De-dollarization Proposal: Will BRICS be able to Overcome Deep-rooted Dollar Hegemony?

With news circling the initiation of a new currency to overlook the global financial system and bypass U.S dominated international trade, the upcoming BRICS leaders’ summit in South Africa could signal the start of a worldwide transitional era through a trade mechanism that allows settlements by members’ national currencies. Eventually, this era might lead to the introduction of a primary, new, sole currency for cross-border transactions.
In his latest trip to the Indian capital New Delhi for the India-Russia business summit, Deputy Chairman of Russia Duma Alexander Babakov announced that progress has been made toward the BRICS official proposal for a new currency. Deputy Babakov also stated a verbal plan describing significant steps to take prior to implementing an effective move away from dollar-dominated international trade. According to Babakov, “The transition to settlements in national currencies is the first step. The next one is to provide the circulation of digital or any other form of a fundamentally new currency in the near future.”

As details of the new currency project are yet to be disclosed, Russian official Babakov mentions that this new currency has no intention of defending the dollar or euro, further describing a new approach that sees this currency as pegged, instead, to a basket of goods including gold and rare-earth minerals, or soil.

Today, BRICS member countries account for one-quarter of the global GDP and upwards of 42% of the world’s population. These shares will only expand, as Saudi Arabia and Iran have now submitted formal intents to join the alliance. Growing interest from over six additional countries, including Mexico, Nigeria, Egypt, and UAE, demonstrates the potential for revolutionary disruption of the BRICS alliance to the existing global financial system and significant US dollar holders if new currency plans mature.

Regarding Babakov’s verbal plan, progress has been made toward the first step. India and Russia recently revived 1953’s long-lost Indo-Soviet trade agreement; this Rupee-Ruble trade mechanism allows for payment in rupees instead of euros or dollars. While Brazil and China – major trading partners with record $150 billion bilateral trade last year – also signed an agreement that allows trade in national currency, enabling direct financial transactions between both parties, exchanging Brazilian Real for RMB Yuan, and vice versa.

With the first step well underway, progress toward the second step of Babakov’s plan is ongoing. Russia and Iran have announced plans to connect their interbank communication systems. This news comes immediately succeeding the sanctions both countries faced amongst recent global conflicts. Both states were locked out of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, a consequence believed to have given ground for mutual agreement and triggered the development of such an alliance. The systems to merge, Russia’s System for Transfer of Financial Messages (SPFS) and Iran’s local interbank telecom system (SEPAM), collectively connect over 158 Iranian and Russian banks and provide complete isolation from Western authorities. Following the US's blanketed sanctions on Iran and Russia, both countries now settle approximately 60% of their trades using the ruble or rial, according to Chairman of the Russian State Duma Vyacheslav Volodin.

Russia and China have also unveiled plans to connect their banking communication and messaging systems. Threatened by this new system’s potential to undermine Western dominance, America and other Western States have threatened to expel the Chinese banks from the SWIFT system if the merger commences. Regardless, China still shows promise of commitment to Russia as seen in the March 2023 Putin-Xi summit, where a joint statement was published covering their shared economic interests and strategic harmonization whilst signing new trade deals worth upwards of US$117.5 billion – thereby confirming the theme of increased trade between both.

Despite potential challenges to its power, the US dollar continues to practice its hegemony. The depth of this matter goes beyond the convenience it provides for simple financial transactions, as the dollar's dominance is integrated into multiple aspects of global affairs. Thus, this raises questions regarding the validity of BRICS’s argument for a new currency, which many perceive as the “tip of the iceberg.” Further, plans to migrate away from the US dollar have been discussed since the 2007-2009 global financial crisis. This gave reason to question the effectiveness and efficiency of concentrated decision-making and current economic systems’ infrastructure.

Given underlying political tensions and its challenge to Western hegemony, BRICS’ de-dollarization plan is high stakes for all parties involved. As to whether this alliance’s financial synergies and partnership network are sufficient for economic integration for five (and potentially more) dispersed and rapidly developing economies, only time will gauge BRICS’ success.