Symbolic Kazan Move Long Way From Bringing Down US Dollar

The latest noise was made at the just-concluded BRICS summit at Kazan in Russia, after a symbolic BRICS banknote was unveiled. However, the final declaration signed by all participating countries stopped short of mentioning anything on a common BRICS currency.

Instead, the declaration encourages and explores the possibilities of trade and financing in local currencies. Though in the past, different countries have tried bilateral trade in local currencies (India had a rupee-rouble trade mechanism with the erstwhile USSR, under the 1953 Indo-Soviet Trade Agreement), it is for the first time that multiple countries from the Global South are actively mulling over it.

Perhaps, BRICS has the potential to effectively take forward its de-dollarisation agenda in foreign exchange (forex) reserves and fossil fuel trade. The bloc is expanding (Egypt, Ethiopia, Iran and the UAE joined earlier this year), and the central banks (CBs) of BRICS+ control 42 per cent of global central bank forex reserves.

The catch, though, is that most of their collective 42 per cent forex reserves are in US dollars.

What Trade And Finance In Local Currencies Hope To Achieve

Russia’s intent to go for de-dollarisation stems from the ongoing Western sanctions against it. Countries in BRICS+ or the Global South will benefit if the cross-border movement of goods, services and finance can be done in local currencies.

The first headache of the monetary policymakers about foreign exchange reserves, especially in US dollars, will disappear if de-dollarisation materialises.

If local currency trade gains traction across geographies, non-US currencies may find opportunities to become “internationally accepted." China has already shown interest, while India aims to strengthen its rupee globally.

The progress of BRICS+ in regional trade is rapid, and the bloc is gaining importance as a potential trade partner for other emerging markets (EMs), particularly in the fossil fuel trade. Currently, the formation accounts for 37 per cent of the EM fuel trade.

That is why fuel trade is a key area of interest for de-dollarisation. The induction of new, oil-producing member countries like Iran and the UAE is significant in this context. Iran is also reeling under sanctions imposed by the US and its Western allies.

The current oil power of the bloc is limited though, as it has only a 30 per cent share of the global oil production.

The key areas, where BRICS has already started active de-dollarisation, include cross-border bank claims and international debt securities. As a result, in recent times, there has been a decline in the US dollar's share in overall BRICS's external debt. China is instrumental in extending loans in renminbi to many countries.

Global Strength Of US Dollar

International usage of the US dollar is steadily declining in two major indices — central bank forex reserves and forex derivatives.

For a forex derivative, the buyer and the seller agree to make a future transaction at a pre-set price and date. But, other developed market (DM) currencies are putting pressure on the US dollar in these two areas. Although EM currencies have also joined this push, within that the BRICS+ influence is negligible at present.

Despite the decline, the US dollar still accounts for 58.2 per cent of global forex reserves in 2024. In 2016, the share was 65.9 per cent. As a result, the dollar’s share in international bank claims dropped from 51.2 per cent of the global total in 2016 to 46.6 per cent in 2024 (see graphic below).

The share of the US dollar in international debt securities, however, has remained steady at close to 47 per cent between 2016 and 2024. During the pandemic year of 2020, it went up to 48.3 per cent. So, during troubled times, the international financial system reaffirmed its faith in the dollar, signifying its importance.

Like any other derivative, interest rate (IR) derivatives are financial instruments to hedge future interest rate risks. The buyer and seller agree to transact for future interest rate payments at a pre-specified rate and time. Significantly, the share of the US dollar in the global pool of IR derivatives increased from 21.8 per cent in 2016 to 27.2 per cent in 2024.

Therefore, any current prediction of the demise of the US dollar’s hegemony in the global financial and payments system is pre-mature and impractical.

BRICS+ Currencies Yet To Gain Heft To Threaten US Dollar 

The BRICS currencies have made some inroads in the derivatives and international transactions segments. The share of Chinese yuan (CNY) or renminbi, in the global CB forex reserves, increased to a modest 2.1 per cent in 2024, from a smaller 1.0 per cent in 2016. 

Similarly, the share of BRICS+ currencies in SWIFT transactions increased from 3.3 per cent in 2016 to 6.4 per cent in 2024. The share in international debt securities increased from 2.7 per cent in 2016 to 3.2 per cent in 2024.

In exchange-traded IR derivatives, however, the share of BRICS+ currencies jumped from 0.9 per cent in 2016 to 2.6 per cent in 2024, mainly driven by the Brazilian real.

Most of these improvements in shares are due to the growing international influence of the CNY. But as data show, the shares are still far too low to make an impact on the dominance of the US dollar.

Ideally, gold is the most natural and obvious alternative to the US dollar. However, the CBs of the BRICS+ hold only 10 per cent of the global central bank gold reserves.

Settling trade dues in national currencies is also a tricky business, due to the issue of trade deficits. For example, some parts of Indo-Russian trade are settled in local currencies.

Now, let’s assume that India and Russia agree to resume rupee-rouble trade. India’s current account deficit with Russia in the April-June quarter of 2024 widened to US$ 9.7 billion. Under a hypothetical rupee-rouble mechanism, this means Russia would be sitting on an excess amount of Indian rupees. Russia, by the way, developed a rupee reserve as part of its trade with India, after the two countries began settling debt in local currencies in the face of Western sanctions.

Now, what would Russia do with that extra rupee stockpile?  

The RBI had earlier suggested that this amount may be channelled into projects and investments on Indian soil. It also hinted at investing in Indian government securities and joint ventures in mutually beneficial sectors like defence.

However, India cannot decide where Russian investors will put their money. Unlike the US dollar, most other aspiring currencies will have to negotiate this "acceptability problem".

Roy Amara, a 1960s American scientist, postulated that people tend to overestimate the short-term impact of anything new and underestimate its long-term impact. The idea of de-dollarisation seems to follow that pattern.

As pure statistics show, the US dollar may be declining slightly in some segments of international financial transactions right now, but its overwhelming might as the “reserve currency of the world” remains intact, at least in the short term.  

In the long term, EM currencies may be able to spread their influence, but their first fight is likely to be against the internationally recognised developed market currencies other than the US dollar (like Euro, Japanese Yen, British Pound Sterling). The latest effort of BRICS+ to do business in the national currencies of the member countries is a part of that continuum.