The dollar dominates world trade – for now. If it goes to China, Russia and many other countries, the dollar should lose this position. China is weaving to make the yuan an alternative, and the BRICS countries are planning a new currency. And what about bitcoin?
The international order is crunching. This could have been swept under the rug for a long time, but since the outbreak of the Russian war of aggression it can no longer be overlooked. And with the geopolitical order, the financial order is also being questioned. The dollar is still at the center of the global financial system. But this could change in the future.
One of the beneficiaries of this unrest would be China and its currency, the yuan. Beijing is currently campaigning in many countries to drop the dollar and replace it with the yuan. Chinese diplomats were only recently able to persuade Brazil to accept trade and investment payments in yuan.
Same with Saudi Arabia. When Crown Prince Mohammed bin Salman and President Xi Jingpeng recently met, they agreed, among other things, to settle Saudi oil supplies to China in yuan .
Brazil and Saudi Arabia are just two countries, but they could be the symptom of a paradigm shift in the international financial order. But Beijing’s quest to position the yuan as the world currency is only part of the story of de-dollarization. The BRICS countries – Brazil, Russia, India, China and South Africa – have been working on developing their own currency for some time . This is intended to reduce dependence on the dollar without simply replacing it with the yuan.
A driving force behind this is obviously Russia. After all, the country has been plagued by US sanctions since 2014, which are enforced through dollar banks. If you don’t use dollars, sanctions hurt half as much. According to Deputy Chairman of the Russian Duma, Alexander Babakov, the BRICS will soon present a new currency at the upcoming summit in Durban.
A new currency that is not issued by a single country, but by a group of countries, a kind of new euro. Exciting! In the past, there has been debate about tying the BRICS currency to a basket of member-state currencies. But now, according to Babakov, the new currency will be linked to gold and other products such as rare earths.
In principle, one could see a model for a new world order in the BRICS. The federal government includes 40 percent of the global population, which generates about a quarter of the global gross national product. As an alternative to the G7 or G20, BRICS is becoming increasingly attractive in the Global South, especially in those countries whose governments perceive the West’s so-called value politics as unjust patronage, such as Saudi Arabia or Iran. But countries such as Algeria, Nigeria, Argentina and Mexico are also striving for membership. BRICS could become the counter-model of the “West” and challenge its global dominance.
New Delhi, Beijing and Moscow, Babakov enthuses, are the founders of a “multipolar world order that the majority of governments long for.”
The 10 countries of the Association of Southeast Asian Nations (ASEAN) around Indonesia and Thailand, which together have 600 million people, are also striving for more independence from the dollar, euro, yen and pound. ASEAN finance ministers recently discussed how to reduce dependence on foreign currencies. Among other things, western payment systems such as Visa or Mastercard are to be replaced by local ones.
So there are quite a few interest groups who want to get rid of the dollar, and also quite a few attempts at de-dollarization. But the success so far has been moderate. According to a BIS study, the dollar, euro and yen continue to dominate world trade and currency exchange, while the yuan plays a more minor role. The Mexican peso, for example, continues to be exchanged for the dollar for the most part, followed by the euro and pound.
However, it cannot be overlooked that there is a certain tendency to make some trade routes less dependent on the flow of the dollar. For example between China and Russia, or between Russia and India, or generally wherever Russia has a finger in the pie. The yuan naturally lends itself as the currency of the world’s largest economy, and its share of China’s foreign trade has grown at double-digit rates in recent years. This is likely to continue and the dollar’s dominance will no doubt continue to decline.
But even the South China Morning Post notes that the yuan is used for just 2.19 percent of global payments, 3.5 percent of all foreign currency transactions and 2.69 percent of central bank reserve assets. Those are paltry values compared to the dollar, and it would take more than a landslide to make the yuan a serious competitor to the dollar for the foreseeable future. Even the pro-government South China Morning Post notes that China’s tight capital controls are holding back the yuan’s global uptake.
Even a currency newly created by the BRICS countries will find it difficult to counteract the massive network effects of the dollar and euro. In addition, it remains to be seen whether the link to commodities such as gold or rare earths really provides a model that is competitive in the 21st century. Does the new currency threaten to be rigged by gold traders and spun around by volatility in rare earth markets? Can it be stable enough to enjoy the necessary trust?
It would probably have been more promising than such a construct for a new currency to opt for Bitcoin or another cryptocurrency. A Bitcoin standard in international trade would already be globally accepted today, would already be based on a highly functional payment system and would already be connectable to decentralized exchanges and lending protocols as a token on other blockchains – such as Avalanche, Ethereum or Polkadot. In short – the BRICS countries could introduce a new currency for settlement overnight, with which the individual countries can be sure that they will not swap dependence on the USA for dependence on China or Russia.
But this will not happen, if only because China has effectively banned Bitcoin and other cryptocurrencies. Nor will de-dollarization likely take place in the foreseeable future.
