In recent weeks, the BRICS countries of Brazil, Russia, India, China, and South Africa have been on the agenda to use their own currencies in commerce among themselves. At the same time, Saudi Arabia and Iran's accession to the union were discussed. Even the name of the group that will expand is named; "BRICS+". A significant threat to the dollar!

Before I begin assessing the impact of BRICS trading in their home currencies on the container freight rate index, I'd like to examine what this step means from a global perspective.

Let's take a look at the recent history of the global currency;

The sterling was the global currency prior to the dollar. After the sterling lost its position as the world's reserve currency, the dollar became the only convertible currency into gold. Every economy began to value its local currency against the dollar. Today, the value of the TL is determined first against the dollar, then multiplied by the Euro/Dollar cross, and the value of the TL against the Euro is computed.

As a result, Central Banks began to hold dollars in addition to gold as reserves. Because they both meant the same thing, the dollar is even more useful in terms of shopping. The fact that the price of oil was also determined in dollars further strengthened the dollar. While everything was going smoothly, the United States, whose economy was in trouble during the Vietnam War, gave up printing the dollar in exchange for gold. Consequently, all of the world's currencies lost their gold-indexed values. They went unreciprocated since they lacked funds. It just fell to the value written on it. This is known as the "price money" issue. The country's Central Bank was the only guarantee behind paper money. By the way, I would like to point out that in the period when the dollar was convertible to gold, 1 ounce of gold was 35 dollars. Right now, one ounce of gold is worth more than 1,900 US dollar. Why did countries continue to stash US  dollars despite abandoning their gold commitment?

The determination of commodity prices in US dollars supported  the dollar's rise to global currency status. Particularly oil. The fact that US dollar is stored as a reserve currency and continues to be a global currency provides the US with a unilateral convenience. Thus, unlike other countries, the US stays away from concerns such as current account balance/current account deficit in its foreign trade. Because all trade is conducted in its own currency, the dollar becomes a neutral medium of exchange. This means that the U.S. can borrow gratuitously, that is, a credit offered to this country.

Is trading in the local currencies of BRICS a threat to the dollar?

Of course it is a threat. But BRICS' trade in local currency is not the only threat. If the United States loses its position as the world's strongest economy, the dollar's strength will be questioned organically. Some argue that such a threat is unlikely; nevertheless, as previously stated, I would like to remind you that while sterling was the global currency in the first half of the twentieth century, it eventually transferred its throne to the dollar with the loss of blood in the British economy.

Some may also recall the attacks of the Mark, Yen and Euro. However, the steps taken to use these currencies for the purchase/sale of oil were not successful. None of these currencies, though, dominated both the energy and industrial sides. They also could not act in unity. From this point of view, the chances of BRICS+ may be higher compared to past examples. Natural resources predominate in the fields of industry and technology.

What is the gain of BRICS?

First of all, why is BRICS taking such a step? It is not easy for BRICS or BRICS+ countries to try to determine monetary policy under the dominance of the dollar. Assume that you want to export more products/commodities by investing; your money is suddenly valued, and your export policy is rendered ineffective. Reason? Because the Federal Reserve Bank (FED) of the United States, which is the world's reserve currency, has altered its monetary policy.

In particular, the rapprochement between China and India, increases Asia's industrial dominance. In this case, changes in world commerce routes are unavoidable. Well, let's assume for a moment that this rapprochement never happened. Is it possible for Asia to become so powerful?

If just Chinese manufacturing is used, Asia's power will remain quite limited. Let us take a step forward. Suppose that this industrial marriage is supported by the energy resources of Saudi Arabia, Iran and Russia. Of course, BRICS+ will be much stronger. Is it not possible for this union to sell/buy oil in a currency other than the US dollar? Of course it is possible!

But how is maritime transport affected by such a situation?

The term BRICS+ refers to member countries expanding commerce among themselves. This step will further increase the already high political tension between the US and China. The fact that most of the transportation is done between China and the US and Europe suggests that this tension will alter routes and ultimately global trade.

Currently, U.S. companies are looking for alternative factories to those in China. People that are quick to route their imports to various nations will be able to locate more attractive conditions, as though those who get up early go a long way. Whatever the circumstances, a higher cost of Chinese imports would result in an increase in US inflation. In other words, the United States does not have considerable power.

The escape scenario from China will lower the container freight rate index;

The container freight rate index moves in favor of the South's advantages if the United States can overcome the risk of inflation and match the production capacity that the BRICS have in other countries, or if it leaves China to the greatest extent possible. The reason is simple; supply-demand balance. The first step of this transition will result in route and trade balance disruptions. The first question is whether these nations have enough port capacities for the growing overseas trade… A disruption of equilibrium can quickly cause a decline in the freight rate index.  This modification will redraw the routes.

The information, comments and advice contained herein are not within the scope of investment consultancy.