How long will the dollar remain the world’s currency?

The BRICS countries are preparing for the creation of a new gold-backed currency, to be discussed at the BRICS meeting in Johannesburg on 22-24 August. Could the new currency challenge the dominance of the dollar? Perhaps, but that is not the point.

In August 2023, South Africa will host the leaders of Brazil, Russia, India, China and South Africa – the group of countries known by the acronym BRICS. Among the issues on the agenda is the creation of a new single BRICS currency.

It is clear why talk of a BRICS currency is gaining momentum. The BRICS summit comes at a time when countries around the world are facing a changing geopolitical landscape that challenges traditional Western dominance. And while the BRICS countries have been seeking to reduce their dependence on the dollar for more than a decade, Western sanctions against Russia over the situation in Ukraine have accelerated this process.

Meanwhile, rising interest rates and the recent debt ceiling crisis in the US have caused other countries to worry about their dollar debt and the demise of the dollar if the world’s leading economy ever defaults.

Nevertheless, the new BRICS currency faces serious obstacles before it becomes a reality. But what the currency debate really shows is that the BRICS countries are keen to discover and develop new ideas on how to shake up international relations and effectively coordinate policies around these ideas.

The impetus for dedollarisation?

Since 88% of international transactions are conducted in US dollars and the dollar accounts for 58% of global foreign exchange reserves, the global dominance of the dollar is undeniable. Nevertheless, de-dollarisation – or a reduction in the economy’s dependence on the US dollar for international trade and finance – has accelerated since the start of the SWOT in Ukraine.

The BRICS countries are implementing a wide range of initiatives to reduce their dependence on the dollar. Over the past year, Russia, China and Brazil have increased their use of non-dollar currencies in their cross-border transactions. Iraq, Saudi Arabia and the United Arab Emirates are actively exploring alternatives to the dollar. And central banks have sought to shift most of their foreign exchange reserves from dollars to gold.

All of the BRICS countries have criticised the dollar’s dominance for different reasons. Russian officials have advocated de-dollarisation to ease the pain of sanctions. Because of the sanctions, Russian banks cannot use SWIFT, the global messaging system that allows banking transactions. And last year, the West froze $330 billion worth of Russian reserves.

Meanwhile, Lula da Silva has been reinstated as president in Brazil’s 2022 elections. Lula is a long-time supporter of the BRICS, which has previously sought to reduce Brazil’s dependence on the dollar and its vulnerability. He has reinvigorated the group’s commitment to de-dollarisation and talked about creating a new euro-like currency.

The Chinese government has also made clear its concerns about the dollar’s dominance, calling it “a major source of instability and uncertainty in the global economy”. Beijing explicitly blamed the Fed’s interest rate hike for causing turmoil in the international financial market and devaluing other currencies. Along with other BRICS countries, China has also criticised the use of sanctions as a geopolitical weapon.

The appeal of de-dollarisation and a possible BRICS currency is to mitigate such problems. Experts in the US are deeply divided over its prospects. US Treasury Secretary Janet Yellen believes that the dollar will remain dominant, as most countries have no alternative. However, the former White House economist sees how a BRICS currency could end the dollar’s dominance.

Currency ambitions

While talk of a BRICS currency is gaining momentum, options for the format are limited. The most ambitious route would be something like the euro, the single currency adopted by the 11 member states of the European Union in 1999. But negotiating a single currency would be difficult, given the asymmetry of economic power and complex political dynamics within the BRICS. And for the new currency to work, the BRICS will need to agree on an exchange rate mechanism, have efficient payment systems and a well-regulated, stable and liquid financial market. To achieve global currency status, the BRICS will need good experience in co-managing the currency to convince others of its credibility.

A BRICS version of the euro is still unlikely; none of the countries involved want to give up their local currency. Rather, the aim is, as a first step, to create an efficient integrated payment system for cross-border transactions and then introduce a new currency.

The preconditions for this already exist. In 2010 the BRICS Interbank Cooperation Mechanism was launched to facilitate cross-border payments between BRICS banks in local currencies. BRICS pay, a payment system for transactions between BRICS countries without converting local currencies into dollars, is being developed. There has also been talk of a BRICS cryptocurrency and of strategically agreeing on the development of digital currencies by central banks to ensure currency interoperability and economic integration. As many countries have expressed interest in joining BRICS, the group is likely to expand its de-dollarisation programme.

From BRICS vision to reality

Certainly some of the group’s most ambitious past initiatives to create major BRICS projects for parallel non-Western infrastructures have failed. Big ideas such as a BRICS credit-rating agency and a BRICS submarine cable have never materialised.

And de-dollarisation efforts have failed both multilaterally and bilaterally. In 2014, when the BRICS countries created the New Development Bank, its founding agreement stated that its operations could provide funding in the local currency of the country in which the operation was conducted. Nevertheless, in 2023, the bank’s survival is still heavily dependent on the dollar. Local currency financing accounts for around 22 per cent of the bank’s portfolio, although its new president hopes to increase this proportion to 30 per cent by 2026.

Similar problems exist in bilateral dedollarisation. Russia and India had sought to develop a mechanism for trade in local currencies that would allow Indian importers to pay for cheap Russian oil and coal in rupees. However, the talks were put on hold after Moscow cooled to the idea of rupee accumulation.

Despite the obstacles to de-dollarisation, the BRICS’ determination to act cannot be discounted – the group has been notorious for failing to live up to expectations in the past.

Despite many differences between the five countries, the bloc has managed to develop joint policies and survive major crises, such as the border clashes between China and India in 2020-2021 and the situation in Ukraine. The BRICS is deepening its cooperation, investing in new financial institutions and constantly expanding the range of policy issues it deals with.

It now has a huge network of mechanisms that link government officials, businesses, academics, think tanks and other stakeholders in different countries. Even if there is no movement on the joint currency front, there are many issues on which BRICS finance ministers and central bank governors regularly coordinate, and the potential for developing new financial cooperation is particularly great.

There is no doubt that talk of a new BRICS currency is in itself an important indicator of many countries’ desire to diversify away from the dollar. However, one can lose sight of the forest for the trees here. A new global economic order will not emerge from a new BRICS currency or de-dollarisation overnight. But it could potentially happen against the backdrop of the BRICS’ commitment to coordinating their policies and innovations, which is what this currency initiative represents.

There has been talk for years about the dollar losing its status as the world’s main currency. Do you think that the creation of a single BRICS currency will lead to a weakening of the dollar’s role?

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