Can BRICS Dethrone the US Dollar?

Can BRICS Dethrone the US Dollar?

Talks about the creation of a new world currency have been on the rise, and, in theory, the BRICS alliance is presumed to introduce such a new, common reserve currency to the world. The BRICS association includes a union of five states: Brazil, Russia, India, China and South Africa. Iran, Argentina, the United Arab Emirates, Saudi Arabia, Ethiopia, Algeria, and Egypt have expressed interest in joining the union in the future. The expansion of the BRICS alliance and its geopolitical position may be better served with a new common currency, which is intended to replace the US dollar.

According to some expert estimates, BRICS now represents almost half of the world's population and a quarter of global GDP.

Managing partner of the investment consulting company Wolfline Capital Nikita Dolgiy suggested that Western sanctions, the growing US national debt, inflation, and rising interest rates in the United States and Europe, as well as economic forecasts promising the collapse of the dollar, forced the BRICS countries to give more consideration to the possibility of creating a new reserve currency. 

“Different theories are being discussed now about what the unit of account of such a currency should be, and what should anchor such currency. For example, one option is to create a single unit of account based on a basket of exchange rates of all countries participating in the alliance, with the share of each national currency in this single unit of account corresponding to the size of each state member's economy. But so far, none of the BRICS alliance countries has shown any desire to abandon their currency.

Another option is to create such a currency based on the GDP of the participating countries. But such a currency would depend 70% on the yuan or the volume of exports from a BRICS country-member. Then each member-state will have to hold more of the corresponding trading partner currency. The extent to which each participating country would be ready to do it will largely depend on the stability of the new currency and its ability to access liquid markets.

Although foreign exchange transactions in the yuan have increased to 7% of the global market share, it is still not a fully convertible currency. The yuan’s floating domestic exchange rate is controlled. The lack of free convertibility remains a barrier for many global investors. Also, the ability to control capital flows remains a top priority for the Chinese authorities.

For the common currency to work, the BRICS will have to agree on an exchange rate mechanism, have efficient payment systems, and have a well-regulated, stable, and liquid financial market. For this to work, each country must implement specific economic changes. In the short term, it makes more sense to focus on creating an effective consolidated cross-border payment system, which will be the first step towards creating a new common currency”, summarized Dolgiy in his note to InVoice Media.

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