In today’s Finshots, we talk about whether a common currency for BRICS economies is a plausible idea.

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The Story

India is amidst a tug of war. And by that we mean that it’s right in the middle, being pulled by two contrasting decisions.

  1. Should it warm up to the idea of having a common BRICS currency?
  2. Or, should it be indifferent to the whole idea of it?

So BRICS is simply an alliance of the world's developing economies. It was actually kickstarted by Brazil, Russia, India, and China back in 2006 because they felt intimidated by the dominance of goliath economies like Europe and the US. A few years later, South Africa jumped in, forming a global economic group that was determined to challenge the world’s wealthy economies. And now BRICS has expanded its membership with 5 more countries (Saudi Arabia, Iran, Egypt, Ethiopia and the United Arab Emirates) on board.

But the BRICS don’t want to only discuss how they can improve their trade relations. They want a common currency to rally around. Or at least, that’s what Russia wants.

When Russia invaded Ukraine, economies in the West slapped it with trade sanctions. They didn’t accept a bunch of goods from Russia and denied non-essential exports to the country. They even froze deposits and reserves the Russian government, companies and its citizens had with them so that they wouldn’t be able to withdraw and use this money to fund their war.

This obviously crippled Russia’s economy.

So Russia had a brainwave. It thought “Hey, what if we get the BRICS member countries to agree to a common currency? It could act as a global reserve currency. Why should currencies like the US Dollar have all the fun?”

You see, the US Dollar (USD) has dominated reserves worldwide since 1944. Most countries want to hold reserve money in the form of the USD simply because that’s the currency in which most global goods are traded. So if a country wants to buy or sell commodities like coal, gold or oil, it happens in the USD. Roughly 80% of global trade and around 60% of global reserves are held in USD.

The US pretty much controls everything!

So it seems like having a common currency for emerging economies is a great plan, right?

Okay, but why can’t these countries simply conduct trade using their local currencies?

Let’s take the example of Russia and India.

When Russia was locked out of the global financial system during the war, they started selling oil at a deep discount.  India jumped in and we consummated the transactions using Rupees.

But what would Russia do with billions of Rupees? The exchange only works if Russia has a massive need for Indian goods and services. It’s the only way they can put the Rupees to good use. And pretty soon, Russia didn’t want our Rupees anymore. They couldn’t use it to trade with other countries either because of certain restrictions.

So yeah, maybe a common BRICS currency makes sense for India too. And maybe that’s why the government seems amenable to even discussing it.

But hold on, we have to talk about the elephant in the room — China!

See, China has been trying to fight the USD’s global influence in every way it can. Over a decade ago it shouldered the responsibility of establishing the headquarters of BRICS’ New Development Bank at a swanky skyscraper in Shanghai. Think of it as a bank for funding infrastructure projects and handing over loans to emerging countries without having to bow down to the USD.

It even launched CIPS (Cross-Border Interbank Payment System) its own global payments messaging platform that would challenge the SWIFT (Society for Worldwide Interbank Financial Telecommunications) as a global messaging system used to facilitate transactions between banks across national borders. As of 2023, SWIFT handled a mammoth $150 trillion in transactions per year, which is only set to rise at a fast clip. And since 7 out of 10 of these transactions happen in the USD and Euro, China’s instinct to challenge these currencies only gets stronger.

And some experts argue that moving to a common currency would benefit China. They’re the largest BRICS economy. Their yuan already has a place as a reserve currency. And at the end of the day, that means they’ll call the shots for a common currency.

What does that mean?

Well, let’s look at the Eurozone. It has taught global economies that common currencies can be a recipe for disaster simply because a single currency has to take care of monetary policies across different countries. When the Global Financial Crisis threatened the world economies in 2008, countries like Greece and Portugal suffered the aftermath in Europe. And that’s because countries like Greece needed to have more liquidity to repay debts. So the European Central Bank would simply have to print more money or take other steps that would help Greece. But that would hurt big economies like Germany where more money would mean skyrocketing inflation. So the big ones eventually called the shots.

India wouldn’t want such a situation, no?

But the bigger problem is — how will a bunch of economies across world borders, with really nothing in common even be able to work together? If you ask, Jim O'Neill, the Goldman Sachs economist who coined the BRIC acronym, he’ll say

It’s just ridiculous. They’re going to create a Brics central bank? How would you do that? It’s embarrassing almost.

So yeah, it does seem to be a far-fetched idea for now. And we’re not sure why the latest chatter says India is even considering it — unless maybe… they can get China kicked out of this plan?

Even that sounds ridiculous, doesn’t it?

Until then…

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