Will a BRICS new currency replace the US dollar as a trading currency?

BRICS currency photo from china daily

The BRICS group, which consists of Brazil, Russia, India, China, and South Africa, is now working on developing a common currency in an effort to abandon the use of the US dollar and challenge the dollar dominance of the United States. This comes as Moscow and Beijing have been calling for the de-dollarization of international transactions in response to Western sanctions.

For many years, the US dollar has served as the reserve currencies for all transactions involving foreign currencies. However, in recent decades, there has been talk of developing a new currency in an attempt to get rid of the dollar and fight back against the dominant power of the United States.

This trend away from dollarization has been given a boost in recent times, especially with the beginning of the Russia-Ukraine war in February of last year. And only the week before, this movement was given even more energy when Alexander Babakov, the deputy chairman of the State Duma, was cited as saying that the BRICS countries are in the process of building a new medium for payments, one that is founded on a policy that “does not defend the dollar or the euro.” This statement provided the movement with even more momentum.

Putting an end to the reign of the currency king

Is it true that the BRICS nations are working on a new currency for commercial use? What are the people who are driving this movement forward?

Will India come out ahead as a result? Will the plan be successful in the end? There are a lot of questions on this matter, and we do our best to answer all of them!

The US dollar is often referred to as the “king” of currencies. In 1944, it was officially designated as the reserve currency for the entire world. The conclusion was reached by a committee comprised of representatives from the 44 countries that were parties to the Bretton Woods Agreement.

Since that time, the US Dollar’s dominance across the world. It has provided the United States with an excessive degree of control over economies all around the world. In fact, the United States has long relied on the application of sanctions as a method for achieving its foreign policy goals.

On the other hand, not everybody enjoys playing by US rules, and countries such as Russia and China would prefer to put an end to the dollar’s hegemony. This procedure is referred to as de-dollarization, and it describes the process of lowering the dollar’s dominance in global financial markets. In the context of the trading of oil and/or other commodities, this refers to the process of replacing another currency with the US dollar.

Also Read: What does a strong Dollar mean for the Philippine Economy?

Brics vs Dollar

How BRICS Challenges US Dollar’s Dominance

The proponents of the new currency present it as a serious threat to the US dollar, arguing in particular that (along with Iran and Argentina, which want to join the BRICS grouping), the countries together account for more than a quarter of the world’s oil production, half of the world’s iron ore production, forty percent of the world’s corn production, and forty-six percent of the world’s wheat production. This may provide the new currency with a solid foundation from which to launch itself into the global financial markets.

One other point of contention is the fact that the percentage of the world’s foreign exchange reserves that are held in US dollars has been steadily going down as of late. This is true (the share of the US dollar has decreased from over 70% in 1999 to 59% by the end of 2021), but the majority of this change is not due to a shift of funds into the currencies of some of the BRICS nations (about 25% of this change is due to a shift into the Chinese renminbi), but rather into the currencies of smaller economies such as the Australian dollar, the Canadian dollar, or the Swedish krona.

The BRICs countries

The BRICS nations that have been listed all have a variety of problems, the most frequent of which include socio-economic challenges, inadequately developed infrastructure, a major share of the shadow economy, high levels of corruption in governmental institutions, sanctions, and significant social stratification, amongst other problems. All of this contributes to a more challenging climate for doing business and for the economy overall in the BRICS nations in the issue.

Today, Russia is engaged in a war in Ukraine, which is costing the country an enormous amount of money. As a result of this conflict, the majority of the Western world does not want to trade with Russia and does not consider it a serious partner. Russia will not get rid of this moniker any time soon, and the other nations in the organization are keeping a guarded tone in this regard rather than taking Russia’s side categorically.

There may be a need for an alternative currency among smaller emerging economies in order to put an end to the dollar hegemony of the US dollar; nevertheless, this demand alone may not be sufficient to ensure the success of the new currency. Bond yields in the BRICS countries may give the impression of being appealing, but this is not a reflection of the quality of the bonds themselves but rather of the substantial credit risk that is associated with the countries. This new currency is therefore more of a political initiative than anything else, and it is quite unlikely that it will ever be put into use. This is similar to the BRICS grouping itself.

The BRICS currency

According to recent reports, the new financial agreement may be made public during the annual summit of these countries, which will take place in South Africa in the month of August.

Sources have revealed that Russia is the driving force behind the concept; as a result of its invasion of Ukraine, Russia has been subjected to economic sanctions from the West.

It is interesting to note that Brazil has already started to accept yuan for the settlement of international trade relations and investments. Rupee-Rouble is a method of international trade that is used by India and Russia. Instead of settling dues in dollars or euros, trading obligations are settled in Indian rupee.

This demonstrates that the BRICS countries have the intention of altering the global financial system that is dominated by the dollar, which would ultimately result in the de-dollarization of the global markets.

BRICS Challenges

Both the economic crisis and the dollar’s dominance in the current economic age have gotten worse. It was determined that other forms of collaboration around international trade and investment were required, and as a consequence, BRICS nations started to form as a result of this realization.

In addition to this, they now have a larger GDP (PPP) than the countries that make up the G7. This group consists of the United States of America, the United Kingdom of Great Britain and Northern Ireland, France, Canada, Germany, Italy, and Japan.

However, during the course of the past three years, the BRICS group has been confronted with a great deal of difficulty. In the year 2023, Russia and Ukraine were deep in the throes of a drawn-out struggle. The stringent “zero-covid” policy had caused China to deal with the ramifications of its actions. Brazil’s economy contracted in 2022, while South Africa’s Gross Domestic Product (GDP) dropped by 1.35 percent between October and December of the previous year. Both are just two of the many issues that have plagued both countries. And it is anticipated that India’s growth will decelerate to 6.1% in 2023 before picking up speed to 6.8% in 2024.

Also Read: Why is Economic Growth important in a City?

Philippines and the BRICS

Jim O’Neill, an analyst at Goldman Sachs, came up with the phrase “BRICS” years ago to refer to prospective emerging markets for financial capital that would extend the boom of the global financial markets in the first decade of the 21st century.

However, one may claim that even if O’Neill had not been the one to come up with the name, the BRICS would still have evolved as a conscious organization of large countries that are fast rising and have a conflicted relationship to the conventional center economies of Europe and the United States.

We need to figure out how to work with the BRICS because they are a significant new player in the global economy. They act as partners in economic production as well as rivals to the traditional centers of economic growth in the United States and Europe.

They present opportunities as well as dangers for us Filipinos, particularly in the event that the government of that nation decides to take a more autonomous path in its approach to foreign policy goals. When it comes to the most powerful nation in the BRICS group, China, this will be an especially difficult task.

During their most recent summit in Brazil in the middle of July, the BRICS gave notice that they are now an economic alliance that poses a challenge to the status quo of the global economy. During the summit, they inaugurated two ground-breaking institutions that were intended to rival the North-dominated International Monetary Fund and World Bank.

These institutions were as follows: a contingency reserve arrangement with an initial capitalization of $100 billion, which is around 558,705,000,000.00 in Philippine pesos, that can be accessed by BRIC members experiencing balance of payments problems, and the “New Development Bank”.

What does BRICS’ Currency Reserve mean for OFWs and Investment?

Emerging giants in their fields The group of countries known as the BRICS is becoming increasingly dominant in economic growth. Reforming the global financial system is one of their top priorities, and in April, Russia became the first nation to ratify an agreement to establish a ”reserve pool” for foreign currency worth one hundred million dollars.

This arrangement, which is known as the “Contingent Reserves Arrangement,” is effectively a reserve of foreign new currency that any of the BRICS countries can access in the event that they have an urgent requirement for it.

The presence of this emergency store will help to maintain their positive balance of payments and, in effect, cover their debts for the time being. It is of the utmost importance to maintain one’s financial assets in a reliable foreign currency since this offers protection against new currency swings in BRICS member countries.

The Brazilian real, for example, lost around 17% of its value versus the US dollar in the first three months of 2015 as a direct result of the political unrest and inflation that occurred in that country. Even when they are going through bad times, Brazil and the other nations that make up the BRICS group can maintain a relatively stable exchange rate for their currencies because they have reserves.

But what will mean to OFWs and Investment?

Having a reserve of foreign currency could be helpful in maintaining global economic stability if you are a citizen of BRICS nations. As a result, this boosts commerce and tourism, which in turn typically results in a decrease in unemployment. Stability usually goes hand in hand with stable new currency rates, which makes it simpler and easier to budget for international endeavors like traveling or buying a home in another country.

Because of the depreciation of the Brazilian real at the beginning of 2015, the value of a home that had been valued at $200,000, which is around 11,174,100 million pesos in today’s new currency, would have dropped to $166,000, which is around 9,274,503 million pesos, which is very rapidly. You can feel more confident about your purchases when interest rates are stable since they protect against sudden devaluations.

If you are an investor in one of the BRICS nations, the reserve has consequences for the level of consumer confidence you enjoy. This is probably going to increase as a result of the fact that BRICS countries are able to pay off their international loans more quickly and have economies that are more secure.

This results in an increase in consumer spending and overall economic growth, which indicates that more money is being invested in businesses in which you may own shares. Exchange rates that are relatively stable suggest that investments are safer overall. The situation is very similar to the one we discussed earlier with regard to the cost of real estate in Brazil; the likelihood of being subjected to an unfavorable surprise has been cut down drastically.

Also Read: Affordable House and Lot: The Ideal investment for OFWs

In a nutshell, the BRICS nations have shown improved collaboration, and they seek an alternative to the current global financial system of the dollar’s dominance. In the context of the BRICS, Russia and China are taking the initiative to de-dollarize their economies in order to protect the interests that have been at stake as a result of their geopolitical competition with the United States and in light of the possibility that they would be subject to future sanctions. India, Brazil, and South Africa have all expressed their support for BRICS’s declarations regarding the modification of the current international monetary system and the expansion of chances to encourage the use of national currencies in international trade. The members of BRICS have all taken action to de-dollarize their economies and increase their level of autonomy within the global financial system.

The primary objective of the BRICS nations in creating a currency that functions similarly to the SDR is to challenge the US Dollar’s dominance while simultaneously constructing their own sphere of influence and a monetary unit that can be used inside it. It is not entirely evident at this point whether or not all BRICS members wish to contribute their foreign reserves to the development of this new area of influence.

To diversify their economies and lower the risk of external shocks and currency shocks induced by the US dollar, all of the BRICS nations have identified de-dollarization as a shared goal and priority. De-dollarization can take several forms.

However, despite the fact that the member states of BRICS both collectively and individually intend to protect their global financial system by creating a reserve currency, over-reliance on the US dollar presents problems that may prevent such an idea from becoming a near-term reality.