BRICS Countries Consider New Currency to Reduce Dependence on US Dollar

For decades, the US dollar has been the official currency for international trade. However, there is a growing movement to create a new currency that would reduce the dollar's dominance and push back against American leadership. This process, known as de-dollarization, seeks to substitute the US dollar as the currency used for trading oil and other commodities. Advocates of de-dollarization argue that reducing other countries' dependence on the US dollar and the US economy could help mitigate the impact of economic and political changes in the US on their own economies. It could also reduce exposure to currency fluctuations and interest rate changes, improving economic stability and reducing the risk of financial crises.

The Shift Away From US Dollars

In recent years, there has been an acceleration in the move away from the US dollar as a global reserve currency, with the trend becoming more pronounced in the past year. The International Monetary Fund highlighted this shift in 2022, reporting that central banks are holding fewer greenbacks in reserve compared to previous years. According to the IMF's Currency Composition of Official Foreign Exchange Reserves data, the dollar's share of global foreign-exchange reserves dropped to less than 59 percent in the final quarter of 2021. Notably, this decline was not accompanied by an increase in the shares of other long-standing reserve currencies such as the pound sterling, yen and euro. Instead, the shift away from the dollar has been in two directions, with a quarter of reserves moving into the Chinese renminbi and the remaining three-quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.

This movement has gained speed in recent years, especially after the Russia-Ukraine war began in 2022. Western governments have imposed sanctions on Russia, freezing $300 billion of its foreign currency reserves and expelling Russian banks from the Swift international payments system. As a result, countries like Russia and China have started trading with each other in yuan and rubles, triggering talk of the de-dollarization of the international trading order.

A New Currency

India is also trying to move away from the dollar. Recently, 18 countries, including the UK, Germany, Russia, and the United Arab Emirates, have been given permission to trade in Indian rupees. In February, economist Nouriel Roubini suggested that the Indian rupee could become one of the global reserve currencies in the world. The BRICS collective, comprising Brazil, Russia, India, China, and South Africa, is also considering creating a new currency to facilitate trade. The new financial agreement could be seen as soon as August when the countries meet for their annual summit in South Africa. Russia is reportedly behind the idea, as it has faced economic sanctions from the West over the invasion of Ukraine.

Alexander Babakov, the Deputy Chairman of the State Duma, has suggested that a common currency that could be used for payments would be the "most viable" route for India and Russia to take at this time. He remarked that China's involvement would be critical in creating a unified currency, as it would bring an additional 1.4 billion people into the fold. According to him, a multipolar world backed by most governments, is now being established by New Delhi, Beijing, and Moscow. He believes that the new currency should be developed based on fresh monetary alliances that don't uphold the US dollar or euro and create a new currency capable of advancing shared objectives instead.

It's noteworthy that Brazil has already begun to accept Yuan as a means of settling trades and investments. Meanwhile, India and Russia have the Rupee-Rouble mechanism, which enables them to settle their dues in rupees instead of dollars or euros. This suggests that the BRICS countries have set their sights on replacing the dollar-centric system, which could lead to global de-dollarisation.

If the BRICS countries do follow through with their proposal to create a new currency, it could potentially bring stability to their economies. This could also result in a boost in consumer confidence and increased spending, leading to economic growth for investors in these countries.

However, the acceptance of this new currency by India remains uncertain, as it may not want to align itself economically with China, especially amidst the ongoing border dispute. Furthermore, some experts suggest that the deal may disproportionately benefit Beijing over New Delhi. The future of this proposal is unknown, but one certainty is the decline in the influence of the dollar.