The new moniker in reserve currency is BRICS.

President Putin's speech today detailing the creation of a new reserve currency based on a basket of goods and services (BRICS) has some people scratching their heads. It is assumed that it will include real, roubles, rupees, renminbi, and rand and serve as a substitute for the Special Drawing Right of the IMF (SDR).

Influence spheres

Perhaps it shouldn't be such a surprise that Russia appears to be spearheading a conversation on a new reserve currency. Russian officials were undoubtedly astonished by how quickly the West and its allies imposed sanctions on Russia's foreign exchange reserves, which were reduced by around half. The Central Bank of Russia practically acknowledged as much, and several BRICS countries, particularly China, undoubtedly took note of the speed and covertness with which

Therefore, the BRICS countries could see the need for a different reserve currency to equal something like the SDR of the IMF. Remember that the SDR issued by the IMF is not a currency but rather a collection of claims on major reserve currencies including the dollar, euro, pound, yen, and its newest addition, the renminbi.

The SDRs, which have an outstanding value of around US$950 billion, are intended to replenish the reserves of IMF members. Most notably, in August 2021, extra SDR 456 billion were made available to IMF members to help with funding needs for balance of payments after the shock of the epidemic.

Why would the BRICS nations require a basket currency like to the SDR？ One can only speculate that this is an effort to counteract the IMF's perceived US hegemony and will give the BRICS the opportunity to create their own area of influence and monetary unit inside that sphere. It's interesting to note that this week there have been press stories suggesting that Russia may wish to manage the rouble's strength against a basket or peg. Could the BRICS serve as the barometer used to control the rouble？ However, we are aware that the CBR is not a supporter of rouble management.

Russia may be strongly motivated to engage in or establish an IMF-like program in order to handle the rising strain on its capital account, without debating the chances of such a proposal becoming a reality. Due to its large trade surplus and the capital outflow that often counterbalances it, Russia is accustomed to being a net creditor to the rest of the world (purchase of foreign assets). Because of sanctions, regulatory limitations, and in certain cases, individual financial institution choices, Russian investments are no longer accepted at their traditional DM destinations in the current geopolitical climate. The backdrop of rising global rates may also lead to a need for external finance in emerging markets and frontier economies at a reasonable price.

market repercussions

What are some of the initial thoughts？ President Putin may be using this as a test balloon. Will the BRICS basket draw significant foreign exchange reserves from the BRICS countries themselves or from countries perceived as falling within its purview, such as CIS states or more amicable governments in the Gulf or South Asia？

Safety, liquidity, and return are the guiding principles of a sound reserve currency, and we shouldn't lose sight of them. With a simple weighted average of 5-year sovereign CDS trading at least 20 times wider than a comparable CDS average for SDR currencies, sovereign credit quality will undoubtedly be a concern for any BRICS-basket currency. It suffices to state that a basket of BRICS currencies works in a different universe from those in the SDR when it comes to FX liquidity. A BRICS basket's average deposit/yield would be substantially higher, but that is due of the much lower credit quality, where, incidentally, it appears that Russia will soon enter sovereign default.

Early indications indicate that the BRICS currencies won't significantly outperform existing fundamentals as a result of this announcement. We don't think the mercantilist BRICS countries would wish to shift significant foreign exchange reserves into this larger regional area of influence, despite their maybe being some high-profile declarations of political ambition to start this project. Like Russia, they could opt to migrate into gold if they are concerned about the direction of the sanctions and the growing weaponization of the dollar.