BRICS is intent on de-dollarization but its chances of success are slim

Most recent article: BRICS, the West and the rest – a fractured world

• BRICS wants to de-dollarize the world economy to curb the US’s power and influence.  
• The chances of it succeeding in replacing the US Dollar are low. 
• The US Dollar would depreciate rapidly should BRICS be successful.
   

One of the main goals of the BRICS nations is to de-dollarize the world economy. BRICS want to topple the US Dollar’s (USD) monopoly on world trade. 

The Dollar’s dominance, such as it is, is breathtaking. About 90% of global transactions involve US Dollars and 50% of all global trade is Dollar-denominated, according to data from The Bank of International Settlements. 

BRICS countries' motives are not purely rooted in anti-American feeling. Reducing reliance on the US Dollar is also a form of “financial” risk management, according to Ray Dalio, CEO of Bridgewater Associates. 

According to Dalio,  BRICS nations want to de-dollarize, or reduce exposure to US Dollar debt in the form of bonds, to avoid exposure to the risk of US sanctions.  

 “The United States greatest weapon to use – as distinct from its military – is sanctions, so sanctions means you freeze other assets, and those assets are (US Treasury) bonds. That happened with Russia and there are threats of it with other countries. There is the thinking that if I hold the bonds can that happen to me? Why am I transacting in this third currency rather than transacting directly,” said Dalio in a recent interview with Tom Bilyeu.  

The effectiveness of US sanctions is dependent on the widespread use of the US Dollar. Russia, Iran and China have all been impacted by US sanctions which can easily be imposed because of the Dollar’s role as the lifeblood of the global economy. 

Pushing for “R5”

BRICS current long-term strategy is to replace the US Dollar with “R5” or the five R’s, which stand for the currencies of the founding BRICS countries – the Real, Ruble, Rupee, Renminbi and Rand. 

BRICS have already had some success in this endeavor.

“We already know that 80 percent of the trade carried about between Russia and China is settled in either Russian rubles or Chinese yuan,” said Chris Weafer, an investment analyst with Macro-Advisory, a strategic consultancy that focuses on Russia and Eurasia, in an interview with Al Jazeera News.

Even outside the core BRICS group, other countries have begun trading in local currencies. The United Arab Emirates and India have signed an agreement enabling them to settle trade payments in Rupees instead of Dollars.

How likely are BRICS to achieve de-dollarization?

Whilst a growing amount of international trade amongst BRICS countries is now being conducted in the R5 currencies, the chances of actually replacing the US Dollar, are very low, according to experts. 

The universal appeal and liquidity of the US Dollar is hard to replace and it is these qualities which ensure its continued use as a medium of trade between different countries. 

To replace the Dollar, countries would have to transact in each other’s currencies which can be  problematic.

Firstly, most of these currencies do not have the widespread appeal and liquidity of the Dollar. As such, they are not as reliable a store of value. In order for widespread trade to occur, countries would need to hold large reserves of the currency to facilitate transactions, according to Chris Weafer. 

The Dollar is a relatively stable currency, backed by the world’s largest economy and because it is already the world’s reserve currency. 

On the other hand, national currencies, especially of developing nations are more at risk of devaluing from currency shocks. This would make FX exposure a major risk factor for importers and exporters. 

BRIC by BRIC

One key threat to the dominance of the US Dollar, however, lies in the growth and popularity of the BRICS as a trade association. 

From starting out as a loose federation of the five founding countries it has grown to include Egypt, Ethiopia, Iran, and the United Arab Emirates. 

In 2023, Algeria and Tunisia also applied to join but had their applications rejected because of their unstable domestic economies. 

That said, it seems more and more countries wish to join BRICS and If the group keeps growing it could eclipse the Dollar through sheer weight of membership. 

One major risk comes from the fact that the founding members are all members of their own regional trade alliances and if BRICS came to adopt these alliances under its umbrella of trade alliances, de-dollarization would become more of a realistic threat. 

China is also a member of the Regional Comprehensive Economic Partnership. India is in the South Asian Association for Regional Cooperation. Russia is part of the Eurasian Economic Union and the Commonwealth of Independent States. Brazil is in the Southern Common Market; and South Africa is in the Southern African Customs Union. 

“If BRICS successfully launches the R5, there is a legitimate threat that the trade groupings of these countries will also feel compelled to adopt the R5—at least alongside the US dollar, if not as a replacement,” says Thomas Hill, writing in the Atlantic Council. 

Another threat to the US Dollar comes from an analysis of long-term historical cycles. A study of these cycles leads to the conclusion that the Dollar’s days as the world’s reserve currency are inevitably numbered, according to Ray Dalio. 

His analysis of grand debt cycles shows a repeating pattern which has seen the rise and fall of leading world economies and their currencies one after another. 

When the Netherlands was the world’s leading economy in the 17th century, the Dutch Guilder became the world’s reserve currency; then in the 19th century the British Pound became the world’s leading currency due to the increasing power of the British empire. Finally, after the collapse of the British empire at the end of the second world war the US took over and became the world’s leading economy, with its Dollar replacing the Pound as the reserve currency. 

Dalio expects the cycle will continue with America eventually being toppled by a greater economic power. At that point the US Dollar will also lose its relevance. It is more than likely the next world power will come from BRICS – probably in the form of China. 

What would be the impact of de-dollarization on FX markets?

If BRICS were successful in replacing the US Dollar, USD would depreciate substantially according to many currency analysts. 

“The United States depends on this global demand to underpin its profligate borrowing and spending. De-dollarization could lead to a dollar glut,” says Mike Maherrey, an analyst at Money Metals Exchange. 

“A de-dollarization of the world economy would cause the value of the U.S. currency to crash and likely spark a currency crisis. Americans would feel the impact through more price inflation eating away at the purchasing power of the dollar. At the extreme, it could even lead to hyperinflation,” he adds.