BRICS Isn’t De-Dollarizing Anytime Soon

Yves here. I am overdue on a post on the recent BRICS and why enthusiasts are greatly underestimating the hurdles member states need to overcome for BRICS to be effective….as in more than a Global South UN.

Let’s mention one. Multipolarity is taken to mean greater national sovereignity for states subject to way too much US/EU/”rules based order” meddling. But effective multinational organizations require some surrender of sovereignity, such as dispute resolution bodies (as in courts or arbitration panels) that sit above nation-states and can issue decisions that are binding upon participants. Look at how the UN looks like joke due to the fact that ICC warrants are being ignored by states that have not opted out of the ICC like Mongolia (admittedly the political stunt one against Putin, so the ICC asked to have its authority challenged). Similarly, does anyone expect any consequential action when the ICJ finds that Israel has engaged in genocide and refuses to cease and desist? Admittedly, this would pave the way for UN sanctions, but then what happens if the US and some EU states were to defy them?

The post below provides some additional reality-checking on the much-hyped de-dollarization plans. But here, the BRICS boosters have done themselves a disservice by overstating what they need to achieve to get free of the risk of US sanctions. The biggie is engaging in bi-lateral trade using the currencies of the trade partner pairs. This is messy since traders and their banks (and central banks) have to traffic in a lot more currencies. But this is a much more attainable objective than a new currency regime.

The big impediment in the intermediate term is that some countries will chronically run trade deficits with other countries (think Turkiye v. Russia) and the exporting country won’t be happy with all of the (probably depreciating) currency it is accumulating from that trade partner. That is why Keynes proposed the bancor, as a way to force countries over time to run pretty balanced trade.

Now admittedly, for China, which as everyone knows is a big exporter to the US, even with having started setting up bi-lateral payment arrangements in 2015, the threat of tighter US sanctions did lead Chinese banks to cut way back on Russia transactions in August. Mind you, the main approach was to payment launder better, as in find cutouts. This does cause friction and increase costs, but for all but small fry does not seem to have been a deal-breaker in the end. From Reuters:

Some Russian companies are facing growing delays and rising costs on payments with trading partners in China, leaving transactions worth tens of billions of yuan in limbo….

Russian companies and officials for a few months have pointed to delays in transactions after Chinese banks tightened compliance following Western threats of secondary sanctions for dealing with Russia….

Chinese state banks are shutting down transactions with Russia “en masse” and billions of yuan worth of payments are held up…

China is Russia’s largest trading partner, accounting for a third of Russia’s foreign trade last year and supplying items such as vital industrial equipment and consumer goods that help Russia weather Western sanctions. It also provides a lucrative market for many Russian exports that China relies on, from oil and gas to agricultural products.

One working solution was to buy gold, move it to Hong Kong and sell it there, depositing cash in a local bank account, the person said.

Sources told Reuters that some Russian businesses have been using chains of intermediaries in third countries to handle their transactions and get around compliance checks run by Chinese banks. As a result, costs to process transactions have risen to as much as 6% of transaction payments, from close to zero before, they said.

This also suggests that US leverage, at least with respect to China, does not come narrowly from the dollar but also from China’s desire to keep exporting bigly to the US. China needs to keep open bank channels to the US in order to get paid.

By David P Goldman. Originally published at Asia Times; cross posted from InfoBRICS

Russian President Vladimir Putin disappointed both anti-colonial enthusiasts and Western alarmists by conceding that the bloc’s members “have not built and are not” building a payment system to challenge the US dollar-based global banking system.

The leaders of the two economic giants present at the BRICS summit, China’s Xi Jinping and India’s Narendra Modi, did not mention alternative payment arrangements in their respective remarks.

The technical requirements for alternative payment systems aren’t the problem. The SWIFT system that controls interbank payments in dollars and other major Western currencies merely transmits secure messages. The challenge, rather, is economic: US demand for imports fuels an outsized portion of economic growth in the Global South. China’s exports to the US amount to just 2.3% of its GDP, but about half of its surge in exports to the Global South since 2020 depends on re-exports to the United States. While China’s exports to the Global South more than doubled from about US$60 billion a month to $140 billion a month, US imports from the Global South rose from about $60 billion a month to $100 billion a month during the past four years.

Dependence on the US market varies widely across the universe of developing countries. Vietnam and Mexico, the two favorite venues for so-called “friend-shoring,” that is, transferring production away from China to putatively friendlier countries, registered big increases in exports to the US as a share of GDP.

Vietnam’s exports to the US in 2023 amounted to about 27% of the country’s GDP, compared to just 10% in 2020, while Mexico’s US exports rose to 27% of GDP in 2023 from 20% in 2010. Singapore and Malaysia, by contrast, showed little increase in US exports as a share of GDP. Indonesia and Brazil export comparatively little to the United States.

Some Asian countries, notably Malaysia and Thailand, export more than 60% of their GDP, mainly to other Asian countries. Brazil, Indonesia and China are far less export-dependent.

Today, China exports just 19% of its GDP compared to 27% in 2010, which means that an increasing share of GDP growth depends on domestic consumption and investment.

What makes the United States such an important factor in the economies of the Global South is its enormous current account deficit. The table below ranks the current account surpluses and deficits of the 20 largest economies from the largest deficit to the largest surplus. With a current account deficit of $80 billion a month, or $1 trillion a year, the US appetite for an excess of imports over exports dwarfs the rest of the world.

China is the largest or second-largest economy in the world, depending on whether we count GDP in US dollars or adjust for purchasing power parity, but China’s imports from the Global South have been stagnant for three years.

China won’t replace much of American import demand for the time being, given Beijing’s focus on high-tech investment rather than consumer demand. At the margin, that leaves the Global South all the more dependent on the US.

Projecting current trends into the future suggests a steady rise in consumer spending in the Global South, especially in East Asia, and the emergence of robust domestic markets and less dependence on exports.

Below is a chart published by the Brookings Institution think tank last year, projecting that the total consumer market in East Asia will overtake the US consumer market by 2028.

Developing countries, though, don’t pay their bills on projections. Arranging payments for goods in international trade is a trivial issue. More challenging is financing long-term deficits.

India, for example, used to run an annual trade deficit with Russia of less than $3 billion. Discounted Russian oil sales to India after the start of the Ukraine war boosted this to more than $60 billion.

What will Russia do with the Indian rupee equivalent of $60 billion? It would far prefer to have another currency, for example, the UAE dirham, that can be used to buy goods in third markets.

The Global South doesn’t yet have the capital markets or the currency stability to convince a surplus trading country to simply hold assets of the deficit country in exchange for goods.

That is what the United States does so well: Its $18 trillion negative net foreign asset position corresponds to the last 30 years’ cumulative current account deficits.

America sells assets to foreigners in return for their goods. The Global South doesn’t have the assets to sell, or at least not in the form that the rest of the world would like to own.

That helps explain why the BRICS Summit’s final declaration relegated the issue of payment systems to feasibility studies:

We reiterate our commitment to enhancing financial cooperation within BRICS. We recognize the widespread benefits of faster, low-cost, more efficient, transparent, safe and inclusive cross-border payment instruments built upon the principle of minimizing trade barriers and non-discriminatory access.

We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners. We encourage strengthening of correspondent banking networks within BRICS and enabling settlements in local currencies in line with BRICS Cross-Border Payments Initiative (BCBPI), which is voluntary and nonbinding, and look forward to further discussions in this area, including in the BRICS Payment Task Force.

BRICS central banks don’t hold each other’s currencies as reserve assets, with limited exceptions. Just 2.3% of world central bank reserves are held in China’s RMB, up from 1.1% in 2016 but down from a peak of 2.8% in 2022. Most of them are buying gold. If the legend on US currency states, “In God We Trust,” gold says, “Trust nobody.”

Sweeping changes across the Global South would be required to make their currencies attractive reserve instruments—transparency and risk management of capital markets, the development of a local middle class, infrastructure, and education.

A great deal of this is happening in stages in many developing countries but progress is gradual and uneven. We now can foresee circumstances under which the Global South might declare independence from the dollar system. But we aren’t there yet and won’t be for years under any foreseeable circumstances.