Much division behind Brics currency plan

A group of emerging countries including Brazil, Russia, India and China introduced their own currencies last week. As long as the group mainly agrees on what they do not want, the position of the dollar and the euro will not be in danger.

It does send a signal when a bloc of countries with 45% of the world's population and a combined contribution of more than a quarter to the world economy tries to sideline the dollar. That is exactly what happened last week at the Brics summit in Russia. Brics stands for Brazil, Russia, India, China and South Africa. This quintet formed the face of the emerging world in previous decades. Since then, the group has expanded to include Iran, Egypt and Saudi Arabia. Turkey and Malaysia are still in the waiting room. Despite the fact that the Brics group carries considerable weight in terms of population and economic size, the plans to sideline the dollar are doomed to failure.

Credibility is lacking
Firstly, the interests of the emerging countries diverge so much that it becomes very difficult to conduct a credible joint policy. Russia is mainly looking for ways to escape Western sanctions. China wants to expand its geopolitical power base and India wants to have a say in all sorts of places from a neutral position in order to increase its own economic growth opportunities. A second reason why the Brics currency cooperation has little chance is because host Russia acts from a position of weakness instead of strength. This is also evident from the call from the host country to delegations from participating countries to bring hard currencies such as dollars and euros.

Unreachable reserves
Credit cards from Mastercard and Visa have ceased operations in Russia following the outbreak of war in Ukraine. The country is desperate for foreign currencies. On paper, the Russian central bank has reserves in foreign currencies of more than €600 billion. However, due to Western sanctions, more than half of those reserves are currently inaccessible. The currency markets seem to show little sign of the financial malaise in Russia. The value of a ruble has been fluctuating around the level of a euro dime for at least a year. However, because trading in rubles is restricted, one should not read too much into that exchange rate trend. It is a sign of the times that the Russian central bank raised the policy rate to 21% last week. That is the highest level in decades.

Economic pain is being felt
With this interest rate hike, the central bank is trying to contain inflation, which has risen to more than 9%. An important reason for this high inflation is the great tightness on the labor market. Because a large proportion of men under the age of 30 have been called up for the army or have fled the country to avoid military service, unemployment has fallen to around 2,5%. The economic pain resulting from the war in Ukraine is increasingly being felt in Russia. A higher policy rate or a high-profile Brics summit will not change anything about that. And the ruble? As soon as President Vladimir Putin loosens the reins on the currency front even for a moment, that currency will plummet so hard that Russia has other things on its mind than developing a Brics currency plan.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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