Evaluating the Feasibility of a BRICS Common Currency

A reserve currency must be backed by deep, liquid, transparent financial markets.

The US dollar dominates because the US offers the deepest and most flexible markets, clearest corporate governance, and the least discrimination between domestic and foreign investors.

Why: Foreign central banks and investors need assets that can be bought or sold in size without moving prices and with minimal political risk.

"the US has the deepest and most flexible financial markets, the clearest and most transparent corporate governance, and, in spite of recent sanctions, the lowest amount of discrimination between domestic residents and foreigners"

Global reserve status requires the issuing country to run persistent external deficits.

Surplus countries must park their excess savings somewhere; only the US is willing to run large enough deficits to absorb these surpluses without destabilising its economy.

Why: Other large economies either run surpluses themselves or would face unacceptable currency appreciation and monetary expansion if they tried to absorb foreign reserves.

"the United States is the only large economy that is willing to generate deficits to soak up the surpluses generated by other large economies around the world"

A viable currency union needs economic convergence and political integration.

The BRICS are a Goldman Sachs marketing acronym, not an integrated bloc; China alone accounts for 72 % of the group’s GDP and 80 % of its growth.

Why: Without fiscal transfers, labour mobility, or shared monetary policy goals, exchange-rate shocks would hit members asymmetrically.

"there's no particular relationship or union between the Brics countries other than that they were all included in a particularly popular report out of Goldman Sachs more than twenty years ago"

Reserve-currency status is incompatible with strict capital controls.

China’s dual currency system (renminbi domestically, yuan internationally) blocks free in- and out-flows of capital, making the yuan ill-suited for third-party reserves.

Why: Foreign holders need assurance that they can liquidate assets at will; capital controls negate that assurance.

"To become a reserve currency for the rest of the world, China would have to give up control of its capital account"

Western sanctions accelerated de-dollarisation talk but did not change fundamentals.

Russia’s 2014 de-dollarisation and subsequent 2022 asset freeze show that diversification away from dollars did not protect reserves from geopolitical risk.

Why: Any asset held abroad—dollars, euros, gold, or yuan—can be frozen if custody lies within sanctioning jurisdictions.

"Russia did diversify and de-dollarize its reserves after the first sanctions were imposed in 2014. But this didn't really work out for them, as after the invasion of Ukraine, the EU froze more Russian reserves than the United States did"

Using commodities as reserves amplifies rather than dampens macro volatility.

Countries would buy commodities when prices (and their economies) are high and sell when prices and economies are low, the opposite of counter-cyclical reserve management.

Why: Reserves are supposed to be most valuable in crises; commodity prices move pro-cyclically with exporters’ economies.

"they would most likely find themselves selling their commodity reserves when their economies are struggling and commodity prices are low. This would exacerbate the volatility of commodity prices"

The so-called exorbitant privilege imposes real costs on US workers and industry.

Persistent capital inflows keep the dollar strong, undermining US manufacturing competitiveness and shifting employment abroad.

Why: Strong currency makes exports expensive and imports cheap, hollowing out tradable sectors.

"American workers, farmers, producers, and small businesses pay a significant economic cost as manufacturing moves abroad to surplus nations"

Rising reserve adequacy naturally lowers the dollar’s share, not necessarily confidence.

Once reserves exceed three months of import cover, central banks treat them as investment portfolios and diversify for risk-adjusted returns.

Why: Higher reserve levels shift objectives from crisis liquidity to portfolio optimisation.

"it shouldn't be surprising that the US dollar's share of reserves declines during a period when reserve adequacy improves. This doesn't indicate a lack of confidence in the dollar"