In another push for the de-dollarisation drive, Russia and China are working on a payment system to avoid their dependency on SWIFT. In recent years, the two BRICS nations have been working together to reduce the US dollar’s global hegemony.
Russian Deputy PM Alexander Novak while addressing the Russian-Chinese Energy Business Forum said: “the transition to a new system has already begun, with payments made in the national currencies of the two countries under contracts for gas supplies from Russia to China.”
He added, “Supplies of oil, oil products and coal are also being switched to payment in national currencies.”
As per the Russian news agency TASS, the Deputy Prime Minister emphasised that the system would help propel the currencies to world reserve status. “Such work allows for the prevention of risks and the promotion of the Ruble and Yuan to the status of world reserve currencies.
“In this regard, the Central Bank of Russia and the Bank of China are collaborating on the possibility of opening accounts for Russian companies in China and Chinese companies in Russia as well as developing a payment system that does not rely on SWIFT” he stated.
The De-Dollarisation Drive
The literal meaning of De-dollarisation is a process of substituting the US dollar as the currency, used for various financial transactions.
Several countries, especially Russia and China have been overly vocal for a de-dollarisation of the global economy, in the wake of several factors which even include diplomatic rivalry. Before understanding the demand of ending the dollar’s hegemony, first, let us delve into why the US currency has been established as the dominant force in world economy.
The Rise of Dollar
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar) is the official currency of the United States and several other countries.
The Coinage Act of 1792 established the US dollar on equal footing with the Spanish silver dollar, divided it into 100 cents and authorised the minting of coins denominated in dollars and cents. U.S. banknotes are issued in the form of Federal Reserve Notes, popularly called greenbacks due to their predominantly green colour.
The Spanish-American silver dollar, which created a global silver standard system from the 16th to 19th centuries due to abundant silver supplies in Spanish America, was historically the primary currency used for global trade between Europe, Asia, and the Americas.
The United States dollar was derived from this coin. When the international gold standard was established in the last quarter of the nineteenth century, the Spanish dollar was displaced by the British pound sterling.
The United States emerged relatively unscathed from World War I and was a significant recipient of wartime gold inflows, the dollar began to supplant the pound sterling as an international reserve currency in the 1920s.
Following the emergence of the US as an even stronger global superpower during WWII, the Bretton Woods Agreement of 1944 established the post-war international monetary system.
Prior to Bretton Woods, most countries adhered to the gold standard. That meant that each country guaranteed that its currency would be redeemed for its gold value. Following Bretton Woods, each member agreed to redeem its currency in US dollars rather than gold.
In the global commodity markets, the US dollar is primarily the standard currency unit in which goods are quoted and traded, as well as payments are settled. Since the dollar is the International reserve currency, the US has in many instances used it as a weapon to harm the financial prospects of rival nations.
The US Department of the Treasury has significant oversight over SWIFT — a financial transaction and payment system, which has often been used to impose sanctions on foreign entities and individuals.
After the Russian military action against Ukraine in 2014, the UK planned to press the EU, for prohibiting Russia from using SWIFT for payments. Although SWIFT declined the call for sanctions still Russia realised the underlying threat as later it created SPFS, a SWIFT equivalent for a backup measure.
The introduction of SPFS by Russia was a big and most importantly the first step in de-dollarisation however the need for the process had been rooted since 2008.
The 2008 Financial Crisis
The 2007-2008 financial crisis, also known as the Global Financial Crisis, was a severe worldwide economic crisis. It was the worst economic crisis since the Great Depression in 1929.
Financial institutions around the world were severely harmed, culminating in the bankruptcy of Lehman Brothers on September 15, 2008, and a subsequent international banking crisis. Countries throughout the globe faced repercussions of the economic crisis in the USA.
The crisis also exposed the cracks under the dominance of US currency. Several experts blamed the bad fiscal policies of the US government and banks for the economic tragedy and nations started formulating policies on how to reduce the dollar’s hegemony to negate the negative impacts in future.
Since it is hard to rival the US or dollar by a single entity, some nations have joined with others, formulating plans for the de-dollarisation. Many countries, including China, have openly agreed to trade in national currencies with others such as Australia, Russia, Japan, Brazil, and Iran.
According to reports, the dollar’s share of bilateral trade between China and Russia fell below 50% for the first time in the first quarter of 2020. Russia had accelerated the process of de-dollarisation after worsening relations with the US.
On March 23, 2022, Vladimir Putin signed an order prohibiting “unfriendly” countries from purchasing Russian gas in any currency other than the Russian Ruble in the aftermath of the Ukraine-Russia War.
Both Russia and China have been together contributing to the de-dollarisation drive as part of the BRICS.
BRICS
The BRICS were initially identified to highlight investment opportunities and were not a formal intergovernmental organisation.
The BRICS are widely regarded as the primary rival to the G7 group of leading advanced economies.
During the first-ever formal summit of BRICS (then BRIC), the members discussed improving the global economic situation.
Following the summit, the BRICS countries announced the need for a new global reserve currency that would be “diverse, stable, and predictable.” Although the statement did not directly criticise the perceived “dominance” of the US dollar, which Russia had previously criticised, it did cause the dollar’s value to fall against other major currencies.
As per a study, BRICS’ foremost achievements have been in the area of financial cooperation, as evidenced by the establishment of the New Development Bank (NDB), the Contingent Reserve Arrangement (CRA), and various other financial coordination mechanisms.”
The NDB and CRA were both created to assist the BRICS in reducing their reliance on US dollar financing and the IMF. For example, BRICS states in the Agreement on the New Development Bank that the NDB “may provide financing in the local currency of the country in which the operation takes place.”
This function of local currency financing makes the NDB resemble the BRICS’ own “mini-World Bank.” However, the NDB provides more benefits to BRICS members than the World Bank: NDB loans have fewer strings attached, and local currency loans allow borrowers to avoid increasing external US dollar debt.
Meanwhile, the CRA was hailed as “BRICS’ own IMF” by Russian President Vladimir Putin because it “creates the foundation for an effective protection of national economies from a crisis in financial markets.”
The most recent de-dollarization milestone was reached during the COVID-19 pandemic at the BRICS 2020 Summit when members agreed to strengthen and advance current de-dollarization processes. The group jointly issued the Strategy for BRICS Economic Partnership 20 Economics of Emerging Markets.
The members’ long-standing commitment to reforming the Bretton Woods institutions was reaffirmed in this Strategy. Although the group still has to go a long way before it can credibly challenge the dominance of the dollar, it is still the most capable rival.
India and Dollar
Recently, the Indian government permitted international trade settlements in Indian currency under foreign trade policy.
The move is intended to promote global trade growth with a focus on Indian exports and to support the growing interest of the global trading community in the Indian rupee.
As per Global Times, “the timing is somehow perfect for India to introduce rupee-based trade settlement, which coincides with emerging markets’ call for de-dollarization.”
The report further adds that presently “West’s restrictions and disruptions to the global supply chains through the abuse of the dollar hegemony are pressuring the world economy to reconsider the role of the dollar in the international trade system and seek for new alternatives to restore trade exchanges as usual.”
India’s decision to focus on trade with its own currency and reduce dependency on the Dollar comes with the new policy of the Indian government which aims at being self-sufficient or Atmanirbhar.
For many Western experts, the de-dollarisation seems quite fancy as challenging the position of US currency seems quite big of a task but then everyone should remember that currency is never constant and is impacted by geo-political situations and scenarios and none better example to cite then of Pound Sterling and the World wars.