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US Dollar Losing Trust

March 2012

BRICS nations are looking for ways to end the dominance of the US currency in the global economy

BRICS nations, which include Brazil, Russia, India, China and the Republic of South Africa, are reducing their reliance on the US dollar. They intend to increase the use of their national currencies when trading with and issuing loans to each other. An agreement to start doing that may be signed at the next BRICS summit in New Deli on March 29th in.
© RIA Novosti, Dmitry Astakhov
BRICS

If this resolution is passed, practically half the world will be able to provide loans to each other without relying on the US dollar, experts explain. For example, China is already opting out of the US dollar in transactions with a number of nations. However, carrying off this vision in its entirety won’t be an easy task, so analysts generally concur that the upcoming agreement will be more of a memorandum of intentions for the future than anything else.

On March 11th the Indian Ambassador to Russia Ajai Malhotra poured cold water on the excessive optimism of some observers expecting the BRICS summit to pass revolutionary resolutions. Mr Malhotra said that there will be no discussions about introducing a common currency at the upcoming summit. ‘Introducing a common currency is a serious multifaceted process that requires large scale coordination of the economic policies of the members states and the introduction of a number of new institutions to monitor the system and standardise the management and reporting systems,’ he noted, ‘The Euro zone is a good example that illustrates how carefully thought-out the introduction of a common currency has to be.’

In the opinion of BNP Paribas’ chief economist for Russia and the CIS Yulia Zeplyakova, so far the BRICS nations have simply announced their intentions. In effect they have announced to the world that they are emerging regions and the main driver behind the global economic growth and they will continue to come to terms with their own significance in the global economy and prove to the rest of the world that they are economies to be reckoned with. However, the process may pick up speed when China surpasses the US as the world’s largest economy. At the moment the US has a 19% share in the global economy and China has 13%, the expert points out.

At the moment the BRICS nations’ intentions are not that easy to put into practice. One of the reasons is that all of the BRICS nations except for Russia have state control over operations with capital and a number of other restrictions. At this point only the Russian rouble is a freely convertible currency, Ms Zeplyaeva explains.

Nevertheless, the gradual refocusing on the new opportunities that are presenting themselves is rather interesting. As Anna Bodrova, an analyst with the independent agency Invest Cafe, points out, on the whole the BRICS nations have already been reducing their reliance on the US dollar in their trade with each other for quite some time, for example Russia and China already agreed a number of payments in national currencies last year, ditching the US dollar. Therefore there is little surprise that Brazil, India and South Africa are now jumping on the bandwagon, these nations have fairly close trading ties with each other.

‘The purpose of the agreement may be to support their own currencies and shield their economies against the negative impact of the problems currently faced by countries whose economies are not closely correlated with those of BRICS, such as the US debt burden and the problems in the Euro zone, ‘ she continues, ‘ This can mean an additional trading advantage for Russia, in particular, in the raw materials market: after a short pause China is bound to need energy resources as is India. On the whole, Russia may become a more attractive country to invest in for the other BRICS nations, but that won’t happen overnight; first they need to agree all the special terms and conditions for trading between each other, their legislative bodies must pass amendments allowing more foreign penetration in the domestic markets – all these processes take time. So at this point these kinds of agreements are more of a formal declaration of intent.’

Russia’s advantage over the other BRICS nations is that its financial system far more closely resembles the modern financial systems, explains Ms Zeplyaeva of BNP Paribas. For example, one big edge that Russia has is that its rouble is freely convertible. The rouble is a far more transparent currency than any of the other BRICS currencies. However, the rouble does have a problem: Russia is very much dependent on the global raw materials prices, which pretty much strips the rouble off its competitive advantages.

Russia’s advantage over the other BRICS nations is that its financial system far more closely resembles the modern financial systems, but Russia depends on the prices of raw materials too much

Alexandra Maltseva, an expert with 2K Engineering Company points out that the agreement only makes sense if the BRICS members agree to promote just one currency. If the agreement is only about using national currencies when trading which each other it will only have benefits locally for the BRICS nations, that will be able to trade more with each other and increase the role of national currencies in the trade. However, in this case the BRICS national currencies won’t be able to replace the USD and Euro in the countries’ gold and currency reserves.

‘The agreement will be important for the entire global economy only if the BRICS countries agree to use a single currency in their gold and currency reserves, ‘ says the analyst, ‘The Chinese Yuan, naturally, has the most potential in this respect. It should be noted that a similar agreement is already in place between Russia and China. In particular the two nations have lifted all restrictions on payments in roubles and Yuan’s. However, China is not willing to keep its national reserves in roubles, while Russia has said it is prepared to keep at least part of its national currency reserves in Yuan’s. If a similar agreement is reached between all the BRICS countries, it would be a significant step towards a new reserve currency.’

The agreement will be important for the entire global economy only if the BRICS countries agree to use a single currency in their gold and currency reserves. The Chinese Yuan, naturally, has the most potential in this respect.

Obviously an agreement of this kind would promote the use of the Yuan within the BRICS. The member nations would try and increase their reserve in this particular currency. Using national currencies in trade with each would just be an appendix to the main agreement. However, this appendix would make trade within the BRICS easier and the member markets more mobile, Maltseva believes

Sergey Slavin,
Economics observer with the Russian Survey RS

Note: Russia’s share in the global economy is 3.7%. In terms of GDP and PPP Russia’s economy is the sixth largest in the world and in terms of GDP alone it’s the 10th largest economy.

The ten largest economies in the world by 2050 (billions of dollars) according to Goldman Sachs

Diagram