THOUGHTS ON THE BRICS SUMMIT AT KAZAN / MACLEOD FINANCE

Thoughts on the BRICS summit at Kazan

Will the Sino-Russian partnership introduce gold backing for a trade settlement currency, replacing the dollar? And what would be the consequences for the dollar?

Alasdair Macleod

The annual BRICS summit in Kazan is rapidly approaching. 

Among the issues likely to be on the agenda are a proposal to create a new class of associate membership to manage the rapid expansion of BRICS with some forty nations now seeking to join. 

Furthermore, there is the thorny question of how to do away with the dollar for cross-border trade settlement, over which there has been disagreement among existing members.

Introduction

The BRICS summit in Kazan comes at a very tricky time. 

Russia may be winning its special operation in Eastern Ukraine, and so NATO led by the US either goes for broke with an all-out war against Russia or seek a face-saving de-escalation. 

The likelihood is de-escalation and to seek another conflict.

At only a year old the Middle East conflict is just starting, and not only is the US backing Israel but Russia is backing Iran. 

It is turning rapidly into another proxy war, potentially far more serious than Ukraine. 

This is because Israel has triggered a fight which without US support will lead not only to its likely defeat but the end of its existence as a nation.

We can be sure that the Americans will be increasingly wanting to call the shots, as much if not more than the Israelis particularly with respect to Iran. 

They don’t do anything abroad without taking control. 

Equally, the restraint initially shown by Iran can be partly explained by Russia’s influence. 

And while Iran appears to be more independent from its backer than Israel, it is still a US objective to defeat Russia. 

This is the turbulent background to the BRICS summit in Kazan later this month.

Most nations expressing an interest in joining BRICS are wary of upsetting the powerful Americans, only coming out openly because there is safety in numbers, and perhaps a perception that America is losing its grip on world affairs. 

Some of these nations are Muslim or have large Muslim populations and are appalled at the killing of civilians in Gaza and America’s unwavering support for Israel. 

Some of them owe dollars and some would have feared American-backed regime changes in their own countries. 

Nonetheless, it’s reported that some 40 nations have expressed interest in joining with many more observing on the sidelines.

This brings with it the practical problems of integration. 

At the Johannesburg summit last year, a partner-country or associate membership model was discussed as the basis for future expansion. 

Out of a list now comprising some 40 nations, last June Russia asked current members for their ten preferences. 

But since then, thinking about the numbers to be accommodated might have evolved.

Perhaps a case could be made for taking in more than ten nations as partner-countries to ram the point home to the Americans that they have lost their grip on world affairs.

The BRICS structure requires unanimity of the summit agenda and is obviously unsuitable for a much-expanded membership, which is why the partner-country model makes sense. 

These additions would offer the benefits of membership without a voting veto.

Currency issues

Perhaps the most important issue is how to reduce dependency on the dollar for payments. 

This issue is central to the entire SCO/BRICS project. 

An alternative currency will be required, which to succeed must be more attractive than the dollar. 

Using BRICS member currencies in some sort of basket with or without a gold element will almost certainly fail to displace the ubiquitous dollar. 

In addition, there must be a reliable payments system free from Western (i.e. American) interference. 

As well as Russian and Chinese payment systems designed to circumvent US restrictions, the BRICS membership has been working on BRICS PAY since 2018. 

This is intended to operate as a digital payments platform. 

But frankly, in six years it is still in planning trying to meld CBDCs, digitisation, and tokenised money together with payments in local currencies. 

The project is overly complicated, when all that’s required is an interbank messaging system and currency to replace the dollar.

Why replace the dollar? 

Apart from geopolitics, there is now the issue of the dollar’s own future not just as a fiat currency, but as the intermediate step between exchanges in other currencies. 

We can be sure that the PBOC, Bank of Russia and many other central banks share these concerns evidenced by their selling down dollar reserves in preference for gold. 

And if they acknowledge by their actions that gold is the safe haven from an increasingly unstable fiat currency system, then they surely understand that the trade settlement solution can only be with a gold-backed currency.

According to Pepe Escobar, this is increasingly seen as the solution. 

This is what he wrote, almost as an afterthought in an article for Strategic Culture Foundation on 29 September:

“A daring proposition is emerging that Russia and China – the actual BRICS leaders – should announce at the summit in Kazan next month that they are backing a yuan/ruble/gold alliance: as in if the world needs to choose between NATOstan hegemony or a BRICS alternative, better start with sound (real) money.”

We cannot judge the quality of Escobar’s source. 

But giving it credibility it was published by Strategic Culture Foundation, a think-tank in Moscow regarded as an arm of Russian state interests on the US Treasury sanctions list. 

To cut to the chase, it is obvious that this is the solution, and the rest is mere noise.

The consequences of a new gold standard

Assuming Escobar’s information is correct and that the Russian state has effectively sanctioned his article, it seems that China which has been dragging her feet over this issue is finally persuaded by Russia’s position. 

Russia was looking to introduce the topic of a gold-backed trade settlement currency onto the Johannesburg agenda last year, but it never made the cut. 

Bringing gold back into the monetary system is clearly in Russia’s economic interests and against those of her principal adversary in war. 

It is only a matter of time, if only for defensive reasons to protect their own currencies, that China and Russia must activate gold standards.

Challenging the dollar with gold-backed currencies is also a highly aggressive move. 

Instead, a gold-backed BRICS trade settlement facility might be a Trojan horse, only an indirect threat to the West’s currency and financial system. 

Initially gold backing would be restricted to credit used for trade settlement between BRICS and SCO members and associates, should they choose to do so. 

Deposit rates would have to be high enough to ensure that balances are maintained and not encashed for gold. 

But the full power of Chinese and Russian gold reserves, both official and off-balance sheet, may then be called upon.

Inevitably, this Trojan horse would become a two-step reintroduction of gold standards, eventually being extended to backing for domestic yuan in China’s case. 

Russia might be advised not to make this distinction and back her rouble from the outset. 

It would however be a major step, calling time on the post-Bretton Woods era of fiat currencies.

The reasons justifying such a precipitous move must surely be related to America’s growing belligerence threatening to spiral out of control. 

While the western alliance might concede Ukraine, for America Israel is more particular and it is far harder to see how an all-out conflict with devastating economic consequences can be avoided.

Therefore, the time may have come to both destroy America’s dollar thereby emasculating her military power, and to protect the yuan and rouble from the fall-out.

China is probably persuaded that this course of action is now inevitable. 

She has always preferred a more patient evolutionary approach to outright confrontation. 

Her export markets would be threatened by a fiat currency crisis at a time when there is already declining demand growth in western markets. 

And as western analysts continuously inform us, China’s economy requires support, not destruction. 

But we know that China’s leadership is less persuaded by these Keynesian solutions.

Furthermore, China’s long-term plan was always to switch from her dependency on ephemeral demand in western markets to developing an Asia-wide industrial revolution, such as the West enjoyed under sound money standards before the First World War. 

Assembling BRICS would ensure that China, with Russia in tow, would have access to all the resources necessary, with zero dependence on the bankrupt West.

The issue, therefore, is whether it is now time to put that plan into action, forced by a combination of growing American aggression in West Asia and the Eastern Pacific, and the bankruptcy of the dollar. 

We must look for clues at Kazan as to whether the Sino-Russian partnership has decided to take the initiative in this respect or to simply let the global currency situation continue to drift.