The “BRICS Currency” and its implications on the dollar and the world economy

The news that Russia appears to be leading a discussion on a new reserve currency should perhaps come as no surprise. This evolution is the result of the sanctions imposed by the US Treasury and Western countries which, evidently, have been well noted by China and other countries, which would like to avoid, one day, finding themselves financially cornered. we see, even with an analysis by ING , the possible economic implications.

BRICS countries may therefore feel they need an alternative reserve currency, able to match something like the IMF's Special Drawing Rights (SDR). Recall that the IMF's SDR is not a currency, but a basket of credits on major reserve currencies such as the dollar, euro, pound, yen and the latest addition, the renminbi, for which it is a unit of account. based on multi-currency credits.

SRDs in circulation amount to approximately $ 950 billion and are intended to supplement the reserves of IMF members. Notably, an additional SRD 456 billion was issued to IMF members in August 2021 to alleviate balance of payments financing needs following the pandemic shock.

Why would the BRICS need a basket of currencies similar to SRDs? One can only think that this is a move to counter the perceived hegemony of the United States over the IMF and that it will allow the BRICS to build their own sphere of influence and monetary unity within that sphere. Interestingly, this week there were reports that Russia may want to address the problem of perhaps excessive strength of the ruble by managing it against the peg or basket. Could the BRICS be the basket against which to manage the ruble? It would be a step in this direction, but it is unclear whether the Russian Central Bank would accept this type of basket.

Without discussing the likelihood of such a proposal turning into something tangible, Russia may have a strong motivation to join or initiate an IMF-like scheme to address the growing pressure on its capital account. Russia is used to being a net creditor to the rest of the world, as its large trade surplus would normally be offset by the outflow of capital in the form of Russian investments abroad. Right now many of the Russian investment destinations are hostile or at least less favorable, due to the sanctions, so a new unit of account could help redirect these flows which, at the moment, are sterile for Moscow.

How realistic are these Moscow wishes? how much will this basket attract financial resources from the BRICS and, perhaps, from other Asian countries?

We must not forget the mantra of what makes a good reserve currency: “safety, liquidity and return”. On the security front, sovereign credit quality will clearly be an issue for any currency in the BRICS basket, where a simple weighted average of 5-year sovereign credit default swaps (CDS) is at least twenty times larger than a comparable average of CDS for SDR currencies. As for foreign currency liquidity, suffice it to say that a basket of BRICS currencies operates in a different universe than that of SDR currencies. The average deposit / yield of a BRICS basket would be much higher, but this is due to the lower credit quality. Furthermore, there is a problem of complementarity between the economies of the BRICS, which, in reality, find themselves trading either with Western countries or with other nations rather than with each other. Furthermore, there is another problem: if there were indeed an over-performance of the BRICS currencies for the implementation of this system, splits would be caused between commodity exporting countries, such as Russia and industrialized countries such as China, for the which overvaluation could lead to competitiveness problems. Without considering some political problems that some countries may have from too close links with China and Russia. On the other hand, what could arise with this BRICS account currency is a parallel payment system, completely detached from Swift and parallel to the American banking systems, which would favor transactions between countries even in the event of sanctions and, above all, allow triangulation of goods as well. Westerners with clear, simple and cost-effective payments.

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The article “The currency of the BRICS” and its implications on the dollar and on the world economy comes from .

This is a machine translation of a post published on Scenari Economici at the URL on Thu, 23 Jun 2022 09:00:33 +0000.