Daniel O’ Brien: Dethroning the Dollar – BRICS to replace the USD?
From their first summit on June 16th 2009, the emerging economies within BRICS sought to promote economic cooperation and development among member states Brazil, Russia, India, China, and South Africa. The first summit was also the first instance of the BRICS bloc calling for "a stable, predictable and more diversified international monetary system" while being mindful of openly criticizing the US Dollar. If BRICS favored a more subtle approach to expressing their distaste for the US Dollar and the Western-dominated G7 14 years ago, it no longer does. During last year's St. Petersburg International Economic Forum, Russia's State Duma Deputy Chairman Alexander Babakov openly urged for a new financial "system that does not safeguard today's dollar and euro."
Russian economic ambitions have since evolved from words into actions. On April 4th, the Chinese Yuan replaced the US Dollar as Russia's most traded currency, the latest development in a series of moves by BRICS members to de-dollarize following the Russian invasion of Ukraine and the resulting Western sanctions. Four days before Russia's de-dollarization, Brazil and China signed an agreement to replace the US Dollar with the Yuan and Brazilian Real during their bilateral trade. A BRICS de-dollarization has now not become a matter of if but when, and more importantly: what impact would a BRICS de-dollarization have?
Impact of BRICS De-dollarization
Although most would assume that a gradual de-dollarization of the BRICS bloc would lead the US Dollar to devalue, the Yuan's value to appreciate, and a decrease in the USD/CNY currency pair, this is not necessarily true. Unlike the economic ambitions of many Russian political figures who interpret the Yuan's internationalization as a precursor to the Dollar's collapse, in actuality, the Yuan is intrinsically tied to the Dollar. China needs the American currency as a benchmark to keep the Yuan's value stable in offshore markets like Hong Kong. If more countries in the BRICS bloc adopt the Yuan as a reserve currency, more dollar reserves will be needed by China's government to keep the Yuan's value from becoming volatile. As the two currencies work together in a complimentary manner, the Yuan's increased use as a reserve currency will not weaken the Dollar.
A BRICS de-dollarization would similarly affect the exchange rate between the American and Australian Dollar. As the Yuan increasingly becomes adopted as a reserve currency, it will increase in value, resulting in China acquiring more US Dollar reserves, which in turn would enact a decrease in value for the Australian Dollar.
How BRICS could end the Dollar's Reign as the Global Reserve Currency
Nevertheless, even though a BRICS de-dollarization will likely not have the catastrophic consequences for the US Dollar envisioned by Russian politicians, BRICS economies still remain a powerful force in the global economy. As the BRICS contribution to the worldwide GDP rises to 31.5%, surpassing its Western-led rival G7's that has fallen to 30%, the Eastern-led bloc is realizing its power in the global economic stage and actively seeking to expand it. Economies like Bangladesh, Egypt, and the UAE have already joined the BRICS New Development Bank. Iran and traditional US economic allies Saudi Arabia and Mexico are also seeking membership, indicating that even American partners are questioning the US's ability to trade fairly.
With increasing support and influence, the next natural step in the expansion of BRICS would be the creation of an alternative currency that serves the bloc's economic interests by directly rivaling the US Dollar. This currency was already hinted at in a 2009 joint BRICS communique calling for "a stable, predictable and more diversified international monetary system." Fast forward to 2023, plans for a new currency are already underway, according to Russian Ambassador to the BRICS Pavel Knyazev. During the 2022 Shanghai Cooperation Organization, Knyazev revealed that BRICS is "actively studying mechanisms" and the "possibility and prospects of setting up a common single currency," with further details set to be revealed during this year's BRICS Summit in South Africa.
What would a BRICS currency look like?
According to Knyazev's comments, "It doesn't matter whether [the new currency is] a digital Ruble, a digital Rupee, a digital Yuan or some other currency," as long as it serves the united interests of BRICS. The currency will be backed by rare Earth elements like gold and based on a basket of BRICS currencies, including the Brazilian Real, Russian Ruble, Indian Rupee, Chinese RMB Yuan, and South Africa's Rand.
What effect would a BRICS currency have?
BRICS members will benefit the most from such a currency – it is likely to stabilize BRICS economies, increase consumer confidence, enact economic growth, and likely lower unemployment. How will this new currency affect the US Dollar, however?
The BRICS currency is likely to increase competition in the global currency markets. This development would result in less demand for the US Dollar, decreasing its value and, in effect, weakening it. A weaker US Dollar would reduce the exchange rate between the USD and Australian Dollar, rendering the Australian Dollar a stronger currency. This result is still a far cry from Russian ambitions of a destroyed Dollar but is by far the most plausible method for dethroning it.
Could the US Dollar be dethroned?
Nevertheless, a plausible method is different from an effective one. The strength and size of the USA's economy are currently unmatched, resulting in an equally strong world confidence in the currency. This has resulted in an indisputably strong majority of 60% of the world's currency reserves being held in the US Dollar. This is far ahead of the second most commonly held reserve currency, the Euro, which represents a relatively dwarfed 21% of international foreign currency reserves. BRICS currently holds only 10% of the world's currency reserves. A sizeable portion of this is held in USD, which would be a significant amount of currency reserves for the USD to lose, but a determinedly non-catastrophic figure that could still allow the American currency to remain dominant.
Furthermore, the USD dominance in reserve currency enables the American currency's sensational popularity in international finance. More than 70% of all non-European exports are invoiced in the American Dollar, making it the world's most preferred medium of trade exchange. This factor has entrenched it as the leading currency in international banking. As long as most of the world's currency reserves are still held in US Dollars, the USD's popularity as a medium of exchange for trade will likely stay the same.
Finally, as the US imports more goods and services than it exports, the rest of the world holds plentiful securities and banknotes in the US Treasury. This makes it harder for countries to transition out of using the US Dollar. To combat this obstacle, countries could begin using their currencies during trade, much like the recent agreement between Brazil and China. However, this would create a problem for these countries as they have to deal with limitations within their own currencies. The Chinese Yuan, for example, is subject to the strict exchange rate control of the Chinese government. The Yuan can only be exchanged for another currency with restrictions, making it harder for companies to accurately price their goods and services, less competitive in the global market, and the Yuan a less stable and unsuitable choice for international transactions. In addition, further restrictions are imposed on the Yuan regarding its movement in and out of China through regulations like taxes, quotas, and other limitations. This occurrence makes it harder for companies to access the capital they need to expand, which actively hinders trade. It would be hard to imagine why countries would want to entrap themselves within their own limitations when they could simply use a strong currency that is free of government restrictions like the US Dollar. Similarly, it would be equally hard to imagine a BRICS currency that is not subject to government control, as all BRICS members impose capital and exchange rate control on their currencies and are also not freely convertible. Such conditions also make it unlikely that the BRICS currency could have the same level of success as the US Dollar.
The idea of a BRICS currency has incredible potential. In line with Russian claims and inter-BRICS beliefs, there is a general consensus among economists that the "US Dollar plays a far too dominant role in global finance," with Western economists like the Briton Jim O'Neill, the former chief economist of the Goldman Sachs Group Inc. and creator of the BRIC acronym, encouraging the BRICS bloc to de-dollarize and counter the American currency's dominance in a paper featured in the Global Policy Journal. BRICS will continue attempting to replace the US Dollar throughout the coming years, with their envisioned unified BRICS currency being the best attempt at achieving this.
However, the US Dollar is simply too strong to be crippled. At most, the new currency will likely cause the Dollar to devalue, albeit not to a catastrophic extent. The most significant effect of the BRICS currency will be a simple fracturing and division of the global economy alongside geopolitical lines. However, as the issuers will be regimes with authoritarian tendencies that enforce severely limiting restrictions on their currencies, it is hard to imagine BRICS members making concessions in controlling their own individual currencies and the currency's inner workings. This uncertainty is further detrimental to the BRICS currency itself, with the US dollar serving as a much more attractive alternative due to the American liberal monetary trade policy.
Therefore, at best, it would appear that the BRICS currency will not outright dethrone the US Dollar but simply serve as a worthy rival to it.
Daniel O’Brien is a celebrated financial analytical writer and Managing Director at easyMarkets APAC. Throughout his 15-year career, Daniel has accrued vast expertise in investment finance and management while working with international financial institutions, allowing him to assist easyMarkets in providing a secure, transparent, and reliable environment for traders of all experience levels.