What is De-Dollarization? Why Trump Warned BRICS Against Ditching the Dollar Explained

The recent BRICS Summit, held in Kazan, Russia, from October 22 to 24, 2024, focused on promoting currency cooperation and exploring alternatives to the dollar.

Through initiatives like enabling trade in local currencies, developing a shared payment system, and launching a BRICS grain exchange, these efforts strengthen financial independence among member nations and minimise exposure to dollar volatility.

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This means, Currency Cooperation ↑ Dollar Dependency ↓

Countries are increasingly entering bilateral or multilateral trade agreements that allow transactions to be settled in their currencies rather than relying on the US dollar.

This gives more weight to de-dollarization. But what is de-dollarization? And why is Trump warning BRICS nations against de-dollarization? Let’s understand!

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Trump vs. BRICS: What is De-dollarisation?

Source: Pars Today

De-dollarization is the process by which countries seek to reduce their reliance on the US dollar as a medium of exchange, reserve currency, or standard for international trade. 

This trend has gained momentum in recent years, particularly among nations in the BRICS group (Brazil, Russia, India, China, and South Africa), as they explore alternatives to the dollar-dominated financial system.

Key Aspects of De-Dollarization

• Reduced Dollar Usage in Trade: Countries are increasingly entering bilateral or multilateral trade agreements that allow transactions to be settled in their own currencies rather than relying on the US dollar.
• Diversification of Reserves: Central banks are diversifying their foreign exchange reserves by holding currencies other than the dollar, such as the euro or yuan, and even gold.
• Alternative Payment Systems: Nations are developing or joining payment systems that operate independently of traditional dollar-dominated networks like SWIFT. For example, China’s Cross-Border Interbank Payment System (CIPS) serves as an alternative for international payments.
• Economic Sovereignty: The goal of de-dollarization is to enhance economic independence and reduce vulnerability to US sanctions and economic policies that can impact countries reliant on the dollar.

Historical Context

The dominance of the US dollar as the world’s primary reserve currency was solidified after World War II with the Bretton Woods Agreement, which linked currencies to the dollar and established it as a stable medium for international trade. 

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However, since then, the dollar’s share of global reserves has gradually decreased from over 70% in 2001 to around 59% in early 2023. This decline has prompted discussions about potential shifts away from dollar dependency.

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Why BRICS Nations Are Moving Towards De-Dollarisation?

Source: Ahead of the Herd

 BRICS nations are increasingly moving towards de-dollarisation due to a combination of geopolitical, economic, and strategic factors. 

Key Drivers of De-Dollarisation

This shift aims to reduce reliance on the US dollar in international trade and finance, reflecting broader trends among emerging markets.

1. Geopolitical Risks:

Many BRICS countries view the US dollar and euro as vulnerable to geopolitical risks, especially in light of sanctions imposed by the US and Europe. 

These sanctions have previously frozen assets and disrupted financial channels critical for trade, prompting countries to seek alternatives to mitigate these risks.

2. Economic Independence:

The desire for economic independence from Western-dominated financial systems is a significant motivator. 

A new BRICS currency could enhance their economic sovereignty and provide a counterbalance to the dollar’s dominance, which currently accounts for about 90% of global currency trading.

3. Expansion of BRICS:

The recent expansion of BRICS to include countries like Argentina, Egypt, and Iran has intensified discussions around de-dollarisation. The bloc now controls approximately 42% of global central bank foreign exchange reserves, which positions it well to promote local currencies in trade.

4. Trade Dynamics:

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BRICS nations are increasingly focusing on intra-bloc trade, which has seen a significant rise in non-dollar transactions. For instance, about one-fifth of oil trades were conducted in currencies other than the dollar in 2023, indicating a shift towards local currencies in key commodity markets.

5. Areas of Focus for De-Dollarisation

• Foreign Exchange Reserves: BRICS countries are actively diversifying their foreign exchange reserves away from the dollar. This includes increasing gold holdings and exploring the use of local currencies for trade.
• Cross-Border Transactions: There has been a notable decline in US dollar-denominated cross-border lending among BRICS members, dropping from 67% in 2016 to 55% recently. This trend reflects a growing preference for using local currencies in international transactions.
• Development Initiatives: Institutions like the New Development Bank (NDB), established by BRICS, aim to facilitate financing in local currencies for infrastructure projects, further supporting the de-dollarisation agenda.

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What Are the Main Challenges BRICS Nation Faces in Promoting Non-dollar Currencies?

The BRICS nations—Brazil, Russia, India, China, and South Africa—face several significant challenges in their efforts to promote non-dollar currencies and reduce reliance on the US dollar in international trade. These challenges stem from political, economic, and infrastructural factors.

1. Political and Governance Challenges

• Diverse Political Landscapes: The BRICS countries exhibit varied political systems and economic interests, which complicates the establishment of a unified currency or coordinated monetary policy. 
• Achieving political convergence is essential but difficult due to these differences, which can lead to tensions over currency exchange rates and governance structures.
• Sovereignty Concerns: A move towards a common currency would require member states to cede some degree of economic and monetary sovereignty. This is particularly contentious among nations like China, Russia, and India, which prioritize non-interference in domestic affairs.

2. Economic Disparities

• Economic Imbalances: The economic conditions among BRICS nations are not uniform. Disparities in inflation rates, unemployment levels, and overall economic resilience can destabilise any proposed unified currency system. 
• Such imbalances may hinder effective coordination of fiscal policies necessary for a successful non-dollar currency initiative.
• Dependence on the Dollar: Despite intentions to de-dollarize, many BRICS countries remain heavily reliant on the dollar for trade and finance. 
• For instance, a significant portion of cross-border transactions within the bloc still occurs in dollars due to existing financial infrastructure that favors dollar-denominated trade.

3. Infrastructural Limitations

• Financial Infrastructure: The lack of adequate financial infrastructure to support the use of local currencies is a major hurdle. 
• Effective payment systems that facilitate transactions in non-dollar currencies are underdeveloped, making it costly and inefficient to conduct trade without using the dollar as an intermediary.
• Logistical Challenges: Establishing new financial systems requires substantial resources and coordination among member states. 
• This includes creating a central bank for a potential unified currency and harmonizing monetary policies—tasks that are logistically complex and politically sensitive.

4. External Factors

• Geopolitical Risks: The geopolitical landscape also influences BRICS’ de-dollarization efforts. Many member states are wary of U.S. sanctions that can disrupt their economies. 
• However, this concern does not uniformly translate into a commitment to abandon the dollar. Countries like India maintain strong ties with the U.S., complicating their stance on a common BRICS currency.
• Market Acceptance: The acceptance of BRICS currencies in international markets is limited. Most BRICS currencies are not widely used outside their borders, which undermines their effectiveness as alternatives to the dollar for global trade.

While there is a strong desire among BRICS nations to promote non-dollar currencies as part of their economic strategy, they face significant obstacles related to political cohesion, economic disparities, infrastructural limitations, and external geopolitical dynamics.

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Impact of De-Dollarisation on Global Trade and the US Economy

De-dollarisation refers to the process by which countries reduce their reliance on the U.S. dollar as a reserve currency, medium of exchange, or unit of account. 

This trend is gaining momentum globally, particularly among nations that perceive geopolitical risks associated with U.S. economic policies and sanctions. 

The BRICS+ nations (Brazil, Russia, India, China, and South Africa, along with other emerging economies) are at the forefront of this movement, actively seeking alternatives to the dollar in international trade and finance.

Impact on Global Trade

• Shift in Trade Invoicing: Countries like Russia and China are increasingly conducting trade in their local currencies or alternative currencies such as the renminbi. 
• This shift is particularly evident in energy transactions, where Russian oil is being sold in currencies other than the dollar. 
• The BRICS+ bloc is also focusing on enhancing intra-group trade, which has risen from 22% to 28% of their total trade turnover since 2008.
• Emerging Market Dynamics: The BRICS+ nations now account for about 37% of emerging market fuel trade. 
• This significant share positions them to further influence global trading practices and currency preferences, potentially diminishing the dollar’s dominance in these markets.
• Alternative Financial Systems: Initiatives like central bank digital currencies (CBDCs) are being explored within the BRICS framework as a means to facilitate de-dollarisation. 
• These efforts aim to create a more balanced global financial system that reduces dependency on U.S.-controlled financial infrastructures like SWIFT.

Impact on the U.S. Economy

• Reduced Dollar Demand: A significant decline in global demand for the dollar could undermine its status as the world’s primary reserve currency. 
• This may result in increased volatility for the U.S. economy, particularly if foreign investors begin to diversify away from dollar-denominated assets.
• Geopolitical Ramifications: The U.S. has historically used its currency’s dominance as a tool for economic sanctions and geopolitical leverage. 
• As countries seek alternatives to the dollar, this power dynamic may shift, potentially leading to reduced U.S. influence on global economic policies.
• Market Stability Concerns: The transition away from the dollar could introduce instability in international financial markets. 
• Emerging economies may face challenges related to currency volatility and liquidity as they attempt to establish new trading norms without a dominant reserve currency.

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What Specific Projects Were Announced at the BRICS Summit to Advance De-dollarization?

Source: SDG Knowledge Hub

At the recent BRICS summit in Kazan, Russia, several specific projects were announced to advance the de-dollarization agenda among member countries. Here are the key initiatives:

• BRICS Pay System: Russian President Vladimir Putin announced the establishment of a new payment system called BRICS Pay. 
• This system aims to facilitate transactions between member countries using their national currencies, thereby reducing reliance on the US dollar for trade settlements.
• Central Bank Digital Currency (CBDC) Projects: The summit emphasized the potential of CBDCs in enhancing cross-border payments. 
• One notable project mentioned is m-Bridge, which involves collaboration among central banks from China, the UAE, and Thailand to improve payment mechanisms and support trade without using the dollar.
• Alternative Payment Systems: Discussions included plans to create alternatives to existing international payment systems like SWIFT, which has been a significant barrier for countries like Russia that have faced sanctions. 
• The focus is on developing secure channels for financial transactions that do not depend on the dollar.
• Increased Use of Local Currencies: BRICS members are actively working to expand the use of their national currencies in trade agreements. 
• This initiative aims to facilitate smoother transactions within the bloc and with other emerging markets, thereby promoting economic independence from dollar fluctuations.
• Future Currency Discussions: While discussions about a common BRICS currency are still in early stages, there is ongoing interest in exploring a reserve currency backed by a basket of BRICS currencies as part of long-term de-dollarization strategies.

Source: https://dinhtienhoang.edu.vn
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