By Corrie Kruger
Russian President Vladimir Putin has suggested that the BRICS countries – Brazil, Russia, India, China and South Africa – are working on a new global reserve currency.
“The issue of creating an international reserve currency based on a basket of currencies of our countries is being worked out,” he said at the BRICS business forum.
According to the Russian president, the member states are also developing reliable alternative mechanisms for international payments. The group said it was working on setting up a joint payment network to cut reliance on the Western financial system. The BRICS countries have also been boosting the use of local currencies in mutual trade.
Previously, Russia had said they would only accept roubles, gold or bitcoin as payment for energy exports to “unfriendly” countries. No dollars or euros will be accepted. This view is perhaps understandable, given that the Western financial system has told Putin he can no longer use dollars or euros to purchase anything.
As a result, Putin is demanding roubles, gold or bitcoin. And that means the Russian rouble is now backed by commodities exports, making it a currency backed by something real. If you buy roubles, one can trade those roubles for natural gas or oil.
According to Putin: “Let me reiterate, the whole global economy and trade have suffered a major blow, as did the trust in the US dollar as the [world’s] main reserve currency.
“The illegitimate freezing of some of the currency reserves of the Bank of Russia marks the end of the reliability of so-called first-class assets.
“In fact, the US and EU have defaulted on their obligations to Russia. Now, everybody knows that financial reserves can simply be stolen.”
Harsh words from the invader of Ukraine.
Just as the petrodollar is not a currency, neither is it a global trading system. The wide use of the US dollar as payment for crude oil reflects the traditional preferences of non-US oil suppliers.
Oil exporters prefer the US dollar because it is the pre-eminent global currency for global investments. That makes it the most convenient store of value for accumulated oil revenue. An early example of petrodollar recycling is the 1974 deal between the US and Saudi Arabia to funnel Saudi petrodollars into US Treasuries.
The question is if it is feasible, or is this just wishful thinking.
To evaluate the advantages for an oil exporter of getting paid in US dollars, consider periodic claims over the past decade that the petrodollar would soon face a challenge from the petro-yuan: oil exports denominated and paid for with Chinese currency.
All buyers of exported oil hold or can easily access US dollars, while only China and mostly Chinese companies hold the Chinese national currency, called the yuan or renminbi. Unlike the US dollar, the renminbi is not a freely convertible currency; its exchange rate against other currencies, including the US dollar, continues to be managed by China's central bank
A new reserve currency not controlled by any individual country would be more desirable. Meanwhile, BRICS countries should peg their currencies to gold to solve this worldwide problem driven by the US dollar.
There are a number of commentators who believe that roubles have a future; the dollar does not. The persistent printing of more dollars renders the dollar to be systematically destroyed. And with it, the future of the US is being rapidly eroded by the day, ultimately leaving the American people impoverished.
One needs a serious rethink on the strength of the dollar as a reserve currency to preserve value. Few people will believe that in the current situation, with all the sanctions in place, that the Russian rouble is stronger against the US dollar over five years. But it is.
The Bretton Woods system of monetary management established the rules for commercial and financial relations among certain countries after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states.
The Bretton Woods system required countries to guarantee convertibility of their currencies into US dollars to within one percent of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at $35 per troy ounce of fine gold (or 0.88867 gram fine gold per dollar).
It also envisioned greater co-operation among countries in order to prevent future competitive devaluations, and thus established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits. If the new Brics currency is based on the same principles, there should be no reason for it not to work.
Preparing to rebuild the international economic system while World War II was still being fought, 730 delegates from all 44 Allied nations agreed to the Bretton Woods system, which operated successfully due to three factors: Low international capital mobility, tight financial regulation, and the dominant economic and financial position of the US and the dollar.
On August 15, 1971, the US terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. As a result, the rand has suffered against the dollar.
Would it not be a change for the good if South Africa could strengthen its inter-Africa trade, while at the same time grow its relationship with the other BRICS countries?
Corrie Kruger is an Independent analyst.