BRICS Currency to End Dollar Dominance, After Asian Currency & Africa Currency Was Unsuccessful

At the 16th BRICS summit in Kazan, Russia unveiled a symbolic BRICS banknote, stirring debate over ending the US dollar's dominance. Russian President Vladimir Putin emphasized that the dollar is being used as a 'weapon,' but BRICS isn't rejecting the currency entirely, instead preparing alternatives for restricted access. India took center stage at the summit, advocating for local currency settlements among BRICS nations. The unveiling of the BRICS currency bill, featuring the Taj Mahal, is a way the BRICS bloc is trying to challenge the US dollar's global financial power.

The banknote, which features the flags of Brazil, Russia, India, China, and South Africa, symbolizes the collective ambitions of these nations to explore alternatives to the US dollar in cross-border transactions. This development highlights the growing effort within BRICS to establish a more independent economic system that is less reliant on Western financial structures.

Putin’s Stance on DeDollarization: Not Rejection, But Preparedness

Russian President Vladimir Putin made it clear at the summit that the BRICS nations are not outright rejecting the US dollar but are preparing alternatives if access to it continues to be restricted. “The dollar remains the most important tool in global finance but using it as a political weapon undermines trust in the currency,” Putin remarked. He stated that BRICS will not fight against the dollar but will seek alternative methods if the situation necessitates it. “If they block us, we’ll find alternatives,” he added, underscoring the pragmatic approach BRICS is adopting.

Putin’s remarks echo within the larger context of sanctions imposed on Russia, which have significantly limited its access to global financial systems dominated by the US dollar. By exploring alternative currencies for trade, BRICS seeks to mitigate the risks posed by such political measures. According to Putin, using the US dollar as a weapon will accelerate the transition to new financial structures, hinting that the BRICS bloc is moving toward a “fairer economic system.” Dilma Rousseff, Chair of the New Development Bank (NDB), echoed Putin’s concerns, stating that the dollar has been used as a political tool, which undermines its reliability in global finance.

BRICS Endorses Local Currency Settlement for Cross-Border Trade

On Oct 23, 2024, the BRICS nations formally endorsed the settlement of cross-border payments in local currencies, marking a significant step toward reducing dependency on the US dollar. The Kazan Declaration, issued at the summit’s conclusion, stated, “We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners.” This initiative is seen as part of the broader BRICS Cross-Border Payments Initiative, which promotes voluntary, non-binding use of local currencies.

The Path Toward a BRICS Currency: A Symbolic Start

While the symbolic BRICS banknote has raised expectations of a common currency, officials remained cautious, focusing instead on integrating financial markets and establishing infrastructure for local currency settlements. Reports have suggested that the BRICS banknote could be called “the unit,” with backing possibly coming from gold and member currencies. However, these remain speculative, and no official announcements have been made regarding the launch of a BRICS currency.

The leaders also tasked their finance ministers and central bank governors to explore further steps in local currencies and financial integration. One significant outcome of the summit was the plan to set up an independent cross-border settlement infrastructure, tentatively called BRICS Clear. This system aims to complement existing financial market mechanisms while promoting the use of local currencies for international trade.

BRICS - Challenges Ahead and Vision for a Fairer Economic System

While the endorsement of local currencies marks a bold move, the road ahead for BRICS is not without challenges. Putin noted that the speed of transitioning to a fairer economic system depends on abandoning “someone else’s rules and platforms.” The longer BRICS operates within the current Western-dominated financial structure, the longer the turbulence, according to Putin.

The summit also saw BRICS collectively reject the European Union’s Carbon Border Adjustment Mechanism, calling it a “protectionist measure” under the guise of environmental concerns. This stance highlights the bloc’s shared goal of resisting what they view as Western economic dominance while promoting a more equitable global financial system.

While the symbolic BRICS banknote and discussions of a common currency may signal a desire for change, the immediate focus remains on enhancing local currency settlements and building the necessary financial infrastructure. As the BRICS nations work toward these goals, they continue to challenge the status quo of global finance, seeking alternatives to dollar hegemony without directly opposing it.

The strengthening of correspondent banking networks within BRICS and enabling settlements in local currencies, in line with the BRICS Cross-Border Payments Initiative (BCBPI), “which is voluntary and non-binding.” The alliance that initially included Brazil, Russia, India, China, and South Africa when it was founded in 2009 has expanded to embrace Iran, Egypt, Ethiopia, the United Arab Emirates, and Saudi Arabia.

Last year, India and the United Arab Emirates signed agreements on the use of local currencies for cross-border transactions. Indian and Russian central banks are also working to set up a mechanism to expand local currency trade. A push for settlement in domestic currency also comes as Russia and China have actively reduced the use of dollars in bilateral trade after the US excluded Russia from the international payment system ‘SWIFT’ following the invasion of Ukraine.

Meanwhile, the IMF’s (International Monetary Fund) Currency Composition of Official Foreign Exchange Reserves (COFER) indicates a gradual decline in the US dollar’s share of central bank and government foreign reserves. However, the reduced role of the US dollar over the past two decades has not been matched by corresponding increases in the shares of the other “big four” currencies — the US Dollar, Euro, Yen, and Pound, according to the IMF.

A New Currency

The idea of creating a unified BRICS currency has been discussed within the bloc for some time, driven by the desire to reduce dependence on the US dollar. However, significant challenges make such a move difficult in the near future.

First, the BRICS founding nations—Brazil, Russia, India, China, and South Africa—are diverse in their economic structures and monetary policies. Establishing a single currency across such varied economies would require extensive coordination and compromise. Each country has its own national interests, fiscal policies, and inflation control mechanisms, which complicates the idea of a shared currency.

While a formal BRICS currency may be delayed, discussions about creating digital financial systems have gained traction. A potential BRICS digital currency could allow the bloc to bypass Western financial networks, offering a new way to conduct trade without relying on the US dollar.

Some proposals suggest backing such a currency with gold, which could provide stability and reduce risks associated with fiat currency inflation. However, no formal timeline has been set for the creation of this digital currency, and discussions remain largely speculative for now.

For decades, the US dollar has enjoyed unparalleled dominance as the world's leading reserve currency. According to the US Federal Reserve, between 1999 and 2019, the dollar was used in 96% of international trade invoicing in the Americas, 74% in the Asia-Pacific region, and 79% in the rest of the world.

According to the Atlantic Council, the US dollar is used in approximately 88% of currency exchanges, and 59% of all foreign currency reserves held by central banks. Due to its status as the most widely used currency for conversion and its use as a benchmark in the forex market, almost all central banks worldwide hold dollars. Additionally, the dollar is used for the vast majority of oil trades. Although the dollar's reserve currency share has decreased as the euro and yen have gained popularity, the dollar is still the most widely used reserve currency, followed by the euro, the yen, the pound, and the yuan.

The potential impact of a new BRICS currency on the US dollar remains uncertain, with experts debating its potential to challenge the dollar's dominance. However, if a new BRICS currency was to stabilize against the dollar, it could weaken the power of US sanctions, leading to a further decline in the dollar's value. It could also cause an economic crisis affecting American households. Aside from that, this new currency could accelerate the trend toward de-dollarization.

Nations worldwide are seeking alternatives to the US dollar, with examples being China and Russia trading in their own currencies, and countries like India, Kenya, and Malaysia advocating for de-dollarization or signing agreements with other nations to trade in local currencies or alternative benchmarks.

While it is unclear whether a new BRICS currency would inspire the creation of other US dollar alternatives, the possibility of challenging the dollar's dominance as a reserve currency remains. As countries continue to diversify their reserve holdings, the US dollar could face increasing competition from emerging currencies, potentially altering the balance of power in global markets.

However, a recent study by the Atlantic Council's GeoEconomics Center released in June 2024 shows that the US dollar is far from being dethroned as the world's primary reserve currency. "The group's 'Dollar Dominance Monitor' said the dollar continued to dominate foreign reserve holdings, trade invoicing, and currency transactions globally and its role as the primary global reserve currency was secure in the near and medium term," reported Reuters.

How Will BRICS Currency Impact Economy?

A potential shift toward a new BRICS currency could have significant implications for the North American economy and investors operating within it. Some of the most affected sectors and industries include: -

·      Oil and gas

·      Banking and finance

·      Commodities

·      International trade

·      Technology

·      Tourism and travel

·      The foreign exchange market

A new BRICS currency would also introduce new trading pairs, alter currency correlations and affect market volatility, requiring investors to adapt their strategies accordingly.

Africa Currency & Asian Currency

In 2019, Malaysia’s prime minister Mahathir Mohammad proposed a Pan-Asian currency based on gold. This was in line with 2009 case when Libya’s President Muammar Gaddafi proposed a Pan-African currency, the gold dinar, echoing the gold dinar coins of the Arab Caliphates that once ruled North Africa. But, unrest in Libya in 2011 put an end to such ambitions. “Gaddafi had a vision and strong belief of uniting Africans. He believed a united Africa would speak with one voice at international fora such as the United Nations and manage to bargain and be seen as an equal partner.” Sultan Kakuba, a political scientist at Kyambogo University in Uganda said.

Kakuba claimed Gaddafi was seen as an enemy of Western countries because of his longing for a “United States of Africa” which he pushed for many years, hoping one day to have a unified African government. Gaddafi believed this was the only way that Africa could develop without Western interference”. Rumours are abound that uprising against Gaddafi was orchestrated to teach him a lesson and ensure the continued dominance of US Dollar in Africa. Just look what has happened to Libya since then. Gaddafi’s death led to nearly a decade of civil war, a prosperous nation with high Per Capita Income and GDP with over US$ 150 billion in forex reserve, is now a poor country afflicted with ethnic division that can’t access its assets abroad. It is said Saddam Hussein of Iraq too had proposed an Arab Currency based on gold.

In 2009, the head of China’s central bank, Zhou Xiaochuan, wrote: “An international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules. Its adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies, as is the case in the current system, is a rare special case in history.” Although Xiaochuan did not say how these goals might be achieved, we can assume it would be done exactly the same way that Mao Zedong ended hyperinflation in China in 1950: by fixing the yuan to gold.

In Moscow, leading intellectual Sergey Glazyev recently proposed a “Gold Ruble 3.0,” referencing the gold-based Rubles of both the Czarist era, and then the Soviet Union. Russian media reported that Russia and Iran are in talks to establish a gold-based cryptocurrency for international trade. All this was a wake-up-call to all governments worldwide that held dollar or euro foreign reserves, or used the SWIFT banking system. The time had come to set up alternative arrangements.

Today, a “gold standard” proposal comes with a cloud of fallacious ideas, having to do with the “balance of payments” and other odd notions. It is best understood as simply a means to stabilize currency value. Today, many countries’ currencies are linked to the euro, including Bulgaria, which uses a euro currency board. A gold standard system is the same basic idea, but using gold instead of a floating fiat euro. All of today’s electronic payment systems would remain the same.

This was the principle that all of the Western World (and actually the Eastern World as well) followed for the past 600 years since the Renaissance. It worked very well. Gold was indeed tolerably stable in value, in the short and long term — stable enough that countries that stuck to it suffered no ill consequences as a result. They may have suffered for other reasons: Mao’s Great Leap Forward (1958-1962) resulted in mass starvation, even though the yuan remained linked to gold. But gold never failed to serve its role as a reliably stable standard of value.

This is now evident from the above that since the collapse of Soviet Union; USA as the sole superpower has used its status as a pre-eminent power to unilaterally impose economic sanction on countries. As US Dollar is the reserve currency in the world since 1945, it allows USA to arm-twist companies and countries into accepting its unilateral actions thereby ensuring that the nations facing its sanctions (not UN) are unable to do business with anyone. The BRICS currency is an attempt to restore parity and ensure USA is unable to impose unilateral sanctions and even if it can thanks to alternative measures available countries are able to continue their business transactions in whichever way they want with other nations.

Also, it is important to note that BRICS is an attempt by the global south to become a force to reckon with and stand up against the economic might of the west. All this is expected to have important strategic and geo-political ramifications for participating BRICS countries, as they can now challenge the economic might of the west. But it remains to be seen as to how does the economically powerful west or first world countries react to BRICS formations and these nations band together. Already Donald Trump has threatened that if he becomes the next president in the upcoming elections in the USA in November 5, 2024; he will impose sanctions on any country that attempts to replace US Dollar as reserve currency. If that happens it will have a tremendous strategic and geopolitical impact on relations between countries of Global North and Global South, mostly affecting their population. Let’s see how this pans out in the future.