Impact of BRICS on the US Dollar

About the Author(s)

Syed Salman Mehdi holds a PGD in Software Technology and a BS in IT. He has a strong background in research and writing, specializing in geopolitical issues and history. Apart from his writing, he has expertise in IT, systems analysis, and academic content creation.

With attempts by other currencies, such as the Euro or the Special Drawing Rights (SDRs) of the International Monetary Fund, to challenge its hegemony failing, the US dollar has remained the dominant global currency since the Bretton Woods agreement following World War II. However, with the rise of BRICS, the dollar may have a turbulent future up ahead.

A world without the dominance of the US dollar in global international trade represents an alternate reality that could materialize soon. Emerging economies are uniting to transform what was previously impossible as they progress toward breaking the status quo. Following the recent BRICS bloc expansion, which added Saudi Arabia, Iran, the UAE, and Egypt to its membership, speculation has risen about how the bloc can overcome US dollar hegemony in international financial trades. As BRICS positions itself as an alternative to Western-led economic structures, the question arises: Can they successfully de-dollarise? The shift brings both advantages and disadvantages to which entities?

Rising geopolitical tensions, notably US sanctions on countries like Russia and Iran, have exacerbated the desire for financial independence. By lessening their reliance on the dollar, BRICS countries might avoid the severe effects of Western sanctions and gain greater control over their economic future.

For decades, the dollar has established dominance as the global reserve currency because of transparency, stability, and market dynamics in American financial sectors. The extensive usage of the dollar currency subjects macroeconomic systems to various potential dangers. The combination of higher U.S. interest rates, strengthening dollar exchange rates, and sanctions threats has created severe financial challenges for developing nations. Russia and China are leading the effort to break away from dollar dependency because both countries receive the harshest impact from US economic restrictions. BRICS nations discover in dollar independence a framework to evade global financial dangers while asserting control in monetary institutions.

The move toward currency independence will provide valuable advantages to selected nations in the BRICS group and other emerging economies. Economic sovereignty improves directly through de-dollarization strategies that serve China and Russia to reduce Western restrictions. Some of these countries actively pursue currency-based trading practices between their nations. Saudi Arabia and the UAE’s cost-controlled oil supplies lead these nations to seek alternatives to minimize their exposure to oil market characteristics dependent on the US dollar.

Through trade agreements using its rupee, India is reaching out to Malaysia and the UAE to amplify global usage of its currency. Local currencies within emerging markets show benefit potential due to their ability to reduce risks, minimize transaction costs, and foster stronger commercial partnerships with neighbouring countries. The BRICS states need to develop an effective system to establish this payment framework while handling the substantial technological barrier.

China and Russia have already begun trading in their respective currencies. A recent agreement established a long-term currency exchange to avoid the dollar in energy trading. Similarly, India has promoted currency-based trade with Malaysia and the United Arab Emirates to expand the use of the Indian rupee.

The US dollar accounts for over 60% of global reserves and over 80% of international trade. A loss in this supremacy would significantly influence the United States’ capacity to finance its debt at lower interest rates, perhaps leading to more significant borrowing costs domestically.

The United States faces the greatest risks from an effective BRICS-led de-dollarization movement. Because of its reserve asset status, the United States worldwide influence declines when the dollar is used less frequently. Diminished dollar use worldwide would increase domestic borrowing expenses because the U.S. government would lose its capability to subsidize deficits via cheap dollar funding.

The transition to international currencies poses risks to BRICS nations with weaker economic strength unless they have sufficient financial stability. These nations risk experiencing increased market volatility and a decline in investor confidence due to their currencies’ inability to remain stable compared to the US dollar.

The plans of BRICS to diminish the dollar’s dominant role face strong obstacles. Due to its great depth, transparency, and liquidity, the U.S. financial system functions as the world’s most stable reserve asset when crises strike. World trade through the dollar exceeds BRICS currencies by nearly 84 percentage points since the dollar dominates over 84% of global commerce. Still, BRICS currencies participate in small percentages of international payments and transactions, according to a Geopolitical Economy Report.

The BRICS nations face additional difficulties because they lack sufficient partnership coordination. China acts to internationalize its renminbi (1 Chinese Yuan equals 38.51 Pakistani Rupee), yet BRICS members are concerned about China’s power in the alliance. The different economic frameworks and strategic priorities make BRICS partners unable to develop common standards toward de-dollarization. Implementing shared reserve currencies or digital payment systems faces exceptional challenges because the bloc is struggling to build the required mutual trust.

While BRICS nations have proposed blockchain-based digital currencies, such as mBridge technology, for cross-border payments, their implementation is still in its early phases. Developing the infrastructure to enable such systems across different nations is a huge challenge.

Even though BRICS suggested ideas about a gold-backed currency and blockchain-based payment systems, they exist at an experimental level and have not moved beyond theory. The worldwide implementation of mBridge technology for digital cross-border payments will require multiple years of development. The dollar maintains its global financial leadership, which shows no signs of loosening in the near future. A multisided economic structure becomes more plausible as BRICS nations work systematically to advance local payment systems while reducing their connection to Western financial frameworks.

The United States and other Western nations are unlikely to embrace a successful BRICS-led de-dollarization effort. In reaction, we may see trade wars, additional sanctions, or other economic measures to maintain the dollar’s dominance.

The BRICS nations pushing to break the dollar hegemony draw from genuine principles about commanding their economies alongside geopolitical advantages. The obstacles of structural challenges coupled with different national priorities and marketplace faith in U.S. financial stability create extensive barriers against de-dollarization. The current steps of BRICS nations today might determine how the worldwide economic order will reshape itself during subsequent decades despite the dollar maintaining its position as the dominant currency.

While the BRICS’ campaign for de-dollarization confronts enormous structural and political challenges, partial success in some areas, such as energy or bilateral trade deals, has the potential to change the balance of global financial power. Over the next decades, a more multipolar economic structure may emerge, even if the dollar’s supremacy stays uncontested in the short term.

The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.