The turbulence of the years since the 2008 global financial crisis hasn’t invalidated the central idea behind the BRICS concept: that the centre of gravity of the world economy has been shifting to the big emerging markets. Since 1990, the share of the world economy accounted for by ‘advanced’ economies (according to the IMF) has declined from 60% to 40% and the emerging markets’ share has grown from 40% to 60%. Much of the increased share is accounted for by China and, recently, India.
It is not surprising that the emergence of an economically successful and powerful group of countries in the ‘Global South’ has found a political expression. After all, the G7 has long been seen as a useful forum for the ‘advanced’ economies, with membership limited by economic size. Reflecting economic size, the first formal meeting of the BRIC group in 2009 met in Russia, bringing together Brazil, Russia, India and China, adding South Africa the following year. Expansion to 10 members was accompanied by some political argument but still reflects economic size, albeit with the exclusion of major emerging economies that are also members of the OECD (Mexico, Colombia).
The group now represents 40 to 44% of the world economy on a purchasing power parity basis and around 30% of world trade. The group has, as one of its objectives, to strengthen economic ties between its members, and specifically there have been calls for currency cooperation. There are two distinct ideas here. One is to increase trade and wider economic cooperation between members, reflecting a long-standing belief in the value of South-South trade to reduce dependence on the (generally slower growing) North. The other is to reduce dependence on the dollar as a global currency.
The idea of a BRICS currency has been mooted, though the idea of a common currency and monetary union does not make much sense if intended literally (which it almost certainly isn’t). The countries are geographically dispersed and have little overlap, with very different economic structures and different economic cycles and external vulnerabilities. They do not begin to satisfy the conditions for an ‘optimum currency area’, within which flexible labour and capital markets make it easier to absorb imbalances domestically rather than through exchange rates. There are no fiscal transfers between members and no coordination or convergence of macro-economic policy.
De-dollarisation is a different matter. There is a serious and systematic attempt to reduce BRICS members’ dependence on the dollar as a store of value in reserves and — more importantly — for transactions. Currently, the USA enjoys the ‘exorbitant privilege’ of having its currency as a global currency. It is estimated that 90% of all transactions across borders touch the US banking system, with the dollar used by at least one counterparty. A narrower definition of transactions — those using the SWIFT network — has around 50% based on the dollar. About 55% of countries’ global reserves are held in dollars.
There are good reasons for the widespread use of the dollar: convenience, familiarity, network effects, confidence that dollar transactions will be honoured in a country with the rule of law, full convertibility, and the width and depth of US capital markets. A global currency is an international public good. It also has benefits for the USA in that it can finance its fiscal (and current account) deficits by borrowing potentially limitless amounts in its own currency, with foreigners holding its debt as their assets. China was long one of the main contributors to dollar ‘hegemony’ by accepting US debt as payment for its large bilateral trade surpluses. Dollar assets were then held as China’s foreign reserves. This symbiotic relationship was of mutual benefit.
The demands for ‘de-dollarisation’ come from several different sources. The first is a long-standing complaint, articulated mainly by France, that the system was asymmetric and unfair, with deficit economies forced to adjust their economies to reduce fiscal and current account deficits, perhaps painfully, while the USA had the privilege of borrowing from the rest of the world in its own currency. More recently, doubts have been aired about the sustainability of the system because of an apparent inability or unwillingness of the US Congress and Administration to exercise discipline over the fiscal deficit, leading to worrying levels of public debt and the possibility — which once seemed very remote — of the USA defaulting on its debt. Question marks over the independence of the Federal Reserve and a cavalier approach to the law by the Trump administration have also sown doubts about the predictability and reliability of the USA. At the very least there is a strong risk of devaluation. There is evidence that central banks, not just in the BRICS group, are diversifying their reserves away from dollar assets for these reasons.
The main driver for de-dollarisation within the BRICS is, however, different: fear that the USA will use the dollar as leverage in bilateral disputes and to pursue geo-political objectives. The use of financial sanctions against Russia as punishment for its invasion of Ukraine demonstrated the power which the USA has as a result of dollar dominance. Russia was prevented from using the SWIFT settlement system and Russian assets have been, in effect, confiscated. China, most obviously, is concerned to escape the same trap. Even those countries which have had broadly positive relations with the USA, like India, have also supported a de-dollarisation strategy (in India’s case for fear of being caught up in secondary sanctions because of its good relations with Russia). Brazil fears that it is vulnerable because of China being its main trade partner.
There is no obvious replacement for the dollar as a global currency. The euro plays a growing role but mainly as a store of value in reserves rather than — except in the eurozone — for transactions. Moreover, none of the BRICS countries can offer currencies with the advantages of the dollar. The RMB is an obvious candidate because of China’s big role in world trade, but the fact that the RMB is not convertible is a major obstacle. Nonetheless, the BRICS group has evolved several mechanisms to advance the goal of de-dollarisation. First, there is growing use of local currencies to by-pass the dollar. A large majority of China-Russia trade is settled in RMB. China has extended ‘swap lines’ to many of its trade partners, enabling settlement in RMB on a deferred basis. Recent payments for Saudi oil have been made in RMB, breaking the long-established settlement patterns in ‘petrodollars’. RMB has also been used for third-party transactions, as with helping Argentina settle its debts with the IMF. Indian rupee transactions are less significant but are used for payments with the UAE and within South Asia. Settlement within the ASEAN group is increasingly in local currencies.
A second important step has been the creation of BRICSpay, designed to provide efficient, decentralised payments (using blockchain technology) within the group. China, India, Egypt and the UAE are leading users, but potentially this is a platform for many other countries to use. A third is the experimental mBridge scheme to enable settlement to take place using central bank digital currencies. The arrangement, involving China, Thailand and the UAE, was originally assisted by the Bank for International Settlements, which has withdrawn for fear of being caught in geo-political crossfire (China is developing the software).
And, lastly, plans are developing to create an alternative international financial system in which sources of credit no longer depend on dollar-based institutions. The Chinese network of swap lines is a key element of this emerging system, as is the BRICS Bank, the NDB (based in Shanghai).
Taken together, these activities do not represent an alternative to a dollar-based global payments system. But they do — or will — provide sufficient diversity of settlement mechanisms to break the dollar hegemony.
