The recent BRIC leaders' summit at Yekaterinburg, east of Moscow in the Ural Mountains, resulted in analysing the role of dollar as the global reserve currency and finding means for an alternative medium.
For some time, Brazil, Russia, India and China had been discussing means to boost the world economy and to decide on the role of dollar.
As holders of one-third of United States' debt, in the form of US treasury bills, the BRIC nations have started questioning the role of the dollar as an international reserve currency in the light of US budget deficits, global financial crisis and the weakened US currency.
Probably this may send a strong signal to the US administration to refrain from its policy of printing money.
The BRIC countries share 15 per cent of the global economy, hold 40 per cent of the global currency reserves, 42 per cent of the world population and 25 per cent of the global land coverage.
Among the group are two global manufacturers -- China and India -- and two resource providers -- Brazil and India.
Fearing a real term fall in their dollar-denominated currency reserves, Russia, China and Brazil have shown their intent to invest in the first bonds that International Monetary Fund is to issue.
China is considering buying bonds worth $50 billion, while Russia and Brazil plan to purchase bonds worth $10 billion.
But then IMF instruments have less liquidity and America being the major investor in IMF, it will be difficult for the BRIC nations to delink from the dollar.
Before the summit, Russian President Dmitry Medvedev stated, "The existing set of reserve currencies, including the dollar, have failed to perform their functions. We will not do without additional reserve currencies to perform their functions."
He advocated that BRIC should consider regional currencies by investing portion of their reserves into each other's bonds.
"An artificially maintained unipolar system was based on the big centre of consumption, financed by growing deficit and thus growing debts, one formerly strong currency and one dominant system of assessing assets and risks," Medvedev said.
These countries feel that over-consumption by US citizens, US buyout of overseas concerns and overseas military spending by the US result in foreign central banks getting loaded with dollars.
These are recycled into the US, either through BRIC nations' investments in US Treasury Bills or by overvaluing their currency in dollar terms. These, in turn, lead to overpricing of BRIC products.
Through their continued military overspending in West and Central Asia, the US has become world's largest debtor. Yet the so-called structural adjustments imposed on poor Third World African countries by IMF is not applicable to the US.
This has provoked global leaders like Medvedev to say, 'What we need are financial institutions of a completely new type, where particular political issues and motives and of particular countries will not dominate.'
It should be mentioned here that the BRIC countries turned down the US request to attend the summit as an observer.
Individually, BRIC nations do more trade with the West than among themselves. Brazil has practically no trade with Russia and little business with India. Except for a meagre arms deal between India and Russia, there has never been any significant mutual confidence among them.
There exists a border conflict between China and India. Russia, too had had border skirmishes with China in the 60s.
Recently, China tried to block Asian Development Bank's loan to Arunachal Pradesh for its watershed management project, claiming Arunachal to be a part of its territory.
Brazil had trade differences with Russia and China on market access. China looks for cheap oil while Russia and Brazil look for higher oil prices. However, China is gradually becoming a major trade partner of Brazil, replacing the US.
China alone has about $1-trillion of US debt instruments and is wary of any far reaching changes to the current position of dollar.
Any downward movement is bound to affect the currency's reserve value in real terms.
Hence, the last BRIC summit concluded in a mild note and could not stress hard on its quest for another currency.
It left the review mechanism to respective central banks and finance ministers so that they could analyse all the factors at their next summit to be held in Brazil in 2010, including the possibility of using their own currencies in domestic trade.
Even though BRIC economy is smaller than its US counterpart, they are growing fast and getting closer.
But many bilateral agreements to hold each other countries' reserve would decouple the dollar from acting as an international medium of exchange.
The collective agenda announced at the end of the summit include food security and financial reform, creation of a 'more diversified international monetary system' and a 'more democratic and multi-polar world order'.
The BRIC nations were attempting to launch a strategic vector with a potential to influence the global affairs in the coming years.
Though China did not want an immediate dilution of dollar as an international reserve currency so as to avoid a meltdown of its dollar-dominated assets, it has been working silently to promote its sphere of influence.
It announced $10-billion assistance to the mineral rich central Asian countries, thus taking a lead over the US.In fact, China has been pleading for a global reserve currency with stable valuation that would belong to no individual nation.
Through a bevy of currency swaps, China is gradually bolstering its currency -- Renminbi. China entered the currency swap a big way.
Bilateral currency swap agreements have assumed an important role in global economy.'Currency swap' gives liquidity-starved central banks direct access to hard currency held by three giants -- US, Japan and China by swapping domestic tender for dollars, yen or yuan.
Recipient countries have easy access to liquidity without going through the rigours of IMF creditline. Since the global crisis came to the fore, the currency swaps have touched over $600 billion with US as the leader.
But China extended about $95 billion to South Korea, Indonesia, Malaysia, Hong Kong, Belarus and Argentina.
China is adding Brazil to its currency swap. By Yuan swaps, Chinese allow import of Chinese goods, thereby promoting increased use of Renminbi in international trade while retaining state control on exchange rates.
Under the garb of providing global finance, currency swaps have the potential of opening up a race for regional as well as global currency dominance.
Realising the threat that Yuan poses to Yen, the Japanese have announced new schemes for East Asia. The tenor for the US currency swaps is six months. None of the Chinese swaps expire before 2012.
To what extent will these developments in international finance settle the score for currency supremacy eclipsing the dollar? For now, the dollar can reign, but BRIC nations have decided to address the issue at the 2010 Brazil summit.
S Srinath is financial controller, Nobel Industries Ltd.