Talk of the Town
Receiving perhaps the most attention last week was the BRICS groups’ announcement, led by Russia, to develop a separate reserve currency system, using currencies from all five countries. On June 22 President Putin commented that the idea “is being elaborated on." The immediate incentives to establish such an alternative to dollar transactions are obvious from the Russian side. China, meanwhile, has long expressed a desire to internationalize RMB, making steps towards this by, for example, establishing RMB clearing houses in the UAE and other locations overseas.
In an interview with Guancha.cn, President of the China Institute of International Studies, Xu Bu, commented that the strengthening of financial cooperation between the BRICS countries is an inevitable trend, given their global economic might – their GDPs added together amount to 25% of the world’s total and together they accounted for 50% of global economic growth in recent years. He also noted, without going into detail, that establishing a reliable alternative international payments mechanism faces many obstacles.
Among these obstacles are the current dominance of dollar payments across the world – indeed almost all Belt and Road related transactions such as loans and EPC contracts are conducted in US dollars – and the BRICS countries’ comparatively poor credit quality. In an analysis of the proposal, Dutch financial services company, ING, highlighted the three fundamentals needed to establish a strong reserve currency, “safety, liquidity and return.” It is questionable whether RMB, rubles, real, rupees and rand meet the standard. They also question the political willingness of “mercantilist nations” such as China to transfer foreign exchange reserves into a shared initiative with less individual state control.
Nonetheless, settling international payments in currencies other than USD may pick up in the face of the immediate political and economic pressures placed on Russia. And BRICS partners in particular appear to have little interest in curbing their trading options in line with Western sanctions, especially as the energy and food crises close in. A few days after the closing of the BRICS summit, UltraTech, India’s largest cement producer, reportedly bought a shipment of coal from Russia using RMB. According to Reuters, the price of the transaction was RMB 170 million for 157,000 tonnes of coal. This comes off the back of growing imports of Russian crude oil and gas.
Russian banks are far more willing to accept RMB than rupees or other emerging economy currencies due to the fact that China is Russia’s largest and fastest growing trading partner. Is RMB destined to become the main currency for transactions between sanctioned Russia and other countries?