** Please note that any information shared in this public blog is NOT to be regarded as an advice or a recommendation, it is meant for EDUCATIONAL AND INFORMATION PURPOSES only and it does not constitute an investment advice, an offer or solicitation to purchase or sell the investment asset classes mentioned. **
The annual Leaders’ Summit of BRICS nations will be held in Kazan, Russia from 22-24 October 2024 and will PROBABLY include announcements moving the BRICS currency plans forward in material ways as well as admit new members, which will drive the group closer to the critical mass needed to launch a currency union. Beyond the 9 current members, there is a waiting list of over 20 aspiring members such as Nigeria, Venezuela, Indonesia, Malaysia, Turkey, Thailand and Vietnam. The BRICS are part of an emerging Global South that is challenging the Collective West for world economic and geopolitical dominance.
The original BRICs membership from 2009 consisted of Brazil, Russia, India and China. South Africa was added in 2010 when the group’s name was changed to BRICS. That group expanded significantly at the 2023 Leaders’ Summit in South Africa when Egypt, Ethiopia, Iran and the United Arab Emirates (UAE) were added. Argentina and Saudi Arabia were also permitted to enter but Argentina withdrew its application, and Saudi Arabia deferred its membership saying it was still considering the matter. The BRICS have been active over the years in institutionalizing its initiatives. In 2014, the BRICS created the New Development Bank (NDB), which functions along the lines of the World Bank to promote infrastructure development in emerging economies. The NDB was capitalized with over US$100 billion from its members and currently has 53 projects underway with commitments of over US$15 billion to those projects.
The creation of a common BRICS currency may PROBABLY be a major focus of the 2024 summit in Kazan, Russia. Implementing a new BRICS currency presents significant challenges but also offers potential benefits for the member states. The success of a BRICS currency could have a profound impact on the international financial system, potentially challenging the dominance of the US$. The BRICS currency is however still very far along in establishing itself as a viable payment currency. The pre-requisites are: agreed-upon value (which can be fixed to another currency, floating or pegged to a weight of Gold), secure payments channels (basically high-speed, encrypted digital pipes for authenticated message traffic), digital ledgers, and an agreed issuer (the NDB based in Shanghai may be suitable for this purpose, but another institution could be created). The single most important element is a sufficiently large membership in the BRICS currency union such that a recipient of BRICS currency can use them for purchases in many jurisdictions for many goods and services.
The last point is where most alternative currency payment arrangements fail. Russia can sell oil to China for CNY (which they are currently doing), but they are constrained in terms of where they can spend the CNY (basically limited to Chinese manufactured goods and semiconductors). The same issue arises when Russia sells oil to India (for Rupees) or weapons to Iran (for Rials). The seller is limited in terms of what they can buy with the trading partner’s currency. However, this constraint can go away in a currency union with 15 or 20 members or more. If Russia earns BRICS currency from China, they can buy semiconductors from Malaysia or Embraer aircrafts from Brazil. For that matter, the use of a payment currency in a multi-member currency union is not limited to members. With access to the payment channels, non-members can nevertheless agree to receive the BRICS currency in payment, confident in their ability to spend it among the other BRICS members who are trading partners. The proof of this is the Eurozone, which is currently a 20-member currency union with a single central bank and worldwide acceptance of the Euro. Do bear in mind that the Euro took almost 10 years to launch from the Maastricht Treaty in 1992 to the actual creation of the Euro in 2000.
BRICS currency will PROBABLY not take a physical form, so it will be notional in some sense. Its main purpose is to act as a simple technical solution. At the onset, BRICS currency MAY likely be purely digital and will be used exclusively on the BRICS payment platform (called mBridge), supported by the Bank of International Settlement (BIS). BRICS’ mBridge will serve as a gateway for settlements in Central Bank Digital Currencies (CBDCs). Effectively, it will act as an alternative to today’s most commonly used payment platform, called Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. It is speculated that the new BRICS currency will be based on Gold and the basket of BRICS sovereign currencies with a ratio of 40% to 60% – that is 40% Gold and 60% BRICS sovereign currencies. Given that China is the BRIC’s largest economy, it is assumed that the currencies’ basket will be dominated by CNY. However, it remains to be seen whether India will endorse this solution, considering its less-than-ideal relations with China. In any case, IF BRICS were to announce a roadmap to common currency or otherwise makes progress on its establishment, the market will likely see a strong impact on the US$ and Gold.
Indeed, should BRICS succeed in launching a peer-to-peer digital currency platform for cross border payments, the demand for US$ will almost certainly drop. On the contrary, the demand for Gold will rise. In fact, over the past year or so BRICS central banks have been doing exactly that – buying Gold and selling U.S. Treasury bonds. No wonder Gold has been hitting new highs every month since March 2024 and continues to trade near all-time highs. In fact, BRICS can also make the BRICS currency a viable reserve currency through Gold. Members of the BRICS currency union could use surplus BRICS currency to buy Gold bullion to hold in their reserves. Russia, China and South Africa are all major Gold producers and China has an extensive network of refineries so there should be ample Gold available for purchase. When needed for purchases or settlements, the Gold could be easily sold for BRICS currency. With these and other reasons such as POSSIBLE occurrence of World War III, loss of CONFIDENCE in governments and hedge against inflation, we are likely to see Gold price rally towards US$3000/ounce or higher going forward.
Overall, a new BRICS currency could be used in a material percentage of global trade giving the US$ a run for its money. It does not mark the end of the US$ as a widely accepted currency. Still, in conjunction with the badly misguided weaponization of the US$, it will mean that the US$ will have a reduced role in total global payments.
** Please note that any information shared in this public blog is NOT to be regarded as an advice or a recommendation, it is meant for EDUCATIONAL AND INFORMATION PURPOSES only and it does not constitute an investment advice, an offer or solicitation to purchase or sell the investment asset classes mentioned. **