This article will focus on the upcoming BRICS summit in August 2023 as well as the developments surrounding the trade settlement infrastructure that Russia has implemented following the economic sanctions imposed on their nation. The migration of gold from the West to the East will also be analysed as the financial divide between the two opposing blocks continues to widen. Finding neutral and unbiased information and updates regarding geopolitics is a difficult task since we’re currently living in the golden era of censorship and biased mainstream media narratives but rest assured, we will always strive to deliver unbiased and informative content.
It has recently been confirmed that the 15th BRICS Summit will be held in the city of Gold, Johannesburg, in August this year. This puts the speculation surrounding a possible venue change to bed. Rumours about the venue change started circulating following the ICC’s warrant for Russian President Putin’s arrest however it’s still unclear as to whether Putin will attend the summit. South Africa is walking the tightrope between Western and Eastern interests and the assurance to host the summit indefinitely strengthens South Africa’s commitment to the BRICS alliance despite pressure from the US.
Pressure from the US will however continue to mount as the United States Congress is set to review the eligibility of countries, including SA, for benefits under the African Growth and Opportunity Act (AGOA) next week. AGOA allows for duty-free access for South Africa to the US market but US officials responsible for national security and foreign relations have been urged to revoke South Africa’s privileges. While being cut from AGOA will undoubtedly be a blow to the economy, a recent study from RMB showed that the combined proportion of SA’s total exports traded under AGOA accounted for a minute 1.1% in 2019 and 1.8% in 2022, respectively. Let’s move on from the AGOA saga, there are bigger fish to fry…
BRICS Summit Agenda:
At the top of the agenda for the summit is the long queue of new member applications. The existing BRICS members will all have to be in agreement to accept new members and it is not clear whether the new members will join as outright members or associates. Nonetheless, formal applications have been submitted from Algeria, Argentina, Bahrain, Bangladesh, Egypt, Indonesia, Iran, Saudi Arabia, and the United Arab Emirates. In addition, Afghanistan, Belarus, Comoros, Cuba, Congo, France, Gabon, Guinea-Bissau, Honduras, Kazakhstan, Nicaragua, Nigeria, Pakistan, Senegal, Sudan, Syria, Thailand, Tunisia, Turkey, Uruguay, Venezuela, and Zimbabwe have expressed an interest. Including the existing five members, that is 36 nations in total.
At the time of writing, existing members, those who have applied to join and those expressing an interest total 36 nations, with over 60% of the world’s population and one-third of global GDP. The most peculiar expression of interest is undoubtedly France with President Macron reportedly applying to attend the Summit. He was however denied the opportunity to participate. This is however visible evidence of an EU member not toeing the American line and recently, TotalEnergies the French conglomerate sold LNG to China for yuan, not dollars, signalling France’s independence from petrodollars.
The next item on the agenda relates to the trade settlement infrastructure that the BRICS alliance will have to implement to bypass the dollar on a wider scale. Before we continue to look at the possible mechanics of this new trade settlement infrastructure, we need to examine how Russia managed to minimize the effects of Western sanctions as well as boomerang those negative economic effects straight back to Europe.
Russia’s current situation:
- In the nine months to September 2022, Russia’s trade surplus with members of the EAEU (Eurasian Economic Union), plus China, India, Iran, Turkey, The United Arab Emirates etc. was $198.4 billion versus $123.1 billion for the same period last year. In other words, the Western alliance’s sanctions failed to suppress Russia’s oil revenues, Russia merely redirected their sales.
- Russia became the third largest country using renminbi for international settlements, accounting for up to 26% of foreign exchange transactions in the Russian Federation. The share of settlements in soft currencies is growing for SCO (Shanghai Cooperation Organisation) members, dialogue partners and associates, replacing dollars. Cooperation between the SCO members and the BRICS alliance will accelerate the moves away from the dollar.
Since early-2022, Russia’s economy had officially been in a mild recession, but in April economic activity was recorded as rising sharply due to buoyant industrial production and retail sales. Additionally, Russia has a low flat 13% income tax and corporation tax of 20% on company profits as opposed to Western economies which are constantly seeking new avenues to tax their private sectors and citizens into insolvency (aside from all the carbon taxes in the pipeline, the US is also attempting to impose a new wealth, you can read more about it, link attached below). Furthermore, Russia’s consumer price inflation is currently running at about 2.5% and domestic economic conditions seem remarkably stable. Russia’s inflation figures are well below the Eurozone and UK whose latest CPI figures came in at 5.5% and 8.7%, respectively. That’s the good stats, now it’s time to look at the other side of the coin.
Due to lower oil and commodity prices, Russia’s main exported goods, the ruble and Russia’s balance of payments have been under pressure. According to the Russian central bank, the current account surplus between January 2023 and May 2023 was $22.8 billion, compared with $123.8 billion for the same period last year. The Russian ruble has also had a tough time this year with the currency depreciating roughly 33% against the dollar, year-to-date. It’s also worth pointing out that the Yuan has also depreciated roughly 8% against the dollar, year-to-date. Russia’s exchange rate volatility is undoubtedly the biggest thorn in the Russian economy and an alternative to the dollar will be imperative for Russia’s economic health.
Gold’s role in the alternative trade settlement infrastructure:
Why gold? Since fiat currencies are exposed to exchange rate fluctuations and sanctions, the best way for Russia to offset these risks was to take payment in non-sanctioned gold from China, the UAE, Turkey, Iran, and other countries instead of their local currencies. This opens the plausibility for a BRICS and SCO trade settlement currency tied to gold which could eliminate exchange rate and sanction risks. Gold can thus indirectly be used to price all major international goods (oil, gas, food, fertilisers, metals, and solid minerals). This won’t just eliminate sanction risks, but it will also be an adequate response to the West’s price ceilings.
Gold has been making a steady migration from the West to the East over the past two decades and central banks have recently been on quite the gold-buying shopping spree. This is illustrated in the two charts below:
How Russia can change foreign trade infrastructure:
Sergei Glazyev, Russia’s leading economist and member of the National Financial Council of the Bank of Russia, recently wrote an article, co-authored by Dmitry Mityaev, who is Assistant Member of the Board for Integration and Macroeconomics of the Eurasian Economic Commission entitled “Golden ruble 3.0: How Russia can change foreign trade infrastructure.” The article focused on the potential for a gold-backed ruble rather than the new trade settlement medium, but the same logic applies.
Before we dive into the ruble 3.0 article it is worth highlighting why commodity, particularly oil exporters like Russia, exporting nations would favour a gold-backed currency system as opposed to the current dollar-based system, besides sanction threats and exchange rate volatility. Before former US President Nixon decoupled the dollar from gold in 1971, essentially abandoning the Bretton Woods agreement, the price per barrel of oil prices in gold was roughly 0.083 ounces (crude oil was priced at $3.56 a barrel and the market price for gold was $42.85). Today, with oil around $75.00 and gold around $1930, the price of oil is 0.038 ounces per barrel, down almost 55%. In other words, the true cost to OPEC+ of dollarisation has been to essentially halve the value of their export revenues since the Bretton Woods agreement was suspended.
There are numerous logistical structures that need to be put in place for a new global gold-backed currency to exist, according to Glazyev and Mityaev. Firstly, a central clearing house would need to be established, whose function is to issue a new book-entry currency backed by physical gold. The issued currency will then be made available only to participating central banks. It will be designed to be a fully trusted gold substitute, independent from fiat currency values.
The new currency will only be redeemable for physical gold by participating central banks from the SCO, EAEU and BRICS nations. The gold does not have to be delivered to a central storage point but can be earmarked from within a participating central bank’s gold reserves, on condition that they are securely stored in vaults on a list approved by the members. Accompanied by the major energy producers setting price benchmarks, commodity exchanges in member nations will be required to price all products in the new currency, replacing pricing in US dollars completely for trade between participating member nations. Lastly, all taxes and restrictions on gold ownership must be fully removed by participating nations. Gold’s legal status as money must be reaffirmed, if necessary.
According to Mityaev the purpose of the new currency is to provide the basis for trade finance and other cross-border financial settlements on a sound money basis. It is also likely to lead to participating nations placing a greater emphasis on their own currencies’ stability while providing a safe haven from a fiat currency systemic collapse.
The SARB’s reserves:
We’ll conclude this article by bringing it back to our shores by looking at the composition of the SARB’s reserves. The SARB’s gold reserves as a percentage of its total reserves have been stable at around 10% for the past decade with gold holdings remaining relatively unchanged at around 125 tons. Just for context, the gold holdings for the USA, Russia and China were roughly 8 133, 2 288 and 2 043 tons, respectively in the first quarter of 2023.
Sources: Zerohedge IGWTreport Newworldeconomics
