When the heads of state and government of the five Brics countries lined up for the press conference at the Sandton Convention Center in Johannesburg on Thursday, they were in a celebratory mood. Their club will take on six new members in the new year in order to replace the western-style world order together. The group then represents almost half of the world’s population and more than a third of global economic output.
But it was important for Vladimir Putin, in the hour of triumph, to also recall a major Brics project that, unlike the expansion of the group, has not yet taken on concrete form: a common currency. “It’s a challenging task,” said Russia’s President via video link from Moscow. “But we will still approach a solution.”
The Brics countries have been working for years to end the US dollar’s dominance in international markets. A separate currency would be the maximum escalation of this takeover attempt. It has been discussed internationally for months under two working titles: either simply “Bric” or “R5”. The national currencies of all five Brics countries, as the abbreviation alludes to, begin with the letter R: Brazil has the real, Russia the rouble, India the rupee, China the renminbi and South Africa the rand.
So far, however, the Brics community currency project has been notable for the fact that it is not progressing. As a precaution, South Africa’s government announced that the issue would not play a role at the Johannesburg summit. In the final declaration, the Brics states confirm their intention to strengthen their own currencies in international trade. But the goal of a common currency is not even mentioned. Against this background, Putin’s statements on Thursday can be understood as a call to the world and to the other member states not to write off the project. But how realistic is it really?
If you want to understand the furor of the countries, you only have to look at the numbers. While the United States itself accounts for only 10 percent of world trade, nearly 50 percent of all international payments are in dollars. If financial professionals exchange currencies in foreign exchange trading, the dollar is on one of the two sides in 88 percent of all cases (see grafic). For many critics, the dollar is not only a symbol of the United States, but also of its global dominance.
The extent to which the dollar can actually become a problem for the countries is shown by the experiences of Russia and China. The Russian leadership has accumulated billions of dollars in dollars over the years, but parked or invested around half of these foreign exchange reserves abroad. When the Kremlin started the war in Ukraine, the West quickly froze the dollar amounts – after all, probably around $300 billion.
China, on the other hand, is feeling in a completely different way how quickly the global dominance of the dollar can become a problem. While interest rates on savings accounts in China are only marginally above two percent, a yield of more than five percent can currently be earned on one-year US government bonds. China experts have been speculating for a few weeks now that this is one of the reasons why wealthy Chinese are taking huge amounts of money out of the country in tortuous ways. “The dollar is our currency, but your problem,” said former US Treasury Secretary John Connally. A quip that the finance ministers of many emerging countries have always had in the back of their minds ever since.
While the plan for a dollar alternative sounds plausible and the possible currency name R5 quite concrete, the plan has numerous pitfalls. So far, the currencies of the five participating countries are not exactly known for their particular stability. The South African rand, Brazilian real and Russian ruble keep causing price caprioles on the financial markets. Only a few days ago, the Chinese central bank had to artificially support its national currency, and the Russian ruble has also been declining significantly since the Wagner mercenary group marched towards Moscow. Foreign exchange experts are certain that five weak currencies together would not form a viable world currency by a long shot.
However, to at least suggest stability, states could deposit a small amount of gold for each currency unit of their Brics currency. After all, the precious metal has been considered an anchor of stability for thousands of years and is an extremely rare metal. If all the gold in the world were melted into a single block, this cube would be just 21 meters long and 21 meters wide. How much additional gold the Brics countries would have to buy for this gold peg of a possible common currency can hardly be quantified. In any case, the costs are likely to amount to unmanageable billions, which could possibly be better invested elsewhere.
The example of the euro shows how complicated a new common currency can be in practice. The planning work alone devoured more than a decade, the common currency slipped massively immediately after the start – and barely ten years after its start, the euro debt crisis threatened to tear the laboriously built up currency area apart again. While the individual states could previously devalue their own national currency in the event of a crisis, they now had to adapt to a uniform central bank policy. Bringing the even more diverse Brics countries under the umbrella of a single currency is likely to be much more complicated.
Russian oil traders are stuck on their rupees from India
However, instead of having their own currency, states could also start making more use of their existing national currencies. China already does some oil deals with Saudi Arabia in renminbi, while India pays for Russian oil in domestic rupees. However, even that is not as simple as it seems.
Ever since Russia settled its oil trade with India in rupees, some of the money seems to be stuck in India. Russian oil exporters’ accounts reportedly piled up with billions of dollars worth of rupees in May, with no one willing to exchange them for Russian rubles. International banks are avoiding the business because of Western sanctions, and domestic companies in Russia are also unlikely to be interested in rupees – after all, they hardly ever trade with India.
Not even the inventor of the handy Brics abbreviation concedes that the currency plans of the five states have particularly good chances. The investment banker Jim O’Neill once invented the abbreviation at the US banking group Goldman Sachs and thus laid the foundation for investment products worth billions. He recently had only one word left for the currency plans of the five states: “ridiculous”.