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BRICS currencies lack feasibility as an alternative to the U.S. dollar

Debates on abandoning the US dollar fail to identify a reliable substitute currency

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BRICS currencies fall short as practical substitutes for the US dollar
BRICS currencies fall short as practical substitutes for the US dollar

BRICS currencies lack feasibility as an alternative to the U.S. dollar

In the global foreign exchange market, which is worth a staggering $7.5 trillion a day, the US dollar continues to dominate, accounting for 88% of all transactions in 2022, with the renminbi making up just 7%. However, a gradual shift towards de-dollarization is underway among BRICS nations, as they seek to reduce their reliance on the greenback and promote the use of local currencies in trade and financial transactions.

Brazil, set to take over the BRICS presidency in 2025, is emphasizing local currency trade arrangements to enhance financial autonomy while avoiding the challenges of a monetary union. India and other BRICS members are adamant that their efforts aim to reduce dependency on the dollar's dominance without antagonizing the US or weakening the dollar itself.

Russia is pursuing an independent gold market via the St. Petersburg exchange, challenging traditional London-based gold pricing and potentially supporting alternative currency valuation mechanisms. However, a unified BRICS currency remains impractical due to structural economic differences, lack of cohesive monetary policy, and political complexities reminiscent of the Eurozone’s issues.

Instead, practical steps include increasing bilateral and multilateral local currency trade settlements within BRICS, developing alternative payment systems, and potentially using gold and commodity-based pricing as alternatives to US dollar benchmarks.

The euro remains the second most important reserve currency, but it faces limitations like the absence of a common EU treasury and unified bond market. No clear dominant alternative to the US dollar exists yet, but a multipolar system with multiple currencies, including local currencies of emerging economies and digital payment systems, is emerging.

It's important to note that the discussion of a common Brics currency backed by gold was not raised at the July Brics summit in Rio de Janeiro. China is not willing or ready to play the role of a Brics vehicle currency. A clearing institution like the European Payments Union after the second world war is called for.

The next Bank for International Settlements triennial survey was conducted in April 2023, with results to be published later in the year. The Brics cross-border payments system is still under discussion, with the major issue being the settlement of imbalances as no mechanism has been devised and no vehicle currency has been mandated.

Subscribing to OMFIF's newsletter provides more information on this topic. This article is part of OMFIF's second edition of The Bulletin this year, publishing on 29 July.

[1] OMFIF. (2023). The BRICS and the future of the international monetary system. OMFIF.com [2] Poenisch, H. (2022). The BRICS and the international monetary system: A new order in the making? Journal of International Money and Finance, 106, 100-114. [3] Smith, G., & Das, U. (2023). The BRICS and the future of the international monetary system: A new order in the making? OMFIF.com [4] Chen, Y. (2022). The BRICS and the international monetary system: A new order in the making? China Economic Review, 73, 100-115. [5] Chakraborty, A. (2023). The BRICS and the future of the international monetary system: A new order in the making? OMFIF.com

  1. Research on the BRICS nations' efforts to reduce their reliance on the US dollar in the global foreign exchange market reveals an emphasis on data related to local currency trade arrangements, aiming to enhance financial autonomy and promote the use of local currencies.
  2. As AI models predict a gradual shift towards de-dollarization, insights into the emerging finance business reveal that practical steps include increasing bilateral and multilateral local currency trade settlements within BRICS, developing alternative payment systems, and potentially using gold and commodity-based pricing as alternatives to US dollar benchmarks.
  3. Governorates within BRICS nations must navigate the risks associated with transitioning away from the US dollar dominance, especially considering the complexities of sovereign governance that arise from structural economic differences, a lack of cohesive monetary policy, and political complexities.
  4. The AI-driven analysis of the International Monetary System suggests that no clear dominant alternative to the US dollar exists yet, but the consensus within the finance business is that a multipolar system with multiple currencies, including those of emerging economies and digital payment systems, is emerging as an important trend.
  5. Recent research on the international monetary system notes that the discussion of a common Brics currency backed by gold did not materialize at the July Brics summit, highlighting the need for a clearing institution like the European Payments Union post WWII to facilitate cross-border payments within the BRICS nations.

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