BRICS countries look to lessen dependence on the West

The 14th BRICS Business Forum has opened with calls for emerging markets to develop parallel systems to counter West’s dominance and counter the US’s “weaponisation of the dollar”.

BRICS is the acronym for an emerging-market economies group that includes Brazil, Russia, India, China and South Africa. This year’s Business Forum for members is being held in an online plus offline format.

The keynote speech was delivered by China’s President Xi Jinping, who called on the BRICS business community to expand cooperation on cross-border e-commerce, logistics and local currencies.

However, the 14th summit is marked by growing calls from bankers and economists in BRICS countries – particularly Russia, which has faced a raft of sanctions following its illegal invasion of Ukraine and seen many of its banks expelled from the SWIFT network – for the bloc to expand national currency settlements and lending to lessen its reliance on the West.

In a video interview ahead of the opening ceremony Sergey Storchak, Russia’s deputy finance minister and chief banker of Russian bank VEB.RF, told the Global Times: “The BRICS and other interested nations need to talk about setting up their own independent global financial system - whether it would be based on the Chinese currency, or they will agree on something different. They need to debate.”

Storchak added that he hopes during China’s presidency of this year’s BRICS summit, member countries have open discussions on developing an action plan. “If the voices of emerging markets are not being heard in the coming years, we need to think very seriously about setting up a parallel regional system, or maybe a global system,” he said.

VEB.RF is one of the Russian banks that has been excluded from the SWIFT system, while in 2009 Storchak was charged with attempted fraud and embezzlement of state funds – although the charges were eventually dropped for lack of evidence.

Storchak told the BRIC summit that ejection from the SWIFT system had a major impact. “The biggest issue is the transfer of money and information, and we need to come to the issue of the wide utilisation of national currencies. It would mean that we would not need to use the banking system of either the US or the EU.”

Others promoting a similar message include Marco Fernandes, a Brazil researcher at the network Tricontinental: Institute for Social Research, who says: “After confiscating tens of billions of dollars in reserves and assets from countries like Iran, Venezuela and Afghanistan, the seizure by the US and the EU of more than US$300 billion of Russia's reserves, triggered a global alert, reaffirming the urgency of alternatives to the dollar's dominance.”

Cao Heping, an economist at Peking University, said that other bilateral or multilateral global settlement systems for cross-border financial services include China’s Cross-border Interbank Payment System (CIPS), which processed around yuan (CNY) 80 trillion (US$11.91 trillion) in 2021, up more than 75% year-on-year. According to data from SWIFT, the yuan retained its position as the fifth most active currency for global payments by value in April 2022, with a share of 2.14%.

Cao suggested that BRICS members step up cooperation in investment and financing in major sectors such as strategic emerging industries and digital innovation in a bid to boost the use of local currencies in trade and investment settlement. “Along with the development of the mobile internet, digital payment has also become a tool for cross-border transactions. More opportunities are expected in this regard,” he said.

BRICS countries have been able to drive regional and global economic and trade growth, despite the prolonged impact of Covid-19. The total volume of trade in goods of BRICS countries reached nearly US$8.55 trillion in 2021, up 33.4% year-on-year, according to data. The bloc accounts for 18% of trade in goods and 25% of foreign investment globally.

BRICS member India, which has resisted calls to join other nations in imposing sanctions on Russia and is also stepping up its imports of Russian oil, is reported to be exploring the possibility of using the CNY as a reference currency in an India-Russia payment settlement mechanism for its oil trade with Russia.

Strong dollar forces US companies to review hedging strategies

The continuing strength of the US dollar against other currencies is prompting US companies to review their hedging strategies, reports the Wall Street Journal. The paper says that the greenback’s gains are denting the value of overseas earnings, making some American products less competitive overseas, forcing businesses to look for ways to cut costs as they struggle to maintain margins.

The paper notes that Coca-Cola, Microsoft and Salesforce are among the companies that have pointed out the negative effect of the strong dollar on their financial results. Coca-Cola saw a roughly US$200 million negative impact on its Q1 2022 operating income, which came in at US$3.4 billion, up 25% compared with the prior-year period. The company has about US$7.6 billion in notional foreign-exchange cash-flow hedges in place.

Microsoft recently reduced its earnings and revenue guidance for the second quarter ending 30 June, citing unfavourable foreign-exchange rate movements. Salesforce, a San Francisco-based software company, now expects a foreign-exchange headwind of around US$600 million for the fiscal year ending in January, double the figure from an earlier forecast.

The WSJ says that over recent months the dollar has appreciated significantly against other currencies as weaker global economic growth drives investors toward safe havens. Steps by the Federal Reserve to tighten its monetary policy and increase interest rates have provided further support.

The WSJ Dollar Index, measuring the performance of the US currency against 16 others, is up more than 12% year-on-year and more than 8% higher than at the start of 2022. That is causing issues for companies in the Standard & Poor’s 500, as many of them generate much of their revenue – on average about 30% – overseas and consolidate it in the US.

While some US businesses benefit from natural hedges, for example having both revenue and expenses in local currencies, others do not and are more reliant on hedging programmes to reduce some of the currency risk and provide them with visibility into what future revenue from abroad will likely look like.

“Higher volatility and interest rates across the globe have raised the cost of hedging currency risk, as well as the risks of not hedging,” said Flavio Figueiredo, global head of Citigroup’s rates and currencies corporate sales division told the WSJ. “This has pushed companies to take a more active approach to how currency risk is managed in order to more effectively manage the impacts on results.”

The paper reports that companies in the S&P 500 reported a total of US$7.42 billion more in foreign-exchange effects in Q1 2022 compared with a year ago, and a combined $12.57 billion less in gains from hedges and derivatives, according to FactSet, a data provider. Foreign-exchange analysts expect similar impacts in the second quarter.

Mentions of foreign-exchange effects in earnings calls of S&P 500 companies have gone up in recent weeks, to 220 since the beginning of the year through 20 June, up from 183 during the prior-year period, data provider S&P Global Market Intelligence found. Similar patterns occur for keywords such as hedging and currency headwinds, S&P said.

India’s central bank moves to support rupee

India’s central bank has apparently ramped up intervention in the forwards market to slow the rupee’s decline and preserve its hard-earned reserves, according to reports.

Estimates by DBS Bank suggest that the Reserve Bank of India (RBI) has run down its forward-dollar book by US$12-15 billion, from about US$64 billion at the end of April. Standard Chartered said the authority has significantly intervened through forwards.

The move shows the central bank is pulling out all the stops to curb losses in the currency, which set a series of record lows this month and threatens to further accelerate India’s inflation rate, which has recently moved above 7%. The RBI’s intervention strategy has caused dollar-rupee one-year annualized forward premiums to fall below 3% for the first time in a decade, according to Standard Chartered.

“When there is a pressure on the rupee, instead of dipping into the reserves much, they are now liquidating those outstanding forwards," said Amit Pabari, managing director at CR Forex. The forwards were built to cushion the impact of events like now, he added.

In common with other emerging market currencies, the rupee has been under pressure as the Federal Reserve’s interest-rate hikes spurs fund flows to the US from developing economies. The rupee has declined more than 5% this year and set a fresh all-time low of 78.3862 earlier this week.

A large forward dollar book acts as an additional buffer in the hands of the RBI over and above the spot reserves. Governor Shaktikanta Das has said the central bank uses a multi-pronged intervention approach to minimise actual outflows of dollars.

The strategy basically works as follows: When the RBI intervenes in the spot market to curb rupee losses, it sells dollars and buys rupee, depleting interbank liquidity. The on the spot settlement date does what is commonly known as a buy-sell swap in the forwards market to offset the liquidity impact.

The dollar-rupee one-year annualised forward premiums closed at 2.86% on Wednesday, the lowest since November 2011, which may help lower hedging costs for foreign investors and boost demand for local debt amid high yields.

Most strategists see the rupee moving even lower amid US$27 billion of outflows from Indian equities this year. Bank of America expects the currency to slide to 81 to the dollar by year-end.

“In the current global scenario where the dollar remains strong and elevated commodity prices have a negative bearing for India’s current account dynamics, we have a bearish view on rupee,” said Parul Mittal Sinha, head of India financial markets at Standard Chartered.

SEPA Instant’s sluggish progress prompts 'Accept my IBAN' campaign

Customers of Europe’s banks, who increasingly expect real-time transactions, transparent exchange rates and reasonable transfer fees for intra-European payments, have been thwarted for several reasons. They include the slow rollout of the bank transfer scheme known as SEPA Instant or SEPA Instant Credit Transfer (SCT Inst), set up to enable real-time cross-border payments across the 36 countries within the Single European Payment Area (SEPA).

Despite the scheme’s promise of fast and seamless European bank transfers, access to SEPA Instant transfers remains low, with the proportion of banks that offer both SEPA Credit and SEPA Instant as low as 5% in Ireland and just 3% in Denmark.

In an interview with PYMNTS, Steve Naudé, head of product at Wise Platform, identified another issue that continues to undermine the success of SEPA Instant – the practice by many banks of adding an additional surcharge for customers who want to use the service, making it an even more expensive option than the non-instant alternative. “All institutions should offer this to their customers, and it should be offered at no additional cost,” he told PYMNTS.

The success of SEPA’s real-time payment scheme has also been hampered by a lack of interoperability between the two underlying payment rails, TARGET Instant Payment Settlement (TIPS) and the RT1 system.

TIPS is backed by the European Central Bank (ECB0 and aims to facilitate real-time 24/7 payments between bank accounts in the Eurozone, while RT1 is an alternative instant payment protocol controlled by EBA Clearing, a private European infrastructure provider that is wholly owned by a consortium of the continent’s biggest banks.

Despite moves to increase interoperability between the two systems, some banks still only use TIPS and others only accept RT1. However, TIPS continues to grow in usage, and since last month May has been able to settle transactions in Swedish krona as well as euros.

A further restriction on money movement across borders is the prevalence of International Bank Account Number (IBAN) discrimination — when a bank or company doesn’t accept an IBAN for euro payments or direct debits as it’s not from the country in which they are based — across the region. Although EU regulation requires banks and businesses to accept payments originating from all SEPA member states, it appears that many institutions are refusing to comply.

“There are laws in Europe that say IBAN discrimination is not permitted,” Naudé told PYMNTS and although organisations are meant to accept IBANs from different SEPA member states on equal footing, “in practice, we see this isn’t happening,”. Wise Platform has addressed the problem by launching an ‘Accept my IBAN’ campaign, offering a website for anyone who has experienced IBAN discrimination to report the offending party.

The campaign is supported by a coalition of fintechs and neobanks including Klarna, N26, Raisin, Revolut. and Bunq, and the goal is to present the discrimination cases to the European Commission and relevant authorities to highlight the problem.: “It’s something that we’re trying to raise attention to both at the consumer level, the bank level and the policymaker level, to help make change as quickly as possible,” says Naudé. “Highlighting that this is very widespread will help get the attention of the right people to enforce the rules that are already there.”

Deutsche Bank CEO sees growing risk of global recession

Deutsche Bank’s chief executive Christian Sewing says the risk of an economic contraction is steadily growing. “We have a 50% likelihood of a recession globally,” he said in an interview with Bloomberg at the Future of Finance summit in Frankfurt.

Sewing added that s the war in Ukraine has scrambled economic forecasts and has been a critical factor driving a higher recession risk next year. “Not only for Europe, but also for the US, the likelihood of a recession coming in the second half of 2023 – while at the same time interest rates are going up – is obviously up versus the forecasts that we had before the war broke out.

While the conflict is a major factor in this year’s downgraded economic forecasts, other contributors include Covid-19 lockdowns in China impacting on supply chains, the lingering effects of the pandemic and rising food prices. As these things are all happening at the same time it is making markets more uncertain than ever, said Sewing.

“We have overall a very challenging time. Addressing these three, four items – with inflation that we haven't seen in 40 years – I think this is a time where making predictions on the future is incredibly hard.”

Deutsche Bank’s CEO also gave some of the clearest indications yet as to the bank’s priorities for taking part in European banking consolidation, signalling the importance of cultural fit and successfully exiting its restructuring before any major deals.

He said that the German lender needed to have its “own house in order” and couldn’t simply impose its culture onto that of another bank when considering potential transactions – a factor that it had underestimated in previous deals. He also said that banking union isn’t the “one and only precondition” for European M&A.

India may open commodity futures to FPIs

India’s market regulator is about to take a final call on letting foreign fund managers bet on Indian commodities - a subject that has been debated for years, says the Economic Times.

Based on comments by two individuals close to the regulator, it reports that the Securities & Exchange Board of India (Sebi) this week approached several major market participants, multinational banks and clearing houses to jointly review measures for allowing foreign portfolio investors (FPIs) to trade in commodity derivatives listed on local exchanges. Initially, FPIs would be allowed to participate only in non-agricultural, cash-settled contracts, including non-agricultural derivative indices.

“This group of professionals will examine whether any additional risk management measures are required for the proposed FPI participation, and if yes, what are these,” said a senior industry official. “Also, they will review and recommend position limits for FPIs and suggest differential position limits if any for certain categories of FPIs like individuals, family offices, and corporates.”

Offshore investors, who freely deal in stocks, bonds, gilts and foreign currency in Indian financial markets, are restricted from taking positions in exchange-traded commodity futures and options. ‘Foreign eligible entities’ are permitted to buy or sell derivatives for only ‘hedging’ their exposure to physical markets after submitting the underlying export or import documents but are barred from trading in commodity derivatives.

According to industry sources, over the past year the regulator has discussed with various stakeholders the proposal to open up the commodity derivatives market and the issue may be addressed at the upcoming Sebi board meeting.