2.1 An Understudied Issue: De-dollarization through BRICS

A major area of focus for existing scholarship on international monetary relations, currency power, and economic statecraft has been the establishment of the US dollar as the world’s dominant currency (both as the most commonly held reserve currency and as the most widely used currency for international settlement), and its implications for US global leadership. Scholars have thoroughly investigated the US dollar’s currency power from the perspective of the dollar’s international currency status.Footnote ² Since the global financial crisis, many scholars have reevaluated the role of the US dollar in the global economy and with respect to US global leadership. They explained how the international use of the US dollar helped build American hegemony; how the dollar’s primacy serves as a source of US prestige; and how the United States has used the dollar to assert its global influence (Reference KirshnerKirshner, 2008; Reference GoldbergGoldberg, 2011; Reference SteinerSteiner, 2014). Some scholars argued that the root cause of global economic imbalance and the 2007–2008 global financial crisis was the lack of institutionalized currency cooperation (Reference LiuLiu, 2014; Reference Que and LiQue and Li, 2014). Thus, a proposed postcrisis solution for liquidity surpluses due to ultralow interest rates was to create a multicurrency global reserves system and reduce the dependence on the US dollar (Reference XiangXiang, 2014).

Historically, the establishment of a dominant currency and the transition from one dominant currency to another did not come as the result of unilateral or collective efforts made by states. For example, the death of the Dutch guilder as a dominant currency in Europe was not the product of the activism of the Bank of England. Rather, the guilder’s loss of reserve currency status was primarily due to a permanent market loss of confidence in the Bank of Amsterdam that suffered from policy insolvency, meaning the net worth was negative under its policy objectives (Reference Stella and LönnbergStella and Lönnberg, 2008; Reference Quinna and RoberdsQuinna and Roberds, 2016). Similarly, the Bretton Woods Conference formally recognized the US dollar’s global reserve currency status, without the US government imposing this status on other states (Reference Eichengreen and FlandreauEichengreen and Flandreau, 2008). The Japanese government’s attempt to internationalize the yen through multiple mechanisms, such as establishing an offshore market and increasing Japan’s foreign aid using the yen, failed due to Japan’s economic stagnation since the 1990s (Reference Wu and WuWu and Wu, 2014). The US dollar’s dominance has also been discussed relative to other rising international currencies. Potential challengers to the dollar hegemony are currencies with a growing influence in international monetary affairs. These include the euro, followed by the renminbi.Footnote ³ However, the inherent flaws with the euro and renminbi constrain these two currencies’ capacity to become the next dominant global currency. In the case of the euro, despite being the second most important global currency after the US dollar, its international role has largely stagnated over the past two decades. The financial market for euro-denominated assets lacks the size and depth of the dollar-denominated market, constraining the euro’s capacity to challenge the dollar hegemony in global financial markets. Similarly, the renminbi lags behind the dollar in financial market size and depth. It has the additional problem of a lack of free international capital flows. Thus, scholars have generally agreed that the US dollar remains the world’s dominant currency and that no alternative currencies have yet presented a credible challenge to its supremacy (Reference Helleiner and KirshnerHelleiner and Kirshner, 2009; Reference EichengreenEichengreen, 2012). Given the absence of a historical precedent of a rising power de-dollarization coalition, existing research has yet to sufficiently explain the mechanisms and prospects of BRICS’ collective de-dollarization initiatives.

Prior research has identified a broad global trend toward financial sector de-dollarization, starting in the early 2000s and continuing until the global financial crisis. However, this trend has generally stalled or even reversed in many countries, with only a few exceptions, such as Peru (Reference Catão and TerronesCatão et al., 2016). Recent scholarship on economic statecraft has examined de-dollarization activities of countries that are subject to US sanctions and the impact of these activities on US foreign policy and the global monetary system. While acknowledging that countries under US sanctions have a shared incentive to de-dollarize their cross-border settlements, scholars disagree regarding the long-run impact of these individual de-dollarization initiatives on the US dollar’s dominance and on the global currency system (Reference Mathews and SeldenMathew and Selden, 2018; Reference McDowellMcDowell, 2020; Reference Andermo and KraghAndermo and Kragh, 2021). Despite the growing theoretical and policy debates on de-dollarization, the extant scholarship has not systematically examined coalitional de-dollarization initiatives conducted by a motivated group such as BRICS. Addressing this gap in the existing literature has not only theoretical relevance but also policy implications. An inability to comprehensively understand emerging de-dollarization coalitions could lead US policymakers to neglect and underestimate coalitional challenges to the US global financial leadership.

The contemporary international relations literature on rising power coalitions has developed primarily along the dichotomy between rising power alliances and the incumbent power. In this context, rising powers seek to increase their status and influence as agenda-setters and norm-makers in global governance.Footnote ⁴ The alliance concept has traditionally been defined from the hard security perspective as a “formal association of states for the use (or non-use) of military force, in specified circumstances, against states outside their own membership” (Reference SnyderSnyder, 1997, p. 4). Recent scholarship has argued that rising powers form versatile alignments rather than security-focused alliances, and that they are unlikely to pursue military alliances to challenge US leadership due to their economic and financial embeddedness in the existing system (Reference ChidleyChidley, 2014; Reference Han and PaulHan and Paul, 2020). In the absence of hard balancing and military threats from rising powers, some scholars suggest that rising powers used soft balancing or “nonmilitary tools to delay, frustrate and undermine” US global leadership (Reference PapePape, 2005). Such challenges ultimately depend on rising powers’ ambitions and whether they are reformers, reform-oriented status quo powers, revolutionaries, counterrevolutionaries, or rational revisionists (Reference LiptonLipton, 2017; Reference DreznerDrezner, 2019).

Existing scholarship has theorized about the conditions under which a rising power coalition would pursue various counter-hegemonic strategies. The coalition can challenge the incumbent leadership with a “go-it-alone” (Reference GruberGruber, 2000) approach: Its members could exclude the United States and operate outside of the existing system, thereby limiting US policy options rather than coercing or persuading the United States to change its ways. Existing global institutions are likely to be challenged in areas where the preferences of the incumbent and the rising powers diverge: these are the areas where states will be motivated to create new institutions (Reference HenningHenning, 2017; Reference Stephen and ParízekStephen and Parízek, 2019). To exercise collective financial statecraft, a rising power coalition can make reforms within the established system or establish new and competing structures, and it can use institutions and markets as the two venues for action (Reference Katada, Roberts and ArmijoKatada, Roberts, and Armijo, 2017; Reference Kruck and ZanglKruck and Zangl, 2020). Although scholars did not specify how a rising power coalition can challenge the dollar hegemony, they discussed the core choice of working inside versus outside the system.

Prior scholarship has analyzed rising powers’ coalitional counter-hegemonic challenges in the context of their institutional choices, including establishing new institutions and attempting to reform major existing institutions.Footnote ⁵ For example, the China-led Asian Infrastructure Investment Bank (AIIB) is an example of rising powers’ counter-hegemonic institutionalism, as it epitomizes the discontent of rising powers with US-led multilateral institutions and the tensions between rising powers and the United States in global economic governance (Reference Ikenberry and NexonIkenberry and Nexon, 2019). However, rising powers’ “market choices” and the relevance of the status quo of market instruments for coalitional mobilization have been less discussed. Existing literature has illuminated the potential use of blockchain-based self-executing contracts to achieve trade de-dollarization among small groups of countries, such as BRICS (Reference AggarwalAggarwal, 2020). Currency swaps and cryptocurrencies could also be used to de-dollarize global oil trade (Reference LadasicLadasic, 2017). But these proposals have not systematically evaluated the mechanisms through which a collective de-dollarization coalition could be mobilized, and how such a coalition could achieve economies of scale. As a result, existing literature has overlooked the challenge of rising powers’ monetary alliances. Thus, it risks underestimating the coalitional scope and credibility of a rising powers alliance, especially if the members of such an alliance have shared frustrations with the dollar and have the financial resources to create their own markets and institutions.

The question of whether BRICS can curb the dollar’s “exorbitant privilege” has received attention in the early literature on BRICS’ collective financial statecraft. Reference Bruetsch and PapaBruetsch and Papa (2013) examined BRICS associational dynamics in the currency realm and found that BRICS generated shared narratives to reduce the dollar’s privilege, but its members’ divergent interests and disagreements about possible solutions undermined coalitional efforts. Subsequently, scholars have evaluated BRICS’ performance both as a financial coalition and as an entity for collective mobilization. Most importantly, BRICS has led emerging markets in changing the global financial order by developing alternative sources of emergency assistance and development financing to create a system that better serves its interests and ideas (Reference Huotari and HanemannHuotari and Hanemann, 2014; Reference DreznerDrezner, 2019; Reference Kring and GallagherKring and Gallagher, 2019). However, while acknowledging that BRICS financial cooperation is deepening, scholars disagree on the prospects and credibility of BRICS’ initiatives to transform the existing global system. Some have doubts regarding BRICS’ potential to act as a system transformer, whereas others hold that the format of BRICS as an informal institution may allow it to gain considerable power (Reference Cooper and FarooqCooper and Farooq, 2013). Reference GallagherGallagher (2015) reconciled these scholarly differences by providing evidence to demonstrate that it is possible for BRICS to “take advantage of a fragmented and disparate global economic governance landscape to leverage benefits” under unique circumstances.

A prerequisite for BRICS to present itself as a credible de-dollarization coalition is its ability to create a robust coalition. Although existing literature has not explicitly discussed the robustness of BRICS’ collective de-dollarization initiatives, it has shown that BRICS has exercised “collective financial statecraft” to challenge the existing liberal international order (Reference Roberts, Armijo and KatadaRoberts et al., 2017). In particular, institutions such as the NDB and the CRA are examples of BRICS’ collective mobilization to reform global financial governance (Reference ChinChin, 2014; Reference Biziwick, Cattaneo and FryerBiziwick, Cattaneo, and Fryer, 2015; Reference Qobo and SokoQobo and Soko, 2015; Reference CooperCooper, 2017; Reference Suchodolski and DemeulemeesterSuchodolski and Demeulemeester, 2018). BRICS has not only transformed the traditional power structures within the existing system, such as the World Trade Organization, but also served as the foundation for broader developing-country coalitions to challenge US hegemony (Reference HopewellHopewell, 2017).

Other scholars are more critical of BRICS’ collective mobilization. Some argue that BRICS is unlikely to become a plausible anti-Western alliance that can credibly undermine US leadership and transform the existing international order (e.g., Reference LuckhurstLuckhurst, 2013). BRICS’ ability to change the existing system is arguably undermined by the group’s political, economic, and ideological heterogeneity (Reference Radulescu, Panait and VoicaRadulescu, Panait, and Voica, 2014; Reference TierneyTierney, 2014; Reference LiLi, 2019); the power asymmetry within BRICS (Reference PanditPandit, 2019); and its lack of a collective world order vision marketable to the broader international community (Reference NuruzzamanNuruzzaman, 2020). Even in development finance, which is often cited as evidence that BRICS is a counter-hegemonic group, scholars contend that the different development assistance models among individual members could weaken a coherent BRICS model (Reference LiLauria and Fumagalli, 2019). BRICS’ failed attempt at creating its own credit rating agency is a demonstration of the group’s limited capacity to transform the global financial order through collective institutional innovation (Reference Helleiner and WangHelleiner and Wang, 2018).

Finally, among prior scholarship that examined BRICS financial cooperation through the cases of the NDB and the CRA, a few evaluated the outlook of de-dollarization through these BRICS-governed multilateral financial institutions (Reference ChossudovskyChossudovsky, 2018; Reference KievichKievich, 2018). However, existing research has not fully investigated the wide range of de-dollarization initiatives that BRICS members have experimented with. Nor has it systematically explored the nature of BRICS’ “coalitional de-dollarization.” This extant research also lacks a comprehensive analysis of how BRICS has engaged with other non-BRICS actors to achieve economies of scale for their de-dollarization initiatives.

2.2 The Puzzle: Is BRICS a De-dollarization Coalition?

It is puzzling why BRICS remains understudied as a de-dollarization coalition for two reasons. First, given the aggregate size of the BRICS economies and markets, as well as the risk of sanctions, the BRICS countries should theoretically have the collective motivation to de-dollarize their international settlements to reduce currency and sanction risks. Historically, all five members have experienced US sanctions, with Russia and China still under various levels of US sanctions. The shared frustrations of the five members should provide strong incentives for them to mobilize toward de-dollarization. Second, reducing dependence on the US dollar and diversifying the global currency and financial system was a publicly declared priority for BRIC when the group first gathered in 2009. When South Africa joined in 2010, BRICS reiterated its shared interest in this issue. Since BRICS is the first rising power coalition with a strong commitment to reforming global financial governance, examining its de-dollarization initiatives presents a unique opportunity for advancing scholarly research on the political economy of coalitional de-dollarization.

The BRICS countries also face a dilemma: While they would prefer to have alternatives to the US dollar as the dominant currency, the dollar’s depreciation would decrease the value of their large holdings of dollar-denominated assets. Thus, they need to balance between their desire for greater international influence and financial autonomy and the material costs of weakening the US dollar’s dominant currency position. This balancing is not only a critical issue for BRICS, but it also has direct policy implications for other countries and regional organizations. Given BRICS’ political and economic significance, its coalitional de-dollarization initiatives will directly impact the US dollar’s dominance in the existing global financial system and US global leadership.

While outlining this research puzzle, it is also important to clarify that de-dollarization in this study should not be confused with replacing the US dollar with another global hegemonic currency. BRICS de-dollarization initiatives are not about the group’s collective support for renminbi internationalization or the internationalization of any other national currency. This research focuses on coalitional de-dollarization pathways and seeks to capture important mechanisms that the five members have pursued to reduce their dependence on the US dollar. Additionally, this research focuses on de-dollarization in the context of international settlements rather than domestic monetary de-dollarization.

2.3 The Analytical Framework: Pathways to De-dollarization

Our analytical framework builds on the assumption that given the tangible costs of being completely isolated from the dollar-based system, members of a rising power coalition do not voluntarily initiate a wholesale revolution against the system. Instead, their de-dollarization initiatives are likely to be reactive to the dollar’s dominance, seeking to correct the “destabilizing asymmetry” (Reference CarneyCarney, 2019) of the dollar’s hegemonic power in the global economic and financial system. Thus, they aim to mitigate the risk of being subject to the US dollar’s hegemonic power so as to achieve higher autonomy and seek broader influence in the global system.

A de-dollarization coalition is likely to emerge when members of the dollar-based system are dissatisfied with the international status quo, including the dollar’s exorbitant privilege, the incumbent US global leadership, and the existing rules and norms. Rising powers continuously renegotiate the international status quo as they seek to increase their influence and status, aspiring to become rule-makers and agenda-setters in global finance (Reference CohenCohen, 2005a, 2005b, Reference Cohen2018). However, their dissatisfaction with the system is particularly pronounced and gives rise to a counter-hegemonic coalition when they face direct threats to their financial and geopolitical autonomy. Such threats include being targeted by hostile and coercive policies or having the existing system experience a severe crisis or a shock. The former occurs when, for example, the international financial infrastructure (e.g., SWIFT) is deployed to coerce a targeted actor to change its behavior (Reference Farrell and NewmanFarrell and Newman, 2019; Reference Drezner, Farrell and NewmanDrezner, Farrell, and Newman, 2021). This leads the actor to turn against the hegemon and build coalitions to resist external pressure. In the latter case, the shared frustration with the crisis and the perceived decline of the existing dollar-based system enabled the rise of coalitional de-dollarization initiatives. Coalitions can help their members survive the crisis and steer the system toward their preferred outcomes. For the de-dollarization coalition to materialize, coalitional members must have the political and economic capacity to influence the dollar system (Reference GoddardGoddard, 2018).

Our proposed “Pathways to De-dollarization” framework conceptualizes various channels through which a rising power coalition and its members can mitigate the risk of operating in the dollar-based system. Rising powers can mitigate this risk using two main approaches (drawing on Reference HirschmanHirschman, 1970; Reference GruberGruber, 2000). One approach is to hedge the risk by developing an alternative nondollar-based system that allows rising powers to maintain direct economic and financial connections with other countries in the world without resorting to the dollar-based system. This is the “go-it-alone” strategy, referring to de-dollarization policy options outside the existing dollar-based system and building new, nondollar structures. The other approach is to pursue risk insurance and risk diversification by using “voice” to initiate changes and improve the existing dollar-based system. This is the “reform the status quo” strategy, referring to the pursuit of reforms within the existing system to dilute the dollar’s dominant currency status.

These two approaches are not mutually exclusive. First, the “go-it-alone” strategy can create an “exit” from the existing system. However, this strategy cannot be completely separated from the existing system because it still depends on it to mobilize the necessary resources to challenge the system. Second, rising powers may use the potential “exit” as a source of leverage when reforming the existing system, so the threats of exit and parallel institutions serve as a means to increase voice in incumbent institutions (Reference LipscyLipscy, 2015). Finally, in their pursuit of autonomy and influence, rising powers can engage with both institutional mechanisms and market mechanisms to implement both strategies. Table 1 visualizes the Pathways to De-dollarization framework by offering an illustrative list of common pathways.

Based on this analysis, we propose the following:

Proposition 1: When rising powers seek greater financial and geopolitical autonomy in response to a perceived threat of sanctions and currency risk, they are likely to focus on developing and accelerating “go-it-alone” strategies that emphasize the creation of new nondollar-based institutional and market mechanisms. While developing alternative institutions and markets is a long-term project and requires significant resources, rising powers would pursue fairly low-cost and near-term “reform-the-status quo” strategies to increase access to the existing trading system and global capital by using nondollar currencies and diffusing the dollar’s dominance. A rising power coalition can promote the use of local currency in the existing global trading system to weaken the US dollar’s dominant vehicle currency status. Its members can reduce their own holdings of US dollar reserves or dollar-denominated assets to defend themselves from currency and sanction-related risks. The coalition can also seek to diversify the existing global currency composition by promoting alternative currencies, such as other national currencies, supranational currencies, or even digital currencies. Finally, coalitional members can also create and expand nondollar-based equity markets in the existing global financial system to divert capital away from the dollar-based markets.

Applied to the BRICS context, we hypothesize that Russia, as a country continuously under Western sanctions, as well as other economies that are negatively affected by the dollar volatilities, would be leading BRICS’ “go-it-alone” de-dollarization strategy, mobilizing other BRICS countries around de-dollarization initiatives and using a wide range of de-dollarization pathways. Threatened rising power coalition members would not only seek to mobilize other BRICS countries around a de-dollarization agenda but are likely to also promote nondollar mechanisms to attract more participants – non-incumbent powers and non-Western organizations such as the Shanghai Cooperation Organization (SCO) to create the economies of scale.

Proposition 2: When rising powers are not under an immediate threat of sanctions, they are likely to stay loyal to the US dollar system and prioritize “reform the status quo” strategies in the near term. The dominant currency paradigm literature suggests that the US dollar’s wide use in international transactions pulls other countries into the dollar-based system (Reference Gopinath, Boz, Casas, Díez, Gourinchas and Plagborg-MøllerGopinath et al., 2020; Reference Gopinath and SteinGopinath and Stein, 2021). However, while some path dependence can be assumed in the short term, ambitious rising powers seeking to diversify the system will use both “reform the status quo” and “go-it-alone” de-dollarization strategies to increase their financial and geopolitical influence. Figure 1 visualizes the key areas of US dollar hegemony that a larger de-dollarization mobilization needs to consider.

Figure 1 A visualization of the US dollar’s dominance

Figure 1 categorizes the various expressions of the US dollar’s dominant currency status into three primary areas: real economy, funding, and investability. These three overarching categories cover the specific areas that constitute the structural constraint that any reactive de-dollarization initiative has to consider. More specifically, the US dollar is the dominant global reserve currency and enjoys the highest weight in the Special Drawing Rights (SDR) basket. It is also the dominant invoicing currency in international trade; the leading currency across global financial infrastructure; and, it has the dominant pricing power in major global commodities. The dollar also dominates the space of development financing, bank deposits, and global corporate borrowing. Finally, the dollar is the leading currency in terms of investability as it dominates global equity markets and is the primary safe-haven currency in times of economic and financial crises. Applied to the BRICS context, since all of the five BRICS countries seek greater financial and geopolitical influence, we hypothesize that they will challenge the dominance of the US dollar by deploying de-dollarization pathways that address these strategic areas, and we measure the level of the challenge on a spectrum from low to high.

Finally, the most comprehensive and effective challenge to the dollar hegemony is if a rising power coalition wages a systematic coalitional de-dollarization campaign and uses a combination of both “go-it-alone” and “reform-the-status-quo” approaches that challenge all the specified areas in which the dollar enjoys dominance. A coalition that can most effectively achieve de-dollarization is one that creates a nondollar club good (e.g., a new institution or market mechanism) that it can govern and use as leverage. Such a coalition can promote the good through broader engagement and even popularize it as a public good to establish an alternative nondollar global system. The “go-it-alone” strategy is more likely than the “reform-the-status-quo” approach to generate such new nondollar club goods. Successful de-dollarization initiatives can not only help rising powers bypass coercive actions but also be weaponized for coercive purposes, and rivals might be denied access. As the initiators of such de-dollarization mechanisms, rising powers would be the dominant rule-makers in a de-dollarized system, likely constraining US policy space and enjoying higher status than their followers.

2.4 Research Design

To examine BRICS’ de-dollarization pathways and whether BRICS can de-dollarize the US-led global financial system, we apply the introduced framework and analyze a wide range of BRICS-related data using qualitative methods, including process tracing, interviews, content analysis, and archival research and quantitative analysis of BRICS-relevant financial data.

First, we combine process tracing and content analysis to identify the key milestones in BRICS’ financial cooperation and de-dollarization initiatives between 2009 and 2021. We investigate the existence of a BRICS de-dollarization agenda and identify the prominent actors in the de-dollarization space. We triangulate key events across different sources ranging from credible local sources in BRICS countries to international media. Second, to evaluate the consistency of BRICS’ commitment to de-dollarization over time, we analyze a variety of archival sources, including speeches and essays by BRICS policymakers, BRICS declarations, BRICS think tank reports, NDB press releases and funding operations, and BRICS Business Council reports. Third, to get a more accurate picture of BRICS policy preferences, we rely upon semi-structured interviews with experts, officials (current and former), central bankers, and financial professionals in BRICS countries who have either participated in BRICS policymaking or published on the issue of BRICS financial cooperation. We identified experts based on our analysis of BRICS documents, credible news reports, BRICS think tanks’ members, and academic publications in leading journals.

We apply the analytical framework by examining a wide range of BRICS de-dollarization initiatives comprising the use of both institutional and market mechanisms to mitigate BRICS members’ risk exposure to the dollar’s hegemonic power. These initiatives include the NDB and development finance de-dollarization; global oil trade de-dollarization; global financial infrastructure de-dollarization through BRICS alternatives to SWIFT; BRICS promotion of de-dollarization initiatives by engaging with non-BRICS members; self-defense measures in US-led institutions against the dollar’s dominance; reforms of the global reserve currency structure; efforts to diffuse the dollar’s dominance as the vehicle currency in trade; and BRICS’ activities in global equity markets. Our Pathways framework allows us to identify and evaluate what members have achieved, and the benchmark of strategic de-dollarization areas illustrates what BRICS should do to de-dollarize. The combination of the two approaches allows us to zoom in and examine the specific strategies each BRICS member pursues, as well as distinguish the BRICS countries leading de-dollarization efforts from the less active members. The resulting analysis allows us to evaluate the overall level of the BRICS’ de-dollarization challenge.

To understand the extent of collective mobilization along the pathways proposed in our framework, we introduce a two-dimensional matrix measuring the effectiveness of de-dollarization initiatives and the level of coalitional strength. The benchmark for a high level of effectiveness is the creation of nondollar institutions and/or market instruments or market infrastructure. Following our conceptualization, the “go-it-alone” strategy leads to a higher level of de-dollarization effectiveness, as it targets the creation of new nondollar mechanisms. In contrast, the “reform-status-quo” strategy yields lower effectiveness due to its lack of mechanism innovations. We measure coalitional strength by the number of participants in a de-dollarization initiative. This is because cross-border settlements in international trade and finance require counterparties and the formation of a nondollar global financial system requires broad participation of state actors and non-state actors. A higher number of participants means that a de-dollarization initiative is more robust. Unilateral initiatives may be potentially scaled to the coalitional level, but they represent a low level of coalitional strength. The coalitional strength increases as more members of the rising power coalition jointly participate in de-dollarization initiatives. Once the coalition builds full consensus, it demonstrates greater coalitional strength. When the rising power coalition expands its de-dollarization initiatives beyond the group members and mobilizes a broader coalition, the coalitional strength is the highest. As Figure 1 illustrates, the combination of high effectiveness and high coalitional strength is in the upper right cell, which features the formation of an alternative nondollar global financial system that is governed by rising powers and not the United States (Figure 2).

Figure 2 Measuring coalitional de-dollarization initiatives

Note: n = number of participants in a de-dollarization initiative (state and non-state actors N = number of formal members in the rising power coalition (in the case of BRICS, N = 5, including Brazil, Russia, India, China, and South Africa).

We augment our qualitative analysis with quantitative data from the NDB’s annual reports, its project database, SWIFT reports and statistics, Bank for International Settlements international locational banking statistics, treasuries holdings data from Bloomberg, the Treasury International Capital System, commodities futures data from the Shanghai Futures Exchange, BRICS reserves data and trading data from the People’s Bank of China, Bank of Russia, South African Reserve Bank, Reserve Bank of India, Central Bank of Brazil, ICE Benchmark Administration, and World Gold Council, and BRICS voting rights data and SDR quota from the World Bank and the IMF.

3.1 Key Milestones in the Evolution of BRICS as a Financial Coalition

The first BRIC summit in 2009 concluded with a clear statement from its leaders: “[w]e are committed to advancing the reform of international financial institutions, so as to reflect changes in the global economy … We also believe that there is a strong need for a stable, predictable and more diversified international monetary system” (BRIC, 2009). Financial cooperation has been a consistent theme during every annual BRICS summit ever since and has been covered in joint summit declarations. Several key milestones energized BRICS’ commitment to diversifying the existing system. For example, between 2012 and 2017, BRICS established the NDB, collectively pushed for the use of local currency in development finance, and launched the CRA. In 2020, BRICS identified empowering local currencies as its long-term agenda item, thereby cementing its importance for the group in the future.

The first milestone is the establishment of the NDB and the CRA, which was initially proposed in 2012 and 2013 respectively, though both materialized in 2014. These two institutions resulted from the BRICS members’ frustration with their limited progress in reforming the Bretton Woods institutions. BRICS created the NDB and CRA to mirror the functions of the World Bank and the IMF respectively, but operate under BRICS ownership and control. The NDB and CRA were both designed to help BRICS reduce their dependence on US dollar financing and the IMF. For example, in the Agreement on the New Development Bank, BRICS states that the NDB “may provide financing in the local currency of the country in which the operation takes place” (NDB, 2014). This statement positioned the NDB as a development finance intermediary that uses local currencies to mobilize capital in international markets and provides financing for its members (see Section 4). This local currency financing function makes the NDB resemble the BRICS own “mini–World Bank.” However, the NDB yields greater benefits than the World Bank for BRICS members: NDB loans have fewer strings attached, and local currency loans allow borrowers not to increase external US dollar debt. The CRA was hailed as “BRICS’ own IMF” by President Putin because it “creates the foundation for an effective protection of (our) national economies from a crisis in financial markets” (RT, 2014). It makes pooled dollar reserves of USD100 billion available to provide liquidity support for members in times of a modest-sized balance of payment (BoP) crisis (BRICS, 2013). Yet, the CRA is not a lender of last resort; rather, it provides the members with the first line of defense before they have to seek conditional help from the IMF (see Section 5).

The most recent de-dollarization milestone was achieved amid the COVID-19 pandemic at the BRICS 2020 Summit when BRICS agreed to reinforce and advance the current de-dollarization processes. Under Russia’s chairmanship in 2020, the group jointly issued the Strategy for BRICS Economic Partnership 2025. This Strategy reiterated the members’ long-standing commitment to reforming the Bretton Woods institutions. More importantly, it identified several “priority areas of partnership” directly related to de-dollarization, including: to promote the use of local currencies in mutual payments, to strengthen BRICS cooperation on payments systems, to collaborate on the development of new financial technologies, to advance the CRA mechanism, to continue cooperation on establishing the BRICS Local Currency Bond Fund, and to continue to facilitate the NDB in development financing while expanding the use of local currencies (BRICS, 2020).

Over the past two decades, BRICS has shown consistent commitment to reforming the global financial system and diversifying the global currency structure. Catalyzed by the global financial crisis and the COVID-19 pandemic, the group has implemented targeted policies and broadened areas of cooperation to help members reduce their dependence on the US dollar. The recent military conflict between India and China did not prevent the coalition members from deepening their economic partnership. This suggests that there is a political will to pursue the economic agenda, and that de-dollarization will remain an important issue for BRICS despite their divergence in other areas.

3.2 The Gradual Rise of BRICS Currencies

As BRICS incrementally implemented specific policies for de-dollarization, BRICS national currencies have progressively gained more market share in the dollar-based global currency system, albeit remaining at relatively low levels compared to the US dollar. The most direct way for BRICS to reduce their dependence on the US dollar is to increase the use of their own national currencies in cross-border transactions. According to the latest Bank for International Settlements Triennial Survey (2019), the Chinese renminbi was the 8th most actively traded currency, ranking just after the Swiss franc. This is a significant increase from its ranking of 35th in 2001. Additionally, the renminbi is now the most actively traded emerging market currency. It reached 4.3 percent of total global turnover in 2019, a significant rise compared with 0.1 percent in 2004. The Indian rupee was the second most traded BRICS currency, in 16th position worldwide and accounting for 1.7 percent of global trade. The Russian ruble, Brazilian real, and South African rand were in 17th, 20th and 33rd position, respectively (Table 2).

Comparing the currency ranking position changes from 2004 to 2019, the increase in the renminbi’s active trading turnover was the largest. The growth in trading turnover for other BRICS currencies was not as rapid but nonetheless steady. In contrast, the shares of leading global currencies, especially the euro, Japanese yen, and the British pound sterling have generally decreased, although they were still three of the top four most actively traded currencies. Trading in US dollars decreased for the two surveys in 2007 and 2010, largely due to the global financial crisis and the US dollar liquidity crunch, but it quickly recovered in the following years (Table 2 and Figure 3).

Figure 3 Currency distribution of over-the-counter (OTC) foreign exchange turnover.

Source: Author compiled data from Bank for International Settlements (BIS) “Triennial Central Bank Survey of Foreign Exchange and Over-the-Counter (OTC) Derivatives Markets,” December 2019

This currency trading activity comparison reveals that the US dollar still maintains its absolute dominance in the currency market. However, the collective market share of BRICS currencies, especially renminbi, has slowly increased, but it is still far smaller than the US dollar’s market share. However, the small increase in the market share of BRICS currencies did not cause the US dollar’s market share to decrease, as the US dollar’s share has remained stable. As the BRICS countries implement their currency internationalization policies, trading activities of BRICS currencies will slowly increase. This increase may not necessarily come at the expense of the US dollar; rather, it may erode the market share of other major currencies, as data from 2004 to 2019 demonstrates.

BRICS currencies’ slight gain in the OTC foreign exchange market cannot credibly challenge the dollar’s dominance in international settlements in any meaningful way. BRICS’ insignificant currency share in global markets at present is disproportionate to their combined weight of approximately 16 percent of global trade (BRICS India, 2021). This discrepancy illustrates both the dollar’s dominance and the difficulty of achieving de-dollarization.

3.3 BRICS Members’ Perspectives on De-dollarization

Recognizing the heterogeneity within BRICS, the analysis now turns to investigating whether BRICS members have demonstrated a shared interest in de-dollarization by examining their respective official discourses.

China’s advocacy for reforming the dollar-based global financial system can be traced back to the 1997 Asian financial crisis. In the aftermath of this crisis, Dai Xianglong, then Governor of the People’s Bank of China (PBoC), stated:

Following the 2007–2008 global financial crisis, Dai’s successor Zhou Xiaochuan (Reference ZhouZhou 2009) openly discussed the necessity of reforming the international monetary system and called for the creation of “an international reserve currency that is disconnected from individual nations” because the prevailing system’s deficiencies were “caused by using credit-based national currencies.” Zhou’s view is believed to represent the thoughts of leading Chinese officials who see the era of a US dollar-dominated world is coming to an end.Footnote ⁶ In 2011, President Hu Jintao commented that “[t]he current international currency system is the product of the past” (Washington Post, 2011).

Although there is no indication that high-level Chinese policymakers explicitly discussed dethroning the US dollar as the leading reserve currency, we find that Chinese academics and observers have frequently criticized dollar hegemony and proposed various means to challenge it. Such proposals have recently proliferated due to the deterioration of US - China relations, and growing threats of US sanctions against China in strategic areas such as advanced technology. Strategic rivalry with the United States provides incentives for China to self-insure against risks in the US-led global system, not just for economic reasons but also for geopolitical and strategic reasons. Compared with other BRICS members, China has more resources and is better positioned to promote de-dollarization across several platforms, including but not limited to BRICS. For example, China has been adjusting its strategies for renminbi internationalization through the development of offshore renminbi markets and through bilateral currency swaps in the context of the Belt and Road Initiative. Chinese state-owned commercial banks are also more potent and more globalized compared to banking institutions in other BRICS members. China’s policy banks, especially the China Development Bank and Exim Bank of China, now provide as much development financing as the World Bank does (Reference Ray and SimmonsRay and Simmons, 2020).

Russia has been actively promoting the idea of de-dollarization through BRICS, and its primary motivation for doing so is its geopolitical rivalry with the United States. In 2012, Sergei Ryabkov, Russian Deputy Foreign Minister at the time, publicly expressed Russia’s concerns over the US dollar’s role as the settlement unit of international trade and banking transactions and affirmed that “it is necessary to become less dependent on the dollar” (Reference LabetskayaLabetskaya, 2012). President Reference PutinPutin (2017) expressed in an article that the BRICS members “are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.” Soon after his article was published, Ryabkov disclosed that it is a “vital need” for Russia to “intensify work related to import substitution, reduction of dependence on US payment systems, on the dollar as a settling currency” (Reference NikolskayaNikolskaya, 2017).

President Putin began his fourth presidential term in May 2018 with a strong commitment to further de-dollarize the Russian economy and defend Russia’s economic sovereignty against US sanctions. In his speech at the Russian parliament Putin called for “getting free of the dollar burden” in the global oil trade and in the Russian economy because the monopoly of the US dollar was “unreliable” and “dangerous” for global trade and the economies of many countries in the world (TASS, 2018). In August 2018, discussions on the need to de-dollarize the Russian economy intensified in the Russian government after the US Congress introduced a new bill that targeted Russian financial institutions. In October 2018, the Putin administration backed a tentative de-dollarization plan designed to limit Russia’s exposure to future US sanctions by reducing the use of the US dollar in international settlements and conducting international business using alternative currencies (Invesforesight, 2018; RT International, 2018).

Brazil initially shared Russia’s enthusiasm for making BRICS a de-dollarization coalition. Former Brazilian President Lula da Silva argued that “BRICS was not created to be an instrument of defense, but to be an instrument of attack. So we could create our own currency to become independent from the US dollar in our trade relations … The United States was very much afraid when I discussed a new currency and Obama called me, telling me, ‘Are you trying to create a new currency, a new euro?’ I said, ‘No, I’m just trying to get rid of the US dollar. I’m just trying not to be dependent’” (Reference EscobarEscobar, 2019). It is not irrational for President Lula to have proposed de-dollarizing Brazil’s trade. The US dollar dominated Brazil’s exports invoicing, as high as 94 percent, although exports to the United States were only 17 percent of Brazil’s total exports (Reference Casas, Díez, Gopinath and GourinchasCasas et al., 2017). Our interviews suggest that there are three primary reasons that incentivized Brazil to follow Russia and China’s de-dollarization initiatives but not take the lead. First, Brazil’s severe economic crisis since 2014 following the end of the commodity boom has fragmented the country’s politics and led to the rise of the right-wing Bolsonaro administration. Under President Bolsonaro, the Brazilian government has sent mixed signals regarding its BRICS policy and has moved closer to Western powers. Second, Brazil has become more reliant on commodities exports, making the country more exposed to volatilities in global markets and currency risks (see also Reference Nogueira BatistaNogueira Batista Jr., 2019). According to UNCTADstat, Brazil’s commodity exports represented 56.5 percent of total exports in 2008–2009. This number has increased to 66.6 percent over the past ten years. Third, China has been Brazil’s most important trading partner, and the economic and financial ties between the two countries have increasingly become closer. The use of local currencies in bilateral settlements is beneficial for both sides. Brazil’s close economic and financial ties with China and the real risks to the Brazilian economy due to its dependence on the US dollar suggest that Brazil is unlikely to openly champion BRICS de-dollarization initiatives. However, it is open to playing along and following them.

India was reluctant to join a BRICS de-dollarization coalition from the very beginning despite its support for other key issues on the BRICS agenda, such as reforming the IMF and World Bank (Economic Times, 2009). When Russia and China proposed to create a new global super-sovereign reserve currency to replace the US dollar in 2009 (Reference ShchedrovShchedrov, 2009; Reference ZhouZhou, 2009), India distanced itself from such a challenge to the US dollar’s supremacy but instead preferred a more modest approach of increasing the IMF’s SDR. The Indian government considered this Sino-Russian proposal more ideological than substantive and did not want to challenge the US dollar and upset the United States, especially at a time when the United States was pressuring Pakistan on counterterrorism (Economic Times, 2009). While the United States treats Russia and China as strategic competitors, it considers India as an important ally in the Indo-Pacific region and an important strategic partner. India’s rivalry with China and the recent military standoff between the two countries have further prevented India from supporting China’s attempt to replace the US dollar.Footnote ⁷ In the context of BRICS, this means India will not support an explicit BRICS mobilization to dethrone the US dollar.

This by no means suggests that India is satisfied with the US dollar’s dominance and would not seek to reduce its dependence on the US dollar. On the contrary, India not only has a strong interest in promoting the use of local currency in trade but also has taken initiatives to explore how to accomplish this. In 2012, India’s Ministry of Commerce and Industry convened a Task Force to examine the use of the rupee in India’s bilateral trade. The Task Force Report favored the idea of extending rupee trade to some oil-exporting countries (Reference Dash, Sharma and NizamiDash, Sharma, and Nizami, 2019). The Indian government formed a multi-agency task force with representatives from India’s economic policymaking agencies to draw up a list of countries with which India could trade in rupees.Footnote ⁸ India has also taken the lead in promoting BRICS financial cooperation and building BRICS financial institutions. For example, it was at the behest of the Indian finance minister that the BRICS in 2012 commissioned a joint working group to study the viability of setting up a BRICS Development Bank, which led to the creation of the NDB that promotes the use of local currencies in development finance. India has also promoted greater use of the rupee in international transactions in light of aggressive steps by China to internationalize the renminbi and US sanctions on Russia and Iran in 2018, which disrupted India’s oil payments in US dollars. The increase in currency exchange volatilities – especially growing volatilities in the US dollar – provides another incentive for India to de-dollarize its trade settlement, as India is among the most dollarized countries in trade invoicing (Reference GajaraGajara, 2020). To give some context, 86 percent of India’s imports relied on US dollar invoicing despite only 5 percent of India’s imports originating in the United States. Similarly, 86 percent of India’s exports were invoiced in US dollars, while only 15 percent of India’s exports were to the United States (Reference Casas, Díez, Gopinath and GourinchasCasas, et al., 2017; Reference Gopinath and ZwaanstraGopinath and Zwaanstra. 2017). Therefore, although India is unlikely to play an explicit role in a BRICS coalition aiming to dethrone the US dollar, it will implicitly help reduce dollar dependence by supporting initiatives that promote the use of local currencies in trade and development finance.

South Africa saw US sanctions imposed against it in 1986 mostly lifted by 1991, and with the dismantling of apartheid, the relationship between the two countries has improved (Reference FriedmanFriedman, 1991). The strength of this relationship partly explains South Africa’s lack of a strong de-dollarization agenda. In the course of our research, we did not find any public records of South African leaders promoting the idea of BRICS as a de-dollarization coalition. Yet, South Africa follows Russia and China’s de-dollarization efforts. Our interviews with scholars in South Africa reveal that South African policymakers are keenly aware of the risks associated with the US dollar’s privilege.Footnote ⁹ Both the real economic risk and transaction risk due to the US dollar’s dominance incentivize South Africa to go along with BRICS’ initiatives to promote the use of local currencies in trade. South African leaders have publicly expressed South Africa’s interests in this issue. Following the 2011 BRICS Summit, South African Trade and Industry Minister Rob Davies said that BRICS members could protect themselves from exchange volatilities and benefit considerably by trading directly in their own currencies and cutting out unstable internationally convertible currencies – specifically, the US dollar (Brand South Africa, 2011). During the 2013 BRICS Summit, Davies reiterated South Africa’s interest in working out a mechanism within BRICS to settle trade in local currencies and emphasized that currency market volatility in developing countries “takes place not really because of any dynamics in our own country but because of dynamics in the world economy” (Economic Times, 2013). This reflects the challenging macroeconomic conditions that developing countries face in global markets as price takers whose currency risk can be triggered by factors beyond their control. Davies’ comments expressed not only South Africa’s frustration over its lack of autonomy in achieving economic security in global markets but also a shared frustration among developing countries within and beyond the BRICS group. There has not been any formal reporting about a unilateral South African push for de-dollarization, but the country has supported BRICS’ general agreement on promoting the use of local currencies in international trade and finance. South Africa has also accepted broader use of the Chinese renminbi and has included renminbi in its foreign exchange reserves to diversify currency risk. SWIFT data shows that between 2013 and 2015, the number of South Africa’s renminbi payments increased by 191 percent, and by June 2015, the value of direct payments in renminbi between South Africa and China/Hong Kong reached 31.3 percent (SWIFT, 2015).

To summarize, BRICS has demonstrated a consistent commitment to reforming the US dollar-based global financial system, as evidenced by the group’s deepening cooperation on de-dollarization. Although not all BRICS members want to explicitly challenge the US dollar, there is a shared interest in reducing their dependence on it. All BRICS members have taken concrete steps towards de-dollarization with the aim of achieving greater autonomy. BRICS has also implemented targeted policies to help members reduce their dependence on the US dollar through the promotion of local currencies in trade and investment, both at the BRICS level and the sub-BRICS level.

Our analysis shows that there have been clear leaders within BRICS attempting to steer the group toward a de-dollarization coalition, namely Russia and to a lesser extent China. Their primary motivation for de-dollarization includes rising geopolitical rivalries with the United States and the growing risk of US sanctions. Our analysis reveals that Russia and China have taken different approaches to de-dollarization. In line with our first proposition, Russia has been far more aggressive in its attempts to protect its economy from US sanctions and has been the most enthusiastic advocate of de-dollarization within BRICS. Russian policymakers are vocal about the topic in public, laying out the case for de-dollarization and its importance. In contrast, China has made less noise but has been more capable of making substantive changes. China has not openly talked about de-dollarization, but it has emphasized its desire to “diversify” the system. The diversification of the system is a positive framing that focuses on China’s prioritization of the system’s stability and equality rather than the potentially counter-hegemonic nature of such actions. BRICS is one of several platforms it can use to pursue de-dollarization.

Our analysis also shows that the followers in BRICS de-dollarization coalition are neither passive nor silent. Brazil, India, and South Africa have all supported BRICS joint statements on reforming the existing dollar-centered global financial system over the past two decades. Moreover, they each have also sought opportunities to promote the use of local currencies in international trade and development financing. Their consensus and practices concerning de-dollarization suggest that de-dollarization does not only take place in countries that are in geopolitical competition with the United States or under US sanctions. Rather, de-dollarization is important for developing countries that are price takers in global markets and lack autonomy in controlling their own economic security. Therefore, it is a real priority for these countries to diversify and reduce their risk exposure to exogenous shocks and exchange volatilities due to the US dollar’s dominance. This creates a baseline of shared interests among all countries that are subject to the US dollar’s privilege, whether they are US allies or adversaries.

4.1 The New Development Bank and De-dollarizing Development Finance

The NDB has already raised funds in local currencies as part of its goal to “break away from the tyranny of hard currencies,” as the NDB President Mr. Kamath put it (RT International, 2017). It has implemented a local currency lending program that not only helps member countries mitigate the borrowers’ foreign exchange risk but also supports the development of local capital markets. The NDB also prioritizes the “use of borrowing country legislation, regulations and oversight procedures” whenever possible, as it sees “using national system as the best way to strengthen a country’s own capacity and achieve better long-term development results” (NDB, 2017, pp. 15–16). Through these programs, the NDB helps the BRICS countries improve their financial autonomy by reducing their reliance on dollar financing.

The establishment of the NDB first and foremost allows for the BRICS countries to borrow from international capital markets at a much lower rate because the NDB has been able to obtain a higher credit rating than most of the BRICS members. Since the NDB was established in 2014, Brazil, Russia, and South Africa have experienced several rounds of credit downgrading into ‘junk’ territory.Footnote ¹⁰ Their deteriorated credit ratings then increased their borrowing costs in international capital markets. Although India did not experience a downgrade during this period, its lowest investment-grade rating was not ideal either. Therefore, all five members were committed to obtaining a higher credit rating for the NDB, and they succeeded: the NDB received a credit rating of AA+ from S&P and Fitch, which is higher than any individual BRICS member, China included. This rating allows several BRICS members to borrow from global capital markets at much cheaper rates through the higher-rated NDB than they could on their own. The NDB’s high credit rating allows it to raise capital relatively cheaply from the bond markets and lend onward at interest rates lower than what could be obtained by some BRICS sovereign borrowers themselves. The NDB’s Vice President Reference MaasdorpLeslie Maasdorp (2019) highlighted the NBD’s ability to borrow at a lower cost as “a significant advantage,” as it enables the NDB to pass on that benefit in the form of competitive interest rates when it extends loans to its members.

The NDB also helps the BRICS members reduce their reliance on dollar financing by extending loans in local currency and prioritizing local regulations and procedures where appropriate. Mr. Reference KamathKamath (2020) reported that a quarter of the NDB’s cumulative total approved financial assistance (about USD15 billion) was given in local currencies by the end of 2019. Although Kamath said that BRICS had no intention of destabilizing the US dollar, he proposed that “50 percent (of projects) should be local currency financed”. He acknowledged that the NDB would raise both dollars and euros, but “at the same time there will be a significant reliance on local currencies,” which would “allow the bank to move away from loans denominated in dollars” (Reference HancockHancock, 2019). The NDB’s General Strategy 2017–2021 considered local currency financing as “a key component of NDB’s value proposition, as it mitigates risks faced by borrowers and supports the deepening of capital markets of member countries” (NDB, 2017, p. 4). It will “rely on local currency lending to the extent feasible to avoid foreign exchange risks for borrowers” and will actively seek opportunities to offer local currency loans “both to reduce risks to borrowers as well as to promote local capital markets” (NDB, 2017, pp. 6, 14). Besides promoting local currency lending, the NDB has also approved loans in other currencies such as the euro and the Swiss franc in 2019 to diversify its source of funding away from the US dollar (NDB, 2019, p. 4).

To reduce the burden of dollar-denominated loans, the NDB must tap into nondollar capital markets for alternative sources of financing. It is also crucial for the NDB to obtain a high-quality credit rating in nondollar markets to reduce its cost of funding. The NDB has been moving in the right direction. It has obtained an AAA rating in capital markets not only within BRICS such as China and Russia but also beyond BRICS such as in Japan.Footnote ¹¹ Additionally, Fitch assigned the NDB’s “Euro Medium-Term Notes Program” an AA+ rating (Fitch Ratings, 2019). Obtaining a wider credit rating in different currency areas paves the way for the NDB to tap into capital markets in these different currency areas, allowing for the diversification of its funding source. Leslie Maasdorp confirmed this point, arguing that the NDB’s “intention is to not only build a dollar curve but also widen out our funding to other currencies, such as sterling and euros” (Reference KhadbaiKhadbai, 2020).

The NDB’s AAA credit rating in China allowed it to quickly tap into the Chinese capital market and issue a renminbi bond. Since then, the NDB has become the most active official sector issuer of Panda bonds, renminbi-denominated bonds sold in China by foreign issuers. The NDB had issued six Panda bonds worth RMB18 billion as of March 2021 (Table 3), with the most recent Panda bond issuance taking place in March 2021 when it sold RMB5 billion (USD767 million) Panda bond. This was the NDB’s first issuance of the Sustainable Development Goals bond. The bond proceeds were to be used to finance China’s RMB7 billion Emergency Program Loan to help mitigate the impact of COVID-19 on the Chinese economy (NDB, 2021).

The NDB also planned to raise local capital funding from other BRICS members’ capital markets and has registered bond programs therein. It registered its debut bond program in South Africa in April 2019. The registered maximum size of the bond program was 10 billion rand and is governed by South African law. In November 2019, the NDB also registered its debut ruble bond program in Russia with a maximum size of RUB100 billion. The program was listed on the Moscow Exchange and is covered by the laws of the Russian Federation (NDB, 2019). Additionally, the NDB planned to tap into the Indian rupee-denominated masala (foreign-issued) bond market in the second half of 2017, but this was postponed due to a significant drop in market liquidity and demand for masala bonds. However, the NDB has remained interested in the Indian rupee offshore market as part of its capital raising (Hindu Business Line, 2019).

Finally, the NDB helps its members with local currency loans. By the end of 2019, cumulative approved local currency loans represented 27 percent of the NDB’s total portfolio (Figure 4 and Table 4). This number is remarkable because it is higher than the local currency loan percentages of other major multilateral development banks. This higher percentage is likely due to the fact that the NDB has been offering renminbi loans since the beginning of its operations. The NDB also approved its first rand-denominated loans amounting to USD1.2 billion equivalent in 2019. By the end of 2019, about two-thirds of the NDB’s cumulative approvals for projects located in China were denominated in renminbi, and about half of its lending to South African borrowers was made in rand. This shows that the NDB has made good on its pledge to extend loans in local currencies.

Figure 4 NDB Cumulative loan approvals by type of currency (as of December 31, 2019).

Source: Author compiled data from NDB official website and NDB annual report (2019, 2020)

4.2 The Yuan Oil Futures and De-dollarizing Global Oil Trade

While the NDB represents a BRICS’ coalitional challenge to the US dollar’s dominance by establishing a new multilateral institution governed by its members, there are also important de-dollarization trends in the global oil market that can be augmented by expanding BRICS energy cooperation.Footnote ¹² The US dollar’s hegemonic position in the global financial system has been critically grounded in its exclusive position as the funding vehicle and pricing currency of the global oil trade. The world’s leading crude oil pricing benchmarks, namely the West Texas Intermediate (WTI) and Brent, are priced in US dollars. Scholars have argued that “the main front where the future of the dollar will be decided is the global commodity market, especially the USD1.7 trillion oil market” (Reference LuftLuft, 2018). The use of nondollar currencies in global oil markets “is a serious challenge to the petrodollar system” (Reference FosterFoster, 2018). BRICS as a group is certainly strong enough to mount that challenge: in terms of consumption power and forms a bigger oil-importing bloc than the entire European Union. China, the world’s largest energy importer, and Russia, the world’s largest energy exporter, are mobilizing within BRICS to promote “yuan oil futures,” thereby challenging the US dollar’s hegemonic position in the global oil market.

Following the 2018 BRICS Summit, China launched yuan oil futures, a renminbi-denominated oil futures contract, on the Shanghai International Energy Exchange. China’s new oil futures are priced in renminbi, and renminbi is also convertible into gold on the Shanghai Gold Exchange and Hong Kong Gold Exchange.Footnote ¹³ This process has led to China, the world’s largest oil importer, having an entirely domestic infrastructure for trading oil using gold, and that China’s oil suppliers can receive payment in renminbi and immediately convert it into gold. This shift marks the beginning of a nondollar financial instrument and nondollar price discovering mechanism for a major global commodity. The Shanghai-traded yuan oil futures still lag behind rivals such as the London-traded Brent oil futures and the New York-traded WTI oil futures in terms of volume, but they have already surpassed comparable offerings traded in Tokyo and Dubai by a significant amount (Figure 5). The renminbi oil futures’ accelerated growth has received the attention of leading central bankers in advanced economies. For example, Bank of England Governor Mark Carney (2019) observed that “the renminbi is now more common than sterling in oil future benchmarks, despite having no share in the market prior to 2018.”

Figure 5 Leading global futures exchanges by crude oil contract open interest.

Note: Shanghai International Energy Exchange series began on March 30, 2018. Open interest is the total number of futures contracts outstanding.

Source: Author compiled data from Bloomberg Financial

With the recent escalation of the US–China trade war, China has accelerated its promotion of a possible petroyuan, renminbi-denominated oil trading. In 2021, Chinese Foreign Minister Wang Yi went on a week-long tour of Saudi Arabia, Turkey, Iran, the UAE, Bahrain, and Oman. This trip was seen as a signal of China’s intention to secure long-term energy deals with major Gulf energy producers to dictate oil pricing terms and fuel the rise of the petroyuan (Reference YeungYeung, 2021). With China’s push for the use of renminbi in oil pricing and trading and the strong global demand for a nondollar denominated oil trading mechanism, “the renminbi-denominated oil trading is likely to become more significant, partially displacing US dollar oil trading in one market after another” (Reference Mathews and SeldenMathews and Selden, 2018). The prospect of a petroyuan would make it possible for countries under US sanctions, especially major oil exporters such as Iran and Russia, to access global markets via an alternative currency and nondollar payment systems, thereby weakening the effectiveness of US sanctions power.

China’s primary motivation for promoting its yuan oil futures is to encourage the use of renminbi in oil trading and risk hedging, especially in the settling of physical oil deliveries to reduce exchange risks. The Chinese government cannot singlehandedly launch the yuan oil futures and ensure the fast growth in trading volume because commodities trading requires buyers and sellers. The fact that the yuan oil futures have been launched successfully and the trading volume has expanded indicates that there is great interest in the market to de-dollarize the global oil trade.

Russia also has a strong interest in de-dollarizing the global oil trade because major Russian energy companies have been under US sanctions since the Ukraine crisis in 2014. Being the world’s largest oil and natural gas exporter, Russia’s economic security revolves around vital oil and gas revenues. Oil and gas accounted for 60 percent of Russia’s export revenues and nearly 40 percent of government revenues in 2017 (Russian Matters, 2018). BRICS supported Russia after the United States imposed sanctions on Russian companies. In June 2017, BRICS foreign ministers condemned “unilateral military intervention or economic sanctions in violation of international law and universally recognized norms of international relations” (China MOFA, 2017). China’s launch of the yuan oil futures provides a crucial alternative trading platform for Russian oil companies and Russian oil consumers.

The potential of the yuan oil futures to advance global oil trade de-dollarization goes even further when considering the linkage to gold. China has sweetened the yuan oil futures by providing trading infrastructure to facilitate swapping oil into gold, with the renminbi serving as an intermediary funding step. If BRICS had their own pricing benchmark for gold – rather than being subject to London or New York’s pricing – this infrastructure would potentially complete the goal of de-dollarizing the global oil trade, making it possible to trade oil using gold with minimum exposure to exchange risk. Sergey Shvetsov, the First Deputy Chairman of Russia’s central bank confirmed in 2017 that BRICS countries were discussing the possibility of establishing a single gold trading system, both within BRICS and at the level of bilateral contracts (TASS, 2017). Shvetsov previously raised this theme at the bilateral level during his visit to China in 2016 (TASS, 2016). Such developments signal a potential BRICS alliance in the global physical gold market, where BRICS countries have major stakes: China, Russia, South Africa, and Brazil are major gold producers, and China and India are also the world’s two largest gold consumers. A BRICS single gold trading system would facilitate the creation of a new gold pricing benchmark based upon global physical gold trading rather than gold derivatives. Combined with the gold-backed trading of yuan oil futures, oil producers could swap oil for gold rather than for US Treasury securities, further de-dollarizing the global oil market. Apart from de-dollarization, a BRICS single gold trading system would also help to strengthen domestic currency stability because it would free BRICS members from being subject to foreign pricing.

4.3 BRICS Alternatives to SWIFT and De-dollarizing Global Financial Infrastructure

In another effort to reduce their dependence on the US dollar, BRICS members have been building their own global payment infrastructures for international transactions that are independent of the US dollar and can serve as alternatives to SWIFT, the leading messaging network for financial transactions worldwide. This allows BRICS members, especially those who are often subjects of US sanctions, to create their own rules for international banking and settlement. Moreover, by extending alternative financial infrastructure to other countries and regions, BRICS can create greater buy-in for their own system and increase their financial and political influence through this alternative system.

Some BRICS members have independently developed their own cross-border payment mechanisms in recent years. Both Russia and China have launched their national alternatives to the SWIFT global banking network and introduced their systems to broader global markets. China’s development of the renminbi cross-border payment system took place in the context of building the BRI’s financial infrastructure and renminbi internationalization. The added benefit of promoting broader use of the renminbi was to reduce foreign exchange risk and US sanctions risk for both China and its trading partners that may be under US sanctions, such as Iran or Russia. For Russia, establishing an international ruble payment system was the government’s direct response to the heightened threat of Western sanctions since the Ukraine crisis in 2014. China and Russia recently established a direct payment settlement system with each other, with the intention to combine it with payment systems in other BRICS members and BRI countries in Eurasia. Russian officials also revealed that the other BRICS members would support the establishment of a common payment system at the BRICS level (Reference HamiltonHamilton, 2019; Reuters, 2019c).

BRICS countries, with the exception of South Africa, have developed their own independent national payment systems, wholesale payment networks paired with a retail bank card network.Footnote ¹⁴ China and Russia have been leading the development of independent national payment systems, which are analyzed in more detail below as they might serve as building blocks for a larger BRICS-wide payment system or even one beyond BRICS in the future. An independent retail bank card network is a set of payment rails that establish protocols and procedures for the execution of retail payments and the exchange of related information among banks for final settlement over wholesale payment networks. An obvious benefit of having an independent retail bank card network, rather than relying upon leading American card network providers such as Visa or Mastercard, is to avoid the fees charged by these service providers. However, more importantly, if a country does not have its own payment rails and relies upon those of Visa or Mastercard – as pre-2014 Russia and pre-2002 China did, and as South Africa currently does – then those payment rails could be unilaterally withdrawn as a part of US sanctions. This withdrawal leaves domestic consumers without the ability to conduct basic retail transactions using bank cards. Connecting these national payment rails to an alternative cross-border payment system would allow the entire life cycle of payments to be carried out while entirely bypassing the US dollar-denominated global system.

4.4 BRICS Plus: De-dollarization Mobilization beyond BRICS

The BRICS countries have leveraged their overlapping memberships in other non-Western multilateral institutions to build wider coalitions around their “go-it-alone” de-dollarization initiatives. Annual BRICS summits have been a convenient platform for such mobilization. For example, EEU and SCO members and observers were invited to the 2015 BRICS Summit to gain their support for de-dollarization efforts. During this meeting, Chinese President Xi emphasized that the BRICS, the SCO, and the EEU are all influential mechanisms of cooperation and that the gathering of state leaders sent out a positive signal of unity and cooperation to emerging markets and other developing countries (China MOFA, 2015). In 2017, the BRICS leaders, together with the leaders of Egypt, Guinea, Tajikistan, Mexico, and Thailand, held the “Dialogue of Emerging Market and Developing Countries” on the margins of the BRICS Xiamen Summit (People’s Daily, 2017). This dialogue marked the launch of the China-initiated “BRICS Plus.” BRICS Plus expands the BRICS platform to bring in other countries and regional integration institutions, such as the Mercosur, the SCO, EEU, South African Customs Union, South Asian Association for Regional Cooperation, and ASEAN + China. BRICS Plus brings together thirty-five countries to form an expanded platform that can coordinate policies with BRICS’ regional partners across the four continents. As such, it provides a convenient venue for de-dollarization policy coordination and nondollar financial infrastructure construction.

A notable example of broader mobilization through the BRICS Plus informal institution is a sub-group of the BRICS Plus, namely, the SCO. Several BRICS members are members of the SCO – both China and Russia are founding members, and India joined as a full member in 2017. With three of the five BRICS members being also SCO members, it is likely that these two non-Western institutions will conduct policy sharing and policy coordination through both platforms, including policies designed to reduce their dependence on the US dollar. The SCO was initially established for security cooperation, but it has gradually taken on economic dimensions as well. Before the Shanghai summit in 2006, SCO members launched the “SCO Mechanism of Interbank Cooperation.” During the Shanghai Summit, members also launched the SCO Business Council to facilitate greater economic cooperation within the SCO framework (Shanghai Cooperation Organization, 2006). BRICS has initiated similar efforts, launching the BRICS Interbank Cooperation Mechanism in 2010 and the BRICS Business Council in 2013. In 2020, the SCO announced plans to further enhance financial cooperation and expressed willingness to continue discussions on the establishment of the SCO Development Bank and the SCO Development Fund. The SCO members underscored the importance of joint approaches to the use of national currencies in mutual settlements between interested SCO member states (Xinhua, 2020). The development of SCO financial cooperation initiatives suggests that China, India, and Russia can potentially introduce de-dollarization policies in the SCO and achieve synergies with similar initiatives in BRICS policy platforms.

The SCO’s consideration of launching its own development bank suggests a BRICS-like path: building formal institutions that can promote the use of local currencies in BRICS’ development finance and reduce risks associated with US dollar financing. The convergence in institutional arrangement and mandates between the SCO and BRICS set the foundation for closer economic and financial policy cooperation between them. Such similarities can provide formal channels for further policy coordination between these two developing-country coalitions on issues such as: expanding the scale and scope of bilateral currency swaps, promoting the use of local currencies in cross-border trade and investment, and eventually reducing the countries’ dependence on the US dollar. In fact, closer alignment between BRICS and SCO toward de-dollarization has already been taking place. SCO Secretary-General Vladimir Norov recently confirmed that the SCO members have been working on a gradual transition to mutual settlements in national currencies, with representatives of the SCO Interbank Consortium already engaged in this activity. He also raised the need for the SCO to establish partnerships with the AIIB, the NDB, and the Silk Road Fund to fully unlock the investment potential of the SCO (TASS, 2021). In 2020, SCO Finance Ministers agreed to send recommendations to finalize a roadmap to promote bilateral trade and investments and issue bonds using local currencies.

To summarize the findings of this section, we have demonstrated that BRICS and its members have pursued de-dollarization through the “go-it-alone” strategy using both institutional and market mechanisms to achieve greater autonomy and influence. The specific examples of the NDB and development finance de-dollarization, BRICS commitments to develop a BRICS alternative to SWIFT, and the members’ joint vision for a BRICS digital currency suggest that BRICS has demonstrated a high level of coalitional strength in executing high-effectiveness de-dollarization initiatives. These are club goods that could serve as critical elements for developing an alternative nondollar global financial system and help shield members from the dollar volatility and US sanction risk. Moreover, there are also powerful sub-coalitional dynamics at play. De-dollarization initiatives at the sub-BRICS level have been most active, with Russia and China being the two pivotal states leading these “go-it-alone” initiatives. A Russia–China de-dollarization mini-coalition is emerging, with the potential for broader participation by other countries under US sanctions, such as Iran. Deteriorating US–China relations will very likely drive China to move closer to Russia and double down on de-dollarization in the future. Additionally, BRICS has also attempted to create broader coalitions by leveraging the members’ overlapping memberships in other non-Western organizations, such as the use of BRICS Plus and its engagement with SCO and EEU. Although such broader mobilization has not yet yielded significant tangible results and has not led to any broader de-dollarization public goods, BRICS has certainly demonstrated its leadership as the rule maker and agenda setter for promoting the use of local currencies in international trade and finance, compatible with the goal to achieve higher international influence.

Currently, predominantly Russia and China’s “go-it-alone” de-dollarization initiatives are unlikely to liberate the BRICS members from the dollar-based global financial system any time soon because of three major constraints. First, the limited capacity of the NDB means BRICS cannot achieve full de-dollarization in international borrowing for development finance. All BRICS members have been strongly in favor of promoting local currency development financing through the NDB, but the NDB’s capacity is much more limited relative to traditional development financiers such as the World Bank or the Asian Development Bank. While the NDB has been considering potential expansion, its size and scope constrain BRICS collective de-dollarization potential. Second, not all BRICS members have the resources or capacity to sponsor their own market infrastructures or instruments. Now only China and Russia have political incentives and the capacity to develop their own alternatives to SWIFT and seek to connect them. Moreover, only China’s market size is large and influential enough to launch an alternative oil futures contract, like the yuan oil futures, to the US dollar market. Thus, it is currently unlikely that the BRICS members would completely abandon the US dollar-based financial infrastructure. Third, the internal geopolitical dynamics within BRICS and its members’ relationships with the United States may prevent BRICS from formally making the group a de-dollarization advocacy coalition, which would be the fastest way to implement the “go-it-alone” strategy and gain followers.

5.1 Strengthening Self-Defense Against the Dollar’s Dominance

An important aspect of the US dollar’s supremacy is the established tradition of using US Treasury securities as the proxy for risk-free assets in global financial markets. Many central banks and sovereign institutional investors hold their reserves and other financial assets in US Treasury securities because of their nearly risk-free nature and credible liquidity. BRICS central banks and sovereign investors are no exception. Having a concentrated portfolio of US Treasury securities has not only increased the opportunity costs for the BRICS members in times of a weakening US dollar, but it has also increased their geopolitical vulnerability to US sanctions. To strengthen their self-defense against the US dollar hegemony, major BRICS central banks, especially the Bank of Russia, have diversified their reserve assets by reducing their holdings of US Treasury securities. Moreover, BRICS also established CRA as a pooled US dollar reserve and an internal first line of defense to help members during small-scale balance of payments shortfalls. All of these measures allow BRICS members to strengthen their self-defense against volatilities in the US dollar and improve their internal support for liquidity in times of dollar shortages.

Russia has been the most aggressive among BRICS in substituting US dollar reserves with alternative reserve assets. Since 2013, the Bank of Russia has been trying to reduce the number of transactions conducted in US dollars and has increased the use of euros, renminbi, and rubles in settlements. In April 2018, following a new round of stringent US sanctions on Russia, the Bank changed the structure of its reserve assets, reducing the dollar’s share in favor of the yuan and the euro. It also expedited the withdrawal of its reserves out of US Treasury bonds. US Treasury International Capital (TIC) data showed that Russian holdings of Treasury securities declined by 84 percent between March and May 2018, falling from USD96.1 billion to USD14.9 billion in just two months (Figure 6). In early 2019, the Bank of Russia revealed that it reduced US dollar holdings by USD101 billion – over half of its existing US dollar assets. For comparison, in February 2013, before Russia’s annexation of Crimea, Russian investments in US Treasury bonds stood at USD164.3 billion. After the Biden administration imposed new sanctions on Russia for cyberattacks and election interference in April 2021, Russia accelerated the pace of de-dollarizing its reserve assets (Reference Macias and TurakMacias and Turak, 2021). Russia decided to completely remove dollar assets from its National Wealth Fund (NWF), whose portfolio forms part of Russia’s currency and gold reserves and had a value of USD186 billion by the end of May 2021 (Reference KantchevKantchev, 2021; Reference SheadShead, 2021).

Figure 6 Russian holdings of US treasuries (2006–2021, USD billions)

Note: Includes both short- and long-term US Treasury obligations.

Sources: Author compiled data from US Department of the Treasury (2021) data on major foreign holders of Treasury securities.

Renminbi was one of the biggest beneficiaries of the de-dollarization of Russian reserves. In early 2019, Russia’s central bank invested USD44 billion into renminbi, increasing its share in Russia’s foreign exchange reserves from 5 percent to 15 percent (Reference SimesSimes, 2020). Russia’s renminbi holdings are about ten times the global average for central banks, accounting for about a quarter of global renminbi reserves (Reference Andrianova and DoffAndrianova and Doff, 2019). With NWF’s ongoing de-dollarization, this number is likely to increase. In 2021, the Kremlin allowed Russia’s sovereign wealth fund to invest in renminbi and Chinese state bonds. Russia’s aggressive de-dollarization policies are conducive to strengthening a potential Russia–China partnership for de-dollarization. Russian experts have suggested that Russia’s push to accumulate renminbi is not just about diversifying reserves but also about encouraging China to become more assertive in challenging US global economic leadership (Reference SimesSimes, 2020).

Besides replacing US dollar reserves with other currencies, the Bank of Russia has also been implementing a gold strategy to move away from US assets. It has been the largest buyer of gold in the past few years, quadrupling Russia’s gold reserves over the past decade: between 2018 and 2019, the value of Russia’s gold reserves increased by 42 percent, to USD109.5 billion (Moscow Times, 2019a). As a result, gold has taken up the largest share of Russia’s total reserves since 2000. By June 2020, gold constituted 23 percent of the reserves of Russia’s central bank, while the share of US dollar assets declined to 22 percent. Russia’s gold strategy has made it the leader among BRICS members measured by the percentage of gold in total reserves (Figures 7–9).

Figure 7 Russia’s increasing gold reserves.

Sources: Central Bank of Russian Federation, International Reserves of the Russian Federation

Figure 8 Russia’s gold reserves vs. dollar reserves as of June 2020.

Sources: Bank of Russia (2021), International Reserves of the Russian Federation

Figure 9 BRICS Central Banks reserves (percent of gold as total reserves, Q1 2008–Q1 2021).

Sources: Central banks, ICE Benchmark Administration, International Monetary Fund, World Gold Council

The BRICS CRA helps further strengthen BRICS collective defense against balance of payments crises due to US dollar shortages. BRICS members are allowed to draw from the CRA’s collective pool of USD100 billion reserves through swaps using their own currencies in times of need (BRICS, 2014). Some scholars view the CRA as an institution that challenges the IMF, especially in light of BRICS’ dissatisfaction with the conditionalities of IMF lending and the domination of Western powers in the IMF (e.g., Reference Roberts, Armijo and KatadaRoberts, Armijo and Katada, 2017). Yet the CRA remains dependent on the IMF, and it cannot serve as a substitute for the IMF. Only 30 percent of accessible CRA funds are available to BRICS members on demand, whereas accessing the remaining 70 percent requires arrangements with the IMF.Footnote ¹⁸ This provisional dependence on the IMF preserves the sustainability of the CRA’s pooled US dollar reserves. If the maximum amount is insufficient, then BRICS members would resort to the IMF. This establishes an internal first line of defense for BRICS members up to the authorized amount. Thus, the CRA modifies BRICS dependence on IMF’s rescuing mechanisms by adding an additional layer of defense and acts within and conditional upon the existing dollar-based system while strengthening BRICS’ self-defense against a US dollar shortage.

5.2 Reforming the Global Reserve Currency Structure

The BRICS members have collectively attempted to disrupt the US dollar’s dominant position in the current global reserve currency structure through promoting the reform of the IMF’s SDR and supporting the renminbi’s inclusion into the SDR basket. These initiatives are part of the BRICS’ broader efforts to reform the existing multilateral international financial institutions.

Chinese officials had expressed China’s interest in restructuring the global reserves currency structure and advocated for giving the SDR a greater role several months before the first BRIC summit. In March 2009, the PBoC Governor, Zhou Xiaochuan, called for making the SDR into a “super-sovereign reserve currency” (Reference ZhouZhou, 2009). Later, the United Nations (UN) echoed Zhou’s idea and proposed establishing a new Global Reserve System based on the IMF’s SDR. The UN proposal stated:

Russia showed its support for this proposal within a week and stated that Russia and China “have similar positions” on the reform of the international financial system (Xinhua, 2009). In June 2009, days before the BRIC summit, President Dmitry Medvedev expressed Russia’s dissatisfaction with the existing reserve currency structure and called upon the IMF to expand the SDR basket to include the renminbi, commodity currencies such as the ruble, and gold to create a supranational reserve currency for international settlements (Doman-b 2009; Reference WangWang, 2009). Russia raised this issue again during the first BRIC summit (Reference BryanskiBryanski, 2009) and revealed its plan to reduce the share of US Treasury bills in its USD400 billion reserves. This sentiment resonated with China and Brazil’s decision to invest USD40 billion and USD10 billion, respectively, in IMF bonds, with another USD10 billion from India (Reference KellyKelly, 2009; Reference StuenkelStuenkel, 2014). In this context, the issue of reforming the global reserve currency structure has become an important issue for BRICS, and members have shown their collective commitment to diversifying their reserves away from being overly concentrated in US dollar assets.

The 2011 BRICS Summit highlighted BRICS members’ shared interests in reforming the existing reserve currency structure. BRICS leaders declared that they “support the reform and improvement of the international monetary system, with a broad-based international reserve currency system providing stability and certainty … and welcome the current discussion about the role of the SDR in the existing international monetary system including the composition of SDR basket of currencies” (BRICS, 2011). During the 2013 BRICS Summit, BRICS members reiterated their commitment to reforming and diversifying the global monetary structure, using almost the same language that they used in 2011 (BRICS, 2013). BRICS members also jointly expressed their support for the inclusion of renminbi into the SDR basket in October 2016 in their Goa Declaration (BRICS, 2016).

BRICS’ efforts to reform the existing system have thus far led to limited success. BRICS combined voting rights at the World Bank and IMF and BRICS total SDR quota are all below 15 percent of total (Table 5). These numbers are still misaligned with BRICS’ collective economic power, which represents close to a quarter of global GDP. This limited success indicates the mounting difficulty facing BRICS members to further advance their voice and representation in the existing global system. If reforming the system from the inside becomes unlikely, BRICS may resort to “go-it-alone” strategies.

5.3 Diffusing the Dollar’s Dominance as the Vehicle Currency in Trade

BRICS members are keen to promote the use of their national currencies in trade settlements, and they have discussed this issue at BRICS summits for nearly two decades (see Section 3). High-level agreements on trade de-dollarization, as expressed in BRICS joint statements, have materialized through bilateral agreements among the members. For example, in June 2009, China and Russia reached an agreement to move toward settling bilateral trade in local currencies (Reference VorobyovaVorobyova, 2009). A few days later, China and Brazil also announced an “initial understanding” to gradually eliminate the US dollar in their bilateral trade, which was estimated to be USD40 billion at that time (MercoPress, 2009). During the 2013 BRICS Summit, India’s Commerce and Industry Minister, Anand Sharma, discussed his proposal to settle bilateral payments in local currencies with his South African counterpart Rob Davies (Reference DilashaDilasha, 2013). In 2015, South Africa’s Investec Bank and the China Export-Import Bank acted on this proposal and signed a Strategic Cooperation Agreement, which included the use of renminbi as a settlement currency in trade. In June 2016, the PBoC added the South African rand, allowing for direct trading on the Chinese interbank market (EIU ViewsWire, 2016).

To further promote the use of local currencies in bilateral trade, the BRICS members augmented their agreements through a series of bilateral currency swaps, especially between China and other BRICS members. In 2013, the new China-Brazil bilateral swap agreement allowed them to trade in local currencies in the equivalent of up to USD30 billion per year, which accounted for half of the bilateral trade between the two countries in 2012 (Reference Lopes and FlakLopes and Flak, 2013). In 2014, Russia and China signed a three-year currency swap deal worth RMB 150 billion (USD24.5 billion) (Reuters, 2014). This was extended for another three years in 2017 (Reference SimesSimes, 2020). In 2015, South Africa and China signed a three-year bilateral swap agreement worth 57 billion rand (USD4.75 billion) (Reuters, 2015). Apart from this 2015 agreement, BRICS’ bilateral currency swaps have mostly been in renminbi. This is unsurprising given that renminbi is the most internationalized of all BRICS’ national currencies.

BRICS’ efforts toward de-dollarization in international trade have progressed, especially in bilateral trade. Between 2013 and 2019, the use of local currency in India–Russia bilateral trade increased from 6 percent to 30 percent (Reference Chaudhury and PubbyChaudhury and Pubby, 2019). According to Andrey Denisov, the Russian Ambassador to China, about 25 percent of bilateral trade between Russia and China was settled using local currencies in 2020, which was about a nine-fold growth over less than seven years. In comparison, the use of local currencies in their bilateral trade was about 2–3 percent during 2013 and 2014 (China MOFCOM, 2021). The use of renminbi in trade in South Africa grew 65 percent in 2016 (Reference DaneseDanese, 2016). The bilateral currency swaps also proved useful for circumventing US sanctions. Under stringent sanctions in 2014, the bilateral currency swap between Russian and Chinese central banks enabled Russia to circumvent Western isolation and fostered a de-dollarization dynamic between China and Russia (Reference AntoniadesAntoniades, 2017). Between October 2015 and March 2016, Russia used these swap lines multiple times to support bilateral trade and direct investment between Russia and China (Reference McDowellMcDowell, 2019).

At the BRICS country level, Russia has achieved the greatest reduction in the use of the US dollar in its trade since 2013. Russia’s trade de-dollarization hit a milestone by the fourth quarter of 2020 when the share of its exports sold in US dollars fell below 50 percent for the first time. However, the decline of the US dollar was not replaced by the ruble but rather picked up by the euro. The share of euro used in Russia’s export transactions increased to 36.1 percent, contrasting with a mere 8.7 percent in the first quarter of 2013 (Figure 10).

Figure 10 Declining use of the dollar in Russia’s export transactions since 2013 (percent, 2013–2020).

Source: Author compiled data from Bloomberg Financial and Bank of Russia

Bilateral trade de-dollarization within BRICS has progressed most rapidly in Russia–China trade. This has been catalyzed by the increasing use of local currencies in Russia’s exports to China, especially after major Russian energy companies stopped using the US dollar in their energy exports. For example, in 2015, Gazprom Neft announced that it settled all of its oil exports to China in renminbi (Reference DuDu, 2015; Reference FarchyFarchy, 2015). The rise of the euro in Russia–China trade also accelerated in 2019, when Russia’s top crude oil producer, Rosneft, switched all export contracts to euros from US dollars to protect itself from intensifying US sanctions (Reference Aliaj and AstrasheuskayaAliaj and Astrasheuskaya, 2019). By the end of 2020, more than 83 percent of Russian exports to China were settled in euro (Figure 11). The euro has now replaced the US dollar and has become the primary vehicle currency in Russia–China trade.

Figure 11 De-dollarization in Russia’s exports to China (percent, Q1 2014–Q1 2021).

Source: Author compiled data from Bloomberg Financial and Bank of Russia

As their relations with the United States have both worsened in recent years, Russia and China have moved closer to jointly de-dollarize bilateral trade and promoting the use of local currencies in trade settlements. In 2018, President Putin announced that “the Russian and Chinese sides confirmed their interest in using national currencies more actively in reciprocal payments” (Deutsche Welle, 2018). In 2019, following his meeting with President Xi, Putin confirmed that Russia and China “intend to develop the practice of settlements in national currencies” (RT International, 2019a). Meanwhile, Russia and China signed a joint declaration announcing the elevation of their bilateral relationship to the level of “comprehensive strategic partnership of coordination for a new era” (PRC Gov., 2019). This upgrade in their relationship enables China and Russia to ramp up their collective efforts to reduce dependence on the US dollar. Concurrent with this upgrade in bilateral relations, Russian Finance Minister Anton Siluanov and the PBoC Governor Yi Gang signed a treaty that agreed to use national currencies in bilateral trade and boost cross-currency settlements up to 50 percent (Sputnik News, 2019; RT International, 2019b). These developments suggest that Russia and China are moving closer to forming a de-dollarization hub as both of their relationships with the United States have deteriorated.

5.4 Disrupting the Dollar’s Dominance in Global Equity Markets

The BRICS stock exchanges alliance is an interesting case of a BRICS coalition initiated by the market and mobilized through the market within the existing global financial system. This alliance idea was first suggested by the Hong Kong Exchanges and Clearing Limited (HKEx) in June 2010, shortly after South Africa joined the BRIC group (Reference TaggartTaggart, 2011). In October 2011, stock exchanges in BRICS countries announced an initiative to cross-list benchmark equity index derivatives (BW Businessworld, 2014). This initiative brought together Brazil’s BM&F BOVESPA, Russia’s Moscow Interbank Currency Exchange from Russia, HKEx as the initial China representative, and South Africa’s Johannesburg Stock Exchange. The National Stock Exchange of India (NSE) and the BSE Limited (formerly known as Bombay Stock Exchange) have signed letters of support and will join the alliance after finalizing outstanding requirements.

The BRICS leaders endorsed the formation of this equity market alliance at the 2012 BRICS Summit, and BRICS stock exchanges alliance also started cross-listing equity benchmark index derivatives that could be bought in local currencies during this summit.Footnote ¹⁹ Members of the BRICS stock exchanges alliance have planned three stages of implementation for the initiative. The first stage is the cross-listing of benchmark equity index derivatives, which is meant to facilitate liquidity growth in the BRICS markets and strengthen the international position of the BRICS alliance in the global economy.Footnote ²⁰ Participating exchanges offer local currency-denominated benchmark equity index derivatives. In the second stage, members of the alliance plan to jointly develop new products for cross-listing on their exchanges. The third stage will include further cooperation in developing joint products and new services.

Although the BRICS stock exchanges alliance was not initiated with the goal of de-dollarization, the outcome is a step toward reducing the US dollar’s dominance in global equities market. At the time of its announcement, the seven participating exchanges represented a combined listed market capitalization of USD9.02 trillion and an equity market trading value per month of USD422 billion, and 9,481 listed companies (Reference TaggartTaggart, 2011). They also accounted for over 18 percent of all exchange-listed derivative contracts traded by volume worldwide at that time (Reference TaggartTaggart, 2011). These exchanges collectively represent sizable and fast-growing equity markets that are not traded using the US dollar. Deeper cooperation through cross-listing and joint product development would facilitate the broader use of BRICS local currencies in these equity markets.

A BRICS exchanges alliance is appealing for investors in BRICS countries as well as those overseas. The alliance allows domestic investors within BRICS who want to go offshore to trade index futures and options for each exchange on their domestic market to use their own currency, which is free of capital controls or currency risk. For investors outside of the BRICS countries, the alliance offers easy access to major equity index derivatives of the BRICS markets, which gives them an opportunity for portfolio diversification and for gaining exposure to BRICS equity markets. Broader domestic and international participation in the cross-listed financial products will not only raise the profile of the exchanges but also increase the use of BRICS currencies in global equity markets and divert capital traffic away from the dollar-denominated financial assets. Moreover, for investors who already have exposure to BRICS economies, futures are essential for hedging and risk management, which is a necessity for developing a robust financial ecosystem in BRICS countries.

To summarize the findings of this section, “reform-the-status-quo” initiatives have allowed BRICS members to reduce their dependence on the US dollar without creating new nondollar institutions or market mechanisms. These initiatives are less effective than “go-it-alone” measures due to the lack of nondollar alternatives. They are likely to be less successful in de-dollarizing the existing global financial system or enabling rising powers to achieve greater autonomy and influence in the global system. However, BRICS group-level initiatives, such as the launch of the CRA as a first line of defense before going to the IMF, and the collective bargaining for SDR reform, have demonstrated a high level of coalitional strength, as BRICS present a united front to the Western-dominated multilateral financial institutions. The sub-BRICS level de-dollarization initiatives, such as the unilateral reduction of the share of dollar assets in foreign exchange reserves and the BRICS stock exchanges alliance, directly improve members’ autonomy. These measures, however, are of a much smaller scope.

Russia’s aggressive reduction in its US dollar asset holdings suggests that for any country subject to US sanctions, its central bank and sovereign fund can unilaterally de-dollarize its reserve assets as one measure to attempt to weaken the effectiveness of US sanctions. However, in the context of BRICS, it is very unlikely that all BRICS central banks will agree to remove the dollar from their reserves. After all, the US dollar is still the most widely accepted currency in international settlements, and the US Treasury bond is still the best proxy for risk-free assets. The large dollar asset holdings of some BRICS members prevent them from dumping the US dollar or US Treasury securities on a large scale, as a decrease in US dollar asset value would inevitably incur major losses for these BRICS members. Moreover, the CRA has limited capacity to provide liquidity needs, and there is also a cap on withdrawals. This means the CRA can only serve as ‘first line of defense’ but not a ‘lender of last resort’ for the BRICS members. Finally, cross-listing among BRICS stock exchanges does not re-write the rules or standards of global capital markets. If these exchanges want to be attractive to international investors, they must establish regulatory certainty, with convertibility to the US dollar market. Moreover, compared with the dollar-based equity market, their size and market depth are much smaller. Therefore, at the current stage, BRICS stock exchanges have little capacity to create a large impact on global financial markets.

Finally, several of these reform measures require negotiations with the incumbent, such as the SDR reform. Collective actions involving only a small number of participants are much easier to mobilize than a multi-party negotiation, especially when the incumbent powers have significant control over the existing system. Even if there was an opportunity for a BRICS currency to be promoted and to share the dominant currency power position with the US dollar, there is no BRICS currency that could take this responsibility, the renminbi included. As long as the renminbi comes with the strings of capital controls attached, it cannot rise to the dominant currency position either in trade or international finance.