Countries that constitute the BRICS bloc first mooted the idea of a common reserve currency between them as far back as 2011.
Back then the Mail & Guardian, a prominent South African media outlet, reported that South Africa backed the creation of a common currency unit which the BRICS countries would use to trade among themselves. The primary purpose for this move would be to circumvent the need to make Euro and US dollar conversions.
The idea of a BRICS currency unit has merit given that the United States dollar and its economy showed remarkable weakness and vulnerability during the Great Recession of 2008 which began in that country’s housing market but quickly spread to the rest of the world.
- BRICS countries that is Brazil, Russia, India, China, and Russia have discussed the possibility of creating a basket reserve currency which would challenge the dominance of the United States dollar in settlement of international transactions.
- BRICS countries between them it has been reported since 2011 hold nearly half of the world’s foreign exchange reserves which places them in an advantageous position should they decide to issue a new currency akin to IMF-issued SDRs.
- Russia has a strong interest in the creation of this alternative reserve currency. The country has seen at least half of its foreign exchange reserves frozen as sanctions on it start to bite.
Secondly, the wisdom of a single monetary unit that is not backed by a centralized fiscus is now starting to be questioned the same way it was in 2011. This is an obvious salvo to the Euro, one such currency unit.
The case for a single BRICS currency unit gains more credence when one realizes that between them BRICS countries hold almost half of the world’s foreign exchange reserves at a time when the reserves of the United States and Europe have been falling. So why can’t this grouping of nations come up with an alternate reserve currency firstly as a medium of settlement for trade transactions between themselves but also as an alternative system that is disproportionately reliant on the use of the greenback which has historically shown that it is prone to volatility in economic cycles.
China presently has the largest sum of foreign exchange reserves in the world. When its over US$ 3 trillion in reserves is added to the reserves of the other BRICS member states the questions as to why they cannot issue their own currency start to grow louder.
Talks of a common currency fizzled out as more pressing national and international matters eclipsed the idea. This year 2022 has seen renewed calls for a common reserve currency emerge once again. This time Russia is leading the call for the creation of a reserve currency that will be an alternative to the United States dollar as a mechanism for the settlement of international transactions.
Russia’s motive for making such a call is obvious, the country has been at war with Ukraine since February 2022. This aggression against Ukraine has earned Russia some of the most stringent economic sanctions in history. What has been the greatest pain point is that Russia has lost access to at least half of its foreign exchange reserves since the beginning of its war with Ukraine.
Leading nations in Europe and the United States have announced embargoes on Russian exports of energy. This development has not been straightforward because most of the countries in Europe and the rest of the world are dependent on Russian oil and gas. Russia for its part has retaliated against what it calls hostile nations by deliberately turning off gas taps. Despite Russia making the calls to reinstate the conversation around the BRICS currency, there is no doubt that China would be and is the driving force behind it. China as has already been said has the largest foreign exchange reserves of any country in the world and is the second largest economy in the world after the United States.
China is the biggest economy among BRICS countries and the Asian superpower has never made a secret of having its currency the Yuan or Renminbi taking on the United States dollar as the global reserve currency.
- The BRICS alternative currency idea has scope and merit however, such a currency by mere inclusion of the Russian rouble in its basket would be volatile because Russia’s trade and capital account have been under pressure since the invasion of Ukraine.
- The basket currency effort has been undermined by the resurgence of the United States dollar which has been appreciating rapidly relatively to other currencies including those in the BRICS bloc.
Chinese economic influence is growing rapidly. Chinese economic hegemony is most prevalent in Africa in terms of infrastructure projects and sovereign debt. In October 2011 stock exchanges in Brazil, Russia, Hong Kong, and South Africa unveiled a cross-listing agreement, the BRIC Exchange Alliance, for derivatives for their combined market capitalization of $9 trillion. Some countries now offer Renminbi banking like Zambia and Nigeria. Russia has a large stake in seeing a BRICS currency unit come to fruition. When the second round of talks on creating this alternate global reserve currency began in 2019, Russia was anxious as it was today to circumvent economic sanctions. In 2019 Russia was under sanctions for its invasion and subsequent annexation of Crimea. Russian leader Vladimir Putin, according to a report by banking group ING announced in June 2022 that the BRICS countries were developing a new basket reserve currency which would include roubles, rupees, renminbi, and rand. The rationale of this round of discussions around the creation of a BRICS currency is that it would be an alternative to the Special Drawing Rights issued by the International Monetary Fund.
ING’s report also questioned the need for an SDR-like basket of currency and concluded that it is the result of the need to break the US hegemonic dominance over international trade as well as for BRICS member states to create their own spheres of influence. For Russia, pegging its currency to the basket of currencies is seen to be a measure meant to slow down the depreciation of the rouble which has been free falling since the invasion of Ukraine began in February 2022. Russia has more skin in the BRICS alternative currency game than other member states especially presently. ING reports that there is mounting pressure on its capital account.
Previously Russia was a net creditor to the rest of the world, meaning that the country was more of a lender to the rest of the world than a borrower. In the years before it became an aggressor, Russia’s trade surplus would be balanced out by the foreign investments it would make in other countries.
Russian capital is no longer welcome in most jurisdictions of the world because of sanctions and legal restrictions.
ING has called these discussions around the creation of a BRICS currency a “trial balloon floated by Putin”. The banking institution is sceptical of such proposals becoming tangible and raises questions about its feasibility. The first question is whether such a basket would attract significant foreign exchange reserves from countries looking to hold it?
These can be friendly nations within their respective spheres or the BRICS countries themselves. ING perhaps most importantly raises a further pertinent issue which is the character and nature of a would-be reserve currency.
- Market pundits like ING are sceptical that the 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 stand up to the criteria of a global reserve currency which include safety, liquidity, and return.
- China is the most dominant economic power of the BRICS member countries. It has the largest amount of foreign exchange reserves of any country in the world. The country is spreading its influence worldwide and is most prevalent in Africa.
This premise questions whether the BRICS basket would be able to stand up to the criteria of what is conventionally believed to be. The qualities of a reserve currency include safety, liquidity, and return. According to ING, in terms of safety, “…sovereign credit quality will clearly be an issue for any BRICS-basket currency, where a simple weighted average of 5-year sovereign credit default swaps (CDS) trades at least twenty times wider than a similar CDS average for SDR currencies. When it comes to FX liquidity, suffice to say a basket of BRICS currencies operates in a different universe to those currencies in the SDR.
The average deposit/yield on a BRICS basket would be far higher, but that is because of the much poorer credit quality where it looks like Russia will shortly go into sovereign default.”
Another inadvertent global economic development that has the potential to undermine the efforts to create the BRICS currency basket is the recent rally in the United States dollar which has been appreciating rapidly relative to other currencies in the world. This strength in the greenback reinforces its position as a global reserve currency.
Investors have been demanding more United States dollars because they perceive it as a safe haven compared to emerging market currencies. The preference for countries one would surmise when it comes to building up national foreign exchange reserves will be to do so in United States dollars.
The idea of a BRICS basket currency has scope and potential however, presently, it is undermined by the country relying on it the most to succeed which is Russia.