De-Dollarisation - What does BRICS mean for the Global Economy?
What is BRICS?
BRICS refers to the trading bloc made up of some of the largest developing nations in the world, including Brazil, Russia, India, China, and South Africa. Accounting for 40% of the world's population and a further 25% of the global economy, this ‘informal club’ serves as the primary challenger to the pre-eminent powers of the US and its Western allies.
During last month's BRICS summit in Johannesburg, the bloc admitted Saudi Arabia, Argentina, United Arab Emirates, Egypt, Iran, and Ethiopia, as its first new members in 13 years. During this meeting they also ‘left the door open’ for future enlargement, addressing the other countries who showed interest in joining.
What is De-dollarisation?
De-dollarisation is defined as the ‘process of moving away from the world’s reliance on the U.S. dollar (USD) as the chief reserve currency’. While the USD remains dominant, from 2001 to 2023 the USD has declined from as high as 70% of global currency reserves down to 59%.
While it is unexpected for the USD to lose its footing in the short term, geopolitical developments such as BRICS could undermine its future positioning.
Reasons Fuelling De-dollarisation?
The main two reasons underpinning de-dollarisation speculation are :
- Geopolitical Shifts: The expanding presence of BRICS against the backdrop of COVID-19 and the Russo-Ukrainian crisis has seen a shift to global influence. In April, Brazilian president Luiz Inacio Lula da Silva questioned the need for USD-dependent trade, and earlier, a Russian official hinted at the creation of a BRICS currency. These events signal heightened confidence amongst BRICS nations as a global power shift occurs. J.P. Morgan’s, Alexander Wise suggests ‘The risk of de-dollarisation, which is a periodically recurrent theme throughout post-war history, has returned into focus due to geopolitical and geostrategic shifts’
- Uncertainty Surrounding the US: Whether it be trade sanctions, inflation, or banking crises, the question marks surrounding the USD have gotten larger over the past 2 years. With notable trade sanctions against Russia, China, Iran, and Venezuela, the US has ‘made some countries wary about being too dependent on the greenback’. Further, unthinkably high inflation levels in the US have brought the stability of its economy, and by extension its currency, to address. Such instability is exacerbated by the banking crises of March - April 2023 where three reputable regional banks all deteriorated in rapid succession.
Is De-dollarisation Feasible?
With the possible emergence of a BRICS currency, speculated to be backed by gold, questions surrounding its feasibility have to be asked. To create this currency, nations would have to unite on a set of common standards that govern their practices. While in theory, this may sound simple, the diverse range of cultures, economic structures, political movements, and government directions would make such a task difficult.
Further, this requires nations to give up controls of their monetary policy, of which has its pitfalls. Within the European Union, when Greece and Italy were in critical fiscal positions, more stable nations such as Germany had to step in and bail them out. This united monetary policy means ‘stronger’ nations, namely China, would have economic trajectories tied to smaller and less stable countries such as Egypt, ranked 2nd in global debt crisis risk by Bloomberg. Due to China’s stringent monetary controls, it is unlikely such an option would be viable.
A more plausible option for BRICS is an international convergence upon a singular currency. It would make sense for this currency to be that of the ‘strongest’ BRICS nation, which is China. Such a shift has been seen in the oil market where ‘sales are now being transacted in non-dollar currencies such as the Renminbi’.
However, the willingness of smaller nations to link policy decisions to movements of the Chinese economy also comes into question.
Further questions have to be asked about its practical implementation, in which tens of thousands of importers, exporters, borrowers, lenders, and traders would have to individually shift their currency usage.
The Most Likely Outcome?
While it is unlikely that a BRICS currency will transition to the leading global currency, a shift to some extent in global currency reserves is likely. J.P. Morgan suggests a ‘partial de-dollarisation will occur, where the ‘Renminbi assumes some of the current functions of the dollar among non-aligned countries and China's trading partners.’
In the near term however, the USD will continue to dominate FX and trade movements, with it being ‘on one side of almost 90% of global forex transactions’.
Ultimately, the key takeaway should be the increased presence of developing nations through BRICS, and their intentions to challenge preeminent global powers to form a more equitable global order.
What is BRICS?
BRICS refers to the trading bloc made up of some of the largest developing nations in the world, including Brazil, Russia, India, China, and South Africa. Accounting for 40% of the world's population and a further 25% of the global economy, this ‘informal club’ serves as the primary challenger to the pre-eminent powers of the US and its Western allies.
During last month's BRICS summit in Johannesburg, the bloc admitted Saudi Arabia, Argentina, United Arab Emirates, Egypt, Iran, and Ethiopia, as its first new members in 13 years. During this meeting they also ‘left the door open’ for future enlargement, addressing the other countries who showed interest in joining.
What is De-dollarisation?
De-dollarisation is defined as the ‘process of moving away from the world’s reliance on the U.S. dollar (USD) as the chief reserve currency’. While the USD remains dominant, from 2001 to 2023 the USD has declined from as high as 70% of global currency reserves down to 59%.
While it is unexpected for the USD to lose its footing in the short term, geopolitical developments such as BRICS could undermine its future positioning.
Reasons Fuelling De-dollarisation?
The main two reasons underpinning de-dollarisation speculation are :
- Geopolitical Shifts: The expanding presence of BRICS against the backdrop of COVID-19 and the Russo-Ukrainian crisis has seen a shift to global influence. In April, Brazilian president Luiz Inacio Lula da Silva questioned the need for USD-dependent trade, and earlier, a Russian official hinted at the creation of a BRICS currency. These events signal heightened confidence amongst BRICS nations as a global power shift occurs. J.P. Morgan’s, Alexander Wise suggests ‘The risk of de-dollarisation, which is a periodically recurrent theme throughout post-war history, has returned into focus due to geopolitical and geostrategic shifts’
- Uncertainty Surrounding the US: Whether it be trade sanctions, inflation, or banking crises, the question marks surrounding the USD have gotten larger over the past 2 years. With notable trade sanctions against Russia, China, Iran, and Venezuela, the US has ‘made some countries wary about being too dependent on the greenback’. Further, unthinkably high inflation levels in the US have brought the stability of its economy, and by extension its currency, to address. Such instability is exacerbated by the banking crises of March - April 2023 where three reputable regional banks all deteriorated in rapid succession.
Is De-dollarisation Feasible?
With the possible emergence of a BRICS currency, speculated to be backed by gold, questions surrounding its feasibility have to be asked. To create this currency, nations would have to unite on a set of common standards that govern their practices. While in theory, this may sound simple, the diverse range of cultures, economic structures, political movements, and government directions would make such a task difficult.
Further, this requires nations to give up controls of their monetary policy, of which has its pitfalls. Within the European Union, when Greece and Italy were in critical fiscal positions, more stable nations such as Germany had to step in and bail them out. This united monetary policy means ‘stronger’ nations, namely China, would have economic trajectories tied to smaller and less stable countries such as Egypt, ranked 2nd in global debt crisis risk by Bloomberg. Due to China’s stringent monetary controls, it is unlikely such an option would be viable.
A more plausible option for BRICS is an international convergence upon a singular currency. It would make sense for this currency to be that of the ‘strongest’ BRICS nation, which is China. Such a shift has been seen in the oil market where ‘sales are now being transacted in non-dollar currencies such as the Renminbi’.
However, the willingness of smaller nations to link policy decisions to movements of the Chinese economy also comes into question.
Further questions have to be asked about its practical implementation, in which tens of thousands of importers, exporters, borrowers, lenders, and traders would have to individually shift their currency usage.
The Most Likely Outcome?
While it is unlikely that a BRICS currency will transition to the leading global currency, a shift to some extent in global currency reserves is likely. J.P. Morgan suggests a ‘partial de-dollarisation will occur, where the ‘Renminbi assumes some of the current functions of the dollar among non-aligned countries and China's trading partners.’
In the near term however, the USD will continue to dominate FX and trade movements, with it being ‘on one side of almost 90% of global forex transactions’.
Ultimately, the key takeaway should be the increased presence of developing nations through BRICS, and their intentions to challenge preeminent global powers to form a more equitable global order.
