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BRICS are drifting away from US and European monetary structures

Mike Kane of Hedgeable

Why the long-term prospects for the BRICS network are positive (Part 1 of 4)

The BRICS countries (Brazil (EWZ), Russia, India (EPI), China (FXI), and South Africa) are slowly but surely drifting away from the 20th Century monetary and political structures setup by the U.S. (SPY) and Europe (EZU), as characterized by Russia’s G8 membership being revoked in the wake of the events in Crimea. The G7, as it is now known, is at odds with Russia’s Vladimir Putin, but that rift applies to the entire BRICS coalition — a group that seems to be growing stronger and more focused as leader of the Emerging Markets.

There have been a slew of recent moves within the BRICS network. Russia and China inked a $400 billion, 30-year natural gas partnership, forged a bilateral inter-bank agreement to deal in local currencies, and announced plans to create a new credit rating system to counter the Western agencies. China is diversifying away its U.S. dollar exposure, China and Brazil finalized a local currency swap, and leaders from the group of nations just met for the sixth annual BRICS Summit in Brazil.

Market Realist – The above graph shows China’s holdings of U.S. Treasuries (IEF), which have been declining consistently over the past year. China is steadily diversifying away from the dollar.

According to a government report released in June, China’s (FXI) holdings of U.S. Treasuries (TLT) declined for the third straight month in June 2014. China held 1.26 trillion in U.S. debt as of April 30, 2014, according to the report. This is an $8.9 billion decline from March. This fact is particularly significant given that China (FXI) is the largest foreign holder of U.S. Treasuries (IEF). According to data compiled by Bloomberg, analysts have seen this decline in holdings for three consecutive months.

China and Russia are also disintegrating from the standard credit rating procedures by agreeing to establish a rating agency on joint projects and international services. The rating agency would use similar tools and criteria for assessing creditworthiness as the existing agencies. This move came in response to the countries’ fears that negative feedback from agencies could prove harmful to their economies.

China and Russia also signed a momentous deal in May 2014. China agreed to purchase $400 billion of natural gas from Russia. This strategic deal comes as Russia finds itself isolated due to tensions with Ukraine. The deal should help China ease its gas shortages and reduce its dependence on coal.

The Russian government–controlled Gazprom will supply 38 billion cubic meters of gas annually to state owned China National Petroleum Corp., which will cater to almost one-fourth of China’s current annual gas consumption (150 billion cubic meters).

U.S. Treasury Secretary Jacob Lew has appealed to China to desist from taking steps that might be contrary to sanctions. However, the government has recognized China’s need for energy.

According to a joint statement from Russia and China on the partnership and strategic cooperation, Russia and China are planning to bypass the dollar and increase the volume of direct payments in their national currencies. This would threaten the dominance of the petrodollar and could be a huge blow to the economy if other nations follow suit.

Read on to the next part of this series to find out how the BRICS summit has led to setting up an alternative to institutions like the World Bank and IMF.

Continue to Part 2

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