Could a New BRICS Currency Emerge in the Future?

The 15th BRICS summit (Brazil, Russia, India, China, South Africa) commenced on August 22 in Johannesburg. The group has taken on an increasingly political stance amid growing tensions between the U.S. and China, and the sanctions against Moscow imposed by the West following Russia's annexation of Crimea and subsequent invasion of Ukraine. Of interest is the decision of the BRICS leaders to expand their influence by inviting Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates to join the group from January 2024.

The BRICS group is positioned as a counterbalance, advocating for an evolving, predominantly multilateral, economic world order that could potentially challenge the pre-eminence of the U.S. dollar in global trade. The discussion to establish a common currency was amongst the topics addressed by the five countries at their Johannesburg summit.

In recent months, there appears to be an increased inclination towards de-dollarization to reduce vulnerability to the greenback amid rising interest rates and to ease the pain from sanctions, with many developing countries criticizing its use as a geopolitical weapon. Settlements for imports of Russian oil, piped gas, coal, and metals are mostly done in yuan, Argentina has stated its intentions to offset part of its debt in yuan, Brazil is looking to use the yuan more in its transactions with China, countries such as Iraq, Saudi Arabia, and the United Arab Emirates are actively looking into alternatives to the dollar, central banks are striving to transfer more of their currency reserves away from the dollar and into gold…. 

However, is it plausible that the dollar may be dethroned by a new BRICS currency?

The greenback is instrumental in more than 74% of all global trade and nearly 90% of worldwide forex transactions, according to the Bank for International Settlements. Even though its influence has lessened somewhat since 2015, it still constitutes 58% of global foreign exchange reserves. Whether one approves or disapproves, the dollar's global supremacy is unquestionable. Nevertheless, de-dollarization has been on the rise following Russia's war in Ukraine.

The most ambitious course of action would be to implement a single currency like the Euro. Easier said than done. Negotiating a single currency within the BRICS could be challenging due to differing economic power and intricate political dynamics. The BRICS bloc is more a strategic balance against the G7-led developed world rather than a unified economic structure. For a new currency to succeed, the BRICS should agree on an exchange rate mechanism to phase out their own sovereign currencies, set up a new central bank, and possess efficient payment systems as well as a well-regulated, stable, and liquid financial market. To establish global currency status, the BRICS nations would need a solid history of cooperative currency management to assure others of the new currency's reliability.

Creating a BRICS equivalent of the Euro seems implausible today. None of the involved countries exhibits any inclination to discontinue its local currency. Furthermore, China is intent on raising the power of the renminbi internationally. There is a significant economic disparity between China and the other BRICS nations. Though India will remain the fastest-growing major economy in the next three years, its GDP is only about one-fifth that of China.

A more reasonable goal would be enhancing the BRICS Interbank Cooperation Mechanism, established to streamline cross-border transactions between BRICS banks in their local currencies. In the last 12 years, member banks have penned multilateral collaboration agreements in various fields including local currency credit, sustainable development, infrastructure finance, fintech, and responsible finance. These concerted efforts have produced a strong impetus for financial cooperation within the BRICS as well as the facilitation of trade and investment. 

Despite the hurdles to de-dollarization, it is important not to underestimate the resolve of the BRICS group. The bloc has already overcome major crises such as the Russo-Ukrainian conflict to strengthen its collaboration, pour investment into new financial institutions, and consistently expand its policy discussion spectrum.

Even if there is no advancement towards a shared currency, there are numerous matters on which central bankers from BRICS regularly synchronize, demonstrating robust potential for cultivating new financial partnerships. A new global economic order won't arise merely from introducing a unified currency. Rather, it could potentially stem from BRICS’ commitment to better-coordinating trade policies, especially through bilateral agreements.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.