The recent BRICS Summit in Kazan brought together key global leaders to discuss much-needed reforms in the International Monetary and Financial System (IMFS).
Russia’s Ministry of Finance proposed reducing dependency on the U.S. dollar by establishing a new settlement platform for BRICS nations, focusing on security, independence, and inclusion.
While there were initial hints at challenging dollar dominance, the Kazan Declaration emphasized voluntary reforms rather than direct opposition. India’s balanced stance favored gradual change, aiming to reshape the IMFS to better support emerging economies.
BRICS Summit & International Monetary System Reform
- Context: Ahead of the BRICS Summit in Kazan, Russia, the Ministry of Finance of Russia released a document titled “Improvement of The International Monetary System.”
- Participants: Heads from the original BRICS countries (Brazil, Russia, India, China, and South Africa) joined by leaders from 20+ other nations.
Key Highlights of the Document
- Need for Reform: Stated that the current International Monetary and Financial System (IMFS) has reached its peak and needs reforms to adapt to the global economy.
- Criticism of Current System: Accused the current IMFS of “destabilizing potential” due to dependence on a single currency and centralized financial structures.
- Proposed Principles: Suggested that future IMFS should focus on security, independence, inclusion, and sustainability.
- Multilateral Settlement Platform: Proposed exploring a common settlement platform for BRICS based on advanced technologies.
Challenge to Dollar Dominance
- BRICS Stance on Dollar: Indications from the Johannesburg summit hinted that BRICS could counter the dollar’s dominance.
- Brazilian President’s Remarks: Luiz Inacio Lula da Silva questioned why trade can’t be conducted in local currencies and why the dollar holds priority.
- Speculation of De-dollarization: Statements by BRICS leaders raised global speculation that BRICS might challenge the dollar’s dominance.
Historical Context of Dollar Dominance
- French Challenge in 1950s-60s: France led initial opposition to the dollar’s dominance, promoting the gold standard and calling for “Banaliser le Dollar” (dethrone the dollar).
- Bretton Woods Agreement (1944): Established gold and dollar as dual standards for international transactions.
- Nixon’s Policy (1971): U.S. President Richard Nixon announced the end of the gold-dollar standard, making the dollar the sole currency standard globally.
De-dollarization Concerns
- Weaponization of Dollar: Concerns have risen over the U.S. “weaponizing” the dollar through sanctions and freezing foreign assets.
- Return to De-dollarization Rhetoric: Economic pressures from the U.S. have rekindled debates on reducing dollar dependency in international transactions.
The Kazan Summit’s Approach
- Kazan Declaration: Largely silent on de-dollarization; focused instead on expressing concern over “unlawful coercive measures” and calling for reforms to Bretton Woods institutions.
- Encouragement for Local Currency Settlements: Promoted BRICS Cross-Border Payments Initiatives (BCBPI) for local currency use, but clarified participation as voluntary and non-binding.
India’s Position
- India’s Neutral Stance: India opposed overt anti-dollar measures and emphasized no “malicious intent” towards the dollar.
- Advocating Gradual Reform: India advised BRICS to focus on reforming the IMFS, allowing for a natural rise of emerging currencies without drastic actions.
- Outcome at Kazan: India successfully influenced a shift toward gradual, organic reforms rather than abrupt, geopolitical shifts in the monetary system.
Alternative Currencies and Systems to the U.S. Dollar
Chinese Renminbi (Yuan): China is promoting the yuan for international trade, with agreements in place with Saudi Arabia and Brazil. The yuan’s role in global payments is growing, especially as Russia holds a substantial portion of its reserves in this currency.
Euro: While a traditional alternative to the dollar, the euro’s share in global reserves hasn’t risen in tandem with the dollar’s decline. It remains a popular choice in Europe and for countries seeking reduced dollar dependence.
Digital Currencies: Central Bank Digital Currencies (CBDCs) offer a way to bypass the dollar for cross-border transactions. Initiatives like mBridge involve multiple central banks (China, Hong Kong, Thailand, UAE), with some countries experimenting with blockchain and cryptocurrencies as alternatives.
Bilateral Trade Agreements: Nations are forming bilateral agreements to conduct trade in local currencies. Brazil and China, for instance, trade in their respective currencies, while India and Malaysia plan to use the Indian rupee. Similar arrangements are growing in Southeast Asia.
Gold and Commodities: Some nations are increasing their gold reserves as a hedge against dollar reliance. Recent years have seen record gold purchases by central banks, and Russia now prices some oil exports in non-USD currencies.
Regional Currencies: Latin American countries, like Argentina and Brazil, are discussing a common currency (the Sur) for trade. Countries such as Turkey and Iran are also exploring trade options using local currencies or gold-backed cryptocurrencies.
Financial Infrastructure Development: New financial systems are emerging to reduce reliance on dollar-based networks like SWIFT. Russia has developed an alternative financial messaging system, while China has advanced its Cross-Border Interbank Payment System (CIPS).
Current Trends in De-dollarization
- Shift in Currency Reserves: The USD’s share in global reserves has dropped from over 70% in the early 2000s to approximately 54.2% by late 2023. This reflects an increasing inclination among nations to diversify their reserve assets.
- Bilateral Trade Agreements: Nations, such as India, are implementing trade agreements to use local currencies. For instance, India has started paying for oil imports in rupees instead of dollars, reducing reliance on the USD for international transactions.
Challenges in Moving Away from the Dollar
- Complexity of International Transactions: Moving away from a single global currency like the dollar could introduce complexities in trade and investment, raising the risk of foreign exchange market volatility.
- Global Economic Stability: The USD remains central to global trade and finance. Any major shift from dollar dominance could destabilize established economic structures and introduce financial uncertainty.
Key Drivers Behind De-dollarization
- Geopolitical Tensions: The U.S. uses its currency as a tool for sanctions, particularly visible after the Ukraine invasion. In response, countries like Russia and China are actively exploring dollar alternatives.
- Economic Independence: Nations like Turkey, Venezuela, and Southeast Asian countries seek to protect their economies from U.S. sanctions and policy changes by trading in local or alternative currencies like the euro or yuan.
- Emerging Alternatives through BRICS: The BRICS group (Brazil, Russia, India, China, South Africa) aims to enhance trade using local currencies. Together, BRICS+ countries control about 42% of global central bank foreign exchange reserves, positioning them as key players in promoting de-dollarization.
(This analysis draws from the article Why Opposition to Dollar Dominance Shouldn’t Be About Geopolitics, published in The Indian Express on October 26, 2024, with further insights contributed by The UPSC GSPedia editorial team.)