As the 16th BRICS summit approaches, the world is watching with anticipation. With the introduction of new members and the ongoing development of a BRICS currency, this gathering could mark a significant turning point in international finance. Will the summit unveil a new era of economic cooperation and bring about a new currency? Octa Broker provides the answers.
● The BRICS organisation has evolved from a discussion forum to a more active player in global affairs.
● The creation of a common BRICS currency is a major focus of the upcoming summit in Kazan.
● Implementing a new BRICS currency presents significant challenges but also offers potential benefits for the member states.
● The success of a BRICS currency could have a profound impact on the international financial system, potentially challenging the dominance of the U.S. dollar.
● Gold is likely to play a role in the new currency development, as evidenced by increased gold purchases by BRICS central banks.
● While the full implications of a BRICS currency are uncertain, its development could mark a significant shift in the global economic landscape.
BRICS countries are due to meet for their 16th annual summit in Kazan, Russia, on 22-24 October. BRICS, a fast-growing intergovernmental organisation currently consisting of nine member states (Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Aran Emirates), has been holding regular summits since 2009. However, many past gatherings have been relatively low-key, as BRICS was considered primarily as a platform for discussion and viewed mainly as a forum for dialogue. Still, there have been notable exceptions, and the organisation has been getting increasingly more vocal lately.
● In 2009, following the 1st Summit in Yekaterinburg, Russia, the BRIC group (South Africa was not part of the organisation then) declared the need for a new world reserve currency. Although the official statement did not include any explicit intentions or an action-plan, it was the first time the U.S. dollar dominance was challenged on such a high level.
● In 2014, at its 6th Summit held in Fortaleza, Brazil, BRICS adopted the so-called Fortaleza Declaration and Action Plan. It laid out the organisation's plans for the future and focused on political dialogue, economic cooperation and integration, and cultural exchange.
● The 14th Summit, presided by China in 2022 and hosted virtually, aimed to strengthen cooperation among the five member states. It was at this summit that Russia's president announced that the organisation was working to design a new reserve currency based on a basket of BRICS currencies.
● The 15th Summit, which took place in Johannesburg, South Africa, in 2023 was particularly notable as five new countries were invited to join the organisation (Argentina, Egypt, Ethiopia, Saudi Arabia, and United Arab Emirates). Although Argentina later declined to accept the invitation, other countries officially became members of BRICS on December 29, 2023 with Saudi Arabia joining later.
‘It is quite clear that BRICS summits are getting progressively noteworthy, and the organisation can no longer be dismissed as a mere talking shop. This year, the BRICS meeting may prove to be yet another turning point, especially for international finance,’ says Kar Yong Ang, a financial market analyst at Octa Broker.
Indeed, the summit in Kazan might potentially produce substantial and meaningful developments with significant and far-reaching implications.
Specifically, the creation of a common BRICS currency is expected to be included in the agenda. ‘It [BRICS common currency] is arguably the most ambitious project in international finance since the introduction of euro in 1999,’ says Kar Yong Ang, noting that while rumors about the BRICS currency have been circulating for years, they are now more likely than ever to become reality in the near future.
Still, Octa Broker does not expect a new currency to be fully unveiled during the summit in Kazan but anticipates substantial advancements in its conceptualisation and development. Despite its many benefits, there are significant challenges to overcome before such a currency can be successfully implemented. Furthermore, it is not entirely clear if the BRICS is aiming to create a mere means of exchange between its members to settle transactions in international trade or is building something more grandiose, such as a Monetary Union, akin to Eurozone, with its own central bank. ‘For now, a Monetary Union is certainly out of the question,’ argues Kar Yong Ang, a financial market analyst at Octa Broker.
‘It would require years if not decades of preparation, harmonisation of central banks' policies and an agreement between states to replace their sovereign currencies with a new, common legal tender. It is not going to happen any time soon.’
Indeed, BRICS does not seem to be aiming for economic convergence. Instead, it wants a technical solution that would enable more efficient cross-border transactions. In other words, BRICS wants to establish a common means of exchange that will be internationally accepted by all the members of the organisation, with transactions settled in an independent BRICS payment system. In fact, BRICS is attempting to solve a very tangible problem. When two countries trade with each other and pay each other in their national currencies (which is the case with some BRICS members), a country which sells more and runs a trade surplus will end up with a surplus of another country's currency.
For instance, this is a problem that Russia faced when it accumulated billions of Indian rupees at its vostro accounts, which was paid by India in exchange for crude oil imports. These surplus rupees must be recycled somehow, but there is a problem. Russia cannot add them to its foreign exchange reserves because they are not accepted by the International Monetary Fund (IMF) as rupee is not in the special drawing rights (SPR) basket. Thus, the only way for Russia to use its excess rupees is to spend them on trade and investments in India. However, that may not always be the most efficient or profitable way to utilise these funds. It is to address these and similar issues that BRICS is working on a common currency.
Kar Yong Ang, a financial market analyst at Octa Broker, notes: ‘BRICS currency will not be a currency per se. It will not take a physical form, so it will be notional in some sense. Its main purpose is to act as a simple technical solution.’ Indeed, at the onset, BRICS common currency will likely be purely digital and will be used exclusively on the BRICS payment platform, called mBridge, supported by the Bank of International Settlement (BIS). BRICS' mBridge will serve as a gateway for settlements in central bank digital currencies (CBDs). Effectively, it will act as an alternative to today's most commonly used payment platform, called Society for Worldwide Interbank Financial Telecommunication (SWIFT) system.
Analysts have speculated that a new BRICS currency (or mBridge unit) will be based on gold and the basket of BRICS sovereign currencies with a ratio of 40% to 60%—that is, 40% gold and 60% BRICS currencies. Given that China is the BRIC's largest economy, it is assumed that the currencies' basket will be dominated by yuan. However, it remains to be seen whether India will endorse this solution, considering its less-than-ideal relations with China. In any case, if BRICS announces a roadmap to common currency or otherwise makes progress on its establishment, the market will likely see a strong impact on the U.S. dollar and gold.
Indeed, should BRICS succeed in launching a peer-to-peer digital currency platform for cross border payments, the demand for U.S. dollars will almost certainly drop. On the contrary, the demand for gold will rise. In fact, over the past year or so BRICS central banks have been doing exactly that—buying gold and selling U.S. Treasury bonds. No wonder gold has been hitting new highs every month since March 2024 and continues to trade near all-time highs. Overall, a new currency will enable BRICS countries to conduct seamless payments across borders, cut transactionary costs and make them more independent. The broader impact on the global scale is hard to contemplate at this point, but it can potentially be very significant. At no time before has the U.S. dollar hegemony been challenged to such a degree that its very status as a reserve currency becomes questionable. Although BRICS is still far from replacing the greenback, the dollar's future as the currency of choice for international trade looks uncertain.
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