BRICS Reserve Currency: Potential Impact to the Global Economy.

Why should nations base their trade on reserve currencies such as the US dollar? Those were the words of Russian President Vladimir Putin at the 14th annual BRICS Summit held in China in June 2022. During the Summit President Putin announced the establishment of the new BRICS reserve currency which will be backed by assets such as gold and oil. The new common reserve currency aims to bolster trade ties, strengthen economic cooperation, and reduce BRICS nations’ dependency on dominant reserve currencies such as the US dollar. According to financial economists and others alike, the new BRICS reserve currency will reshape international trade, and achieve financial autonomy, and investment among the emerging economies’ powerhouses.

Despite their economic prowess, BRICS nations have traditionally faced challenges regarding exchange risks, currency volatility, and limited influence in global financial decision-making. The establishment of a common reserve currency emerged to counter these challenges and enhance deeper economic integration. The establishment of the new currency has the potential to revolutionize global finance and introduce a balanced and diversified monetary system. In this article, we explore key aspects and potential economic implications of the new BRICS currency.

BRICS Background:

Let us take a brief history lesson on the formation of the BRICS group, tracing its origins and development. The idea of BRIC nations (Brazil, Russia, India, and China) was established in 2001 in a publication titled “Building Better Global Economic BRICs” by Jim O’Neill. O’Neil coined the term to describe fast-growing economies that would collectively dominate the global economy in 2050. In 2006, the concept led to the formation of a BRIC group to foster corporation, facilitate mutual development, and tackle shared challenges. During the third BRIC summit in 2011, South Africa joined, and the group adopted the acronym BRICS.

According to the IMF, BRICS nations represent approximately 42% of the world population and have a combined Gross Domestic Product of around 27 trillion which is more than one-quarter of global GDP. The BRICS nations also account for 18% of world exports and their export growth rate is increasing at a rate that exceeds the global average. The figure below illustrates the estimated GDPs of BRICS nations in 2023.

As 14 other countries mention their desire to join BRICS, according to Dezan & Associates, the acceptance of the 14 countries would undoubtedly be a significant trade game changer as they will create an institution with a GDP of 30% larger than the United States of America. The institution will have more than 50% of the global population and be in control of 60% of global gas reserves.

What does the new BRICs currency mean for the reserve currency such as the US Dollar?

It is often said that when the US coughs everyone catches the flu. That is one of the many reasons why the BRICS countries established their new currency. The BRICS nations have long sought to reduce their dependency on the US dollar. Thus, the effect of the new BRICS reserve currency on popular currencies would depend on various factors, including the level of adoption and acceptance, the global landscape, and the strength of BRICS economies.

However, it is important to note that: If the BRICS currency were to gain significant traction and acceptance, it could potentially pose a challenge to the dominance of the US dollar as a global reserve currency. Furthermore, the admission of 14 other countries into BRICS including oil Giants such as Saudi Arabia, Nigeria, UAE, etc., will increase the usage of the BRICS currency in international transactions and could reduce the demand for the dollar, and potentially lead to a decline in its value relative to the BRICS currency. In the same vein, the introduction of the currency may expedite the movement towards “de-dollarization”, as nations around the globe are actively looking for alternatives to the US dollar.

In our honest viewpoint, in contrast to previous contenders, such as the digital yuan, the common BRICS reserve currency possesses the genuine potential to challenge or disrupt the dominant position of the US dollar.

Benefits and Implications to BRICS Countries:

The new BRICS reserve currency will benefit participating member nations in the possible following ways:

• It can enhance regional integration, for instance, the new currency is expected to stimulate closer economic integration among the participating members and encourage trade and investment within the bloc, enhance economic growth, and establish a more favourable environment for business collaboration. Furthermore, it will enhance BRICS nations’ financial sovereignty and reduce vulnerability to external shocks.
• It can enable member countries to bypass currency conversion costs and promote direct trading channels in their respective currencies. The member countries will achieve this by eliminating the need for a “middleman” and reducing transaction costs.
• Participating members can be immune to US or Western sanctions. The USA is commonly known for sanctioning countries with whom they have disagreements. These sanctions can have dire economic consequences for the sanctioned country, as they will be restricted from using the US dollar.
• It can lessen the BRICS nations’ dependence on the US-centric “lender of last resort (i.e., IMF and World Bank). Member states may use the BRICS New Development Bank (NDB) as the lender of last resort instead of the IMF and World Bank.
• It is often said that the United States “export inflation” due to dollar dominance, thus the use of the BRICS currency will immune the BRICS members from the devastating effects of US inflation.
• It can increase BRICS’ geopolitical influence. The establishment of the currency could amplify the collective influence of these emerging economies on global financial governance. This may lead to increased representation in decision-making power for the BRICS countries in international financial institutions, potentially reshaping existing power dynamics.

Disadvantages include:

• Different Economic Characteristics. The BRICS nations exhibit varying levels of economic growth, development rates, and policy framework. Achieving convergence and managing disparities among the member nations will be crucial for the successful implementation of the new currency. Balancing monetary policies, addressing inflation differentials, and ensuring equitable economic growth will require sustained cooperation and policy coordination.
• Integration and Global Acceptance. The new reserve currency must gain acceptance beyond the BRICS group. Building trust and convincing other nations of its value will require proactive engagement with the international economy, fostering partnerships, and demonstrating the benefits of adopting the new currency.
• Credibility. Establishing the credibility of the new BRICS currency will be essential for gaining market confidence, both domestically and internationally. Robust financial infrastructure, transparent governance, effective monetary policy framework, and adherence to international standards will be significant in building trust and ensuring the currency’s long-term stability.

In conclusion, the establishment of the new BRICS reserve currency has the potential to transform the global economy and financial system by introducing an alternative to the prevailing US dollar centered system. This new reserve currency signifies a remarkable stride towards regional collaboration, financial sovereignty, and a more diversified international monetary framework. However, Global acceptance and credibility will play a significant role in the success of the new reserve currency. As for whether the new reserve currency will surpass the US dollar as the world’s primary currency, only time will provide a definitive answer to that question if the establishment materializes.

Sources: silkroadbriefing IMF ukinvesting foreignpolicy investingnews