Leaders in the five major emerging economies are in the midst of “creating an international reserve currency”, revealed Russia and members of the BRICS countries. This comes on the heels of inflation data in Europe and the US rising significantly higher last month. According to analysts, the BRICS reserve currency is meant to rival the US dollar and the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) currency.
In the backdrop of the Ukraine-Russia war and Covid-19, Western countries are in a recession or about to experience one. Analysts believe the BRICS move to create a reserve currency is an attempt to undermine the US dollar and the IMF’s SDRs.
During the 14th BRICS Summit, Russian President Vladimir Putin announced that the five-member economies—Brazil, Russia, India, China, and South Africa plan to issue a “new global reserve currency.” “We are ready to openly work with all fair partners,” he added. Turkey, Egypt, and Saudi Arabia are also considering joining the BRICS group.
Chris Turner, the global head of markets at ING, said, “This is a move to address the perceived US hegemony of the IMF.” The news of a reserve currency is not really a surprise, as specific accounts about the member countries countering the US dollar have been reported on for quite some time.
At this year’s St Petersburg International Economic Forum, Putin talked about the US ruling the world’s financial system for years. “Nothing lasts forever,” Putin said, adding, “(Americans) think of themselves as exceptional… that means everyone else is second class.”
“Domestic socio-economic problems that have become worse in industrialized countries as a result of the (economic) crisis are weakening the dominant role of the so-called historical West. Be ready for any development of the situation, even for the most unfavourable development,” he said.
In June, Bloomberg published a report about the BRICS Summit and noted that China’s president Xi Jinping suggested that NATO was responsible for antagonising the Russian Federation. “Politicising, instrumentalising and weaponising the world economy using a dominant position in the global financial system to wantonly impose sanctions would only hurt others as well as hurting oneself, leaving people around the world suffering,” Xi detailed, adding, “Those who obsess with a position of strength, expand their military alliance, and seek their own security at the expense of others will only fall into a security conundrum.”
Strengthening of the BRICS nations
In 2014, Russia fully developed the System for Transfer of Financial Messages (SPFS), and later the Mir payment system was launched. That same year, in response to the annexation of Crimea, Russia started to stockpile gold in vast amounts.
China has been hoarding massive amounts of gold as well. Both countries hiked their gold reserve purchases a great deal a few years before the war. Russian banks also joined the China International Payments System (CIPS) making it easier for the two countries to trade.
Since World War I, the US dollar has been the world’s global reserve currency and America emerged as the largest international creditor. The US dollar currency index (DXY) gained over 10 per cent this year and outpaced strong currencies like the Japanese yen.
Just recently, the euro met parity with the dollar. Other currencies like the Indian rupee, Polish zloty, Colombian peso, and the South African rand have faltered against the greenback in recent times. However, the Russian ruble has been a strong competitor to the dollar.
Kamakshya Trivedi, the co-head of a market research group at Goldman Sachs thinks the dollar, at least for now, will remain robust. Trivedi wrote on July 16, “There might be a bit more to go, but probably the largest part of the dollar move may well be behind us.”
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