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While there is efforts by the BRICS countries to reduce their dependency on the US dollar as the global reserve, experts cast doubt whether the process of de-dollarisation could actually be help ease payment friction.
There has been much speculation recently regarding efforts by the BRICS countries (Brazil, Russia, India, China and South Africa), to reduce their dependence on the US dollar, the global reserve currency, a process known as de-dollarisation.
Much of the speculation was fuelled by utterances from leaders of two of the countries themselves at the BRICS summit in August. Notably Brazil’s president, Luiz Inancio Lula da Silva called for the BRICS to create a common currency for trade and investment. While Russia’s president, Vladimir Putin, said: “The objective, irreversible process of de-dollarisation of our economic ties is gaining momentum.”
But how serious a threat do their efforts pose to the dominance of the US dollar? Indeed, what is the real intention of the BRICS in the short and long-term? Are they planning to develop a new currency that will seek to end dollar dominance? What about developing an alternative payments system to rival Swift? Moreover, what might be the effects of de-dollarisation on payment friction? Would it really be a negative?
Certainly, the BRICS are slowly becoming a force to be reckoned with, led by China. As the UNCTAD document, the BRICS Investment Report points out: “The changing absolute and relative economic weights of the BRICS economies over the past decade have transformed the shape of the global economy.
“According to the World Bank, the share of BRICS in global GDP [Gross Domestic Product] grew from 18% in 2010 to 26% in 2021, with increases in all years during the period.”
Of course, the stand-out performer among the BRICS is China which, as the report stresses, accounted for 70% of BRICS GDP in 2021.
Reducing dollar dependence
Costas Lapavitsas, professor of economics at the School of Oriental and African Studies (SOAS) believes that the BRICS desire for a way to reduce their dependence on the US dollar is perfectly logical. That’s because the reserve status of the US dollar places an enormous restraint on their domestic monetary policies, given the need to stabilise their foreign exchange rates by targeting inflation and also hold dollars in reserve.
“It’s in this context that the BRICS development has to be understood,” argues Lapavitsas. “It has been a longstanding demand of developing countries that the global financial architecture should be reformed.
“That’s how you can think of it in terms of policy, it creates policy space for a finance minister. If you give yourself policy space domestically, then you can follow develop strategies far more openly, domestically. That doesn’t mean, however, that it is going to work or that they are going down the right path or that they will succeed, and the world will de-dollarise. It doesn’t mean that at all,” he cautions.
While the BRICS appear to be focused on trading more between each other using national currencies, this is a long way from developing a common international currency. This position was acknowledged by India’s foreign secretary Vinay Mohan Kwatra in August, just prior to the BRICS summit.
He said: “The substantive part of trade and economic exchanges and discussions that have been a part of BRICS discussions, have so far, in a major way, focused on how to increase trade in respective national currencies which […] is considerably different from a common currency concept.”
However, from these limited efforts has grown speculation that they are planning to introduce a currency that will threaten the global dominance of the US dollar. Notably, economist George Magnus gave this aim credibility in an essay entitled, ‘.
This fear was also fuelled by comments from Jim Rickards, an American lawyer, investment banker, media commentator, and author on matters of finance and precious metals. He suggested prior to the BRICS summit that it was likely they would announce the launch of a gold-linked international currency, although he did stress in an interview that it wouldn’t threaten the reserve currency status of the US dollar.
No evidence of BRICS currency
Nevertheless, others argue that there is scant evidence that the BRICS are actively planning any such move in the near future.
Lapavitsas explains: “I think it is an expression of desire and possibly a longer term plan, but they would have to do a lot of very concrete institutional things before it becomes serious and I’ve seen nothing so far – all I’ve seen are just words.
“And the institutional things [to consider, such as]: co-ordination of domestic policies, fiscal and monetary and developmental policies, [and a] method of controlling capital flows at least within the group. When they show me that I will begin to think seriously about whether that can be a realistic option.”
For his part Michael Hudson, professor of economics at the University of Missouri–Kansas City, disputes the very notion that the BRICS are planning to develop a new euro-like currency and argues that all that those countries are trying to do, is use their own national currencies as a means of settlement for trade and investment among themselves, which he views as a positive.
Still, concerns persist in some quarters that the future development of any BRICS currency combined with an attempt to move away from Swift as a payment system could produce trade and payment frictions. The extent to which it might theoretically increase payment friction would depend on the following.
- Liquidity: The availability and liquidity of the currency.
- Exchange rate risk: Fluctuation in the value of a BRICS currency could lead to additional costs for businesses engaged in international trade.
- International acceptance: How likely would it be to be accepted or trusted internationally?
- Banking infrastructure: International payments rely heavily on the banking infrastructure that supports the US dollar, including correspondent banking relationships, clearing systems, and international payment networks. Shifting away from the dollar would require the development of a similar infrastructure.
Magnus points out that despite Chinese efforts to diversify from the Swift international payments system by developing its own platform – Cross-Border Interbank Payments System (CIPS) – the latter still relies on Swift.
He says: “De-dollarisation rolls off the tongue easily enough, but its supporters and advocates do not really know that they are playing with fire.
“We are part of the USD system and it suits us. America’s exorbitant burden is something we don’t have to carry. But disorder and chaos in the global financial system and architecture, such as you allude to, would be chaotic for us too. There is no natural or smooth progression to another payments architecture in which there isn’t a lot of churn and damage.”
Existing payments friction
Arguably, from the BRICS perspective, payments friction already exists under the dominance of the US dollar. In his latest book, ‘The State of Capitalism’, Lapavitsas explains that the US has “repeatedly used access to the dollar as world money for strategic political purposes, for instance by freezing the reserves of several countries, including Iran, Venezuela and Afghanistan”.
“Most conspicuously, the USA froze a large part of the enormous reserves of Russia during the Russo-Ukrainian War in 2022. The actions of the US government left no doubt that the dollar as world money is a cardinal instrument of imperial power for the USA,” he adds.
Furthermore, Lapavitsas argues that the institutional mechanisms of Swift are controlled by the US. “Through Swift, the US controls the banking ‘language’ required for international clearing and settlement and is able to monitor all the relevant transactions. The imperial use of Swift was demonstrated in 2022, when Russian banks were excluded from its facilities, as Iranian banks had been in 2018.”
In a statement on its website, Swift claims it is “neutral” adding that while “sanctions are imposed independently in different jurisdictions around the world, Swift cannot arbitrarily choose which jurisdiction’s sanction regime to follow”.
“Being incorporated under Belgian law it must instead comply with related EU regulation, as confirmed by the Belgian government,” it went on to state.
This could be a reason enough for the BRICS to wish to be a little less reliant on the US dollar and Swift. But, even if there is a long-term desire to do this, how likely is it in the foreseeable future?
While many countries outside of the West would like to have the economic autonomy that the dominance of the dollar arguably prevents, there is scant evidence to suggest the BRICS have any plans, much less the ability, to usurp the dollars role as global reserve currency in the foreseeable future.
Thus, Hudson claims: “Magnus doesn’t understand what the BRICS are doing. […] They are not talking of a new euro-like BRICS currency.”
For his part, Magnus freely acknowledges that “the US, because of its reserve currency status, can and does weaponise its currency and financial structure to penalise others” deliberately causing disruption. Yet, he doubts the BRICS ability to bypass the current system.
No viable alternative
Indeed, Magnus doesn’t even believe there is any viable alternative, as long as the current global balance of payments structure is what it is.
“As long as [countries such as] China, Germany, Japan [and] Korea run up large surpluses, they simply have to invest them [dollar denominated assets such as US treasury bonds] in capital markets that are deep, broad, law-bound and transparent. That’s the simple beginning and end,” Magnus says. “That is why I think the US itself has to be part of the solution to a world in which the USD loses part of its global status.”
While Lapavitsas isn’t enamoured of US dollar dominance, he similarly doesn’t see any chance that the BRICS are likely to usher in an end to it soon.
“It is not going to happen for a long time and for it to happen they have got to take institutional steps which would be very serious,” he says. “Without telling us they are going to take these institutional steps no one can take it seriously.
“When they come close to the institutional steps that they have got to take, they will realise the difficulties. Then they will have to compromise politically, I’d love to see that. I would love to see India and China agree on how to manage the currency. But if you want my opinion it is never going to happen.”
From a long-term perspective, Lapavitsas adds: “This indicates the decline of US hegemony and the weakening ability of the United States to impose its will on others.
“In terms of manufacturing [and] commerce, the US is no number two. In terms of finance, however, it is very much number one. And for common money, that is what matters. The US will not easily be shifted from that.”
Thus, it appears that the growing intra-BRIC trade in local currencies poses no immediate threat to the existing system. Nor, can the blame for the payment frictions that currently exist in international trade be placed at its door.