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Talking the dollar up while plotting to get out of it

Section: Daily Dispatches

BRICs May Buy Each Other's Bonds in Shift from Dollar

By Lyubov Pronina and Alex Nicholson
Bloomberg News
Tuesday, June 16, 2009

Brazil, Russia, India, and China are considering buying each other's bonds and swapping currencies to lessen dependence on the U.S. dollar as their leaders meet for a summit in Russia's Ural Mountains.

The leaders of the so-called BRIC countries will discuss measures to promote regional currencies, including "possibly placing part of reserves in the financial instruments of partner countries," during their meeting in Yekaterinburg, Arkady Dvorkovich, Russian President Dmitry Medvedev’s top economic adviser, told reporters.

The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries. The first BRIC summit comes after Brazil, China and Russia announced plans to shift some foreign reserves into International Monetary Fund bonds, driving Treasuries and the dollar lower.

"This is not something for the immediate future, but rather a direction of movement," said Stanislav Ponomarenko, a fixed-income analyst at ING Groep NV in Moscow. "I don't think more than a few percent of reserves could be reinvested into BRIC bonds. What we're seeing is a continuation of discussions to find an alternative to the dollar, yet nobody is going fundamentally to alter anything yet."

Brazil's zero-coupon bonds due January 2010 rose today, pushing the yield down less than a basis point to 9.005 percent, the lowest level on record, prices compiled by Bloomberg show. Russia’s 11 percent dollar-denominated bonds due July 2018 were little changed, yielding 4.877 percent, according to ING Groep NV data on Bloomberg. The yield on India's 6.07 percent note due May 2014 climbed 4 basis points to 6.67 percent. China’s 3.02 percent bonds maturing May 2019 were unchanged, yielding 3.15 percent.

The ruble strengthened 0.7 percent to 31.0926 against the dollar at 16:42 p.m. in Moscow after earlier weakening as much as 0.3 percent.

Medvedev is hosting back-to-back summits of developing economies in Yekaterinburg as he seeks to ease the world economy's dependence on the U.S. dollar. Medvedev began talks this afternoon with Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva.

The summit will be "a launch pad for our future talks," Medvedev said at the start of the meeting. The talks would give the countries the opportunity to "implement new economic programs and reform international financial relations," he said.

Medvedev and Hu earlier today attended a summit of the Shanghai Cooperation Organization, which also includes the four former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.

The Russian leader reiterated his intention to push for the creation of a "supranational currency" to challenge the dollar and encouraged China and called on other Shanghai group members to use each other’s currencies for trade.

"There can be no successful global currency system if the financial instruments that are used are denominated in only one currency," Medvedev said. "Today this is the case and the currency is the dollar."

Hu pledged $10 billion to help the Shanghai group's Central Asian members weather the global recession, joining Russia in seeking greater influence in the region through aid. Medvedev in February said Russia would contribute $7.5 billion to a regional fund created by the Eurasian Economic Community, which also includes Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan.

Today's meetings "show a very strong desire of developing countries to play a bigger role in world finance, especially given the growing insecurity related to the current crisis," said Masha Lipman, a political analyst at the Carnegie Center in Moscow, in an interview with Bloomberg Television today.

On June 10, Alexei Ulyukayev, first deputy chairman of Russia's central bank, said Russia may move some of its reserves from Treasuries into IMF bonds. About 30 percent of Russia’s international reserves, which stand at $409.5 billion, are currently held in Treasuries, he said.

Russian Finance Minister Alexei Kudrin said on June 13 that the dollar's "fundamental indicators" are "fine" and that he was confident in the currency's strength. A week earlier, Medvedev said the dollar isn't in "a spectacular position" and questioned its future as a global reserve currency.

Dvorkovich said the positions of Medvedev and Kudrin aren't contradictory and that the Russian government is united on its dollar policy.

"In the long term, it is beneficial for all and all agree that the world needs a few strong currencies," Dvorkovich said. "It cannot happen quickly."

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