UNIVERSITY OF LINCOLN

ASSIGNMENT

Analyze the main reasons why the BRICS nations are some way off establishing a
currency to challenge the dominance of the US dollar.

Module Title: International Economics

Module Code: ECO2006
Full name: Quynh Anh Nguyen
Student ID: 28343398
Seminar Tutor: Aliyu Isah
It is widely known that the United States dollar has dominated almost all trade systems for over
80 years. This currency dominance has caused lots of controversies among a group of developing
countries called BRICS - consisting of Brazil, China, South African, India and Russia. This essay
will discuss the intentions behind BRICS’s de-dollarization plan, and the main reasons why the
BRICS are some way off to dethrone the US dollar’s predominance.

Initially, in 2009, the organization only consisted of four countries, namely Brazil, Russia, India,
and China, which created the “BRIC” group. South Africa later joined in 2010, making the
acronym of the group became “BRICS”. On January 1, 2024, more countries are due to enter,
including Egypt, Saudi Arabia, Ethiopia, Iran, and the United Arab Emirates, which might
change the acronym of the group to become “BRICS+”. [1]

The creation of the group BRICS has attracted a great deal of publicity, because it includes major
world powers like China, Russia, India, and Brazil. Specifically, China had $17.96tn IN GDP,
while India had $3.39tn, Russia had $2.24tn and that of Brazil was $1.92tn according to World
Bank/OECD in 2022. According to Jim O’Neill, who wrote a paper on emerging economies, said
these countries had GDP growth that exceeded that of the G7 countries - consisting of the United
States, France, Germany, Italy, Japan, Canada, and the United Kingdom. Not only that, but the
group also has an overall population of approximately 3.5 billion, which equals to 45% of the
world’s population. In terms of producing oil, BRICS countries also will be producing around
44% of the world’s overall crude oil [1].

BRICS countries demand representation for emerging economies, considering Western countries
have dominated important financial organizations such as the World Bank and the International
Monetary Fund. Following this decision, BRICS members set up the New Development Bank in
2014, and by 2022, the organization had lent approximately $32bn to support developing
countries for infrastructures projects. This is considered the main purpose of creating BRICS for
China, as the country wants to grow its influence and power, especially in Africa, says Professor
Padraig Carmody - an expert at Trinity College Dublin [1].

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While the other BRICS member, Russia has a different view and purpose regarding forming the
BRICS alliance. According to Creon Butler of the London-based think tank Chatham House,
Russia sees BRICS as a fight against the West dominance, serving as a base to overcome the
sanctions after the Russia - Ukraine’s war. He also adds that by having Iran as their official
member of BRICS, it would increase the anti-Western nature of BRICS [1].

Overall, BRICS nations are aiming to create a new economic and trade system separate from the
Western system, by creating the BRICS Business Council, the Contingent Reserve Agreement
for providing short-term liquidity support, and the New Development Bank for funding projects.
Following that, BRICS countries are discussing de-dollarization.

There are several reasons why the group considers de-dollarization as one of their future goals.
One of the reasons is that the group nations want to reduce the U.S dollar dominance and
reliance. They want to promote the use of national currencies rather than relying on an
international currency like the U.S dollar. Another reason can be seen is that the U.S dollar
affects other currencies by weakening the latter. For example, $1 USD used to equal 110 yen.
Now, $1 USD is worth 143 yen [3]. Having a new currency system will create more benefits for
the BRICS countries, for example: the currency would help strengthen economic integration
within the group countries. It is important because the group countries have different economic
performance, as well as politics, so having a new currency would help promote trade and more
efficient cross-border payments and transactions. For international trade, it will reduce the
influence of the US dollar, therefore weakening the dominance of the US dollar as a global
reserve currency [4].

However, creating a new currency system seems to be a hard goal to achieve for BRICS
countries for several reasons. One of the reasons would be years of preparation and the
establishment of a new central bank. The group countries also must launch an agreement to
phase out their own sovereign currencies. To make this successful internationally, it also needs
the support of the International Monetary Fund [5].

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In recent years, the economic disparity between countries within the BRICS nations has been
large. For example, Russia’s economy has been affected by the war with Ukraine, and China is
planning on raising the power of their sovereign currency - yuan. BRICS nations have never
been a cohesive economic unit, for example, GDP per person, trading patterns and policy have
been different in the beginning. Specifically, Russia’s growth rate has been modest for several
years, South Africa has economic woes, which makes its GDP per capita fall, and Brazil has a
normal growth rate. Meanwhile, China and India have a booming growth rate, and these
countries play a big role in contributing the share of GDP in the BRICS nations [5]. Therefore, it
is difficult for all nations within the BRICS nations to agree on creating their own system
because of differences in economic background and goals.

BRICS nations not only have economic disparity, but also their politics differ. Russia and China
are autocratic systems of government, while Brazil, India and South Africa are democracies.
India and China have strategic rivalry, which makes it harder to form a regulatory policy.
Therefore, political mistrust issues between BRICS members are high.

From the point above, it is also concerned that other members of BRICS might grow their
independence on China’s currency. For example, when Russia demanded that India pay for oil in
Chinese currency yuan, India refused to pay by yuan, and only wanted to use U.S dollars or
rupees [6]. The differences in opinion and mistrust between BRICS nations are wide, therefore
some experts believe that a common currency is difficult to achieve between BRICS nations.

The U.S dollar has already established an important role in international finance. For instance,
approximately half of external debts of China were priced in the U.S dollar in December 2022.
Similarly, over 50% of external debts of India were also priced in the U.S dollar as of December
2022. In 2021, Argentina and Ethiopia half of the debts were dollar-denominated [7].

Gian Maria Milesi-Ferretti - a senior in the Brookings Institution’s Hutchins Center on Fiscal and
Monetary Policy, said that while they could make progress on cutting the share of the dollar,
almost every world trade already involves the US dollar as the main currency, so it will be tough
for BRICS members to make differences to the US dollar dominance [5]. According to data

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from 2022, the United States dollar was used on one side of the transaction for over 97 percent of
Indian rupee, 95 percent of Brazilian real, 94 percent of Chinese renminbi, 88 percent of South
African rand foreign exchange transactions. In addition, almost 90 percent of overall foreign
exchange transactions used dollars on one side of the trade. Dollars are generally liquid and thus
less costly to exchange than emerging market currencies, therefore, dollars are often used to
facilitate the transactions between emerging market currencies [7].

It can be easily seen that most global trade is priced in dollars. This reinforces the importance of
the dollar currency, especially with commodity-dependent countries like Argentina, Russia,
Saudi Arabia, Ethiopia, Brazil, and the UAE. For example, Russia still used the dollar for one-
third of its export by the end of 2022, despite the United States sanctions against Russia's
economy followed by the Russia-Ukraine war [7].

Inadequate financial infrastructure is another reason why BRICS currency will be less effective.
Financial infrastructure consists of one important type called PvP - payment-versus-payment -
which ensures the reliability and confidence in exchanges of currency pairs, therefore reduces
settlement risk when the other party fails to transfer currency. It is important for currencies to
satisfy this condition because this can enhance cross-border payments and mitigate the
transaction risks. PvP settlement accounted for 40 percent of global foreign exchange trading
volume, and South African Rand is by far the only BRICS currency that is eligible for this
condition [7].

Overall, with the points above, it further explains why several central banks choose dollars as
their main foreign currency reserves, especially in developing countries. Foreign currency
reserves play a key role in foreign currency liabilities within the economy, which makes sure that
the foreign currency supply is enough to pay externally and can help the domestic currency’s
value be more stabilized. The reality speaks volume, for example, foreign currency reserves
approximately were around 50% in China and India, while in Brazil, it was around 80%, and
these countries are core members of BRICS [7].

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In conclusion, BRICS members have taken into consideration the de-dollarization option to
lessen the United States’s currency influence on international trade. While it is an ambitious plan
for BRICS nations to establish a currency to dethrone the United States’s dollar dominance, it is
a difficult task to achieve for numerous reasons, including differences in economic performance,
political mistrust, and inadequate financial infrastructure.

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 REFERENCE
[1] BBC News (2023) 'Brics: What is the group and which countries are joining?,' BBC News,
Available from: https://www.bbc.co.uk/news/world-66525474. [Accessed 08 January 2024]

[2] World Bank (2022) ‘GDP (Current US$) - China’. Available from:
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=CN [Accessed 08 January
2024]

[3] Caitlin O., (2023) ‘What is BRICS? Group of world leaders that considered making a new
currency meet to discuss economy’, CBS News. Available from:
https://www.cbsnews.com/news/what-is-brics-group-of-world-leaders-that-considered-making-a-
new-currency-meet-to-discuss-economy/ [Accessed 08 January 2024]

[4] Melissa P., (2023) ‘How Would a New BRICS Currency Affect the US Dollar?’, Investing
News Network. Available from: https://investingnews.com/brics-currency/ [Accessed 08 January
2024]

[5] Todd P., (2023) ‘A Common BRICS Currency To Challenge The U.S Dollar? A Very Far-
Fetched Notion, Expert Says’, Radio Free Europe, Radio Liberty. Available from:
https://www.rferl.org/a/brics-common-currency-challenge-russia-brazil/32571316.html
[Accessed 08 January 2024]

[6] Anup R., Sudhi R. S., Rakesh S., Bloomberg, (2023) ‘India pushes back against Russia
demands to pay for oil in yuan’. Available from:
https://economictimes.indiatimes.com/industry/energy/oil-gas/india-pushes-back-against-russia-

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demands-to-pay-for-oil-in-yuan/articleshow/104569606.cms?from=mdr [Accessed 08 January
2024]

[7] Robert G. (2023) ‘The Difficult Realities of the BRICS’ De-dollarization Efforts - and the
Renminbi’s Role’. Available from: https://carnegieendowment.org/2023/12/05/difficult-realities-
of-brics-dedollarization-efforts-and-renminbi-s-role-pub-91173 [Accessed 08 January 2024]