Could a Revamped SDR Include Gold, the Ruble and Renminbi?

The saga of what the Russian government "really" thinks about the continued status of the US dollar as the global reserve currency took another twist yesterday. In a report this morning from Vladimir Isachenkov, Associated Press Writer, who was present at the just concluded Shanghai Cooperation Organization meetings held in Russia's Ural city of Yekaterinburg, the Russian president went the furthest yet in calling for less reliance on the US currency as the primary reserve vehicle.

"No currency system can be successful if we have financial instruments denominated in just one currency," Medvedev said. "We must strengthen the international financial system not only by making the dollar strong, but also by creating other reserve currencies."

Medvedev's economic adviser Arkady Dvorkovich said Russia may put part of its currency reserves in bonds issued by Brazil, China and India. He told a briefing that Russia could make the move if the other three BRIC members reciprocate as part of efforts to diversify financial instruments.

Over the weekend the Russian finance minister, Alexei Kudrin, while attending the G8 meeting of finance ministers in Italy was quoted as saying that “It’s too early to speak of an alternative” to the dollar...the fundamentals of the dollar are still in good shape.”

As I noted in a posting Monday, Kudrin's comment was in contradistinction to other recent suggestions from Russian officials which have quite outspokenly referred to their preference for less reliance on the US dollar as the basis for their holdings of foreign reserves.

Returning to the AP report from the recently concluded summit of Asian countries in the Urals, there were also concrete proposals regarding the extension of the basket of currencies that should henceforward be included in the underlying composition of the Special Drawing Rights [SDRs] of the International Monetary Fund.

Dvorkovich also proposed revising the way the International Monetary Fund's obligations are valued. He said the ruble, the yuan and gold should be part of a revised basket of currencies to form the valuation of the IMF's special drawing rights, or SDRs.

Dvorkovich denied any rift on the global currency issue with Russian Finance Minister Alexei Kudrin, who this week helped the dollar rebound in global markets by saying over the weekend that the dollar's status as the world's main reserve currency wasn't likely to change soon.

Dvorkovich said that the emergence of new reserve currencies would be a gradual process reflecting shifts in the global economy. "It can't happen fast, new reserve currencies emerge as economies of the countries issuing them gain strength," he said.

"Least of all now we need shocks at the currency markets," he said. "Any additional shocks are bad during the crisis. No one wants to bring the dollar down."

Upon closer inspection there is a consistent thread to the comments coming from different Russian officials. They do not want to talk down the dollar and would quite plausibly want to see it remain strong as they have enormous holdings of US dollar denominated assets, but on the other hand they want to ramp up the movement towards a viable supplemental reserve currency - based on SDRs but where the constituents of that SDR unit of currency should include currencies from the BRIC economies as well as gold.

All of which strikes this writer as eminently sensible and if implemented (and that is a big "if") would make the global financial system a lot less fragile. As I have previously argued a strong case could be made that the basket of components underlying the SDR should, in addition to including gold, also include other strategic commodities such as industrial metals and energy products as well.

It is not palatable to believe that in the long term the most indebted nation can continue to control the fundamental hub - and single point of failure of the global financial system - the US Treasury market which, in the foreseeable future, is dependent on a Q.E. policy of the Federal Reserve.

Comments

[cameroni:]

There is vested interest in the dollar remaining as the reserve currency. And it is not just talking heads from the BRIC paying lip service to the idea to the idea that the Dollar is too important to lose. They cannot yet afford to disengage from the system that works.

This could change in the future of course as opportunities arise to test US strength and fortitude but my thinking is that any new reserve currency will still be substantially US based and the new formulation will be as a "World Currency".

A basket including all of the worlds lead economies.

Jun 21 01:08 AM

[cameroni:]

Well a second comment is in line.

First Clive I want to say that you have some good ideas here. But we need to consider that if there is a second or third reserve currency that eventually they will grow together to become a single currency. A world currency.

This is not just a flight of fancy. Now we have the greenback that is accepted around the globe. But at the same time it's very foundation is being called into question. Alternate "reserve" currencies provide opportunities for the release of investment into other currencies with diminished risk.

A basket based on multiple economies further spreads the risk that we might see by investing in a single country. It is really an index of countries. A currency fund.

The Gold, Silver and Commodity components will just act to keep all the parties honest. You have stuff or you don't. What is crazy about that? If you don't have resources then you don't have money.

OK. fine then. Let there be SDR's based on a community basket. It can compete with Euros and Ameros and Everybody else aeros.

Eventually they will meld back to a single currency. A world currency. And I do believe it will still be one based primarily on Dolleros.

Jun 23 02:09 AM