Future BRICS Currency To Combine A Gold Standard & Sovereign Currency Mix

As we reported last week, Russian President Vladimir Putin has held meetings with Dilma Rousseff, the Head of the BRICS New Development Bank (NDB).

A new priority for the NDB, as directed by its shareholders, is the development of a new digital currency to facilitate direct trade between members and bypass sanctions imposed on Russia and the threat of sanctions upon third party countries. These sanctions, imposed by the West, are usually actioned by terminating SWIFT connectivity to the global financial system. A common BRICS currency would evade these threats and facilitate direct trade.

However, there are limitations in this as trade volumes amongst certain members are one-sided. For example, Russia’s trade with India is greatly affected by India’s purchases of Russian energy such as oil and gas, however Russia then finds itself with an excessive amount of Indian rupees, which it can find difficult to offload.

To deal with these trade practicalities, discussions between Putin and Rousseff have apparently reached a consensus, along with other NDB members, that the future BRICS currency would be based upon a basket including 60% of BRICS sovereign nation currencies, and 40% upon gold reserves. Such a structure provides asset-backed stability, in addition to catering for exchange rate fluctuations. Unlike the US dollar, it is also an apolitical, transactional form of cross-border payments. Also unlike the US dollar, a BRICS currency can operate externally from the SWIFT payment network.

The NDB might find itself sanctioned, but as the bank isn’t used for trading with the West, such a move would be largely symbolic. The only way the West would be able to hinder this arrangement would be to sanction other currencies, such as the Chinese RMB and the Indian Rupee. However, such a dramatic move would curtail trade between China, India and the West. Combined trade between these two countries with the United States and EU last year reached US$1.56 trillion. Sanctioning their currencies would seriously damage global trade flows and spark huge shortages, inflationary pressures and a strong recession upon the West, rendering such a drastic move rather unlikely.

Meanwhile, NDB shareholders currently include Russia in addition to Brazil, India, China, South Africa, whose original combined shareholding must be maintained at a minimum 55% of the total equity. Over the past two years, the original five have been joined by Bangladesh, Egypt, the UAE and Uruguay. A further 30 countries, including Turkiye, Thailand and several African, Middle Eastern and LatAm countries have also expressed interest in joining the BRICS group. Some of these may also become NDB members, thereby expanding the groups reach – and adding to its overall future currency stability.

On top of this, should the proposal come to fruition, a BRICS trading bourse would also likely come into existence. We discussed the potential for a BRICS Commodities Trading Bourse last week here.