Since their first summit on June 16, 2009, the emerging economies within the BRICS have sought to promote economic cooperation and development among members Brazil, Russia, India, China and South Africa and called for "a stable, predictable and more diversified international monetary system." If 14 years ago the BRICS were more inclined to express their distaste for the dollar and the Western-dominated G7 in more subtle ways, that is no longer the case as the international situation has changed. At last year's St. Petersburg International Economic Forum, Alexander Babakov, deputy chairman of the Russian State Duma, publicly called for a new financial system that would remove the current international protection of the dollar and the euro.

Since then, Russia's economic ambitions have moved from words to deeds. China's yuan replaced the US dollar as Russia's most commonly used currency on April 4, the latest in a series of moves by BRICS members to de-dollarize in the wake of Russia's invasion of Ukraine and the resulting Western sanctions. Four days before Russia's de-dollarization, Brazil and China signed an agreement to replace the dollar with the yuan and the Brazilian real in bilateral trade. The de-dollarization of the BRICS is now no longer a question of if, but of when.

How can the BRICS end the dollar's reign as the global reserve currency

While the gradual de-dollarization of the BRICS may not have the devastating consequences for the dollar that Russian politicians envision, the BRICS economies remain a powerful force in the global economy. With the BRICS 'contribution to global GDP rising to 31.5 percent, surpassing the 30 percent of Western-dominated rival G7, the East-dominated bloc is realizing its power on the global economic stage and actively seeking to expand its influence. Economies such as Bangladesh, Egypt and the United Arab Emirates have joined the BRICS New Development Bank. Iran and traditional U.S. economic Allies Saudi Arabia and Mexico are also seeking to join, suggesting that even U.S. partners are questioning the United States' ability to conduct fair trade.

With increasing support and influence, the next natural step in BRICS expansion would be to create an alternative currency that serves the group's economic interests by competing directly with the US dollar. The currency was already hinted at in the 2009 Joint BRICS communique, which called for "a stable, predictable and more diversified international monetary system." Fast forward to 2023, and according to Russian Ambassador to the BRICS Pavel Knyativ, plans for a new currency are already in the works. On the sidelines of the 2022 meeting of the Shanghai Cooperation Organization (SCO), Knatiev revealed that the BRICS countries are "actively studying mechanisms" and "the possibility and prospect of establishing a common single currency," with more details to be revealed at this year's BRICS summit in South Africa.

What will the BRICS currency look like?

According to Knatiev, "It doesn't matter if the new currency is a digital ruble, a digital rupee, a digital yuan or some other currency, as long as it serves the common interests of the BRICS countries." The currency will be backed by rare earth elements such as gold and based on a BRICS currency basket that includes the Brazilian real, the Russian ruble, the Indian rupee, the Chinese yuan and the South African rand.

What impact will BRICS currencies have?

Brics members would benefit the most from such a currency - it would likely stabilize BRICS economies, increase consumer confidence, achieve economic growth, and potentially reduce unemployment. However, how will this new currency affect the dollar?

While most would assume that the gradual de-dollarization of the BRICS group would lead to a depreciation of the US dollar and an appreciation of the Chinese yuan (USD/CNY), this is not necessarily true. Contrary to the economic ambitions of many Russian politicians, who see the internationalization of the renminbi as a harbinger of the collapse of the dollar, the renminbi is in fact intrinsically linked to the dollar. China needs the dollar as a benchmark to keep the yuan's value stable in offshore markets like Hong Kong. If more of the BRICS countries adopt the yuan as a reserve currency, the Chinese government will need more dollar reserves to keep the yuan's value constant. Since the two currencies complement each other, the increased use of the yuan as a reserve currency will not weaken the dollar. The de-dollarization of the BRICS countries will similarly affect the exchange rate between the US dollar and the Australian dollar. As the yuan becomes more of a reserve currency, it will appreciate, giving China more access to US dollar reserves, which in turn will cause the Australian dollar to depreciate even more against the US dollar. Of course, the value between currencies will still be determined by many other different external factors.

Will the dollar be overturned?

The strength and size of the U.S. economy is still number one, which has contributed to the world's confidence in the dollar. Sixty percent of the world's currency reserves are indisputably held in dollars. This is well ahead of the second largest reserve currency, the euro, which accounts for a relatively tiny 21 per cent of international reserves. The BRICS currently hold only 10 per cent of global currency reserves. The dollar will remain dominant for a long time to come.

Moreover, the dollar's dominance as a reserve currency gives it a significant role in international trade. More than 70% of non-European exports are denominated in US dollars, making it the world's most popular medium of exchange for trade. This factor has consolidated it as the dominant currency in international banking. As long as most of the world's currency reserves remain dollar-dominated, the dollar's role as the main medium of exchange for trade will remain unchanged.

Moreover, because the United States imports more goods and services than it exports, the rest of the world holds a lot of securities and cash in the U.S. Treasury. That makes it harder for countries to switch to other currencies. To overcome this obstacle, countries have begun to use their own currencies for trade, as in the recent agreement between Brazil and China. However, this will create problems for these countries as they have to deal with restrictions within their own currencies. For example, some national currencies are subject to strict exchange rate controls by the government. Such issues also make it more difficult for companies to price their goods and services accurately, less competitive in global markets, and such currencies are unstable and unsuitable for international transactions. In addition, many of these currencies face additional restrictions on how they can move in and out of the country, such as taxes, quotas and other restrictive regulations. That makes it harder for companies to get the capital they need to expand, hampering finance and trade.

conclusion

The BRICS currency scheme has great potential. In line with Russia's claims and the belief among the BRICS, economists generally agree that "the dollar plays too dominant a role in global finance," says Western economist Jim O 'Neill, a former chief economist at Goldman Sachs. In a paper published in the Journal of Global Policy, the creator of the BRIC acronym, encourages the BRICS group to de-dollarize and fight back against the dollar's dominance as a global currency. The BRICS countries will continue to try to increase their competitiveness in the future and eventually replace the dollar.

Yet the dollar still dominates global trade and finance. The most significant impact of BRICS currencies will be the simple fragmentation and differentiation of the global economy along geopolitical lines. We have to consider whether the issuing country has strict monetary restrictive policies, as well as the stability of the political and financial environment. The uncertainty is also bad for the BRICS currencies themselves. Therefore, it will be difficult for the BRICS currencies to shake the status of the dollar at this stage, let alone to destroy the dollar. In the next few years, it is likely to become the most serious competitor to the dollar, thus affecting the value of the dollar.

Daniel O 'Brien is a well-known writer of financial analysis and managing Director of easyMarkets APAC. During his 15-year career, Daniel has gained extensive investment finance and management expertise while working with international financial institutions, which enables him to provide a safe, transparent and reliable environment for traders of all experience levels at easyMarkets.