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How does the BRICS Currency Transform the World Economy?

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By  Yaroslav Lissovolik

The creation of a BRICS currency has become throughout the past year one of the headline themes related not only to BRICS, but also the global financial markets. Along with the skepticism coming from most of the pundits from the developed world there is also an enormous number of misconceptions and unsubstantiated claims of the speedy “demise of the dollar” and the crumbling of the global financial system due to the creation of a common BRICS currency. In reality the actual scenario and the modalities of the introduction of such a currency are yet to be determined and it could well be that in the first stages of the launching of the BRICS currency it could take the form of an accounting unit rather than a full-fledged international transactions currency. But even in the guise of a unit of account for the economies of the Global South the R5 (taking its name from the first letters of BRICS respective currencies) could have a significant effect on the international financial system and deliver important benefits to the economies of the developing world.

The first forays into the R5 common currency project and the use of BRICS as a platform for de-dollarization, were undertaken by Y. Lissovolik back in 2017-2018 in a series of publications for the Valdai club1 as well as the South African Joburg Post and “The Thinker”2. The subsequent discussions around R5 while mostly revolving around the creation of a full-fledged euro-like currency for international transactions also featured such alternative paths as a reserve currency, or an accounting unit. The latter would in fact be the easiest and perhaps the most realistic scenario for the first stages of the R5 project. According to the leading experts in the field, the creation of an accounting unit for BRICS could be realistically undertaken with minimal resources and could be implemented in a relatively short period of time3.

Rather than rushing to create a physical unit to service international transactions, a staged approach that involves the creation of an accounting unit allows for tracking the volatility and stabilizing expectations around the operation of the future BRICS currency. The launching of the new BRICS currency in the form of a physical medium of exchange may well be greeted with speculative attacks and attempts to test the resilience of the new currency to the full force of global capital markets. Accordingly, in terms of the sequencing of the BRICS currency it may make sense to prioritize the creation of an accounting unit first and to accompany this effort with the development of market infrastructure in the main financial centers of the Global South that can support this project.

Apart from the simplicity of its introduction this mode of R5 is also in line with international best practice – in particular with such instruments as the Euro and the SDR. Furthermore, the “accounting unit” route has the advantage of being flexible, with one or several BRICS countries having the capability to launch such a currency format on their own, without the need for participation from all BRICS members. The resulting balance of pros and cons suggests that the creation of R5 as an accounting unit would minimize the risks, while retaining a lot of the benefits associated with a common currency, i.e. the easiest way to create the BRICS global currency – via the introduction of an accounting unit – is also the most optimal in the near term.

As for the R5 impact, perhaps the most important aspect in which the BRICS currency changes the world economy is the change in the mindset and the mentality of economic agents and businesses that is currently centered very much on the greenback. This “mental dependency” on the dollar arises from the fact that it is central in pricing, accounting and statistics across the globe – whether in advanced or the developing economies. The introduction of a BRICS accounting unit that replaces the dollar in the major economies of the developing world would provide a different reference point for emerging markets and a different lens through which businesses track the BRICS+ economies. Expectations of economic agents would be increasingly geared towards the new BRICS currency with greater attention accorded by global markets to the monetary policy decisions in BRICS countries rather than being overly fixated on the minutest of signals from the Fed.

Another reason why the issue of a BRICS currency is seen as being so critical is the credibility and stature that it delivers to BRICS as a block with a global reach. Thus far, the main achievements of BRICS have largely been associated with the creation of the New Development Bank – something that falls short of sizeable transformation in global governance or the international financial system. It is the creation of a new global currency by the BRICS bloc that would represent a veritable innovation and a transformation of the global economy with a qualitatively different stature attained by the grouping on the international arena.

In qualitative terms the introduction of a BRICS currency could impact the direction and the quality of macroeconomic policy pursued by BRICS members. My sense is that the emergence of R5 would somewhat reduce the tolerance of BRICS monetary authorities to sizeable swings in the exchange rate of their respective national currencies. There may also be greater coordination of macroeconomic policies of BRICS and BRICS+ economies to ensure a smoother trajectory towards implementing the subsequent stages of the introduction of R5. The overall quality of macroeconomic policies is also likely to improve to ensure a secure macroeconomic foundation for the operation of the future common currency. In fact, recent developments may be suggestive of such trends in the monetary policy sphere as some of the emerging markets acted earlier and more decisively in warding off inflationary pressures compared to the Fed and other Central Banks from developed economies.

And then there is of course the reaction from global financial markets to the introduction of the BRICS currency. The very introduction of R5 as an accounting unit could feed expectations of greater future demand for BRICS currencies as the R5 project advances to the stage of reserve currency and/or physical unit of exchange. The creation of R5 could also fuel the use of national currencies (including those of BRICS) in international trade. At the same time, the dollar may start to lose ground due to expectations of lower shares in global FX and commodity trade transactions. Accordingly, on balance the emergence of R5 would likely favor EM currencies, most notably the yuan, with some negative effect for the US dollar – the scale of these effects will depend on the exact modalities of the BRICS currency. The impact on the greenback is unlikely to be sizeable in the short-term as uncertainty concerning the future of the BRICS currency will remain significant. The effect on the yuan will be relatively more pronounced compared to other EM currencies due to the higher weight that the Chinese currency may have in the R5 basket and the relative importance for China of the resulting change in the geo-economics of the global financial system.

There could also be risks associated with the introduction of a common BRICS currency such as the scenario of the excessive zeal in introducing “advanced modifications” of the R5 in the form of a physical unit of exchange. There is a somewhat disconcerting predilection on the part of many market participants to advocate the creation of such a BRICS currency in digital form with lots of supplements such as oil or gold to be used to back this currency. This may be due in part to the abundance of speculative appetites around the creation of the new currency that favor a price boost to bitcoin, gold or other dollar competitors. But the end purpose of the BRICS common currency is greater wealth creation for the households and businesses of the Global South rather than servicing the interests of market speculators. In this regard, it may be preferable to make things transparent and simple during the early stages of the R5 project for the sake of its credibility. Another risk is the volatility issue of the R5 basket and its underlying national currencies – this calls for preparatory work to be done with respect to the depth and quality of supporting market infrastructure.

Overall, there may be important dividends for BRICS even with a minimalist approach of opting at first for the path of an accounting unit for R5. The impact of the creation of such a currency for the global economy, business operations and the international economic policy debate could also be significant in the near term. Going forward, it is crucial that the creation of the new BRICS currency is not centered solely on the creation of an alternative to the dollar – rather at an early stage the key priorities of the R5 project need to be focused on building greater trust in the financial systems and currency instruments in the Global South, to facilitating greater South-South trade and investment as well as the development of deeper capital markets. The BRICS currency will also need to serve as a credible anchor for those developing economies that will be increasingly re-orienting their trade and investment flows to the Global South. In the longer term as it advances to the stage of a reserve currency the R5 will contribute to a more balanced global monetary system and will compete for greater prominence alongside the US dollar and other leading reserve currencies. After all, as Western economic thought has it (compliments of Vilfredo Pareto), fair competition is one of the cornerstones of efficient and wealth-enhancing markets.

Author’s note: first published in BRICS+ Analytics

1 Y. Lissovolik. Monetizing BRICS+: introducing the R5 initiative. Valdai club. August 30, 2017. https://valdaiclub.com/a/highlights/monetizing-brics-r5/

2 https://eng.globalaffairs.ru/articles/boosting-the-use-of-national-currencies-among-brics/

3 https://tass.ru/interviews/17281219

Courtesy: Modern Diplomacy


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A Labour Government Should not Frighten the Horses

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The UK general election is likely to mean changes, but Gulf citizens need not be too worried.

By James Drummond

If the tension was killing you, now you know. If it wasn’t, then be aware that a general election in the United Kingdom will be held on July 4 – less than six weeks away.

For the hapless Rishi Sunak, it looks like a case of “If it were done when ’tis done, then ’twere well it were done quickly.” Polls indicate that after 14 years of conservatism, real or imagined, voters are likely to elect a new Labour government.

What does this mean for us here in the Gulf?

The six Gulf states are certainly exposed to Britain. The extent of GCC holdings in the UK is enormous, ranging from Qatari ownership of the Shard building in London, stakes in the Sainsburys supermarket chain and Barclays bank, to Sheikh Mohammed bin Rashid’s Godolphin stables in Suffolk.

Manchester City and Newcastle United football clubs are owned by Emirati and Saudi interests, respectively. Kuwait’s wealth is managed by the Kuwait Investment Office near St Pauls Cathedral.

Labour has been careful to detail very few policies (or hostages to fortune, as its strategists may see it), but last week, David Lammy, the likely new foreign secretary, outlined a further campaign against dirty money.

Britain is a “corruption services centre”, while London is a “hotbed of kleptocracy”, Mr Lammy said. He said that he wanted to reward whistleblowers and clamp down on “enablers” of financial crime.

Given the paucity of public announcements, Lammy’s speech is significant, because it implies that the incoming government is likely to act. Fighting financial crime is relatively uncontroversial and attracts cross-party support – although in the UK’s case with limited success.

British politicians have made similarly grandiose statements before. But after Russia’s invasion of Ukraine, London has moved particularly against Russian dirty money, and sanctioned individuals. It finally introduced an obligation mandating the disclosure of beneficial owners of property.

Overseas trusts are also now required to disclose their ultimate beneficial owners, and there is now greater transparency when registering entities at Companies House.

This seems to have had only limited effect, however. Last week Andrew Mitchell, the deputy foreign secretary, cited estimates that 40 percent of the world’s dirty money still passes through London.

Spotlight on Corruption, a non-governmental organisation, wrote in October last year that “major reform is needed to how lawyers and accountants, the property sector and company formation agents are regulated for money laundering.” Lammy may choose to take further action against these and other professionals.

Other so-called enablers include retired politicians, some of them in the House of Lords, who work as advisors to unsavoury actors. Labour could move to tighten disclosure, although several of its senior former members are likely to lobby against further transparency.

It is also possible that Labour will go further in taxing expatriates. In its limited public commitments, the party has promised to clamp down on “tax dodgers”.

Those with property in the UK already pay tax on rental income they receive, and worldwide assets are subject to Britain’s inheritance tax. Some Gulf Arab families with UK property have been caught by inheritance tax.

A government led by Sir Keir Starmer, the Labour leader, could go further, as the US does, in taxing worldwide income of its citizens, more than 200,000 of whom live in the UAE alone. The argument is that if you have the privilege of carrying the passport, you have an obligation to pay tax.

Another question surrounds nationalisation. Labour is committed to re-nationalising the railways for one, although the infrastructure is already under central government control.

But another target may – may – be England’s water supply network, which was privatised in 1989. Shareholders in various of the rump companies include the Qatar Investment Authority and Adia of the UAE.

The water companies have been the subject of a vociferous campaign, for allegedly paying their shareholders high dividends while neglecting maintenance and investment. It is possible that an incoming Labour government will nationalise the industry.

All that said, the primacy of the rule of law and respect for property rights remain strong in Britain.

Barratt, a mass housebuilder, reported earlier this week that London remains the top choice among world cities for UAE investors looking to buy overseas. The holdings of Gulf states and rights of Gulf citizens in the UK remain secure, even with a Labour government.

James Drummond is Editor-in-Chief of the AGBi

Courtesy: The AGBI.Com


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Kuwait’s Political Crisis Adds to Economic Uncertainty

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Kuwait’s latest standoff is deeply concerning for both the near and long term, writes Andrew Cunningham

The decision by Kuwaiti emir Sheikh Mishal Al-Ahmad to dissolve the country’s recently elected parliament just days before its inaugural session on May 14 presents overseas investors and Kuwaiti citizens with more uncertainty.

The situation raises concerns about the country’s economic prospects over both the short and long term.

Disputes and stand-offs between Kuwait’s emirs and its boisterous parliament are nothing new. Parliament has been dissolved, and the constitution suspended, numerous times over the past 40 years. The country has held four elections in the past four years.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

In March this year, rating agency Fitch described Kuwait’s fiscal and external balance sheets as among the strongest of any of the governments it rates.

But when we look at long-term trends, the picture is more complex and less secure.

Kuwaiti government spending remains overwhelmingly dependent on oil and gas revenues. The government has made almost no progress, over many decades, in diversifying the economy away from oil, or in reducing the huge burden of government salaries and welfare payments.

Oil and gas revenues currently account for nearly 70 percent of total income and, according to IMF projections, will continue to do so for the rest of the decade.

These revenues have served the country well in the past, despite the volatility of oil prices, but such overwhelming dependence looks foolhardy when consumers worldwide are striving to reduce consumption of oil and gas and investors and energy firms have pivoted towards renewables.

Nearly all of the Kuwaiti government’s non-oil and gas revenue arises from overseas investments and from dividends from state-owned companies. Tax revenues account for less than 1 percent of total government income.

Looking beyond the fiscal imperative to diversify the economy is the need to provide employment opportunities for Kuwaiti citizens.

No less than 84 percent of the Kuwaiti workforce was employed by the government at the end of 2022. It is hardly surprising that nearly half of government expenditure is allocated to the salaries of public employees.

Pressure for social spending will increase in the years ahead. A World Bank report, published last year, showed that levels of obesity and Type 2 diabetes were higher in Kuwait than in any of the other GCC countries and nearly double the average in OECD countries.

Partly as a result of this, the World Bank estimated that Kuwait’s old age dependency ratio – the number of people over 65 years old in relation to those of working age – will be nearly double that of its neighbours by 2040.

Kuwait is also a country that is being significantly affected, even today, by climate change. Temperatures during the summer can exceed 50 degrees, making Kuwait one of the hottest places on earth.

These are difficult and complex challenges, both economic and social, but they are hardly unique to Kuwait. That they are, in some cases, more acute in Kuwait than elsewhere is due to decades’ long procrastination and political paralysis.

The government’s General Reserve Fund, which held most of its liquid assets, was entirely depleted in September 2020, according to Kuwait’s own ministry of finance. With AA ratings, the obvious solution was to borrow money – Kuwait’s debt-to-GDP ratio is less than 5 percent. Yet the parliament has still not passed a so-called ‘Liquidity Law‘ that would allow modest issuance of foreign currency debt.

The parliament also held up the introduction of Value Added Tax (VAT), making Kuwait one of two of the six GCC countries not to fulfil a joint commitment to implement a minimum VAT of 5 percent.

Over the past four years, all three of the big international credit rating agencies have downgraded the government of Kuwait.

In their rating reports, all agencies cited a dysfunctional and slow-moving political environment that was reducing the country’s financial flexibility and delaying much needed economic and financial reform.

Politics matters.

It is unrealistic to think that after decades of enmity the ruling family and the parliament will soon form a harmonious working relationship.

But they do need to find some common ground that will enable them to start addressing fundamental economic and social issues while the country still has large financial reserves and strong credit ratings.

Time is running out.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems


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ICD and JSC Ziraat Bank Collaborate to Boost Uzbekistan’s Private Sector

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At the 3rd Tashkent Investment Forum, the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan took a significant step forward in their partnership to empower small and medium-sized enterprises (SMEs) and foster economic growth in Uzbekistan. The forum, held in the capital city of Uzbekistan, brought together key stakeholders from the public and private sectors to discuss investment opportunities and economic development strategies for the region. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is aimed at boosting the private sector in Uzbekistan.

During the forum, ICD and JSC Ziraat Bank Uzbekistan formalized an expression of intent to collaborate on various initiatives aimed at supporting SMEs. One of the key elements of this collaboration is the provision of a Line of Financing (LoF) facility by ICD to JSC Ziraat Bank Uzbekistan. This LoF facility will enable the bank to fund private sector projects as an agent of ICD, thereby providing SMEs with access to the necessary capital to initiate and grow their businesses.

The partnership between ICD and JSC Ziraat Bank Uzbekistan is expected to have a significant impact on the SME landscape in Uzbekistan. By equipping entrepreneurs with the resources they need to succeed, this collaboration will not only support the growth of individual businesses but also contribute to the overall economic development of the country. SMEs play a crucial role in driving economic growth, creating jobs, and fostering innovation, and this partnership will help strengthen the SME ecosystem in Uzbekistan.

JSC Ziraat Bank Uzbekistan, as a strategic partner for ICD, brings a wealth of experience and expertise to the table. As a prominent commercial bank with foreign capital, JSC Ziraat Bank Uzbekistan has a strong track record of supporting SMEs and promoting economic development. The bank’s partnership with ICD further underscores its commitment to advancing the private sector in Uzbekistan and its dedication to supporting the country’s economic growth.

ICD, for its part, is a leading multilateral development financial institution that focuses on supporting the economic development of its member countries through the provision of finance and advisory services to private sector enterprises. By partnering with JSC Ziraat Bank Uzbekistan, ICD is furthering its mission of promoting economic development and fostering entrepreneurship in Uzbekistan and across the Islamic world.

The LoF facility provided by ICD to JSC Ziraat Bank Uzbekistan is just one example of the many initiatives that the two entities are undertaking to support SMEs in Uzbekistan. In addition to providing financial support, the partnership between ICD and JSC Ziraat Bank Uzbekistan will also include capacity-building initiatives and technical assistance programs to help SMEs succeed in today’s competitive business environment.

Overall, the partnership between ICD and JSC Ziraat Bank Uzbekistan represents a significant step forward in supporting SMEs and fostering economic growth in Uzbekistan. By working together, these two institutions are helping to create a more vibrant and dynamic private sector in Uzbekistan, which will ultimately benefit the country’s economy and its people. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is expected to have a far-reaching impact on the private sector in Uzbekistan.


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