Impact of BRICS on the US Dollar
BRICS aims to reduce reliance on the US dollar, driven by geopolitical tensions and economic sovereignty. While de-dollarization efforts have gained traction, structural challenges, coordination issue
Can BRICS Really Drop the Dollar?
With attempts by other currencies, such as the Euro or the IMF's Special Drawing Rights (SDRs), to challenge its hegemony failing, the U.S. dollar has remained the dominant global currency since the Bretton Woods agreement following World War II.
A world without the dominance of the U.S. dollar in global international trade represents an alternate reality that could materialise soon. Emerging economies are uniting to transform what was previously impossible as they make progress toward breaking the status quo. Following the recent BRICS expansion which added Saudi Arabia, Iran, the UAE and Egypt to its membership, speculation has risen about how the bloc can overcome US dollar hegemony in international financial trades. As BRICS positions itself as an alternative to Western-led economic structures, the question arises: Can they successfully de-dollarise? The shift brings both advantages and disadvantages to which entities?
Why BRICS Wants to Challenge the Dollar
Rising geopolitical tensions, notably US sanctions on countries such as Russia and Iran, have exacerbated the desire for financial independence. By lessening their reliance on the dollar, BRICS countries might avoid the severe effects of Western sanctions and gain greater control over their own economic future.
During many decades the U.S. dollar established dominance as the global reserve currency because of transparency alongside stability and market dynamics in American financial sectors. The extensive usage of the dollar currency subjects macroeconomic systems to various potential dangers. The combination of higher U.S. interest rates and strengthening dollar exchange rate and sanctions threats has created severe financial challenges for nations that are developing. Russia and China are leading the effort to break away from dollar dependency because both countries receive the harshest impact from U.S. economic restrictions. BRICS nations discover in dollar independence a framework to evade global financial dangers while asserting control in monetary institutions.
Who Stands to Benefit?
The move toward currency independence will provide useful advantages to selected nations in the BRICS group and other emerging economies. Economic sovereignty improves directly through de-dollarization strategies that serve China and Russia to reduce Western restrictions. Some of these countries actively pursue currency-based trading practices between their nations. The cost-controlled oil supplies of Saudi Arabia and UAE lead these nations to seek alternatives that would minimise their exposure to oil market characteristics dependent on the US dollar.
Through trade agreements utilising its currency rupee India reaches out to Malaysia and UAE to amplify global usage of its currency. Local currencies within emerging markets show benefit potential due to their ability to reduce risks and minimise transaction costs and foster stronger commercial partnerships with neighbouring countries. An effective system needs to be developed by BRICS to establish this payment framework while handling the substantial technological barrier.
In actuality, China and Russia have already begun to trade in their respective currencies. In reality, a recent agreement between China and Russia established a long-term currency exchange to avoid the dollar in energy trading. Similarly, India has promoted currency-based trade with Malaysia and the United Arab Emirates in order to expand the usage of the Indian rupee.
Who Could Lose?
Currently, the US dollar accounts for more than 60% of global reserves and over 80% of international trade. A loss in this supremacy would have a significant influence on the United States' capacity to finance its debt at lower interest rates, perhaps leading to greater borrowing costs domestically.
The United States faces the greatest risks from an effective BRICS-led de-dollarization movement. Because of its reserve asset status, the United States' worldwide influence declines when the dollar is used less frequently. The diminished use of the dollar worldwide would increase domestic borrowing expenses because the U.S. government loses its capability to subsidise deficits via cheap dollar funding.
The transition to international currencies poses risks to BRICS nations with weaker economic strength unless they possess sufficient financial stability because they require financial stability to transition. These nations run the danger of experiencing increased market volatility and a decline in investor confidence due to their currencies' inability to remain stable when compared to the US dollar.
Why Dropping the Dollar is Not Easy
The plans of BRICS to diminish the dollar's dominant role face strong obstacles in their path. Due to its great depth transparency and liquidity, the U.S. financial system functions as the world's most stable reserve asset when crises strike. World trade conducted through the dollar exceeds BRICS currencies by nearly 84 percentage points since the dollar dominates over 84% of global commerce but BRICS currencies participate in small percentages of international payments and transactions (Geopolitical Economy Report).
The BRICS nations face additional difficulties because they lack sufficient partnership coordination. China acts to internationalise its renminbi (1 Chinese Yuan equals 38.51 Pakistani Rupee) yet BRICS members keep concerns about China's power in the alliance. The different economic frameworks and strategic priorities make BRICS partners unable to develop common standards toward de-dollarization. The implementation of shared reserve currencies or digital payment systems faces exceptional challenges because the bloc is struggling to build required mutual trust.
While BRICS nations have proposed blockchain-based digital currencies, such as mBridge technology for cross-border payments, their implementation is still in its early phases. Developing the infrastructure to enable such systems across different nations is a huge challenge.
What Lies Ahead?
Even though BRICS suggested ideas about a gold-backed currency and blockchain-based payment systems they exist at an experimental level and have not moved beyond theory. The worldwide implementation of mBridge technology for digital cross-border payments will require multiple years of development. The dollar maintains its global financial leadership which shows no signs of loosening in the near future. A multisided economic structure becomes more plausible as BRICS nations work systematically to advance local payment systems while reducing their connection to western financial frameworks.
The United States and other Western nations are unlikely to embrace a successful BRICS-led dedollarization effort. In reaction, we may see trade wars, additional sanctions, or other economic measures aimed at maintaining the dollar's dominance.
Conclusion
The BRICS nations pushing to break the dollar hegemony draws from genuine principles about commanding their economies alongside geopolitical advantages. The obstacles of structural challenges coupled with different national priorities and marketplace faith in U.S. financial stability create extensive barriers against de-dollarization. The current steps taken by BRICS nations today might determine how the worldwide economic order will reshape itself during subsequent decades despite dollar maintaining its position as the dominant currency.
While the BRICS' campaign for dedollarization confronts enormous structural and political challenges, partial success in some areas, such as energy or bilateral trade deals, has the potential to change the balance of global financial power. Over the next decades, we may see a more multipolar economic structure emerge, even if the dollar's supremacy stays uncontested in the short term.
ℹ️ This article first appeared on Paradigm Shift under the title “BRICS & De-Dollarization.” It is reprinted here for broader reach.