BRICS currency: De-dollarizer or Yuan Proxy

For decades, the US dollar has been the sole leader in global finance. It dominates international trade, forex reserves and pushes American financial interests all over the globe. The BRICS bloc which represents over 40% of the world's population and 37% of the global GDP has made it their mission to change this.

 Before we talk about how they plan to change this we must understand what this mystic BRICS bloc is. BRICS was an informal coalition created in 2009 in order to as Bernardo Jurema puts it ‘de-westernise’ the world. Consisting of emerging world powers like Brazil, India, China, Russia, South Africa; BRICS presents a significant threat to the dominance of the west. 

Now coming to BRICS’s de-dollarisation plan there are serious talks about a common currency as they try to find ways beyond the dollar system. At first thought the idea seems revolutionary, a single currency just like the euro which has been quite successful. Unfortunately when we take a deeper look this ambitious vision is not only complicated and hard to implement but risks turning into a financial weapon for China enabling them to exert their ambition of becoming a global superpower. 

Weaponization of the dollar  

The current financial landscape is overwhelmingly held by the dollar. It makes up 57% of the world's forex reserves and accounts for 88% of global forex transactions. We could say that the entire globalised world's trade runs on the dollar.  

This system, although established and convenient, presents a huge threat to anyone who is not American. This dominance of the dollar gives huge amounts of economic power to the US by allowing them to sanction countries who don't serve their financial interests straight into the ground with a snap. For example during Russia’s invasion of Ukraine the US froze about 300 billion dollars worth of Russian foreign reserves sending a clear message, if you defy the US all your assets could vanish overnight. 

For BRICS nations this was very much a wake up call. They realised that the only way to safeguard themselves from the US is to de-dollarize and develop a shared currency. 

Prospects of a BRICS currency 

We can see the benefits of a shared BRICS currency are very clear. Not only does it safeguard us from USD but it also lowers transaction costs and streamlines trades. Unfortunately there are a lot of issues and complications specifically with the initial implementation of the BRICS currency. 

Alternatively, there are a few potential currency models that BRICS could implement. 

The first is a single currency model, similar to the euro, this would replace all the BRICS currencies with a shared free floating currency. There are many merits to this but convincing member nations to abandon their currencies would be difficult at best.

Determining the initial exchange rate is also a very complicated task, it could be pegged to a basket of member currencies for the initial valuation or it could be pegged to commodities like gold. Unfortunately pegging the currency to a commodity like gold only to drop it later would create a massive crash in the currencies valuation just like the dollar did when the gold standard was abandoned. 

The second option is simply a basket backed model similar to that of IMF’s SDR (Special Drawing Rights). This is more realistic and has many advantages. Firstly it allows all the members to retain their domestic currencies. It wouldn't overly intertwine the members' economies.

However this system comes with its own issues. Relatively speaking some of the economically weaker economies like South Africa may feel like they have been treated unfairly. On top of that, the currency's  reliance on developing unstable economies doesn't exactly inspire confidence. The lack of any kind of central regulatory body is also concerning but this can easily be fixed in due time. 

China's growing financial influence  

China represents over 70% of the blocs total GDP and holds a dominant  export surplus creating massive demand for the yuan. It has already begun its initiative to ditch the dollar with many bi-latteral trade deals being conducted in yuan. 

It has also pushed yuan based trade settlements all over Africa usings its belt and road initiative and debt traps.By pushing this yuan based trade settlement, china slowly is preparing to internationalise the yuan. They have also been stockpiling gold reserves, possibly preparing for a future where the yuan becomes a global currency. 

This is where the risk of the BRICS currency being used to further Chinese interests comes in. As the most dominant force militarily, economically and politically in the BRICS as of now there are many worries that China may use this opportunity to exploit the currency to further its own economic incentives. Logically speaking the end goal for China has always been to become a global superpower. This goes directly against the BRICS goal of creating a multipolar global front. 

Along with all this China has a centralised finance system which gives it an edge in its ability to manipulate a shared currency. They can artificially control exchange rates and liquidity. They would be able to stockpile massive reserves of the BRICS currency because of their trade surplus. They could easily use this stockpile to value and devalue the currency as they see fit. 

Conclusion

While a common BRICS currency aims to reduce the dependency on the US dollar there are many hurdles that it must overcome. Even if it does manage to overcome these hurdles there is always the threat of one member overpowering the others and manipulating the currency to match their needs. Unlike the euro these countries' economies are not deeply intertwined nor are they even necessarily allies. A shared BRICS currency must be tightly regulated in an unbiased manner for any amount of success to be had. It must represent what BRICS does, a dream for a truly multi-polar world.  Written by: Rishi Teja Picture Credits: https://tradebrains.in/brics-to-launch-new-currency-will-it-challenge-the-dominance-of-us-dollar/