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While inflation data in Europe and the United States rose significantly higher last month, Russia and members of the BRICS countries revealed that leaders of the five major emerging economies are in the midst of “creating an international reserve currency.” Analysts believe the BRICS reserve currency is intended to compete with the US dollar and the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) currency.
Over the past month, the West has struggled with red-hot inflation and skyrocketing energy prices. Politicians in the UK, Europe and the US have tried to blame the economic disaster on a number of things such as the war between Ukraine and Russia and Covid-19.
Data from last month’s consumer prices in America and Europe have climbed to all-time highs, and many analysts say Western countries are in or about to experience a recession. Meanwhile, in late June, members of the BRICS nations met at the 14th BRICS Summit to discuss world affairs.
During the 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.”
“The issue of creating the international reserve currency based on the basket of currencies of our countries is under consideration,” Putin said at the time. “We are ready to work openly with all fair partners,” he added. In addition, Turkey, Egypt and Saudi Arabia are considering joining the BRICS group. Analysts believe that the BRICS move to create a reserve currency is an attempt to undermine the US dollar and the IMF’s SDR.
“This is a move to address the perceived US hegemony of the IMF,” ING global head of markets Chris Turner explained in late June. “It will allow the BRICS to build their own sphere of influence and currency unit within that sphere.”
While the news of a reserve currency created by BRICS may come as a surprise to some, specific accounts of the member states countering the US dollar have been reported for some time. In late May 2022, a Global Times report noted that members were being urged to end their dependence on the dollar’s global dominance.
Putin explained the following month that “Contacts between Russian business circles and the business community of the BRICS countries have intensified.” The Russian President further noted that Indian retail chain stores will be hosted in Russia and Chinese cars and hardware will be imported regularly. Putin’s recent statements and comments at the BRICS summit have led people to believe that the BRICS members are no longer “just a ‘talk shop’.”
In addition to South Africa, Russia has also increased foreign aid and has supplied weapons to African countries south of the Sahara. Furthermore, Putin and other BRICS leaders have targeted US hegemony and exceptionalism in specific statements published by the media.
At this year’s St. Petersburg International Economic Forum, Putin addressed the audience in a 70-minute speech, talking about how the United States has controlled the world’s financial system for years. “Nothing lasts forever,” Putin said. “[Americans] think of themselves as exceptional. And if they think they are exceptional, it means that everyone else is second-rate,” the Russian president told forum participants.
Speaking to Russian ambassadors in a biennial address, Putin said the West is weakening a lot in terms of economic power. – Domestic socio-economic problems that have worsened in industrialized countries as a result of the (economic) crisis are weakening the dominant role of the so-called historical West, Putin told the ambassadors. “Be ready for any development of the situation, even for the most unfavorable development.”
Russia and Putin have said that America’s dominance in the financial world has been dying for years now. In October 2018, speaking at the Valdai Forum, Putin said that US sanctions against specific countries (including Russia) would undermine confidence in the US dollar.
The Russian president noted that most of the fallen empires have made the same mistake. “It’s a typical mistake for an empire,” the Russian leader declared at the time. “An empire always thinks it can afford to make a few small mistakes, take a few extra costs, because its power is such that they don’t matter. But the amount of these costs, these errors is inevitably growing.” Putin continued:
And the moment comes when it cannot handle them, either in the security sphere or the economic sphere.
Also, in June, Bloomberg published a report on the BRICS summit and noted that Chinese President Xi Jinping suggested that NATO was responsible for countering the Russian Federation. Xi also said that certain countries that strengthen exceptionalism will fail by suffering from security vulnerabilities.
“Politicizing, instrumentalizing and weaponizing the world economy by using a dominant position in the global financial system to deliberately impose sanctions would only harm others as well as oneself, leaving people around the world suffering,” Xi said. “Those who are obsessed with a position of strength, expand their military alliance and seek their own security at the expense of others, will only end up in a security conundrum.”
The strengthening of the BRICS nations has been going on well before the conflict in Ukraine started. For example, in 2014 Russia developed the System for Transfer of Financial Messages (SPFS), and later the Mir payment system was launched. In the same year, in response to the annexation of Crimea, Russia began to stockpile gold in huge quantities.
China has also been hoarding huge amounts of gold, as both countries greatly increased their gold reserve purchases 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. Last April, China opened its borders to billions of dollars worth of gold imports, according to a Reuters report.
Since the First World War, the US dollar has been the world’s global reserve currency and America emerged as the largest international creditor. Fast forward to today and the dollar is booming against a number of other currencies and the USD is the most robust it has been in a generation. The U.S. dollar currency index (DXY) is up more than 10% this year, outperforming strong currencies such as the Japanese yen.
More recently, the euro hit parity with the dollar, and other currencies such as the Indian rupee, Polish zloty, Colombian peso and the South African rand have faltered against the dollar in recent times. However, the Russian ruble has been a strong competitor to the dollar this year and has been one of the best fiat currencies in 2022.
With inflation rising and interest rates raised by the Federal Reserve, Kamakshya Trivedi, co-head of a market research group at Goldman Sachs, stressed that it has been a “pretty tough mix” to manage. Despite the uncertainty, the Goldman Sachs analyst believes the dollar, at least for now, will remain robust. But relative to the dollar’s recent rise in value, most of that rise is in the past, Trivedi noted.
“For now, we still expect the dollar to trade on the upside,” Trivedi wrote on July 16. “There may be a little more left, but probably the biggest part of the dollar movement may be behind us.”
What do you think of the BRICS nations creating a new international reserve currency to compete with the US dollar and the IMF’s SDR? Let us know what you think about this topic in the comments section below.
Image credit: Shutterstock, Pixabay, Wiki Commons, World Gold Council, Econfact.org, 14th BRICS Summit,
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