De-dollarization Explained
The United States dollar has been the dominant global currency for decades. In the post-war period the prospect of de-dollarization has periodically re-appeared as a topic of discussion among global leaders and policy analysts. Yet, in the last few years, calls for de-dollarization and de-coupling from US markets have grown louder than ever. So, what is de-dollarization, and why is it happening?
What is De-Dollarization?
De-dollarization describes the process by which the world moves away from a reliance on the US dollar (USD) as the global reserve currency, a position the USD has held since the end of the Second World War.
The USD has entered a period of relative decline: in 2001 70% of foreign currency reserves around the globe were held in USD, today that number is only 59%. The USD is also losing its status as the default currency for global trade: for example, the trade between China and Russia, two of the world’s largest economies, is now conducted primarily in RMB, while Saudi Arabia, one of the world’s largest oil producers, has signaled its openness to accepting payment for oil in currencies other than USD.
What is Driving De-Dollarization?
The largest single factor driving the current trend towards de-dollarization is the shock caused in the international community by the sanctions placed on Russia in 2022. After the beginning of the current war in Ukraine, the US and its European allies moved swiftly to seize Russian international reserves and cut Russia’s access to international markets. The US control of the global reserve currency was an important factor in the successful application of these sanctions levied in an attempt to apply maximum pressure on Russia.
The sanctions regime does not seem to have had the intended effect on Russia, but these moves did damage global confidence in the dollar system, especially in the Global South. As Ding Yifan, a senior fellow at the Taihe Institute, has said in his summary of widespread feelings around the sanctions on Russia: “The US dollar settlement has become an instrument that the US uses to determine who has complied with or defied its bans on doing business with sanctioned countries and to impose costly sanctions on those who are not complaint.” Even allies of the US aren’t immune to this: companies based in the EU have been fined billions for doing business with sanctioned entities even when, such as in the case of Cuba or Iran, the host country of the company does not support the US-sanctioning country.
With an increasing number of countries living under sanctions or the threat of future sanctions, which are often unilaterally imposed by the US outside the framework of international law, the dollar system has lost any pretense of impartiality. This has driven many countries to consider de-dollarization as a vital step in securing their own sovereignty and economic security.
However, it is not just America’s liberal use of unilateral sanctions that are damaging the global reputation of the dollar. Increased instability in the American economy also has many international economists and central banks worried. Under President Biden the US debt has ballooned to $34 trillion - meaning the ratio of US government debt to GDP is now 130%. With around 60 currencies pegged to the dollar, a US default would be a disaster for the global economy. Even among US allies and partners, then, de-dollarization has become a way to insure against the increasing instability of the US political and economic system.
Another issue with the global dollar hegemony is it often leaves developing economies at the mercy of the fate of the US dollar. Recently, the rise in interest rates and an end to the policy of quantitative easing has strengthened the US dollar - and damaged many emerging markets in South America. This is because emerging markets tend to be commodity exporters, and a strong US dollar makes commodities more expensive for importing countries. For example, Bolivia, a major resource exporter in South America, has been struggling to maintain the economic growth so central to its welfare program due to a strong dollar affecting Bolivia’s export market. Economic policies made in the Federal Reserve for the benefit of the US economy are having negative downstream effects on developing economies, in large part due to the hegemonic role USD plays in the global economy. Little wonder then that Bolivia announced in 2023 that it would start accepting payment for commodities in RMB.
What Comes After the Dollar?
For the process of de-dollarization to supplant the US dollar then a new global currency must be found to challenge the American dollar hegemony. Currently, there are two viable candidates: the Chinese RMB and a potential BRICS trading currency.
Chinese RMB: The international demand for RMB has risen sharply in the last ten years, largely due to the role of the Belt and Road Initiative (BRI) in overseas markets. China has also started trading or is planning to trade, with several countries using RMB, rather than the dollar, as the trade currency. This has led to speculation that the RMB could act as the new global reserve currency for those countries who wish to shift away from their reliance on USD. However, despite recent growth, the RMB still forms a relatively minor part of the global market: for example, RMB makes up only about 2.3% of the global SWIFT system payments, compared to 32% for Euros and 43% for USD. The relatively small size of the RMB in the global currency market, then, prevents any realistic hope of the RMB becoming the global reserve currency in the short to medium term.
BRICS currency: Russia holds the BRICS presidency this year, and the Russian leadership has been known to be a big proponent of the idea of an international BRICS trading currency in the past. Brazil, which holds the presidency next year, has also pushed for a BRICS currency. It is possible, then, that over the next two years, Brazil and Russia might make the BRICS currency happen. However, despite the obvious benefits of a BRICS currency for international trade for countries under US sanctions, the odds of this happening are still pretty long.
This kind of international currency requires a level of political integration and unity the BRICS bloc of nations does not yet possess. A good example of the political problems the BRICS face comes from Brazil: under the presidency of Lula da Silva (2003-2011 and 2023-now) and Dilma Rousseff (2011-16), Brazil has been one of the loudest global advocates for de-dollarization, but during the presidency of the right-wing Jair Bolsonaro (2019-2023) Brazil reversed this policy, and once again embraced the dollar system. This kind of policy instability makes the creation of a BRICS currency difficult since, if one of the member countries withdraws, it opens the other participants to liabilities. Without the political integration of, say, somewhere like the Eurozone it is difficult to see how a BRICS currency could be made to work.
Will It Happen?
Despite the hurdles that would have to be overcome in order for the RMB or a potential BRICS currency to supplant the dollar system, the largest obstacle is likely to be stiff US opposition. The dollar’s position as the global reserve currency has given the US political establishment unprecedented power on the global stage, and the US will fight to keep this position. We only need to look at history for examples of this: after the Second World War, the British economist John Maynard Keynes proposed an independent international currency. The US government refused to entertain the idea, instead preferring the emerging dollar system since this would always ensure complete American control of the global reserve currency. The US would then use its control of British war debt to prevent the Sterling area (a currency union in the British Commonwealth) from emerging as a rival to the dollar system in the post-war era. In the same period, the US would use its vetoing power in the IMF to squash attempts to transform the IMF’s Special Drawing Rights (SDR) into a fully-fledged currency. All of these actions were committed against nominal allies in the Cold War: we can imagine the lengths to which the US might go against attempts by perceived enemies to liberate themselves from dollar hegemony.
However, there is a positive historical example to draw on. In 1979 the European Monetary System (a precursor to the Euro) anchored European Economic Community (EEC) national currencies to the Deutsche Mark as a way to prevent large fluctuations in value caused by manipulation of the dollar. The BRICS bloc of nations have natural resources, energy reserves, manufacturing, and labor resources, and so are potentially in a stronger position than the EEC in 1979. However, the problem remains that in 1979 the Deutsche Mark was the obvious choice for a European anchor currency. For the BRICS and the rest of the Global South, the choice is much less clear.
Further Reading
What Is Driving the BRICS’ Debate on De-Dollarisation?
Evaluating the BRICS Financing Mechanisms: Q&A with Paulo Nogueira Batista, Jr
De-dollarization, the Belt and Road Initiative, and the Future of the Chinese Yuan
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Li Jingjing
An outstanding overview of the de-dollarization trend.
I will point out that BRICS is aware of the limits of a BRICS currency, and even the RMB. So, in anticipation of this, they have already been at work for an alternate means of money transfer between countries (especially BRICS and BRI participants) by developing an alternative to SWIFT. For the last several years, BRICS --strongly supported and fostered by China and Russia since about 2014-- are facilitating a system called Project mBridge.
As of June 2024, Project mBridge reached minimum viable product (MVP) stage, while broadening its international reach. "The project aims to explore a multi-central bank digital currency (CBDC) platform shared among participating central banks and commercial banks, built on [a block-chain based] distributed ledger technology (DLT) to enable instant [secure] cross-border payments and settlement." Countries using this system can operate with or without the US dollar. In fact, it is more likely that a "basket" of currencies will participate in cross border trade without the US dollar. This is going to expedite a dramatic decline in the US dollar hegemony. Global economist, Jeffrey Sachs, suggests less than five years. Accordingly, this will coincide with America's global decline.
[Here is the article: Project mBridge reaches minimum viable product stage and invites further international participation (bis.org)]
All Best
Werner
The USD will not be replaced by a different currency.
BRICS is moving towards multilateral currency trading, where countries use their own currencies and central bank swaps to facilitate trade. Yes, this also has limitations, but the total reliance on the USD and US bonds and bills as instruments to store USD deposits will disappear.
This will make it harder for the US to fund its massive deficit warmongering spending. t will takw some time before this will take effect, because US vassal states such as Europe, the UK and Japan will be told to suck up the bonds and bills to prevent auction failures.