Don’t Underestimate The BRICS. They’re Stronger Than Ever.

The BRICS met in Kazan, Russian Federation last week. The BRICS have a rotating presidency, and this year Putin is president of the BRICS.

The world was waiting for the announcement of a new BRICS currency. That may come in time, but not yet. The new currency may be ten years away. What happened instead is that Putin and the BRICS announced a new blockchain-based digital ledger to record trade payments using existing currencies of the BRICS members.

The significance of this system (tentatively named “BRICS Clear”) is that there are no dollars involved, and the secure payment channels are relatively safe from U.S. and EU sanctions. Russia will sell oil to China for rubles; Brazil will sell aircraft to China for rais and India will sell technology to China for rupees and so on. (Alternatively, any BRICS member can elect to take the currency of any other BRICS member, all to be recorded on BRICS Clear).

Payments can be settled on a net basis instead of a gross basis. This means, for example, that Russia and China can trade goods and record payments. There will be a “due to” and a “due from” on the ledger. Those can be netted out with only the net amount changing hands. And this does not have to be done in real-time; it can be done monthly or quarterly. This greatly reduces the number of payments and message traffic.

The central bank or commercial banks in each country can provide payments to local sellers in local currency while recording a due from the BRICS Clear ledger on its books. That system can work well, but it leaves two issues unresolved compared to a single currency system.

The first is stability in exchange rates while balances are left unsettled. The second is the overaccumulation of a certain currency by one party that may have limited use for that currency. The answer in both cases is gold.

If you don’t want to take an exchange rate risk, you can take your counterparty currency balances and buy gold. And if you have too much of a certain currency standing on your accounts, you can reduce the balance by buying gold. The implications of this have not yet sunk into gold market pricing. It’s tantamount to an informal gold standard without fixed exchange rates. It relies on market forces (mostly denominated in U.S. dollars for now) and does not rely on huge hoards of freely convertible gold in central banks.

Still, it works. It positions gold as an anchor in a new international monetary system without the strictures of the classical gold standard. The entire plan is one more nail to the heart of the dollar-based system.

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