Approaches to the Formation of a BRICS Reserve Currency Portfolio
Abstract
The issue of reducing the international financial system’s dependence on the US dollar, particularly the reduction of the dollar’s share in international reserves, has been frequently discussed in recent years. This topic is especially relevant for the BRICS countries, whose role in the global economy is growing. The creation of a single BRICS currency in the near future is not feasible due to differences in the level of economic development among the member states; a more realistic scenario is the creation of a common reserve asset based on a currency basket. The purpose of this article is to assess the stability of BRICS reserve currency portfolios that could form the basis of a potential reserve asset.
There is a considerable body of scientific literature dedicated to the topic of reserve currencies: the earliest research focused on the effectiveness of exchange rate regimes and the problem of backing reserve currencies with real assets, while later works cover more specialized topics—the determinants of the composition of currency reserves, the optimization of central bank reserves and the characteristics of a reserve currency. In global practice, the value of currency baskets is most often calculated based on the weighted averages of their exchange rates, with GDP and international trade indicators of the issuer countries used as criteria for determining the weights, an approach also applied in this study.
This paper attempts to calculate the value of various BRICS currency portfolios, as well as the standard deviation of their returns for the period 1999–2023. A comparison of the volatility of the constructed currency baskets, the national currencies of the BRICS countries and existing reserve currencies shows that most of the constructed BRICS currency portfolios are inferior in stability to the majority of existing reserve currencies and a number of national currencies of the member states. This means that it is premature to talk about creating a single BRICS reserve asset based on a currency basket at this time. This research can be continued by applying more complex methods for forming currency baskets—for example, using H. Markowitz’s modern portfolio theory, which would allow for the optimization of currency weights within the portfolios.
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