This article is a part of the series - Raisina Files 2024
Much has been made of the assertive political posturings regarding ‘de-dollarisation’ during the BRICSa 15th Summit in August 2023 in South Africa. Analysts have variously described the idea as “an economic inevitability” and “political fantasy”, particularly in the case of the mooted BRICS currency.[1] As in most cases where a proposal courts controversy, the reality is likely to settle somewhere in between.
This article seeks to derive clarity amid the sensationalism. It gives a brief overview of dollarisation and the context of the US Dollar as the world’s reserve currency, and offers a perspective on monetary system developments as distinct from mere political rhetorical displays. It argues that rather than debating an alternative reserve currency, attention must be paid to an alternative system of international payments rails. Finally, it offers a perspective on the implications for the Global South, in particular the African economies, whom the BRICS grouping professes to champion.
Dollarisation in Context
‘Dollarisation’ is a broad term that encompasses a number of different elements as it relates to the functioning of economies. Within the context of a country’s domestic activities, dollarisation can refer to either of the following:[2] Financial dollarisation: Substituting local currency assets or liabilities for their foreign currency equivalent, i.e., making dollar-investments or taking on dollar-denominated debt; Real dollarisation: The use of foreign currency to denominate prices and wages; and Transactional dollarisation (currency substitution): The use of a foreign currency as legal tender. First gaining traction in Latin America in the 1970s, real and transactional dollarisation has been used as a tool to stave off the effects of (hyper-)inflation, during which a local currency may lose its ability to act as a credible store of value.[3] In addition to domestic economic challenges, exogenous factors, such as global risk aversion—which implies less international investor demand for emerging economies’ currencies— further encourage financial dollarisation to mitigate domestic vulnerabilities against the impact of cycles.[4] Albeit a response to a weakened local currency, dollarisation on a long-term basis can ironically have the impact of exacerbating the very situation that policymakers intend to solve. In many cases, dollarisation can further erode the use of local currency, which in turn increasingly limits a country’s monetary policy autonomy.[5]This vicious cycle is made worse where the country has foreign currency liabilities (dollar-denominated debt) resulting in a debt burden that can be influenced by economic factors over which the local monetary authorities have limited control.[6]In recognition of these risks, a number of dollarised economies have endeavoured to de-dollarise in an attempt to reclaim monetary autonomy, but as Abdelati (2006) notes,[7] de-dollarisation has historically been difficult to achieve.
As a result of the above, emerging economies are wary of the role of the dollar, both domestically and as it relates to the global economy. The dollar’s international influence is most usefully described through the prism of money’s classical interrelated primary functions:[8]
• medium of exchange (international trade)
• unit of account (commodity price indexation, such as oil and precious metals)
• store of value (central bank reserves)
An alternative global reserve currency—whose time has come, according to some BRICS leaders[9] — would require an erosion of the dominant role the dollar plays in these areas, and the emergence of a credible substitute.
Dollar Disintermediation
Medium of Exchange: According to data from the Bank of International Settlements, the USD is consistently involved in almost half of global foreign exchange transactions.[10] Even where the transaction does not directly involve the USD, it is sometimes used as benchmark for value in an indirect medium of exchange between two nonUSD currency pairs. Indeed, according to some estimates, this kind of exchange intermediation drives nearly 40 percent of USD foreign exchange turnover.[11] Simply put, the USD serves as a kind of monetary lingua franca that facilitates currency exchange across the world. Unit of Account: For the same reason, key global commodities such as gold and crude oil are priced in dollars; as is the vast majority of debt issued on the international capital markets.[12] Moreover, 88 percent of USD-denominated debt has neither a US-domiciled issuer nor borrower.[13] Debt, which after all, is bought and sold on the secondary market by investors just like any other international commodity, is being price-indexed to a universally accepted benchmark. Store of Value: The USD’s dominant position as an international currency is reinforced by its ease of exchange, promoting market liquidity, and its perceived ability to hold value. Traditionally, the dollar has therefore comprised the bulk of central banks’ foreign currency reserves. With the United States’s Gross Domestic Product (GDP) weighing in at only circa 25 percent of the global total, it is evident that the international role of the USD is disproportionate to its country’s economic contribution. As evidenced by the above, the USD is used even where the US is not directly involved. This has led to an expansion of the indirect influence of the US economy on global economic trends—in the 1960s, then French Minister of Financec Giscard D’Estaing termed this the US’s “exorbitant privilege”.[14] For example, continued global demand for dollars as the world’s reserve currency permits the US government to easily finance a growing fiscal deficit.
Pronouncements at the BRICS Summit, particularly from Brazilian President Luiz Inácio Lula da Silva and Russian President Vladimir Putin, left no doubt as to their desire to disintermediate the dollar so that currency utilisation is more appropriately reflective of (and therefore limited to) economic activity and contribution to global output. The beginnings of this trend have already quietly begun. According to data from the International Monetary Fund (IMF), USD as a share of foreign exchange reserves has fallen gradually over time, reaching a 20-year low in late 2022 at 58 percent;[15] in the 1970s, this proportion was as high as 85 percent. The majority share in 2022 comprised a basket of currencies such as Australian Dollar, Canadian Dollar, and Swiss Franc, which have traditionally played a limited role as reserve currencies.[16] Strengthening the case for diversification, the World Gold Council notes an increasing demand from central banks, during 2022 and 2023, for gold reserves—traditionally also a safe haven for savings, at the expense of the dollar.[17] This does indicate that there is a tendency for central banks to adopt a diversification policy vis-à-vis currency reserves away from the dollar, but not necessarily towards a single natural successor. Whereas central banks have increased their Chinese Renminbi holdings, this only accounts for around 25 percent of the shift away from the dollar. Indeed, whereas CNY as a share of central bank reserves rose from negligible in 2015 to 2.6 percent in 2022, and CNY SWIFTd transactions doubled to 2.3 percent, this is still a far cry from the scale of internationalisation that would be required to tilt the world’s reserve currency. Moreover, whereas it is clear that the People’s Bank of China is taking steps to ensure that the renminbi becomes a more internationalised currency,[18] this does not mean that China is willing to assume responsibility for the world’s reserve currency. As Magnus (2023)[19] points out, a number of significant monetary policy reforms would have to be undertaken, such as rendering the renminbi freely and fully convertible, and increasing market transparency. However, the Chinese government and the PBOC have signalled little interest in carrying these out. Furthermore, to support a functioning reserve currency, the Chinese government would need to be able to support the currency’s global liquidity with sufficient institutions such as stand-by mechanisms and reserve facilities, while managing the domestic impact.[20] India and Russia have already experienced difficulties where these institutions do not yet exist—talks to settle bilateral trade in Rupees were suspended in May once Russia’s rupee surplus accumulation reached levels that were “no longer desirable”, due to the currency’s lack of full convertibility. [21]Meanwhile, the proposal for a BRICS currency is far less feasible than it might appear on the surface, given the lack of geographic, economic, or political alignment among the grouping’s disparate members. Moving to a single currency would require all members to surrender a measure of their economic, monetary, and political sovereignty—this is currently anathema to most, as China, Russia and India have historically placed a high political premium on the non-interference of other nation states in their domestic affairs.
Systems and Payments
The removal of the USD as the world’s reserve currency is not only unlikely in the immediate future; it may well even be undesirable by certain BRICS members. A far more interesting proposition, and one with better chances of success in the medium term, is developing alternative channels in financial markets infrastructure. The fact remains that the USD underpins key international financial market infrastructures. Revocation of access can therefore be politicised, as demonstrated by the freezing of US$640 billion in Russian gold and FX reserves as well as the suspension of Russian banks from the SWIFT network following the launch of the war in Ukraine.[22] Rather than assume the role of reserve currency custodians, China and Russia, as well as BRICS allies, seek to disintermediate the dollar from third-party transactions, limiting its influence in non-bilateral affairs. Underlining this, Russian Finance Minister Anton Siluanov noted at the BRICS ministerial meeting in April 2022: “This pushes us to the need to speed up work in the following areas: the use of national currencies for export-import operations, the integration of payment systems and cards, our own financial messaging system, and the creation of an independent BRICS rating agency.”[23] Most of the original five BRICS member countries have sought to evolve their domestic payments architecture, largely in a bid to increase financial inclusion and interoperability at home. Brazil, Russia, India, and South Africa each boast their own domestic interbank payment systems.e China’s UnionPay was officially launched in 2002 as an alternative to Visa and Mastercard and overtook both incumbents in 2015 in terms of card payment value.[24] India’s universal payments interface (UPI) is following suit, and is expanding from a domestic payments network to ensuring that it is an accepted form of payment outside of India, while also offering other countries technical assistance to develop similar domestic payments networks.[25] Where these systems have extended to cross-border payments, they represent challenger systems to global norms. China’s Cross-border Interbank Payment System (CIPS) is designed to provide payment and clearing services cross-border and for offshore renminbi transactions.[26] However, it utilises the SWIFT network as a messaging service, and thus relies upon, rather than challenges, the existing international monetary system.[27] CIPS already facilitates China-Russia trade and there are reportedly plans to link it to Russia’s SPFS, a SWIFT financial messaging service alternative. Whereas SPFS is currently largely limited to domestic usage in Russia, international sanctions against Russia provide a renewed imperative to circumvent current international protocols. The enlargement of the BRICS bloc provides a wider collective of potentially allied members to test the viability of an alternative system of payments and messaging.
Commodity Price Indexation
It is a long-standing irritant to certain BRICS members that commodities are priced in dollars and traded on exchanges located in the West. It is therefore no coincidence that of the six new BRICS members—Saudi Arabia, United Arab Emirates, Iran, Egypt, Argentina, and Ethiopia—three are significant oil producers. Indeed, BRICS+ now constitutes 43 percent of global oil production.[28] The expanded membership provides a natural forum for China and India, two significant oil importers, to increase their universe of receipt for sizeable imports in their own currencies on alternative payments systems if they so choose. China has already entered into several swap agreements, notably with Russia and Saudi Arabia, to facilitate trade settlement in renminbi.[29] During a state visit to Saudi Arabia in December 2022, Chinese President Xi Jinping broached the idea of using the Shanghai Petroleum and Natural Gas exchange as a platform to facilitate renminbi-denominated oil and gas trades.[30] A renminbidenominated trade between CNOOC and France’s Total Energies has already been effected.[31] In seeming confirmation of this movement, immediately following the BRICS Summit, China and Saudi Arabia renewed the existing currency swap agreement and signed a memorandum of understanding to partner on the development of a Central Bank Digital Currency (CBDC).[32]This could well set the scene for exploration into a multi-currency cross-border clearing mechanism.
Impact for African Countries
Cries of dethroning the dollar are wildly premature and perhaps misdirected.[33] Despite the political grandstanding during the 2023 BRICS Summit, rather than seeking to replace the dollar as the world’s reserve currency, they are merely looking at disintermediating it as the currency of reference (real dollarisation). For African economies, political schadenfreude in witnessing the dollar’s gradual decline in favour of alternatives, should not cloud a strategic approach in the face of the instability of a more multipolar world. The universalism of the USD and payment systems such as SWIFT cause the concentration of their control in the hands of a few. The opportunity cost of multiple alternative systems is a fragmentation of the payments architecture and a loss of interoperability. This phenomenon is well-known in the African continent, where there are 32 different instant payment systems.[34] Only further integration will allow the continent to truly develop the rails for meaningful intra-continental trade and economies of scale. Similarly, the development of alternative cross-border payment rails will present a trade-off between optionality and universality, with the potential to render higher transaction costs due to the need for membership of multiple payment systems. Furthermore, with the precedent having been set of the weaponisation of monetary systems architecture in the case of Russia’s exclusion from the SWIFT network in 2022, the politicisation of all such architecture, including alternative channels, is likely to increase. As in the case of Huawei’s 5G roll-out,[35] those countries that opt into such systems will be viewed as having nailed their colours to the mast from a political alliance perspective, with the potential to heighten diplomatic sensitivities.
Conclusion
It is clear that whereas the US Dollar may have become the world’s reserve currency due to the US’s economic rise in the mid-20th century, its continued clout well into the 21st is propped up by, rather than the cause of the continued disproportionate global role of the USD. Put differently, much of the USD’s pervading influence (and therefore, by proxy, that of the United States) stems from the indirect role the currency plays within global financial architectures. While global actors such as China and Russia have been vocal about international monetary system reform, it is unlikely that they wish immediately to see a direct replacement of the USD, either with a monetary union or their own national currencies. Rather, as this essay has argued, it appears that these political actors are seeking to disintermediate the role of the USD in financial markets infrastructure and payments rails. If successful, this will, in a stroke, reduce global reliance on USD-based norms and provide a buffer against the former’s use for political means, while also curtailing the reach of the US beyond strictly bilateral transactions. As South Africa’s BRICS ambassador noted, the emphasis was about giving the world more choices rather than replacing the USD per se.[36] However, for an incumbent, any change in the status quo where the dominance of a certain actor is eroded, is often viewed with suspicion. It is also worth considering that other actors will similarly bear the expense of a loss in monetary unipolarity. Removing the financial Pax Americana will increase the transaction costs of countries that must consider and potentially participate in multiple systems while suffering the political implications of their choices. The efforts of BRICS countries to develop alternative payment rails and pricing benchmarks is potentially a far more interesting development that could have wide-ranging implications in the coming years.
Endnotes
[1] Dipanjan Roy Chaudhury, “BRICS Working on New Global Reserve Currency and Alternative Mechanism for Int’l Payments: Vladimir Putin,” Economic Times, June 23, 2023; Rachel Savage, “What is a BRICS Currency and is the US Dollar in Trouble,” Reuters, August 24, 2023; Didier Borowski, “Renminbi’s Rise With Not Challenge Dollar Dominance,” Official Monetary and Financial Institutions Forum, June 23, 2022
[1] Annamaria Kokenyne, Jeremy Ley, and Romain Veyrune, “Dedollarization,” IMF Working Paper WP/10/188 (2010)
[2] Luis A. V. Catão and Marco E. Terrones, “Financial De-Dollarization: A Global Perspective and the Peruvian Experience,” IMF Working Paper WP/16/97 (2016)
[3] Catão and Terrones, “Financial DeDollarization”
[4] Marcello Estevão and Greetje Everaert, “Enhancing Monetary Policy Flexibility Through De-Dollarization,” IMF Blog, September 21, 2016
[5] Patricia Alvarez-Plata and Alicia García-Herrero, “To Dollarize or De-Dollarize: Consequences for Monetary Policy,” BBVA Economic Research Papers No. 0808 (December 2008): 1-35,
[6] Wafa Fahmi Abdelati, “International Experience of Dedollarization,” In Cambodia: Rebuilding for a Challenging Future (Washington: IMF, 2006).
[7] ING, “BRICS Expansion and the Dollar: Would a Larger Bloc Mean Faster De-Dollarisation,” August 2023
[8] Kgothatso Madisa, “No Consensus on De-Dollarisation During BRICS Talks but Putin Says Process is ‘Irreversible and Gaining Pace’,” Times Live, August 23, 2023
[9] Maronoti Bafundi, “Revisiting the International Role of the US Dollar,” BIS Quarterly Review, December 2022; ING, “BRICS Expansion and the Dollar: Would a Larger Bloc Mean Faster De-Dollarisation,” August 2023
[10] Maronoti, “Revisiting the International Role of the Dollar”
[12] ING, “BRICS Expansion and the Dollar”
[13] Maronoti, “Revisiting the International Role of the Dollar”
[14] Ben Bernanke, “The Dollar’s International Role: An “Exorbitant Privilege”?” Brookings, January 2016
[15] Naomi and Libby George, “The End of King Dollar? The Forces at Play in De-Dollarisation,” Reuters, May 25, 2023
[16] Serkan Arslanalp, Barry Eichengreen, and Chima Simpson-Bell. “The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies,” IMF Working Paper WP/22/58 (2022)
[17] Michael Roach, “Dedollarisation: Shifting Power Between the US and BRICS,” The Interpreter, Lowy Institute, August 3, 2023
[18] People’s Bank of China, “Milestone of RMB Internalization: RMB Cross-border InterBank Payment System Starts Operation,” October 14, 2015
[19] George Magnus, “De-Dollarisation Would Upend the Global Economy,” Council on Geostrategy, no. GPE18, July 2023
[20] Herbert Poenisch, “Brics Common Currency Would Be No Threat to the Dollar,” Official Monetary and Financial Institutions Forum, June 13, 2023
[21] Aftab Ahmed Swati Bhat, “Exclusive: India, Russia Suspend Negotiations to Settle Trade in Rupees,” Reuters, May 4, 2023
[22] ING, “BRICS Expansion and the Dollar”
[23] Al Jazeera, “Russia Urges BRICS Nations to Integrate Payment Systems and Cards,” April 22, 2002
[24] Finextra, “UnionPay Takes Top Spot from Visa in $22 Trillion Global Cards Market – RBR,” July 22, 2016
[25] Samar Srivasta and Salil Panchal, “How India is Taking UPI Global,” Forbes India, August 14, 2023
[26] People’s Bank of China, “Milestone of RMB Internationalization”
[27] Emily Jin, “Why China’s CIPS Matters (and Not for the Reasons You Think),” CNAS, April 5, 2022
[28] Marcus Lu and Bhabna Banerjee, “Visualizing the BRICS Expansion in 4 Charts,” Visual Capitalist, August 24, 2023
[29] Herbert Poenisch, “Brics Members Face Obstacles on Road to De-Dollarisation,” Official Monetary and Financial Institutions Forum, August 25, 2023
[30] Reuters, “China to Use Shanghai Exchange for Yuan Energy Deals with Gulf Nations – Xi,” December 9, 2023
[31] Economic Times, “China Completes First Yuan-Settled LNG Trade,” March 29, 2023
[32] Joshua Ramos, “BRICS: UAE and China Sign Currency Swap, CBDC Partnership,” Watcher.Guru, November 29, 2023
[33] William Gumede, “BRICS: Rising De-dollarisation of the World,” Inclusive Society Institute, August 2023; Joseph Moss, “De-Dollarisation Continues Unabated in 2023,” The International Banker, October 5, 2023; Jakkie Cilliers, “BRICS+ and the Future of the US Dollar,” Institute for Security Studies, August 25, 2023; Ramu Thiagarajan et al., “Dedollarisation: Is US Dollar-Dominance Dented?” State Street, June 2023
[34] AfricaNenda, The State of Inclusive Instant Payment Systems in Africa, 2023
[35] Iryna Bogdanova, “Politicization of the 5G Rollout: Litigation Way for Huawei?” WTI Working Paper no 01/2023, January 2023
[36] Sumayya Ismail, “Can BRICS Dethrone the US Dollar? It’ll Be an Uphill Climb, Experts Say,” Al Jazeera, August 24, 2023,
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