De-dollarization takes center stage at the BRICS summit

At the BRICS summit in Kazan, member countries made significant strides toward de-dollarization, aiming to reduce their reliance on the U.S. dollar for international transactions. This initiative was underscored by the unveiling of a symbolic BRICS banknote featuring the flags of Brazil, Russia, India, China, and South Africa, signaling a united front in seeking alternatives to the dollar. The discussions highlighted a collective ambition to reshape the global financial landscape, moving towards a more independent economic system that diminishes the dominance of Western financial structures.

The potential impact of complete de-dollarization is significant; if core BRICS countries fully transitioned away from the U.S. dollar, it could affect around US$ 2 trillion of the global total of US$ 18.4 trillion in U.S. dollar-denominated cross-border bank claims.

At the recent BRICS Summit in Kazan, Russia, Prime Minister Narendra Modi emphasized the need for BRICS nations to enhance financial cooperation by adopting trade in local currencies. He argued that such an initiative could bolster economic ties and reduce reliance on foreign currencies, particularly the U.S. dollar. The group, which now includes Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the UAE, represents roughly 40% of the world’s population and accounts for around 30% of the global economy.

Modi outlined India’s active efforts to promote local currency trade, citing the Reserve Bank of India’s recent agreements. The RBI allowed rupee-based settlements with Russia in 2022, marking a milestone in local currency trade. Since then, similar arrangements have been pursued with the UAE for cross-border payments in rupees and dirhams, and discussions are underway with countries like Indonesia. Showcasing the success of India’s Unified Payments Interface (UPI), he further highlighted its adoption in several countries, including the UAE, Sri Lanka, France, Malaysia, Thailand, and Singapore. UPI’s international expansion, backed by collaboration with global central banks, reflects India’s growing influence in digital finance.

This phenomenon is termed as De-dollarisation, and it carries transformative implications for global economic power dynamics. By weakening the dollar’s role as the dominant reserve currency, it diminishes U.S. economic influence, potentially increasing U.S. import costs and domestic inflation. BRICS+ stands to benefit from stronger regional currencies, which could enhance trade stability and create more resilient, interconnected economies. For emerging markets, lower dollar dependence may reduce exchange rate risks, fostering financial resilience. As other currencies, including central bank digital currencies (CBDCs), gain ground, they could lower transaction costs and reduce reliance on dollar-dominated systems like SWIFT, though this shift could bring initial liquidity and stability challenges. Ultimately, de-dollarisation may lead to a multipolar currency system, reshaping global economic power structures.

To reaffirm their commitment to de-dollarize, leaders unveiled a symbolic BRICS banknote during the BRICS summit. The banknote, adorned with the flags of Brazil, Russia, India, China, and South Africa, represented the united aspirations of these nations to seek alternatives to the U.S. dollar for cross-border transactions. This development underscores BRICS’s increasing commitment to creating a more independent economic system that is less dependent on Western financial structures.

Global De-dollarisation Progress

Decline in Dollar-Denominated Financial Instruments: The share of U.S. dollar-denominated cross-border lending by core BRICS residents dropped from 67% in 2016 to 55% as of the first quarter of 2024, indicating a significant reduction in dollar dependency. Further, The U.S. dollar’s share in BRICS international debt securities declined from 83% to 7% in the same period, reflecting a broader trend of decreasing reliance on the dollar.

Role of the New Development Bank (NDB): The NDB, established in 2015 to support infrastructure investment in emerging markets, aims for 30% of its lending to be in local currencies. However, 70% of its lending remains in hard currency, highlighting the prevailing investor preference for established currencies despite the push for de-dollarisation.

Growth in BRICS and Emerging Market Currencies: BRICS and other emerging market currencies are benefiting from de-dollarisation. Over the past four years, BRICS foreign exchange (FX) claims increased from 9% to 15%, while other emerging market currencies rose from 15% to 19%. In international debt securities, BRICS FX rose to 11%, with non-core FX increasing to 9%.

Further Implications

The potential impact of complete de-dollarisation is significant. If core BRICS countries fully transitioned away from the U.S. dollar in their financial transactions, it could affect around US$ 2.0 trillion of the global total of US$ 18.4 trillion in U.S. dollar-denominated cross-border bank claims, as well as approximately US$ 0.6 trillion of the global US$ 13.6 trillion in U.S. dollar-denominated international debt securities.

Shift in Economic Power Dynamics: De-dollarisation is poised to alter the global balance of power among nations, diminishing U.S. economic dominance and fostering a more multipolar financial landscape. This transition may enable other nations to gain more economic autonomy and leverage in international negotiations

Changing Dynamics in Commodity Markets: The trend of pricing commodities, especially energy, in non-U.S. dollar currencies could reshape global trade practices. Countries like Russia are already selling oil in local currencies, which may prompt other exporters to follow suit, thereby diminishing the dollar’s role in commodity pricing.

Emergence of Alternative Payment Systems: New payment systems, such as India’s CBDC and UPI inter-inkage or China’s CIPS, are being developed to facilitate cross-border transactions without relying on U.S. banks. This evolution could undermine the dollar’s dominance in global finance and challenge existing Western financial infrastructures.

Financial Inclusion: Such payment innovations can significantly enhance financial inclusion and create trade opportunities that would otherwise be unattainable. They can also offer alternatives for countries that prefer not to use the dollar or are unable to do so. For instance, as a result of these sanctions, Russia has been effectively excluded from using the US dollar and euro, limiting its access to significant portions of global trade and capital markets.