On Saturday President elect Donald Trump wrote a social media post threatening BRICS countries with 100% sanctions if they create a new currency or try to dislodge the dollar through another alternative. However, Russia, which proposed a common BRICS currency long before it invaded Ukraine, has reservations about it. Or Russia’s central bank thinks it would be very hard to achieve.
BRICS (Brazil, Russia, India, China, South Africa) was founded as a trade group and this year expanded to BRICS+ through the inclusion of Egypt, Ethiopia, Iran and the UAE. Hence, with Russia and Iran as members it has two sanctioned countries.
Last year the group pivoted from a focus on a new single currency towards encouraging local currency payments. At the same time, there appears to be some reluctance by other BRICS members to become dependent on China’s renminbi.
In November Vladimir Putin commented, “I have heard a lot of discussions at the expert and journalistic levels about the need to consider creating a single currency. However, it is too early to talk about that, and it is not a goal we have set for ourselves. To even consider a common currency, we would first need to achieve a higher level of economic integration among our countries.”
There has been significant discussions about BRICS Bridge, a local currency cross border payment system that uses wholesale CBDCs and blockchain. That sounds similar to mBridge the cross border system involving the central banks of China, Hong Kong, Saudi Arabia, Thailand and the UAE. The overlap encouraged the Bank for International Settlements (BIS) to withdraw from mBridge saying the project had graduated from its Innovation Hub. However, BIS leader Agustín Carstens also emphasized that the BIS cannot engage with sanctioned nations.
BRICS Bridge NEEDS an intermediate currency
However, there’s a bit of chicken and egg situation. Without an intermediate currency, the success of BRICS Bridge or mBridge could be challenging beyond sanctioned nations that have no choice. That’s because local currency FX rates are often expensive. There’s a very practical reason for the dollar’s dominance.
There are 180 currencies in the world. That means there are more than 16,000 currency pairs, most of which have horrible exchange rates. The foreign exchange market is like any other – the deeper the market, the narrower the spread between the buy and sell prices, and the better the FX rate.
Hence, pretty much all currencies have their best FX rates against the US dollar. If you want to exchange Indian rupees with Hong Kong dollars, you’re probably best off trading rupees for US dollars and US dollars for Hong Kong dollars.
So while mBridge might technically create an alternative to Swift beyond the reach of US sanctions, the average business that is not in a sanctioned country will prefer to conduct transactions the way they usually do. If that’s local currency, then mBridge is fine. Often it will be US dollars.
However, the more these platforms progress, the more the need for an alternative intermediate currency will become obvious in order to achieve those optimal FX rates.
Trump’s BRICS dollar comments
On his family controlled social media platform, Truth Social, one of President Trump’s posts said: “We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy. They can go find another “sucker!” There is no chance that the BRICS will replace the U.S. Dollar in International Trade, and any Country that tries should wave goodbye to America.”
After Trump won the election, Putin made quite a few comments about the dollar.
“As for us in Russia, we are not abandoning the dollar, nor did we ever intend to. We have simply been denied the use of the dollar as a payment method.”
He continued, “It seemed to me that the dollar is like a sacred cow, something that should never be disturbed. But no, they have taken it into their own hands and essentially cut off its horns, stopped taking care of it, and instead are exploiting it recklessly. What is this? Yet, it is their own doing. Payments in dollars have not declined drastically around the world just yet, nor has its role as a means of accumulation been significantly reduced. However, even among their closest partners, the use of the dollar is slowly diminishing, and this is becoming a clear trend.”
A digital tool from BRICS development bank?
When talking about BRICS investment in emerging markets, Putin made other comments which were not entirely clear without context. It sounds as though the BRICS New Development Bank is considering creating a new ‘stable’ financial instrument, a cross between an investment and an algorithmic stablecoin: “We can make these digital tools almost inflation-free, because in case of an oversupply we can withdraw some of them, and if there is a shortage, we can issue more and regulate them with the help of oversight on the part of central banks and the BRICS New Development Bank,” said Putin.
Perhaps that might provide a surrogate for an intermediate currency?
