BRICcoin doesn’t stand up

A thing, via Bloomberg:

The BRICS group of nations will discuss the feasibility of introducing a common currency and shouldn’t rush any decision, according to South Africa’s foreign minister.

In a new instalment in the endlessly running “Is the dollar dying?” debate, the five geopolitically, ethnically and economically diverse nations that make up the BRICS block — Brazil, Russia, India, China and South Africa — are likely to discuss the matter at a late-August summit in Johannesburg.

If you’re lucky enough to have had the recent discourse pass you by, Capital Economics has a good tl;dr summary of the situation (their emphasis):

— The importance of the dollar gives the US enormous power over global trade and financial flows. Increasingly it has been wielding that power. Most starkly, the US imposed heavy financial sanctions on Russia in the wake of the war in Ukraine. In doing so, it exposed how much other economies’ international transactions are dependent on the mercy of Washington.

— That has spurred a new push, particularly by geopolitical adversaries of the US, to push back against the hegemony of the dollar. One idea that has surfaced in some quarters is the creation of a new currency by the BRICS (Brazil, Russia, India, China, South Africa). Perhaps unsurprisingly, the most vocal advocates have been Russian, with backers including President Vladimir Putin and Foreign Minister Sergei Lavrov. But Brazil’s President Lula has also recently voiced his support.

They also have a good tl;dr of how utterly vibes-based the current discourse is:

It’s not clear what these policymakers have in mind when talking about a BRICS currency. It may even be that they are referring to different things.

Capital’s Mark Williams and Shilan Shah laid out a couple of ways this ethereal BRICcoin could become more solid:

1) A monetary union between the BRICS countries, creating a bloc similar to the eurozone.
2) A reserve asset based on the BRICS’ currency modelled on the IMF’s special drawing rights. CapEcon: “One way this could work would be for each country’s central bank to be issued “BRICS currency” assets constituting a claim on the other central banks. For each central bank, the value of their new asset would be matched by the value of the liability formed by the other central banks’ claims.”

They also laid out several big reasons it would absolutely not work…

— India is almost certainly absolutely definitely not going to turn its back on the US to side with China. India and China do not get along super well!
— Trade between the members is severely imbalanced, with India and South Africa both running long-term deficits with the other members
— Introducing an entire new system and market to replace the dollar in International transactions is substantial more difficult than, you know, just continuing to use the dollar

. . . concluding:

In sum, a BRICS currency wouldn’t solve any of the problems that make moving away from the dollar hard, and in some ways would make those problems worse.

Bank of America has taken a similar “DollarDefender44 has logged into the chat” approach.

In a long note released last week, analysts said reports of USD replacement are “greatly exaggerated” — pointing to a lack of credible alternatives, the greenback’s continued dominance in financing, and the unsteady progress of the renminbi and euro.

Death-of-dollar advocates of course, will point to many examples in history where things appeared had no alternative until, suddenly, a very much superior alternative arrived. Could BRICcoin be that thing?

Focusing on Brazilian president Lula’s call for a dollar replacement, the BofA gang write:

It would take time and would need co-operation at multiple levels among countries that are not always able to co-operate very well with each other. It is not at all obvious which currency President Lula was suggesting using instead of the USD. It is also not clear whether, how and when other countries could follow such initiative. We note that back in 2009 there were reports that some major oil producers were planning to start trading oil in non-USD currencies, which of course has yet to happen…

We would not necessarily completely dismiss the possibility, but we don’t see it as a threat to the USD for now. It is not clear to us that President Lula’s call will be followed any time soon with specific action. Even if it does, it will take considerable time and will involve difficult decisions in our view, unless they go with the RMB right away. And even in this case, it is far from clear whether other countries will follow, eventually replacing the USD.

To our eyes, there’s actually a fair bit of wriggle room baked into that analysis, but it’s hardly a glowing endorsement of a mooted dollar-slayer.

Another obvious response to all this might be… why BRICS? Sure, the five countries’ relations have a degree of structure already via regular summits since 2008, but, really? They’ve got more beef than Brazil (boo — ed). And South Africa — a late entrant to the group, which was simply BRIC when Lord Jim O’Neill coined the acronym in 2001 — looks increasingly like an economic basket case. (O’Neill has expressed apparent scepticism over South Africa’s inclusion, indicating in a recent paper that other countries had a better claim at the spot).

From this perspective, the BRICS countries hardly seem like the starting point from which to launch a dollar rival.

O’Neill’s perspective is of course interesting. Writing in Project Syndicate last month, he said:

The eclipse of the dollar would not necessarily be a bad thing for the US, given all the added responsibilities that come with issuing the world’s main reserve currency…

But the fact that a US-excluding group of emerging powers has higher aspirations for itself does not necessarily mean anything for the US-centered financial system.

And pointing the impact the inclusion of Saudi Arabia or Iran could have, he added:

[This] increases the likelihood of some oil being priced in currencies other than the dollar. But unless edging out the dollar is an explicit, genuinely shared, and deeply held goal, such invoicing changes will be exciting only to niche financial writers. I have lost count of the times I have heard arguments about why oil could soon be priced in a new currency. First it was going to be the Deutsche mark, then the yen, then the euro. It’s still the dollar.

Can the BRICS make it work? Will they even try? To our eyes, the answer to both is no, but then we’re a desperately cynical financial blog. Maybe Lula knows better.

Further reading
— Dollar 🙁
— Dollar 🙂