Can a BRICS currency really compete with the US dollar?

If it manages to achieve further cohesion and attract major economies like Saudi Arabia and Iran, BRICS could indeed become the most prominent and influential economic group in the world.

Ewan White

Can a BRICS currency really compete with the US dollar?

Toufic Chanbour

last update on 22 Aug 2023

The BRICS group, comprising five nations – Brazil, Russia, India, China, and South Africa – has been actively working to decrease its reliance on the US dollar since its inception in 2009.

As a step in the right direction, they use their own national currencies to facilitate intra-trades among member states – an approach that has proven effective due to their strong product diversity, which lowers investment costs and eases international financial transactions.

The largest component of this long-term strategy, however, is BRICS’ ongoing mission to develop a unified currency that could compete with, or even replace, the US dollar.

If it manages to attract major economies like Saudi Arabia and Iran, BRICS could indeed become the most prominent and influential economic group in the world.

Some believe that the current probability of BRICS’ freeing itself from dollarisation is higher than ever. In the past year, its group states had more money coming in than going out, unlike the G7 grouping (considered BRICS’ “rival”), which witnessed a decline in common GDP.

Diana Estefana Rubio

Joseph Sullivan, a former White House economic adviser, believes that BRICS states have an unprecedented capacity to achieve high-level self-sufficiency in global trades – something that has eluded other currency unions, such as the eurozone – due to significant geographical diversity and a wide range of exchanged commodities and services.

If BRICS states can maintain their unity – and succeed in pulling in influential economies – then we could very well be on the precipice of a gargantuan geopolitical shift.

The main challenge here is to create an integrated payment system that connects the group states' different payment links without the need to convert their currencies into dollars. This would be even more effective if, and when, their central banks introduce digital currencies.

China's currency, the renminbi (or Chinese yuan), is currently ahead of the rest of the BRICS nations. Its significance has become clear over the past year, especially after an agreement at the inaugural GCC-China summit to use the yuan for trading oil and gas.

China also established a special platform, the Shanghai International Energy Exchange, in 2018, solely for trading a crude oil futures contract in its currency.

Economic disparity

At first, a new, common BRICS currency would primarily be used among member states to facilitate operations and regional trading. But over time, its use would expand to other countries, gaining traction globally – much like the euro.

This new currency is expected to be adopted by around 40% of the global population, helping to develop a multi-polar financial reality, in which the BRICS currency competes with the dollar, euro, pound, yen and many others.

Despite a relatively positive outlook, there are still some serious questions, challenges, and obstacles that stand in the way of BRICS achieving total independence from the dollar with its proposed rival currency.

Despite a relatively positive outlook, there are still some serious questions, challenges, and obstacles that stand in the way of BRICS achieving total independence from the dollar with its proposed rival currency.

For starters, it's unclear what the common currency would be based on. Would it be like bancor, proposed by English economist John Keynes seven decades ago, which involved pegging the currency to gold or other precious metals? Or will it take on a more "basket of goods" approach?

Perhaps it would go down the euro route, the value of which was determined through a process of conversion from the national currencies of the participating countries – involving an agreement to fixed conversion rates for each state.

As of now, however, the answer is murky.

REUTERS — A view of the logo of the New Development Bank (NDB) at its headquarters in Shanghai, China

Another challenge is a lack of economic cohesion among member states in terms of production, growth, and financial openness. Real GDP per capita at constant prices between 2008 and 2021 rose by 138% in China, 58% in India, 13% in Russia, and 4% in Brazil, while shrinking by 4% in South Africa.

China's disproportionately large economic prowess, which accounts for 72% of the group's GDP, could also put off other member states.

At the end of the day, the power – and final decision – regarding a common currency will inevitably fall in China's hands, which could simply shift the narrative from Western dominance to Chinese dominance – essentially defeating the purpose of a unified, dollar-busting currency.

Some member countries – particularly India and Russia – will be hesitant to concede to an inevitable loss of economic and financial control. Their priority is to strengthen their sovereignty, not weaken it.

As of now, no member state has shown any real intention or desire to abandon its national currency. That means the BRICS is unlikely to go down the European Union road by establishing a central bank independent of BRICS governments.

Joint project struggles

Member states have struggled to successfully execute joint mega-projects that mimic infrastructure schemes in the West. For instance, they weren't able to create a shared credit rating agency – or establish a submarine cable to secure optical communications between them.

In 2015, the group founded the New Development Bank (NDB), with the purpose of providing money in local currencies to borrower countries. However, nearly eight years on, the bank still relies on US dollars, and only about 22% of the money it gives out is in local currencies.

This casts doubts over BRICS' ability to handle more complicated undertakings in the future, like the creation of a central bank issuing a common currency.

The BRICS, "never achieved anything since they first started meeting", said the economist Jim O'Neill, who first coined the acronym by which the bloc of countries is known. pic.twitter.com/tySXbxqTtV
— Felix Tih (@felixtiih) August 16, 2023

Lord Jim O'Neill, chief economist and asset manager at the investment bank Goldman Sachs, openly critiqued the idea of a BRICS currency, referring to it as a fictional, even nonsensical proposition. He believed the best-case scenario would be a global strengthening of the Chinese yuan and, perhaps, the Indian rupee.

There are also serious doubts about whether all member groups could come to a consensus over the "rules" behind launching a successful currency. These relate to rights, laws, governance, transparency, capital deregulation and freedom of movement.

There are also serious doubts about whether all member groups could come to a consensus over the "rules" behind launching a successful currency.

They would also involve setting the levels of deficits, public debt, inflation, interest rates, and exchange rate fluctuation ceilings, as well as the development of financial markets that enable them to absorb global savings and channel them into real investments.

Not to mention a "basic" obstacle – achieving greater cohesion in economic and financial policies among member states.

Getty Images — China's President Xi Jinping, Russia's President Vladimir Putin, Brazil's President Jair Bolsonaro, India's Prime Minister Narendra Modi and South Africa's President Cyril Ramaphosa.

A major vulnerability that BRICS – and, particularly, China – will have to consider is that, if a currency becomes hugely popular worldwide, such as the dollar, then the country behind that currency carries the risk of owing a significant amount of money due to high foreign demand.

This could happen to the yuan if it becomes a full alternative to the dollar, which could ultimately increase the price of Chinese products sold outside China.

All in all, BRICS, as a rapidly growing economic and geopolitical group, has a lot of questions to answer and doubts to clear before the path to independence from the US dollar currency becomes clear.

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