Could a new currency be set to challenge the dominance of the dollar? Perhaps, but that may not be the point.
In August, South Africa will host the leaders of Brazil, Russia, India, China and South Africa – a group of nations known by the acronym BRICS. Among the items on the agenda is the creation of a new joint bloc currency.
The summit comes as countries across the world are confronting a changing geopolitical landscape that is challenging the traditional dominance of the West.
And while the BRICS countries have been seeking to reduce their reliance on the dollar for more than a decade, Western sanctions on Russia after its invasion of Ukraine have accelerated the process.
At the same time, rising interest rates and the recent debt-ceiling crisis in the United States have raised concerns among other nations about their dollar-denominated debt and the demise of the greenback should the world’s leading economy ever default.
Still, a new BRICS currency faces major hurdles before becoming a reality even as the bloc seeks to develop new ideas to shake up global affairs.
With 88% of international transactions conducted in US dollars, and the greenback accounting for 58% of global foreign exchange reserves, its dominance is indisputable. Yet de-dollarization in international trade and finance has been accelerating since Russia’s invasion of Ukraine.
The BRICS nations have been pursuing a wide range of initiatives to decrease their dependence on the dollar. During the past year, Russia, China and Brazil have turned to greater use of other currencies in their cross-border transactions.
All the BRICS countries have been critical of the dollar’s dominance for different reasons.
Moscow has been championing de-dollarization to ease the pain from sanctions after Russian banks were unable to use SWIFT, the global messaging system that enables transactions. The West also froze Russia’s US$330 billion in reserves last year.
Meanwhile, the 2022 election in Brazil reinstated Luiz Inácio Lula da Silva as president. Lula is a longtime proponent of BRICS who previously sought to reduce Brazil’s dependence on and vulnerability to the greenback.
He has reenergized the group’s commitment to de-dollarization and the creation of a new Euro-like currency. The Chinese government is also clearly concerned with the dollar’s dominance, labeling it “the main source of instability and uncertainty in the world economy.”
Beijing directly blamed the US Federal Reserve’s interest rate hike for causing turmoil in the international financial market and substantial depreciation of other currencies. Together with other BRICS countries, China has also criticized the use of sanctions as a geopolitical weapon.
The appeal of de-dollarization and a possible BRICS currency would be to mitigate such problems. But experts in the US are deeply divided about its prospects.
US Treasury Secretary Janet Yellen believes the dollar will remain dominant as most countries have no alternative. Yet a former White House economist sees a way that a BRICS currency could end dollar dominance.
Although such talk has gained momentum, there is limited information on various models under consideration by members of the bloc.
The most ambitious path would be something similar to the Euro, the single currency adopted by 11 member states of the European Union in 1999. But negotiating such an agreement would be difficult given the complex political dynamics within BRICS.
And for a new currency to work, the bloc would need to agree to an exchange rate mechanism, have efficient payment systems, and a well-regulated, stable and liquid financial market.
To achieve this status, BRICS would need a strong track record of joint financial management to convince others that the new currency was reliable.
For now, a version of the Euro is unlikely. None of the BRICS nations involved show any desire to discontinue their local currencies.
Rather, the goal appears to be to create an efficient integrated payment system for cross-border transactions as the first step and then introduce a new currency.
Building blocks for this already exist. In 2010, the BRICS Interbank Cooperation Mechanism was launched to facilitate cross-border payments between the bloc’s banks in local currencies.
Since then, they have been developing “BRICS pay” – a payment system for transactions among the bloc without having to convert local currency into dollars. As more countries express an interest in joining BRICS, the group is likely to scale its de-dollarization agenda.
To be sure, some of the bloc’s most ambitious past initiatives to set up major projects to parallel non-Western infrastructures have failed. Big ideas like developing a credit rating agency and creating a BRICS undersea cable never materialized.
And de-dollarization efforts have been struggling both at the multilateral and bilateral levels.
In 2014, when the BRICS countries launched the New Development Bank, its founding agreement outlined local currency financing plans. Nine years later, the bank was still heavily dependent on the dollar for its survival.
Local currency financing represents around 22% of the bank’s portfolio, although its new president hopes to increase that to 30% by 2026.
Similar challenges exist in bilateral de-dollarization pursuits. Russia and India have sought to develop a mechanism for trading in local currencies. This would enable Indian importers to pay for Russia’s cheap oil and coal in rupees.
But talks were suspended after Moscow cooled on the idea of rupee accumulation. Despite the barriers to de-dollarization, the determination of the BRICS to act should not be dismissed – the group has been known for defying expectations in the past.
Differences among the five countries exist but the bloc has managed to develop joint policies and survive major crises such as the China-India border clashes and the war in Ukraine.
BRICS nations have also deepened their cooperation, invested in new financial institutions, and broadened the range of policy issues.
It now has a huge network of interlinked mechanisms that connect governmental officials, businesses, academics, think tanks, and other stakeholders across countries.
Even if there is no movement on the joint currency front, there are multiple issues on which BRICS finance ministers, as well as central bankers, regularly coordinate. And the potential for developing further financial collaboration is particularly strong.
No doubt, talk of a new BRICS currency is an important indicator of the desire of many nations to diversify away from the dollar. But I believe in focusing on the risks misses the forest for the trees.
A new global economic order will not emerge out of a BRICS currency or de-dollarization happening overnight. But it can potentially emerge out of the bloc’s commitment to coordinating their policies and innovating – something this currency initiative represents.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.