New currency for South Africa, Russia and China – how it could work

As the BRICS bloc continues to expand and establish itself as a hedge against so-called ‘Western nations,’ talk of forming a united currency for member states has been one of the more dominant topics.

While officials have repeatedly denied the idea that a ‘BRICS currency’ is imminent, discussions on how to better facilitate trade between BRICS nations and decrease reliance on the US dollar have been prominent within the bloc.

The BRICS countries have made it no secret that they have a specific ‘de-dollarisation’ agenda, actively moving to conduct and complete trade agreements in local currencies. This has already been done between bigger economies in the bloc, like Russia and China.

However, there are many logistic and credibility issues tied to trying to establish an entirely new currency.

According to Professor of Finance & Economics at Cumberland University and Free Market Foundation consultant Richard J Grant, there could be a way to do it, however. Just not in the sense that most people understand.

Grant noted that acceptance of a currency in trade today depends on confidence that others will accept it in trade tomorrow and that the currency will be stable in value.

“Its usefulness in trade also depends on trust in the prudential management of associated financial institutions and impartial access to payment systems. In a world of fiat money and extensive financial regulation, this implies trust in a government,” he said.

This is why the US dollar has been so dominant in global trade – and BRICS+ currencies have not.

“Those who use a currency do so to facilitate trade; that is, to reduce the cost of trade. The better a currency is perceived to do this, the more widely used it will be. And the more widely used it is, the better it is at facilitating more trade.

“This explains the ubiquitous use of the US dollar in international trade and, within some countries, as a de facto local currency and store of wealth. All the BRICS nations have benefited from the worldwide trading relationships facilitated through acceptance of the dollar as the common international currency.

“They have also benefited from access to American banking and payment systems – and to American financial markets.”

Because of this, none of the BRICS+ currencies are currently favoured to displace the dollar, Grant said.

“None has sustained the cultural development, and the relationship between government and governed, that builds confidence in the rule of law – and is a prerequisite for the emergence of deep financial markets. This takes a long time to develop but can be destroyed rather quickly.”

What a BRICS currency could look like

Talk of a ‘BRICS currency’ has emerged because of major shifts in the global landscape.

Since early 2021, the US has suffered a burst of inflation rising as high as 9% before declining to just over 3%. Although the dollar inflation rate is likely to fall further, the federal deficit has soared on the back of huge increases in unproductive spending, Grant said.

This has made the US dollar slightly less appealing in trade. Add to this the US’ position on various geopolitical tensions—especially vis-a-vis Russia and China—and it becomes understandable why there is a rising call to de-dollarise.

Notably, American-led sanctions against trade with Russia have blocked access to dollar-based banking and payment systems.

“The freezing and likely confiscation of $300 billion of sovereign Russian assets is a lesson to all countries – especially China – that future policy disputes could put their assets and trade facilities at risk. It is prudent to take precautions against such risk,” Grant said.

“Many countries have shifted significant portions of their dollar reserves into gold and taken delivery of that gold. The dollar price of gold has risen more than 15% in the past year, though it has steadied over the past two months.”

Grant said that gold is the definitive reserve currency, and it is rumoured that the BRICS currency – “the Unit” – will be a gold-based unit of account, possibly combined with a basket of BRICS national currencies.

“In the past year, four of the five individual BRICS currencies have tended to stabilise relative to the US dollar. Brazil has announced an inflation target of 3%, a target that might sound familiar to South Africans. This hints at a policy of currency convergence,” he said.

“If the main purpose of the BRICS currency is to reduce dependence on the dollar and euro payment systems, then gold should play a greater role in the creation of a BRICS unit of account. It is the only non-fiat reserve currency.”

As a unit of account, the BRICS currency would not need to circulate as a medium of exchange, Grant said, it would simply facilitate pricing and contracts.

“Settlement of contracts could be achieved through book entries in BRICS Unit accounts or through direct exchange of the indexed values of national currencies.

“The foreign exchange market would continue with high volumes of daily trades to ensure price discovery for all tradable currencies. Gold would continue to be priced in dollars. But a new emerging pattern of international trade cooperation will promote direct settlement in national currencies and the development of non-dollar payment systems,” he said.

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