Gold in the concept of common BRICS currency p. III

Concept of a common BRICS currency and discussions about potential role of gold in, has been an idea of more or less serious considerations and speculations for last several years. It has a multidimensional significance, as it concerns global changes of a monetary scope, in which the de-dollarisation trend is embedded.

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In first part of our analysis, we provided profiles of US dollar and gold. In second part we focused on reasons for euro’s graduate failure to dominate international currency reserves. We also described how said reserves evolved in the last two decades, and how gold behaved in the process. Having this covered, it is time to focus fully on BRICS and gold.

Due to the size of the issue covered, decision has been made to present subject in several separate parts forming a cycle. Therefore, distribution of information on gold may be uneven.

Monetary coup’d etat or attempt to reform?

On the eve of financial crisis of 2007-2008, dollar formed nearly 64% of international currency reserves, as it was commonly used in quotes at international contracts and loans. Euro peaked on 26%, Pound Sterling had nearly 5% share, and Yen 3%. Just these 4 currencies of G7 bloc formed approx. 98% of all international currency reserves held by central banks. In Q1 2007 these were at 5.5 bln USD in total. Additionally, central banks cumulatively owned gold weighting approx. 11% in average of the above.

However, dollar’s supremacy and US global leadership have been increasingly questioned since 2007–2008 global financial crisis. Fact that financial crisis originated in USA, raised many concerns about the reliability of US and dollar dominance, especially in the context of Triffin Paradox. Crisis has therefore been used as an opportunity for rising powers to seek greater status and representation in global governance. In 2009, Russian President Dmitry Medvedev hosted first BRIC (Brazil, Russia, India, China) Summit in Yekaterinburg dedicated to subject of how to “overcome the crisis and establish a fairer international system (…) and discuss the parameters for a new financial system.” South Africa joined BRIC in 2010, transforming it into what is known as BRICS.

In years passing, BRICS has developed two approaches: one to attempted reform of current system to inflict raising role of emerging powers, and other to raise its own parallel system, independent of USA and G7. In both cases, that would dilute American dollar’s and its allies’ strength. After failing on first, BRICS had chosen second path. To succeed in its attempt, it had to start of basics. That means, strongly internationalize its own currencies and advocate usage of other means than USD, before creating something bigger in scale. That would also have to avoid mistakes made by creators of euro. ’The new’ would have to be based on something incentivising its usage, guaranteeing stability and competitiveness to potential trade partners. After all it was to challenge informal reserve currency.

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Original BRICS accounts for 41% of world’s population, 24% of world GDP and over 16% of world trade. Together, bloc surpasses USA terms of nominal GDP. In terms of GDP based on purchasing power parity BRICS surpassed G7 countries in 2020. Due to size of emerging bloc, its de-dollarization activities would not only impact inter-BRICS financials but also create strong shocks on global scale. However existing de-dollarization infrastructure, and strong exposure to USD among many members, does not yet allow to make a complete break from the existing dollar-based financial system:

• China and USA are bonded strongly with size of its trade relations and ownership of US treasuries. Political allegiance dictates who more dependant of whom is, however in terms of scale it is incomparable in scale to anything existing before.
• India seemed to be hesitant on its allegiance, considering main purpose of BRICS as ideological. Only recently New Delhi leaned slightly more towards BRICS de-dollarized stance. Reason for that lies in possibility to promote its own currency in international trade. And India would need to do such badly. Until recently, 86% of India’s trade payments were being settled in USD, with USA itself being importer of Indian goods weighting 15%, and exporting its own at 5%.
• South Africa and Brazil – both having strong trade bonds with USA - for long time were less engaged in political scrambles between hegemon and pretendent. That has changed with growing position of China as trade partner. Beijing recently surpassed USA in both cases as a trade partner. All the above hold large volumes of USD, so the weakening of American currency could impose heavy losses on them. Hence necessity to balance between desire for greater international influence and financial autonomy versus costs of challenging USD’s dominant position.
• Only long-term de-dollarizing Russia, fuelled by memories of imperial past, seems to be nearly fully de-coupled from exposition on dollar, US treasuries and trade bonds with west. De-dollarisation took Russia over a decade. Cutting ties with west It has been mostly achieved due to events of 2021 and 2022.

Just in recent years BRICS managed to attract large chunk of emerging economies that applied for membership – Saudi Arabia, Nigeria, Egypt, Argentina, Iran, just to mention few. Worthy pointing out, that among these are both countries strongly tied with USA politically and economically, and US enemies. Also, due to its geopolitical allegiances and local rivalry on dominance over Muslim world, Saudi Arabia and Iran were considered as local enemies. That has only recently changed, with Teheran and Riyadh trying to make peace for the sake of higher stakes.

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In many past occasions, USA used its dominant position to weaponise dollar – informal reserve currency of the world - to fulfil its own political agenda. Such was accompanied by other mechanisms i.e. via by imposing individual or international sanctions. Historically, all members of BRICS were at some point under US sanctions, with Russia and China still being under many. However, latest example of ceasing Russian private and national assets around the world, has been considered by BRICS, most of its allies, and many western legal commentators, as unlawful. Despite of what real legal status it is, that is perception an appropriate presentation of such action what matters the most. And that made BRICS’s offer to create alternative to USD, so interesting to many countries.

Hence, process of in reducing dependence on the USD seems to be speeding up, although BRICS members and applicants seemed not to develop group-level consensus on how to do such until recently. According to IMF, for Q3 2022, USD, EUR, GBP and JPY consisted now 88% of known, allocated currency reserves.

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But attempt to de-dollarize is just one aspect of a bigger whole. Under brokerage of China, Saudi Arabia and Iran established diplomatic ties. Same with civil war torn Syria and other Arab countries. Peace on Middle East seems to be achieved (although statistically it may be just a temporary status). Such, serves interests of China, which is production powerhouse of the world and requires un-interrupted flow of cheap fuels to maintain its position. Hence further tightening commercial bonds – over 50% of all Belt and Road initiative infrastructure funds, are being invested now in the Gulf region. In this case there is a need to explain, that China cannot be consider in 100% as peaceful dove bearing olive branch. Its actions are dedicated to strengthen its position and to undermine status of current dominant superpower. Besides, Mainland China with its high defence budget, multiple land and sea claims towards its neighbours, dams on Mekong affecting sweet water flows to Vietnam simply states openly since at least 2020 need to ‘prepare for war’. China’s actions are dedicated against dominant superpower, which is USA. And of course, USA does exactly the same towards China.

De-dollarisation and unexpected Chinese success in peace mediations seem to support BRICS’s position. But there is one more element, which could be added to get full picture - ‘revolution of tired’. These are emerging economies, who decided to choose Chinese offer as viable alternative to USA’s hegemonistic approach. In our part of the world, and as an ally to G7, we often accept its point of view as our own. However, among Africa, South America and large chunk of Asia, approach to revolt against weakening hegemony starts to dominate. Official accessions to BRICS is of course noticeable. But when President of Mexico – (not BRICS member or applicant) - states that ‘Mexico is not a colony of the USA’ in a month after nationalising its lithium reserves to great displeasure of US entities, or when Salvadorian head of state states that “Monroe Doctrine is dead” – what else could it be, then signs of fast pacing erosion of current system.

Chinese offer is being listen with great interest in regions being subject of colonial exploitation in the past. Hence negative comments of African politicians towards President of France and its propositions for cooperation with Eu and against Russia and China. And that is why, African heads of state visited in crowds Moscow on the eve of Xi’s visit.

Approach to bilateral usage of own currencies

Initially BRICS nations developed more bilateral approach. It was usage of own currencies in mutual trade. After all, collective push for the use of local currencies lowers dependency to USD. Just to mention few:

• Such approach is clearly noticeable among India and Russia, Russia and China, China and Brazil or China and their partners from emerging markets.
• Brazylia i Argentyna zadeklarowały w styczniu 2023 roku chęć utworzenia unii walutowej, a nawet rozszerzenia jej na cały kontynent południowoamerykański. Bez wspólnego rynku długu może on jednak podzielić drogę euro.
• Brazil and Argentina declared in January 2023 will to create currency union between each other, or even extending such to the whole South American continent. Without common debt market, it may however share euro’s path.
• Saudi Arabia – which was crucial part of petro-dollar system as itself and OPEC main member – now considers accepting yuan instead of dollars in its trade settlements with China. Worthy noticing, that trade value Rijad has with China, recently surpassed cumulative value Kingdom has with USA and EU. However in this particular case, seems that OPEC countries won’t ditch dollar entirely in near future.
• In 2022 Bank of Israel added new currencies to its reserves, one of them is Chinese Yuan. Israel is considered as close ally to US, however its geography dictates necessity to remain open to the Asian trade.
• In 2020, China, Japan, Korea, Australia and ASEAN countries forged treaty named Regional Comprehensive Economic Partnership. What is now the largest trading bloc in history (approx. 30% of world’s GDP), wants to eliminate most of tariffs in between members and incentivise trade between members, by establishing commonly respected rules. And just with the end of March 2023 ASEAN members of RCEP discussed matter of how to settle trade in local currencies, instead of dollars.

There are also internationalized incentives to use currencies other than USD. For example, BRICS established New Development Bank with purpose to de-dollarize development finance. They also created Contingent Reserve Arrangement (CRA), as a framework to support its members through liquidity and precautionary instruments in response to potential short-term balance of payments issues. Both were created as response to lack of successes in reforming financial system and IMF. Group has also been planning the launch of a common payment framework that can be integrated with a BRICS digital currency to create and support de-dollarized global financial infrastructure. BRICS has also collectively pursued reformist approaches, advocating for the reform of the IMF Special Drawing Rights, and forming BRICS stock exchanges alliance within the existing system. Great international success is UnionPay – China’s central bank-approved independent bank card network launched in 2002 – has achieved a significant global presence - with over 7.5 billion cards issued worldwide, more than Visa and Mastercard combined.

Matter of de-dollarisation remained of great importance especially to Russia. At the BRICS 2020 Summit, under Russia’s chairmanship, group jointly issued the Strategy for BRICS Economic Partnership 2025 attempting to reform current financial system and made vows to reinforce and advance de-dollarization processes.

Approach to use own currencies in bilateral trade may be considered as progressing, Renminbi – as most recognisable of all BRICS’s currencies - was in 2019 8th most traded currency, currently surpasses Swiss Franc and Canadian Dollar. Belt and Road initiative was great support to its internationalisation. Same with internationalized institutions, like China Development Bank and Exim Bank of China, who now provide as much development financing to emerging economies as World Bank does. More internationalised usage of local currencies had been noted also among rest of BRICS currencies, although at smaller scale and with strong assumption that rouble share has dropped significantly. This has been achieved mostly on expense of EUR, GBP and JPY.

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Let’s be honest however – USD as a world reserve currency has been accepted by international consensus of 44 countries in 1944. Among signatories were USA, USSR, colonial empires of France and UK, and nearly everyone except III Reich and axis countries – for obvious reasons. After Bretton Woods’s fall, nearly everyone in western world accepted new status-quo of petro-dollar dominance, as natural progression. Even in communist countries USD had proper street-credit, and was subject of high demand. Dollar’s position even strengthened, when USSR thrown a towel, ending boxing match known as Cold War. As a part of post-Cold War Pax Americana, dollar peaked and flourished. And its dominant position wasn’t questioned until recent 2 decades.

To compare - Renminbi – strongest of BRICS’s currencies - is national currency, strictly controlled by PBoC. Its internationalization made significant progress in recent years, as RMB fx trading (despite of being pegged to dollar) and demand from financial institutions outside Mainland surged. It is also used in international settlements, reserves and debt issuance. In 2015, China launched the Cross-Border Interbank Payment System (CIPS) for onshore Renminbi clearance settlement services and to promote greater use of the Renminbi and support its internationalization. As a result, in 2021 cross border trade settlements made in Renminbi grew to equivalent of 5.77 trl USD, together for receivables & payables. That is equivalent of 14.7% (and growing) of total worldwide trade against approx. 50% invoiced in USD at the time. However, it is still far not enough to challenge USD.

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Despite of progress RMB’s done in the last years, it seems to be moderated by being countered worldwide and on multidimensional level by G7 and its allies. Would BRICS really want to challenge position of USD it has to move out from existing frameworks of incentivising usage of local currencies or yuan in bilateral trade. Would it really think of speeding up de-coupling and de-dollarisation, it needs something more recognisable to undermine dollar. And among assets available to central banks within tier 1 of Basel III accord, or just logically, based on recognisability, abundance and value, there is just one alternative that could be used for such. It’s definitely not euro – as explained in part 2 of analysis.

In this context, there are growing in strength signals about grand introduction of international currency or instrument, developed by core BRICS nations, to be used in international trade. A tradeable currency backed up with something else than debt rolled in future. In other words – there is a need for something bigger.

Need for something bigger

BRICS is working on a new reserve and high-volume trade currency. Potentially to be backed by basket of gold and other commodities. Details to be announced on BRICS Summit held in South Africa in August 2023 (and it seems to be no coincidence, that just in July 2023 USA will introduce its FedNow). However full scale usage of such is not going to happen immediately. On initial stage BRIC’s currency will be highly supported by usage of local currencies only gradually gaining in power and size.

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Subject of how such may work is wildly speculated. Currently, would a country require to purchase oil or most of the goods it has to own USD among its reserves, pay commissions and in effect it becomes dependent of US monetary policies. Would FED decides to raise interest rates, debts in USD become more expensive to handle. And in times of crisis, capital migrates to USA which considers to be ‘safe haven’. So lack of dollars to cover required payments, may become problematic. Milkshake Theory explains these mechanisms in detailed way.

Upon running out of USD, countries have to make a costly loan. Would such is to be done by IMF, they will usually try to impose austerity and privatisation of local strategic sectors, which is very incentivising and profitable to US high market cap entities. As BRICS with allies now form biggest oil importing and producing bloc in the world, they may attempt to change described and benefit of new.

It seems that view in which gold may hold strategic function in such seem to be more encouraging and prevailing. Example of such approach is presented by Iran and Russia, that recently attempt to settle their trading balances using gold in physical or tokenised form. We discussed this matter in more depth in 2nd part of our ‘How sanctions affected Russian flows of precious metals’ analysis. Singapore, which is international trading centre, seems to present similar approach as it made further purchases of gold just after mentioned earlier ASEN meeting. Its holdings now reached 205 tonnes. Key example of such approach is of course China, that couple years before successfully launched yuan oil futures contract, a new financial instrument to de-dollarize the global oil trade.

China’s oil futures priced in Renminbi effectively surpassed dollar pricing of most important commodity benchmarks (like WTI on oil). Renminbi is convertible into gold on Shanghai Gold Exchange and Hong Kong Gold Exchange. This made China - world’s largest oil importer – an owner of entirely domestic infrastructure for trading oil using gold. Oil suppliers can receive payment in Renminbi and immediately convert it into gold. This shift marks the beginning of a nondollar financial instrument and nondollar price discovering mechanism for a major global commodity (hence high possibility for arbitrage in between markets). Shanghai-traded yuan oil futures still lag in size to London Brent and New York WTI oil futures, but they have already surpassed Tokyo and Dubai by a significant amount. With escalations between Washington and Bejing, it is no brainer that China accelerated its promotion of a Renminbi-denominated oil trading.

Potential of the yuan oil futures to advance global oil trade de-dollarization goes even further when considering China’s close bonds with OPEC & OPEC+, and linkage to gold. China stabilised the yuan oil futures by providing trading infrastructure to facilitate swapping oil into gold, with the Renminbi serving as an intermediary. Having its own pricing benchmark for gold – rather than being subjected to London or New York’s pricing, may accelerate goal of de-dollarizing global oil trade, making possible to trade oil using gold with minimum exposure to fx exchange risk. Of course – trading oil for assets different than dollar is not new idea. Mu'ammar al-Kaddafi wanted to create pan-African gold Dinar and use it for international commodity trade. Saddam Hussein was close to trade Iraqi oil for euro. However, China is something of much greater proportion than Libya and Iraq.

What is position of BRICS alliance in the global physical gold market? BRICS countries have major stakes: China, Russia, South Africa, and Brazil as major gold producers. China and India are also world’s two largest gold consumers. BRICS gold trading system would facilitate creation of a new gold pricing benchmark based upon global physical gold trading rather than gold derivatives like on Comex. Apart from de-dollarization, BRICS single gold trading system would also help to strengthen domestic currency stability because it would free BRICS members from being subject to foreign fx pricing.

Applying such solution to global commodity trading – not only for oil - could be a movement of great magnitude and long-term consequences. It is very possible that it is something BRICS intend to do with regards to implementation of its its partially gold-backed currency.

In our opinion and based on available data, we believe:

• Such solution would be dedicated to global community but against Anglo-Saxon dominance. It is therefore possible that it would be gram instead of ounce as a basic unit of value.
• Comex uses 100 oz, London 400 oz as basic units, but Shanghai follows system based on grams and kilograms. So would plan Moscow World Exchange.
• New currency would be backed with gold (and other undefined commodities). So, its supply would be limited and used only for large volume trading.
• At this stage it is impossible to assess would above be based on fractional reserve or full backup.
• Dollar preserved its worldwide dominance by creation of petro-dollar system. Considering strong and ongoing evolution towards EV technologies and zero-emissions, we could speculate would it be lithium to become part of such backing currency basket.
• Lithium’s presence would mark symbolic upgrade from ‘old’ oil currency and energy systems to new, green and futuristic ‘lithium’. That would guarantee strong PR.
• Argentina who has one of the largest lithium reserves in the world applied to BRICS.
• Bolivia is also abundant in lithium. Considering failed coup’d etat of 2019 that was an attempt to push its lithium reserves in western hands, it has eventually signed long-term production-delivery contract with China.
• Bejing has 4th largest lithium reserves in the world and is number one in lithium processing.
• Serious consideration is required about if and how large part of such backing-up would be formed by strategic metals, rare earth metals, oil and soft commodities – all abundant within BRICS.
• Potential attack on basket making commodities, could have strong effects and create instability. Hence it seems logical, to have more commodities included and at different weights. Such diversification could stabilise new currency, especially if majority of basket making commodities would be mined or manufactured within BRICS.
• Potential abundance of such commodities within BRICS and scarcity at G7, would act preventive to destabilising attacks, as it would be easier for BRICS to stabilise its currency on commodity markets.
• As backed by commodities, its gradual usage and implantation, could create larger international arbitrage between east and west. Some commodities could therefore appreciate in price heavily.
• BRICS currency would be digital and used just for trade and commerce purposes among BRICS members. It would be therefore initially strongly supported by local currencies. Hence push for ditching USD and usage of own currencies in bilateral trade.
• India and Brasil confirmed, that Ripple (of XRP coin) is working with central banks to implement technology.
• Of course, BRICS would not ditch contacts with ‘external world’. As stated previously, ties between BRICS and USA remain deep. Hence, necessity to create few open gates for international trade in local currencies. Shanghai, Hong Kong, Singapore, Moscow, with possibility to add more.
• Existence of such trading points, and another ring made of local currencies would keep international currency safe from attempts of strong FX attacks.

So probably it would be circulating in a closed loop in between member states, would not be exported outside BRICS, would be secured by commodity basket with strong presence of gold, in the environment of BRICS commodity benchmarks valued in price of gold and/or BRICS currency and/or local currencies, but not USD. New currency had been exchangeable to local BRICS’s currencies used for external trade. That pretty much excludes possibility of fx destabilising attack. At this moment it is unable to assess possible strength of Chinese governance over international currency backed with gold and commodities. Initially China would have to keep high transparency on it, to attract its internationalisation and to avoid accusations on attempts to replace USA as hegemon.

Of course, above is based on press releases, comments, deliberations and speculations. Final shape of anti-dollar BRICS solutions we’ll find out in time.

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Final word

Part 3 concludes series dedicated to idea of common currency for BRICS countries. We have lied our views and reflections on how future international trading currency could look like, and presented current state of affairs. Data and information published so far, seems to confirm that new currency will be backed by commodity basket with strong presence of gold and lithium in it – minerals which are abundant among BRICS nations. What commodities would be inclusive and at what weights, we will find out soon. However, such challenge to USD’s dominant position in trade may create strong international shocks and aftershocks of global scale, as dominant superpower probably won’t allow pretenders to undermine its position. Such happened in the past, upon emergence of US, Britain, Netherlands and Spain as worldwide superpowers.

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Initially, BRICS wanted to change existing system that evolved from Bretton Woods, to show growing importance of emerging markets. Someone could consider that in category of moral historical justice, someone in category of representing changes happening geopolitically and financially, and some just as a need to have its own piece of cake and benefit of it. Such approach was visible in questioning UK and France presence in United Nations Security Council, questioning role and position of how IMF works, or discussing lack of emerging powers representants in SDR system. These attempts had failed in most cases.

While still representing reformist approach, in its speech delivered in March 2009 titled ‘Reform the International Monetary System’, Zhou Xiaochuan - Governor of the People's Bank of China - called John Maynard Keynes's idea of Bancor "farsighted" and proposed adoption of IMF’s SDRs as a global reserve currency as a response to the financial crisis. Idea has been rejected by USA, as clearly undermining its position. Since then, BRICS gradually ditched reformist approach and started developing its own system.

Idea very much looks like Keynesian idea of Bancor – supernational currency conceptualised by Keynes for the purpose of international trade. Proposed by UK on Bretton Woods conference in 1944, but rejected. Instead, international community has been convinced to opt for US dollar pegged to gold. Since then, it has been clearly proved that existence of national currency backed by gold and serving for national and international purposes at the same time won’t work. Triffin Paradox proved that currency used for nation’s needs and internationally, will have to ditch one of these roles to save the other. Gresham’s Law proved, that people will ditch weaker currency, while hoarding more valuable assets. Both of these theories turned to be correct in case of slowly eroding US dollar.

It would be great historical irony, if BRICS decide to name its commodity-based trading currency after idea presented by Keynes, and imply in this way need to go back to the roots.