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HomeBusinessRussia and China are thinking to challenge the dollar's dominance by creating...

Russia and China are thinking to challenge the dollar’s dominance by creating a new reserve currency

Its no question that Russia has struggled with accumulating Rebels in the wake of its invasion of Ukraine and seemingly endless sanctions. Whispers of creating a new BRICS (Brazil, Russia, India, China, and South Africa) echoed back in June from Russian President Vladimir Putin. However, the mention never made it to the headlines. 

Following this past week’s virtual BRICS summit hosted by China on July 24, 2022, it seemed to have locked in the group in greetings its own reserves based on earth minerals. The new reserve currency was indicated by President Vladimir Putin and was said to be a currency that would be based on a basket of the currencies of the group’s BRICS members.

According to a TASS report, Putin told the BRICS Business Forum on Wednesday, “The matter of creating the international reserve currency based on the basket of currencies of our countries is under review; we are ready to work with all fair partners openly.”

While at the summit, Putin gave a speech that lasted more than an hour, exploring and expanding on the U.S. ruling the world’s financial system for years. He ended the speech with a lingering quote, “Nothing lasts forever.” The final section was a perfect nail in the coffin for a system that is what we all knew, sparking curiosity for China.

The American dollar’s value is in trouble as members of BRICS attempt to start a new reserve; one based on earth minerals might land higher on the value scale than the everyday dollar. Although the dollar’s been viewed as the world’s reserve currency, many Central banks are looking to diversify their holdings into more non-traditional and less regulated ones. 

It seems as though this move was a direct attack against Western thinking. Following Western sanctions imposed due to the conflict in Ukraine, Russia added this step to re-enter the international financial system after its sanctions effectively cut off access to dollars and placed pressure on its economy. 

In a note, ING’s global head of markets, Chris Turner, explained why this was Russia’s move: “This is a move to address the perceived U.S. hegemony of the IMF. It will allow BRICS to build their sphere of influence and unit of currency within that sphere.”

As the value of the ruble continues to diminish, Turner explained the presumed reasoning as to why now and Why BRICS: “Without discussing the likelihood of such a proposal turning into something tangible, Russia may have a strong motivation to participate or initiate in an IMF-like scheme to address the mounting pressure on its capital account. Russia is used to being a net creditor to the rest of the world, as its big trade surplus would normally be balanced by the capital outflow (purchase of foreign assets).”

Thanks to assistance from the central bank, Russia’s rouble has recovered to levels above the pre-war period after falling by 70% in less than two weeks following the invasion of Ukraine. It rose 15.2% in June to 1.87 cents. Meanwhile, the yuan has held steady at around $0.15 over the same period.

Russia is continuing down an unpaved path, seeking to pave its own. Many don’t see this currency coming to fruition due to the guiding principles of a sound reserve currency: Safety, liquidity, and return. Something that sounds like it could be a struggle when working with Earth minerals.



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