De-dollarization in action: BRICS’ ambitious agenda

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Apurva Dhamankar

9/13/20232 min read

What is BRICS?

It is a group of emerging market countries with member nations such as Brazil, Russia, India, China & South Africa. Their goal is to establish deeper ties between their nations and cooperate on economic expansion, including trade.

The US Dollar has been a standard reserve currency for many countries since 1944. USD was preferred as a reserve currency because of its stability along with assets such as United States Treasury security that have both scale and liquidity.

What is De-dollarization?

De-dollarization refers to countries reducing reliance on the U.S. dollar as a reserve currency, medium of exchange, or unit of account.

What triggered De-dollarization?

After the Russia-Ukraine started, the US and many other countries imposed sanctions on Russia, such as barring Russia from the SWIFT banking system, freezing Russia’s forex reserves, etc.

Freezing of Russia’s forex is what made the BRICS nations look for an alternative reserve currency. But that is not the only reason for De-dollarization:

  1. The over-dependence on the dollar exposed a country to associated risks value of dollar fluctuations, sanctions or restrictions imposed by US, and changes in US monetary policy.

  2. For many years, the US government has been running large budget deficits, which raised concerns about inflation & volatility of the value of the dollar.

  3. The main reason is about what dollar dominance did to Russia; BRICS nations fear of same consequences if they go against the USA.

While we are far away from complete De-dollarization, here are some steps that BRICS nations have taken to reduce their reliance on USD:

● Bilateral and Multilateral Trade Agreements: BRICS nation leaders meet every year to discuss economic matters such as engaging in bilateral and multilateral trade agreements, to conduct trade in their respective currencies. For example, China and Russia have set up currency swap agreements to conduct direct trade without using the dollar as an intermediary currency.

● Formation of New Development Bank (NDB): NDB or BRICS Development Bank is an alternative to Western countries dominated IMF and World Bank. It offers financial support for infrastructure and sustainable development projects among BRICS members.

●Gold Reserves and Hedging Strategies: Almost often, gold is used to hedge against events such as inflation, deflation, and currency devaluation. Gold has always had an inverse correlation to the U.S. dollar and is widely considered a currency hedge. Some BRICS countries, notably Russia and China, have been actively accumulating gold reserves as a hedge against dollar fluctuations.

BRICS countries are actively implementing measures to reduce their reliance on the US dollar, marking a significant shift in the global financial landscape. Their ambitious agenda in de-dollarization shows their commitment to a more stable international financial system.  

Thank you.

Regards,

Atharva Mahadik,

Kautilya, IBS Mumbai.

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