Photo: © REUTERS/Wu Hong
Then the well-known South African publication Mail & Guardian reported that South Africa supported the creation of a single currency that the BRICS countries would use to trade among themselves. The main purpose of this move was to move away from the need to convert to euros and US dollars.
The idea of creating a BRICS currency deserves attention, given that the US dollar and its economy showed significant weakness and vulnerability during the Great Recession of 2008, which began in the real estate market in this country, but quickly spread to the rest of the world.
The BRICS countries, namely Brazil, Russia, India, China and South Africa, discussed the possibility of creating a basket of reserve currencies that would challenge the dominance of the US dollar in international transactions. Since 2011, it has been reported that the BRICS countries hold almost half of the world’s foreign exchange reserves, which puts them in an advantageous position if they decide to issue a new currency similar to free drawing rights (SDRs) issued by the IMF. Russia is strongly interested in creating this alternative reserve currency. As the sanctions began to take effect, the country found that at least half of its foreign exchange reserves were frozen.
Second, the wisdom of a single currency not backed by centralized budgeting is now beginning to be questioned, as it was in 2011. This is an obvious blow to the euro, one such currency.
The case for a single BRICS currency becomes more compelling when you consider that the BRICS together hold almost half of the world’s foreign exchange reserves, while those of the US and Europe are shrinking. So why can’t this group of countries come up with an alternative reserve currency, firstly as a means of settling trade deals among themselves, but also as an alternative system that is disproportionately dependent on the use of the dollar, which has historically shown itself to be prone to volatility in economic cycles?
China currently has the largest amount of foreign exchange reserves in the world. When its reserves of more than $3 trillion are added to those of other BRICS countries, questions regarding why they can’t issue their own currency grow louder.
Talk of a single BRICS currency stalled as more pressing national and international concerns overshadowed the idea. This 2022, there are renewed calls for a single reserve currency. This time, Russia is leading the call for a reserve currency to replace the US dollar as the settlement mechanism for international transactions.
Russia’s motives for such a call are obvious: the country has been in conflict with Ukraine since February 2022. Because of this, Russia has come under some of the toughest economic sanctions in history. What was the biggest problem was that Russia lost access to at least half of its foreign exchange reserves.
The leading countries of Europe and the USA have declared an embargo on the Russian export of energy resources. This decision was not an easy one because most of the countries in Europe and the rest of the world are dependent on Russian oil and gas. Russia, for its part, took revenge on what it calls hostile countries by deliberately (according to Western leaders) turning off the gas taps. Despite Russia’s calls to revive the conversation regarding the BRICS currency, there is no doubt that China will continue to be the driving force behind this process. China, as already mentioned, has the largest foreign exchange reserves of any country in the world and is the second largest economy in the world following the United States.
China is the largest economy among the BRICS countries, and the Asian superpower has never made a secret of the fact that its currency, the yuan, is displacing the US dollar as the world’s reserve currency.
The idea of an alternative BRICS currency has scope and merit, but such a currency simply including the Russian ruble in its basket would be unsustainable as Russia’s trade balance and capital account are under pressure from the sanctions. Efforts to create a basket of currencies have been undermined by the resurgence of the US dollar, which has been rapidly strengthening once morest other currencies, including those of the BRICS bloc.
China’s economic influence is growing rapidly. Chinese economic hegemony is most prevalent in Africa in terms of infrastructure projects and public debt. In October 2011, the Brazilian, Russian, Hong Kong and South African stock exchanges unveiled a cross-listing derivatives agreement (the BRIC Exchange Alliance) with a combined market capitalization of $9 trillion. Some countries currently offer banking services in RMB such as Zambia and Nigeria.
Russia is very interested in creating a BRICS currency. When the second round of negotiations to create this alternative global reserve currency began in 2019, Russia, as it does today, sought to circumvent economic sanctions. Russia was sanctioned in 2019 for annexing Crimea. Russian leader Vladimir Putin, according to a report by banking group ING, announced in June 2022 that the BRICS countries are developing a new basket of reserve currencies, which will include the ruble, rupee, yuan and rand. The rationale for this round of discussions around the creation of a BRICS currency is that it will be an alternative to the Special Drawing Rights issued by the International Monetary Fund.
The ING report also questions the need for a currency basket and concludes that it is the result of a need to break the hegemony of the United States in international trade, as well as a need for BRICS member states to create their own spheres of influence. For Russia, pegging its currency to a basket of currencies is seen as a measure to slow the depreciation of the ruble, which has been falling freely since the start of the special military operation in February 2022. Russia has more interest in the BRICS alternative currency than other member states, especially at the present time. ING reports growing pressure on the capital account.
Previously, Russia was a net lender to the rest of the world, which meant that the country was more of a lender to the rest of the world than a borrower. Years before Russia became the aggressor, Russia’s trade surplus had to be balanced by the foreign investment it made in other countries.
Russian capital is no longer welcome in most jurisdictions around the world due to sanctions and legal restrictions.
ING called these discussions around the creation of the BRICS currency “a trial balloon launched by Putin.” The Bank is skeptical that such proposals will become a reality and questions their feasibility. The first question is, will such a basket attract significant foreign exchange reserves from countries willing to keep it?
These may be friendly states in their own spheres or the BRICS countries themselves. ING raises another pertinent question, namely the nature of a potential reserve currency.
Market experts such as ING are skeptical that a BRICS currency will see the light of day, given current geopolitical realities and the fact that such a basket or alternative reserve currency would not be able to meet the global reserve currency criteria, which include safety, liquidity and profitability.
This premise raises the question of whether the BRICS basket can meet generally accepted criteria. From a security standpoint, according to ING, “…sovereign credit quality is likely to be an issue for any currency in the BRICS basket, where a simple weighted average of five-year sovereign default swaps (CDS) trades at least twenty times wider than similar averages for hard currencies. currencies of developed countries. When it comes to liquidity in foreign currencies, suffice it to say that the BRICS currency basket operates in a different universe than the currencies of developed economies.
The average deposit/yield ratio of the BRICS basket will be much higher, but this is due to much lower credit quality, which is likely to lead Russia into sovereign default soon,” ING believes.
Another unintended global economic event that might undermine efforts to create a basket of BRICS currencies is the recent rally in the US dollar, which is rapidly strengthening once morest other world currencies. This strength of the dollar strengthens its position as the world’s reserve currency.
Investors are demanding more US dollars as they see them as a safe haven compared to emerging market currencies. It can be assumed that when it comes to creating national foreign exchange reserves, countries prefer to do so in US dollars.
As Mikhail Shulgin, Head of the Global Research Department “Opening Investments”, noted in his analytical note on the topic of the BRICS reserve currency, technically creating a platform for the reserve currency and a formula for its calculation with an effective distribution of weights is a quite feasible task for itself, and feasible in a relatively short time. According to the expert, the key issue is the motivation of the BRICS countries and its relevance. Russia obviously has a strong motivation to deal with the growing pressure on its capital account. Russia’s huge trade surplus was balanced by an outflow of capital, which is impossible in the current realities. The motivations of the rest of the BRICS members look vague so far.
BRICS members do not have the same opinion on de-dollarization at the group level, nor the same sense of urgency to prioritize de-dollarization, Shulgin noted. All of them are interested in reducing their dependence on the US dollar, but not all of them want to be separated from the US-led global financial system. Most BRICS members still hold large amounts of US dollar assets in their reserves.
“The BRICS countries face a dilemma: although they would prefer to have an alternative to the US dollar as their dominant currency, a depreciation of the dollar would reduce the value of their large amounts of dollar-denominated assets. Thus, they need to balance their desire for greater international influence and financial autonomy with the material costs of weakening the dominant currency position of the US dollar. This balance is a critical issue not only for BRICS, but also has a direct political significance for other countries and regional organizations,” said Mikhail Shulgin.
