Towards de-dollarization: BRICS advances alternative to US-dominated financial system

A senior Russian official indicated that a new currency project might be announced at the upcoming BRICS summit in South Africa. The alliance’s other members—Brazil, China, Russia, and India—have already taken steps to bypass the US-dominated global trade and finance system

April 07, 2023 by Tanupriya Singh
BRICS new currency
(Photo: Xinhua)

Speaking last week on the sidelines of the Russian-Indian Strategic Partnership for Development and Growth Business Forum in Indian capital New Delhi, the Deputy Chairman of Russian State Duma Alexander Bobakov announced that BRICS states (Brazil, Russia, India, China, and South Africa) were working towards the creation of a new currency. 

The bloc’s members have made key moves away from the US-dominated international trade and financial system. “The transition to settlements in national currencies is the first step. The next one is to provide the circulation of digital or any other form of a fundamentally new currency in the near future,” Babakov said.

He further claimed that “readiness to realize this project” will be indicated at the upcoming BRICS summit, to be held in August in Durban, South Africa. 

While further details of this landmark project are yet to be fully revealed, it is already clear that its scope will be significant. The current BRICS countries already account for 40% of the global population and one-fourth of the global GDP.  The alliance is now set to expand with Iran and Saudi Arabia having initiated the formal process to join. Over 10 other countries, including Egypt, Algeria, the UAE, Mexico, Argentina, and Nigeria, have also expressed interest in joining the bloc.   

Babakov added that the new currency would be based on a strategy that “does not defend the dollar or euro,” and will be pegged to the value of not just gold but also “other groups of products, rare-earth minerals, or soil.” 

The first part of this process, namely trade in national currencies, is already well underway. On March 29, China and Brazil—the world’s second largest economy and Latin America’s biggest economy, respectively—announced that they will conduct bilateral trade in their local currencies, the Chinese yuan (unit of Renminbi) and the Brazilian reais, bypassing the US dollar. 

China is Brazil’s biggest trade partner, with bilateral trade reaching US$150 billion in 2022. China’s currency, the Renminbi (RMB), has also become Brazil’s second-largest international reserve currency.

Watch: China and Brazil strike deal to ditch US dollar

In January, another major step away from the US-dominated global financial system came in the form of an agreement between Iran and Russia to connect their interbank messaging systems—the SEPAM and the SPFS—and bypass the US-dominated SWIFT banking communication and transfer system. 

Iran has been locked out of the SWIFT system as part of the wide-ranging sanctions that the US has imposed against the country since 2018. Several Russian banks were subsequently also cut-off from SWIFT after the Ukraine war broke out. 

While the creation of an alternative system to counter dollar dominance, or, more broadly, “monetary cooperation” in the face of US dominance had been discussed among the BRICS states for years, the blanket sanctions imposed on Russia by the US and its allies gave further impetus for countries to move in this direction. 

“After confiscating tens of billions of dollars in reserves and assets from countries like Iran, Venezuela, and Afghanistan, the seizure by the US and the EU of more than $300 billion of Russia’s reserves, triggered a global alert, reaffirming the urgency of alternatives to the dollar’s dominance,” said Marco Fernandes, a researcher at the Tricontinental Institute for Social Research, as quoted by Global Times

The agreement between Russia and Iran would go around West-imposed economic sanctions, undermining a key tool by which the US seeks to coerce other countries and maintain its hegemony—a fact not lost on its government officials. 

According to State Duma Chairperson Vyacheslav Volodin, the ruble and rial already account for over 60% of the mutual trade settlements between Russia and Iran.

These countries are not alone; Russia and China have also been working towards connecting their banking communication systems. However, the US has threatened to expel Chinese banks from SWIFT if this proceeds. 

Nevertheless, both Russia and China have reaffirmed their commitment to advancing bilateral trade in their national currencies, and this was reiterated at their joint summit in March: 

“We should continue promoting settlements in national currencies, and expand the reciprocal presence of financial and banking structures in our countries’ markets…At this stage, two-thirds of payments under trade deals between our countries are made in rubles and yuan,” Russian President Vladimir Putin said

He also highlighted that trade between Russia and China had increased by over 30% in the past year and was expected to reach US$200 billion in 2023. Putin also expressed support for the use of the Chinese yuan in transactions between Russia and its partners in Asia, Africa, and Latin America—where China is already the largest trade partner for many of the countries.  

While the US dollar continues to play an outsized role in the international financial system, including serving as the leading global reserve currency, the use of the yuan has increased over the past few years, accounting for 7% of global foreign exchange trades. It has also become the fifth largest payment as well as reserve currency, and the third largest in trade settlements. 

The US’ dominance has been further challenged as oil producing countries, including Iran and,  particularly, Washington’s long time ally Saudi Arabia announced that they will consider selling oil in currencies other than the dollar. 

Following the inaugural China-Gulf Cooperation Council (GCC) Summit in 2022, China had announced that it would continue to import crude oil and Liquefied Natural Gas (LNG) from GCC countries and conduct trade settlements in oil and gas using the yuan. On March 28, China carried out its first purchase with cross-border settlement in yuan for LNG sourced from the UAE. 

The growing trend towards seeking alternatives to reduce dollar dependence, including trade in local currencies, is also being deliberated upon by regional organizations, including the Association of Southeast Asian Nations (ASEAN). 

Earlier this year, Brazil and Argentina also proposed to work towards creating a common currency, called the “SUR”, to enhance regional trade and financial exchanges while reducing reliance on the US dollar. 

Not only is the BRICS bloc seeking to move away from dollarization in matters of trade and finance, it has also attempted to provide an alternative to the US-dominated Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank, in the form of the New Development Bank (NDB). 

At present, aside from the five BRICS countries, Egypt, the UAE, and Bangladesh are also members of the NDB. 

One of the reasons to set up the NDB, South Africa’s Foreign Minister Naledi Pandor told Sputnik, was to seek an alternative to the dollar-based payments architecture: “The systems currently in place tend to privilege very wealthy countries and tend to be really a challenge for countries, such as ourselves, which have to make payments in dollars which costs more in terms of our various currencies.”