U.S. Foreign Policy: The Unintended Adversary to Dollar Hegemony
The longstanding dominance of the U.S. dollar as the world’s primary reserve currency is facing challenges not just from emerging political blocs such as BRICS but, somewhat ironically, from the very nation that issues it. Recent policy choices by the United States are prompting emerging economies to seek alternatives to the dollar, potentially reshaping global financial systems.
BRICS Stepping Away from the Dollar
Recent data from Russia’s Ministry of Economic Development reveals a decisive pivot away from the dollar in trade between Russia and China. A staggering 95% of their mutual trade now bypasses the U.S. dollar entirely, favoring the ruble and yuan instead. This shift reflects a broader trend among Russian transactions, where nearly 70% are conducted with these two non-dollar currencies.
These significant moves were a topic of discussion at the VII International School of the BRICS Alliance in Moscow, attended by experts from Brazil, India, and Russia on November 16. Their dialogue underscored the growing urgency for diversified financial practices among these nations.
The Stability of National Reserves Under Threat
Víctor Jeifets, a professor at Saint Petersburg State University and director of the Center for Ibero-American Studies, pointed out that despite these changes, around 60% of BRICS countries’ currency reserves are still held in U.S. dollars. Brazil, for example, maintains 80.42% of its reserves in U.S. currency, although the usage of the Chinese yuan is on the rise.
Jeifets cited economic sanctions as a significant concern, driving countries to adopt national currencies in trade or discuss alternative payment systems. He noted, “The spectrum of economic sanctions is worrying many countries, not just those who are currently affected.”
Mitigating the Dollar’s ‘Obligatory Burden’
Bruno de Conti, a professor at the Institute of Economics of the State University of Campinas (Unicamp), criticized the dollar’s dominance as imposing “structural limitations” on developing countries’ economic performance. He termed the phenomenon an “obligatory burden,” forcing nations like Brazil to commit vast resources to managing exchange rate volatility.
“The dominance of the dollar makes our economic policies extremely dependent on events in the capitalist center,” De Conti stated, adding, “This is unacceptable.”
To counter these structural disadvantages, BRICS countries have established initiatives such as the Contingent Reserve Arrangement. This fund offers financial support to member states during crises, but according to De Conti, it does not entirely address the problem, urging for a gradual exit from the dollar’s “trap.”
A Possible BRICS Currency?
The prospect of creating a common trading currency for the BRICS alliance that could operate independently of the U.S. dollar is fraught with both political and technical challenges. Notwithstanding U.S. pressures, the move towards a multilateral compensation system for BRICS countries is gaining support.
“The currency wouldn’t be used by individuals or companies,” clarified De Conti, emphasizing the continued use of national currencies but within a shared BRICS compensation framework.
Karin Vázquez, a professor at O.P. Jindal Global University in India and a senior researcher at the Center for China and Globalization, highlighted the political will among BRICS members to develop this payment system. She mentioned that countries like Russia and China have unique interests in pursuing an alternative system, aligning with Brazil’s goals of market access and operational cost reduction.
The introduction of six new BRICS members—Argentina, Saudi Arabia, Egypt, Ethiopia, the United Arab Emirates, and Iran—could bolster the original alliance’s ambitious plans, particularly in forming a dollar-free transaction system.
Vázquez noted that the preexistence of bilateral agreements among members could lighten the operational load, reinforcing the initiative’s viability.
BRICS Summit Proposals on the Horizon
Proposals for creating an alternative payment system are due for presentation at the next BRICS summit in Kazan, Russia. With the groundwork laid at the Johannesburg summit in South Africa in August, where a task force of economy ministers and central bank representatives was formed, the stage is set for potentially momentous decisions that may affect the dollar’s global standing.
In conclusion, the U.S. foreign policy has inadvertently strengthened the resolve of BRICS nations to explore monetary alternatives. With the balance of global economic power gradually shifting, the dollar’s future as the primary reserve currency is becoming increasingly contingent on the financial strategies pursued by these emerging powers.