilitated through this system.

Chinese President Xi Jinping shakes hands with Russian President Vladimir Putin at the BRICS summit in Kazan

Of course, compared to SWIFT, the current efficiency of CIPS may not be entirely satisfactory. This is normal; a system can only improve in quality through widespread and frequent use, which helps identify and resolve issues. We believe that as the BRICS currency system is established and CIPS sees increased usage, the quality of its payment and communication will significantly improve, positioning it as a strong alternative to SWIFT.

Regarding the regulation of the BRICS currency system, it encompasses two main aspects: first, the oversight of the issuance of “BRICS”; and second, the regulation of foreign currency transactions among BRICS countries. Let’s first discuss the oversight of “BRICS” issuance.

The oversight of “BRICS” issuance refers to the monitoring by BRICS member countries (or external entities holding BRICS accounts) of whether the BRICS Bank issues “BRICS” in accordance with established rules. This oversight can be easily implemented using blockchain technology. In this sense, the BRICS currency can be regarded as a form of digital currency.

Regulating external currency transactions among BRICS countries means identifying and prohibiting the direct exchange of domestic currencies with other sovereign currencies (both within and outside the BRICS). This is a challenging task, especially since systems like SWIFT make such exchanges relatively easy to conduct unnoticed. Therefore, comprehensive oversight can only be achieved by incorporating all external payments into the BRICS payment system (i.e., CIPS) rather than SWIFT. Thus, BRICS countries not only need to participate in the BRICS payment system but also should consider distancing themselves from the SWIFT system.

6) BRICS countries’ will and determination
Except for all the barriers mentioned before, we believe that the biggest challenge in transforming the BRICS currency from concept to reality is the will and determination of the BRICS countries. After all, the emergence of the BRICS currency represents a direct and substantial challenge to the hegemony of the U.S. dollar, and it will undoubtedly provoke a strong reaction from the United States, testing the resolve and commitment of the participating countries.

For over 70 years, the U.S. dollar has served as the world’s currency, fulfilling functions such as accounting, pricing, payment, and reserve. However, it has always been managed by a central bank of a single nation, leaving the international community without the means to restrict its issuance. This issue has faced widespread criticism globally, including from America’s allies. Yet, the U.S. has staunchly resisted any attempts to undermine its dollar hegemony. For instance, the Special Drawing Rights (SDR) established within the International Monetary Fund (IMF) in 1969 have never been allowed to grow and develop into a formal currency. The U.S. has consistently used its veto power within the institution to prevent the SDR from threatening the dollar’s status as the dominant currency, even if such a challenge is minimal.

The dollar hegemony has brought endless benefits to the United States, but the abuse of this privileged position has led to a significant loss of legitimacy in the current international monetary system. This represents a substantial weakening of confidence in the dollar and reflects the determination and will of the BRICS countries to unite in creating a BRICS currency.

The world has long suffered under the dollar’s dominance, and the BRICS currency system offers hope: it promises a more stable and equitable international monetary framework. Furthermore, as the BRICS currency system is also an open and inclusive one, it implies that as the system expands, even the United States may eventually have to sit down and negotiate with the BRICS countries. Thus, we can see that the BRICS currency system is likely to lay a solid foundation for humanity’s progression towards a community of shared future.