As the US weaponises the dollar in the Russian and Iran sanctions, there is increasing desire by other developing countries to seek alternative currencies for trade, investment, and reserves, as well as developing alternative multilateral clearance systems outside of SWIFT.
In the just concluded BRICS summit held in the Russian city Kazan the idea of de-dollarisation found wide appeal amongst the BRICS countries – Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and United Arab Emirates. They all were keen to see the dollar off its perch.
BRICS member states agree: dollar must be dethroned. The push gained tremendous strength after the United States froze Russia’s foreign holdings of U.S.-dollar assets in response to Putin’s move against Ukraine. As the world reserve currency, the dollar is supposed to serve a purely economic function and otherwise be politically neutral. For the most part, that has been true. With this action, the United States announced not just to Russia but to the whole world that dependence on the dollar comes with political risks. Noncompliance could be met with asset seizure.
The goal is clear. In the near term, this group is attempting a currency and trade union to protect itself from sanctions and political interventions from the United States and NATO countries. In the long term, the goal is the creation of a world governed by multipolarity with other options besides U.S. dollar settlement.
This will be the second step in the direction of making the member countries go a single path without any help from others to ensure the economy is not disturbed. Earlier to ensure seamless cooperation, it was decided to work out an investment platform through strengthening the New Development Bank (approved around 100 infrastructure projects worth USD 35 billion) as the key institution for sustainable development of its shareholders; and consider the BRICS Cross-Border Payments Initiative to facilitate interaction between central banks and the use of local currencies to strengthen financial sovereignty and independence, among others.
Critics like Morgan Stanley strategists are of the opinion that there is no competition when it comes to US dollar being the world’s dominant currency, and it is very distant from being dethroned at this point. Strategists have also stressed on the concerns that some of the most-held currency including the Chinese Yuan or the Japanese Yen could eventually dethrone the US dollar as the most dominant currency.
However, China’s yuan, which officials in Beijing have been trying to position as a challenger to the dollar on the world stage, isn’t liquid enough to truly disrupt the dominance. That’s partly due to strict capital controls China has on its currency, which limit the amount of cash that can be taken in and out of the country. To do so, China would need to relax control of its currency and open the capital account. It doesn’t seem likely that Beijing will want to do this anytime soon,
The Kazan Declaration did not mention global dollar dominance but it highlighted alternatives. “We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners,” said the Kazan Declaration.
A International Monetary Fund’s latest growth forecasts shows that BRICS economics are likely to contribute to a bigger share of global growth over the next five years versus G7 economics, which includes the US. China is expected to be the top contributor, accounting for about one-fifth of global growth over the five years. This is a bigger share than all of the G7 countries combined. BRICS member states represent about 45% of the world’s population and 37% of global GDP based on purchasing power parity. They also control 42% of bank foreign exchange reserves.
BRICS has transformed into an emerging centre of power, and it keeps attracting more and more countries as a response to the global turbulence and uncertainty. No doubt, the BRICS’ currency has the potential to end up becoming the significant currency, and disrupt the US dollar’s track record.
The Russian President Putin said that the BRICS group isn’t creating an alternative to SWIFT but is trying to resolve the issues of payments with national currencies. He said the financial messaging systems of Russia’s central banks and other BRICS member states are “sufficient,” so the group is not coming up with a new system.
But Putin’s comments did not surprise anyone because it was a politically correct statement at this stage.
