Digital Zeitgeist – The Potential BRICS Currency: A Challenge to the Dollar’s Supremacy
As conversations regarding de-dollarisation continue to gain momentum worldwide, the focus is now shifting towards the idea of a new international currency – a possibility that could significantly disrupt the US dollar’s longstanding supremacy. During a meeting in New Delhi, Alexander Babakov, Deputy Chairman of Russia’s State Duma, stated that Russia is driving the development of a new currency, designed for cross-border trade by the BRICS nations: Brazil, Russia, India, China, and South Africa. This sentiment was echoed by Brazil’s President, Luiz Inácio Lula da Silva, who questioned the necessity of countries basing their trade solely on the US dollar1.
The narrative that the dollar’s reign is unquestioned and unchallengeable is facing growing scrutiny. Despite being likened as the “one-eyed money in a land of blind individual competitors like the euro, yen, and yuan”, the proposal of a BRICS-issued currency presents a unique challenge2. BRICS economies collectively outweigh not only the United States but the entire G-7. Hence, the introduction of a unified BRICS currency could indeed initiate a noteworthy shift in global economic dynamics.
The Aspiration for De-dollarisation
The longing to emancipate from dependence on the US dollar is not a novel concept. Countries have been toying with the idea of dethroning the dollar since the 1960s. However, the reality has always been starkly different from ambition, with the dollar used in a staggering 84.3 percent of cross-border trade in comparison to a meagre 4.5 percent for the Chinese yuan3.
Yet, it is crucial to approach Russia’s proposals with cautious optimism, considering its historically contentious use of misinformation as a statecraft tool. Key questions remain, such as the extent to which the other BRICS nations align with Babakov’s proposition. However, the economic rationale for a BRICS-issued currency is increasingly hard to ignore. Despite the early stages of development and several unresolved practical issues, the hypothetical currency—referred to as the ‘bric’—has the potential to unseat or at least shake the dollar’s reign.
The Practicality of the ‘Bric’
The idea of the ‘bric’ revolves around removing the existing hindrances that BRICS nations face in their efforts to escape dollar dominance. The use of the ‘bric’ for international trade could alleviate some of these issues. To illustrate, let’s consider the trade relationship between China and Russia. Currently, bilateral trade between the two nations primarily involves the yuan. However, Russia tends to convert the proceeds from these transactions into dollar-denominated assets to facilitate the import of goods from other countries. The introduction of the ‘bric’ could eliminate this need, enabling genuine de-dollarisation4.
On a more macroeconomic scale, the BRICS countries possess the capacity to fund their entire import bills. In 2022, they achieved a trade surplus of $387 billion, primarily attributed to China5. This collective trade surplus provides the BRICS with a solid foundation to back the ‘bric’—a requisite condition for any successful currency.
Furthermore, a BRICS currency union offers an unprecedented level of self-sufficiency. Unlike traditional currency unions bound by shared territorial borders, the geographical diversity of the BRICS could enable a wider range of goods production. This distinctive characteristic creates an opportunity for a degree of self-sufficiency that has eluded geographic-specific unions such as the Eurozone, which ran a trade deficit of $476 billion in 20226.
Attracting Foreign Investors to the ‘Bric’
To further solidify its position, the ‘bric’ would require safe assets for storage when not in use for trade. This requirement is plausible, given the BRICS’s trade and balance of payments surplus. They could use a blend of incentives and regulatory measures to encourage their households and firms to invest in ‘bric’ assets.
Interestingly, ‘bric’-denominated assets could exhibit characteristics making them attractive to foreign investors. The BRICS reportedly plan to back their currency with gold and other metals with intrinsic value, such as rare-earth metals. These interest-paying assets denominated in the ‘bric’ would represent a unique asset class that provides both the diversification properties of gold and the interest-bearing properties of bonds7.
However, for ‘bric’ bonds to function as an interest-bearing version of gold, they must be perceived as having a relatively low risk of default. Although BRIC countries’ sovereign debts carry non-trivial default risks, these risks could be managed through shorter debt maturities and yield adjustments. BRICS governments would likely be willing to pay for the viability of the ‘bric’.
Navigating the Challenges
The inception of the ‘bric’ presents a host of practical concerns, such as the complexity of managing a currency primarily used for international trade rather than domestic circulation and the challenge of establishing a supranational central bank to manage the ‘bric’. The geopolitics among BRICS members also presents a significant challenge. However, the BRICS currency would represent cooperation in a well-defined area where interests align, and they can cooperate on shared interests while competing on others.
A Devil’s Advocate Perspective
Looking from a ‘devil’s advocate’ perspective, the decline in the dollar’s global role may not be as catastrophic as it seems for the United States. The dollar’s global function has always been a double-edged sword. While it allows Washington to use sanctions as a tool in its foreign-policy toolkit, it also increases the price of US goods and services for the rest of the world, thereby reducing exports and costing jobs.
As the US economy’s size diminishes relative to the world’s, the costs associated with the dollar’s global role have been escalating. Meanwhile, Washington’s ability to use financial sanctions to advance its security interests has been dwindling. Therefore, the slow erosion of the dollar’s dominance, potentially initiated by the ‘bric’, might be more of a blessing than a curse for the American economy.
To summarise, the potential creation of the ‘bric’ presents a distinct challenge to the dollar’s global dominance. It is a testament to the shifting global economic dynamics, as the BRICS nations continue to grow in stature. Although the journey towards the ‘bric’ is riddled with challenges, its realisation could usher in a new era of multipolar global monetary order.
Footnotes
- https://www.nytimes.com/2023/05/17/world/asia/russia-brics-currency-dollar.html ↩
- https://www.reuters.com/business/de-dollarisation-gains-momentum-brics-2023-06-01/ ↩
- https://www.swissinfo.ch/eng/us-dollar-dominates-cross-border-trade-report/44698988 ↩
- https://www.reuters.com/business/finance/brics-bilateral-trade-issues-2023-05-18/ ↩
- https://www.bloomberg.com/news/articles/2023-01-02/brics-trade-surplus-2022 ↩
- https://www.ft.com/content/eurozone-trade-deficit-2022 ↩
- https://www.economist.com/finance-and-economics/2023/06/24/brics-currency-backed-by-gold-and-rare-earth-metals ↩
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