BRICS: The new name for reserve currencies | Opinion


Spheres of influence

The news that Russia appears to be leading a discussion on a new reserve currency should perhaps not come as such a surprise. The speed with which Western nations and their allies sanctioned Russian foreign exchange reserves (freezing about half) undoubtedly shocked the Russian authorities. The Central Bank of Russia has indeed admitted this and no doubt some BRICS countries – particularly China – have noticed the speed and stealth with which the US Treasury has acted.

BRICS countries may therefore feel they need an alternative reserve currency to match something like the IMF’s SDR. Recall that the IMF’s SDR is not a currency, but in fact a basket of claims on the main reserve currencies such as the dollar, the euro, the pound, the yen and its most recent addition the renminbi.

There are approximately $950 billion of SDRs in circulation and these are intended to supplement the reserves of IMF members. Most notably, in August 2021, an additional SDR 456 billion was released to IMF members to ease balance of payments financing needs following the pandemic shock.

Why would the BRICS countries need a basket currency similar to the SDR? One can only think that this is a move to remedy the perceived American hegemony of the IMF and will allow the BRICS to build their own sphere of influence and their own monetary unit within this sphere. Interestingly, this week has seen reports that Russia may want to tackle ruble strength by managing it relative to the peg or basket. Could the BRICS be the basket against which the ruble is managed? We know, however, that the CBR is not a fan of ruble management.

Without discussing the likelihood of such a proposal turning into something tangible, Russia might have a strong incentive to participate or initiate an IMF-like program to deal with the mounting pressure on its capital account. Russia is used to being a net creditor to the rest of the world, its large trade surplus being normally offset by the outflow of capital (purchase of foreign assets). Today, in the new geopolitical reality, Russian investments are no longer welcome in its usual destinations in DM due to legal sanctions/restrictions and in some cases individual decisions of financial institutions. At the same time, the rising global rate environment may create demand in emerging and frontier markets for cost-competitive external financing.

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