BRICS Isn’t De-Dollarizing Anytime Soon

Yves here. I am overdue on a post on the recent BRICS and why enthusiasts are greatly underestimating the hurdles member states need to overcome for BRICS to be effective….as in more than a Global South UN.

Let’s mention one. Multipolarity is taken to mean greater national sovereignity for states subject to way too much US/EU/”rules based order” meddling. But effective multinational organizations require some surrender of sovereignity, such as dispute resolution bodies (as in courts or arbitration panels) that sit above nation-states and can issue decisions that are binding upon participants. Look at how the UN looks like joke due to the fact that ICC warrants are being ignored by states that have not opted out of the ICC like Mongolia (admittedly the political stunt one against Putin, so the ICC asked to have its authority challenged). Similarly, does anyone expect any consequential action when the ICJ finds that Israel has engaged in genocide and refuses to cease and desist? Admittedly, this would pave the way for UN sanctions, but then what happens if the US and some EU states were to defy them?

The post below provides some additional reality-checking on the much-hyped de-dollarization plans. But here, the BRICS boosters have done themselves a disservice by overstating what they need to achieve to get free of the risk of US sanctions. The biggie is engaging in bi-lateral trade using the currencies of the trade partner pairs. This is messy since traders and their banks (and central banks) have to traffic in a lot more currencies. But this is a much more attainable objective than a new currency regime.

The big impediment in the intermediate term is that some countries will chronically run trade deficits with other countries (think Turkiye v. Russia) and the exporting country won’t be happy with all of the (probably depreciating) currency it is accumulating from that trade partner. That is why Keynes proposed the bancor, as a way to force countries over time to run pretty balanced trade.

Now admittedly, for China, which as everyone knows is a big exporter to the US, even with having started setting up bi-lateral payment arrangements in 2015, the threat of tighter US sanctions did lead Chinese banks to cut way back on Russia transactions in August. Mind you, the main approach was to payment launder better, as in find cutouts. This does cause friction and increase costs, but for all but small fry does not seem to have been a deal-breaker in the end. From Reuters:

Some Russian companies are facing growing delays and rising costs on payments with trading partners in China, leaving transactions worth tens of billions of yuan in limbo….

Russian companies and officials for a few months have pointed to delays in transactions after Chinese banks tightened compliance following Western threats of secondary sanctions for dealing with Russia….

Chinese state banks are shutting down transactions with Russia “en masse” and billions of yuan worth of payments are held up…

China is Russia’s largest trading partner, accounting for a third of Russia’s foreign trade last year and supplying items such as vital industrial equipment and consumer goods that help Russia weather Western sanctions. It also provides a lucrative market for many Russian exports that China relies on, from oil and gas to agricultural products.

One working solution was to buy gold, move it to Hong Kong and sell it there, depositing cash in a local bank account, the person said.

Sources told Reuters that some Russian businesses have been using chains of intermediaries in third countries to handle their transactions and get around compliance checks run by Chinese banks. As a result, costs to process transactions have risen to as much as 6% of transaction payments, from close to zero before, they said.

This also suggests that US leverage, at least with respect to China, does not come narrowly from the dollar but also from China’s desire to keep exporting bigly to the US. China needs to keep open bank channels to the US in order to get paid.

By David P Goldman. Originally published at Asia Times; cross posted from InfoBRICS

Russian President Vladimir Putin disappointed both anti-colonial enthusiasts and Western alarmists by conceding that the bloc’s members “have not built and are not” building a payment system to challenge the US dollar-based global banking system.

The leaders of the two economic giants present at the BRICS summit, China’s Xi Jinping and India’s Narendra Modi, did not mention alternative payment arrangements in their respective remarks.

The technical requirements for alternative payment systems aren’t the problem. The SWIFT system that controls interbank payments in dollars and other major Western currencies merely transmits secure messages. The challenge, rather, is economic: US demand for imports fuels an outsized portion of economic growth in the Global South. China’s exports to the US amount to just 2.3% of its GDP, but about half of its surge in exports to the Global South since 2020 depends on re-exports to the United States. While China’s exports to the Global South more than doubled from about US$60 billion a month to $140 billion a month, US imports from the Global South rose from about $60 billion a month to $100 billion a month during the past four years.

Dependence on the US market varies widely across the universe of developing countries. Vietnam and Mexico, the two favorite venues for so-called “friend-shoring,” that is, transferring production away from China to putatively friendlier countries, registered big increases in exports to the US as a share of GDP.

Vietnam’s exports to the US in 2023 amounted to about 27% of the country’s GDP, compared to just 10% in 2020, while Mexico’s US exports rose to 27% of GDP in 2023 from 20% in 2010. Singapore and Malaysia, by contrast, showed little increase in US exports as a share of GDP. Indonesia and Brazil export comparatively little to the United States.

Some Asian countries, notably Malaysia and Thailand, export more than 60% of their GDP, mainly to other Asian countries. Brazil, Indonesia and China are far less export-dependent.

Today, China exports just 19% of its GDP compared to 27% in 2010, which means that an increasing share of GDP growth depends on domestic consumption and investment.

What makes the United States such an important factor in the economies of the Global South is its enormous current account deficit. The table below ranks the current account surpluses and deficits of the 20 largest economies from the largest deficit to the largest surplus. With a current account deficit of $80 billion a month, or $1 trillion a year, the US appetite for an excess of imports over exports dwarfs the rest of the world.

China is the largest or second-largest economy in the world, depending on whether we count GDP in US dollars or adjust for purchasing power parity, but China’s imports from the Global South have been stagnant for three years.

China won’t replace much of American import demand for the time being, given Beijing’s focus on high-tech investment rather than consumer demand. At the margin, that leaves the Global South all the more dependent on the US.

Projecting current trends into the future suggests a steady rise in consumer spending in the Global South, especially in East Asia, and the emergence of robust domestic markets and less dependence on exports.

Below is a chart published by the Brookings Institution think tank last year, projecting that the total consumer market in East Asia will overtake the US consumer market by 2028.

Developing countries, though, don’t pay their bills on projections. Arranging payments for goods in international trade is a trivial issue. More challenging is financing long-term deficits.

India, for example, used to run an annual trade deficit with Russia of less than $3 billion. Discounted Russian oil sales to India after the start of the Ukraine war boosted this to more than $60 billion.

What will Russia do with the Indian rupee equivalent of $60 billion? It would far prefer to have another currency, for example, the UAE dirham, that can be used to buy goods in third markets.

The Global South doesn’t yet have the capital markets or the currency stability to convince a surplus trading country to simply hold assets of the deficit country in exchange for goods.

That is what the United States does so well: Its $18 trillion negative net foreign asset position corresponds to the last 30 years’ cumulative current account deficits.

America sells assets to foreigners in return for their goods. The Global South doesn’t have the assets to sell, or at least not in the form that the rest of the world would like to own.

That helps explain why the BRICS Summit’s final declaration relegated the issue of payment systems to feasibility studies:

We reiterate our commitment to enhancing financial cooperation within BRICS. We recognize the widespread benefits of faster, low-cost, more efficient, transparent, safe and inclusive cross-border payment instruments built upon the principle of minimizing trade barriers and non-discriminatory access.

We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners. We encourage strengthening of correspondent banking networks within BRICS and enabling settlements in local currencies in line with BRICS Cross-Border Payments Initiative (BCBPI), which is voluntary and nonbinding, and look forward to further discussions in this area, including in the BRICS Payment Task Force.

BRICS central banks don’t hold each other’s currencies as reserve assets, with limited exceptions. Just 2.3% of world central bank reserves are held in China’s RMB, up from 1.1% in 2016 but down from a peak of 2.8% in 2022. Most of them are buying gold. If the legend on US currency states, “In God We Trust,” gold says, “Trust nobody.”

Sweeping changes across the Global South would be required to make their currencies attractive reserve instruments—transparency and risk management of capital markets, the development of a local middle class, infrastructure, and education.

A great deal of this is happening in stages in many developing countries but progress is gradual and uneven. We now can foresee circumstances under which the Global South might declare independence from the dollar system. But we aren’t there yet and won’t be for years under any foreseeable circumstances.

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32 comments

  1. Guy Liston

    Mr. Goldman is a smart fellow but he’s wrong often as not. I’ve followed him for years in Asia Times. Time will tell as Time will tell, Mike Liston

    1. Yves Smith Post author

      That is an ad hominem attack and thus a violation of our written site Policies. You need to refute Goldman’s argument, and not signal that you don’t like it but cannot find any holes in it. Future drive-by shootings will not be approved.

      1. William Verick

        I think Goldman has it basically right. It might behoove multilateralists to re-examine the Bretton Woods negotiations between Harry Dexter White and John Maynard Keynes by which the United States subsumed the British Empire. Keynes fought hard and many ideas were exchanged before the two (White, a Soviet agent) came up with the gold dollar and the IMF. Volume 3 of Sidelsky’s Keynes biography deals in depth with these issues.

  2. NotThePilot

    The more I’ve thought about this, the more I think BRICS should divert some energy from the financial side of their project to the physical.

    A common economic-planning mechanism could influence trade (through both the current account and non-financial parts of the capital account), help streamline financial transactions with collateral, could be seeded by China’s existing know-how from the BRI, has at least one historical example of success (the ECSC), and fits the unofficial BRICS vibe of real people over financiers perfectly.

  3. PlutoniumKun

    You cannot have an international trade bloc consisting of countries that all insist on running trade surpluses. Someone has to buy all the stuff. It is ironic in many ways, that the US’s main strength internationally these days comes from its position as buyer of last resort of everyone elses surplus.

    In any event, I’m deeply sceptical of Brics being much more than a talk shop. Russia and China clearly have a mutual advantage in co-operating over a range of issues, but the other members are far too diverse, with multiple conflicting internal and external interests, to be capable of making the sacrifices needed to make it meaningful. Definitionally, joining a bloc of any sort means reducing your sovereignty. Most countries just aren’t interested in doing that unless there is a very obvious benefit, and certainly in trade, that benefit doesn’t exist at present.

    1. Polar Socialist

      I guess North Korea is the most sovereign state in the world, then. Seriously, though, it’s not like countries exists in a state of total freedom and sovereignty outside of BRICS. Looking at how USA can dictate with whom even the smallest foreign financial institutions can interact with, how it can impose socio-economical and even cultural norms in exchange for loans, how it’s domestic financial policies can wreck national economies – I’d say joining BRICS is for many an attempt to gain more sovereignty.

      It’s precisely because the members and wannabes are so diverse that BRICS is not demanding anyone to work with everyone. It’s a place where members can find aligning interests, and then proceed with them without asking State Department or Federal Reserve if it’s OK. If they don’t find aligning interests, or they’re fine with USA controlling their transactions regarding those interests, they don’t have to use BRICS mechanism.

      I think the only serious rule in BRICS is that members don’t get to tell other members how to run their countries or what system of government they should have. Unlike some blocks we know. I’d like to say it’s a competition with a system that seriously tires to limit sovereignty and a system tries to limit it as much as possible in an international system (see: North Korea), but it’s not really even a competition, since BRICS is not trying to replace the other system.

      1. PlutoniumKun

        I’m not sure how you measure sovereignty, but I suppose you could argue that PRK and the USA are the most sovereign nations on earth, as neither enter international groups, alliances or organisations, unless they are in charge.

        It’s all very well to say that Brics is not demanding anything of anyone who belongs in the organisation, but thats precisely what makes it meaningless. Unless, by some chance, every single one of them has the same objective, then they can’t work together. And if they have the same objective, then they don’t need an expensive set of institutions, they can just do it.

        So yes, it’s nice to have an international organisation that is made up of countries that don’t want to tell each other what to do. They can have very lovely get-together where they don’t tell each other what they should be doing. I’m sure the catering will be delicious. But actually creating an alternative to the western capitalist system requires a lot more than this.

        1. Mikel

          It’s not out of the question that that could agree on an objective or two or three, etc. and not feel blackmailed or strong-armed into it.
          But a country setting itself up to be like Greece in the EU or disgruntled like the UK in the EU or any country in the UN looking like boo-boo the fool with every US veto shouldn’t be the only options or definitions for doing some things as a bloc.

    2. Thuto

      I think all these articles raining on the Brics parade are responding to the hype merchants who are given to hyperbole and spouting mouthfuls of slogans and soundbites around every summit more than to the people involved in formulating official plans for the grouping. I know someone involved in a committee that represents South Africa’s position within the group, and he assures me that no serious participant within the Brics underestimates the hurdles that stand in the way of achieving its stated LONG TERM strategic objectives. And these hurdles aren’t only external to the group but also include internal conflicting interests and fissures that have to be ironed out.

      But, he assures me, their refusal to be seduced by the hype is matched by an equal if not greater commitment to refuse to be downcast by the musings of those dismissive of the grouping’s ability to achieve its strategic objectives. These are serious people who know the gauntlet has been thrown down and there’s no going back and are aware that writing the code for the geostrategic firmware that’s going to lay the foundation for the gradual erosion of US imperial power isn’t an undertaking that can coast along on hype alone. They operate above the fray of hyperbole and emotion that fuels much of the wide eyed hype merchants that dutifully inflate, without fail, a hype bubble at every Brics summit.

      1. Susan the other

        So how do the proposed commodity exchanges function as a kind of fail safe way to protect some basic commodities like grain? The one mentioned by Putin was to prevent hunger in Africa. Doctorow suggested this exchange system would erode the international use of the dollar, especially when the dollar is used to sanction other countries. Back to trade as a direct exchange, no currency necessary. But what method of establishing value for value?

        1. CA

          So how do the proposed commodity exchanges function as a kind of fail safe way to protect some basic commodities like grain?

          [ What China has been doing is exporting designed seed and growing technologies for grains to developing country after country. China has extensive, degreed training programs for farmers. Programs in reclaiming land are being designed and exported, as to Kenya where bamboo is being used to reclaim extensive amounts of land, while serving as a cash crop. Mushroom farmers, as from Botswana, are offered graduate degrees in China in Juncao development. ]

        2. Thuto

          I think the mechanics of how these things could work were a viable alternative system to be successfully implemented are still being worked out (CA below makes an interesting observation which is worth looking into) My belief is that the overarching theme for this stage of the process is to devise ways to increase economic and trade connectivity among the members of Brics and insulate these connections as far as possible from coercive meddling by the US and its partners. We are still in the early innings of this process and hurdles abound but TINA…

          1. CA

            Thuto:

            “My belief is that the overarching theme for this stage of the process is to devise ways to increase economic and trade connectivity among the members of Brics and insulate these connections as far as possible from coercive meddling by the US and its partners…”

            [ Perfectly expressed; just the way in which the Chinese understand BRICS. ]

      2. PlutoniumKun

        With respect to people involved in Brics, and I’m sure many are very well meaning and sincere, I’ve never yet heard a bureaucrat advocate anything but a career long lifespan for their organisation to achieve whatever goals they wish to achieve.

        I would love to be proven otherwise, but I have absolutely no idea how such a very diverse set of countries (many of which have directly conflicting objectives on a range of very important issues) can ever make a meaningful difference. And thats not even taking into account potential cuckoos in the nest, like Egypt or India.

        Organisations like Brics can either succeed on their own terms by setting strict rules which everyone abides by (as the EU and GATT, etc., do), or by working on consensus. It seems highly unlikely that Brics will set up the such legally abiding rules (not least because the most powerful members are unlikely to be willing to accept them). So you are left with building up a consensus on important long term aims, and the funding and institutions to achieve them among a vastly differing range of countries. So that means getting the UAE, India, Ethiopia, Russia and Egypt all agreeing to fund and manage some set of binding proposals to follow in the long term. Good luck with that, is all I can say.

        1. Thuto

          Brics was always going to be faced with having to navigate the choppy waters of doubt and criticism for its bold ambitions. By definition when a group of countries (or individuals for that matter) align behind what they deem to be a worthy common objective, there’s bound to be a diversity of interests at play, this is to be expected. I’m not convinced that this, in and of itself, represents a death knell for the ambitions of Brics, especially when the reasons why this group was set up in the first-place look set to only intensify as the hegemon weaponizes its “exorbitant privilege” and indulges in egregious forms of coercive behaviour in a desperate attempt to stem the tide of its accelerating decline.

          Simply put, countries in the global South in general, and Brics members in particular, will have to face a moment of reckoning and decide whether Uncle Sam’s boot on their neck is more palatable than resolving the differences between them and doing whatever needs to be done to set up an alternative system, whatever the obstacles are that lie in their path. Having the goal to cast off the yoke of oppression has united diverse groups of people across the arc of human history so let’s see how things unfold in the years and decades ahead. It’s too early in the game to be writing off anything.

  4. Wukchumni

    BRICS central banks don’t hold each other’s currencies as reserve assets, with limited exceptions. Just 2.3% of world central bank reserves are held in China’s RMB, up from 1.1% in 2016 but down from a peak of 2.8% in 2022. Most of them are buying gold. If the legend on US currency states, “In God We Trust,” gold says, “Trust nobody.”
    ~~~~~~~~~~~~~~~

    The FTC decreed in the 1980’s that markups on coins couldn’t be more than 40%, and the boiler rooms pushing quasi numismatic bullion really got going in the horse latitudes that prevailed for a generation from 1980 to 9/11 in the marketplace.

    They preyed mostly on evangs, as gold is mentioned 418 times in the good book, and they are so fruity for content therein, and were an easy sale @ 39.874% over cost, and as far as I could discern, were the largest bloc of bullion buyers in the days* of $250-400 spot prices, similar to their current voting bloc percentage.

    Evangs continue to be the same presence if not more in terms of who owns what in the USA in physical form, look how they get preyed upon on all the usual righty tv channels and radio stations.

    Nobody wants to go back to the gold standard, it would only return upon a lack of faith in fiat writ large. Were that to happen, not only would the far religious right own the politics, it would be the proverbial one-eyed man in a country of the financially blind.

    * Indians were another bloc of only ever buyers-never sellers in fair retail transactions over the counter, where the retail but/sell spread was 3%. Only 24k coins/bars, of which a good deal of it was turned into chunky bracelets and the like by an Indian jeweler in Cerritos, Ca.

    The reason being that there wasn’t duty on personal jewelry coming into India, but there was on bullion in coin or bar form, ha.

  5. Ram

    Can someone explain what would happen if US pushes for rapid reshoring of manufacturing. As I understand EM currency will crumble. But what will be the effect on US local population. Will they also see a sharp drop in standard of living due to price rise

      1. Mikel

        A wholesale economic ideology change would have to happen first…who knows how long that would take. But it could be done. Countries have started from much less and become industrialized from total scratch.

  6. IronForge

    Goldman obviously hasn’t been reading up recently.

    RUS, CHN, and IND already have their own Interbank Payment Systems; and they’ve been working on Inter-System Venues and Joint Systems Platforms for some time.

    Chinese Banks? No Problem. Those exposed to Western Trade do cave. Others won’t.

    Adding KSA, UAE, and IRN just boosted the Gold Purchase/Bartering Options.

    Didn’t he see the BRICS_Pay Card Demo? App allows you to load Multiple Member State Bank Cards for the user to pay from.

    No One’s taking much about the Tether Coin – who branched out to €UR and Gold Tokens. BRICS+ could do the same with CHN, IND, KSA, UAE, and BRA not cut off…

    Just a few thoughts…

    1. LY

      And you’ve missed the main point of the article. It’s not payment systems, unless you’re here to flog digital coins…

      The Global South doesn’t yet have the capital markets or the currency stability to convince a surplus trading country to simply hold assets of the deficit country in exchange for goods.

      1. Jason

        Yes that is the big problem. Something like the BRI with China acquiring real assets, via equity investment and physical construction, might ameliorate things somewhat. While most of the BRICS countries are surplus countries now, a large part of that is due to doing self-insurance to prevent being visited by the IMF during a currency crisis. BRICS can help with that too and reduce the need to run trade surpluses to accumulate reserves.

  7. CA

    Share of World GDP, 2023

    https://www.imf.org/en/Publications/WEO/weo-database/2024/October/weo-report?c=223,924,532,534,546,922,199,&s=PPPGDP,PPPSH,&sy=2007&ey=2023&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1

    BRICS = Brazil, China, India, Russia and South Africa.

    Brazil ( 2.4)
    China ( 19.1)
    India ( 7.9)
    Russia ( 3.5)
    South Africa ( 0.5)

    BRICS+ = Egypt, Ethiopia, Iran and United Arab Emirates are full
    members of BRICS.

    Egypt ( 1.2)
    Ethiopia ( 0.2)
    Iran ( 1.0)
    United Arab Emirates ( 0.4)

    BRICS and BRICS+ counted for 36.16% of world GDP in 2023
    G7 counted for 29.48% of world GDP in 2023

    BRICS and BRICS+ in 2023 were 22.66% larger in real GDP than the G7

  8. CA

    https://www.imf.org/en/Publications/WEO/weo-database/2024/October/weo-report?c=924,532,546,111,&s=PPPGDP,PPPSH,&sy=2007&ey=2023&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1

    China in 2023 was 26.8% larger in real GDP than the US, and 29.8% larger in GDP than the EU.

    BRICS has a core of Brazil, China, India, Russia and South Africa.
    BRICS+ has added Egypt, Ethiopia, Iran and United Arab Emirates.

    Algeria, Belarus, Bolivia, Cuba, Indonesia, Kazakhstan, Malaysia, Nigeria, Thailand, Turkey, Uganda, Uzbekistan and Vietnam will now become BRICS Bank * members.

    * New Development Bank (NDB)

    1. Yves Smith Post author

      The New Development Bank is not a “BRICS Bank” in the way you imply. It does not have any role in trade or payments processing. It makes loans and then only in proportion to the particular member’s contribution.

      And its balance sheet is a puny $100 billion. A single US bank, JP Morgan, is 40X larger: https://stockanalysis.com/stocks/jpm/financials/balance-sheet/

      It intends to make a mere $5 billion in loans in 2024 (https://www.reuters.com/business/finance/brics-development-bank-aims-make-5-bln-loans-2024-2024-03-26/).

      JP Morgan’s is

      1. CA

        Forgive me for being unclear or imprecise:

        https://www.ndb.int/about-ndb/

        The New Development Bank (NDB) is a multilateral development bank established by Brazil, Russia, India, China and South Africa (BRICS) with the purpose of mobilising resources for infrastructure and sustainable development projects in emerging markets and developing countries (EMDCs). *

        * BRICS countries established the NDB in 2015.

  9. JonnyJames

    To oversimplify: it took a rare historical watershed event, the two “world wars”, to create a situation where the Bretton Woods institutions could be established and dominated by the US, as well as the USD national currency becoming numeraire and reserve currency. Most of the rest of the world has since become path-dependent; will it take another watershed event to shock the world into a radical change to the current institutional order?

    (Historical examples: After the “30 years war” a radical new multilateral, mutually recognized international legal framework arose, the Treaty of Westphalia. After the “Napoleonic Wars” another intl. framework was agreed on “The Concert of Vienna”) .

    Given the obstacles and huge levels of multilateral trust and cooperation required, can this be a gradual transition? Yves raises the point of a lack of rule of law and the US relying on brute force (Law of the Jungle). The US has shown it is “not capable of agreement” and will double-cross and try to crush any country that might stand in the way.

    In addition to he great points raised here: I don’t imagine that the US will sit idly by and watch its “exorbitant privilege” disappear altogether. A desperate, declining power is engaged in extremely reckless behavior in an attempt to maintain hegemony. Ironically, perhaps the watershed event will be precipitated by the policies of the US itself.

      1. CA

        The graph shows foreign currency reserves for the 5 largest countries by GDP in purchasing power parity terms. Country reserves are valued in dollars, but holdings can be in a range of currencies such as Euros or Pounds or Yen or Swiss Francs, etc.

  10. JW

    One of the most annoying facets of the western media’s coverage of Ukraine is the constant production of ‘Russia’s red lines’ and then arguing why they are not defending them.
    The same is at work with coverage of ‘Big Brics’ (BB). I can recall many times that various people in Russia, China and India have refuted the idea that anyone is seriously considering the creation of a ‘bancor’ never mind a ‘euro’. Yet here we are again, shooting down something that is not planned.
    What is planned are alternative mechanisms for bilateral trade and settlement which can exist alongside the existing mechanisms, whilst BB tries to influence the management and control of existing institutions which would continue to use USD. Its not the currency that is the problem nor the position of the US economy, but its the way its used in a manner familiar to the mafia.
    The NDB is indeed underfunded and its here where most progress for the betterment of the global east/south can be made. A viable alternative to IMF/World Bank lending is required.

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