BRICS Watch: Risks and Tricks of the De-dollarization Campaign

By Chinedu Okoye 

Minor successes and Major Challenges in the de-dollarization scheme:

The push to reduce the reliance on the greenback by BRICS economic alliance has gained momentum in recent months. Recently, China and Saudi Arabia agreed to a currency swap and over 90% of trade between China and Russia are done in either the Ruble or the Yuan.

This is a full de-dollarization of economic ties between both countries as the share of the Yuan in global payments systems rise from 1.9% to 3.6% by October 2023.

India faces a road block:

The de-dollarization push has yielded minor successes for China but not all countries within the alliance. India which made a move to pay for crude oil in it's local currency (watcherguru reported a deal with the United Arab Emirates to settle oil import transactions in the Rupee).

The deal however has been turned down by trade partners citing higher transaction costs and foreign exchange risk as major reasons.

Apart from China and Saudi Arabi, the alliance consists of a developing emerging economies with volatile currencies. A feature investors may be accustomed to buy not fond of.

This poses a major challenge to the alliance as its strength is dependent not only on the size of their economies alone, but on the monetary and financial stability of the countries. The BRICS lack that sense of economic coordination that the West have perfected, but they can modify a thing or two to change that even though it is very much a long journey out.

To successfully de-dollarize, the BRICS alliance would have to coordinate monetary policy in a uniform manner, find a strong enough currency upon which all transactions can be conducted. One that is more acceptable to trade partners.

The alliance basically needs a common currency of exchange and a higher degree of monetary flexibility.

A Central Currency of Exchange:

The most important lesson is there has to be a leading currency as ten currencies against the US Dollar is not exactly feasible. The alliance would have to choose the most dominant currency and throw their weight behind it.

That means using the Yuan for trade with partners within and outside the alliance, as the Peoples Bank of China (PBOC), in turn holds significant amounts of the remaining nine currencies in its reserve.

Monetary Flexibility:

Backing currencies up with commodity limits - to some extent - the money supply (Central Banks can only print as much as money as they have Gold) and this reduces their ability to intervene in markets by injection liquidity as we have seen Central Banks do in the last decade.

An absolute reversion to the gold system may therefore reduce liquidity forcing the international payments system to stick to a flexible Fiat US Dollar. Gold can be used as a hedging mechanism, but not a monetary policy tool.

Merits of backing the Remninbi:

Using the Yuan under such arrangements is a more realistic approach as all currencies cannot be accepted by trading partners across the globe.

Hedging the Yuan with Gold strengthens this currency essentially putting the alliance in a position of simpler trade with a currency backed by a commodity that can get you any currency in the world and in many ways can be considered a currency.