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In June 2022, Russian President Vladimir Putin announced the mini-lateral member states' plan for a new reserve currency at the BRICS Economic Conference. This currency is expected to compete with the International Monetary Fund's Special Drawing Right (SDR).
Putin's announcement further projects the motivations of the BRICS states to go beyond intra-BRICS commerce in local currencies and encourage de-dollarization. It's been nine months since this announcement, and events have unfolded that may have affected the validity of the USD in a different region.
The Rise of the BRICS Alliance
After the global financial crisis in 2007 and 2008, the dominance of the U.S. dollar has been called into doubt. Many countries questioned the dollar's hegemonic role in the global financial system primarily because the financial crises emanated from the U.S.
In 2009, Russian President Dmitry Medvedev held the inaugural BRIC (Brazil, Russia, India, and China) Conference in Yekaterinburg to discuss strategies to overcome the global financial crisis. The conference focused on creating a more equitable global financial system.
BRIC became BRICS when South Africa joined the mini-lateral member states in 2010. These five countries have together achieved policy cooperation in a variety of sectors. Their successes include forming the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA). (Top regulated brokers to watch out for in 2023)
The Regional Impact of the BRICS Alliance on the USD
Aside from BRICS, the dollar's relevance has been relatively constant in other parts of the world. While there have been a few fluctuations in the value and use of the USD in BRIC mini-lateral member states, the dollar's impact in all five countries is not uniform. A closer look at each country reveals a distinct pattern of acceptance of the USD.
Brazil and the USD
China is Brazil's major trading partner and using local currency for bilateral transactions benefits both countries economically. Brazil's trading statistics, however, reflect a 17% export to the US, and 90% of its export invoicing is denominated in dollars.
Former Brazilian President Lula Da Silva in his call for a multipolar world stated his displeasure with the dollar's dominance in Brazilian commerce. He advocated using BRICS as a de-dollarization alliance. However, Brazil's stance on de-dollarisation has deteriorated dramatically after the 2014 economic crisis in Brazil under the Bolsonaro government.
Under Bolsonaro, the Brazilian government has grown closer to Western powers and has been inconsistent in supporting a BRICS reserve currency. Brazil's tight economic connection with China and its reliance on the US dollar imply that it will not be in the vanguard of BRICS de-dollarization efforts.
Russia and the USD
Considering its geopolitical objectives, Russia has long sought to use BRICS to further the concept of de-dollarization. The near-elimination of Russia from the West-led dollar-dominated financial system at the start of the Russia-Ukraine war in early 2022 has bolstered the country's notion of an economic system free of Western dominance.
However, Russia's push for de-dollarization did not start with the Ukraine war. In 2018, the Putin administration approved a strategy to lessen Russia's reliance on the US dollar. The country restricted overseas settlements and traded in alternative currencies. Putin has often emphasized the need for further de-dollarization and preservation of Russia's economic autonomy.
India and the USD
India is a significant partner of the United States in the Indo-Pacific region. Hence, it is unsurprising that the Indian government regards Russia and China's attempts to restrict dollar usage as more ideological than practical.
Despite being a member of BRICS, India does not officially endorse BRICS mobilization to challenge the dollar's hegemony. The recent military standoffs between India and China strengthen India's stance against China's aspirations to dethrone the dollar. However, this does not adequately express India's position on the US dollar's supremacy.
In the past, India has made efforts to minimize its reliance on the dollar. In 2012, India's Ministry of Commerce and Industry formed a task group to investigate the use of the Indian Rupee in bilateral commerce. The Indian government also established a multi-agency task group to prepare a list of nations with whom India could trade rupees.
Currency instability and geopolitical developments such as the United States oil sanctions on Russia and Iran have prompted India to promote using the rupee in international transactions. Besides, India has also been influenced by China's attempts to internationalize the renminbi.
India's trade invoice suggests that the country is one of the world's most "dollarized" countries; hence, the rise in global currency volatility encourages India to de-dollarize. Yet, this won't be easy because 86% of India's imports and over 85% of its exports are invoiced in USD.
India will unlikely explicitly participate in any BRICS effort to limit the USD's impact. However, by supporting measures that encourage using local currencies for trade, India may indirectly promote de-dollarizing.
China and the USD
China is the world's most influential trading partner. The country is also a major development financier in many Asian and African countries. Hence, it is perfectly positioned to contribute to regional and global de-dollarisation.
During the Asian financial crisis of 1997, Dai Xianglong, then Governor of the People's Bank of China (PBoC), criticized the dollar-based financial system. He argued that the way forward for global reform was to decouple the role of a few currencies as the global reserve currency. He explained that these currencies were a source of instability in the international monetary system.
Similarly, Dr. Zhou Xiaochuan, former Governor of the PBoC, noted in the aftermath of the 2008 global financial crisis the weaknesses and systemic hazards of the international monetary system. He advocated for the establishment of a global reserve currency that is independent of particular states.
The deterioration of US-China ties has also underlined the dominance of the USD and its capacity to deter Chinese trade. Such impediments have prompted China to abandon the US-dominated global order and establish a sphere of influence with the BRICS states.
South Africa and the USD
South Africa has followed Russia and China's de-dollarization programs but has not openly advocated or developed its own. The relationship between the US and South Africa has vastly improved since American sanctions were dropped following the end of apartheid in 1991.
While South Africa may have a partial de-dollarisation strategy, it is aware of worldwide currency volatility, particularly that of the US dollar. South African Trade and Industry Minister Rob Davies voiced concerns about exchange volatility and reliance on volatile foreign currencies at the 2011 BRICS conference. He also emphasized the advantages of trading directly in South African rands.
At the 2013 BRICS meeting, Davies also emphasized the importance of developing mechanisms for settling transactions in local currencies. He established that developing-country currency volatility is directly driven by global economic dynamics, making them price takers whose currency risk can be triggered by macroeconomic events outside their control.
The transaction and financial risk posed by the US dollar's predominance has compelled South Africa to support BRICS initiatives to promote the use of local currencies in trade. South Africa recently embraced the renminbi's expanded use and incorporated it in its foreign exchange reserves to diversify currency risk.
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The Possibility of Future De-dollarization
There have been several speculations that the de-dollarization is already happening. This is fueled by the recent news that Argentina and Brazil plan to create a unified currency called the 'sur,' to be used in Latin American bilateral trade transactions. However, the possibility of de-dollarization has long been in existence.
The global financial structure emerged after World War II, with the US dollar at the center of everything. Even after the Bretton Woods System's dollar-to-gold conversation framework fell, the US dollar remained the global economy's center of gravity.
The relevance of the USD is still being felt today. According to the Bank of International Settlements, activity in foreign exchange markets reached $7.5 trillion daily in April 2022, with the greenback accounting for about 90% of the total.
It is evident, however, that the global financial system is evolving from a unipolar world centered on the US dollar and approaching a multipolar, deglobalized future in which the dollar may wield less power. According to the IMF, central banks' proportion of USD reserves decreased to 59% in Q4 2020, its lowest level since 1995.
While absolute de-dollarization may be a long time coming, it is essential to note that it will have far-reaching economic, financial, and geopolitical repercussions. It appears that China has the most potential to make de-dollarization a future possibility.
China's financial clout has aided its capacity to influence global politics, posing a challenge to American hegemony. Only time will tell how soon China's yuan, which has already surged in value, will earn worldwide recognition and acceptance.
Final Thoughts
The primary rationale for adopting an SDR-like basket currency for BRICS nations is to challenge the US dollar's hegemony and to establish their area of influence. However, it is uncertain if all BRICS members are willing to contribute foreign reserves to build this new area of influence.
To diversify and lessen the risk of external and currency shocks induced by the US dollar, BRICS members have a common interest and priority to de-dollarize. While they seek to protect their global financial interests by forming a reserve currency, their current over-reliance on the US dollar poses a problem that hinders the reality of de-dollarization.
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