DOLLAR in distress, Dollar in trouble, de-throwing of dollar, end of Dollar era and reign of Dollar coming to an end. These are the hot news these days in the global financial market. Economic wizards and financial experts are forecasting different scenarios. Some painting gloomy future for Dollar and others less worried and some even least bothered about the launching of a new BRICS currency in August 2023 at the next meeting of 30 or so new powerful economic block in South Africa, headed by China and Russia. The way BRICS membership is growing rapidly is, of course, cause of worry for the US and Europe and Dollar lovers but to what extent the new currency will dent the role of Dollar which has hitherto has been the dominant currency, globally, remains to be seen. Only time will decide what happens next.
Last month, in New Delhi, Alexander Babakov, Deputy Chairman of Russia’s State Duma, said that Russia is now spearheading the development of a new currency. It is to be used for cross-border trade by the BRICS nations: Brazil, Russia, India, China and South Africa. Weeks later, in Beijing, Brazil’s President, Luiz Inàcio Lula da Silva, chimed in. “Every night,” he said, he asks himself “why all countries have to base their trade on the dollar.” These developments complicate the narrative that the dollar’s reign is stable because it is the one-eyed money in a land of blind individual competitors like the euro, yen and yuan. BRICS-issued currency would be different. It’d be like a new union of up-and-coming discontents who, on the scale of GDP, now collectively outweigh not only the reigning hegemon, the United States, but the entire G-7 weight class put together.
Murmurs in foreign capitals about a desire to dethrone the dollar have been making headlines since the 1960s. But the talk has yet to turn into results. By one measure, the dollar is now used in 84.3 percent of cross-border trade—compared to just 4.5 percent for the Chinese yuan. And the Kremlin’s habitual use of a narrative as an instrument of statecraft offers grounds for skepticism about anything Russia says. On a litany of practical questions, like how much the other BRICS nations are on board with Babakov’s proposal, answers remain unclear, at least for now.
Nevertheless, at least based on the economics, a BRICS-issued currency’s prospects for success are new. However early plans for it are and however many practical questions remain unanswered, such a currency really could dislodge the U.S. dollar as the reserve currency of BRICS members. Unlike competitors proposed in the past, like a digital yuan, this hypothetical currency actually has the potential to usurp, or at least shake, the dollar’s place on the throne.
If the BRICS is used only for international trade, they would remove an “impediment” that now thwarts their efforts to escape dollar hegemony. Those efforts now often take the form of bilateral agreements to denominate trade in non-dollar currencies, like the yuan, now the main currency of trade between China and Russia. The impediment is Russia which is unwilling to source the rest of its imports from China. So after bilateral transactions between the two countries, Russia tends to want to park the proceeds in dollar-denominated assets to buy the rest of its imports from the rest of the world, which still uses the dollar for trade. If China and Russia each used only the new BRICS currency for trade, Russia would not have any need to park the proceeds of bilateral trade in dollars. After all, Russia would be using BRICS currency, not dollars, to buy the rest of its imports. Is it realistic to imagine the BRICS using only the BRICS currency for trade? The answer is Yes. For starters, they could fund the entirety of their import bills by themselves. In 2022, as a whole, the BRICS ran a trade surplus, also known as a balance of payments surplus, of $387 billion – mostly thanks to China.
The BRICS would also be poised to achieve a level of self-sufficiency in international trade that has eluded the world’s other currency unions. Because a BRICS currency union—unlike any before it—would not be among countries united by shared territorial borders, its members are likely to be able to produce a wider range of goods than any existing monetary union. An artefact of geographic diversity, that is an opening for a degree of self-sufficiency that has painfully eluded currency unions defined by geographic concentration, like the Eurozone, also home to a $476 billion trade deficit in 2022.
But the BRICS would not even need to trade only with each other. Because each member of the BRICS grouping is an economic heavyweight in its own region, countries around the world are likely to be willing to do business in the “BRICS” currency. If Thailand felt compelled to use the bric to do business with China, Brazil’s importers could still purchase shrimp from Thai exporters, keeping Thailand’s shrimp on Brazil’s menus. Goods produced in one country can also circumvent trade restrictions between two countries by being exported to and then re-exported from, a third country. That’s often a consequence of new trade restrictions, like tariffs. If the United States boycotted bilateral trade with China rather than trade in the BRICS, its children could continue to play with Chinese-made toys that became exports to countries like Vietnam and then exports to the United States. A preview of something like the absolute worst-case scenario that could befall consumers in BRICS countries if their governments adopted “BRICS or bust”, terms of trade expected from today’s Russia. On the other hand, American and European governments have prioritized Russia’s economic isolation.
Nevertheless, some US and European goods will continue to flow into Russia. The costs for consumers are real, but not catastrophic. As officials in BRICS countries grow increasingly emphatic about their desire to de-dollarize, with today’s Russia as an upper bound of how bad it could get, the risk-reward trade off of de-dollarization will look increasingly attractive. Though some economists and financial analysts seem to be skeptical of the success of new BRICS currency, the fact remains that the idea has shaken the Dollar from the roots.
—The writer is Former Civil Servant and Consultant (ILO) & International Organisation for Migration.
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