BRICS De-Dollarisation: A Commentary on Feasibility and an Analysis on Strategic Moves.

BRICS De-Dollarisation: A Commentary on Feasibility and an Analysis on Strategic Moves.

By Chinedu Okoye 

Summary:

 • BRICS (Brazil, Russia, India, China, and South Africa, UAE, Iran, Saudi Arabia, Ethiopia, Egypt, Argentina) nations aim to reduce their reliance on the US dollar in international trade settlements.

 • Several policy actions taken by these countries to facilitate non-USD based transactions, such as settling oil trade in local currencies rather than the US dollar.

 • Potential obstacles and complexities exist in the implementing de-dollarization.

 • BRICS nations engage in significant trade with non-BRICS countries, which may still require the use of the US dollar.

 • De-dollarization is a long-term strategy and the outcomes are uncertain.

 • The economic significance of BRICS nation shouldn't be discounted, neither are the difficulties of promoting local currencies trade as alternative options have their advantages

The fight against Dollar Hegemony:

BRIC nations namely; China, Brazil, India and UAE have all sold off a total of $123 billion worh of US Treasuries. China is said to be trimmig it's US Dollar exposure, to defend it's currency against the greenback.

The figure alone, is inconsequential however, there are other factors and policy actions that pose a bigger threat to the US Dollar and it's economy by extension; e.g. the recent and gradual switch away from US Dollars by using local currency for trade settlements amongst each other.

Policy actions to facilitate Non-USD Based Transactions:

United Arab Emiates and India have agreed to settle Oil trade in Indian Rupee, whilst Russian State Oil Company has also announced it would only accept Russian Ruble and Chinese Yuan for oil payments. If countries such as Saudi Arabia, Iran etc follow suit this could have huge impacts on the US economy.

Potential Obstacles:

The move essentially shifts the reserve assets of these countries away from the dollar to a few local BRICS nation currency. As a result, the value of the most dominant BRICS reserve currency -as not all of them can be as influential - impacts the value of all BRICS nations with direct exposure to them.

Monetary Policy changes or economic instability in one country could easily be felt by the other, and nothing stops a country from devaluing its currency on purpose to skew trade balance in their favor. Also, BRICS nations are highly involved in global trade and are beneficiaries of trade liberalism.

This means as much as a large volume of global trade is done within the Bloc, there is also a considerable amount of trade between BRICS and Non-BRICS nations. Take India and the United States for instance. If these countries cannot be persuaded to accept a dollar alternative, the US dollar would always be a part of the BRICS Foreign Reserve assets, even though it might be to a slightly lesser degree.

There are also counteractive moves the US could make to thwart the De-Dollarisation objective. The US Treasury announced a Treasury buy-back plan less than a week after the Treasury sell-off by China, Brazil, UAE and India. The move was said to be aimed at injecting liquidity into the market. There are other measures that could be taken to maintain the dollars role in global trade as well.

A new Payment System

The group of 11 Member States also plans to sidestep SWIFT (the International Banking Standard for online payments) as Finance Ministers meet to discuss possibilities of a unified payment system. 

South Africa’s finance minister Enoch Godongwana was reported by dailyhodl.com said that "a BRICS-based payments system would aim to strengthen trade in local currencies as opposed to the US dollar".

Again this means that Banks in BRICS nations would have to run SWIFT alongside whatever alternative payments system is in place as not all countries would be expected to accept a new online payment platform. This is limiting and dependent on a range of political and economic factors even as it promises to strenghten trade in it's local currencies.

De-Dollarisation Scheme is a Long-term Strategy:

It would be premature to predict the outcomes of the BRICS initiative. Upon accepting six new nations as members into the group, the eleven state alliance between Saudi Arabia (13%), Russia (10%), United Arab Emiates (4%) and Iran (4%) alone produce 31% of the world's Crude Oil as at 2022.

BRICS also nations have a "combined GDP reaching 26% of the world's output in 2022 and their share of global trade reaching 21%". To put his into perspective, within ten the economic alliance supplies a third of the world's Crude Oil, contributes a quarter of global GDP, and one- fifth of global trade.

A gradual shift from the settlement of all these transactions from the US Dollar would definitely create a massive headwind for the value of the US Dollar, but to a minimal extent, as it is not clear whether the Bloc can impose thw use of its local currencies for the settlement of non-oil transactions. Or perfect a complex system of settling trade in multiple currencies.

Complexity of implementation:

All BRICS settlig trade in their respective local currencies creates a complex system that may not be feasible. To rival the US Dollar, they would need a common currency.

However, these are countries that enjoy autonomy over their economic policies and would be less inclined to submit to a European-like monetary union.

Final Summations:

The economic landscape of the global financial system upon which business models have been built with a long term view, will not change overnight.

The Acquisition of Gold only strengthens a currency - in a Fiat system, if it can use the commodity tonsettle transactions or readily convert them to cash.

Post Bretton Woods, the USD, US Treasuries (amongst a few others like Gilts, Bunds, etc) has been amongst the most liquid Assets, and thus used to defend local currencies.

A switch back to Gold, ties down resources, putting Central Banks in a speculative position. It is also restrictive of monetary policy interventions depending on the mode of usage.