De-Dollarization: The Spirit Is Willing, the BRICS Is Still Weak

By Mike Maharrey 

The desire to unseat the dollar as the global reserve currency is strong, but it’s easier said than done. And it doesn’t appear the BRICS bloc is quite up to the task – yet.

Russia, in particular, has pushed hard for the BRICS nations to create alternatives to the dollar-dominated global financial system, but the willingness of other BRICS nations to push aggressively in that direction seems to be limited, at least for the time being.

That’s not to say the BRICS fall summit in Kazan, Russia, rejected de-dollarization. The idea remains very much on the table.

However, it appears getting there won’t be as quick and easy as the Russian delegation may like. As a report by the South China Morning Post put it, “Few countries in the grouping seem ready to ditch the U.S. dollar despite Russian President Vladimir Putin’s recent efforts to encourage an alternative system of payment among members.”

Russia was pushing hard for BRICS to consider an alternative payment system to replace the dollar-denominated SWIFT system. But after the summit, Russian President Vladimir Putin conceded that there was no immediate plan, saying the economic bloc “have not and are not” creating such a system.

Nevertheless, there plenty of rhetoric came out of the meeting indicating that the U.S. shouldn’t think de-dollarization is off the table.  

Leaders and representatives of 36 nations attended the summit, including BRICS members, along with leaders from countries interested in joining the bloc.

BRICS is an economic cooperation bloc originally made up of Brazil, Russia, India, China, and South Africa. As of Jan. 1, 2024, the bloc expanded to include Egypt, the UAE, Iran, and Ethiopia. Saudi Arabia has also been formally invited to join but has yet to formally accept the invitation. Turkey, Azerbaijan, and Malaysia have formally applied to become members

The BRICS summit adopted “The Kazan Declaration,” outlining some of the areas of agreement by members of the bloc.

While the bloc adopted no formal plan for an alternative payment system, it did declare the need for reform, condemning “the disruptive effect of unlawful unilateral coercive measures, including illegal sanctions.”

“We underscore the need to reform the current international financial architecture to meet the global financial challenges, including global economic governance, to make the international financial architecture more inclusive and just.”

It also left the door open for the development of a BRICS payments system in the future.

“We recognize the widespread benefits of faster, low cost, more efficient, transparent, safe, and inclusive cross-border payment instruments built upon the principle of minimizing trade barriers and non-discriminatory access. We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners.”

In that spirit, the summit agreed to “discuss and study the feasibility of establishment of an independent cross-border settlement and depositary infrastructure, BRICS Clear, an initiative to complement the existing financial market infrastructure, as well as BRICS independent reinsurance capacity, including BRICS (Re)Insurance Company, with participation on a voluntary basis.”

The Kazan Declaration affirmed support for a Russian proposal to create a grain trading exchange as an alternative to Western exchanges that currently set international prices for agricultural economies.

“We welcome the initiative of the Russian side to establish a grain (commodities) trading platform within BRICS (the BRICS Grain Exchange) and to subsequently develop it, including expanding it to other agricultural sectors.”

Why didn’t the summit follow Russia’s lead and more aggressively pursue an alternative payment system?

University of Tasmania professor of Asian Studies James Chin told the South China Morning Post that few countries are willing to give up the U.S. dollar entirely. Their economies are too tightly bound to the greenback. “It’s very difficult to bypass the U.S. dollar,” Chin said. 

Chin speculated that a bilateral currency agreement seems like a more reasonable path forward. The dollar would likely continue as the global reserve currency but on a smaller scale, with other currencies gaining an increasingly important role.

“A bilateral currency agreement seems to be the easiest way. In some ways, it is a bit clumsy, but it can be done if the amount is big enough.”

This dovetails with the existing China’s Cross-Border Interbank Payment System (Cips). HSBC Hong Kong announced it will formally join Cips. It is one of the world’s largest banking and financial institutions.

 There is also mBridge, an instant cross-border payment system established by the Bank for International Settlements (BIS) Innovation Hub in Hong Kong. Currently, there are five full members—Thailand, China, Hong Kong, Saudi Arabia, and the U.A.E.—and over 30 observing members.  

One of the most interesting proposals to come out of the BRICS summit was the development of a precious metals exchange to compete with the COMEX. According to Russia’s Finance Minister, Anton Siluanov, “The mechanism will include the creation of price indicators for metals, standards for the production and trade of bullion, and instruments for accrediting market participants, clearing, and auditing within BRICS.“

While it appears the BRICS nations won’t move quickly to implement alternatives to dollar systems, it would be unwise to write the bloc off. It is clearly gaining clout and influence globally. It may prove difficult to bring all of the BRICS nations together in agreement on specific policies or systems, but it is clear they are concerned about the weaponization of the dollar and that there is a growing desire for dollar alternatives. 

In fact, the Atlantic Council identifies the rise of BRICS as a threat to long-term dollar dominance.

“The project identifies the BRICS as a potential challenge to the dollar’s status due to the individual members’ signal of intent to trade more in national currencies and the BRICS’ growing share of global GDP.” 

Even before the summit, BRICS+ Analytics think tank founder Yaroslav Lissovolik told Reuters that an alternative payment system is undoubtedly feasible, but it will likely take time to develop.  

“After the significant expansion of BRICS membership last year, the attainment of consensus is arguably harder.”

Of course, in the world of geopolitics, things often happen slowly and then all at once.

And even the relatively small decline in the dollar’s status with an increasingly multi-polar global financial system where the dollar is no longer the only rooster in the hen house could prove harmful to the U.S. economy.

We were seeing this long before the BRICS summit. Dollar reserves globally have dropped by 14 percent since 2002, and de-dollarization accelerated after the U.S. and her Western allies aggressively sanctioned Russia. 

Because the global financial system runs on dollars, the world needs a lot of them, and the United States depends on this global demand to underpin its bloated government. The only reason the U.S. can borrow, spend, and run massive budget deficits to the extent that it does is the dollar’s role as the world reserve currency. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies.

But what happens if that demand drops? What happens if BRICS nations and other countries don’t need as many dollars? 

A de-dollarization of the world economy would cause a dollar glut. The value of the U.S. currency would further depreciate. At the extreme, global de-dollarization could spark a currency crisis. You and I would feel the impact through more price inflation eating away at the purchasing power of the dollar. In the worst-case scenario, it could lead to hyperinflation.

The world doesn’t have to completely abandon the dollar to create negative impacts. Even a modest drop in the demand for dollars will ripple through the U.S. economy. 

It would be easy to analyze the Kazan summit and conclude that worries about BRICS undermining dollar dominance are overblown, but I don’t think it’s wise to completely discount the evolution of the bloc. It won’t happen overnight, but the rise of BRICS reveals a growing dissatisfaction with the way the U.S. uses its monetary clout as a foreign policy tool and increasing worries about the country’s fiscal irresponsibility. These varying movements to de-dollarize and minimize dependence on the greenback will likely continue to percolate. U.S. policymakers should be wary.