De-dollarisation, a distant dream: How a common BRICS currency has bumpy road ahead

The much-hyped idea—forget a launch—about a gold-backed BRICS currency has died without a whimper for now. As the economic bloc, comprising Brazil, Russia, India, China and South Africa, concluded its 15th summit in Johannesburg on Thursday, introducing a currency to counter the dollar wasn’t even on the agenda. From an informal club created as BRIC—an acronym coined by then-Goldman Sachs chief economist Jim O’Neill considering the economic potential of Brazil, Russia, India and China in 2001—at Russia’s initiation in 2009, the grouping has come a long way. The bloc accounts for more than 40 per cent of the world population and has a global GDP of 31.5 per cent, more than the G7’s. Considering the economic power and potential of BRICS, whose members are also part of the G20, the idea of a common currency gained traction in the last few months to prompt some experts to conclude that the dollar’s dominance could end one day. Dollar’s weaponisation unites emerging economies More than 40 countries—from Iran, Saudi Arabia and UAE to Argentina, Bolivia and Kazakhstan were keen to join BRICS before the summit. In the first expansion in more than a decade, the bloc allowed Iran, Saudi Arabia, UAE, Egypt, Ethiopia and Argentina to join from January 1, 2024. BRICS is increasingly becoming an attractive club for developing and emerging economies, which feel that the West, particularly the United States (US) with its dollar, dominates world trade and other major global financial institutions. The dollar has dominated other currencies for the last 80 years and became the global principal reserve currency after World War II. The US often uses the dollar’s international influence to sanction enemy states as it is used in more than 80 per cent of global trade. After Iran, the most recent example was Russia following its invasion of Ukraine in 2022, prompting President Vladimir Putin to announce during the 14th BRICS summit that an “international reserve currency” was in the works. The same year, the US imposed restrictions on exports of semiconductor technology to China. Besides, dollar fluctuations can destabilise developing and emerging economies. If the greenback rises, it can suck investment out of other nations or increase the cost of repaying dollar-denominated loans or imported products. In a July study titled Emerging Market Economies Bear the Brunt of a Stronger Dollar, the International Monetary Fund said that the dollar’s strengthening in 2022 to a 20-year high “disproportionately” affected emerging economies. For example, a 10 per cent dollar appreciation, linked to global financial market forces, “decreases economic output by 1.9 per cent after one year and this drag lingers for two-and-a-half years”. An appreciation in the dollar also affects global current account balances—the overall size of deficits and surpluses across countries. The IMF study showed that a 10 per cent rise in the dollar’s value is “associated with a decline in global current account balances by 0.4 per cent of world GDP after one year”. In 2020, global current account balances increased to 3 per cent from 3.5 per cent in 2021. The consternation of several countries in Asia, the Middle East, Africa and South America is understandable. They want independence from the US financial system and seek an alternative currency for trade, investment, borrowing or reserves. Last week, Chen Xiaodong, the Chinese ambassador to South Africa, told the media that the “traditional global governing system has become dysfunctional, deficient and missing in action” and the BRICS is “increasingly becoming a staunch force in defending international justice”. The Ukraine war has further polarised the world with the US seeking the support of developing economies, like India, against Russia despite the deep military and economic ties between New Delhi and Moscow. BRICS opposes the US pressure to take sides in the Ukraine war. “Countries in the South don’t want to be told who to support, how to behave and how to conduct their sovereign affairs. They are strong enough now to assert their respective positions,” Anil Sooklal, South Africa’s ambassador-at-large for Asia and BRICS, recently said referring to the Russia-Ukraine war. “Countries are being forced to take sides.” Making a valid point, Sooklal said, “The major markets are now in the Global South … but we are still on the margins in terms of global decision-making.” Saudi Arabia has already announced that it is open to trading in other currencies and the dollar. In a virtual address to the Johannesburg summit, Putin said that the way to de-dollarisation is “irreversible” and “gaining pace”. Brazilian President Luiz Inacio Lula da Silva, who is against using the dollar for trading between countries that don’t use it, proposed a common currency at the summit for trade and investment between the bloc’s members. He advocated a BRICS currency to increase “our payment options and reduce our vulnerabilities”. Advantages of a BRICS currency The possibility of a BRICS gold-based currency gained momentum with Russia spearheading its development to counter the US. When BRICS foreign ministers met in June, South Africa’s Naledi Pandor said that the grouping’s New Development Bank would seek options to replace the dollar. A hypothetical currency? If BRICS nations start trading in a new currency, they could challenge the dollar. For example, China and Russia are already trading in yuan but Moscow keeps the proceeds of the bilateral trade in dollar-denominated assets—the only way to source imports from other nations using the dollar. However, as the BRICS membership increases and its members start using a common currency, Russia wouldn’t need to keep the bilateral trade proceeds in dollars and can source the rest of its imports using the new currency. A new currency would help BRICS in a self-sufficient international trade unlike the euro, which is defined by territorial borders. For instance, Brazil could trade with South Africa using the new currency. As more countries join the bloc, its members would be inclined to produce a broader range of goods that will be traded in the BRICS currency, not the dollar. If a new currency is adopted, BRICS members must have assets in gold—since it will be backed by the precious metal. But since gold is a non-yielding asset, it doesn’t pay a dividend to investors, who prefer bonds. However, investors would prefer gold if real interest rates are low or negative, markets are volatile and geopolitical uncertainty spikes. In fact, the central banks of India, China, Singapore and Turkey started hoarding gold following the Ukraine war and sanctions on Russia by purchasing a staggering 1,136 tonnes. After the European Union, the US and other G7 countries sanctioned Russia’s central bank to prevent it from accessing around $300 billion in reserves held abroad, the global demand for gold zoomed to an 11-year high of 4,741 tonnes in 2022 from 3,678 tonnes in 2020. According to asset manager Invesco, China and Turkey accounted for nearly 20 per cent of these purchases. From 50 per cent of central banks holding part of their gold reserves domestically in 2020, the figure is expected to rise to 74 per cent in five years. The Reserve Bank of India’s gold reserves peaked at 794.64 metric tonnes in the 2023 fiscal from 760.42 metric tonnes in 2022. Why the idea wasn’t on BRICS agenda? Despite the valid arguments for de-dollarisation of the international financial and trading system and Russia leading the charge against the greenback, a common currency wasn’t on the BRICS agenda in Johannesburg. Strangely, Sooklal, who had protested the sidelining of emerging economies in global decision-making a week before the summit, had said in July, “There has never been any talk of a BRICS currency; it’s not on the agenda.” Sooklal’s dichotomy was unexplainable. “BRICS started a process that has been expedited due to the conflict and the unilateral sanctions,” he added. “The days of a dollar-centric world are over; that’s a reality,” he said. However, neither the process has progressed nor the dollar’s dominance has been over. Even external affairs minister S Jaishankar had discounted the idea of a BRICS currency at a press conference earlier last month. “We’ll have to see what we will discuss at the BRICS meeting because there are many other issues—but there is no idea of a BRICS currency. Currencies will remain a national issue for a long time to come.” Is the idea of a common currency a mere bluff and impractical? Several issues must be sorted out before the bloc agrees on a common currency—like a uniform set of standards and values by harmonising financial rules and regulations, which is difficult to achieve considering the animosity between China and India following the eastern Ladakh stand-off. Beijing and New Delhi haven’t been able to end the stalemate despite 19 rounds of Commander-level talks. Like the US dominates world trade and global financial institutions due to its No. 1 economic status and the dollar’s superiority, China would dominate BRICS. According to most recent IMF data, China’s share in BRICs GDP at market rates has rocketed from 47 per cent in 2001 to 73 per cent and in trade from 55 per cent to 69 per cent. A central bank for operationalising the currency, which will depend on the yuan, will be dominated by China—a situation India doesn’t want. Like South African central bank governor Lesetja Kganyago said in July, a common currency needs “a banking union”. “You will have to get a fiscal union; you’ve got to get macroeconomic convergence. Importantly, you need a disciplining mechanism for the countries that fall out of line with it. Plus, they will need a common central bank. Where does it get located?” Standard Bank Group CEO Sim Tshabalala mentioned the differences over the lack of consensus on a common currency during the summit in his address to hundreds of captains of industry from the BRICS member countries and 40 other nations. “Participants also debated the question of whether a BRICS currency is possible or desirable with strong views expressed both for and against and little consensus reached.” Without referring to such a currency, he reminded the audience to be “realistic about the necessary characteristics of an international reserve currency” that would take years to establish. “These include being a currency issued by a central bank with very high credibility in the implementation of monetary policy—being the currency of a state or supranational entity, with an equally strong track record on fiscal policy and meeting its debts, freely available in large quantities in many jurisdictions and full convertibility at all times,” he said. A BRICS currency will probably meet the fate of the Euro, which never seriously challenged the dollar. From 1999 to 2019, the dollar dominated trading in the Americas at 96 per cent, in Asia at 74 per cent and in other continents at 79 per cent. When it comes to oil and other commodities, the dollar will continue to dominate. Even if an expanded BRICS uses a common currency, its members will use the dollar to determine the value of commodities. Most countries will keep their reserves safe in dollars. Besides, the original five members starkly differ in trade and growth. Except for China and India, Russia, Brazil and South Africa are stagnant commodity exporters. Russia was the weakest performer last year with Brazil and South Africa struggling without strong commodity prices. Ironically, O’Neill termed the idea “ridiculous” and “embarrassing” earlier this month. “It’s just ridiculous. They’re going to create a BRICS central bank? How would you do that? It’s embarrassing almost,” he told the Financial Times. “Quite what they attempt to achieve beyond powerful symbolism, I don’t know,” he added. Coming from a veteran economist who coined the term ‘BRIC’ shows the difficult road ahead for a common currency. “BRICS has never achieved anything since they first started meeting [2009],” he said. He also pointed out that the China-India relationship is one of the major hurdles to a common currency. “It’s a good job for the West that China and India never agree on anything because if they did, the dollar’s dominance would be a lot more vulnerable.” Stressing that China should better its ties with India, he said, “I often say to Chinese policymakers that forget your endless historical battles and try to invite India to share the leadership on some big issues because then the world might take you a bit more seriously.” In June, O’Neill had said China and India “can’t even really agree on basic things like a peaceful border. I mean, how on earth can people seriously believe these guys are going to introduce a shared currency? It’s amusing. Sorry, I just think it’s fanciful”. The writer is a freelance journalist with two decades of experience and comments primarily on foreign affairs. Views expressed in the above piece are personal and solely those of the writer. They do not necessarily reflect Firstpost_’s views._ Read all the  Latest News,  Trending News,  Cricket News,  Bollywood News, India News and  Entertainment News here. Follow us on  Facebook,  Twitter and  Instagram.