He said at the New Delhi forum in January 2009: “The world needs an absolutely new global currency system based on a common monetary unit, with all countries participating in creating, issuing and regulating it.” Ahead of the Eurasec summit in midMarch 2009, Nazarbayev proposed adding to its agenda the issue of creating a supranational currency for the Eurasec member states “in the light of the dollar’s clear inability to fulfil the functions of a global currency.” Russia supported the idea “in principle,” yet failed to ensure its discussion at the G20 summit in London in early April.
When preparing for the London summit of the group of the world’s 20 leading countries, the Kremlin proposed reforming the world’s currency and financial system to encourage settlements and price formation in several currencies whose issuers would meet internationally approved requirements.
According to Russia, it would be reasonable to support the development of strong regional currencies as the basis for creating a new reserve currency.
At the same time, Russia does not intend to liquidate existing monetary institutions, namely weaken the dollar, the pound sterling or the euro.
Zhou Xiaochuan, the governor of the People’s Bank of China, supported Russia’s initiative saying the world needed a new currency that would not be connected to individual countries and would maintain long-term stability.
It now appears that this project is also supported in the Persian Gulf and Latin American countries.
Although the G20 summit did not directly discuss the idea of a supranational reserve currency, Russia believes that it has initiated broad public debates. The world powers, whose economies and finance are heavily dependent on the dollar, will definitely mull over the idea.
Even the International Monetary Fund is prepared to consider it, even if so far informally.
“The idea is to instruct the IMF to prepare a report on this issue, assessing related risks and opportunities and the role of regional currencies, special drawing rights (SDR) and gold in the international system of saving and settlements,” said Arkady Dvorkovich, an economic aide to the Russian president.
The idea of a new super-currency was not put on the agenda of the G20 summit in London because of pressure from the United States and Britain.
US President Barack Obama expressed confidence that the US economy was recovering and the dollar was quite strong, and so there was no need for a new global currency.
Obama’s views are echoed by World Bank president Robert Zoellick, who said that a stable dollar was vital for helping the global economy to overcome the crisis.
“I think the dollar will remain the principal reserve currency,” he said.
Therefore, a compromise decision was taken to instruct the IMF to prepare a report on the risks of regional currencies, the role of gold in the international monetary system, and other issues related to the potential creation of a global reserve currency.
Russia said after the London summit that it would continue to advocate the idea. By now, it has only initiated broad global discussions, but major powers whose economies depend on the dollar can be expected to promote the idea.
It can be divided into two scenarios: the creation and use of regional reserve currencies within trade and economic alliances (similar to the euro), and the creation of a super-reserve globally operating currency.
Russian President Dmitry Medvedev proposed creating a multi-currency basket and subsequently a super-reserve global currency. The current multi-currency basket is based on the dollar, the euro, the pound sterling and the yen, but it can be expanded through the addition of the yuan and the rouble.
Is the international community prepared to change the global financial system? The Russian leaders believe that the first step should be “enhancement of the legitimacy of the institutions, that is, legislation underlying the operation of the global financial institutions, which should become more effective.” “This goal should be attained on a new conventional basis, which implies the elaboration of new international agreements,” Mr Medvedev said.
Everyone agrees that the reform is imminent in the current situation. Even the states that keep most of their reserves in US dollars say this must be done, especially now that the global financial crisis, provoked by the mortgage meltdown in the United States, has affected all countries, even if to a different degree. A number of once prosperous countries are fighting a deep recession. Russia has also been hit hard, and also has a substantial amount of dollars in its reserves.
If Russia, Japan, China and other dollar holders demand payment from the United States, the US economy, which has so far been considered the strongest in the world, will become its weakest element overnight. The country simply does not have enough gold or material values to cover the multitude of dollars spread worldwide.
Many analysts say that the dollar has exhausted its potential, but it would be unwise to give the IMF the right to print new banknotes or issue SDRs.
First, the IMF’s charter capital is worth only 217 billion SDRs, which amounts to $321 billion in current quotations, according to online trading venue iTrader. Consequently, the quotas of IMF member states should be increased severalfold, which is improbable during a financial crisis.
Second, the United States has the largest number of votes (17.5%) in the IMF. The next largest participants, Japan and Germany, have only 6.3% and 5.53%, respectively. This means that the US will still benefit the most from the issue of a new global currency and will also control the process.
Vladislav Inozemtsev, head of the Centre for Postindustrial Studies, a Moscowbased think tank, said: “The creation of a new currency implies political integration of three economic entities – the US, the EU and Japan.” “I don’t believe this is a viable project, because it took half a century, clearly worded laws and the establishment of the European Court, which has the powers to tackle any disputes between people, companies and countries within the EU, to integrate European countries enough for them to switch to a common currency,” the analyst said.
Moreover, the SDR basket has dramatically changed its outlines. The US Federal Reserve is minting dollars at the same rate as before the crisis, which is not strengthening the US currency.
The British pound sterling is no longer a strong currency either, because the UK real economy sector has been weakened by its pre-crisis economic policy. The leading EU economy, Germany, is responsible for the post-socialist East European countries and is also suffering, just like Japan, from a decline of the US demand for its products. As for Japan, its state debt has soared to 185% of GDP.
So the creation of new regional currencies and subsequently a new superreserve global currency is only a matter of time. The only thing so far hindering their appearance is lack of the countries’ trust in their reliability and predictability, the qualities that had once propelled the dollar to the status of the global currency.
Only in this case will they be able to push back the dollar and fill the multicurrency basket.
The world’s best minds and think tanks are now working on several relevant scenarios.
Four member states of the Cooperation Council of the Arab States of the Gulf, commonly known as the Gulf Cooperation Council or GCC – Saudi Arabia, Bahrain, Kuwait and Qatar – signed an agreement in early June to establish a common currency.
The document stipulates only the formation of a coordinating council as a precursor to establishing a common currency.
The other two GCC countries, Oman and the UAE, have declined to participate in the project.
The future banking authority of the oilrich Gulf countries’ common currency, khaleeji, will be headquartered in Riyadh, capital of Saudi Arabia. The upcoming common currency is scheduled to go live in 2013. It will be linked to a basket of currencies comprising the US dollar, the euro, the Japanese yen and the British pound.
Analysts say that the khaleeji, if created, will be used for regional settlements and is unlikely to be granted the status of a reserve currency. The global market needs a universal instrument for assessing the value of goods, services or securities.
Therefore, the dollar and the euro, which are among the reserve currencies of the world’s central banks, will remain the basic instruments of international settlements.
