BRICS and Dollar
Context:
Donald Trump has issued a warning to the BRICS nations (Brazil, Russia, India, China, and South Africa), threatening 100% tariffs on imports if they pursue creating a new currency or backing an alternative to the US dollar as the global reserve currency.
More on News:
- The global push to reduce dependence on the dollar has gained momentum since the US barred Iran and Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a crucial system for international transactions.
- Countries, including India, are exploring alternatives to the US-led financial system.
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a crucial entity in the global financial system, primarily functioning as a secure messaging network that facilitates international money transfers and communications between banks and financial institutions. SWIFT was founded in 1973 and is based in La Hulpe, Belgium. As of recent reports, SWIFT connects over 11,000 financial institutions across more than 200 countries, processing an average of approximately 44.8 million messages daily.
Rising Calls for a BRICS Currency:
- Kazan Summit: At the BRICS summit in Kazan in October, Russian President Vladimir Putin criticised the use of the dollar as a weapon, calling it a strategic mistake.
- Johannesburg Summit: Earlier, at the 2023 BRICS summit in Johannesburg, Brazilian President Luiz Inácio Lula da Silva advocated for creating a BRICS currency to expand payment options and mitigate vulnerabilities.
India’s Steps Toward Currency Diversification:
- Trade Settlements: In 2022, the Reserve Bank of India (RBI) enabled international trade settlements in rupees following Western sanctions on Russia amid the Ukraine conflict.
- Kazan Summit: Prime Minister Narendra Modi, speaking at the Kazan summit, supported financial integration among BRICS nations, emphasising trade in local currencies.
- However, India’s trade imbalance with Russia and fears of US sanctions have limited progress.
- Much of Russia’s rupee reserves have been redirected into Indian investments rather than bilateral trade.
- In contrast, Russia-China trade, settled primarily in rubles and yuan, now accounts for over 90% of transactions between the two nations, according to the Russian government.
- Official Stand: External Affairs Minister S. Jaishankar clarified that India is not targeting the dollar, stating that the country’s initiatives aim to address practical trade needs, not challenge the global dominance of the dollar.
Implications of US Tariffs on BRICS:
- Trade experts caution that Trump’s tariff threats could backfire on the US.
- Such tariffs would likely lead to a shift in US imports to third countries, raising costs for American consumers without reviving domestic manufacturing.
- China might use the BRICS framework to challenge the US.
Dollar’s Declining Role in Global Reserves:
- Data from the International Monetary Fund (IMF) shows a gradual decline in the dollar’s share of official foreign exchange reserves, with non-traditional reserve currencies like the Australian dollar, Canadian dollar, Chinese renminbi, and South Korean won gaining ground.
- The IMF has highlighted the renminbi’s rise, which accounts for about a quarter of the dollar’s decline.
Balancing Reform and Diplomacy:
- BRICS countries will likely continue exploring alternatives to the US dollar despite the tariff threat.
- For India, a balanced approach is crucial—supporting financial reforms within BRICS while maintaining strong ties with the US to protect broader strategic and economic interests.
- Diversifying trade mechanisms, they argue, is about fostering global financial stability, not opposing the dollar’s dominance.
