Trading Signals 05/02 – 09/02
BRICS Expansion: What’s the Future of a Unified Currency and Economy?
To address the question posed in the article’s title, it’s best to say: time will reveal the answer.
Regardless, BRICS members are seeing tangible benefits, both economically and in terms of reputation. The recent BRICS summit in South Africa might have ushered in transformative changes. The summit’s outcomes were recognized not only within the BRICS nations but also in emerging and frontier markets.
To the surprise of many skeptics, members reached an agreement on introducing a unified currency, at least for intra-union transactions. The BRIKS Pay payment system is already up and running. This raises questions: Will this new currency be digital or a cryptocurrency? How feasible is this initiative, and what’s the expected timeline?
The economic situation in BRICS countries can be likened to the Russian proverb “swan, crayfish, and pike.” Considering the actions of South African President Cyril Ramaphosa, who excluded Vladimir Putin from the summit, it’s anticipated that this proverb will remain relevant. In the near future, it might even resemble a parody of a famous fable.
Discussing the “veteran” BRICS members:
According to Sergey Lavrov, the head of Russia’s Foreign Ministry, who represented Russia in the absence of its president at the summit, the BRICS abbreviation will remain unchanged despite its expansion, as it’s an internationally recognized brand. This subtle hint, polished with the rhetoric of a seasoned diplomat, indicates the dominant players in the group and which five countries will drive the integration processes of emerging and frontier economies.
However, within this core group of the world’s largest emerging economies, there’s no singular economic trend. Russia’s situation is intricate: the ruble is declining, but the stock market is on the rise, driven by major raw material corporations benefiting from a weak ruble.
This highlights their distinction from ordinary Russians, who are increasingly unable to afford many long-term use products, either imported or manufactured in Russia using imported materials. Additionally, there are significant expenditures on their own special operations, which have transitioned from being special operations to a draining, prolonged standoff for all parties involved.
China’s Distinct Path
China is a topic in its own right. Driven by the country’s phenomenal economic growth and the state’s optimistic appetite for investment risks, government investments often went into projects that were more about prestige. These projects enhanced China’s global image in the eyes of the international community and businesses, but they might not be genuinely beneficial for the general population.
Funds from the treasury were frequently invested in the real estate bubble, leading to the construction of residential buildings that remained vacant. In many cases, not a single apartment in these buildings was sold for years after their completion. Across the country, new airports and railway stations sprang up, many of which are now underutilized and haven’t justified the investments made in their construction.
Despite attempts to establish a more humane form of communism, China hasn’t been able to reform its core issue: the bureaucratic desire to initiate grand projects to stand out from their peers. This is reminiscent of what was experienced in the Soviet era and the post-Soviet period.
In China, this approach led to a predictable outcome: a crisis in the real estate and construction sectors due to non-returnable capital investments resulted in an overall economic slowdown, yuan devaluation, and a significant yield gap between Chinese and American government bonds.
If Not in Africa, Then Where?
In South Africa, the host of the summit, things aren’t smooth either. The country is heavily reliant on global commodity market trends. The rand has depreciated significantly, with only the Russian ruble (for obvious reasons) and the Argentine peso faring worse in emerging markets.
India and Brazil appear slightly more optimistic. Brazil’s economic growth is primarily due to favorable natural conditions (and unfavorable conditions for global commodity market competitors). A drought in the US has led to Brazil, shielded by its remaining rainforests from such events, becoming the world’s leading corn supplier.
Brazilian wheat exports also benefited from the situation in Ukraine, which reduced its global market supplies. Given this backdrop, India stands out as the most promising among all BRICS nations. Investors have recently diversified their investments across sectors, achieving growth not only in commodity markets but also in IT and pharmaceuticals.
The situation is even more diverse with the new BRICS members, who were decided to be included at the summit. Strictly speaking, only Egypt and Iran can be unequivocally categorized as emerging economies. Saudi Arabia, the UAE, and Argentina are more on the fringe. The first two are due to certain investment restrictions, which are, however, being relaxed. As for Argentina, due to its national economic crisis, it cannot be classified as an emerging market.
As of now, even Sergey Lavrov, the head of Russia’s Foreign Ministry, acknowledges that the idea of a unified currency remains theoretical. Introducing a basket of currencies at this point seems risky. The Russian ruble is under pressure due to sanctions and the benefits of raw material exports by Russian state corporations. Both the yuan and rand are weakening.
Regarding the Argentine peso, there were suggestions to replace it with the US dollar prior to the summit. However, now there’s an idea to peg it to the Brazilian real. Given the diverse dynamics of national currency rates, there’s a risk that events in any single BRICS country could devalue its unified currency.
The most likely scenario in such a case seems to be the joint issuance of a digital “BRICS coin” that will serve as a common means of payment. Additionally, it will showcase the unexpectedly expanding influence of BRICS worldwide.