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Shared Brics money: a Basket Currency or a Basket case?
Summary:
Eight questions for proponents of a Brics common currency.
Many nations would like to reduce their dependence on the increasingly weaponised dollar, especially for dollar-denominated trade that does not pass through the US. The idea of a shared currency issued by the Brics nations (Brazil, Russia, India, China, South Africa) made headlines in late 2024 ahead of their conference in Kazan, Russia.
Wanting to move away from the dollar is understandable, but making progress will be challenging. Here are eight questions for the proponents of a Brics currency.
Is this just a Russian dream to dodge US sanctions?
Not quite. Brazilian President Luiz Inácio Lula da Silva has also expressed enthusiasm for the idea of a new currency for settling trade between the Brics nations. However, politicians from South Africa, India and particularly China have been conspicuously quiet on the topic.
The Brics nations are not a homogenous group of countries with common aims and objectives. They are a diverse group and, in the case of India and China, have significant rivalries. This is not an obvious starting point for a shared currency project.
Would it replace domestic currencies?
It is not clear if the plan is to replace domestic currencies or to create something to operate in parallel. The lack of clarity on this seminal point is an indication that discussions are at an early stage.
These things take time. The euro was created in 1999, 29 years after the 1970 Werner report, which proposed a single currency, and 21 years after the launch of the European Monetary System. It was built on shared political institutions and 50 years of economic integration among neighbouring countries.
A big-bang move to a shared currency for the Brics nations is not practicable. A fixed but adjustable exchange rate regime might be a more viable route to a new currency.
How would a fixed but adjustable exchange rate system work?
The experience of the European Exchange Rate Mechanism, a precursor to the euro, is instructive. The system had a bumpy history but eventually succeeded in establishing guide rails for the launch of the single currency.
Fixed but adjustable exchange rates require occasional realignments to account for differing inflation rates over time. Under the ERM, the burden of adjustment usually fell onto the nation of the weaker currency. Realignments were often fraught events, with political repercussions. If a Brics currency ran parallel to domestic currencies, who would manage exchange rates versus domestic currencies?
Lula’s suggestion for inter-Brics trade currency redenomination out of the dollar would require similar adjustments. The weights of each currency will need to constantly be adjusted to reflect global currency movements (often versus the dollar) and prevent arbitrage.
Would expanding the list of qualifying Brics nations enhance the appeal of a shared currency?
The issues involved in establishing any kind of Brics currency would be enormous. The initiative to expand the group and invite an eclectic list that includes the United Arab Emirates, Iran, Indonesia, Ethiopia and Egypt adds to this complexity and reduces the probability of a new currency arrangement.
If the Brics group is intended to provide a counterweight to the US-led Bretton Woods institutional framework, it should be highlighted that Ethiopia and Egypt are currently reliant on International Monetary Fund financing programmes. Will the Brics group be offering a more credible financing mechanism as an alternative?
Would a gold-linked currency be more viable?
A gold-backed currency might appeal to major gold producers like China, Russia and South Africa.
If a gold-backed currency replaced domestic currencies, then the Brics nations would find themselves on a version of a gold standard. Gold-backed currency regimes in the 20th century collapsed because of the need for governments to print currency to pay for war (the first world war for European nations and the Vietnam war for the US). Does Russia understand that it might have to rein in military spending to maintain a peg?
How would responsibility for maintaining convertibility into gold work between a disparate list of nations with differing holdings of gold and access to new production?
If ‘gold-backed’ meant convertible into gold at the prevailing market price, then the unit would change in value every day. When one of the underlying currencies fell in value who would intervene and defend? Would a gold contribution be required by the nation of the weak currency at a time of vulnerability? Such a system would lead to destabilising speculative movements of gold between participant countries – the opposite of the desired stable and predictable framework.
Why not just use local-to-local currency settlement for intra-Brics trade?
Settlement in local currencies is increasing from an extremely low level. The scope is constrained by nations having a limited appetite for accumulating the currency of the other. Since sanctions were imposed on Russia in 2022, oil exports have been redirected to India. However, Russia does not want to accept rupees because of a limited demand for Indian exports. Local-to-local trade in home currencies will be easiest between nations where trade is in balance. That is rare.
A solution to the rupee conundrum was found by using the UAE dirham, a currency that is fixed to the value of the dollar and internationally accepted in multilateral trade.
The Brics nation currency that has made most progress in term of increased usage in international transactions is the Chinese renminbi. As China is the largest trading partner for 120 other nations it is best placed to become the de facto Brics currency.
What exactly came out of the Kazan summit?
The Russian report to the Brics summit recommended a common platform for cross-border payments using central bank digital currencies. This would avoid having to use the dollar, the US banking system and Swift, the interbank payment service. However, the roll-out of CBDCs is best described as a ‘work in progress’.
The Bank for International Settlements has helped to develop a platform, known as Project mBridge with the participation of five central banks, including the People’s Bank of China.
It’s a solution for the long term, but it could eventually provide for own-currency settlement using CBDCs. Although it would not address the problem of trade imbalances leading to piles of unwanted local currency, it could lead to much lower transaction costs, which might tip the scales for some players.
Why is US President Donald Trump warning against a Brics currency?
Trump is reacting to a problem that does not exist and cannot become a problem during the four years of his presidency. Barry Eichengreen, historian and economist of University of California Berkeley, dismissed the Brics currency idea as a charade. That sounds like a vote for basket case rather than currency basket.
Although the desire to move away from the weaponised dollar is real and growing, the switch will be tough even for trade flows that occur within the Brics group. The power of incumbency is strong. At the margin there will be a bigger role for the renminbi and for gold. The asset management industry is unlikely to need to provide Brics currency-linked products for several decades, if at all.
Source:Gary Smith
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