Can a United BRICS Starting a Process of De-dollarization?

Dollar

By Emil Bjerg, journalist and editor of The World Financial Review

Ever since the abolition of the gold standard, the US dollar has dominated international trade. Will the coordinated attempts from the BRICS countries end the dollar hegemony?

“Every night, I ask myself why all countries have to base their trade on the dollar. Why can’t we do trade based on our own currencies?” Those were the words passionately spoken by the Brazilian president Lula during a recent state visit to China  – symbolically in front of the New Development Bank in Shanghai, also known as the BRICS bank.

Brazil’s president is not the only BRICS leader to contemplate a disruption to the dollar hegemony: Increasingly, it’s being asked if “BRICS [can] De-dollarize the Global Financial System?

During Xi Jinping’s visit to Moscow in March, Vladimir Putin suggested that the yuan should be adopted for trade between Russia and Asian, African, and Latin American countries.

Xi Jinping, whose global ambition has long been challenging US dominance, is pushing through deals linked to the yuan. Recently trade with Saudi Arabia, Brazil, and even France has been carried out in yuan.

The BRICS Five has numbers to back up their recent display of currency confidence. A historical news story – that was covered more in the media of BRICS countries than in the G7 countries – is that the BRICS countries combined now contribute more to the global economy than the G7 countries. The BRICS five account for 31.5 percent of the global GDP, while the G7 countries contribute 30% of the GDP.

A movement from West to Southeast

The movement towards a potential de-dollarization happens now for a number of reasons.

The Russian invasion of Ukraine is a driver of a lot of change on the global scene. The American sanctions against Russia – especially the sanctions on SWIFT – is by many observers seen as a ‘weaponization’ of the dollar. According to analysts, using the dollar as a political instrument is “likely to accelerate a move already under way by many countries to diversify investments into alternative currencies”.  With its war in Ukraine and the subsequent sanctions, Russia tries to avoid trading in US dollars and euros, which are viewed as “toxic” currencies – even if they’re unable to avoid the currencies altogether.

The perceived weaponization of the dollar has been a factor in a myriad of trade deals between countries from Asia, South America, and the Middle East. Among them are India and Malaysia’s agreement to trade in the Indian rupee and Brazil and China’s to trade in their own currencies.

Partnerships are being formed and strengthened across BRICS, while BRICS countries – especially China – are strengthening relations with developing countries. This happens while the US is increasingly losing support in developing countries. According to a 2022 study from the Centre for the Future of Democracy, for the first time ever, more people in developing countries are slightly more favorable towards China (62%) than towards the United States (61%). While that doesn’t necessarily reflect the politics of leaders of the worlds developing countries, it reflects that we’re moving from a unipolar to a multipolar world, not just financially, but also politically and culturally.

Add to that, that none of the BRICS countries are interested in a unipolar world order with US at the end of the table. China has enormous global ambitions – for a long time, Xi Jinping has displayed interest in accelerating the development from a unipolar to a multipolar world order. The movement towards a potential de-dollarization is a symbolic, practical, and financial advantage to strengthen that agenda. Vladimir Putin’s Russia is still in a cold war with the US. Brazil’s main trading partner in recent years is China.

Let’s have a look at the financial infrastructure that could dethrone the dominance of the dollar.

De-dollarizing initiatives

While the discourse is full of drive to terminate the global dollar dominance, there’s no currency ready to take its place.

The yuan has its obvious drawbacks. Its potential in the global economy is severely limited by the fact that China doesn’t have free movement of capital. The yuan only accounts for approximately three percent of the global currency reserves and international payments.

Maybe that’s the rationale behind the rumored new BRICS currency – tentatively named ‘bric’. Foreign Policy writes that Russia is spearheading the development of the new currency. India Times quotes Alexander Babakov, deputy chairman of Russia’s State Duma, for saying that the BRICS countries are “in the process of creating a new medium for payments”. Further, India Times quotes Babakov for saying that, that the new currency is established on a strategy that “does not defend the dollar or euro”.

The new currency is – according to the same source – going to be secured by gold and other valuables like rare-earth elements. According to Babakov, there are plans to present the new currency at the BRICS summit, which will be held in Gauteng, South Africa, this August. Financial analyst Joseph W. Sullivan believes that if “the BRICS used only the bric for international trade, they would remove an impediment that now thwarts their efforts to escape dollar hegemony”.

A BRICS currency – a bric – would be a logical next step to build on top of existing financial infrastructures. China has already created a SWIFT equivalent, the Cross-Border Interbank Payment System (CIPS), which was launched in 2015 to boost the international use of the Chinese currency in trade agreements. The banning of certain Russian banks from SWIFT has likely accelerated the expansion of CIPS.

The BRICS countries also have their own development bank, The New Development Bank, often called the BRICS Development Bank. Since 2015, the New Development Bank has given loans for 33 billion dollars, against the 67 billion that the World Bank has loaned out in the same period.

Enter a new wave of ‘dollar-hatred’

Since the establishment of the Gold Standard in the 19th century, and its eventual dissolution in the 20th, the US dollar has remained a cornerstone of the global financial structure.

In the aftermath of World War II, a system was instituted in which the US dollar was tied to the value of gold, whilst other global currencies were pegged to the dollar. This transformed the US dollar into the world’s primary reserve currency, a position it has largely maintained since. The constant global demand for dollars gives the US a number of benefits including lower interest rates as well as reducing inflation.

According to Jens Nordvig, a leading currency expert, the current wave of animosity towards the USD is neither the first or the last wave of “dollar hatred”. In the last few decades, the dollar dominance has survived a severe financial crisis, balance of payments deficit, a pandemic and subsequent inflation.

With some of the biggest economic players in the world allied against it, the question is if the dollar will survive the most recent round of dollar hatred.

Towards de-dollarization?

As we move from a unipolar to a multipolar world, will we also move to a multipolar currency world?

According to experts in the field like Zoltan Pozsar and the aforementioned Joseph W. Sullivan, the number of initiatives and the speed of the development is so substantial that the position of the dollar will be undermined.

Other experts point to the weaknesses of the yuan – the low global market cap and China’s closed economy. While a new currency might threaten the dollar in the long run, it will most likely require decades of stable performance for investors to see it as a viable alternative to the dollar. Just look at the euro, which still hasn’t convinced investors after two and a half decades.

In that perspective, the immediate threat to the dollar might come from within the US. President Biden recently managed to stay clear of the debt ceiling, but the internal political polarization threatens the historic stability of the dollar. The upcoming elections might well add to the polarization and unpredictability that has characterized American politics in recent years.

There’s no currency ready to dethrone the dollar, but a number of initiatives and events – internal and external to the US – are shaking it. Now that the alliances have been carved out, the currency competition might become one of the determining factors for the world order of the 21st century.