Amidst the slowdown of the Chinese economy and Russia’s embroilment in the war in Ukraine, and with India’s decision to prohibit rice exports to protect its domestic market following Russia’s decision not to renew the grain export agreement with Ukraine, and considering the absence of Putin from the summit due to security concerns and instead a virtual presence , including the arrest warrant issued against him, a BRICS summit took place in Johannesburg, South Africa from 22 to 24 August, bringing together China, Russia, Brazil, India, and South Africa, and attended by representatives from 40 countries.
This summit aimed tol address a number of issues, foremost among them being the request of 23 countries to join the group and establishing a currency specific to this economic coalition. These were the two files, which had been overlooked, in previous summits. However, global changes after the Ukrainian war necessitated the search for solutions regarding America’s control over the global trade payment system, which is dominated by the dollar. As a result, these variables brought the unified currency file onto the summit’s agenda, making it a subject of interest for observers.
As is known, the first summit of this economic group was held in the Russian city of Yekaterinburg on 16 June 2009, after three years of negotiations. It initially brought together Russia, China, and Brazil, followed by the addition of South Africa on December 21, 2010. At the time, Chinese President Hu Jintao described BRICS countries as “advocates for the interests of developing countries and a force for global peace.” One of the founding aims of the organisation was to encourage trade, political, and cultural cooperation among member states and to inform the Group of Seven (G7) major nations that member states had options and not all roads lead to Washington.
A review of the BRICS summit statement in New Delhi in 2012 clearly reveals the organisation’s pursuit of reform within the global financial system. This pursuit involves calling for reducing the dominance of the dollar and generating a “more representative international financial structure.” However, this has not translated into action since the most crucial bilateral relationship for each member of the group lies in their trade relations with the US and the European Union (EU). The intra-group trade amounts to no more than $422 billion, roughly 40% of the value of trade between BRICS countries and the EU.
Nevertheless, a significant shift occurred in the trajectory of the group after President Xi Jinping and his faction assumed power in China in 2013. This shift produced unprecedented effects and an unacceptable polarisation in international relations for the Americans. The collective Western imposition of sanctions on Russia following its annexation of Crimea in 2014, and the subsequent economic pressure on Russia, also impacted the course of BRICS. This, in turn, motivated member states to seek institutional cooperation and common ground.
However, these efforts continue to face obstacles due to the divergence in ambitions and national interests of each member. For instance, China opposes any expansion in the permanent membership of the United Nations Security Council, aiming to remain the sole Asian nation with a permanent seat. Additionally, China seeks to contain India’s regional role, which is fuelled by the US allowing Chinese investments in Pakistan and stoking competition between China and India in Afghanistan, Bangladesh, and Sri Lanka. As a result of this shift, several economic and financial initiatives were undertaken, including establishing the New Development Bank in 2014. This bank operates in parallel with the International Monetary Fund (IMF), supporting infrastructure projects and sustainable development in BRICS and other developing countries. The bank was capitalised at an initial sum of $100 billion and was named the BRICS Contingent Reserve Arrangement (CRA) to serve as an equivalent to the IMF.
Furthermore, the creation of the “International Energy Exchange” in Shanghai in 2018 was designed for trading oil contracts exclusively in Yuan, including shipments from Russia, Venezuela, and Iran. This exchange marked the culmination of China’s efforts to purchase oil from Iran in Yuan since 2012. However, the Chinese currency’s non-internationalisation and lack of a “trusted option” necessitated establishing a gold support mechanism for each oil contract through the Shanghai Financial Gold Gate, to build the required trust.
The sanctions imposed on Russia, a significant funding source, led to the search for new funding sources for the New Development Bank. These obstacles that hinder BRICS’ endeavours and its course in influencing the international system reveal a clash of wills between Russia and China on one side, and the US on the other.
In the same context of the transformation that has affected the actions of the BRICS group to implement reforms in the global financial system, the group’s endeavour to establish a unified currency among its members as a competitive alternative to the dollar falls within this framework. This was exemplified by a statement from Brazilian President Lula da Silva during his visit to China in April 2023, where he said, ‘Why can’t we trade in our national currencies?’ and questioned, ‘Who decided that the dollar is the currency after the disappearance of the gold standard?’
If we added to this Russia’s and China’s call to expand BRICS by adding Saudi Arabia, Iran, and Egypt to the organisation, the Chinese and Russian Presidents call for breaking free from the constraints of using the dollar and activating trade exchange between their countries using national currencies, as per the China-Brazil agreement, China allowing Russia to use the Yuan to evade Western financial sanctions after its invasion of Ukraine, Russia’s reduction of its dollar reserves by 26% in 2018 and its investment in gold, all this constitutes a real and explicit challenge to the dollar, indicating a serious attempt to restructure the global financial system, since it is associated with concrete steps to reduce the reliance of these countries on the dollar.
China’s policy to compete with the dollar is aggressive, open, and consistent with its trade-oriented foreign policy. It poses a significant challenge to the US international centrality if it successfully penetrates the global financial system. This was cautioned against by former U.S. Secretary of State Pompeo in his speech in Brussels in December 2018 when he stated, “America will not stand idly by; we will confront China, demanding it adheres to and abides by the systems and laws of the international order.” He slammed the region’s countries, stating that America’s stern policy towards China is due to “the world being complacent in its responses to China when it began acting in an unprecedented manner.”
However, establishing a common currency among BRICS states not only requires a desire to move away from the dollar but also necessitates determining the policy of the unified currency and its pricing mechanism. This involves agreeing on a reference or arrangement that defines the exchange rate (gold, dollar, euro, or a currency basket). It also requires specifying the legal, commercial, and fiduciary governance mechanism that determines interest rates in the capitalist system. This poses a hindrance to the possibility of creating and implementing a unified vision for an international financial system that competes with the dollar in the foreseeable future.
It’s important to note that there is a distinction between internationalising a local currency to compete with the dollar and generating an international global currency like the Euro. For example, China is not seeking to internationalise its currency due to fear of losing financial and economic control. Internationalising its currency would require abandoning monetary flow control policies, interest rate determination, exchange rate controls, and transitioning to a market mechanism. This would limit its currency to bilateral transactions and dealings with third-world countries. Therefore, the internationalisation of the Chinese currency is unlikely.
As for establishing a global currency based on the gold standard, it necessitates central banks of member states relinquishing some of their authorities in favour of a monetary entity above the individual countries (a supreme monetary authority). This entity would assume monetary powers, akin to the Federal Reserve or the European Central Bank. This raises ongoing questions about BRICS’ ability to unify its standpoints on these issues, considering its varying national priorities and its connection to the system of rules, laws, and international norms established by the US after World War II. This includes the infrastructure for cross-border money transfers, such as the SWIFT system, CHIPS (Clearing House Interbank Payments System), and Fedwire, which are used for enforcing Western sanctions.
As for basing the new currency on gold or precious metals with industrial uses like palladium, it would lead to a reduction in bilateral exchange if there were not enough gold backing. Additionally, governments would lose the mechanism to inject liquidity into markets for economic stimulus, as is customary in the capitalist system.
As for the expansion of the BRICS group, initially, the process might seem to serve the interests of the founding countries toward enhancing the organisation’s power to achieve its goals of reducing US dominance and the dollar’s influence on the global economy. It could also open up new markets for exports and increase the capital of member banks. However, the process of new member states joining poses a host of challenges that could hinder its plans and programs. Countries that have applied for BRICS membership, like Saudi Arabia, Algeria, Egypt, and the United Arab Emirates, are traditionally aligned with the US. Moreover, they have significant needs for projects, aid, and loans, which might negatively impact their banking capabilities and obligations to non-member Southern countries. Politically, these countries’ alignment with the West might lead to factionalism and dispersion in the political and economic standpoints of the BRICS group. In this sense, their application for membership is driven by the desire for financial benefits in the form of loans and projects, rather than a true belief in countering the dollar or US dominance.
There is no doubt the expansion of the group, which China and Russia are attempting to internationalise BRICS , will lead to further dispersion of the member states’ standpoints. India, for instance, is not keen on implementing a vision that would increase China’s influence both regionally and globally. Meanwhile, the “AUKUS” alliance comprising the US, Britain, and Australia aims to strengthen Western presence in the Indian and Pacific Oceans. India is also a member of the “Quad” group, alongside the US, Japan, and Australia, which aims to counter Chinese influence. Both China and Russia have criticised India’s support for these two groups, viewing them as extensions of the North Atlantic Treaty Organisation (NATO) in Asia, and the Indian, and Pacific Oceans.
Despite the global buzz surrounding the BRICS group and its promised currency, the left-wing French presidential candidate Jean-Luc Mélenchon announced that the launch of the BRICS currency would be a “geopolitical event that will change the world.” However, the political reality reveals that BRICS’ movements are still dominated by economic motives. The group is still limited in its ability to displace the US from its international position or break its control over the financial system, which is a powerful tool in America’s global dominance.
The dollar is not merely a financial tool in markets that can be ousted by directing arrows towards it. It is protected by American policy through other means that prevent its weakening and America’s central role in the international situation. It is fortified by a network of deep relationships in the military, political, and economic fields. The US has penalised France for the audacity of its President Emmanuel Macron in April 2023, when he called on Europe to reduce its reliance on the US dollar to maintain its “strategic independence.” Macron’s calls for rejecting subservience to America and his stances on the Ukrainian crisis, military coups in West Africa, expulsion of France’s agents, and undermining its influence were all part of the American response to his manoeuvres.
The mere consideration by the BRICS member states to establish a gold-backed currency is evidence of their failure to establish a financial currency possessing the “trusted option” element that the US dollar possesses. There is no better proof of this than the global investor’s flight to the dollar as a “safe haven” due to the shocks and financial crises the world has faced over the past four decades, starting with the Asian Tigers (1997), the financial collapse (2008), the annexation of Crimea (2014), the COVID-19 pandemic (2020), and the foreign countries holding 25% of the total US federal public debt. Despite all of this and amid repeated calls over a quarter-century to reduce the dominance of the dollar in the global financial system, it has only led to an 8% decrease in the International Monetary Fund’s reserves.
While this attempt to dethrone the dollar is serious, it lacks the mechanisms for its execution. Thus, it is likely that the dollar and American economic and financial hegemony over the world will only end with an actual change in the international situation and a radical shift in the balance of global power, similar to the Dutch guilder’s decline at the end of the 17th century during the Napoleonic Wars, or Britain’s rise after the Congress of Vienna in 1815, or the British pound’s decline after World War II in favour of the US dollar due to Britain’s fall from its international standing
Copyright LCIR 2023
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