What are the possibilities and challenges of de-dollarizing the Global South’s economies?

Brasil de Fato

A common BRICS currency is still considered a distant possibility, according to experts who took part in a recent debate organized by the Beijing Club for International Dialogue. The organization is a Chinese think tank founded in 2023.

However, the group agrees to move forward with the process of de-dollarization. The next BRICS Summit, which will take place in the Russian city of Kazan at the end of October this year, could possibly announce some new measures “to create an inclusive international financial system,” according to Andrey Mikhailishin, head of the Financial Services working group of the BRICS Business Council, in an interview with the TASS Agency.

In June, at one of the preparatory meetings for the next summit, the foreign ministers of the BRICS countries reaffirmed the importance of improving the use of local currencies in trade and financial transactions between the bloc members.

China is the country that has made the most progress in using its currency – the yuan – for international trade. The yuan’s share of international payments reached a record high in July. The Chinese currency has become the fifth largest currency in the world for reserves, payments and trading, and the third-largest currency for commercial financing. In Latin America, Bolivia is one of the most recent cases of countries adopting the yuan for trade transactions.

Last year, the period from April to June was the first quarter in history in which the use of the Chinese currency surpassed the use of the dollar in the country’s bilateral trade. The sanctions against Russia partly explain this shift.  

In Brazil, the US dollar is still predominant. Last year, the currency accounted for 95.84% of our country’s total exports and 80% of imports.

Alternatives to the payment system and international reserves

In addition to using more national currencies in intra-BRICS trade, the South Centre’s Senior Advisor on South-South Cooperation and Development Finance, Li Yuefen, said in an interview with Brasil de Fato that another of the measures that countries – not just from the BRICS, but from the entire Global South – should gradually begin to take is to reduce their dependence on the SWIFT system.

SWIFT is used by more than 11,000 banks and financial institutions in over 200 countries to exchange information about financial transactions. In 2015, China created the Cross-Border Interbank Payment System (CIPS), which works with the yuan. The system works with the most used currencies, but the use of the U.S. dollar has remained around 47% in recent months, with the euro as the second currency, far behind (in March, it had a global share of 22%, for example). In 2022, seven Russian banks were banned from the SWIFT system as part of the sanctions imposed due to the Ukraine crisis.

An alternative payment and settlement system to SWIFT is not linked to the formulation or emergence of a common currency, but is a way of exploring what to do in the short term to reduce overdependence on the dollar, argues economist Li Yuefen.

For her, if dependence on the SWIFT system continues, “the weaponization of the dollar will certainly continue”. She says this trend has escalated: “It’s not just trade sanctions, financial sanctions, it’s has been, already, reaching the stage of confiscating the assets of the sanctioned countries.”

Recently, the spokesperson for the Russian Foreign Ministry, Maria Zakharova, said that de-dollarization is not a goal of organizations and some nations, but a reality, “because the dollar has become a problematic currency.”

Because the US currency is still so dominant, changes must happen incrementally, argues Li Yuefen.

She believes that the BRICS can develop an alternative to reduce overdependence on the SWIFT system, for example. “The BRICS countries can develop a kind of system and gradually there will be an alternative type of infrastructure for this kind of trading.”

Diversification of assets and foreign exchange reserves is also a need, Yuefen points out. “You don’t put all your eggs in one basket. You can use not only the dollar, but also other currencies, and also gold, so you diversify the foreign exchange reserve.”

The price of gold hit an all-time high earlier last week, caused in part by the reduction in the US interest rate by 0.5%, the first cut since 2020. There is even the prospect that the Federal Reserve, the US central bank, will make further interest rate cuts. Because gold doesn’t earn interest, the cost of owning gold goes down and demand tends to increase.

Oleg Barabanov, a member of the Valdai discussion group, agrees with the need to diversify foreign exchange reserves. In an interview with Brasil de Fato, he mentions as an example both the freezing of around US$300 billion in Russian assets in Global North countries (and Singapore), and the unlawful blocking of 32 tons of Venezuelan gold by the Bank of England since 2018.

The seizure of Venezuelan property happened because the British government recognized former parliamentarian Juan Guaidó as president in 2020.

What is important is sovereign control over reserves, says Barabanov. “They should be kept either on the states’ own territory or on the territory of some friendly states.” “There is some discussion among economists and politicians in the Global South [about] how to avoid the situation in the future and the obvious recipe is to renounce dependence on the West,” says the Russian analyst.

What about the BRICS currency?

A common BRICS currency is considered a possibility that could still take time. One of the challenges is the great diversity between the BRICS countries, points out Chinese economist Yuefen. She mentions the case of the euro and the East African common currency, whose implementation has been postponed until 2031.

“Up to now, common currencies are usually among countries that share borders, history, religion or economic structure, political structure, and macroeconomics. So, they have a lot of things in common and these were the preconditions for them to establish a common currency,” explains the expert.

These preconditions are not seen in the case of BRICS, and the scenario becomes even more diverse as the group expands. She reaffirms that the way forward in this case is to “move step by step”. The closest option should continue to be the use of local currencies among the BRICS countries, including the possibility of digital currencies.

This would include both cryptocurrencies and central bank digital currencies. “Now the Russian Parliament is passing legislation to regulate the Central Bank digital currency. The same process is happening in China.”

He argues that this could be the better option for the moment: a “basket” of digital currencies from the BRICS member countries and other Global South countries.

“It could be useful not to be tied to the dollar or the euro, not to be tied to the SWIFT system of financial transactions, and at the same time, to keep sovereign control over currencies.”

Like several other countries, the Brazilian government is developing its digital currency, Drex, which recently entered its second testing phase.

*With information from Tass and Xinhua agencies.