Navigating the Challenge to Dollar Dominance: BRICS Expansion and De-Dollarisation

The challenge to the dollar

The war in Ukraine and the freezing of Russian FX reserves in 2022 have prompted much discussion on the ‘weaponisation’ of the dollar, the splintering of geopolitical blocs and ultimately the “inexorable” decline in the use of the dollar – or ‘dedollarisation’. An integral part of this debate will not only be how those geopolitical groupings develop but also whether other currencies can challenge the dollar’s.

 

We suspect the subject of de-dollarisation might gain some traction this summer when senior leaders of the BRICS nations meet in South Africa on 22-24 August. At the top of the summit’s agenda is the proposed expansion of this geopolitical grouping and perhaps some proposals relating to a common payment system in BRICS currencies. Regarding BRICS expansion, speculation is rife as to how many countries, if any, will join the club – for the first expansion in a decade. The focus here tends to be on countries that have already joined the BRICS-sponsored New Development Bank (NDB).

 

These include countries such as the United Arab Emirates, Egypt, and Bangladesh. The proponents for accelerated change argue that some of the major oil exporters like Saudi Arabia, Iran and Nigeria might be included, too. Experts, however, warn that friction between China - a proponent of expansion - and the more reticent India makes the subject highly uncertain.

 

It's all about the speed of any BRICS expansion

Why this is important to the de-dollarisation debate is that the speed of expansion in BRICS could well determine the speed with which this bloc adopts commercial and financial systems outside of the dollar sphere. There are also suggestions that this summit could re-introduce the subject of a BRICS currency. Far from abandoning their own national currencies, we presume this venture could be pursued along the lines of a new ‘Unit of Account’ – similar to the IMF’s Special Drawing Rights (SDR). For example, the NDB or other commerce being conducted in ‘BRICS’ could require users to hold more of these currencies and potentially gravitate away from the dollar.

 

The link to de-dollarisation here is that the creation of a BRICS unit of account could increase these currencies’ shares in FX reserves of BRICS users – in the same way that China’s 2015 entry into the SDR basket was meant to increase interest in the renminbi. Away from the speculation over the future of BRICS, our article examines evidence of de-dollarisation seen so far. There are a whole host of scholarly articles on this subject and perhaps one of the best definitions of what makes an international currency is outlined in the chart below. Here, the function of an international currency is assessed through the prisms of both the public and private sectors

 

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While we find this a useful framework to assess the extent of de-dollarisation, we prefer to examine the challenge to the dollar’s dominance through the three key areas:

• trade and commerce
• the asset side (store of wealth)
• the liability side (currency of issuance)