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Will the yuan compete with the dollar?

In June of this year, at the 6 summit of the heads of the BRICS states in the Brazilian city of Fortaleza, the creation of the BRICS Bank

Will the yuan compete with the dollar?

It is expected that BRICS Bank will become a new model of South-South cooperation and will help a group of five countries - Brazil, Russia, India, China, South Africa (BRICS) - to resist the influence of the dollar.

Multilateral international cooperation of the BRICS countries

In 2008, after the financial crisis broke out, the BRICS countries consistently created cooperative mechanisms based on trade, economic and financial instruments. At the summit in South Africa's Durban, the leaders of the five countries agreed on the creation of a new development bank, and this year, after a comprehensive assessment, the BRNIX Development Bank was announced at the 6 BRICS Summit.

In the modern world, where the dollar is the leading currency, no country has levers of influence on US monetary policy, on which fluctuation in inflation largely depends. Dollar standard also causes inflationary processes in countries with a positive balance of trade, up to the situation when the Central Bank of the country is forced to abandon the rigid binding of the national currency.

The BRICS countries are developing countries, they have long been exporters of goods and energy because of extremely cheap labor. As a result of this phenomenon, the BRICS countries accumulated foreign exchange reserves that were reinvested in the financial markets of Europe, bringing even more currency. In recent years, European countries have pursued a monetary policy of quantitative easing in order to combat the debt crisis, which led to a sharp drop in interest rates, and this, in turn, to the flight of speculative capital to the BRICS countries, whose national currency began to strengthen, inflation to rise, and Foreign exchange reserves - depreciate. When Europe withdrew from the quantitative easing policy, the BRICS countries faced a situation of capital outflow, the devaluation of national currencies, which led to their financial weakening and fluctuations in their economies.

To combat these problems, Ronald MacKinnon proposed a project to improve the dollar standard, and Walter Mondale - the way to create a single currency, following the example of the EU. Unfortunately, the BRICS countries today do not have the conditions for creating a single currency, but they need to strengthen financial cooperation. Firstly, a group of five states should develop a joint position on financial issues and increase its presence in international financial organizations such as the IMF and the World Bank. Secondly, the BRICS countries will have to develop cooperation in high-tech and other industries, expanding the use of national currencies in mutual settlements to reduce dependence on the dollar, as well as diversify the global foreign exchange market.

Replenishment of the investment deficit in the infrastructure of the BRICS countries.

The BRICS countries have huge reserves of energy, but a backward infrastructure. This limits their opportunities in both energy production and economic development, so large infrastructure investments are the only way to change the development paradigm of the participating countries. Basically, all the BRICS countries are in the process of transition to a market economy, so there is a great demand for the creation of urban transport networks, telecommunications, power grids and other infrastructure. In connection with the development of green technologies, increasing the efficiency of energy use, the desire to correct the negative ecological trend, the traditional infrastructure is on the threshold of large-scale changes, which requires a large amount of investment.

The agreement signed at this summit provides for the creation of a BRICS development bank "providing resources to BRICS countries and other emerging economies to create infrastructure and ensure a stable growth of the economy." To date, the BRICS countries are experiencing a shortage of funds for investment in infrastructure, and existing funding channels do not allow meeting the demand for this type of investment in full. So, Brazil, South Africa, India - current account deficit of 52.4 billion, 23.3 billion, 88.1 billion dollars, respectively. This shows that these countries do not have enough internal funds to meet the demand for investment in infrastructure. China and Russia, by contrast, have a current account surplus of 193 and 72 billion, respectively, which indicates the ability of these countries to invest large amounts of funds in infrastructure. Nevertheless, despite the presence of large amounts of funds, investment instruments both in Russia and in China are extremely undeveloped, which reduces the effectiveness of investments. Thus, even China and Russia are experiencing a shortage of funds for investing in infrastructure.

If we consider this situation in terms of external borrowing, the picture becomes even more gloomy. From 2008 to 2012, the World Bank provided loans to the BRICS countries totaling 52 billion dollars, of which only 515 million are in Russia. In 2011, the Asian Development Bank provided loans to India and China in the amount of 26.9 and 25.9 billion dollars, respectively, and the EBRD and the Pan American Development Bank provided loans to Russia and Brazil for insignificant amounts. Thus, it becomes obvious that existing credit and financial organizations dealing with development problems cannot satisfy the multibillion-dollar demand of the BRICS countries for infrastructure investments. This is what forced the BRICS countries to look for other ways to finance investments, and the creation of the BRICS Development Bank was one of those ways.

Solving the problem of profitability of foreign exchange reserves

Since the 90-ies of the twentieth century, the export orientation of the BRICS countries has led to an increase in their foreign exchange reserves. As of 2012 year, the total amount of foreign exchange reserves of the BRICS countries was estimated at almost 4.5 trillion dollars, which was 40.6 world currency reserves. However, if we consider the stability of sources of currency, only China has those, and the sources of foreign exchange earnings to other countries are characterized by an unstable nature and a high level of volatility. Despite the large volume and rapid growth of foreign exchange reserves, the BRICS countries lack the tools for their effective investment, which is reflected in their low profitability. This is mainly due to the use of low-risk and low-yield bonds of the United States and other developed countries, rather than shares or bonds of companies and various organizations. American 10-tiennye bonds had an average yield of 3-6%, but after the crisis, which arose due to "bad loans", the implementation of a quantitative easing policy led to a drop in bond yields to 2%, which in turn caused a drop in stock indices and Decrease in profitability of direct investments.

The creation of a BRICS development bank will, firstly, slow down inflation in the BRICS countries by slowing down the growth of the monetary base; secondly, bank lending or profits from investments in the real economy will be able to increase the yield of government securities, as well as stimulate domestic demand for investments in infrastructure; thirdly, the creation of the aforementioned bank will give impetus to the use of national currencies in settlements between the BRICS countries, turn them into convertible currencies, and also help to reduce dependence on the dollar.

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