Still a long way to go for BRICS countries to ‘de-dollarise’ and establish their own reserve currency

As the BRICS heads of state and government gather this week for the Johannesburg summit, the issues of a BRICS currency and the addition of new members will be at the top of the agenda, as announced by South Africa’s President Cyril Ramaphosa during the Paris Summit for a New Global Financing Pact.

The unprecedented scale and reach of sanctions imposed on Russia by the US and its Western allies in response to its “special military operation” in Ukraine have rejuvenated the bloc because of the increased worry of falling victim to similar risks among non-Western countries, and accelerated the search for alternative trade settlement methods to reduce their vulnerability to such risks.

BRICS offers a platform for developing countries to ventilate their issues and criticise decisions made by Washington institutions.

As a result, “de-dollarisation” is heard in almost all conversations on the BRICS summit. Furthermore, the weaponisation of the dollar and the continuing trade wars between the US and China have also aggravated tensions and pushed China to seek the security of its financial assets away from US Treasury bonds.

For US foreign policy strategists facing a geopolitical climate underpinned by the eastward shift of gravity of the centre of the global economic system, keeping the dominance of the dollar as a reserve currency is crucial to maintaining their country’s leadership on the world scene. 

It is mainly through the power of the dollar in global commodity trade that the US keeps its ranking at the top of the GDP hierarchy, as China has already surpassed it in 2014 in terms of real value of output measured by purchasing power parity (according to IMF data).

Any attempt at de-dollarisation by any entity or any group of nations can therefore expect to be met with a fierce fightback aimed at preserving American primacy and associated privileges in the global financial system.

Over the past two decades, de-dollarisation has slowly but steadily held the US currency from regaining the overwhelming power that it held in the global financial markets in the 1970s, with the share of the dollar as a reserve currency falling from 72% in 2001 to 59% in 2023.

The euro remains a distant second at a steady 20% and forms no real threat to the US dollar. The British pound, the Japanese yen and the Chinese renminbi are also reserve currencies, but their share is considerably lower than that of the US dollar.

In parallel with the slow decreases in reserve percentage, some attempts were undertaken to bypass the US dollar in bilateral trade settlements, but so far with little success.

One of the most notable examples of such attempts was the Sino-Japanese direct yen-yuan trade agreement concluded in 2012, with the aim to boost the countries’ bilateral trade by eliminating third-party currency transaction costs.

The Democratic Party of Japan-led government that had reached the deal lost the general elections in September of the same year and Prime Minister Yoshihiko Noda was replaced by US-educated Shinzo Abe of the Liberal Democratic Party, who shelved the implementation indefinitely.

The use of own currencies – or the announced creation and possible future launch of a BRICS currency for mutual trade settlement – runs the risk of facing the same fate in the face of complex geopolitical and trade flow dynamics.

The use of bilateral currencies that eliminate the need for third-party currencies in mutual trade settlement offers new possibilities to broaden the scope of trade flows among BRICS members. The resultant savings from reduced transaction costs could be substantial.

Recently, India and UAE initiated a bilateral currency swap to reduce their dependence on the US dollar. China has extended bilateral currency swaps with South Africa. At the current volumes of trade among BRICS partners, currency swaps may offer the most practical benefits.

However, BRICS countries with huge trade deficits would sit with huge reserves of the other countries’ currencies, which might not be of much use if they cannot buy goods and services from these countries.

Indeed, for a BRICS currency to be a viable alternative settlement mechanism, not only do intra-BRICS trade flows need to be substantially higher than the current levels, but the sum of all mutual trade deficits within the bloc also needs to be relatively low.

With large mutual trade deficits, payment for extra-BRICS imports from countries where the dollar is the dominant settlement mechanism may hamper the efforts to reduce the dollar demand. Currently, the trade deficit between India and China, for example, is $108-billion for 2022, while India’s deficit with Russia is $43-billion for 2023.

A more balanced trade is the one between China and Russia, with a Russian trade surplus of only $1.7-billion.

For South Africa, trade flows with fellow BRICS member Brazil are relatively meagre, and even though China remains its number one export partner, the combined volume of its exports to the US and its allies Germany and Japan is more than 2.5 times the value of exports to China. 

On the plus side, South Africa imports more from BRICS members China and India than from the US and Germany.

The addition of new members with strong intra-BRICS trade combined with low deficits such as Indonesia and Saudi Arabia would strengthen the viability of the BRICS currency.

With the economic weights of these aspiring members, the BRICS bloc would be substantially stronger than G7 countries and could assert its voice in global affairs if its members manage to resist external pressure and reach political cohesion.

For that, the current border frictions between India and China would need to be resolved quickly enough, while simultaneously free trade agreements would need to be negotiated without undue delay to give substance to the demand for the new currency.

The creation of a BRICS reserve currency still has a long way to go as long as the bloc partners are not connected through overarching free trade agreements that can serve as a basic cooperation and convergence framework leading progressively to a monetary union and a common currency.

Despite its important role in financing BRICS members, the New Development Bank established in 2015 is not in a position to serve as a central bank that can issue the BRICS reserve currency and manage its monetary policy in the absence of a monetary union framework.

It is also unlikely that any of the BRICS countries would feel the appetite to surrender their monetary sovereignty to a common central bank.

Without a clear framework and policy convergence to overcome these crucial obstacles, BRICS currency and de-dollarisation will remain elusive. DM

Dr Alexis Habiyaremye is a senior researcher in the South African Research Chair (SARChI) in Industrial Development, School of Economics, University of Johannesburg.

Dr Magdalene Kasyoka Wilson is a senior lecturer in the School of Economics College of Business and Economics at the University of Johannesburg. She is an assistant editor of the Journal of Economic and Management Issues.