Common BRICS Currency: A Step Towards De-dollarization
Divyanshu Dhar
Assistant Manager @ AdaniConneX - Adani Group | MBA- SIBM Bengaluru (2022-24) | Exchange Student- RSB, France
BRICS, a grouping of 5 developing economies: Brazil, Russia, India, China and South Africa, which has overtaken the G7 countries in share of world PPP GDP, with BRICS now contributing to 31.5% of global GDP led by China and India, now seem to be in the process of talks to take their economic and trading cooperation to the next level by establishing a new medium of payment that does not defend and reduce the dependence on US Dollar or Euro.
As per the remarks made by Mr. Alexander Babakov, Deputy Chairman of the Russian State Duma, the issuance of a BRICS currency shall be discussed and deliberated upon in the next BRICS Summit scheduled to be held in Durban, South Africa in August this year. Mr. Babakov indicated that this new BRICS currency shall be secured by gold and other commodities such as rare earth elements. These remarks are significant since these were made just a few days before the host of the next BRICS Summit, South Africa, sent some of its officials to Russia to discuss “recalibration of the global order”.
To avoid US sanctions due to the Russia-Ukraine war, Russia has already moved towards using the Chinese Yuan for its bilateral trade. In Russia, Chinese Yuan has replaced the US Dollar as the most traded currency. For the first time in February, the Chinese Yuan surpassed the US Dollar in monthly trading volume and this difference further increased in the month of March as per the data compiled by Bloomberg. India too seems to be trying to move away from the US Dollar and recently about 18 countries including Russia, UAE and Sri Lanka have agreed to trade in Indian Rupee. Moreover, Brazil and China are also trading in Chinese Yuan with each other.
The question now arises is: Why are countries moving towards de-dollarization? De-dollarization, in simple terms involves reducing the dominance and influence of US Dollar in the global market.
While the US Dollar became the official global reserve currency in 1944 following the decision made at the Bretton Woods Agreement and provided a much required boost to the global economy following World War 2, it also gave the United States huge and disproportionate amount of influence over other economies.
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Quite often in the past, sanctions against other countries have been used by the US as a means of achieving their own objectives and foreign policy goals. Recently, as a consequence of the Russia-Ukraine war, Russia’s $300 billion of foreign currency reserves were frozen and Russian banks were expelled from the Swift International Payment System. Many countries, concerned by this weaponization of the US Dollar have started considering alternate routes to surpass US sanctions and reduce dependence on US Dollar, triggering the de-dollarization of international trading order.
De-dollarization could mitigate the impact of changes in political and economic order in the United States on other economies. Moreover, de-dollarization can help countries reduce their exposure to interest rate changes as well as to currency fluctuations and it may result in improved economic stability and reduced risk of financial crisis for other economies.
Now it is important to consider and analyze what impact could it have on BRICS member nations to adopt a common currency.
A common BRICS currency could result in reduced dependence on US Dollar and stabilization of their economies. Usage of a common BRICS currency would mean increased consumer confidence for an investor in BRICS countries. It may lead to an increase in spending as well as propel economic growth.
It is still quite early to state what overall impact could the introduction of a common BRICS currency have on the mighty US Dollar as about 90% of the global trade is done in US Dollar and about 60% of the global foreign exchange reserves are held in it, but one might also point towards the emergence of Euro which was initially restricted to internal trading within the European Union but over time emerged as a strong global currency. ?
Retired Telecom Professional
1 年I'd expect that some of the trade between BRICS-members to be denominated in the new currency but certainly not all. While true that BRICS cumulative GNP is high, I'd be surprised that the BRICS-currency denominated trade between them will amount, in the long run, to more than 10% of the world trade and central banks reserves. It is also quite very unclear what does "backed by gold and rare earths" exactly means. I doubt Brazil could sent 10T of the new currency to Moscow in exchange for, say, 10 tons of gold. Let us also recall that US' gold reserves are twice as high as Russia+China's combined and that rare earths are not really rare, but rather very environmentally-unfriendly to extract. The more I look at this the more it looks like a typical Putin delusion which the rest entertains with the vague hope something may come out of it. Don't sell your USDs yet..