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De-Dollarisation: More BRICS in the Wall

The BRICS nations, led by China and Russia, are accelerating efforts to reduce reliance on the US dollar in global trade and finance. Cryptocurrencies and blockchain technology are emerging as key tools in this de-dollarization push, even as BIS officials are considering nixing the mBridge project.

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Last week's BRICS meeting was the first since Egypt, Ethiopia, Iran, and the United Arab Emirates joined the group earlier this year.

One of the key areas of focus for BRICS is to reduce reliance on the US dollar in international trade and finance, particularly in terms of energy trade and foreign exchange reserves. This aligns with the broader global trend of de-dollarization, driven by geopolitical tensions, economic concerns, and the rise of alternative currencies and payment systems.

Cryptocurrencies and blockchain technology have the potential to play a significant role in accelerating de-dollarization. By offering decentralized, secure, and transparent financial systems, these technologies can challenge the dominance of traditional financial institutions and currencies.

Some point to the mBridge initiative as an alternative avenue through which the BRICS might de-dollarize their financial and commercial flows. mBridge is a central bank digital currency (CBDC) initiative backed by the Bank for International Settlements (BIS) and central banks of China, Thailand, the UAE, and Hong Kong. It aims to create a cross-border payment system that bypasses traditional correspondent banks, reducing transaction costs and increasing efficiency.

However, a recent report by Bloomberg suggests that the BIS may be considering shutting down mBridge due to concerns about its potential use by BRICS nations to circumvent US financial dominance. This decision, if implemented, could have significant implications for the future of global finance and the de-dollarization movement.

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Well, discussions on the BRICS Bridge, a similar cross-border payment system, have been going on for a while. Furthermore, Russia is currently advocating for a securities system based on the BRICS to offer clearing and a depositary, which is allegedly also DLT-based.

With 42% of the world's central bank foreign exchange reserves, BRICS+ is probably helping the world de-dollarize. The largest possible substitute for the US dollar for the bloc is gold.

Despite their aggressive purchasing in recent years, gold still only makes up 10% of the central bank reserves of the BRICS+, which is half of the world average. Because of the member nations' relatively low external obligations, there are few opportunities for global diversification towards BRICS+ currencies, even a synthetic one.

As a result, other developed markets will mostly gain from the de-dollarization of global foreign exchange reserves, not the emerging market.

In addition, BRICS+ is growing its influence in regional commerce, concentrating more on member-to-member trade and becoming a more significant trading partner for other developing economies, particularly in the fuel sector.

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BRICS+ accounts for over 35% of the EM gasoline trade, a major area of focus for de-dollarization.

The bloc's power is constrained by its meagre 30% global oil production share, which is comparable to the combined shares of the United States, Canada, and Mexico.

Additionally, the Americas' trade is heavily dollarized, and BRICS+'s 20% share of global trade is more stable and modest than the DM's 60% share.

Long-Term Evolution BRICS+ Member Countries

Source: IMF, WB, BIS, SWIFT, Refinitiv, national sources, ING*Latest available data for 2022-24;BRICS+ Include the current nine full member states;BRICS correspond to just five core member states;Shares of BRICS+ in financial flows are retrospectively adjusted for FX revaluation

BRICS+ is actively de-dollarising its financial flows from above-average levels, as seen through declining shares of US dollars in their cross-border bank claims, international debt securities, and broader external debt.

At the same time, BRICS+ has a much smaller global presence in those areas, limiting the impact of its regional de-dollarisation on the global role of the US dollar.

The BRICS+ nations have had some success turning their increased global influence into more active currency use around the world.

The largest advancements over the past four to eight years may be observed in the increased proportion of core BRICS currencies in OTC FX options (6.8% as of 2022) and worldwide payments through SWIFT (6.4% as of 2024).

The US dollar, which appears to be maintaining its global supremacy despite the US' changing position in the global economy and markets, is not immediately and directly threatened by this expansion from a relatively low base.

However, in the future, BRICS+ may threaten some DM currencies.

Definitions in Context

The informal BRICS+ group consists of five core members—Brazil, Russia, India, China, and South Africa—and four newcomers: Egypt, Ethiopia, Iran, and the United Arab Emirates.

They comprise 44% of the world's population and 37% of its GDP (on a Purchasing Power Parity basis).

Azerbaijan, Bahrain, Bangladesh, Belarus, Bolivia, Cuba, Pakistan, Senegal, Thailand, Turkey, and Venezuela are among the other nations that have reportedly submitted membership applications. These candidates make up 8% of the world's population and an extra 5% of the global GDP.

Saudi Arabia, which accounts for 11% of global oil production, has yet to reply to a formal invitation to join BRICS+.

The term "de-dollarization" describes the US dollar's waning influence in global affairs.

Evolution of the Dollar's Global Role (Source: IMF, WB, BIS, SWIFT, Refinitiv, INGLatest available data of 2023-24; FX pairs with USD in one of two legs. sum of FX shares is 200%; all shares are retrospectively adjusted for FX revaluation effects).

The shifting proportion of US dollars used in various contexts, such as foreign reserves, cross-border bank loans, international debt securities, derivatives, and payment transactions, provides a gauge for this.

Exchange rate movements affect currency shares; therefore, past data must be updated to reflect current exchange values. The most recent currency shares in this report correspond to the reported headline numbers.

All previous data points have been changed to illustrate what the shares would have been under the fixed pricing conditions of the most recent reporting date.

Global Role of BRICS+

The BRICS meeting was held in Kazan, Russia, last week.

Reports indicate that this year's meeting focussed on increasing internal integration, particularly trading, as opposed to last year's gathering, which focused on significant block growth.

The trade focus centres on the bloc's political goal of lowering its dependency on the dollar. President Putin appears to have opposed the notion of a united BRICS currency. The emphasis is on reducing the dollar's usage and, if feasible, boosting the use of BRICS currencies.

Central banks' foreign exchange reserves and the global oil trade are two important areas where BRICS+ holds elevated global market shares, indicating the greatest de-dollarisation potential if all members join forces.

Particular attention is paid to these sectors in the context of de-dollarization, where worldwide statistics or anecdotal evidence and remarks have documented advancements.

According to the IMF COFER, foreign currency reserves are the most well-known and important aspect of the worldwide de-dollarization effort.

Since the FX composition of the central bank reserves of the major members, such as China and Russia, is limited, it is challenging to determine the precise contribution of BRICS+.

Worldwide de-dollarization was only possible with the present members of the informal block, who have maintained a steady hold of 42–44% of the world's foreign exchange reserves since 2008.

BRICS+ Since the Global Financial Crisis

Since the Global Financial Crisis, BRICS+ has demonstrated a greater long-term preference for monetary gold as an alternative to currency reserves.

Compared to the worldwide rise of 5,500 tonnes, the BRICS+ net acquired 6,600 tonnes of monetary gold between 2008 and 2021.

Its proportion of world gold holdings rose from 5% to 22% as a consequence.

Due to sales by Brazil, Russia, India, and South Africa offsetting some small increases by China, the total amount of gold held by BRICS+ has been unchanged since 2021.

Since gold presently makes up just 10% of BRICS+ central bank reserves, compared to 20% of the world average, there is likely still room for growth in BRICS+ global holdings.

If the central banks of the BRICS+ countries doubled their gold holdings, the global demand for gold would increase by 8,000 tonnes. However, global manufacturing capacity would limit a substantial rise in gold purchases.

International trade flows are another crucial area where BRN believes BRICS+ might play a significant role in promoting de-dollarization.

According to IMF data, the current trade flows of BRICS+ members show that the bloc consistently contributes a sizeable 20–21% share of world trade.

In 2023, this translated to a yearly trade turnover of $10 trillion (exports + imports).

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Around the time of the financial crisis, when China's output and the world's GDP slowed, the development of the BRICS+ share as a whole ceased.

At the same time, the trend of oil prices reversed, restricting the nominal trade numbers of the oil-producing members.

Meanwhile, BRICS+ trade's regional structure demonstrates that, in spite of the bloc's stagnant global role, member nations are focussing more on trading with one another, particularly China.

The bloc's share of total trade turnover is steadily increasing, rising from 22% in 2008 to 28% today.

This development is even more noticeable in emerging markets as a whole because the BRICS+ countries now account for 31% of trade with other EM nations, up from 19 percent in 2008.

However, the most noteworthy development occurred in the EM fuel trade, where the BRICS+ share of total transactions in 2023 almost doubled, from 20% to 37%.

The greatest opportunity for BRICS+ to impose de-dollarization is in this area.

According to US EIA data, non-OECD oil demand accounted for 55% of world oil consumption in 2023.

Whether producers or consumers determine the currency of energy invoices is debatable, but this is undoubtedly a good place to start the de-dollarization narrative.

However, one barrier to measuring the BRICS' de-dollarization development is the lack of sufficient information on the FX structure of trade.

Details in the EM arena are mostly anecdotal, but the ECB offers some of the most perceptive evaluations of the invoicing currency in the petroleum trade.

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For instance, it has been reported that energy imports have been paid for using currencies such as the Indian rupee, the UAE dirham, and the renminbi.

According to some accounts, Indian refiners are using rubles to pay for Russian oil.

The yuan, which has surpassed the dollar as the main foreign exchange rate used in Russia's internal and international commerce, is one of the most promising options here.

Prior to this, the Bank of Russia actively purchased CNY, and by the end of 2021, the renminbi had grown to 22% of its foreign exchange reserves.

FX Composition of Russia's Foreign Trade

Source: Bank of Russia, ING

However, there are still barriers to international commerce de-dollarization.

First, when it comes to oil output, the BRICS+ nations account for 30 per cent of world production (or 41% if Saudi Arabia finally joins), with the United States, Canada, and Mexico holding a combined 30% share.

It is important to note that prior research indicates that over 95% of international trade in the Americas is dollarized.

The second possible drawback is that while BRICS+ may contribute twice as much to world trade as the US (11%), they only make up one-third of DM's trade volume, representing around 60% of global trade turnover.

Global De-Dollarisation Progress is Mixed

The de-dollarization of the world is not just due to BRICS. The impending US elections may play a role, if not directly or indirectly, through a possible reduction in the US' influence in international commerce.

After rising in the 2010s, the de-dollarization of some financial flows, such as cross-border bank lending, represents a return to early 2000s levels.

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Other DM currencies are the US dollar's primary rivals, although non-core currencies are also gaining momentum.

Due to its large market capacity and favourable interest rate environment, the US dollar continues to hold a firm footing in other important areas, such as international debt securities, interest rate derivatives, and transactions, with little indication that it will soon lose its dominant position.


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