Talk of expanding BRICS membership and de-dollarization is gaining traction, but enlarging the group or ditching the dollar remains elusive.
Recently 19 countries, among them Saudi Arabia and Iran, have enquired about joining the BRICS bloc, which was established by Brazil, Russia, India, China, and South Africa. The nations that attended the BRICS summit held in June were all emerging economies, disenchanted with the U.S.-led international order.
Democratic Republic of Congo Foreign Minister Christophe Lutundula Apala expressed the feelings of many attendees when he said that his country wanted to join BRICS in the hope that the bloc could “bring change and the creation of a new international order.”
Replacing the dollar in international trade settlements is seen as a key step toward breaking U.S. hegemony. The de-dollarization movement is gaining traction in the sense that many countries are talking about ditching the dollar. Trading in currencies other than the dollar, however, is extremely difficult and expensive. Other currencies have limited global acceptance and are subject to exchange rate volatility and currency risks. They also suffer from higher transaction costs, limited convertibility, perceived instability, and lack of settlement infrastructure.
A typical case of attempted de-dollarization is Argentina, which uses the yuanto trade with China. But Argentina’s economy is on the brink of collapse, and the country is running short of dollars. This year’s inflation rate is 115.6 percent, while the country’s currency, the peso, has fallen from 128 to the dollar last July to 264 this year. Argentina’s central bank is using the yuan to purchase dollars in the international market in order to prop up the economy.
Russia and China now conduct 80 percent of their business in the yuan and the ruble, while the ruble is used in 40 percent of all export transactions between Russia and member countries of the Shanghai Cooperation Organization. This is not exactly proof that widespread de-dollarization is underway or that it is even possible. International sanctions against Russia prevent Moscow from using dollars and trading with most developed countries. Consequently, Russia has had to find a way around the U.S.-led global financial system just to survive. However, the economy is shrinking, and the lack of dollar inflows is causing the ruble to lose value. The ruble went from 74.45 rubles to the dollar on May 10 to 90.03 on July 17.
While Russia and China trade in local currency, neither wants to hold the other’s currency in reserves. Russia’s central bank still has more than half of its reserves in U.S. dollars, with the euro as the No. 2 reserve currency. In fact, Moscow is holding 30 times as much U.S. dollar reserves as the yuan. And this ratio is consistent with other nations, as the global average is only 3 percent of foreign reserves being held in yuan.
As none of the BRICS members are willing to hold the others’ currencies as reserves, the U.S. dollar is the primary reserve currency of BRICS members. Some 60 percent of the world’s central bank reserves are held in U.S. dollars. And 88 percent of all global trade is settled in dollars. One option put forth by nations on the de-dollarization bandwagon has been to conduct trade in their own currencies while still holding reserves in dollars. Currently, countries can obtain foreign reserves by selling their exports in dollars. In addition to trading in local currencies being problematic and subject to greater risk than dollar transactions, countries would still have to go on foreign exchange markets and purchase dollars to hold in reserve. And can countries truly claim to be de-dollarizing if they still hold their reserves in dollars?
BRICS has formed a development bank in China called the New Development Bank. To have a BRICS currency, however, BRICS would need a central bank. As there are no viable means of combining the real, ruble, rupee, yuan, and rand, the New Development Bank is a U.S. dollar-based bank. Furthermore, not only does the de-dollarization of BRICS remain part of a hypothetical future, but so does the bloc’s expansion.
Despite recent talks, BRICS has yet to admit any new nations. In fact, to date, no official accession mechanism has been put in place to do so. The next BRICS summit is set for August when a possible membership procedure will be discussed. The summit is proving problematic, however, because it is due to be attended by Russian President Vladimir Putin, now the target of an arrest warrant issued by the International Criminal Court (ICC). Given that South Africa is a member of the ICC, Pretoria would be expected to arrest Mr. Putin if he shows up.
The nation is also obligated to arrest Mr. Putin under South African law. South Africa has failed to condemn the Russian war in Ukraine, and it is unclear if Pretoria will violate international and domestic law should it allow Mr. Putin to attend the BRICS summit. South Africa’s primary opposition party, the Democratic Alliance, has applied to the courts to oblige the authorities to arrest Mr. Putin if he enters the country.
