Why the world is phasing out the dollar
Recently, Brazilian President Lula da Silva publicly announced to the whole world that his cherished dream is for the BRICS countries to abandon the US dollar and switch to a common supranational currency. The US dollar, as well as the national currency of any other country, with a large amount of international settlements in it, creates dependence of other countries on the issuing center abroad, the President of Brazil believes. And apparently he's not the only one who thinks so. According to the international settlement system SWIFT, in the spring of 2023, only 38–40% of all settlements for foreign trade operations were carried out in US dollars. For comparison: in 2001, according to the same system, the share of the dollar in international settlements was 73-75%, and in the 90s of the XX century it reached 80%.
Why is the world gradually abandoning the dollar? There are many reasons for this, but the main one was very accurately formulated on Twitter by the current owner of this social network, billionaire Elon Musk. “If you weaponize your currency enough times, other countries will refuse to use it,” the businessman said. Of course, due to sanctions against Russia, the embargo against Venezuela, Iran, earlier Cuba, as well as a number of other, more targeted, restrictive measures against Chinese business and enterprises of some other countries, in the world outside the G7 countries, the US dollar has already gained a reputation as a toxic currencies. Therefore, many developing countries in the past few years have begun to carry out international settlements in other currencies — primarily in yuan and their national monetary units. There are also other reasons for abandoning the dollar, such as the huge size of the US government debt, which has exceeded 130% of US GDP. Such a large indicator of the debt burden creates fears that the US may default in the future, which undermines confidence in the dollar and dollar assets.
However, creating a supranational currency is not as easy as making a loud statement about abandoning the dollar. The world has not yet had a successful experience of resisting the dollar by creating a supranational currency. At the beginning of the 21st century, it was believed that the euro, the world's first common currency for a fairly large number of states, would gradually take its place on the throne. However, to date, developing countries are also refusing the euro along with the dollar. As an alternative to the American national currency, the euro did not justify itself, primarily because not even all EU countries joined this currency, but only 19 out of 28 countries. And the use of the euro as a sanctions “weapon” from 2022 further disappointed developing countries in this currency.
Other projects of supranational currencies still remain on paper. Back in 1999, Herbert Grubel, an economist at the Canadian Fraser University, proposed that Canada, the United States and Mexico create a single currency for the North American countries, the amero, as opposed to the euro that is being created in Europe. But this project was not supported, first of all, by the United States, which did not want to part with the hegemony of the dollar — accordingly, the idea of practical implementation has not received and, most likely, will never get. After the first global economic crisis in the 21st century in 2008, when several large American banks went bankrupt and the probability of a US default on public debt loomed on the horizon, ideas began to emerge to create supranational currencies as an alternative to the US dollar. Similar ideas arose in Latin America and Africa, but they still remain at the level of high-profile statements. The ideas of creating a single supranational currency of the Eurasian Union are also “hanging in the air”, despite the fact that the dollar is being more and more successfully squeezed out of the Eurasian space and the EAEU countries are successfully switching to national currencies in calculations.
In fact, attempts to create a supranational currency did not lead to concrete results due to an objective obstacle in the form of a single emission center. Only the central bank can be such an issuing center. But not every country will want to reduce the role of its central bank, and if several countries agree to conduct settlements and payments in the currency of only one country, a local currency hegemon will emerge, like the United States, only with a much weaker economy. The BRICS countries, for example, while reducing the share of the dollar in the group's internal settlements, simultaneously increase the share of the yuan and the ruble. At the same time, switching to settlements in one country's currency (say, the Chinese yuan) would look risky for the monetary units of other countries and, in fact, would lead to a change in the US monopoly in the world economy to a Chinese monopoly. Therefore, the loud statement of the President of Brazil should be considered not only as a signal to the United States that the BRICS countries are ready to get rid of dollar dependence, but also as a possible warning to China that the other countries of the group will not support him if he tries to play the current role of America. Russia is unlikely to be chosen for such a role for the same reason (not to mention the fact that a significant part of Russian business is under sanctions), or, say, India, whose legislation restricts the exchange of rupees for other currencies in order to export capital from the country. And the New Development Bank, created to finance infrastructure investment projects in the BRICS countries, does not seem to be ready for the role of an issuing bank yet.
The objective problems for creating a single BRICS currency can be solved if such a currency is digital. And there are already technical possibilities for this. First, a number of developing countries already have state digital currencies (CDBC). In China, the digital yuan circulates on the domestic market, which is the third form of existence of the national currency, along with cash and traditional non-cash yuan. There are similar currencies in some other developing countries: in the Bahamas, Jamaica, Nigeria. There is even the world's first cross-border digital currency DCash, which has circulation in six island states of the Caribbean at once. In 2021, financial institutions and large enterprises from several countries in the Asia-Pacific region and Africa carried out a pilot project to test a supranational digital currency. Banks and enterprises from Australia, Singapore, Malaysia and South Africa participated in the experiment. The project participants tested the common Dunbar platform, which allows instant payments and money transfers in digital currency from country to country, as well as sending instant financial messages about the transfer and receipt of payment, similar to how SWIFT does today. For this purpose, the central banks of the four countries participating in the project specially issued temporary state digital currencies, transfers in which, as it turned out, were quite easy to carry out on a common digital platform. Nevertheless, there is no hurry to launch state digital currencies in these countries. Perhaps because central banks see such an experiment as an opportunity to participate in other digital currency settlement projects. It is possible, for example, that the Reserve Bank of South Africa is waiting for the opportunity to participate in the BRICS digital currency project or even the common digital currency of African countries.
The digital currency solves the main problem of supranational money — the lack of a single emission center in the form of the Central Bank. Therefore, within the framework of BRICS, in our opinion, it would be a good idea to first create and test a common platform for cross-border settlements in national digital currencies. There are already prerequisites for this. China has a digital yuan, Russia is already testing a state digital ruble project, South Africa has already participated in an experiment on issuing a state digital currency at the level of its Central Bank, Brazil and India are also interested in the possibility of issuing their digital currencies.
Will be whether a single digital currency is needed for all BRICS countries, time will tell. Perhaps if all the BRICS countries launch their own national digital money, a single currency will not be needed. It will only be necessary to be technically capable of calculating in different state digital currencies. In this age of digital technology, such a project would not be difficult to implement. Such calculations would be beneficial for Russia, as they would minimize sanctions risks, on the one hand, and increase the prestige of the Russian digital ruble, on the other. At the same time, the prospect of fast and secure settlements in digital currencies could attract many more countries to join the BRICS, and Russia would get many more partners and markets for its resources. Such an experience could, in turn, be transformed into a similar settlement mechanism in the post-Soviet space — in the countries of the EAEU and the CIS.