There has been speculation that a desire to avoid using the US dollar might encourage the BRICS nations to adopt a gold-backed currency. But there are several questions to ask about such a proposal
Many nations would like to reduce their dependence on the increasingly weaponised US dollar, especially for dollar-denominated trade that does not pass through the US. The idea of a shared currency issued by the BRICS nations (Brazil, Russia, India, China and South Africa) made headlines in late 2024 ahead of their October conference in Kazan, Russia. Wanting to move away from the dollar is understandable, but making progress will be challenging. Here are eight questions for proponents of a BRICS currency.
1. Is this a Russian dream to dodge US sanctions?
Not quite. Brazilian president, Luiz Inácio Lula da Silva, has expressed enthusiasm for the idea of a new currency for settling trade between the BRICS nations. However, politicians from South Africa, India and particularly China have been conspicuously quiet on the topic.
The BRICS nations are not a homogenous group with a common set of aims. These nations are diverse with differing objectives and, in the case of India and China, significant rivalries. This is not an obvious starting point for a shared currency project.
2. Would it replace domestic currencies?
It is not clear if the plan is to replace domestic currencies or create something to operate in parallel. The lack of clarity on this seminal point is an indication that discussions are at an early stage.
These things take time. The euro was created in 1999, 29 years after the 1970 Werner report proposed a single currency, and 21 years after the launch of the European Monetary System. The eurozone was built on shared political institutions and 50 years of economic integration among neighbouring countries.
A ‘big bang’ move to a shared currency for the BRICS nations is not practicable. A fixed but adjustable exchange rate regime might be a more viable route to a new currency.
3. How would such an exchange rate system work?
The experience of the European Exchange Rate Mechanism (ERM), a precursor to the euro, is instructive. The system had a bumpy history but eventually succeeded in establishing guide rails for the launch of the single currency.
Fixed but adjustable exchange rates require occasional realignments to account for differing inflation rates over time. Under the ERM, the burden of adjustment usually fell to the nation of the weaker currency. Realignments tended to be fraught events with political repercussions. If a BRICS currency ran parallel to domestic currencies, who would manage exchange rates versus the domestic currencies?
Lula’s suggestion for an inter-BRICS trade currency redenomination out of the dollar would require similar adjustments. The weights of each currency would need to constantly be adjusted to reflect global currency movements (often versus the dollar) and prevent arbitrage.
4. Would expanding the list of ‘BRICS’ nations enhance the appeal of a shared currency?
Attempting to establish a BRICS currency among the current members would be an enormous undertaking; the recent initiative to expand the group – with invitations sent to the United Arab Emirates, Iran, Indonesia, Ethiopia and Egypt among others – would only add to this complexity and reduce the probability of a new currency arrangement. If the BRICS group is intended to provide a counterweight to the US-led Bretton Woods institutional framework, which led to the creation of the International Monetary Fund and the World Bank, it should be highlighted that Ethiopia and Egypt are currently reliant on IMF financing. Will the BRICS group be offering a more credible alternative financing mechanism?
5. Would a gold-linked currency be more viable?
A gold-backed currency might appeal to major gold producers like China, Russia and South Africa. If a gold-backed currency replaced domestic currencies, then the BRICS nations would find themselves on a version of a gold standard. Gold-backed currency regimes in the 20th century collapsed because governments needed to print currency to pay for war (the first world war for European nations and the Vietnam war for the US). Does Russia understand it might have to rein in military spending to maintain a peg?
In addition, how would responsibility for maintaining convertibility into gold work between a disparate list of nations with differing holdings of gold and access to new production? If ‘goldbacked’ meant convertible into gold at the prevailing market price, then the unit would change in value every day. Who would intervene and defend when one of the underlying currencies fell in value? Would a gold contribution be required by the nation of the weak currency at a time of vulnerability? Such a system would lead to destabilising speculative movements of gold between participant countries – the opposite of the desired stable and predictable framework.
6. Why not just use local-to-local currency settlements for intra-BRICS trade?
Settlement in local currencies is increasing, albeit from an extremely low level. However, the scope is constrained by nations having a limited appetite for accumulating the currency of the other. For example, since sanctions were imposed on Russia in 2022, oil exports have been redirected to India. However, Russia does not want to accept rupees because of a limited demand for Indian exports. Local-to-local trade in home currencies will be easiest between nations where trade is in balance – but that is rare. A solution to the rupee conundrum was found by using the UAE dirham, a currency fixed to the value of the dollar and internationally accepted in multilateral trade.
The BRICS nation currency that has made the most progress in terms of increased usage in international transactions is the Chinese renminbi. As a nation that is the largest trading partner for 120 other nations it is best positioned to become the de facto BRICS currency.
7. What came out of the Kazan summit?
The Russian delegate to the BRICS summit recommended a common platform for cross-border payments using central bank digital currencies (CBDCs). This would avoid having to use the dollar, the US banking system and Swift, the interbank payment service. However, the roll-out of CBDCs is best described as a ‘work in progress’.
The Bank for International Settlements has helped to develop a platform, known as ‘Project mBridge’, with the participation of five central banks including the People’s Bank of China1. It is a solution for the long term, but it could eventually provide for own-currency settlement using CBDCs. Although it would not address the problem of trade imbalances leading to piles of unwanted local currency, it could lead to much lower transaction costs, which might tip the scales for some players.
8. Why is US president Donald Trump warning against a BRICS currency?
As it stands, Trump is reacting to a problem that does not exist and is unlikely to become one during the four years of his presidency. However, historian and economist Barry Eichengreen, from the University of California, Berkeley, has labelled the BRICS currency idea ‘a charade’2, which certainly makes it sound more like a basket case than a currency basket.
The bottom line
Although the desire to move away from the weaponised dollar is real and growing3, the switch will be tough – even for trade flows that occur within the BRICS group. The power of incumbency is strong.
At the margin there will be a bigger role for the renminbi and for gold. However, the asset management industry is unlikely to need to provide BRICS currency-linked products for several decades. Traditional core fixed income products such as global aggregate, developed market governments, and hard currency emerging market debt will continue to be the bedrock for fixed income investors.
