“Ridiculous” or not, the idea of a BRICS currency replacing the dollar certainly got economists talking last week when the topic was aired at the 2023 BRICS Summit.
In a virtual address to the summit on 23 August, Russian President Vladimir Putin said the process of de-dollarisation is “irreversible” and “gaining pace”.
A week earlier, the former Goldman Sachs economist who coined the BRICS acronym told the Financial Times that the notion that the group of emerging nations might develop its own currency was “just ridiculous” and “almost embarrassing”. Lord Jim O’Neill added that creating a common currency for the five strongly diverging countries – Brazil, Russia, India, China, and South Africa – would be unfeasible.
But even before the heads of state of the member countries – sans Putin – descended on Johannesburg for the 15th summit, talk of toppling the United States dollar as the dominant world currency – a position it has maintained for the past 80 years – was making headlines.
Despite its many naysayers, among emerging markets, the idea of a BRICS currency seems to be, well, gaining currency – a shift that represents a significant realignment in geopolitical forces.
According to Adriaan Pask, chief investment officer of PSG Wealth, two main factors are driving the narrative of why emerging markets are thinking of replacing the dollar.
The first is tensions between the US, China, and Russia.
“The US and China tensions escalated significantly during the Trump administration, and, obviously, recent developments in Ukraine have put tremendous strain on US and Russian relations.
“The latter resulted in sanctions that essentially cut Russia off from the global financial system, which is referred to as the so-called ‘weaponization’ of the dollar. China also knows it would not be exempt were the tensions there to escalate.”
The second, Pask says, is a broader emerging market.
“The relatively strong dollar over the past few years, in what’s been a risk-off environment, has put emerging economies under pressure. Importing goods becomes increasingly expensive if your currency is relatively weak, and the offset that you get from exports has less of an impact. That then means that you are ultimately importing some inflation, which in turn leads to higher interest rates, which negatively impacts on growth.”
He explains that most emerging-market countries also have significant amounts of dollar-denominated debt.
“In a higher interest rate environment, coupled with a firmer dollar, this debt becomes increasingly expensive to repay, and these countries ultimately risk a potential default.”
Reign of the dollar
Before the US dollar, the United Kingdom’s pound sterling was the primary reserve currency for much of the world in the 19th century and the first half of the 20th century. That was until the country almost bankrupted itself fighting World War 1 and World War 2. Emerging as the dominant economic power post-war, the US would see its dollar adopted as the new reserve currency in 1944.
Pask says the US dollar serves as the world’s reserve currency primarily because of the petrodollar system where oil transactions are conducted in dollars and the proceeds are reinvested in US bond and treasury markets.
“The reserve currency’s purpose is to facilitate efficient trade by providing a widely accepted medium of exchange and sufficient reserves for seamless transactions across regions. This efficiency also extends to investments and debt settlements.”
Currently, 84% of the world’s trade is done in the US dollar, but Pask says this does not mean it will remain the world’s reserve currency indefinitely. He says financial developments across the globe have paved the way for the easier entry of alternatives. Take the euro, for example. Introduced in 1999, it is currently the second most-held reserve currency in the world.
“However, if you ask how realistic it is for a BRICS currency to ultimately dethrone the dollar as the primary reserve currency, I think we’re still a very long way off from that,” he says.
Moving mountains
Implementing a BRICS reserve currency, as O’Neill pointed out to Financial Times, will – considering the considerable complexity of implementing cross-regional policies – also be rather difficult.
Pask is of the same mind. He says the BRICS countries exhibit notable variations in their policy deployment, GDP generation, currency management, interest rates, and inflation policies.
“Achieving the required level of integration would be exceedingly complex.”
And then there is the question whether, ultimately, it will be worth all the effort.
“One could simply opt to hold the individual BRICS currencies as reserves if needed,” Pask says.
This is something that might happen in any case, it seems.
In an interview with Al Jazeera, Chris Weafer, an investment analyst with Macro-Advisory, a strategic consultancy that focuses on Russia and Eurasia, said that,in finding alternatives to the dollar, BRICS was likely to push for the greater use of local currencies. He said that 80% of the trade carried about between Russia and China is already settled in either Russian rubles or Chinese yuan.
“Russia is also trading with India in rupees … So, you’re not talking about a new currency; you’re talking about settling in the South African currency or the Russian currency,” said Weafer.
Thinking global
But however unlikely or far off the possibility of a BRICS currency may be, that does not mean that it doesn’t bare thinking about.
Pask says it’s a good debate to have because it forces the hand of some emerging markets to adopt more global investor-friendly policies. As an example, he references China, which, he says, faces certain constraints.
“Such as governance and regulations which can be erratic, and the currency is not fully convertible yet. Refinement and improvement in these areas are necessary before it could even be considered a viable alternative.”
The ultimate goal, he says, is to enhance transparency, convertibility, and integration into the financial system.
“Achieving these objectives would offer investors greater security and more options in high-growth environments.”
However, he cautions that while this shift has the potential to be positive, successful implementation is key.
“Poor execution could lead to turbulence instead of the desired efficiency,” says Pask.
