The first summit of the so-called BRIC group – Brazil, Russia, India and China – was held on Tuesday in the Russian city of Yekaterinburg to discuss how they can exert more control over the global financial system.

The BRIC countries comprise about 15 percent of the world economy and, more important, have about 40 percent of global currency reserves (combined reserves of $2.8 trillion according to Bloomberg.com). The group is united in their frustration with the dollar’s status as the world’s reserve currency, which enables Washington to run budget deficits without fears of facing the kind of budgetary day of reckoning that other countries risk.
Supranational currency
Earlier, Russian President Dmitri A. Medvedev and Chinese President Hu Jintao attended the SCO summit which also includes the four former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. The SCO meeting was also attended by President Mahmoud Ahmedinejad. Although not a member, Iran has observer status at the SCO summits. The Russian leader reiterated his intention to push for the creation of a “supranational currency” to challenge the dollar and encouraged China and called on other Shanghai group members to use each other’s currencies for trade.
“There can be no successful global currency system if the financial instruments that are used are denominated in only one currency,” Medvedev said. “Today this is the case and the currency is the dollar.” About 30 percent of Russia’s international reserves, which stand at $409.5 billion, are currently held in U.S. Treasuries. On the other hand China has invested $1 trillion in American government bonds or debt.
The excess dollars are held in foreign central banks leaving the reserve holders with only two choices: reinvesting the dollars in U.S. securities or holding them and facing an increase in the value of their own currencies, which makes their products more expensive and less competitive in the world market.
In the past decade, with the exception of the last few months, we witnessed a steady decline in the value of the greenback as the price of oil soared alongside. Many analysts partially blame today’s global economic crisis on the fluctuations in the U.S. dollar.
In March, the prime minister of China, Wen Jiabao, expressed concerns about United States budget deficits, suggesting they might lead to inflation, a weaker dollar and rising yields on Treasuries, any one of which would hurt China’s $1 trillion investment in American government debt. Later that month, the head of the Chinese central bank called for a new international currency to replace the dollar.
China, Brazil and Russia have said recently that they will purchase notes from the International Monetary Fund to begin diversifying their reserves.
At the moment, there is no immediate alternative to the dollar for international trade. No other markets in the world, including EU which is also the world’s largest market, has the depth and liquidity of those in the U.S.
Local currency
Today, there is a growing tendency towards using local currencies for commodity transactions. Brazilian President Luiz Inacio Lula da Silva and his Chinese counterpart Mr. Hu first discussed the idea of replacing the dollar with the renminbi and real (Chinese and Brazilian currencies) when they met in the G-20 Summit in London in April.
In a meeting in May, during Mr. Lula’s visit to China the two leaders followed up on their earlier conversation in the G-20 Summit to work towards using their local currencies for trade transactions.
Other countries are taking similar measures of using national currencies for trade transaction. This month the state-run Iranian Bank Mellat opened a Turkish lira special account in its Istanbul branch to streamline two-way trade based on national currencies, rial and lira.
The two sides formerly held talks over the use of national currencies in bilateral trade to double their annual trade volume which hit $10 billion in 2008.
According to Turkish daily Zaman, Turkey is currently in negotiations with Russia over the use of the local currency in mutual trade.
Although the amount of trade between the BRIC members is not significant at the moment but it is growing. Brazil announced this year that China has surpassed the U.S. as its largest trading partner and said last month that they would look for ways to finance their trade without the dollar.
So far there has been no consensus on what a new financial system should look like. China’s dependence on exports to the U.S. and EU and its enormous holdings of dollar-dominated assets give it a vested interested in the status quo, leaving China’s leaders reluctant to pursue far-reaching changes.
Due to the lack of an alternative to the U.S. dollar the likelihood of a “supranational currency” emerging any time soon is unlikely. However, just the fact that such a large group can have a summit without the presence of American or European leaders is a start.