South Africa, the host of this year’s BRICS Summit 2023, has gained global attention in the international press more than ever. The leaders from Brazil, Russia, India, China, and South Africa focused on two themes: the potential expansion of the bloc and the acceleration of de-dollarization.
The potential expansion would add Egypt, Ethiopia, Argentina, Iran, Saudi Arabia, and the United Arab Emirates to the emerging markets bloc; as of now, they were invited to join the bloc after the summit and will officially join the bloc on January 1, 2024.
The newcomers to the bloc have had significant economic growth in the past few years, despite political turmoil. As BRICS experts pointed out, the inclusion of these countries would diversify the bloc and strengthen the collaboration of the Global South. On top of that, Saudi Arabia and the United Arab Emirates are key players in the global oil and energy markets, and their inclusion would bolster the bloc’s energy security and trade potential.
But the big focus of the summit was the de-dollarization of the Brics bloc. To understand why this has become a central focus now, we need to understand what’s been happening with global versus domestic trade so far.
The Reality of De-Dollarization: Reasons
In simple terms, de-dollarization is the process by which countries reduce their reliance on the US dollar in international trade, especially for trading oil and other commodities.
The dollar in the global economy gives the US significant power to influence other countries’ economies, from imposed sanctions as pressure to achieve foreign policy goals to the US tendency to print both physically and electronically to manage its economic stability.
Another crucial reason is that the increasing US debt and its frequent reach of the debt ceiling limit will always raise concerns about the US defaulting on its debt payments, and in the worst-case scenario, a potential US recession could significantly impact the international financial system.
In essence, global entities are shifting away from the US dollar, aiming for economic resilience and autonomy, and this is what’s been happening so far:
Russian banks now use the China-based cross-border interbank payment system for transactions. In 2015, China launched the renminbi to enhance cross-border yuan payments and trade.
The BRICS New Development Bank has channeled up to 50% of its loans in national currencies since 2015, echoing the strategy of Asian Central Banks, which hold over $400 billion in local currency swap lines.
India’s Reserve Bank rolled out a rupee settlement system in 2022, targeting the global use of the rupee. The South African rand serves as a currency of choice in several African nations. Latin American countries pivot towards stronger inter-regional trade, while ASEAN amplifies bilateral currency swaps with China, Japan, and South Korea.
In the opening ceremony, South African President Ramaphosa said: “We must focus on developing and supporting trade within our nations using our national currencies. It’s time for a new global financial architecture where trade isn’t solely reliant on one currency.”
An Unified BRICS Currency: Unlikely
There was also the suggestion of a BRICS own currency, with the sole purpose of making trading between the BRICS easier, but experts say that “it’s a distant dream and very unlikely” that would happen.
“I am in favor of creating, within the BRICS, a trading currency between our countries, just like the Europeans created the euro, , Brazil’s president Lula da Silva mentioned during the summit. However, according to Reuters, South African officials pointed out that the summit would not include discussions of a potential currency on the agenda.
Could China’s Yuan Become the Common Currency for the BRICS?
One option would be to adopt the Chinese Yuan as a common currency because all BRICS countries have China as their main trading partner but do little trade with each other.
In a recent interview, Santiago Cafiero, Argentina’s Foreign Minister, said Argentina’s entry into the BRICS bloc would allow the country to continue strengthening its existing markets, particularly by using the yuan for trading with Brazil. This proposal is already being discussed with Brazil’s Economy Minister Sergio Massa, and if the proposal goes ahead, Brazil would use Chinese Yuan guarantees for exports to Argentina.
Argentina and China already have a currency swap agreement in place, which could facilitate the use of the yuan in trade. Such agreements could be extended to other BRICS nations, further promoting the use of the yuan.
