BRICS 2024: Russia To Push Petroyuan and mBridge in Kazan

Herbert Poenisch, Senior Fellow at Zhejiang University and former Senior Economist at the Bank for International Settlements (BIS), outlines two reasons why the upcoming BRICS summit in Kazan, Russia, could be groundbreaking compared to the 2023 summit in Johannesburg, which Western observers largely dismissed as non-threatening to the dollar.

Expansion of BRICS Membership

Poenisch points to the expansion of BRICS as the first key development. Since the last summit, BRICS has added five major members: Saudi Arabia, the United Arab Emirates, Iran, Egypt, and Ethiopia. Saudi Arabia, the world’s top oil supplier, has also joined Project mBridge, a digital currency arrangement led by the BIS. Poenisch notes Saudi Arabia’s openness to alternatives to the dollar-based oil payment system, including the possibility of using the petroyuan for oil transactions.

Russia’s Push for Economic Independence

The second reason, according to Poenisch, is Russia’s increasing efforts to distance itself from Western economic systems. At the Kazan summit, Russia is expected to advocate for the petroyuan and its own mBridge system as alternatives for oil payments. There’s also discussion of creating a common BRICS currency to further reduce reliance on the dollar.

Challenges to the Petroyuan

However, Poenisch also outlines significant hurdles for the petroyuan to overcome. A true currency must serve as a denomination, a means of payment, and a store of value. While denomination—pricing oil in renminbi—can be easily done, the real challenge lies in establishing it as a reliable means of payment. The BRICS nations have suggested using an outdated correspondent account system to bypass US-controlled SWIFT, but this setup faces scrutiny, especially from Chinese banks under the threat of US sanctions.

Another challenge is the imbalance among BRICS nations’ currencies. For instance, Russian banks are accumulating Indian rupees from oil payments, but there’s no smooth mechanism for using these currencies in cross-border trade. The bigger issue, however, is that major oil-importing countries like India don’t earn enough renminbi to pay for their oil imports, meaning China will need to provide them with renminbi through other channels.

mBridge: A Potential Solution

Project mBridge could offer a solution. Poenisch highlights that mBridge uses central bank digital currencies (CBDCs) to replace the traditional correspondent account system. This modern system allows for immediate settlement among partner central banks in China, Hong Kong, the UAE, Thailand, and Saudi Arabia. Importantly, transactions on this platform avoid oversight from SWIFT and the US, making it an attractive option for countries looking to bypass Western influence.

Storing Value in Renminbi

The third function of a currency is acting as a store of value, and here too, the petroyuan faces challenges. Oil-exporting countries will accumulate large surpluses of renminbi, but the question is how to recycle these funds efficiently. In the dollar-based system, global banks managed this process seamlessly, but doing so with the renminbi will be more complicated.

“Any surpluses that were added to the foreign exchange reserves of oil-exporting countries were attracted by foreign banks that lent them to countries in need. With the exception of the Mexican crises in the early 1980s, this process worked smoothly, mainly through the eurodollar market.” 

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