TALK of de-dollarization is in the air everywhere. Financial capitals of the world are abuzz with this news and experts, businessmen, traders, bankers and political leaders are all eagerly waiting for the next BRICS meeting scheduled in South Africa in August 2023. Everyone is asking “Will the BRICS currency dislodge the all mighty and powerful Dollar? Is Dollar domination coming to an end? Is the global financial market heading for turmoil and a big shake-up (or maybe a crash)? The reasons to get worried are real, genuine and valid. The global power balance which hitherto has been tilted towards the USA, might get affected as the BRICS currency is going to be backed by current economic heavy weights – China and Russia and Asia and the Middle East economic giants Saudi Arabia, UAE, India and some 30 other countries in the region. What must be worrying Uncle Sam is the speed at which the countries in the region are making a dash to become a member of BRICS. The way it is going, who knows by the time the next BRICS meeting is held in the first week of August in South Africa, the membership might reach 40 or may be more.
But there are big question marks to de-throne and displace the dollar as a reserve currency. The BRICS countries would need safe assets to be parked in when not in use for trade. They would need Dollar reserves when trading with the EU and USA to finance their imports from these countries. Dollar has long been the safest reserve currency for those who have bought and will buy assets and properties in the USA, Canada and EU area. Is it realistic to imagine the BRICS countries finding solutions to these issues? The answer is Yes.
For starters, because the BRICS run a trade and balance of payments surplus, they would not necessarily need to attract any foreign money at all. BRICS governments could use some combination of carrots and sticks to get their own households and firms to buy BRICS assets with their savings and effectively coerce and subsidize the market into existence. But assets denominated in the BRICS currency would actually have characteristics likely to make them unusually attractive to foreign investors. Among the major drawbacks of gold as an asset class for global investors is that, in spite of its risk-reducing value as a diversifier, it does not pay interest. Since the BRICS reportedly plan to back their new currency with gold and other metals with intrinsic value, like rare-earth metals, interest-paying assets denominated in the BRICS currency would resemble interest-paying gold. That’s an unusual characteristic. It is one that could make the assets denominated in the BRICS currency attractive to investors who want both the interest-bearing property of bonds and the diversifying properties of gold.
Sure, for BRICS bonds to simply function as an interest-bearing version of gold, they’d need to be perceived as having a relatively low risk of default. And the debt even of sovereign governments in the BRICS countries has non-trivial default risk. But these risks could be mitigated. Issuers of debt denominated in the BRICS currency could shorten debt maturities to lower the riskiness. Investors might trust a government in South Africa to pay you back when the unit of time is days but not when it is years. Prices could also simply compensate investors for that risk. If market participants demanded higher yields for buying BRICS assets, they could likely get them. That’s because BRICS governments would be willing to pay for the viability of the new currency.
The new BRICS currency, to be fair, would raise a litany of thorny practical concerns. Used primarily for international trade rather than domestic circulation within any one country, it would complicate the job of national central bankers in BRICS countries. Creating a supranational central bank like the European Central Bank to manage the currency would also take time and effort. These are challenges—but not necessarily insurmountable ones.
The geopolitics among BRICS members is also thorny. But a BRICS currency would represent cooperation in a well-defined area where interests align. Countries like India and China may have security interests at odds with each other. But India and China do share an interest in de-dollarizing. And they can cooperate on shared interests while competing on others. The BRICS currency would not so much snatch the crown off the dollar’s head as shrink the size of the territory in its domain. Even if the BRICS is de-dollarized, much of the world would still use dollars and the global monetary order would become more multipolar than unipolar.
Many Americans are inclined to lament declines in the dollar’s global role. They should think before they lament. The dollar’s global role has always been a double-edged sword for the United States. Though it does allow Washington to add sanctions to its foreign-policy toolkit, by raising the price of the US dollar, it raises the cost of American goods and services to the rest of the world, decreasing exports and costing the United States jobs. But the side that cuts into America at home has been sharpening, and the side that cuts America’s enemies abroad has been dulling.
Among those who understand that the dollar’s global role comes at the expense of jobs and export competitiveness at home, at least based on comments in 2014 from Jared Bernstein, now head of the White House Council of Economic Advisors. But these costs have only grown over time as the US economy shrinks relative to the world’s. Meanwhile, among the traditional benefits of the dollar’s global role is America’s ability to use financial sanctions to try to advance its security interests. But Washington sees the security interests of the United States in the 21st century as increasingly defined by competition with state actors like China and Russia. If that is correct, and if the checkered track record of sanctions on Russia is any indication, sanctions will become an increasingly ineffective tool of US security policy.
If the new currency replaces the dollar as the reserve currency of the BRICS, the reactions will be varied and bizarre. Applause seems poised to come loudly from officials in BRICS countries with anti-imperialist dispositions and from certain Republicans in the US Senate, and from US President Joe Biden’s top economist. Thumbs-up seem poised to emanate from both former US President Donald Trump and the US national security community that he so often feuds with. Either way, the dollar’s reign isn’t likely to end overnight—but the new BRICS currency would begin the slow erosion of its dominance.
—The writer is Former Civil Servant and Consultant (ILO) & International Organisation for Migration.
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