by Marco Grisenti* – Unimondo
De-dollarisation is not a new phenomenon, but a process that has been underway for at least 25 years, as evidenced by the composition of the world’s central bank reserves, where the dollar has steadily declined from 72% in 1999 to 59% today. The euro is at around 21%, reaching 29% in 2010 before collapsing with the European sovereign debt crisis, the Japanese yen at 6% and the pound sterling at 5%. Are we, therefore, witnessing a process to undermine the dollar’s hegemonic role in international trade transactions? Is a new currency, driven by the BRICS countries (Brazil, Russia, India, China and the recently added South Africa), taking the place of the dollar in traders’ confidence in international markets? So far, the answer is no. But there are interesting developments to watch.
First of all, de-dollarisation refers to the loss of the US dollar’s dominance in trade. This scenario starts with the simple assumption that a world without the greenback is possible – on paper, of course. As we know, the reality is different. The current dollar-dominated international monetary system was born out of the Second World War and the Bretton Woods Agreements, which were designed to re-structure international trade. Even today, the dollar’s dominance is unmatched by any other currency, and this is because choosing which currency to use depends on the confidence people have in it. Rationally, we choose a currency based on the projection of its future value, i.e. its ability to hold and transfer value over time. Ergo, the most stable currency is the one that depreciates the least relative to others. And this depends on an enormous range of macroeconomic variables, starting with the strength of the country’s economy, the effectiveness of its central bank, its fiscal balance, etc. This is why the dollar is preferred to other currencies.
In fact, if we look at the private sector, and more precisely at the presence of the dollar in the invoicing of exports, in the denomination of bank loans and liabilities, i.e. in the real economy, as well as in SWIFT transactions, the presence of the dollar remains dominant, with a trend that has remained essentially unchanged in recent years, or is increasing, as in the case of developing or emerging countries, which today generate almost half of the more than 12 trillion USD of debt issued by entities outside the United States. To take another example, 90% of foreign exchange (FOREX) transactions are still conducted in USD, trivially because it is more liquid, i.e. cheaper.
But hasn’t the famous decline in dollar reserves led to a reflexive rise in the currencies of the BRICS or emerging countries? Not exactly. The decline in the dollar has been offset by greater diversification into other stable, smaller currencies such as the Canadian or Australian dollar and, to a limited extent, the Chinese renminbi, which remains marginal at 2.7% of total reserves.
While it is true that the BRICS are countries that tend to break away from the Western axis, with the common denominator being the will to emancipate themselves from the dollar, it is also true that they have not managed to come up with a convincing proposal in recent years, due to very heterogeneous economies, asymmetric interests and international political tensions. It is still too early to outline the path that the Chinese renminbi, the Indian rupee or some utopian currency coined by the BRICS will take, but that path is certainly still very much uphill. In the case of China, the capital controls imposed by Beijing or the blockade on the free movement of money are a major obstacle to their spread; the Indian economy, on the other hand, is still fragile, accounting for only 2% of world exports and the rupee is not a fully convertible currency. Moreover, in May this year, after several months of negotiations, efforts to regulate bilateral trade between India and Russia in rupees were suspended. Not to mention the border hostilities that bind China and India, further obstacles to the creation of an alternative currency union.
At the same time, it is fair to point out that the waters are slowly turning and that the BRICS countries have been pursuing a wide range of initiatives to reduce their dependence on the dollar, starting with the numerous trade agreements signed between Russia, China and Brazil aimed at encouraging greater use of currencies other than the US dollar in their cross-border transactions. The central banks of these countries are moving significant portions of their foreign exchange reserves out of dollars and into gold. Recent oil agreements between China and Saudi Arabia were celebrated in renminbi, as the oil market is an important sector where Southern countries are increasingly using local currencies for trade payments.
Theory tells us that the more transactions are conducted in a currency, the more liquid its markets become, and the more the currency strengthens. Given that the BRICS represent more than 40% of the world’s population and 31.5% of its total GDP, today’s order could be overturned in the coming decades if certain conditions are met. Undoubtedly, to undermine the dollar’s throne, the BRICS would first have to settle their differences, resolve conflicting nationalist interests, abandon dictatorial political regimes and form a united front. Then they would have to mature their economies, develop better payment systems and consolidate their finances. Steps that would increasingly strengthen their currencies globally. The BRICS summit currently taking place in Johannesburg could be the first step towards a breakthrough in the multipolar process of world politics and economics.
More than the creation of an implausible BRICS currency, the possibility of establishing an efficient integrated payment system for cross-border transactions, no longer dependent on the dollar, is on the agenda. It remains to be seen whether the fine and pompous words that will surely be spoken will be followed by concrete actions.
* A graduate in economics and financial analysis, I have been working in sustainable finance since 2014, with a focus on Latin America, which has welcomed me for many years. I have worked with NGOs in the field of microfinance and social entrepreneurship, held various positions in consulting firms and ethical banks, and ended up in investment funds specialising in impact investing. In a constant search for answers and solutions to the many problems of the Global South and beyond. I believe in a healthier, more balanced and inclusive world where diversity can be valued.
On the cover photo, Brazilian President Luiz Inácio Lula da Silva © Isaac Fontana/Shutterstock.com