The push to de-dollarisation

It is hardly surprising that Argentina will adopt the yuan in trade deals with China. It is the first Latin American country to switch to the yuan. Brazil has also agreed with China to trade in yuan and its own currency, the real, rather than the American dollar.

The possibility of BRICS developing a currency union to be used for cross-border trade between the nations that form the bloc is a challenge with a chance of success. During the 2020 summit, the group jointly issued the Strategy for BRICS Economic Partnership 2025.

A single union currency means a free flow of trade between members, even when not sharing geographic borders; therefore, US sanctions on one country will lose their effectiveness because products can still travel between member states and end up beyond or even inside the United States consumer market. The strategic choices of the dragon and the bear.

Several countries have recently expressed interest in joining the group. Thirteen countries have formally applied to join, and another six have asked informally, according to reports as the BRICS members prepare to meet in June to discuss the bloc’s expansion. Saudi Arabia, Iran, Argentina, the UAE, Algeria, Egypt, Bahrain, and Indonesia have all shown interest in joining the bloc.

It appears that the goal to dethrone the US dollar dates back to 1960. In 1944, the US dollar became the worldwide reserve currency, the main currency used for trade and saving, as part of the Bretton Woods Agreement (and System). The arrangement granted the US government control over the banking system – and the right to use that control to sanction adversaries.

China’s advocacy for reforming the dollar-based global financial system can be traced to the 1997 Asian Financial Crisis, according to a statement by Dai Xianglong, then Governor of the People’s Bank of China. It is also relevant to observe that BRIC, founded in 2009, publicly declared it a priority during its inaugural meeting to reduce reliance on the US dollar and diversify the global currency and financial system. South Africa joined the bloc in December 2010. BRICS is an acronym for the grouping of emerging market economies, namely Brazil, Russia, India, China, and South Africa. Regardless of the acronym sequence, China is seen as the BRIC concept’s backbone.

The bloc’s principal achievements have been – so far - in the area of financial cooperation. It is important to acknowledge that Russia and China have already created their cross-border payment mechanisms. China’s yuan has replaced the US dollar as the most traded currency in Russia, largely because of sanctions on Russia following the war in Ukraine. India’s rupee is the second most traded currency in Russia for the same reason. Also, China’s national oil company, CNOOC, and France’s TotalEnergies had just completed China’s first LNG trade settled in yuan.

It is not just a monetary union; it also has the appeal of having a strong political influence on global governance. With growing tensions between the United States, Russia, and China, the BRICS move indicates a shift in global finance. New technologies are enabling market instruments for trade contracts and payments. Therefore, the impact of a BRICS union currency would not be limited to inter-BRICS but would have a global effect.

The academic article on the ‘pathways to de-dollarisation’ framework addressed by Zongyuan Zoe Liu and Mihaela Papa in ‘Can BRICS De-Dollarise the Global Financial System?’ makes an excellent read on what is under way. The BRICS are emerging as a club of great powers committed to collective action. The literature and academic research on the BRICS’ long-term commitment to reforming the global financial system and diversifying the global currency structure are limited, but there is plenty of reliable information on the players’ long-term aim to dethrone the US dollar.