By David Collins, August 1, 2023
The BRICS countries (Brazil, Russia, India, China and South Africa) are poised to announce the establishment of a new trading currency at their summit in South Africa next month. The new, as yet unnamed currency will be backed by gold and other precious metals, helping to bolster its prospects of displacing the US dollar as the world’s reserve currency.
Led by China, ‘de-dollarization’ is part of the emerging markets’ strategy to counter the US’s global economic and geopolitical hegemony. Whether the BRICS currency will succeed in ousting the dollar remains to be seen – commentators appear to be skeptical about whether the combined economic influence of the BRICS countries is sufficient to warrant a wholesale shift away from the dollar as the main currency of international trade.
The US remains the world’s largest economy and likely will be for some time. While the greenback is still universally regarded as a safe store of value for international transactions, its burnish is beginning to fade, particularly since the US implemented heavy sanctions in the form of freezing bank accounts held by Russians. The level of US debt in an era of rampant inflation has also called into question the stability of the dollar.
The new BRICS currency has been strangely ignored by Western media, including in Canada where it could have a significant impact on the Canadian economy. The value of the Canadian dollar is tied closely to that of the US dollar, in fact for most Canadians this is how their dollar is routinely measured, itself a reflection of the dependency of the Canadian economy on trade with the US, by far its largest trading partner. If the US dollar were to be displaced or even partly marginalized as the world’s reserve currency, the effect on US markets would most likely shake the Canadian economy.
On the other hand, a shrinking greenback might boost the value of the Loonie, not just mathematically, but because the value of the Canadian dollar is itself closely linked to commodities including precious metals. As the BRICS have prepared for the launch of their new money, they have repatriated much of their foreign-held gold and have instigated a gold and precious metal buying spree. If their new money is genuinely backed by gold and precious metals, then they will need to hold enough of it to have a meaningful impact as a means of settlement in international trade. Gold is Canada’s third-largest export, accounting for more than $20 billion last year, and Canada is ranked seventh in the world in terms of gold reserves. If the new BRICS currency is successful, we can expect global demand for gold and precious metals to increase, raising the value of the Canadian dollar correspondingly.
Of course, a higher value Loonie is not necessarily a good thing. It will raise the cost of other Canadian exports and could harm domestic manufacturing with knock-on effects on productivity and employment. Crucially, though, a stronger currency could help counter inflation, which remains a stubborn problem in Canada. Like that of most Western countries, Canada’s central bank has attempted to use higher interest rates to tame inflation, but this will soon become counterproductive as borrowers, especially mortgage holders, could soon find themselves under water.
Which leads to another plausible outcome for Canada because of the BRICS currency: If the emerging markets’ new money manages to oust the dollar as the world’s reserve currency, and in so doing de-stabilizes the global economy while strengthening the Loonie, the Bank of Canada may use the moment to implement its long-planned experiment with digital currency. A Canadian digital currency could be introduced in the near future, packaged as a panacea for economic turmoil.
It is beyond the scope of this short note to evaluate the benefits and drawbacks of a digital currency, but while a digital dollar could facilitate payments and encourage spending (especially retail) it also raises the spectre of greater government monitoring and interference in the private commercial activities of Canadians. We have already seen, during Covid-19 vaccine protests, how the federal government was willing to suspend bank accounts to combat what it considered to be ‘undesirable’ activity. A digital currency would only make this easier, especially if it results in the eventual elimination of cash. Of course, the Bank of Canada says this will never happen, but they have done the opposite of what they said they would do too many times before to be trusted.
Next month’s launch of the new BRICS currency may be little more than a publicity stunt designed to flex China’s and Russia’s muscles in the face of escalating tension with the US. It is not yet known what the magnitude of the BRICS reserve will be when it goes online; some reports indicate that India is not yet ready to participate. But if it catches on, which it could easily do, the new BRICS currency would signify a monumental shift in the global order away from the US. This could have profound implications for Canadians both internationally and at home.
David Collins is a Professor of International Economic Law, City, University of London. TW: @davidcollinslaw
