BRICS and de-dollarization

De-dollarization, or the move away from the US dollar, is occurring.

It is happening especially at the promptings of the BRICS countries (Brazil, Russia, India, China, and South Africa) and the countries that are planning to join the bloc to trade with the other members and reduce their dependence on the US dollar.

As part of this effort to move away from the US dollar, reports are coming out that the bloc is even planning to come up with its own common currency.

For most people, these two might mean the same thing: that de-dollarization means a BRICS common currency, like how the euro played a role in the eurozone to replace previous currencies such as the German Deutschmark or French franc.

However, it is not. De-dollarization can happen and will continue to happen even in the absence of a BRICS common currency. De-dollarization does not equate to having a BRICS common currency at all.

What to watch out for instead

What de-dollarization means here is that the BRICS economies will start trading with each other in their own currencies backed up by gold. All the countries that will join the bloc in the future will try to do so as well, although it remains to be seen how successful they can be using their own national currencies. It is more likely that they will use a basket of currencies and will try to balance these currencies by naturally trading with each other on a bilateral basis or as a trading bloc.

For example, since India has been buying Russian oil in Indian rupees, Russia will necessarily pile up Indian rupees, which it can then use to buy Indian products. This means that boosting bilateral trade between the two can naturally balance the trade deficits that occur when trade is mostly one-sided.

Of course, it remains to be seen just how that can be accomplished immediately, as this will take time to develop. Though such trade is already happening in Indian rupees for Russian oil, which is already a form of de-dollarization.

De-dollarization can also mean a preference for a particular currency of a BRICS country rather than a BRICS common currency. This could be the Russian ruble, to be used to pay for Russian energy and food commodities, or the Chinese renminbi, which can be used to pay for Chinese exports. The renminbi can already be used to pay for Saudi Arabian oil, and the “petroyuan”, or use of the Chinese yuan for oil trading, is already a done deal.

Bypassing the US dollar

Because these currencies can be used to buy oil, they naturally bypass the need to buy US dollars, which used to be the only currency allowed to buy Saudi Arabian oil (the petrodollar). This, in turn, pulls down the demand for US dollars. Not only that, this is not necessarily something that BRICS countries alone can do, as other countries outside of BRICS can use these currencies instead of the US dollar to pay for oil, which is another form of de-dollarization.

Finally, it must be mentioned that there are also attempts to price commodities in non-dollar terms. For example, while payment might be in rubles or renminbi, the commodity might still be priced in US dollar terms.

This means that the currencies are still tied to the US dollar anyway, even if payments are not made in dollars. This implies that the relevance of the dollar is not expected to drop suddenly.

In a world moving away from US dollars, these currencies will have to find their value independently of how they are traded relative to the US dollar, implying a need to find direct currency quotes rather than being crossed through the US dollar.

Many forms of de-dollarization

And here is where the value of having gold might come in, because rather than having a currency measured against the US dollar, it can be measured in terms of gold. Again, this is just another form of de-dollarization.

All told, de-dollarization is already happening, although mostly in ways people do not recognize, simply because of the misconception that BRICS and de-dollarization mean a BRICS common currency similar to the euro that will rival the US dollar.

As discussed here, that does not need to happen at all. In fact, the US dollar has been coming down as a percentage of global reserves without that kind of rival common currency.

The way things are going right now, perhaps it is not even the renminbi, the ruble, or a proposed BRICS common currency that will replace the US dollar as it recedes slowly as a percentage of global reserves. Perhaps that role will be played by something else that is already there and would be the ultimate form of de-dollarization – using more gold as a reserve to replace the US dollar.

MARC BAUTISTA, CFA, is Vice-President and Head of Research & Business Analytics at Metrobank, in charge of the bank’s macroeconomic, industry, and financial market analysis and research. He loves teaching finance and investments, portfolio management, statistics, financial derivatives, economics, etc. in a university setting. He plays guitar in a rock band and loves learning other languages, especially Spanish, promoting its recovery as a heritage language in the Philippines.