China, others back Russia’s alternative to dollar

China and several other emerging economies support Russia's proposal for a discussion on creating a new world reserve currency replacing the dollar, a senior Russian official said on Thursday.

Russia has called for the creation of a new reserve currency, to be issued by international financial institutions, in the text of its proposals to the April G20 summit published last Monday.

"We fully agree that this is not the issue, which would enable us to get out of the crisis and cut costs. The main idea is to initiate discussions on this issue," the Russian news agency Novosty quoted a government source.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the US Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia earlier put forward a suggestion to the G20 summit which would see the IMF examining possibilities for creating a supra-national reserve currency, and also forcing national banks and international financial institutions to diversify their foreign currency reserves.

"We believe it is necessary to consider the IMF's role in this process and also define the possibility and the need to adopt measures allowing for Special Drawing Rights (SDRs) to become an internationally recognised super-reserve currency," Russia's proposals read.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decision-making globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

Russia holds about half of its reserves, the world's third-largest, in dollars, with the rest in euros and pounds. Prime minister Vladimir Putin has called on reserve currency issuers to show more financial discipline.

Finance minister Alexei Kudrin told reporters on the sidelines of the G20 finance ministers meeting that it would take up to 30 years to create a new super-currency, suggesting there was no unity in Russia on the issue.

Meanwhile, a UN panel of experts is also looking at using expanded SDRs, originally created by the IMF in 1969, but now used mainly as an accounting unit within similar organisations as a new reserve currency instead of the dollar.

The source said that India did not object to the discussion but was not prepared to take the lead. The source said South Korea and South Africa backed the idea, while developed nations were not "allergic" to it.

"We are not waiting for everyone to say: 'How beautifully it has all been formulated, let's subscribe to it'," the source said. "The main idea is to start a discussion about it."

Currency specialist Avinash Persaud, a member of the UN panel of experts, said in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the US ran up huge twin budget and external deficits.

Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.

The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.

The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. However, this system collapsed in only a few years, and the major currencies shifted to a floating exchange rate regime.

Reforming global financial institutions
Russia President Dmitry Medvedev on Sunday said Russia will prioritise the reform of international financial institutions, control of advanced economies' macroeconomic indices and audit and accounting issues at the G20 leaders summit.

Medvedev will attend the summit in London on April 2 for discussions on overcoming the global financial crisis and reform of international financial structures.

"The current crisis has shown that their [the international financial organizations'] activity is far from ideal - the IMF, World Bank, and other structures," Medvedev said in an interview broadcast Sunday on Russia's First Channel.

Medvedev also said it was important to exercise control of the macroeconomic indices of the countries that influence the world financial situation to prevent a chain reaction, as he referred to the subprime mortgage crisis in the US that eventually spilled over to other countries.

According to Medvedev, it is necessary to create mechanisms making it possible to influence decisions made by partner countries and at the same time allowing for protection against negative impacts.

In October 2008 Putin proposed that Russia and China gradually switch over to national currency payments in bilateral trade, expected to total $50 billion in 2008.

"We should consider improving the payment system for bilateral trade, including by gradually adopting a broader use of national currencies," Putin told a bilateral economic forum.