BRICS Currency vs Dollar’s Dominance
De-dollarization is a topic of discussion. Alexander Babakov, the deputy chairman of the Russian State Duma, claimed last month in New Delhi that Russia is now leading the creation of a new currency.
What is BRICS?
The BRICS nations—Brazil, Russia, India, China, and South Africa—will use it for international trade. Brazil’s president, Luiz Inacio Lula da Silva, weighed in a few weeks later in Beijing. He claimed that he constantly asks himself “why all countries have to base their trade on the dollar” before going to bed.
The idea that the dollar’s dominance is secure because it is the one-eyed currency in a world of blind competitors like the euro, yen, and yuan is complicated by these developments. According to one economist, “China is a prison, Japan is a nursing home, and Europe is a museum.” He is correct. A currency issued by the BRICS, however, would be unique. It would be comparable to the formation of a new union of emerging dissidents who now collectively outweigh not only the current hegemon, the United States but also the entire G-7 weight class taken as a whole on the basis of GDP.
Also read: What we need to understand about de-dollarization
It’s nothing new for foreign governments to want to break free from their dependence on the US dollar. Since the 1960s, rumors about a desire to dethrone the dollar have been making headlines in foreign capitals. But the discussion hasn’t yet produced any action. According to one statistic, the dollar now accounts for 84.3 percent of international trade, compared to the Chinese yuan’s mere 4.5 percent. Additionally, there are reasons to doubt anything the Russian government says given its propensity for using lies as a tool of statecraft. Many practical questions remain unanswered, including how much support Babakov’s proposal has from the other BRICS countries.
However, the likelihood of a BRICS-issued currency succeeding is novel, at least in terms of economics. Such a currency could replace the U.S. dollar as the reserve currency of the BRICS nations, regardless of how tentative the plans for it are and how many practical questions remain unanswered. This fictitious currency actually has the potential to usurp, or at least shake, the dollar’s throne, unlike rivals previously proposed, like a digital yuan.
Let’s call the hypothetical currency the bric.
BRICS Currency vs Dollar’s Dominance
The BRICS would remove a barrier that currently stands in the way of their efforts to break free from dollar hegemony if they restricted all international trade to the bric. These initiatives now frequently come in the form of bilateral agreements to denominate trade in non-dollar currencies, such as the yuan, which is currently the primary trade currency between China and Russia. The obstacle? The remainder of Russia’s imports cannot be sourced from China. In order to purchase the remainder of its imports from the rest of the world, which still uses the dollar for trade, Russia tends to want to park the proceeds of bilateral transactions between the two countries in assets denominated in dollars.
However, Russia wouldn’t need to keep the profits from bilateral trade in dollars if China and Russia only conducted business using the bric. After all, Russia would purchase the remainder of its imports using brics rather than dollars. finally, we have de-dollarization.
Is it plausible to assume that the BRICS will only conduct trade within the BRICS? Yes.
To begin with, they could cover all of their import expenses on their own. The BRICS collectively had a $387 billion trade surplus in 2022, also known as a balance of payments surplus, largely due to China.
The BRICS would also be in a position to achieve a level of international trade independence that has eluded other currency unions in the world. A BRICS currency union would likely produce a wider variety of goods than any other currency union because, unlike any currency union before it, its members would not be bound by shared territorial borders. The Eurozone, which will have a $476 billion trade deficit in 2022, and other currency unions characterized by geographic concentration have painfully failed to achieve a level of self-sufficiency. This is an artifact of geographic diversity.
However, the BRICS would not even have to trade exclusively among themselves. Countries from all over the world would probably be willing to conduct business with the BRICS because each member is an economic powerhouse in its own region. Brazil’s importers could still buy shrimp from Thai exporters if Thailand felt compelled to use the bric to transact business with China, keeping Thai shrimp on Brazilian menus. Exporting goods to a third country, and then re-exporting them from there, is another way to get around trade restrictions between two nations.
That is frequently a result of new trade restrictions, such as tariffs. Instead of engaging in bric trade, the United States could boycott bilateral trade with China, allowing its children to continue playing with toys made in China that were later exported to the United States from nations like Vietnam.
Today’s Russia provides a glimpse of what could be the BRICS countries’ consumers’ worst nightmare if their governments adopted “bric or bust” trade terms. The isolation of Russia’s economy is a top priority for the American and European governments. Nevertheless, some products from the United States and Europe continue to enter Russia. Consumer costs are substantial but not disastrous. With today’s Russia serving as an upper limit of how bad it could get, officials in BRICS nations will become more and more adamant about their desire to de-dollarize, making the risk-reward tradeoff of de-dollarization appear more and more alluring.
The BRICS would also need safe assets to be parked in when not being used for trade in order to replace the dollar as a reserve currency among the BRICS. Is it possible to envision the bric discovering these? Yes.
First off, the BRICS would not necessarily need to attract any foreign capital at all because they currently have a surplus in their trade and balance of payments. In order to effectively coerce and subsidize the market into existence, BRICS governments could use a combination of carrots and sticks to persuade their own households and businesses to invest their savings in bric assets.
However, assets denominated in bric would likely possess qualities that would make them unusually alluring to foreign investors. Despite its risk-reducing value as a diversifier, one of the main disadvantages of gold as an asset class for international investors is that it does not pay interest. Interest-paying assets denominated in the bric would resemble interest-paying gold since the BRICS reportedly intend to back their new currency with gold and other metals with intrinsic value, such as rare-earth metals. It’s an unusual trait, that one. It is one that might attract investors who desire both the diversifying qualities of gold and the interest-bearing property of bonds to the assets denominated in the bric.
Sure, bric bonds would need to be viewed as having a relatively low risk of default for them to simply serve as an interest-bearing version of gold. Furthermore, there is a non-trivial default risk on the debt even of sovereign governments in the BRIC nations. However, these dangers might be reduced. Debt maturities could be shortened by bric-denominated debt issuers to reduce risk. Investors may have faith in a South African government to repay you “30 from now” if the measure of time is in days, but not if it is in years. Prices might also just make up for that risk for investors. Market participants would probably succeed in getting higher yields if they demanded them for purchasing bric assets.
That’s because BRICS governments would be willing to pay for the viability of the bric.
To be fair, the bric would bring up a long list of difficult practical issues. The bric, which is primarily used for international trade rather than domestic circulation within any one nation, would make it more difficult for national central bankers in BRICS nations to carry out their duties. Work would also be required to establish a supranational central bank to govern the bric, similar to the European Central Bank. These are difficulties, but they’re not necessarily insurmountable.
The geopolitics of the BRICS nations is also complicated. However, a BRICS currency would stand for collaboration in a specific area where interests are similar. There may be conflicting security interests between nations like China and India. However, there is a de-dollarization interest shared by China and India. Additionally, they can compete in some areas while working together in others.
The bric would reduce the size of the dollar’s domain rather than snatching the crown from its head. Even if the BRICS stopped using dollars, most of the world would still do so, and the world monetary system would shift from being unipolar to being more multipolar.
Many Americans have a tendency to bemoan the dollar’s declining influence abroad. Before they complain, they ought to pause. For the United States, the dollar’s global influence has always been a double-edged sword. Although it does give Washington the option of adding sanctions to its arsenal of foreign policy instruments, the increased value of the dollar raises the price of American goods and services abroad, reducing exports and costing the country jobs. The edge that cuts against America at home, however, has been getting sharper, while the edge that cuts against America’s enemies abroad, has been getting duller.
According to comments from 2014 at least, Jared Bernstein, the current head of the White House Council of Economic Advisors, is one of those who recognises that the dollar’s global role comes at the expense of domestic jobs and export competitiveness. But as the U.S. economy deteriorates in comparison to the rest of the world, these costs have only risen over time. America’s ability to use financial sanctions to try to advance its security interests is one of the conventional advantages of the dollar’s global role. However, Washington believes that competition with state actors like China and Russia will increasingly define American security interests in the twenty-first century.
If that is the case, and if the rocky history of sanctions against Russia is any indication, sanctions will lose more and more of their effectiveness as a tool of American security policy.
The BRICS will experience a range of strange reactions if the bric takes the place of the dollar as the reserve currency. Applause is expected to be heard loud and often from anti-imperialist BRICS officials, some Senate Republicans, and U.S. Vice President Joe Biden’s top economist. Donald Trump, the former president of the United States, and the American national security establishment, with whom he frequently spars, are both expected to receive criticism. In either case, the dollar’s hegemony is unlikely to end suddenly; however, the introduction of the bric would signal the start of a gradual decline.
