Putin Leads BRICS In Discussions On New Global Reserve Currency

Many of the headlines last week involved the G7 meeting of national leaders in Bavaria. The G7 consists of the U.S., UK, Germany, Japan, France, Canada, and Italy. (Other nations and the EU are invited as observers and allowed to participate to some extent).

When the G7 was formed, they were the seven largest economies in the world. In recent years China (#2) and India (#5) have worked their way into the top seven economies, but the original membership is unchanged. Some years ago, Russia was invited and the group informally became the “G8.”

Needless to say, Russia received no such invitation this year. But there was another international meeting last week that may prove to be even more important than the G7. This was the meeting of the BRICS countries (Brazil, Russia, India, China, and South Africa).

Those economies are ranked second, fifth, tenth, and eleventh largest in the world. (South Africa is ranked thirty-sixth largest and is an outlier in size; it was included so that a major economy in Africa would be represented alongside members from Asia, South America, and Europe).

While somewhat smaller in economic size than the G7, the BRICS still represent 30% of global GDP and 40% of the global population. Like the G7, the BRICS invite many other countries to participate in their meetings.

Prominent attendees at this year’s meeting included Argentina and Iran. The BRICS cooperate on a long list of issues including technology standards, economic development, climate change, and international trade. This year, a critical new topic was introduced as described in this article.

On the initiative of Russian President Putin, the BRICs began to consider the formation of a new international reserve currency. This was clearly in reaction to the West’s economic sanctions aimed at Russia as a result of its invasion of Ukraine. The sanctions take many forms and affect many different areas of commerce and trade, but what they all have in common is the use of the U.S. dollar as the principal weapon.

Whether the West is banning exports, limiting imports, stopping investment, or freezing assets it is using the dollar payment system and dollar accounts in correspondent banks to enforce the sanctions. The BRICS realize that as long as they are dependent on dollars for holding assets or purchasing global commodities, they will be under the thumb of those who control the dollar payments systems, which is basically the U.S. with some help from big European and Japanese banks.

The BRICS also know that while Russia is the current target of sanctions, the other members could easily be next. If China turns up the pressure on Taiwan or India does not go along with the Russia sanctions, then they could soon be subject to dollar-based sanctions also. The only way to escape the sanctions is to escape the dollar.

This is easier said than done. None of the BRICS currencies are safe enough or have large liquid bond markets based on their currencies to step into the role of the dollar. But a new currency in digital form backed by a basket of commodities or gold could provide a satisfactory substitute.

The new currency would probably start out as a payment currency for trade and investment among the BRICS and their associate members. Eventually, it could graduate to reserve currency status if a large bond market denominated in the new currency were created possibly with bonds from a multilateral institution located in a good rule of law jurisdiction (Switzerland?) and guaranteed by the combined resources of the member nations.

Similar initiatives are underway in other forums such as the Shanghai Cooperation Organization, and the Eurasian Economic Union. These initiatives will take time, but participants are determined to break free of dollar domination.

The best way for individuals to take advantage of this trend is to buy gold. When confidence in the dollar is finally lost, the dollar price of gold will soar.

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