De-dollarization and global sovereignty: BRICS’ quest for a new financial paradigm

Abstract

This paper argues that the Brazil, Russia, India, China, and South Africa (BRICS) de-dollarization movement represents a significant shift away from the hegemonic influence of American finance, which is crucial for empowering liberation movements in the Global South. Historically, the dominance of the U.S. dollar as a global currency has restricted collective action by centralizing economic power. By reducing reliance on the dollar, BRICS nations aim to foster a new financial paradigm that supports left-wing revolutionary projects, enhancing their financial sovereignty, and enabling more equitable economic frameworks. This shift could potentially redefine global financial interactions, offering a fresh model for economic transactions that bypass traditional Western financial systems.

Introduction

During a summit in August 2023, leaders from Brazil, Russia, India, China, and South Africa (BRICS) convened to address pressing concerns surrounding the pervasive dominance of the United States dollar in global commerce and finance. Central to their discussions was the imperative to enhance the appeal of utilizing local currencies within BRICS nations for cross-border transactions—a process commonly called de-dollarization. This initiative emerged as a strategic response to the overwhelming presence of the dollar in international trade and finance, even within regions where it is not the official currency. Additionally, the U.S. can control foreign sovereign financial assets, including the ability to freeze or seize them within the existing regulatory and technical systems. It also has the unilateral power to impose sanctions.

Despite the diverse economic landscapes of BRICS members and other emerging markets, many cross-border transactions continue using the dollar as the invoicing currency, underscoring its entrenched position in the global financial system. Amid these discussions, this paper embarks on a critical exploration of de-dollarization within the BRICS framework, focusing on the role of money in shaping the legal frameworks of such initiatives. I argue that the BRICS de-dollarization movement, in rhetoric and practice, operates as a shift away from hegemonic American finance, which may be crucial for various liberation movements in the Global South as struggles via collective action were hampered as the dollar became the dominant global currency. A shift away from this universal money-equivalent may offer a new mode of finance for left-wing revolutionary projects.

The dollar and “world-money”

The BRICS countries have collectively sought to reduce their reliance on the U.S. dollar. This effort stems from a desire to mitigate their vulnerability to dollar-induced economic shocks and U.S. monetary policy changes, and to challenge the unipolar concentration of economic power symbolized by the dollar's dominance as world-money. World-money serves as the universal equivalent across borders, facilitating international trade by acting as a standard measure of value for commodities worldwide (Ivanova, 2013). In domestic markets, money facilitates the exchange of commodities by serving as the embodiment of value. Similarly, on the global stage, world-money allows for comparing and exchanging goods across different national economies. At the same time, domestic money takes on various roles within a national economy (e.g., medium of exchange, measure of value), world-money functions beyond the confines of any single nation-state. It must be universally recognized and accepted internationally as a form of payment (Marx, 1990 [1867]).

In the evolving landscape of global finance, the preeminence of the U.S. dollar as world money remains a cornerstone of international economic relations, shaping trade dynamics, monetary policies, and the financial stability of nations worldwide. Due to ubiquity in international transactions, the U.S. dollar is the primary medium of exchange, facilitating significant global trade. ¹ Post-World War II, the Bretton Woods Conference established the U.S. dollar as the anchor of the international monetary system, pegged to gold ² and other currencies pegged to the dollar. However, this role is not merely a product of historical circumstances following the Bretton Woods Agreement 1944. Still, it is continually reinforced by the dollar's perceived stability and the economic might of the United States. International institutions and practices developed around the Bretton Woods system, such as the International Monetary Fund (IMF) and World Bank, continued to function with the dollar as their primary currency.

The dollar's role in pricing and settling international trade, especially in commodities like oil, reinforces its global indispensability. It functions not only as a medium of exchange but also as a universal standard of value, a store of value for foreign reserves, and a unit of account for multinational entities. This multifaceted role solidifies the dollar as the cornerstone of the global financial system. The dominance of the dollar grants the U.S. considerable economic leverage, enabling it to run large current account deficits and profit from seigniorage. However, this dependency also creates global vulnerabilities, as changes in U.S. monetary policy or economic conditions can significantly impact other countries, highlighting the risks of global dollar reliance. Amid this backdrop, a narrative of de-dollarization has gained momentum, spearheaded by countries and blocs like the BRICS seeking to diminish their reliance on the dollar.

The imperative for de-dollarization in BRICS nations

The BRICS concept originated as BRIC, coined by Goldman Sachs economist Jim O'Neill in 2001, predicting Brazil, Russia, India, and China as future economic powerhouses. Formal cooperation began with a 2006 meeting of their foreign ministers at the UN General Assembly, leading to the first BRIC Summit in Russia in 2009, where they discussed global financial reforms. South Africa joined in 2010, expanding the group to BRICS. António Filipe, a former MP and member of the Central Committee of the PCP, stated in Expresso that the increasing multipolarity of BRICS allows countries to pursue development independently of imperial control (Filipe, 2023). He noted that this development is beneficial for the world and will significantly influence social struggles.

The dollar's dominance in international trade and finance subjects these nations to currency risk, trade imbalances, and policy decisions made in Washington, D.C., which may not align with their economic interests or stability requirements. The dollar's hegemony imposes several constraints on BRICS economies, including increased transaction costs, exchange rate volatility, and susceptibility to external economic policies. Such dependency curtails the financial sovereignty of these nations, limiting their ability to implement independent economic policies tailored to their development goals.

Evidence can be posited across primary and interrelated examples of BRICS de-dollarization: engaging in currency swap agreements, establishing new financial institutions such as the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA), advocating for the use of local currencies in trade settlements, promoting the invoicing of bilateral trade in local currencies, and seeking greater currency diversification and financial sovereignty independent of Western-dominated financial systems (Acioly da Silva, 2019). Brazil, Russia, India, China, and South African nations have increasingly engaged in currency swap agreements to facilitate trade and investment among member countries using local currencies, bypassing the need for dollar-denominated transactions. For instance, Brazil and China signed a currency swap agreement worth $30 billion in 2013, allowing for direct exchanges between the Brazilian real and the Chinese yuan without relying on the dollar as an intermediary currency. This move promotes bilateral trade and reduces dependency on the dollar within BRICS economies. Research highlights the significance of currency swap agreements among BRICS nations in promoting intra-BRICS trade and reducing reliance on the dollar (Antoniades, 2016). A speech by Raghuram Rajan, Governor of the Reserve Bank of India, at the National Council of Applied Economic Research underscores how agreements such as the Brazil–China currency swap, amounting to $30 billion, have facilitated direct exchanges in local currencies, thereby minimizing transaction costs associated with currency conversions and decreasing dependency on the dollar as an intermediary currency. ³ Brazil, Russia, India, China, and South African nations have initiated the establishment of new financial institutions, such as the NDB and the CRA, to provide alternative sources of financing independent of traditional Western-dominated institutions such as the IMF and the World Bank. By pooling financial resources and offering loans denominated in local currencies, these institutions aim to promote economic cooperation among BRICS members while decreasing reliance on dollar-based financing mechanisms. ⁴ The European Union Parliament has analyzed the establishment of the NDB and the CRA by BRICS nations as part of their de-dollarization strategy (Schöllmann, 2014). This research emphasizes how these institutions provide alternative sources of financing independent of Western-dominated institutions, thereby reducing the dollar's influence in BRICS economies and promoting financial sovereignty among member countries. The establishment of the NDB by BRICS nations marks a significant shift in the global economic landscape, aiming to provide an alternative to traditional western-dominated financial institutions. This move is particularly crucial as it challenges the long-standing hegemony of institutions such as the IMF and the World Bank, which have been critiqued for their imperialistic tendencies. The COVID-19 pandemic has highlighted the importance of such an institution, as the NDB approved emergency assistance programs totaling $10 billion to support BRICS countries in mitigating the economic impacts of the crisis. ⁵ During this period, intra-BRICS trade increased significantly, with China–Russia trade reaching a record $147 billion in 2021, a 36% increase from the previous year, showcasing the bloc's resilience and cooperation during the pandemic. ⁶ Additionally, efforts toward de-dollarization accelerated, with Russia and China conducting a substantial portion of their trade in local currencies, such as the yuan-ruble trade, which accounted for 25% of transactions in 2021. ⁷ India and Brazil have explored opportunities to settle trade in their respective currencies, signaling a shift away from dollar-centric trade practices and toward greater currency diversification. Studies examine the trend of BRICS nations using local currencies in trade settlements to reduce reliance on the dollar (Dash, 2019). Evidence of increasing bilateral trade invoicing in local currencies among BRICS countries indicates a shift away from dollar-dominated trade practices (Kondratov, 2021). Similarly, there is a growing importance of local currency invoicing in BRICS trade, particularly in transactions involving China, India, and Russia, signaling a move toward currency diversification and de-dollarization (Li, 2023).

Brazil, Russia, India, China, and South Africa and the role of sanctions

The United States frequently uses economic sanctions as a foreign policy tool to influence other countries’ behavior. These sanctions can freeze assets, restrict trade, and limit financial transactions, effectively isolating targeted nations from the global economy. The U.S. leverages its control over the global financial system and the dominance of the dollar to enforce these measures unilaterally. A major example of this is seen in Russia. After the annexation of Crimea, the U.S. imposed sanctions that significantly affected Russia's financial sector. The IMF reported that these sanctions, combined with falling oil prices, contributed to Russia's GDP contraction by 2.5% in 2015. ⁸ Since the escalation with the 2022 invasion of Ukraine, extensive sanctions by the United States and its allies have been implemented. These sanctions aim to cripple Russia's economy, limit its military capabilities, and pressure it to cease its aggressive actions.

The U.S. has imposed sanctions on major Russian banks, including Sberbank, Vneshtorgbank (now VTB Bank), and Gazprombank, restricting their access to international financial markets (U.S. Department of the Treasury, 2022). These measures prevent these banks from conducting transactions in U.S. dollars and accessing global capital. Sanctions target Russia's energy exports, a critical component of its economy. Restrictions have been placed on new investments in Russian energy projects, including oil and gas exploration and production. Several major Russian banks were excluded from the SWIFT financial messaging system, which is essential for international bank transactions. This move significantly hinders Russia's ability to conduct cross-border financial operations.

Brazil, Russia, India, China, and South Africa nations, particularly China and India, have ramped up trade with Russia using local currencies instead of the U.S. dollar. This move helps Russia bypass some of the financial restrictions imposed by Western sanctions. This includes greater military cooperation and diplomatic support, collectively reducing reliance on the U.S. dollar and countering Western economic pressures.

Brazil, Russia, India, China, and South Africa and the specter of neo-imperialism

Harvey's exploration into the concept of new imperialism is centered on understanding the contemporary structures of global dominance through the lens of capital expansion (Harvey, 2005). Harvey argues that this form of imperialism is not merely about geographic or military conquest but is fundamentally driven by the need for capital to find new markets, resources, and spheres of influence beyond national borders. This critical perspective highlights how economic exploitation and political control are intricately woven into the fabric of global capitalism, serving as the backbone of Western hegemony.

Building on Harvey's foundational work, Alex Callincos extends the conversation on new imperialism by focusing on Western nations’ specific economic and geopolitical strategies to sustain their global dominance. ⁹ He emphasizes the role of international financial institutions (such as the IMF and World Bank) and the strategic imposition of neoliberal economic policies on developing countries. Callincos’ analysis sheds light on the subtle yet powerful mechanisms through which Western nations maintain their influence, pointing out the coercive and consensual ways economic policies are enforced globally. This extension of Harvey's work provides a more granular understanding of the tactics of control and dominance in the global financial system, highlighting the contemporary forms of imperialism manifested through economic dependency and policy imposition. In response to the Western-dominated global financial systems, Stiglitz (2003) challenges the prevailing Western-dominated financial systems to advocate for an economic cooperation and development model that prioritizes inclusivity and equity. ¹⁰ Stiglitz criticizes the one-size-fits-all approach to economic policy championed by Western institutions, arguing for a more nuanced and context-sensitive approach to development. His work calls for reimagining global economic relations, promoting a model that transcends the traditional hegemony of the West and fosters genuine partnerships based on mutual respect and shared goals. Stiglitz's contributions are crucial in envisioning alternative economic futures not predicated on exploitation and dominance but cooperation and sustainable development.

Stephen (2014) further explores the strategic positioning of BRICS nations, highlighting their concerted efforts to counteract the forces of new imperialism through economic policies and alliances that champion multipolarity and financial independence (Stephen, 2014). Such initiatives are mainly aimed at enhancing the monetary sovereignty of BRICS and other developing nations, resonating with Escobar's (1995) critique of conventional development practices (Escobar, 1995). Despite these promising initiatives, BRICS nations have yet to be immune to criticism. Stephen (2014) raises concerns regarding the potential replication of neo-imperialist practices within their regional spheres of influence. Moreover, Thirlwell points to the internal contradictions within the BRICS consortium, underscoring the significant challenges these nations face in coalescing their efforts against global imperialism (Thirlwell, 2014). Despite the optimistic vision of BRICS as a counterforce to Western imperialism, the coalition faces significant critiques and challenges. Michael Roberts and Federico Fuentes point out the accusations against BRICS nations of replicating neo-imperialist practices within their regions, suggesting that the dynamics of power and domination are not easily escaped (Links, 2024). Thompson and de Wet highlight the internal contradictions and challenges to collective action within BRICS, underscoring the complexities of navigating global roles and ambitions against entrenched imperialistic practices (Thompson and de Wet, 2017). These critiques reflect the nuanced and often contradictory nature of international resistance to imperialism, pointing to the inherent difficulties in forging a cohesive and principled stance against the deeply rooted mechanisms of global dominance.

Brazil, Russia, India, China, and South Africa and global south liberation

De-dollarization presents an opportunity for nations in the Global South to assert greater control over their economic destinies. By reducing dependency on the U.S. dollar, these countries can shield themselves from external financial shocks and policies that do not align with their developmental goals. Moreover, the shift toward multipolarity championed by BRICS has the potential to foster a more equitable global financial system where the interests of the Global South are better represented and protected.

The growth of BRICS indicates a shift toward greater assertiveness among Global South nations as they prioritize their own agendas. This move toward autonomy is altering the geopolitical landscape, with Goldman Sachs analysts describing it as the rise of “geopolitical swing states.” The future role of BRICS remains uncertain, but developing countries are likely to seek competitive advantages and build resilience against external pressures. Argentinian political scientist Spektor emphasizes that for the U.S. to maintain leadership in a multipolar world, it must engage with the Global South as equals (Spektor). This approach is crucial for liberal democracies, requiring strategies that prioritize mutually beneficial opportunities and adapt to the unique, fluid nature of bilateral relationships. Effective engagement will also necessitate a deeper understanding of each developing nation's domestic conditions.

Conclusion

The BRICS consortium's initiative for de-dollarization represents a strategic move to challenge the hegemony of the U.S. dollar in global finance. This effort seeks to foster economic independence and mitigate vulnerabilities caused by dollar fluctuations. By promoting the use of local currencies and creating alternative financial institutions like the NDB, BRICS aims to redistribute global economic power, advocating for a multipolar financial order. This approach enhances the financial sovereignty of developing nations and supports a more equitable global financial system, potentially transforming the international economic landscape to better serve all nations, particularly those in the Global South.