Will the new BRICS basket ‘de-dollarise’ the global financial system?

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In his address at the 14th BRICS (Brazil, Russia, India, China and South Africa) Summit in June 2022, Russian President Vladimir Putin stated that the mini-lateral member-states are working on developing a new global reserve currency. "We are ready to openly working with all fair partners," he said.

"The possibility and prospects of setting up a common single currency, based on a basket of currencies of the BRICS countries, are being discussed," Pavel Knyazev, Russian Sous Sherpa added recently.

It is presumed that the new reserve, consisting of the currencies of the BRICS member-states will be an alternative to the International Monetary Fund’s Special Drawing Right (SDR).

Previous moves

It is not the first time that this bloc of emerging economies is trying to firewall their global financial interests. On July 15, 2014, it signed an agreement at the summit in Fortaleza (Brazil) and called it the BRICS Pool of Conventional Currency Reserves.

The goal of this pool, according to a statement at the Summit, was a mutual provision of money denominated in US dollars by central banks of BRICS countries in case of any potential problems around dollar liquidity. The pool amounted to $100 billion. China contributed the most -- $41 billion. Russia, India and Brazil contributed $18 billion each, and South Africa $5 billion.

The move to launch the new global reserve currency is seen as a direct defence against the dependency on the US dollar. The group said it is also working on setting up a joint payment network to cut reliance on the western financial system.

Also read | Can BRICS reserve currency diminish dollar dominance?

Catch-22

However, market pundits will unanimously agree that changes in the global financial system do not happen overnight, or in a forum. According to the Bank for International Settlement (BIS), around $13.4 trillion was borrowed in dollars by non-bank entities till the end of 2021, of which one-third was by emerging markets.

Countries seem to have found a way to reduce their dependence on the dollar. They are trimming their dollar holdings as the clout of the US in global trade is receding. According to a Cambridge analysis, the share of dollar reserves was 71 percent in 2000 when the US was the largest trading nation, accounting for a 12.1 percent share of global exports.

In 2020, China overtook the US with a 14.7 percent share of global exports while the US’ share stood at 8.1 per cent.

What is the effect of reducing dollar-denominated assets?

According to the IMF’s Official Foreign Exchange Reserves statistics, as economies are reducing dollar-denominated assets in their official forex reserves, the share of the dollar in globally allocated forex reserves declined to 58.8 percent in March 2022 - the lowest since 1995.

Homeground

Back home, the Reserve Bank of India (RBI) is creating a new set of arrangements to allow companies to settle foreign trade in rupees. In 2012, the Ministry of Commerce and Industry convened a task force to examine the use of the rupee in India’s bilateral trade. The task force report favoured extending rupee trade to some oil-exporting countries.

Other BRICS members are also keen to promote the use of their national currencies in trade settlement, and they have discussed the same at BRICS summits for nearly two decades now.

In June 2009, China and Russia agreed to trade in local currencies. During the 2013 BRICS Summit, Indian Commerce and Industry Minister Anand Sharma discussed making a similar move with his South African counterpart Rob Davies.

In 2015, South Africa’s Investec Bank and the China Export-Import Bank acted on this proposal and signed a Strategic Cooperation Agreement, which included the renminbi as a settlement currency for trade.

In June 2016, the People’s Bank of China (PBoC) added the South African rand, allowing for direct trading on the Chinese interbank market.

Putin leading the new reserve currency discussion is not a surprise. The economic sanctions imposed on Russia by the West following Ukraine’s invasion propelled the dollar on an upper trajectory for the better part of H1FY23. Thus, with the new proposed reserve and the use of local currency for trade, the bloc looks to act as a bulwark against the greenback’s global hegemony.