Could a fresh currency emerge to challenge the dominance of the US dollar? That’s a possibility, but there’s more at play. In August 2023, South Africa will host a summit involving Brazil, Russia, India, China, and South Africa – collectively known as BRICS – where discussions about a new shared currency are on the table.Thank you for reading this post, don't forget to subscribe!
As a scholar familiar with BRICS for over a decade, I can see why the idea of a BRICS currency is gaining traction. The context is a shifting geopolitical landscape challenging Western dominance. The impact of Western sanctions on Russia following its Ukraine invasion has hastened BRICS countries’ efforts to lessen reliance on the dollar.
Simultaneously, concerns are arising globally due to rising US interest rates and the recent debt-ceiling crisis. Other nations worry about their dollar-denominated debt and the potential decline of the dollar if the leading global economy defaults.
Despite these developments, a new BRICS currency faces significant obstacles before becoming a reality. Nevertheless, discussions about currency underscore BRICS nations’ pursuit of new approaches to international coordination and policy innovation.
Is this trend toward de-dollarization gaining momentum? With 88% of international transactions conducted in US dollars and the dollar accounting for 58% of global foreign exchange reserves, its dominance is clear. However, the push for de-dollarization – decreasing reliance on the dollar for trade and finance – has accelerated since the Russian invasion of Ukraine.
BRICS nations have taken various steps to reduce their dollar dependence. In recent times, Russia, China, and Brazil have increased the use of non-dollar currencies in cross-border transactions. Countries like Iraq, Saudi Arabia, and the United Arab Emirates are exploring alternatives to the dollar. Central banks are also diversifying their reserves from the dollar to gold.
All BRICS nations have concerns about the dollar’s dominance for different reasons. For instance, Russian officials advocate de-dollarization to counter sanctions. Sanctions have restricted Russian banks’ use of SWIFT, the global transaction messaging system. Western powers also froze Russia’s $330 billion reserves last year.
In Brazil, the 2022 election brought Luiz Inácio Lula da Silva back to the presidency. Lula supports BRICS and aims to reduce Brazil’s dollar dependence. He’s reinvigorated the group’s commitment to de-dollarization and floated the idea of a new Euro-like currency.
China, too, has expressed unease about the dollar’s dominance, blaming it for instability. Beijing particularly points to the Fed’s interest rate hikes causing turmoil in the global financial market and currency depreciation. China and other BRICS countries criticize sanctions as geopolitical tools.
The attraction of de-dollarization and a potential BRICS currency is to mitigate these issues. Experts in the US disagree on its prospects. Treasury Secretary Janet Yellen believes the dollar will stay dominant due to the lack of alternatives. However, a former White House economist suggests a BRICS currency could end dollar supremacy.
Regarding currency ambitions, while talk of a BRICS currency is growing, information on potential models remains limited. The most ambitious path resembles the Euro – a single currency adopted by some EU states in 1999. But implementing a single currency is complex given BRICS’ economic and political dynamics. To succeed, BRICS needs exchange rate mechanisms, efficient payment systems, and a stable, liquid financial market. A track record of joint currency management is crucial for global currency status.
A BRICS Euro-like currency seems unlikely; members show no intention to abandon local currencies. Instead, the focus is on creating an integrated payment system for cross-border transactions, followed by a new currency introduction.
Foundations for this already exist. The BRICS Interbank Cooperation Mechanism started in 2010 for cross-border payments in local currencies. “BRICS pay” is under development for transactions within the group. Talk of a BRICS cryptocurrency and aligning Central Bank Digital Currency development for interoperability and integration also exists. As interest in joining BRICS grows, de-dollarization efforts are likely to expand.
From vision to reality, past initiatives for major BRICS projects paralleling non-Western infrastructures have often faltered. Ambitious ideas like a BRICS credit rating agency or undersea cable didn’t materialize. De-dollarization faces challenges at both multilateral and bilateral levels.
For example, the New Development Bank, launched by BRICS in 2014, aimed to use local currencies for financing, but in 2023 it heavily relies on the dollar. Bilaterally, Russia and India’s efforts to trade in local currencies stalled after Russia cooled on the idea.
Despite these hurdles, BRICS’ commitment to action shouldn’t be underestimated. The bloc has defied expectations before, weathering crises and fostering cooperation. It’s built extensive mechanisms linking officials, businesses, academics, and think tanks across nations. Even if a joint currency stalls, opportunities for financial collaboration remain.
While talk of a new BRICS currency signals diversification desires, the bigger picture shouldn’t be missed. A new global economic order won’t emerge overnight from a BRICS currency or de-dollarization. However, BRICS’ commitment to coordination and innovation holds potential for a new economic landscape.