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Episode 4: Russia & BRICS

Episode 4: Russia & BRICS

President Vladimir Putin no longer looking to work with the USA and is now looking for other alternatives

President Putin's speech today detailing the creation of a new reserve currency based on a basket of goods and services (BRICS) has some people scratching their heads.

It is assumed that it will include real, roubles, rupees, renminbi, and rand and serve as a substitute for the Special Drawing Right of the IMF (SDR).

Perhaps it shouldn't be such a surprise that Russia appears to be spearheading a conversation on a new reserve currency.

Photo from The Moscow Times

Russian officials were undoubtedly astonished by how quickly the West and its allies imposed sanctions on Russia's foreign exchange reserves, which were reduced by around half.

The Central Bank of Russia practically acknowledged as much, and several BRICS countries, notably China, undoubtedly took notice of how quickly and covertly the US Treasury moved.

Therefore, the BRICS countries could see the need for a different reserve currency to equal something like the SDR of the IMF.

Remember that the SDR issued by the IMF is not a currency but rather a collection of claims on major reserve currencies including the dollar, euro, pound, yen, and its newest addition, the renminbi.

The SDRs, which have an outstanding value of around US$950 billion, are intended to replenish the reserves of IMF members.

Most notably, in August 2021, an extra SDR 456 billion was made available to IMF members to help with funding needs for the balance of payments after the shock of the epidemic.

Why would the BRICS nations require a basket currency like the SDR?

One can only speculate that this is an effort to counteract the IMF's perceived US hegemony and will give the BRICS the opportunity to create their own area of influence and the monetary unit inside that sphere.

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It's interesting to note that this week there have been press stories suggesting that Russia may wish to manage the rouble's strength against a basket or peg.

Could the BRICS serve as the barometer used to control the rouble? However, we are aware that the CBR is not a supporter of rouble management.

Russia may be strongly motivated to engage in or establish an IMF-like program in order to handle the rising strain on its capital account, without debating the chances of such a proposal becoming a reality.

Due to its large trade surplus and the capital outflow that often counterbalances it, Russia is accustomed to being a net creditor to the rest of the world (purchase of foreign assets).

Because of sanctions, regulatory limitations, and in certain cases, individual financial institution choices, Russian investments are no longer accepted at their traditional DM destinations in the current geopolitical climate.

The backdrop of rising global rates may also lead to a need for external finance in emerging markets and frontier economies at a reasonable price.

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