Will the dollar hold up against the BRICS currency?

International financial institutions, including the US-funded monetary watchdogs, have begun to predict a bleak future for the US dollar in the backdrop of Russian President Vladimir Putin’s disclosures that the BRICS+ may introduce its currency unit at its upcoming summit meeting this year.

Institutions such as the International Monetary Fund (IMF) and JPMorgan have noted that numerous countries, including members of the BRICS, are reassessing their substantial dependence on the dollar for reserves and international transactions in response to recent geopolitical developments. Foreign capital has consequently shifted towards developing countries.

The US dollar took a serious hit on Wednesday, November 12, as the Moscow Stock Exchange abruptly halted all trading in dollars and euros. This happened hours after the US Treasury Department imposed additional sanctions on Russia, banning over 300 entities and individuals to cut off Russia’s access to products and services needed for military production. This development coincides with the end of the US petrodollar contract with Saudi Arabia.

Additionally, there is no obligation now for Riyadh to sell oil in US dollars because the 50-year-old petrodollar deal between the Kingdom and the US has already expired and no new agreement has been signed between the two. Instead of selling oil only in US dollars, it can now offer it in a variety of currencies, such as the Chinese RMB, Euros, Yen, and Yuan. This will deal serious damage to the already collapsing US economy.

Putin unveiled the plan for a BRICS currency

Putin confirmed that BRICS is in the process of developing an independent payment system that will be “unaffected by political pressure, abuse, and external sanctions” while addressing an impressive gathering of over 100 countries at the 27th annual St. Petersburg International Economic Forum (SPIEF) last week from June 5-8.

Giving an overview of the BRICS strategy of evolving a collective payment system and what the member countries, including Russia, can derive from such an arrangement, Putin said that it will be a game-changer for BRICS import/export trade.

“Undoubtedly, the Western countries themselves have significantly undermined the reliability and trust in Western payment systems.” Together with foreign partners, we will increase the use of national currencies in foreign trade settlements, as well as the safety and efficiency of such operations through the BRICS line.”

“We cannot rely on and exploit others, as the US does,” Putin asserts. “The US trade deficit is worth $1 trillion per year. I think everyone will get what I’m saying. This is neocolonialism in the modern sense. Because of the dollar’s monopoly status, the US spends $1 trillion more annually than it generates. It takes these resources away from other nations,” he continued in his speech at the International Economic Forum.

Putin emphasized the significance of Saudi Arabia, Iran, the United Arab Emirates, and Egypt entering the BRICS group, pointing out that the group now comprises 46% of the world’s population and contributes 36% of the global GDP.

BRICS gold reserves

Gold and oil appear to support the BRICS common payment system. In anticipation of BRICS’s new financial strategy, the alliance has been stockpiling billions of dollars worth of gold since late 2022.

Interestingly, the major economies of the BRICS have been steadily increasing their gold reserves over the past few years. As of the first quarter of 2024, the combined gold holdings of the founding BRICS countries and their five new acquisitions accounted for nearly 17% of the total gold held in central banks globally. China, India, and Russia are among the countries with the highest central bank gold holdings.

Russia has a substantial holding of 2,332.74 metric tons (MT) of gold, ranking fifth among central banks. China holds the sixth position with a total of 2,262.39 MT, while India ranks ninth with 822.58 MT. Brazil and South Africa have significantly smaller gold holdings compared to other central banks—129.65 MT and 125.44 MT, respectively. Egypt and the UAE, as new members of BRICS, have impressive gold reserves of 126.46 MT and 74.5 MT, respectively, indicating their strong financial position. Saudi Arabia has a significant amount of gold reserves, totaling 323.07 MT. Both Ethiopia and Iran, the other two new members, do not possess any gold reserves.

The IMF raises alarming bells

The IMF warned that the US dollar could experience a decline if the BRICS were to assume control of the energy industry and begin trading in their respective currencies. Several of the BRICS nations that have recently joined are heavily reliant on hydrocarbon production and exports. According to the International Monetary Fund (IMF), Saudi Arabia’s participation in the alliance could significantly alter the dynamics of the global oil market.

During her speech at a Stanford Institute for Economic Policy Research event on the Future of the International Monetary System (IMS), Gita Gopinath, the first Deputy Managing Director of the IMF, noted that China’s total foreign exchange reserves include 4.3% gold, up from less than 2% in 2015. At the same time, China’s foreign exchange reserves have decreased from 44% to approximately 30% of their original value due to its holdings of U.S. Treasury and Agency bonds. This accounts for the impact of both valuations and net purchases.

Gita emphasized the importance of following existing legal frameworks to maintain trust among nations and the international monetary system. This was about speculation that the EU, along with the United States, could potentially use Russia’s frozen foreign currency assets for reconstruction.

“Several countries are closely monitoring the current discussion about the possible use of Russian public assets, such as the Bank of Russia reserves, to support Ukraine. “The decision-making power lies with the appropriate courts and jurisdictions, but the International Monetary Fund must ensure that any move in this regard has a solid legal basis and would not disrupt the global monetary system,” she added.

JPMorgan Chase & Co., a renowned multinational finance company, asserts that a significant global transformation has occurred in the realm of global economics. Given the increasing de-dollarization of BRICS, there may be potential consequences to consider. JPMorgan has predicted an imminent crisis that could have a significant impact on the dominance of the US dollar in the global arena.

JPMorgan CEO Jamie Dimon has consistently expressed concerns about the US economy. Now, he has once again emphasized the need for significant government spending, which has the potential to cause lasting damage to the country. In addition, he points out that the consequences of that harm may be inevitable. JPMorgan shares a bleak outlook for the US economy and the dollar.

China dumped billions into the US Treasury

China sold $53.3 billion worth of US Treasury and agency bonds in the first three months of 2024. China’s efforts are part of a larger strategy to diversify its assets amid escalating geopolitical concerns with the United States, as it expands its purchases of gold and other commodities at a rapid pace. Taking note of the penalties China faced after Russia invaded Ukraine in 2022, some observers claim China wants to reduce similar risks.

Economic analysts identified three primary causes for this pattern. China likely decreased its exposure to US Treasury assets to avoid facing the same threats of expropriation and sanctions that the US and other G7 countries imposed on Russia and Iran when handling their reserves, he added. He also mentioned the consequences of growing US budget imbalances as another impetus for China’s move, adding that going back on the US dollar will touch a new milestone in the dedollarization drive. 

Congress passed a new bill last week that gives the US administration the authority to seize US dollar assets from Russia, which it has designated as an “aggressor state.” House members approved a foreign aid package that would authorize the Biden administration to seize $6 billion in Russian assets held by American banks and send the funds to Ukraine for rebuilding. This measure is known as the REPO Act, and Congress also approved tens of billions of dollars in aid for Ukraine, Israel, and Taiwan. Russian bank accounts in the US and Europe are worth almost $300 billion. At their meeting in Italy, the G-7 is expected to announce a comparable move.

An analysis that appeared in Schiff Sovereign found that although this may seem like a morally good concept, in practice, it will just drive away foreign investment. Why would China, Saudi Arabia, or any other nation purchase US government bonds when they could take them immediately? All of this creates a world where the US dollar is not the primary reserve currency. That change is already beginning to manifest itself, and by the end of the decade, it may be fully underway.