By Jonathan Skatoff
Around two decades ago, Goldman Sachs published a Global Investment Research report investigating four countries that seemed to be poised to reshape the world’s economy. The four nations (Brazil, Russia, India, and China) form the newly coined ‘BRIC’ group, which has since become integral to politicians’ and professionals’ economic vocabulary. The group is now officially recognized as an economic and political entity among each participating country and is widely considered the antithesis of the G7. In 2010, South Africa joined the bloc, forming what is currently known as the BRICS group.
The countries’ collective objective to position themselves as an alternative to the international standard of the United States, its allies, and its financial instruments is multi-faceted; however, the case of the US dollar and replacing it as the reserve currency of the world seems to have pulled away as the primary concern of the BRICS nations. In August, Vladimir Putin declared, “The objective and irreversible process of the de-dollarization of our economic ties is gaining pace.” But is this goal of de-dollarization feasible? Will we one day live in a world where trade between two nations will be denominated and settled with a BRIC (for lack of a better word) instead of the dollar?
Dollar Dominance
It is vital to establish why the dollar is the global reserve currency to gauge the difficulty of
replacing the dollar for the BRICS nations. A reserve currency, by its very nature, requires
enormous levels of liquidity such that central banks are always in possession of or have the
ability to acquire the currency in order to both denominate and settle international transactions. Such a level of utilization for the dollar was only made possible with the Bretton Woods Agreement, in which 44 nations, including all five original BRICS members, collectively agreed to adopt the dollar as the global reserve currency. In addition, the massive deficit the United States runs alongside its multi-trillion dollar debt hole has continued to flood the markets with dollars. Since the Bretton Woods Agreement, the value of the greenback has steadily declined, particularly after the dollar-to-gold convertibility in 1971, primarily due to the tremendous number of bills in circulation worldwide. These inflationary trends are one of the reasons why BRICS has been gaining recognition, as the global population struggles with the rising costs of goods.
While a declining dollar may seem like a weakness that BRICS can exploit, this trend is actually USD’s greatest strength. Because countries have so many dollars, they are by far the most liquid and safe medium of exchange. Coupled with the multi-trillion dollar US bond market, which has allowed nations to store unused dollars in the world’s undisputed most secure financial instrument, US treasury notes, the dollar has rooted itself firmly in domestic and international monetary affairs. The dollar’s US supremacy is evident and likely never going to come under threat, and therefore, BRICS is trying to usurp the dollar on the international stage. To that end, the challenge is steep, as the dollar currently represents around 46% of all international payments within the SWIFT system, which is the largest international payment network in the world.
Lessons from the Euro
Some readers may look at the 46% statistic and acknowledge that the dollar is used for almost half of all international transactions, but 54% still represents a large number of transactions not completed in dollars. This quandary ties back into one of the critical objectives of a reserve currency: facilitating international trade. 24% of that 54% comes from the Euro, but importantly, depending on the transaction, only between 20 and 60% of those trades are done between noneuro area countries. The lack of non euro area transactions clarifies the task for a potential BRICS currency, as it proves that displacing the dollar will require more than just a transition to a single currency used between the BRICS countries. Instead, the potential BRIC would have to cement itself in all variations of international trade, including transactions between nations with no formal connections to the BRICS entities, just as the dollar has done.
Cracks in the Dollar
The dollar’s strengths are plentiful; however, over recent years, the weaponization of the dollar as a way to force nations to adhere to the United States’ wishes and the dangerous links between Federal Reserve interest rate hikes and overall global financial health have propelled the question of a BRICS currency into the spotlight.
The problem for the BRICS countries is their lack of political and economic homogeneity. While the United States is a singular, capitalist democracy, between each of the 5 BRICS nations (before even considering its numerous future and potential entrants), there are a whole host of different structures and ideologies that make decisions on the group’s future difficult. Constructing an economic policy enabling the mass distribution of a BRICS currency would likely require at least a majority of its nations to run a trade deficit to swap goods for the BRICS currency worldwide. Currently, India is the only nation in such a deficit, although the Russia-Ukraine war may cloud Russian data. Still, getting each country to agree on a singular policy will be one of the first significant hurdles BRICS faces.
The other major hurdle seemingly clashes with this earlier point of a lack of a concrete direction for the group. Although, on paper, decisions are made based on some form of consensus, the truth is that with China representing around 70% of the group’s total output, Beijing likely has the final say on most matters. An imbalanced power dynamic paired with reports that India and Brazil are at odds with Russia concerning anti-American language that Putin wants to be included in official documentation suggests that BRICS is still far from acting as one fluid body. In addition, India and Brazil’s reluctance to embrace criticism of the United States may also suggest that some nations are not fully committed to forcing the United States off the world stage, further highlighting tensions within the group.
The Dollar Today
Since the end of the Second World War, there has been almost a subconscious expectation that most transactions between nations will be denominated and settled in dollars, particularly outside the Euro Zone. With United States treasuries, bonds, and notes comprising most foreign exchange holdings in central banks worldwide, the dollar has firmly rooted itself as the
cornerstone of the global monetary system. However, recent conflicts, such as those in Ukraine and Afghanistan in which the United States has used the dollar as a weapon to manipulate outcomes, have led to a growing number of nations expressing distaste towards the dollar’s status as the global reserve currency.
Besides other goals, BRICS has developed an objective to try and displace the dollar from its perch. However, a lack of unity within the BRICS nations and their future entrants suggests that the level of cooperation to formulate a strategy to rewire the monetary system is beyond the new rival to the G7.
However, as with most geopolitical and monetary situations, the situation can change. Should the United States continue to abuse its position in the financial world and bully countries into uncomfortable positions, BRICS may continue to grow in popularity and importance, as it has done since its creation on a Goldman Sachs investment report. One day, countries may be faced with a legitimate choice between using a BRIC or a dollar to complete their latest trade agreement, but that day is not likely in our immediate future.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
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