In recent years, we have seen an increasing tightening of sanctions and asset seizures against certain countries and individuals. While these measures are often used as political tools to enforce certain objectives, they have also had a significant impact on the stability and integrity of Western financial and payment systems. Sanctions are often used by Western governments as tools to punish or prevent undesirable behaviour by governments or individuals. They can take various forms, including trade restrictions, entry bans, freezing and confiscation of assets and financial sanctions. These measures are designed to put pressure on the targeted countries to make political, economic or social changes.
It is important to emphasise that international legal norms, including the rules of the World Trade Organisation (WTO) and various investment protection agreements, do not include provisions for the ‘freezing’ of assets. Such an approach, as seen for example in the financial and trade sanctions against Russia, could be seen as arbitrary and not in line with the rule of law. Only the United Nations has the legal authority to impose such measures.
Legal concerns and economic challenges
For states and international organisations such as the European Union, this opens up challenges of considerable proportions. The Russian central bank funds are the subject of particular debate. Around 300 billion euros are currently blocked, the majority of which, 210 billion euros, are frozen in the EU, while 7.4 billion euros are blocked in Switzerland. Under the provisions of international law, state assets generally enjoy immunity and both individual states and international organisations are prohibited from seizing them. These developments have the potential to affect the perception of the legal system and burden economic activities as well as lead to economic instability, capital flight and a deterioration in living conditions for the population. They could undermine confidence in the rule of law by raising concerns about the fairness and transparency of legal proceedings. Similarly, they could affect the investment climate by creating uncertainty and risk for businesses, which subsequently inhibits economic growth.
Economic instability and global consequences
One of the direct consequences of sanctions is the undermining of the financial and payment systems of the countries affected. If assets are frozen or access to international financial markets is restricted, governments and companies may find it difficult to conduct business, make investments and service debts. In an era of globalisation of financial markets, disruptions in one area can quickly have global consequences. Recent actions by the United States and the European Union against Russia, including the seizure of Russian state assets in foreign banks, have raised increasing concerns in some countries about their dependence on the US dollar. There is concern that if their foreign policy is not in line with Western interests, they too could become the target of sanctions. The use of the US dollar as a foreign policy tool has become more important, which has been noticed by foreign central banks. In response, some countries have begun to increase their gold reserves.
Increase in gold reserves
Current developments on the gold market (as at January 2024) clearly show that a number of countries have recently increased their gold reserves. The Chinese central bank acquired an additional 9.5 tonnes of gold in January and now officially holds 2,245.3 tonnes of gold in its reserves. India also increased its gold reserves, with current holdings now standing at 812.3 tonnes after adding 8.7 tonnes. Turkey reported an increase in its state gold reserves by 11.8 tonnes to a total of 552 tonnes compared to the previous month. Kazakhstan also recorded an increase of 6.2 tonnes and now has 300.4 tonnes of gold in its reserves. Jordan recorded an increase of 4.7 tonnes and now holds a total of 74.3 tonnes of gold. The Czech Republic also increased its gold reserves by 1.7 tonnes to 32.4 tonnes. At the end of April 2024, Borge Brende, President of the World Economic Forum (WEF), gave a sobering assessment of the global economy. In his speech at the WEF's ‘Special Meeting on Global Collaboration, Growth, and Energy for Development’ in Riyadh, Saudi Arabia, he emphasised the worrying state of global debt and compared it to a level not seen since the 1820s. He emphasised that the world is approaching a critical point as debt has reached almost 100% of global GDP, a situation reminiscent of the post-Napoleonic era. He emphasised the need for prudent fiscal policy measures and stressed the importance of reducing debt without triggering an economic downturn. With regard to China and the United States, the WEF President emphasised the high level of debt. He criticised the loose financial policy in the USA as particularly worrying, as it exerts pressure on interest rates and the dollar, which increases financing costs worldwide and exacerbates existing weaknesses.
The role of the Global South
In view of these developments, countries of the Global South, which have joined forces as part of the BRICS bloc, have intensified their efforts to establish their own payment and financial systems since the summit in Johannesburg in August 2023 and have set themselves the goal of introducing an alternative to the Swift financial payment system in the near future, among other things. This will accelerate the exit from the dollar as the main trading currency. Payments for crude oil and gas as well as other natural resources and raw materials between the bloc states could no longer be settled in US dollars in future. The BRICS payment system is intended to form the foundation for the bloc's future economic partnership, firstly because it is not controlled by the United States or any other Western country and is therefore beyond the reach of sanctions, and secondly because it is based on a basket of local currencies rather than the US dollar. In my assessment, it will primarily help the countries of the so-called Global South to significantly strengthen their own economies. Until now, their hard-earned and scarce financial resources have been channelled to a country that is geographically far away and whose foreign policy is not always friendly. These measures will also have the effect of reducing demand for the US dollar, with the result that the US dollar could lose its previous unrestricted supremacy. This would have a major impact as the United States would no longer be able to print money out of thin air and would no longer be able to balance its current government deficit of around 34.5 trillion. Both together could trigger a collapse with far-reaching consequences for the global markets.
In addition, the BRICS countries recently announced their intention to introduce a common official trading currency, the development of which is expected to be finalised shortly. As a first step, the BRICS countries have agreed on a BRICS payment system that is based on blockchain technology and is to be operated in parallel to the Western SWIFT payment model. The BRICS blockchain technology infrastructure, driven by Russia and China, forms the basis of this new financial system and the payment processing platform for the entire block.
The second step now involves the introduction of the new currency. According to previous information, the BRICS currency is to be used for international payment transactions in order to reduce the high costs of currency exchange. Due to the large number of currencies whose values are subject to constant fluctuations, the losses caused by arbitrage are considerable. The introduction of the BRICS currency should solve this problem and make it cheaper than the dollar. Given the significant gold purchases by the BRICS countries, particularly China, it is highly likely that gold will form a significant part of this currency once it is approved and launched. Technically, this currency is almost finalised, the software and the necessary mathematical tools have been developed. This new currency is expected to be based on two baskets, making it less vulnerable to debasement. One basket will consist of the national currencies of the member states, while the other will be based on foreign exchange commodities. At this stage, however, it is not yet clear in what proportion the currency will be backed by gold or commodities.
This model would ensure the stability of the currency, making it potentially more attractive than traditional currencies such as the dollar, pound and euro. Political approval from the BRICS countries is now required for the introduction of this currency, and three heads of state have already expressed their support for the idea of introducing a new currency. China and India have yet to respond. The South African ambassador to China, Cyprian Cwele Siyabonga, also recently confirmed progress towards a common BRICS currency. The details of this initiative are to be announced at the BRICS summit in Kazan, Russia, in October. A planned BRICS central bank is to coordinate currency issuance and fiscal guidelines. Russia's Deputy Foreign Minister, Mr Sergeyov, expressed his support for the establishment of this central bank.
Trade relations and engagement in Europe and Africa
Despite their efforts to become independent of Western currencies, the BRICS continue to seek trade with Europe and are open to global trade opportunities. Countries such as Hungary and Serbia could benefit from closer relations with the BRICS. In addition, China's President Xi Jinping emphasised the importance of these trade relations at a meeting with European leaders in May.
Another important topic is the increased involvement of Russia and China in Africa. The BRICS countries are planning to invest in the continent's infrastructure and education. The head of the new development bank, Dilma Rousseff, explained that the bank will finance physical and digital infrastructure projects in Africa and promote education projects. ‘The new development bank has the potential to take the lead in projects that address the most pressing challenges facing African countries,’ said Rousseff.
ASEAN and strategic measures to strengthen local currencies
Recent developments in the ASEAN region highlight the efforts of a group of Southeast Asian countries to strengthen their own local currencies and move away from Western currencies such as the US dollar, British pound and Japanese yen. This alliance includes Vietnam, Thailand, Cambodia, Indonesia, Brunei, Laos, Malaysia, Myanmar, the Philippines and Singapore. These countries have recognised that the promotion of their national currencies is crucial to minimise the impact of rising US national debt, Western militarisation and escalating conflicts on their economies and development prospects.
ASEAN countries have decided to strengthen their national currencies and build closer relations with trading partners within the region. A key step in this direction is the introduction of the Local Currency Transaction (LCT) system, an extension of the Local Currency Settlement (LCS) system introduced by Thailand and Malaysia in 2016. This system enables Southeast Asian countries to settle trade and financial transactions directly in their own currencies, thereby reducing their dependence on Western currencies.
Final Reflection
Overall, these developments show that the ASEAN and BRICS countries are taking strategic steps to strengthen their economic independence. In my view, the trend is towards reducing the dominance of Western currencies and opening up new avenues for economic co-operation. However, it remains to be seen how the political and economic balance of power will continue to develop and whether the BRICS countries can successfully realise their plans to introduce a common currency.
