BRICS Nations Explore Alternatives to US Dollar

At the 16th BRICS summit in October 2024, BRICS countries discussed increasing the use of local currencies in trade or to create a new BRICS currency, to reduce reliance on the US dollar.

In response, US President-elect Donald Trump stated that BRICS nations could face 100% import tariffs if they support a currency to replace the US dollar as the global reserve currency.

This has intensified discussions on reducing dollar dependence and creating of a multipolar financial system.

Why are BRICS Nations Exploring Alternative Currencies to the US Dollar?

Reducing Transaction Costs: Trading in local currencies eliminates the need for intermediary foreign currencies, which can lower transaction costs and make trade more efficient between BRICS countries.

Dominance of the Dollar: The US dollar currently dominates over 90% of global trade and is central to international reserves. Relying heavily on the US dollar means that countries are significantly affected by US monetary policies.

This can lead to economic instability in their economies, prompting them to seek more control by using their own or other currencies.

Many BRICS countries, particularly from the Global South, struggle to access major currencies like the dollar, hindering their ability to import goods, repay debts, and trade internationally.

Using local currencies can bypass these challenges, fostering growth in local markets and boosting trade within the bloc.

Political Motivations: One of the primary reasons for exploring local currencies is to escape the influence of financial sanctions by the US.

For example, the US blocked Russia and Iran from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network, a vital system for international financial transactions, which left these countries searching for alternatives to maintain trade.

Avoiding reliance on the US dollar also grants these countries more sovereignty in global trade and reduces vulnerability to external economic pressures.

Geopolitical Reasons: Nations like Brazil, Russia, and India are seeking greater autonomy from US influence by promoting currencies like the yuan and ruble, or even considering a unified BRICS currency, to reduce vulnerabilities tied to dollar dependency.

As emerging economies like China grow, they are becoming major trading partners for many countries. This shift encourages the use of alternative currencies for trade settlements.

Trade in Local Currencies

China’s Approach: China has promoted the use of its currency through bilateral currency swap agreements as seen in China’s trade with Ethiopia.

A bilateral currency swap agreement is a financial contract between two central banks to exchange a specific amount of one currency for the same amount of another currency.

China’s barter trade model bypasses traditional currencies by exchanging goods with African countries for local currencies.

These currencies are then used to buy goods from those countries, which are exported back to China and converted into renminbi, supporting its currency internationalization efforts.

Southern Africa: The currency of South Africa (South African Rand) is essential for cross-border trade in the Southern African Customs Union, where Namibia, Botswana, Lesotho, and Eswatini use it alongside their currencies, promoting economic integration and reducing reliance on the US dollar or euro.

India-Russia: In response to US sanctions, India and Russia have been trading in their local currencies (rupee and rouble), with 90% of bilateral trade now conducted in these currencies or alternate currencies.

What are the Potential Risks of Moving Away from the US Dollar?

Chinese Domination: Reducing reliance on the US dollar raises concerns about increasing Chinese economic dominance. China is pushing for greater use of the yuan in international trade, especially with Russia and other BRICS nations.

Within BRICS, China’s dominant economy could lead to disproportionate influence, potentially overshadowing the interests of other members like India, Brazil, and South Africa, who seek a multipolar financial system.

Implementation Challenges: The adoption of a BRICS currency or local currencies faces challenges, as seen in India-Russia trade, where banking concerns over US sanctions hinder large-scale implementation.

Many of the BRICS currencies are not widely used internationally, limiting the effectiveness of trading with local currencies.

Countries that primarily export more than they import face the challenge of accumulating foreign currencies for trade, making the use of local currencies difficult.

Liquidity Issues: The US dollar is highly liquid and widely accepted. Alternatives may not offer the same level of liquidity, complicating international transactions.

Volatility and Exchange Rate Risks: During the transition away from the dollar, countries may experience increased exchange rate volatility.

What are India’s Initiatives to Reduce Dependence on the US dollar??

Internationalizing the Rupee: In 2022, the Reserve Bank of India (RBI) allowed invoicing and payments for international trade in Indian rupees, especially with countries like Russia.

This move was in response to US sanctions and aimed at reducing the dependence on the dollar.