De-dollarisation unstoppable, BRICS cooperation fostering multi-polar currency world

By Yawen Xu

Amidst the growing flaws of the dollar-centric financial system and the concerning geopolitical weaponisation of the reserve currency, participants at this week’s St. Petersburg International Economic Forum (SPIEF) convened to discuss the transition from a unipolar currency-based international financial system to a new world order centred around a multipolar currency.

Moreover, the forum will explore the significant role of BRICS partnerships in shaping this emerging economic landscape.

De-dollarisation is occurring ten times faster than the decline witnessed in the previous two decades. From 2021 to 2022, the dollar’s share in global reserves dropped eight points, from 55% to 47%, compared to 73% in 2001.

What has led to this rapid de-dollarisation in recent years? Sanctions played a significant role. As Elon Musk, CEO of Tesla and SpaceX, warned in a recent tweet: “If you weaponise currency enough times, other countries will stop using it.”

In response to the Ukraine crisis, the US-led West imposed wide-ranging sanctions on Russia.

Some financial sanctions involved banning Russian banks from the SWIFT financial messaging system and freezing $300 billion worth of assets from Russia’s Central Bank reserves. The economic sanctions have backfired, serving as a wake-up call for many countries worldwide, particularly in the Global South.

“Every night I ask myself why all countries are forced to do their trade backed by the dollar. Why can’t we do our trade backed by our own currencies?” Brazil’s President Luiz Inacio Lula da Silva asked these soul-searching questions during his state visit to China in April, which summed up the growing sentiment and frustration regarding the dollar hegemony in international trade.

While actively advocating for local currency settlements among BRICS countries, Brazil signed an agreement with China to conduct trade settlements in their respective currencies before Lula visited China, meaning the annual bilateral trade flow of US$150 billion would be conducted using the Chinese and Brazilian currencies, rather than using the US dollar as an intermediary.

Meanwhile, as a member of the BRICS, Brazil has also been striving to encourage other Latin American countries to join the bloc. During a visit by Venezuelan President Nicolas Maduro to Brazil in late May, he expressed a clear desire to join BRICS, a sentiment supported by Lula, who emphasised his dream of using local currencies for settlements and reducing reliance on the US dollar.

While Brazil is leading the movement to de-dollarise Latin America, South Africa, another BRICS member, is also actively involved. Earlier this year, South African Foreign Minister Naledi Pandor expressed her concern and emphasised the importance of creating a fairer payment system as an alternative to the dollar. He believes that the current dollar-centric financial system tends to “privilege” wealthy countries, but developing nations like South Africa must incur additional costs when making payments in dollars. Pandor highlighted this as one of the reasons why the BRICS bloc established the jointly-run New Development Bank (NDB) in 2014.

In the face of the weaponisation of the dollar, Europe also seems to be taking steps to undermine the dollar’s supremacy. French President Emmanuel Macron recently called to reduce the European continent’s reliance on the “extra-territoriality of the US dollar”. Also, Macron has reportedly requested an invitation from South African President Cyril Ramaphosa to attend the BRICS Summit scheduled for August in Pretoria.

While Ramaphosa did not make any commitments to Macron, this bold and innovative move by the French president indicates that his vision, at least regarding international financial reform, aligns with that of the BRICS countries.

So how can the New Development Bank assist in building a multi-polar currency system that is friendly to developing countries and emerging markets?

Firstly, let’s delve into the vision behind establishing the NDB. As the first new multilateral development bank created by developing countries since the end of World War II, the NDB aims to mobilise resources for infrastructure and sustainable development projects in BRICS countries and other emerging economies. Its ultimate goal is to contribute to building a fair, just, and diverse international economic order.

Contrary to the goals of the NDB, the World Bank and the IMF, the two pillars of the Bretton Woods system, have long been focused on establishing and maintaining an international financial system with the United States at the helm and other Western countries and Japan playing supporting roles. Their objective has not been to serve the interests of developing countries genuinely. This is where the NDB steps in to fill the void and address this shortcoming.

Current NDB members include the five founding nations of BRICS (Brazil, Russia, India, China, and South Africa) as well as Bangladesh, Egypt, the UAE, and Uruguay. More countries are applying to enter or are in the process of joining the bank, such as Argentina, Saudi Arabia, Zimbabwe, and Honduras.

It’s worth noting that the combined GDP of the five BRICS nations (31.5% of the global total) surpassed that of the G7 nations (30.7%) this year, making it the world’s largest economic bloc. It is expected that by 2030, as more countries join BRICS Plus, the disparity between the two groups will further widen. This will increase the economic influence of the BRICS nations, making the New Development Bank even more attractive to other developing countries.

Secondly, the NDB has demonstrated institutional innovation in its operational processes, particularly in equitable governance structure, local currency financing, and sustainable infrastructure projects.

In terms of governance structure, unlike the World Bank’s approach to shareholding, the NDB has equally split shareholding among its five founding member countries. With an equal contribution totalling $100 billion as the initial authorised capital, each member country has equal voting and decision-making rights. More importantly, no country holds veto power, ensuring equal mutual benefits and respect among the nations.

Regarding local currency financing, the NDB stands out from the IMF and the World Bank, which primarily use the U.S. dollar as the dominant currency for international transactions. This new development bank for the Global South offers loans in multiple currencies, including the US dollar, euro, Chinese yuan, and other local currencies. And the approach effectively mitigates exchange rate risks associated with loan projects, reduces the vulnerabilities stemming from excessive reliance on the US dollar, and fosters the growth of member countries’ domestic capital markets.

For instance, as of the first quarter of 2023, loans in local currencies accounted for 21.5% of the NDB’s loan portfolio. And the bank aims to increase the share of project financing conducted in the national currencies of its member countries to 30% during the strategic cycle of 2022-2026.

This objective underscores the NDB’s commitment to promoting financial stability, enhancing regional cooperation, and bolstering the economic resilience of its members.

Regarding investment projects, the NDB focuses on sustainable infrastructure initiatives, including renewable energy, digital infrastructure, smart cities, water resources, and sanitation facilities.

Infrastructure development represents a significant bottleneck for economic growth in developing countries. Existing international multilateral development banks often adopt a cautious approach towards infrastructure investment due to the high costs, complex processes, and politically sensitive nature of environmental concerns and resettlement issues. However, the NDB is determined to make a unique and significant contribution.

The NDB’s “2017-2021 General Strategy“ shows that about two-thirds of its investments are dedicated to sustainable infrastructure projects. In its ”2022-2026 General Strategy“, 40% of the funds are allocated to projects that promote climate change mitigation and adaptation. These strategies highlight the bank’s commitment to addressing global development challenges by prioritising sustainable infrastructure investments.

Lastly, the BRICS emergency reserve fund, also known as the Contingency Reserve Arrangement (CRA), complements the role of the NDB. With a full scale of US$100 billion, China has pledged the largest share of US$41 billion, while South Africa has committed US$5 billion, and the remaining BRICS countries have each pledged US$18 billion. The function of the CRA is to provide liquidity support through currency swaps when a member state faces a long-term shortage of U.S. dollars and struggles to repay foreign debts. This mechanism allows fellow member states to offer assistance, reducing dependence on U.S. dollar reserves and ensuring stability within the bloc’s financial system.

In summary, the vision of the BRICS bloc and its New Development Bank is focused on enhancing financial autonomy for participating nations, providing assistance to emerging markets and developing countries, and diversifying and stabilising the global financial system. The Global South has been neglected for far too long. They deserve sovereign development and the opportunity to thrive.

* Yawen Xu is a journalist and commentator with CGTN, based in Beijing.

** The views expressed do not necessarily reflect the views of IOL or Independent Media.