We’re late to a story that interestingly has been very much under-reported, perhaps because it is contrary to the anti-globalist narrative….already a minority faction in the Anglosphere. We’ve said for some time that the prospects for replacing the dollar are a long way away, even more so with a newly-created, reserve currency aspirant.
Our views have been confirmed by none other that Russian central bank governor Elvira Nabiullina, who has effectively cleared her throat to sanity check the desire of some BRICS leaders, including Vladimir Putin, to announce a splashy breakthrough on the “new currency” front at a late August BRICS summit.
Keep in mind that wanna-be dollar refusniks have already been able to achieve a key aim, that of escaping dollar sanctions, by engaging in bi-lateral trade in each other’s currencies. This isn’t as tidy as it seems, since unless the two countries trading with each other also happens to have close to a trade balance, one will wind up holding the other’s currency and not have any use for it. Russia has been grumbling a bit about all the Indian rupee it now has.
The reason the dollar was not perceived to be problematic as a currency to retain is the dollar has very deep investment markets, including of course Treasuries, and robust and well-settled laws and institutions so investors aren’t worried about, say, using a dollar depositary or clearing firm. Dollars can also be swapped readily into other currencies. As a result, investment flows in dollars dwarf trade flows. The Bank of International Settlements once found they were over 60x trade flows.
Needless to say, the need for ready tradeadility, investible assets, and reliable institutions/legal regime work against China as a successor any time soon. For starters, China likes capital controls.
Now to Nabiullina’s remarks. From Bitcoin.com:
Bank of Russia Governor Elvira Nabiullina talked about the proposed BRICS currency on the sidelines of the central bank’s annual Financial Congress, which took place on July 6-7 in St. Petersburg…
The proposal gained much attention over the past week when Russian news outlet RT reported that Russia has confirmed the BRICS is launching a gold-backed currency. However, no BRICS officials have officially announced or corroborated the news.
The Russian central bank chief told reporters (translated by Google) that the idea of a BRICS currency “deserves attention.” However, she stressed that this project “will be quite difficult to implement,” emphasizing: “Like any idea of a supranational currency, it requires the consent of many parties. This is not a simple project at all.” Nabiullina continued:
Therefore, we are still working and concentrating our efforts on the development of bilateral settlements using the national currency, the development of the infrastructure that connects our payment systems, what businesses need today.
While RT claimed that Russia has confirmed that the common BRICS currency will be backed by gold, a top official of the New Development Bank, also known as the BRICS Bank, has stated that the creation of any alternative to the U.S. dollar is a medium to long-term aspiration. According to him, “No one is suggesting right now that BRICS will form an alternate currency.” Nonetheless, many people expect a common BRICS currency to erode the dominance of the U.S. dollar.
Even in this short account, you can see the signs of lack of consensus. The RT story “announcing” the gold-backed currency scheme1 looks to have been the amplification of a tweet from the Russian Embassy in Kenya. With all due respect, the Foreign Ministry is not driving this train. And the story above confirms that this rumor has not been confirmed by any key actors.
Second is not just Nabiullina, but also the presumed key party, the head of the so-called BRICS Bank explicitly said that “No one is suggesting right now that BRICS will form an alternate currency”…except all sorts of commentators in the alt media, including Bitcoin.com. In fairness, BRICS officials have been talking up the idea too.
Now why is a new currency such an uphill climb? Let’s start with two reasons (trust me, there are others). For any currency regime to operate, you need laws, institutions, regulations. Crypto users wound up trying to build bit by bit the key elements of a banking system, like custodians, and those still wound up relying on existing legal regimes (the agreement with the custodian said which law governed the agreement). Similarly, when the 11 year project to launch the Euro started, Europe had had a legal regime, with the European Court of Justice at its apex, for 40 years.
So pray tell…whose law and courts would govern a BRICS currency? You know no BRICS member will be happy to have their use of a BRICS currency subject to the jurisdiction of another BRICS member. But how long would it take to set up a free-standing court/adjudication system, and all the necessary laws? Oh, and then even if that were not a massive and fraught process, all of the BRICS members opting in would wind up having to agree that their court systems were subordinate to this new BRICS currency regime. How easy will that be to solve conflicts with regular commercial lows of these countries?
And isn’t ceding sovereignity to a new monetary regime at odds with the multi-polarity project, which is supposed to be about reclaiming national sovereignity?
Mind you, the legal part is only one element that would have to be solved. We’re skipping over clearing, settlement, supervision and regulation, and setting up a central bank/lender of the last resort.
A second problem is all the coding. It’s remarkable how just about everyone is insensitive to how miraculous the operational side of banking is. You get your bloody bank and credit card statements every month, on time, with all those transactions listed tidily and totaled up correctly, from geographically dispersed merchants. And they are never inaccurate. There may be fraud or fees you think are wrong, but you don’t worry that your credit card statement says you spent $110.57 at Home Depot when the charge was actually $35.33, or that your neighbor’s purchases wound up on your account.2 And mind you, any bank or card processor is handling a simply ginormous number of transactions.
Remember that it took three years of planning and eight years of execution to transition to the Euro. The introduction of a BRICS currency would require all participating countries to set up new currency fields in their payment systems and routines for keeping accounts in them and converting to other currencies. We discussed this topic at length when the idea of having Greece exit the Eurozone was A Thing. It didn’t take much digging to see how hard this would be. For instance, from the New York Times in 1998….when there was way less bank code than now:
On Jan. 1, 1999, the European Monetary Union will introduce the euro, a new currency that could have serious consequences for the computer systems of financial institutions and just about any company that deals in foreign currencies and exchange rates.
Compared with the much-publicized year 2000 problem, which can set computer clocks back to 1900 instead of recognizing 2000, the euro poses a greater number of technological problems.
Exchange-rate and tax software will need to be upgraded, financial statements redesigned, automated teller machines revamped and historical data converted — and that is just scratching the surface.
”The magnitude of the problem the euro poses is unbelievable,” said Nick Jones, research director of the Gartner Group Europe…
The Gartner Group estimates that it will cost European corporations, many of which have operations worldwide, $150 billion to $400 billion to upgrade their systems. Add to that the expenses in fixing the millennium bug, and that cost almost doubles. Mr. Jones said the cost of fixing each line of code is estimated at $1.10, with billions of lines of code having to be changed.
The problem that the BRICS currency participants would face is that all institutions in the system need to code up if they are to join in. As the Euro discussion above allude, that would include any businesses that intend to use the new currency. Rather than belabor the point here, the technically-minded can take a gander through Convert to the Drachma – Piece of Cake. Right…, Once Again on the IT Challenges in Converting to the Drachma, and More on the IT Implications of a Grexit particularly the comments, where payments systems and bank IT experts weighted in. From the start of the last post:
It has been surprising to see how much resistance readers voice to the fact that making large-scale IT changes within major financial firms is extremely time consuming and that most large scale projects fail. That means the difficulty of converting IT systems to incorporate drachma is a major process not just at single institutions, but even more so across complex and fragmented systems like electronic point of sale devices, like credit card terminals, and ATMs. That is why it took eight years of planning and three years of conversion for the introduction of the euro to go smoothly. And the size of the code base and the volume of transactions running over these systems has increased, while most of the legacy code on mainframes from that era remains in place.
Members of the commentariat also seem unable to grasp how changing this code is very labor intensive. As reader Andrew Williams put it:
What many of you “it’s easy” people fail to understand is that mainframe programming is nothing like today’s coding. COBOL, PL/I etc. do not support modern concepts like objects, polymorphism or anything else. Think assembly language with nicer mnemonics. XML? Hah, there is virtually no such thing for the mainframe. There’s no git, no mercurial etc. Virtually none of the tools that exist for Wintel/Linux are available to mainframers.
In large organizations there are hugely cumbersome change management processes. Where I am, a simple code change might take a minimum of eight weeks to deploy, and we only have a dozen systems. Actual application changes like envisioned here would take at least six to twelve months for coding and testing, and then another four months for deployment. For large banks, I would expect the timeframes to be even longer because the systems are so critical.
And we are not exaggerating when we say most large IT projects fail. From an update to IT Project Failure Rates: Facts and Reasons:
According to the Standish Group’s Annual CHAOS 2020 report, 66% of technology projects (based on the analysis of 50,000 projects globally) end in partial or total failure. While larger projects are more prone to encountering challenges or failing altogether, even the smallest software projects fail one in ten times. Large projects are successful less than 10% of the time.
Standish also found that 31% of US IT projects were canceled outright and the performance of 53% ‘was so worrying that they were challenged.’
Research from McKinsey in 2020 found that 17% of large IT projects go so badly, they threaten the very existence of the company.
This is before considering the common practice, at least for Wall Street IT projects, of aborting them before they can be classified as failure (“Oh, the specs were found to be outdated” or somesuch).
So as we said earlier, don’t expect the dollar to be dethroned any time soon. Its stature can and will fall but the prospects for a successor regime any time soon are poor. It’s too hard and costly. The dollar became dominant due to circumstances unlikely to be replicated: the US constituting 50% of world GDP at the end of World War II, having an established and reasonably well functioning banking system and legal regime, and being able to dictate the design of major institutions outside the Soviet bloc like the World Bank and IMF.
1 Note that the gold standard and gold-backed currencies are not viewed favorably by economists. First, due to a limited stock of gold, they do not allow for increases in money supply in concert with growth, and thus are deflationary. Trust me, as much as economists do not like much in the way of inflation, deflation is worse. Second, the idea that the provide for “soundness” is also exaggerated, since countries cheated all the time on the gold standard by repegging the value of their currency in gold terms.
2 This sort of thing happens at private clubs, where members put down the wrong member number or the accounting staff misreads it and puts the charge on the wrong account.