After the Bell: The great R-currency rumble

US President-elect Donald Trump took aim at the BRICS bloc over the weekend in typical fashion — a bite-sized attack combined with an outrageous demand combined with an extreme threat.

It’s impressive that Trump is able to be both outrageous and pertinent in the space of two sentences. Trump demanded that BRICS countries should commit themselves to neither creating a new BRICS currency nor backing any other currency to replace “the mighty US dollar”. Failure to do so would mean they will face “100% tariffs, and should expect to say goodbye to selling into the wonderful US economy. They can go find another ‘sucker’!

“There is no chance that the BRICS will replace the US dollar in international trade and any country that tries should wave goodbye to America,” said Trump in an X post.

I always find a kind of hucksterish quality in Trump’s threats. I suspect they are deliberately outrageous and overstated, which has a double upside: the people who might be turned off by the threat think it’s mere bloviating, which means they don’t have to take it seriously. So presumably US importers and exporters, of which there are quite a few, who might normally be worried about their complicated supply chains, take heart in the fact that this will never happen because someone will talk sense into Trump at some point.

The people who might be turned on by the flag-waving are fulfilled by the outré and affected boosterism. “Look there, there is our man, taking the fight to them. What a champion!”, they think. It’s so puerile, it is simultaneously depressing and fabulous theatre.

Anyway, let’s try to get a grip on this topic. There are four questions here:

• How feasible is a BRICS currency?


• What form would it take?


• How useful would a BRICS currency be?


• Lastly, and most pertinently for Trump, can it be stopped?

The questions are not difficult to answer, but they lead to a set of odd contradictions.

First: is a BRICS currency feasible? The short answer is “no”, but of course, it depends what you mean. The reason it’s currently impossible is simply that the contradictions within the BRICS bloc are too extreme. Two countries in the bloc want it desperately, Russia and Iran for obvious reasons: they have largely been booted out of the global financial system and an alternative method to integrate at least part of their economies into the global economy would be very welcome.

Ironically, the pressure to create an alternative reserve currency comes at least partly from the US itself, because the heavy financial sanctions on Russia in the wake of the war in Ukraine have illustrated to the BRICS+ group how vulnerable they might be to the US dominance in the global financial system.

The extent of this fear depends very much on the particular country’s relationship with the US. Saudi Arabia is comfortable with the dollar as the world’s reserve currency. China and Brazil not so much. SA and the UAE, among many others around the world, sit firmly on the fence. SA’s position has been to say this is a very long-term project, which of course it is.

Okay, second question: what form would it take? In a note to clients, Mark Williams, the chief Asia economist at Capital Economics, says the most likely form would be something akin to the IMF’s special drawing rights.

“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,” writes Williams.

The value of the new asset would track a basket of the underlying domestic currencies, he writes. It could supplement existing reserves and, in principle, be used to help importers settle trade in the new currency. However, there are two problems here.

The first is that trade within the BRICS bloc is not balanced. India and South Africa have run persistent deficits with their BRICS partners since the turn of the century.

According to Williams: “If all bilateral trade were settled in the new BRICS currency, India and South Africa would run out of reserves unless they received counterbalancing investment inflows in the new currency from other BRICS economies.”

The second issue relates to the question of whether a BRICS currency is desirable. From a financial point of view, it’s not. The huge global market in dollars means that international trade can quickly and cheaply be settled in dollars. There is a reason why SDRs (Special Drawing Rights), once envisaged as a dollar replacement, have failed.

“The lack of a liquid market for them or an institution willing to create a market in them has doomed them to (near) irrelevance,” writes Williams.

While it’s not feasible or necessarily desirable, you can imagine a future in which the dollar is not nearly so dominant. Ironically, Trump himself is the reason there is no question in my mind that it will develop over time. His antics and extreme volatility are exactly why countries around the world are going to gradually wonder whether the US is a reliable underpin for the global economy. They won’t say anything, of course, but trust me, they are thinking it now.

The way the global economy is unfolding will support this development. US trade with the rest of the world has increased massively over the past half century, but trade generally between other countries has increased more. The result is that in 1960, the US constituted about 40% of global GDP; it now constitutes a little more than half that. China constituted about 4% of global GDP in 1960 — now it constitutes about 16%.

We have seen this all before. By the mid-to-late 19th century, more than 60% of global trade was denominated in pounds sterling, reflecting Britain’s extensive trade network, economic clout and industrial base. That all disappeared in 50 years as Britain went off the gold standard, got into debt saving Europe and lost its colonial empire, while at the same time, other countries caught up, including as it happens, the US.

All in all, the dominance of the dollar is unlikely to be severely undermined soon. However, a generation from now, the global currency mix will inevitably be different. It will happen sooner if US voters keep choosing global trade-destabilising presidents.

In that case, the R-currencies — the rouble, the rand, the real, the renminbi and the rupee — will become very real indeed. DM