More BRIC Noises

Many people are still talking about the BRICs even though the summit concluded wihtout much in the way of fresh initiatives. Some reports suggested that the BRICs agreed to buy each other's bonds. But this seems like a gross exaggeration. Nothing has stopped these countries from buying each other's bond except prudence. Central banks appear to focus on security and liquidity, and then yields.

An economic advisor to Russian President Medvedev had suggested buying each other's bonds would be on the agenda, but Brazilian President Lula confirmed that, on the contrary, the BRICs did not even discuss buying each other's bonds.

As it turns out, the BRIC's dollar bonds are outperforming local currency bonds (renminbi, rubles and reais). Bloomberg data shows that Chinese dollar bonds returned 11.4% over the past 12 months vs 4.6% for the renminbi bonds. Brazil's dollar bonds have returned 3.6% vs a nearly a 5% loss on the bonds denominated in reais. Russian dollar bonds have lost almost 2% over the past year, but the ruble bonds have lost 7%. India does not issue dollar bonds.

Lula did confirm speculation that the BRICs did discuss reducing the reliance on the dollar for trade purposes. Yet even this seems to be more talk than action. Last month Brazil and China agreed to study settling bilateral trade.

Today, at the conclusion of their bilateral meeting, Russia and China appeared to strike a similar agreement. Yet like Brazil and China, Russia and Chinese trade is not very significant. China buys about 5.5% of Russia exports and provides Russia with almost 7.5% of its imports. In dollar terms, China's purchases are worth about $1 bln while its sales to Russia are worth about $9.5 bln.Russia would like to sell its energy to China for roubles.

It is not immediately clear how China will get the roubles. It also raises the question of who and at what price the currency risk of rouble-dollar exchange rate is borne. The BRICs seem to view the role of vehicle currencies as a political decision and something that can be decided by fiat--government command. There is a reason that bulk of world trade is invoiced in two currencies--the dollar primarily and the euro secondarily. Currencies that are not convertible, in countries where capital does not flow freely, there this is a lack of transparency are not going to mount a serious challenge to the dollar's role.