Tuesday, 16 June 2009

Could a revamped SDR include the renminbi, ruble and gold?

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 today. 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 yesterday 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 (SDR's) 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 SDR's 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.

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