Trading Signals 05/02 – 09/02
Digital ruble: How will it affect the economy of the BRICS countries?
The upcoming summit in Johannesburg, South Africa, will see discussions among the BRICS countries regarding the possibility of introducing a unified currency. This topic holds immense significance in shaping the post-crisis global order.
With the combined economic strength of the BRICS nations already accounting for over 30% of the world economy, which is comparable to the GDP of the G7 countries, the introduction of a common BRICS currency has the potential to disrupt the established position of the dollar as the dominant international trade currency.
The work towards creating a new reserve currency for the informal club of BRICS nations (Brazil, Russia, India, China, and South Africa) was initiated back in 2022. The focus on further “de-dollarization” of the global economy has become impossible to ignore. Are there any chances that the digital Russian ruble could become the new reserve currency?
Let’s begin by providing some definitions.
What is the Digital Ruble?
The digital ruble is a piece of software code, but it is distinct from cryptocurrencies like Bitcoin. Cryptocurrencies are mined using computational resources and are not physically backed. Their value is highly dependent on market interest.
In contrast, the Central Bank issues the digital ruble, which is backed by reserves in the same way as traditional paper rubles. Each digital ruble is assigned a unique identifier, and the issuance and quantity of money in the economy are controlled by the Central Bank. Therefore, the exchange rate of the digital ruble will be the same as that of traditional or electronic money.
Why is it Needed?
The government needs a digital ruble primarily to reduce the shadow economy, control the expenditure of budgetary funds, cut costs, and ensure independence from Western sanctions in the financial sector.
Digital money is akin to marked banknotes. Each digital ruble has its own number, and the entire history of its usage is recorded. Moreover, this information is stored in multiple locations, so even if hackers attack one set of servers or a failure occurs, the history remains intact in other places, and payments continue to be processed.
Furthermore, since digital rubles are programmable code, information can be embedded in them regarding their authorized use. This means that budgetary funds allocated for roads, for example, cannot be spent on a governor’s PR campaign or the construction of a country house.
Thus, the government will be able to fine-tune the economy, significantly reduce corruption, kickbacks, capital flight to offshore accounts, and so on. The same story applies to digital currencies of other countries as well.
Prospects for the BRICS Single Currency
There are numerous unresolved issues on this journey. The first question is: Does the creation of a single currency imply the abandonment of national currencies? This was the approach taken with the introduction of the Euro, but it is unlikely to be the case for BRICS at this stage.
Abandoning national currencies would mean that the BRICS common currency, by definition, would be used not only for trade settlement purposes but also as a medium of exchange within these countries. However, the level of integration among the BRICS members does not currently allow for this question to be prioritized.
A potential solution could be the implementation of a digital currency for BRICS, initially serving as a tool for international transactions within the union. The digital ruble, digital yuan, digital real, and digital rand could form the foundation of the BRICS currency basket. The “commodity-based” currencies of Russia, Brazil, and South Africa would be balanced with the “consumer-based” currencies of China and India.
Digital Ruble and the BRICS
At present, there are several key considerations surrounding the digital ruble and its relevance to the BRICS countries. The Central Bank of Russia’s precise vision for the digital ruble’s primary purpose remains unclear. The State Duma plans to further refine the relevant legislation, aiming to provide a more comprehensive definition of the digital ruble, its scope of application, digital wallets, and related aspects.
It is uncertain whether the digital ruble will serve as a means of payment for international contracts, potentially circumventing sanctions, or if its usage will initially be limited to domestic transactions within Russia. These questions are also pertinent to the financial regulators of the other BRICS nations.
Another significant challenge lies in the trade imbalances among the BRICS countries. Despite their substantial contributions to the global economy and trade, intra-BRICS trade often exhibits disparities. For instance, China does not prioritize trade with Russia, India, Brazil, or South Africa over its engagements with the United States and the European Union.
Similarly, other BRICS countries, with the exception of Russia, prioritize external trade partners. This highlights the need for greater balance and deeper engagement within the BRICS economic framework.
A recent example exemplifying these dynamics is the shift towards rupee-based trade between Russia and India. In 2022, Russian exports to India surpassed $37 billion, while Indian imports amounted to only $2.5 billion, nearly fifteen times less. This trade imbalance poses challenges, particularly as the substantial increase in Russian oil and gas exports could not be offset by Indian imports, primarily consisting of medical products.
So the Digital Ruble is the Way Out?
To address these challenges, the implementation of a digital currency, such as the digital ruble, could offer potential solutions. By incorporating digital currencies into trade settlements, it could facilitate smoother transactions and help rebalance trade deficits. Furthermore, considering the expansion of the BRICS membership to include additional countries with significant trade potential, taking into account both political and economic feasibility, could foster greater cooperation and mitigate trade imbalances within the bloc.