BRICS Currency May Signal the End to the Greenback

For many years, the US dollar has been the official currency for foreign trade. However, there has recently been talk of establishing a new BRICS currency in order to dump the greenback and challenge American hegemony.

This de-dollarization has gained momentum in recent months, particularly since the Russia-Ukraine conflict started in February. Last week, Alexander Babakov, the deputy chairman of the State Duma, was quoted as saying that the BRICS countries are in the process of developing a new payment medium based on a strategy that “does not defend the dollar or euro.”

Is the BRICS group truly developing a new trade currency? Who are the leaders of this movement? Will it help India? Will the scheme come to fruition? This topic raises several concerns, which we attempt to address.

Reliance on the US dollar and the US economy

The US dollar has been referred to as the “king of currencies.” In 1944, it was designated as the world’s formal reserve currency. The conclusion was reached by a delegation of 44 Allies known as the Bretton Woods Agreement.

Since then, the dollar has held a commanding position in the global economy. It has given the United States disproportionate power over other economies. In reality, the United States has long used sanctions to achieve foreign policy objectives.

However, not everyone agrees with US standards, and countries such as Russia and China would like to end dollar hegemony. This is known as de-dollarization, and it relates to the process of reducing the dollar’s dominance in global markets. It is the practice of substituting the US dollar as the trading currency for oil and/or other commodities.

De-dollarization supporters argue that the process would reduce other countries’ reliance on the US dollar and the US economy, potentially mitigating the effect of economic and political changes in the US on their own economies. Furthermore, nations can reduce their exposure to currency fluctuations and interest rate changes, thereby improving economic stability and lowering the risk of financial crises.

This trend has accelerated in recent years, particularly in the prior year. The International Monetary Fund observed in 2022 that central banks are not holding the dollar as reserves in the same quantities as in the past.

“According to the IMF’s Currency Composition of Official Foreign Exchange Reserves data, the dollar’s share of global foreign-exchange reserves fell below 59% in the fourth quarter of last year, extending a two-decade decline,” the paper stated.

D-dollarization in international trading

“Importantly, the decline in the dollar’s share has not been accompanied by a rise in the shares of other long-standing reserve currencies, such as the pound sterling, yen, and euro. Rather, the shift has been in two directions: one-quarter into the Chinese renminbi and three-quarters into the currencies of smaller nations that have played a more limited role as reserve currencies.”

Western governments froze $300 billion of Russia’s foreign currency reserves last year, nearly half of the total, to punish Russia for its invasion of Ukraine, and expelled Russian banks from the Swift international payments system.

“The so-called dollar “weaponisation” has rattled many countries, not just Russia,” says Jason Hollands, managing director of investment platform Bestinvest.

“Countries willing to continue trading with Russia, such as India and China, have begun to do so in rupees and yuan instead, sparking speculation about the de-dollarization of the international trading order.”

He went on to say that Brazil and China are now trading in yuan, which is assisting to establish the Chinese renminbi as an international currency and a dollar challenger.

India, too, has been attempting to wean itself off the currency. Recently, 18 countries, including the United Kingdom, Germany, Russia, and the United Arab Emirates, were granted approval to trade in Indian rupees. In February, renowned economist Nouriel Roubini predicted that the Indian rupee would eventually become one of the world’s reserve currencies.

In an interview with First Post, the economist known as Doctor Doom stated, “One can see how the rupiah could become a vehicle currency for some of the trade that India does with the rest of the world, particularly South-South trade.”

“It (the Indian rupee) could be a unit of account, a means of payment, or a store of value.” Certainly, the rupiah has the potential to become one of the world’s reserve currencies.”

The Countries of the BRICS Currency

Moving forward, the BRICS (Brazil, Russia, India, China, and South Africa) group is considering creating a new currency to facilitate commerce. The new financial deal could be seen as early as August, when the countries gather in South Africa for their annual summit.

According to sources, Russia is behind the plan because it is facing economic sanctions from the West as a result of its invasion of Ukraine.

Alexander Babakov emphasized that the establishment of a common currency that could be used for payments would benefit both Russia and India, calling it the “most viable” option at this time. “New Delhi and Moscow should establish a new economic association with a new shared currency, which could be a digital ruble or the Indian rupee,” Babakov said.

He went on to say that China would be crucial in the development of a common currency because it would bring an extra 1.4 billion people into the system. “New Delhi, Beijing, and Moscow are now instituting a multipolar world that is supported by the vast majority of governments,” he said. “Its composition should be based on the inclusion of new monetary ties based on a strategy that does not defend the US dollar or the euro, but rather creates a new currency capable of benefiting our shared objectives.”

Surprisingly, Brazil has already started to accept yuan trade settlements and investments. India and Russia use the Rupee-Rouble trade mechanism to resolve trade debts in rupees rather than dollars or euros.

This demonstrates that the BRICS nations intend to change the dollar-dominated system, which will ultimately lead to global de-dollarization.

According to reports, a new BRICS currency could be announced in August when the collective’s leaders gather in South Africa.

If the BRICS countries follow through on their plan and create a new currency, it could help stabilize their currencies. It would imply increased consumer confidence for a BRICS investor. This would result in increased spending and economic development.

Will India, however, adopt this new currency? Will it want to be economically linked with China, with whom it is locked in a border standoff? Furthermore, some experts believe that this new agreement may help Beijing more than New Delhi.

What transpires next is a mystery. But one thing is certain: the dollar is losing its value. We’ll keep a watch on it and get back to you as soon as we can.