2023-07-28 13:45:00
WORLD ECONOMY – South Africa is hosting the BRICS (Brazil, Russia, India, China and South Africa) summit in Johannesburg from August 22-24. The use of national currencies and the question of less dependence on the US dollar are on the agenda. If the rumor of the creation of a common currency and backed by gold causes a sensation, several difficulties however stand against it.
The 15th BRICS summit will take place in South Africa, in Johannesburg, next month. The South African diplomat in charge of relations with the BRICS, Anil Sooklal, indicated during a press conference on Thursday July 20, that “allied nations will discuss the use of national currencies and reducing reliance on the US dollar.”
However, a common currency created and backed by the BRICS to tackle head-on the US dollar – which is currently used for nearly 90% of global transactions – is not explicitly on the summit’s agenda. But this prospect, a veritable sea serpent of the world economy and finance, will be in the minds of all the decision-makers present in Johannesburg.
Get rid of the US dollar
Following Western sanctions since the start of the war in Ukraine against Russia, whose central bank has seen $300 billion of its assets frozen, several BRICS countries have sought alternatives to the American currency. The objective is to maintain international trade independent of the dollar and to protect itself from its well-known power as a monetary weapon.
In this sense, one of the solutions consists in favoring national currencies as a means of settlement in mutual exchanges. It is with this in mind that the Kremlin persuaded China, Brazil, India and Turkey to increase their trade with Russia and to pay in rubles for their exports of hydrocarbons, cereals and metals.
This situation has also encouraged other states to find alternatives to dethrone the dollar from its status as the world’s reserve currency. Among them are the creation of a “common” currency, mentioned for several years as backed by gold, and the establishment of a new international transaction protocol.
Towards a common currency?
Last April, Brazilian President Lula da Silva and Russian Foreign Minister Sergei Lavrov championed the concept of a common currency, to counter Western dominance in global finance, they say.
By thus establishing a new currency, it becomes possible to reduce transaction costs outside the markets in which the dollar reigns and to increase a certain flexibility favorable to the development of foreign trade and investment between the BRICS countries.
To this end, the latter must first make their financial markets more open, more transparent and more reliable. It’s about in fine encourage several countries to turn away from the dominant payment system, SWIFT (Society for Worldwide Interbank Financial Telecommunication) and to adopt another unified protocol, in order to guarantee the completion of international transactions.
In 2022, Vladimir Putin proposed to other BRICS countries to use SPFS (Financial Message Transfer System), the Russian system equivalent to SWIFT. According to Anil Sooklal, more than 40 countries have already expressed interest in joining a new system managing transactions.
Noting the distinction between dedollarization efforts and the creation of a common currency, Leslie Maasdorp, vice president and chief financial officer of BRICS bank, the New Development Bank, confirmed that “the development of any alternative is indeed a medium or long-term ambition”.
Obstacles
For the moment, however, several problems stand in the way of the birth of an alternative currency to the dollar in the short term: the pre-eminence of China’s GDP and therefore of its economy within the BRICS; volumes exchanged between members which are still modest compared to those maintained with other geographical areas including Europe; lack of consistent standards in place; very different needs between the BRICS countries in terms of raw materials.
This last point represents one of the key problems. Admittedly, uniting the economies of the BRICS countries to a gold standard would make it possible to reduce monetary exchanges and leave each State the choice to maintain its economic policies via its central banks. But India and China are essentially importers of raw materials when Russia and Brazil are exporters.
How to support the idea of a guaranteed convertibility for the BRICS if some of its countries accumulate the “new” common currency when others have to spend their gold to obtain these famous raw materials? This would quickly result in a financial imbalance which would harm the project of such a single currency.
While waiting for the BRICS to resolve this type of problem, a technological partnership, with a strong symbolic aura, is mentioned: that of space conquest, with a new axis of cooperation, called “Milky Way”. To better then win the moon of a common currency that rhymes with dedollarization?
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