Blame The BRICS For The De-Dollarization
(an article on Modern Diplomacy published on 23 September 2023 is summarized here, for original – go here; these are not my view, its just for perspective)
The BRICS alliance – originally comprising Brazil, Russia, India, China, and South Africa – took a major step toward flexing its communal currency muscle at its recent summit in South Africa, writes ‘The New York Post’.
Six new members joined the organization – Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates – in an effort to reduce the dollar’s decades-long dominance and end its use as the preferred payment for the one commodity that still dominates global trade: oil.
Most crucially, at a time of unprecedented global conflict, diminishing the dollar’s importance would allow rogue nations such as Iran and Russia to become immune to sanctions in response to geopolitical bad behavior.
As the BRICS summit made clear, the block’s leverage in the oil market has never been greater. The anti-Western alliance now has six of the world’s top oil producers – Saudi Arabia, Russia, China, Brazil, Iran, and the United Arab Emirates.
By shutting Washington out of trade and diplomacy, BRICS membership allows rogue nations to upend our ability to “Weaponize” the dollar as a tool to punish ‘bad guys’.
China and India – both of which have yet to condemn Russia for its invasion of Ukraine – have kept Moscow’s energy revenue flowing, helping to finance Putin’s war machine and highlighting the power of BRICS cooperation.
My conviction regarding De-Dollarization
The concept of De-Dollarization, which involves reducing the dominance of the US dollar in global trade and financing activities, holds immense potential for the BRICS nations. Comprising Brazil, Russia, India, China, and South Africa, these emerging economies have expressed a shared desire to rely less on the US dollar and instead utilize their national currencies. This shift away from the US dollar, which has long dominated global trade and finance, is a significant step towards reclaiming economic autonomy and strengthening their respective economies.
Rather than pursuing a common currency, the initial focus of the BRICS nations is to increase the use of their own currencies in trade. This approach, as emphasized by Indian Foreign Secretary Vinay Mohan Kwatra, is aimed at boosting trade in national currencies rather than developing a unified currency. This strategy is already in motion, with China, India, and Russia conducting usage trials of their respective national currencies, which will be supported and managed by their central banks.
The introduction of digital sovereign currencies will revolutionize financial transactions among the BRICS nations, eliminating the need to rely on the global SWIFT transactional system, which is predominantly controlled by the US. This will enable these nations to exchange financial data and conduct transactions more efficiently and independently, reducing their vulnerability to US sanctions and promoting risk diversification.
The benefits of De-Dollarization are numerous and compelling. Firstly, it allows for risk diversification, as the BRICS nations will no longer be excessively reliant on a single currency. This will result in stronger national currencies and reduced vulnerability to US sanctions, providing them with greater economic stability and resilience.
Furthermore, De-Dollarization restores autonomy over monetary policy, empowering central banks to adjust interest rates and money supply more effectively. This flexibility enables these nations to respond more efficiently to domestic economic conditions, without being constrained by US monetary policy decisions. It opens up avenues for tailored monetary strategies that can be fine-tuned to address specific economic challenges and promote sustainable growth.
Reducing reliance on the US dollar also helps countries mitigate currency risk, especially if they have significant dollar-denominated debt. By diversifying their currency holdings, the BRICS nations can safeguard themselves against fluctuations in the value of the US dollar, ensuring greater stability in their financial systems.
By embracing their national currencies and reducing their dependence on the US dollar, these emerging economies can unlock a plethora of benefits. From risk diversification and stronger national currencies to restored autonomy over monetary policy and reduced exposure to currency risk, the advantages are undeniable.
However, it is important to consider the potential challenges that de-dollarization may present. Transition difficulties, short-term instability, increased trade costs, and limited global acceptance of alternative currencies are all obstacles that cannot be ignored. These factors may initially cause some disruptions and uncertainty in the financial landscape.
Nevertheless, the continued focus of the BRICS nations on de-dollarization demonstrates their determination to reduce their dependence on the US dollar and reshape the global financial system. This determination should not be underestimated, as it signifies a long-term commitment to diversifying away from the US dollar.
One potential consequence of de-dollarization is a gradual reduction in institutional, investor, and corporate demand for the US dollar. Over time, this could lead to a decline in the value of the US dollar. The impact of such a decline would be most acutely felt within the United States, potentially resulting in a broad depreciation and under performance of US financial assets compared to the rest of the world. Moreover, de-dollarization could also have implications for access to capital and borrowing costs in the US.
As the demand for US dollar-denominated assets decreases, it may become more challenging for US entities to secure funding. This could lead to higher borrowing costs and limited access to capital, which could have a negative impact on the overall economy. Additionally, the stock market values in the US may be affected by de-dollarization.
A shift away from the US dollar as the dominant global currency could lead to a reevaluation of stock market investments, potentially resulting in lower values for US companies. Furthermore, a weakened US dollar could create inflationary pressures within the country. As the cost of imported goods and services increases, consumers may experience higher prices, leading to potential inflationary effects.
In summary, while de-dollarization may have significant implications for the US economy, it is crucial to approach this topic with a balanced perspective. While there may be potential challenges and impacts on various aspects of the US financial system, it is important to recognize that these effects may unfold gradually over time. The US has the opportunity to prepare itself for de-dollarization and its potential consequences, allowing for a smoother transition and mitigating any extreme effects on its economy.
In conclusion, de-dollarization holds immense potential to revolutionize the global financial system and redefine the balance of power in the global economy. The profound impacts that de-dollarization can have on the economy and international trade are contingent upon the speed at which it progresses and the level of coordination achieved among nations. It is imperative that we recognize and embrace the convincing prospects that de-dollarization presents, as it has the capacity to bring about significant positive changes in the world’s financial landscape.