Rachel’s note: For quite some time, countries like China and Russia have been unhappy with the dollar’s global dominance.
China, for example, took steps to try to bypass the dollar when it enabled any oil producer in the world to sell its oil for the Chinese currency, giving birth to the petroyuan.
And in June, Russian president Vladimir Putin made a big announcement…
He said Russia and its allies are working on a new international currency.
So today, we’re passing the baton to financial expert and Casey Research friend Nomi Prins, who’ll explain what this means for the distribution of world powers… and if it poses any threat to the U.S. dollar.
By Nomi Prins, editor, Inside Wall Street with Nomi Prins
If you keep up with the news, you might have heard of the G7 Leaders’ Summit.
Think of the G7 – or Group of Seven – as the cool kids’ club.
It’s where the countries with the largest and most advanced economies – including the U.S., U.K., and Germany – come together to discuss global issues.
Unfortunately, this also means that not everyone gets invited.
So in 2009, other countries got together and created their own version of G7: the BRICS Summit.
And these aren’t just any countries. Together, the five BRICS nations are a global energy powerhouse.
And just this summer, they announced plans to establish a tighter economic relationship among themselves… and challenge the U.S. dollar.
They want more control over their own trade, currency, and energy destinies.
And with the latest escalation of Russia’s moves in the Ukraine, that history is important – because it can impact your money. Let me explain…
A Global Energy Powerhouse
BRICS represents the world’s leading developing countries. It’s short for Brazil, Russia, India, China, and South Africa.
And at this year’s BRICS Summit in June, Russian president Vladimir Putin made a big announcement…
He said Russia and its allies are working on a new international currency. In Putin’s words, it would be a “basket of currencies” of the BRICS countries.
This new currency is meant to rival the U.S. dollar’s global reserve currency status. That much is clear.
But is this anything to lose sleep over? I’ll get to that in a moment, but first consider this…
Together, the BRICS nations represent 32% of the world’s GDP. That’s the value for all the goods and services the world makes.
And as I mentioned, the BRICS are a global energy powerhouse. And as we’ve seen all this year – from spiking prices at the gas pump, to higher costs to cool our homes – what happens in the energy markets in one part of the world can have a big impact on energy prices here at home.
Take a look at the chart below. It shows the BRICS’ share of global fossil fuel production…
As you can see above, the BRICS countries produce roughly 68% of the world’s coal supply. They also produce about 21% of oil and 25% of natural gas.
But BRICS nations aren’t just major producers. They’re also rich in energy resources. They hold 40% of global coal reserves, 25% of global natural gas reserves, and 8% of global oil reserves.
China in particular is a force to reckon with. It produced 50% of the world’s total output of fossil fuels in 2020. Plus, it’s also the largest producer of wind and solar energy in the world.
It’s not surprising, then, that BRICS have been raking in billions in profits amid the energy crisis I’ve been writing about in these pages.
In fact, that crisis has been a boon for the BRICS group.
China alone closed the first half of 2022 with a trade surplus of $391.2 billion. BRICS, as a group, reported a surplus of $500 billion.
In other words, for BRICS, this isn’t the worst of times to try out a new global currency. And they have the reach to make it work.
Challenging the U.S. Dollar
Now, this isn’t the first time a nation has tried to dethrone the U.S. dollar.
BRICS countries like China and Russia have been unhappy with the dollar’s dominance for quite some time. And China specifically has taken steps to try to bypass the dollar.
Regular readers will know what I’m talking about. Back in June, I wrote to you about one of China’s attempts: the petroyuan.
In March 2018, China launched a crude oil futures contract on the Shanghai International Energy Exchange (INE) denominated in Chinese yuan.
This enabled any oil producer in the world to sell its oil for the Chinese currency, giving birth to the petroyuan.
And now, with Western countries slapping Russia with unprecedented sanctions this year… including plans for even more sanctions, which the U.S. and European Union proposed just last week…
BRICS countries have even more reason to try to find an alternative to the dollar.
As justified as the Western sanctions might be, it shows the world just how risky it can be to depend on the U.S. dollar.
Countries want control over their finances. That’s especially true for big economies like China and Russia.
A new BRICS currency would reduce any threat by the U.S. to exclude BRICS nations from the dollar-based financial system.
The BRICS countries would also benefit from being able to pay for their energy imports with their own currency.
What This Means for You
So what does this mean for those of us here in the U.S.?
Since World War II, the U.S. dollar has been the global reserve currency. But over the last couple of decades, the influence of the dollar has been slowly decreasing.
In 1999, for example, 70% of the world’s reserves were held in U.S. dollars. Today, it’s closer to 59%. In other words, more countries are choosing to hold alternative currencies (in addition to U.S. dollars).
That said, I don’t see the U.S. dollar’s status as the world’s primary currency changing any time soon.
Despite 40-year record inflation, the U.S. dollar is still faring well compared to other currencies. You can see this in the chart below…
This chart shows the U.S. Dollar Index (DXY). It tracks the value of the dollar against a basket of foreign currencies. And as you can see above, the U.S. dollar is hovering near a 20-year record high.
Even if BRICS rolls out its new currency tomorrow, it will take a long time before that currency can really challenge the dollar.
And that’s because, for an international currency to be successful, it has to meet three criteria. It has to:
Be safe. None of the BRICS currencies meet this. It’s safe to say that so long as the Chinese Communist Party is in power in China and Putin in Russia, both the yuan and ruble will continue to be considered anything but safe.
Have a stable value and market depth. Most BRICS countries, with the exception of China, don’t have large liquid bond markets needed to prop up their currencies. But even China doesn’t have a floating exchange rate that is determined by market forces, as is the case with the U.S. dollar. Instead, it pegs the yuan to the U.S. dollar. This is a dealbreaker for the world’s major central banks.
Move without restrictions. BRICS nations are no strangers to capital controls, which limit the flow of foreign capital in and out of the country. China has them. So does Russia (even though it relaxed some of them recently). This means that their capital markets aren’t free, which is a problem for any central bank wishing to hold their respective currencies as reserves.
To be sure, the BRICS’ efforts to de-dollarize their economies are worth paying attention to. But it’s not something that could happen overnight.
Until a BRICS currency can meet the three criteria above, the biggest threat to the U.S. dollar remains the Federal Reserve.
So if you’re worried about China and Russia’s efforts to dethrone the dollar, my advice is simple: Don’t lose sleep over it. I don’t expect that to change in my lifetime.
Editor, Inside Wall Street with Nomi Prins