The BRICS nations (Brazil, Russia, India, China, and South Africa) have been discussing the possibility of creating a new currency to challenge the dominance of the US dollar. While this idea has gained attention, it faces numerous obstacles. Let's delve into the complexities of this endeavor and examine its feasibility.
Challenging the Dollar:
Various BRICS representatives, including Alexander Babakov from Russia and Brazil's President Luiz Inàcio Lula da Silva, have expressed their desire to shift away from the dollar. The motivation behind this is multifaceted. Recent global financial challenges and aggressive US foreign policies have prompted the BRICS countries to explore the possibility. They aim to better serve their own economic interests while reducing global dependence on the US dollar and the euro. However, the practicality of such a move remains uncertain, as the dollar currently constitutes 84.3 percent of cross-border trade, whereas the Chinese yuan accounts for only 4.5 percent. Skepticism arises due to Russia's use of deception in international relations, casting doubts on its commitment to the cause.
Prospects of a BRICS-Issued Currency:
Despite the uncertainties, a BRICS-issued currency holds economic potential. The collective GDP of these nations already surpasses that of the United States and the G-7 countries combined. By exclusively using their currency, the BRICS could overcome challenges posed by dollar reliance. This approach would enable self-sufficiency in international trade, as demonstrated by their significant trade surplus of $387 billion in 2022, primarily driven by China.
Diverse Trade Opportunities:
A unique advantage for the BRICS lies in their geographical diversity, allowing a broader range of goods to be produced compared to existing monetary unions like the Eurozone. This diversity could facilitate self-sufficiency and attract global trade partners. For instance, if one BRICS member were to use the new currency to trade with China, other members could still engage in trade with that country indirectly, maintaining a seamless flow of goods despite trade restrictions.
What Progress Has Been Made So Far?
During the 14th BRICS Summit held in mid-2022, Russian President Vladimir Putin said the BRICS countries plan to issue a "new global reserve currency" and are ready to work openly with all fair partners. More recently, Brazilian President Luiz Inacio Lula da Silva expressed his support for a BRICS currency, commenting, “Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries? Who decided that the dollar was the (trade) currency after the end of gold parity?” The reaction from non-BRICS countries has been a mixed bag. Some nations, like Turkey, Egypt, and Saudi Arabia, are considering joining the BRICS, and Saudi Arabia has been purchasing Russian oil at record levels. However, some experts believe that a BRICS currency is a flawed idea, as it would unite countries with very different economies. There are also concerns that non-Chinese members might increase their dependence on China's yuan.
Challenges and Limitations:
Despite the potential benefits, challenges persist. The BRICS coalition, while accounting for 42% of the world's population, contributes only 23% of global output and 18% of trade. The dollar remains deeply entrenched as the primary reserve currency, with widespread usage in domestic and international transactions. Additionally, the BRICS face internal disagreements, with China's dominance and India's border disputes potentially undermining the unity required for a successful currency union.
How Would a New BRICS Currency Affect the US Dollar?
For decades, the US dollar has enjoyed unparalleled dominance as the world's leading reserve currency. Its status provides numerous advantages to the United States, including lower borrowing costs, increased demand for US financial assets, and the ability to impose economic sanctions. A successful BRICS currency could erode the dollar's influence, diminishing the United States' economic and geopolitical power on the global stage.
Conclusion:
While the BRICS' ambition to challenge the dollar is commendable, their path to success is strewn with obstacles. The dollar's supremacy in global trade, its role as a store of value, and the lack of a viable alternative hinder any swift transition. Achieving substantive progress in commerce among the BRICS should be the primary focus before attempting to challenge the dollar's hegemony. The BRICS nations must address internal disagreements and build a strong economic foundation to enhance their collective bargaining power. Only then can they effectively challenge the dollar's dominance and create a truly viable alternative currency for global trade and economic stability.