‘From De-Risking to De-Dollarisation: The BRICS Currency and the Future of the International Financial Order’ (从去风险到去美元化：金砖货币与国际金融秩序的未来) was originally published in Wenhua Zongheng (文化纵横), issue no. 5 (October 2023).

‘De-risking’ is replacing ‘decoupling’ as the key word to describe today’s international political and economic hotspots. Western countries are emphasising de-risking trade and investment with China at the level of supply chains, while non-Western countries are de-risking their economic ties with the West in response to Western-led economic sanctions against Russia, enacted after the outbreak of the Russia-Ukraine war. The refusal of developing countries to align with Western policy on the war and sanctions against Russia has led to increasing discourse on the Global South’s political role on the international stage. The Global South’s rising economic and political influence was highlighted at the 2023 BRICS summit in South Africa, where Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates (UAE) were invited to join the organisation, amid dozens of applicants. The BRICS grouping appears set to become a significant international political and economic platform representing the interests of the Global South, a development that will profoundly reshape the international order.

Western economic sanctions against Russia have significantly impacted the developing economies of the Global South in three main respects. First, Western energy sanctions and decoupling from Russia have disrupted the relatively stable, long-standing supply-demand relationships in the international energy market. When Russian-European energy cooperation ceased, the Russian energy industry was forced to turn to the Asia-Pacific market, exporting oil and gas at low prices. Russia’s strategic response has, in turn, placed a lot of pressure on other energy producers, driving fierce competition in the Asia-Pacific market. This competition is altering the geopolitical landscape and the international political and economic balance of power. Second, Western economic sanctions against Russia have led to restructuring of the global supply chain. The withdrawal of Western companies and suppliers from the Russian market has forced Russia to find new sources of numerous goods and components, providing important commercial opportunities for non-Western firms to enter the Russian market. Third, Western financial sanctions have frozen Russia’s foreign exchange reserves and confiscated the assets of some wealthy Russian citizens. These measures have triggered concerns in many countries about the risk of holding dollar-denominated assets, prompting them to transfer these assets away from developed countries and to actively seek alternatives to the US dollar, thus becoming a key driver of the current de-dollarisation trend.

This paper examines three aspects of the de-risking efforts of the Global South and explores their impact on the future development of the international economic order. First, the de-risking efforts of the Global South are epitomised by de-dollarisation. Countries of the Global South are attempting to reduce their use of the dollar in international trade by strengthening monetary sovereignty and national economic security. This movement is separating the international trading system from the international financial system, which since the end of the Second World War, has been tightly linked by the key currency, the US dollar. In the past, the US dollar, as the reserve currency of countries in the international financial system, was used not only for commodities’ pricing but also for cross-border trade settlements and inter-bank lending, greatly enhancing the efficiency and convenience of settlements in the multilateral trading system governed by the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO). However, the West’s weaponisation of the US dollar has prompted Global South countries to pursue local currency settlements, a dynamic that will likely upend the dollar-dominated system of international trade settlements and payments, weaken or even end the dollar’s status as the key global currency, and reshape the international financial order.

Second, although many in the de-dollarisation debate advocate for replacing the US dollar with the Chinese renminbi (RMB) as the new key global currency, this is unlikely to happen in the short term. Most supporters of RMB settlements are large energy exporters with large trade surpluses with China. Although the internationalisation of the RMB is set to take off in the future, unless the weaponisation of the US dollar intensifies or the credibility of the US dollar is destroyed by a severe debt crisis in the US, it is unlikely that the RMB will replace the US dollar in the short term due to various objective conditions. In the present period, it is more likely that the dollar’s global status will be weakened by the various de-risking efforts of the Global South countries and that the international financial system will transition from the dominance of the US dollar to the coexistence of several major currencies, including the US dollar, RMB, euro, and the BRICS currency.

Third, in a situation where several major currencies coexist, the greatest common denominator for joint action among the Global South countries is establishing a reference value for settlements in their local currencies and an exchange platform to support such settlements. The great demand for such a valuation reference provides an opportunity for the creation of a BRICS currency. Most Global South countries do not wish to choose sides in global political-economic matters but seek a multipolar world and the creation of international platforms that are more equal and fair, and that better represent their interests so that they can hedge against the risks posed by the current international economic order. In advocating for de-dollarisation, these countries aim to mitigate the various risks posed by the US dollar, not to confront it. Therefore, the traditional perspective – i.e., the international financial system must have one dominant currency and, since the dollar is no longer viable, it should be replaced by the RMB – may be inadequate in grasping the crux of the global situation, as the world faces ‘great changes unseen in a century’ (百年未有之大变局, bǎinián wèi yǒu zhī dà biànjú).

The Russia-Ukraine war is profoundly changing the international order: on the one hand, Western countries are trying to break away from the unified international economic order led by the United States in the post-Cold War period and return to the landscape of the coexistence of the two confrontational systems during the Cold War period; on the other hand, the Global South countries, through de-risking, have begun to put building a multipolar world into action, which was just lip-service in the past. Whether it is the de-risking of China and Russia by the West or the de-risking of the West by the Global South countries, the common feature is the weakening of the existing Western-dominated international economic order and the promotion of a more multipolar world.

The Impact of Western Sanctions against Russia

This section analyses the relationship between de-risking, de-dollarisation, and the BRICS currency and the impact that Western economic sanctions against Russia have had on this dynamic in the Global South.

(i) International Energy Markets

After the outbreak of the Russia-Ukraine war, both Europe and the United States banned imports of crude oil, refined petroleum products, and coal from Russia, leading to a sharp decline in Russian energy exports to Europe. Russian gas exports plummeted 25.1 percent in 2022 due to European countries’ halting their purchases of Russian gas and the sabotage of the Nord Stream pipeline. Europe’s energy decoupling has forced Russia to accelerate its efforts in Asia-Pacific markets. In 2022, China’s imports of Russian pipeline gas and liquefied natural gas (LNG) soared 2.6 times and 2.4 times to $3.98 billion and $6.75 billion, respectively.^[1]

Similar trends have taken place in the oil sector. Prior to the war, in 2021, 8 percent of US oil imports came from Russia; after the outbreak of war, the US banned imports of Russian energy.^[2] In December 2022, the European Union (EU), Group of Seven (G7) countries, and Australia imposed an embargo on Russian oil and a price cap on Russian exports. This forced Russia to reduce the price of its oil significantly and shift its export focus to the Asia-Pacific region. India, China, and Turkey, all major energy consumers, have significantly increased their imports of Russian crude oil.^[3] In 2022, China’s imports of Russian crude oil increased by 8 percent, making Russia the second largest supplier of crude oil to China.^[4] India’s imports of Russian oil saw the largest increase, increasing by more than 9 percent in the months following the imposition of the Western embargo in December 2022. In addition, in 2022, China’s coal imports from Russia surged 20 percent to 68.06 million tonnes, while India’s imports of thermal coal from Russia grew by nearly 15 percent to 161.18 million tonnes.^[5]

(ii) Supply Chain Restructuring

Many US-origin technologies have been restricted from being exported to Russia and Belarus. US exporters must apply for licences to export a range of technologies to Russia, including computers, communications equipment, sensors, lasers, navigation, and aerospace and propulsion technology. The sanctions against Russia also restrict the export of products from other countries that use such US technologies.^[6] Since February 2022, European exports to Russia affected by the sanctions have amounted to 43.9 billion euros, including products related to quantum computers, advanced semiconductors, electronic components and software, machinery and transport equipment, energy industry equipment, technology, and services, aviation and space industry goods and technologies, maritime navigation and radio communication technology, dual-use goods, luxury goods, and more.^[7]

The massive withdrawal of US, European, Japanese, and South Korean companies from Russia has created opportunities for companies from other countries to enter the Russian market. For example, Samsung and Apple’s joint share of the Russian mobile phone market, which was as high as 53 percent at the end of 2021, fell to only 3 percent by the end of 2022. Meanwhile, the share of Chinese mobile phones in the Russian market rose from 40 percent at the end of 2021 to 95 percent at the end of 2022.^[8] A similar trend was observed in the Russian auto market. Between 2021 and 2022, Germany’s BMW and Mercedes-Benz disappeared from the Russian market, while China’s Chery, Great Wall Motor, and Geely rose to the top ten best-selling passenger car brands. Despite the sharp overall contraction of the Russian auto market due to economic sanctions, sales of Chinese-made cars in Russia grew by 7 percent in 2022.^[9]

(iii) Financial Risk Avoidance

After the outbreak of the war, the West expelled Russia from the SWIFT international banking communications system, and European and American banks froze as much as 300 billion euros of the Russian central bank’s foreign exchange reserves and 21.5 billion euros of assets belonging to sanctioned Russian individuals.^[10] In the past, the US dollar was trusted globally as a ‘safe haven currency’, but this trust has been broken by the Western financial sanctions against Russia, which have de facto constituted a ‘selective default’.^[11] Many developing countries, including traditional US allies such as Saudi Arabia, have begun to fear that, should they ever find themselves on the opposite side of the US in a geopolitical dispute, their dollar-denominated assets will not be safe. Countries like India have also argued that sanctions against Russia have led to volatility in food and energy prices, harming the world’s poor. As the US-China relationship has become increasingly tense, concerns have also grown regarding the potential crises that US sanctions against China could trigger in the future. Although the US dollar is the world’s most popular trade settlement currency, China is the world’s largest trading nation, and in the face of this international political and economic uncertainty, some countries have argued that it would be better to reduce the use of the US dollar in global trade rather than reduce trade with China.^[12]

The case of Switzerland illustrates how the behaviour undertaken by other countries to avoid the financial risks posed by sanctions against Russia can harm the West’s financial sector. Before the war, roughly 80 percent of Russian commodities were traded through Switzerland, amounting to $11 billion, while 30 percent of private Russian assets held abroad were located in Switzerland. Since the war broke out, Switzerland has abandoned its neutrality and participated in the EU’s financial sanctions against Russia. Credit Suisse alone froze $19 billion worth of Russian assets, more than a third of all Russian assets in Switzerland, while the Swiss government froze more than $8 billion worth of Russian and Belarusian assets. Swiss authorities also required local banks to report deposits of over 100,000 Swiss francs belonging to Russian individuals and prohibited them from accepting new deposits exceeding this amount from Russian individuals. By November 2022, 7,500 people were on the list, involving CHF 46.1 billion in deposits.^[13] Due to these sanctions, wealthy individuals worldwide began to move their funds out of Switzerland. For instance, Credit Suisse experienced severe client divestment, reaching $119 billion in the final quarter of 2022 alone. The divestment crisis was compounded by the subsequent collapse of several US banks and the refusal of Credit Suisse’s largest shareholder, Saudi National Bank, to increase its capital input. As a result, Credit Suisse faced insolvency and was ultimately acquired by UBS at the behest of the Swiss government. Leading Swiss banker Josef Ackermann noted that the Swiss government had put the rule of law and property rights at risk when it made individuals pay for the actions of the Russian government. Citizens of other countries would assume that the Swiss government would do the same in the future to make them pay for the wrongs done by their homeland governments. Confiscating the assets of Russian individuals has been devastating for the Swiss financial industry.^[14]

Financial Sanctions and Barter Trade

The impact that Western economic sanctions against Russia have had on the Global South is intertwined across three areas: energy markets, supply chains, and international finance. Accordingly, the Global South’s de-risking behaviour is closely related to these three areas.

After the West banned Russia from the SWIFT system in March 2022, Russian energy exports could no longer be settled in dollars or euros. Russia countered by requiring hostile countries to purchase Russian energy in rubles. If these countries did not have rubles, they had to open accounts in Russian banks to deposit dollars and euros, which were then converted to rubles for payment. Since European countries were unable to completely decouple from Russian gas immediately for most of 2022, they had to convert their euros and dollars into ruble payments. In this way, the ruble’s exchange rate was strongly supported for a time. At one point, its value was even higher than it had been before the war.

The weaponisation of the US dollar and Russia’s countermeasures have given the Global South countries a new perspective on the relationship between the international financial and trading systems. First, the dollar’s value as a currency for international trade settlements has become less important for countries facing Western economic sanctions and experiencing major geopolitical crises or wars because these countries cannot buy what they want even if they have dollars. Second, in such extreme environments, a country can only trade with others for critical resources if it has energy, resources, or industrial manufacturing capacity.^[15] Third, to reduce the risk of being unable to make purchases in the face of sanctions or warfare, it is necessary to build strong cooperative relationships in peacetime with various economies that can provide important goods. Finally, trade between major producers of energy, resources, and manufactured goods, if settled in their currencies, can enable them to significantly reduce their dependence on the US dollar.

With Russia’s energy exports shifting to the Asia-Pacific and competition intensifying among energy exporters for this regional market, major exporters of energy and resources are expanding their cooperation with China for several reasons. First, these principal energy and resource exporters also import vast quantities of manufactured goods from and have trade surpluses with China. To bundle strategic interests, these countries are more willing to settle trade in RMB. For example, China has signed or intends to sign, agreements to settle bilateral trade in RMB with major energy resource countries – such as Saudi Arabia, Russia, Brazil, Iraq, Iran, and Argentina – all of which have tens of billions of dollars in trade surpluses with China and can use RMB to purchase more manufactured goods and infrastructure directly from China. Second, under extreme conditions, such bilateral trade can be bartered. As such, for these energy-rich countries, cooperation with China, a manufacturing powerhouse, can reduce the risk of being unable to obtain vital supplies should they encounter a major international crisis. Third, through cooperation with China, these countries can combine bilateral trade in energy resources with their medium- and long-term economic development needs, obtaining from China the investment, technology, and infrastructure necessary for industrial development, particularly high-tech industries.

In December 2022, the Gulf Cooperation Council (GCC) and China held their first joint summit in Saudi Arabia. The joint statement issued at the conclusion of the summit marked the beginning of a paradigm shift in strategic cooperation between the Gulf states and major countries outside the region. Since the Second World War, strategic cooperation between the Gulf states and the United States has taken the form of an ‘oil-for-security’ exchange: the Gulf states ensure the supply of oil to the US, which, in turn, provides security for the states, including the sale of massive amounts of weapons; the Gulf states use their oil revenues to purchase a large number of US treasury bonds and invest in US dollar-denominated assets, thus creating a petrodollar system.^[16] As the US began to increasingly exploit its offshore oil and gas reserves as well as shale oil, it not only drastically reduced its dependence on energy from the Middle East – thereby reducing the strategic value of the Gulf region to the US – but also became a competitor to the Gulf states in the international energy market.^[17] Before the Russia-Ukraine War, the US and Gulf states had already begun to drift apart. After the outbreak of the war, the decoupling of Europe from Russian energy and Russia’s shift to the Asia-Pacific energy market have greatly accelerated this trend. Unlike the oil-for-security cooperation between the Gulf states and the United States, cooperation between the Gulf states and China is based on ‘all-round cooperation in the energy sector’: China invests in the Gulf states’ downstream energy industries, while the Gulf states use their expertise to cooperate with China in the development of its upstream energy industries, including joint oil and gas exploration and extraction in the South China Sea. A new ‘oil-for-development’ paradigm is replacing the old ‘oil-for-weapons’ paradigm.^[18] This new paradigm is reflected in the recent consensus in cooperation between China and countries such as Saudi Arabia, Russia, and Brazil.^[19]

The US-dominated international economic order is based on finance, emphasising the dominance of the US dollar as the world’s reserve currency. The new international economic order that is being promoted by the Global South, including China, is based on trade – exchanging energy and resources for manufactured goods and infrastructure. This new international economic order will be based less on currencies and more on commodities, which will lead to higher inflation rates in the West. During the Nixon administration, then US Treasury Secretary John Connally famously remarked, ‘The dollar is our currency, but it’s your problem’. According to former Credit Suisse analyst Zoltan Poszar, this is now being replaced by a new motto: ‘Our commodity, your problem’.^[20]

RMB or Common Currency?

Where is the Global South’s de-dollarisation trend heading? In the current debate, many believe that China’s RMB will replace the US dollar, while others have high hopes for the development of a common currency backed by oil. Both routes have their challenges.

Let us first look at RMB internationalisation. From a geopolitical perspective, this is widely seen as a major threat to the US dollar. There is no doubt that the US opposes the internationalisation of the RMB and pressures other countries on this issue. A recent example is Saudi Arabia, which has indicated that it will consider using other currencies to settle its energy trade but has yet to issue an official statement on the matter. Meanwhile, in March and April 2023, the Indian government explicitly opposed the country’s companies settling energy imports from Russia in RMB. In July, under pressure from Russia, India had to pay a small portion of energy imports in RMB. However, this is because, under Western economic sanctions, Russia exported oil to India at a very low price; hence, India’s huge benefits greatly outweighed its geopolitical concerns about the RMB’s expanding influence. Energy resource exporters are relatively more receptive to settling in RMB because they all have large trade surpluses with China. For countries with large trade deficits with China, settling in RMB would not address their settlement cost concerns with the US dollar, and it actually would be more costly.

Moreover, replacing the dollar with the RMB would not resolve the paradox that is responsible for the dysfunctionality of the international monetary system. As the Brazilian economist Paulo Nogueira Batista Jr. pointed out, ‘[t]he fundamental contradiction […] lies in the fact that the international system depends on a single national currency, managed according to the interests of the state that created it’. The United States tends to formulate financial policies to serve its interests, which are not always in line with those of the international financial system and, in many cases, the two conflict with each other. Thus, even if the Global South countries continue to work to de-dollarise, they would not support another country’s currency assuming the US dollar’s role as the new key currency.^[21]

So far, RMB internationalisation has not taken the US dollar as a reference point but has followed its own path. First, the RMB has not achieved free currency convertibility, without which it cannot provide other countries with the same efficiency and ease of use in international trade settlements as the dollar. Second, for a national currency to become a major world reserve currency, the home country must have a developed financial market, sufficient financial instruments available for investment, and capital account liberalisation. However, China’s financial sector remains relatively underdeveloped and the country has always regarded national financial security as a top priority. Third, as the key global currency, the dollar provides liquidity to other countries. However, as a manufacturing giant with a large population and a high pressure to maintain employment, China cannot provide liquidity to other countries through a large current account deficit as the United States does. Under these internal and external constraints, the impact of different RMB internationalisation paths on the Chinese economy remains to be explored.

There is a risk in using local currency settlements for bilateral trade in the Global South: if the deficit country’s currency underperforms, the surplus country is likely to give up its long-term holdings; if the surplus country chooses to sell, the deficit country’s currency is at risk of further depreciation.^[22] While there are certainly real economic fundamentals and the impact of US interest rate hikes behind the recent RMB depreciation, another important reason is the effect of currency swaps and RMB settlements, given that the RMB is not freely convertible. For example, Russia suddenly possesses a large amount of RMB through its energy trade surplus with China, but there is no channel for these RMB to flow back to China because China does not have a developed financial market or sufficient financial instruments for Russian investment. Under these conditions, it becomes a reasonable choice for Russia to maintain the ruble’s exchange rate either by selling large sums of RMB or by selling RMB acquired at parity for dollar profits against the backdrop of the dollar’s appreciation against the RMB. As long as China’s financial markets and instruments are not developed to provide sufficient channels for the return of the ‘oil RMB’ to China, countries with large surpluses will have an incentive to sell RMB for other currencies, thus creating pressure to devalue the RMB. Whether China is willing to bear this burden of RMB internationalisation in the long term remains to be seen.

Now, let us turn to the prospects for a common BRICS currency. The strength of the BRICS has indeed grown rapidly, laying a solid foundation for launching a BRICS currency. For reference, when the G7 was founded in the 1970s, the group’s share of global gross domestic product (GDP) was as high as 62 percent; today, the BRICS countries have surpassed the G7 in terms of their respective shares of global GDP, measured at purchasing power parity (PPP). According to the International Monetary Fund (IMF), in 2021, the BRICS collectively accounted for 31.5 percent of global GDP (PPP), whereas G7 accounted for 30.7 percent.^[23] The IMF projects that by 2028, the expanded BRICS10 (including Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE) will account for 37.9 percent of global GDP (PPP), with the G7’s share falling to 27.8 percent.^[24] With major energy exporters such as Saudi Arabia, Iran, and the UAE having joined the BRICS cooperation mechanism in 2024, the likelihood of a BRICS currency has further increased. In the future, if the BRICS can cooperate with OPEC in developing a BRICS currency, such an initiative may surpass the limitations of the BRICS member countries and greatly enhance the material basis of a BRICS currency.

However, there are still significant challenges to issuing a BRICS currency underpinned by oil. First, the underpinning of the US dollar by oil is guaranteed through the exclusivity of the US-Saudi agreement to price oil only in US dollars. Countries use the US dollar as a foreign exchange reserve to ensure that their energy imports are not subject to exchange rate fluctuations, thus indirectly securing the US dollar’s status as a key global currency. Would a BRICS currency be able to establish exclusivity in oil and gas pricing and settlements in the international energy market, thus supporting its transformation into a reserve currency for countries? Unless the BRICS countries want to go to war with the United States, it seems unlikely. Would it be possible for a BRICS currency to become one of several currencies for oil and gas pricing and settlements? The answer is yes, but a BRICS currency would still face fierce competition from the US dollar, which has the world’s largest financial markets and most developed financial instruments, especially the massive US Treasury market. Second, developing an oil-based BRICS currency is easier said than done. To underpin a currency with oil, a fixed exchange rate must be established between a certain unit of oil and a certain unit of the currency. Yet, even if a fixed exchange rate is established between a BRICS currency and oil, when the price of oil rises in the international market, who will BRICS currency holders turn to for oil at the fixed exchange rate?^[25] When designing the Bretton Woods system, John Maynard Keynes had also envisioned the establishment of an exchange rate between oil and the dollar, but he found that the types and quality of oil were too numerous and varied too significantly from country to country, so this was not operational in practice. In the end, he decided to use gold.^[26]

Local Currency Settlement, Reference Values, and Exchange Platform

For Global South countries, the greatest common denominator for future joint action is the demand for local currency settlement, which is shared across the various de-dollarisation propositions put forward today. In recent years, several agreements have been reached between BRICS countries to use local currencies for bilateral trade, including China and Russia, China and Brazil, and Russia and India’s energy trade. Furthermore, in 2023, the Association of Southeast Asian Nations (ASEAN) met to discuss reducing their reliance on the US dollar, Euro, British pound, and Japanese yen for financial transactions and issued a declaration on the promotion of local currency trading schemes. ASEAN plans to expand its cross-border digital payment system further and allow ASEAN countries to trade in local currencies. This will encourage cross-border trade and investment within the ASEAN grouping and reduce the impact of external factors on the regional economy. Southeast Asia is often subject to economic volatility due to abrupt policy changes at central banks in the United States and other countries and regions; as such, ASEAN countries would like to increase the use of local currencies to promote economic stability and reduce the spillover effects of high inflation in developed countries.^[27]

For various reasons, it is difficult to establish a direct and relatively stable exchange rate between two currencies with limited international circulation. Therefore, when making local currency settlements, it is often necessary to resort to a reference to help the parties establish their relative values vis-à-vis each other. This creates an opportunity for the development of a BRICS currency. If a relatively stable exchange rate is established between a BRICS currency and the sovereign currencies of the respective BRICS member countries, it can serve as a reference value between the currencies of the different member countries.

Russia and Brazil, both proponents of de-dollarisation, have put forward different views on whether and how to anchor a BRICS currency. On the one hand, Russia has favoured anchoring a BRICS currency in gold, establishing an exchange rate between a unit of BRICS currency and a unit of gold. The challenge with this option is that central banks would have to stockpile large amounts of gold.^[28] US financial expert James Rickards, inspired by the Russian view, has instead suggested that a BRICS currency use gold only as a reference value and not to underpin the currency, thereby allowing BRICS central banks to avoid the need for gold redemption for BRICS currency holders. Such a BRICS currency would not replace the US dollar but coexist with it and reflect its value to a large extent with the help of the US dollar. Since gold is denominated in dollars on the international market, the fixed relationship between a BRICS currency and gold will also be reflected in the dollar-denominated price of gold.^[29] According to Rickards, the dollar will depreciate in the long-term; however, even if the dollar does depreciate in the future, this would not negatively impact a BRICS currency because a depreciation of the dollar would lead to an appreciation of gold and, at the same time, an appreciation of a BRICS currency. Under this framework, the US dollar would bear the burden of being the key global currency, while the BRICS currency would merely need to coexist and reap the benefits. As the BRICS grows to thirty or forty members, there would be no major obstacles to the internal circulation of such a BRICS currency; the diversity of trade among the BRICS members would be sufficient to support the currency’s settlement efficiency and ease of use.^[30]

On the other hand, Nogueira Batista, former vice president of the New Development Bank (NDB), has put forward an influential view that opposes anchoring a BRICS currency in gold or any other commodity. Instead, it would be preferable to build a BRICS currency as a basket of currencies similar to the IMF’s Special Drawing Rights (SDR), in which the relative weight of each BRICS member’s currency would be determined according to its economic strength. Such a BRICS currency would not need to replace national currencies – countries would retain their monetary sovereignty – and would not require the BRICS to establish a unified central bank – the New Development Bank (NDB) could undertake the issuance of the currency.^[31] How could this BRICS currency be widely accepted without an anchor asset that is freely convertible at a fixed exchange rate? Following Nogueira Batista’s logic, the credit of the BRICS currency would be backed by the currencies of the respective BRICS member countries. BRICS currency holders would have the right to freely convert it into their currencies at any time. The NDB would ensure the convertibility of the BRICS currency, relying on its reserves and, when necessary, seeking additional funds from countries that issue internationally liquid currencies to support the BRICS currency. Another confidence-boosting option would be for the NDB to issue BRICS bonds of varying maturities and interest rates, while allowing the BRICS currency to be freely convertible into BRICS bonds.^[32]

Initially, a BRICS currency is likely to serve only as a unit of account, providing a reference value for the BRICS member countries when settling bilateral trade in their local currencies, thus reducing the current cost of settling in US dollars. A BRICS currency would be freely convertible with the currencies of BRICS member countries but would lack the systemic characteristics of a key currency like the US dollar. Nonetheless, it could still help the BRICS countries hedge some of the risks the US dollar poses. The Euro was born partly out of Europe’s desire to avoid the negative externalities of US financial policy. While the Euro has been far from successful in competing with the dollar as a key international currency, it has been successful in helping to insulate the eurozone from the dollar cycle.^[33] It may be easier to establish political consensus among the BRICS countries around a currency that coexists alongside the US dollar. At the 2023 BRICS summit, both Russian President Vladimir Putin and Brazilian President Luiz Inácio Lula da Silva actively pushed for de-dollarisation; however, the host government, South Africa, did not include de-dollarisation as an official topic under pressure from the US, while India explicitly opposed the option of a head-to-head confrontation with the US. With Russia hosting the 2024 BRICS summit, it can be expected that the Russian government will push hard for de-dollarisation. Yet, as long as the BRICS decision-making process adheres to the principle of consensus, the position of countries such as India is bound to abort any radical programmes. Given the BRICS international political structure, a BRICS currency is more likely to move forward if it has a relatively straightforward initial functionality – emphasising only the basic function of serving as a unit of account to facilitate local currency settlements in trade among BRICS countries – rather than an initiative that more deliberately confronts the US dollar.

Observers tend to believe that an initial BRICS currency will not be used for personal consumption but only for international trade settlements between banks. It is likely that a BRICS currency will be launched as a digital currency and will be linked to the digital currencies actively promoted by various countries’ central banks.^[34] Therefore, creating an international platform to support the exchange of digital currencies will not only be important for a BRICS currency, but will also be necessary infrastructure for the future international financial system. In 2021, the Hong Kong Monetary Authority, the Digital Currency Institute of the People’s Bank of China, the Bank of Thailand, and the Central Bank of the United Arab Emirates jointly launched a multi-central bank digital currency bridge (mBridge), a cross-border payment system that can be used as an alternative to SWIFT. During its trial period from August to September 2022, the four central banks issued $12 million worth of digital currencies on mBridge, while twenty commercial banks used the digital currencies on the platform on behalf of their clients to conduct more than 160 payments and foreign exchange (FX) and payment versus payment (PvP) transactions, with a total value of $22 million.^[35]

This digital currency exchange platform, underpinned by blockchain technology, is of great significance to Global South countries. High-value, high-volume wholesale international payments between financial institutions are currently a major component of cross-border transactions. This wholesale interbank FX market provides incentives and liquidity for a wide range of retail operations. However, this form of FX trading is subject to settlement risk. As it still takes one to two days to complete a cross-border payment, when one party has completed the payment, the other party will not have immediately received it. This risk affects up to $6.6 trillion worth of transactions per day in the international FX market, and more than half of the daily cross-border transactions lack insurance mechanisms. In addition, the system does not work around-the-clock, which also inconveniences both sides of the transaction. PvP is an important solution as it eliminates settlement risk and reduces friction by ensuring that both parties confirm and receive payments simultaneously. Moreover, mBridge functions around-the-clock, year-round, and both transaction parties decide when to complete the settlement. Central banks in all countries have a huge demand for this service. While some developed markets already offer PvP services, they do so in a limited number of currencies, completely ignoring the ever-growing currency demands from the Global South. Replacing the services provided by traditional banks will require shifting essential infrastructure facilities into a completely new processing model, utilising distributed ledger technology and digital currencies. Banks in many developed countries are not yet ready to meet these challenges.^[36]

Discussion

The pendulum movement of globalisation, the hegemonic cycle, and technological revolution have brought the world into an era of ‘changes unseen in a century’. How should we interpret the Global South’s de-risking and de-dollarisation in this period? How should we understand the expansion of the BRICS and its impact on the future international order? And how can we identify the trajectory and future direction of China’s exploration in the twenty-first century?

First, as de-dollarisation continues, a conflict may arise in the future between a multi-currency financial system and the post-war multilateral trading system, further intensifying de-globalisation. The US dollar has various disadvantages as the global reserve currency, but its settlement efficiency and ease of use have made it an indispensable component of the post-war multilateral trading system. In the future international financial system, while countries may shun the dollar or even adopt barter trade as a transaction form, they will not use an inconvenient currency as their primary reserve currency. In the era of globalisation, cost and quality determined the flow of goods and services. Today, the declining influence of the US dollar signals the demise of this efficient business model, and the flow of goods and services begins to depend on the willingness of exporting countries to accept a particular country’s currency. When countries no longer accumulate surpluses in their current accounts as a means of acquiring a reserve currency, they may resort to restricting trade and employing other distortionary methods to maintain balance in bilateral trade.^[37]

Second, the West’s weaponisation of the US dollar after the outbreak of the Russia-Ukraine War and the de-dollarisation efforts of Global South countries indicate that both developed and developing countries are frustrated with the post-Cold War international order established by US hegemony. The West’s attempts to decouple or de-risk from China and Russia are shaking the dollar’s hegemonic status. Meanwhile, the attempts to return to a Cold War situation are likely to be counterproductive in the end, seriously weakening the West’s own position in the international order. This is because the decoupling of the West and the de-risking of the Global South are giving rise to a ‘systemic rival’ that surpasses the Western alliance in terms of population, the size of the real economy, energy, resources, and industrial manufacturing capacity. The balance of power between the West and the Global South countries today is very different from the balance that existed during the Cold War between the West and the former Soviet bloc.

Third, technological development will be a critical enabler of local currency settlements for Global South countries in the future. Both mBridge and a future BRICS currency will support transactions through digital currencies and use blockchain as the underlying technology. To move away from the high cost of traditional banking services in developed countries, Global South countries have been building a new generation of financial infrastructure facilities based on contemporary information technologies.

Finally, China’s long exploration of a relationship between its own development and the international environment seems to have found a clear outline. From its full integration into Western-dominated globalisation at the end of the twentieth century and the beginning of the twenty-first century, to its Belt and Road Initiative (BRI) aimed at promoting Eurasian economic integration over the past decade, to the establishment of the Shanghai Cooperation Organisation (SCO) and the BRICS mechanism, China has ultimately prioritised cooperation with Global South countries.

The geographical distribution of the six countries invited to become members indicates the priorities of the BRICS and China in their future development strategies. First, five of the six invitees are located around major transport routes such as the Strait of Hormuz, the Red Sea, and the Suez Canal, suggesting that the BRICS countries, including China, are placing more emphasis than ever on the Middle East as a hub connecting Asia and Africa. In China’s previous spatial projections of the BRI, Europe was the western terminus and Southeast Asia was the important southeastern end. However, under the conditions of the United States’ ongoing Indo-Pacific strategy and Europe’s tightening policy, China not only mediated the historic rapprochement between Saudi Arabia and Iran in March 2023 but also brought the two countries into the BRICS. Such an emphasis on the Middle East signals that the BRI’s future development will probably tilt even more towards the region. The ultimate aim is to establish a land bridge between Asia and Africa, transforming these two continents into the main arena for collective actions by the BRICS countries in the Global South.

Second, the invitation of energy giants such as Saudi Arabia, Iran, the UAE, and Argentina represents a shift in the Global South, beyond individual initiatives and moving towards institutionalised efforts on a global scale to de-risk from the weaponisation of the US dollar. This development lays a significant foundation for the creation of a BRICS currency. The expanded BRICS includes six of the world’s top ten oil producers in 2022 (which together accounted for 40 percent of the world’s oil production) and five of the world’s top seven oil consumers in 2021 (which together accounted for 30 percent of the world’s oil consumption.^[38] With such a concentration of production capacity and consumption, the creation of a BRICS currency – first and foremost for energy trade among member countries – seems to be on the horizon.

Nevertheless, China took a low-key stance on de-dollarisation at the 2023 BRICS summit. Unlike Putin and Lula, who explicitly advocated de-dollarisation, President Xi Jinping, when speaking on the topic, only said, ‘We need to fully leverage the role of the New Development Bank, push forward reform of the international financial and monetary systems, and increase the representation and voice of developing countries’.^[39] This relatively moderate stance is much closer to that of most Global South countries. Even today, China still owns $830 billion in US Treasury bonds and $2 trillion in other dollar-denominated assets. In this sense, China remains embedded in an international financial system in which the US dollar is the key currency. Also, amid the intensifying competition between China and the United States, holding US Treasury bonds remains one of the few vital leverage points that China has to respond to US pressure. Constrained by these circumstances, China is unlikely to aggressively pursue de-dollarisation. Losing its leverage could not only make it more difficult for China to counterbalance US strategic pressures but could also lead to mutual harm in the event of a strategic miscalculation by the United States.

Since the US ‘pivot to Asia’, China’s response and international strategy – which included the creation of the BRI – has consistently kept open two possibilities: hedging or confronting. A century ago, the resonance of the three major historical cycles of globalisation, hegemony, and technological revolution pushed the world into an abyss. Today, a situation has again emerged in which these three cycles are simultaneously exerting influence: the pendulum of globalisation is shifting from market fundamentalism to protectionism, the hegemonic cycle is entering a phase where emerging powers are approaching and challenging the hegemonic power, and the technological revolution is rapidly altering the international political and economic power dynamics. A century ago, facing the crises created by these three primary cycles, nations chose confrontation, resulting in the ultimate tragedy of two World Wars and immense human suffering. Today, war is raging in Ukraine and elsewhere, while the weaponisation of the US dollar and the de-risking efforts of the Global South are accelerating the collapse of the post-Cold War unipolar world.

As the wheels of history once again bring the world to a pivotal crossroads, the Global South’s convergence towards the BRICS cooperation mechanism provides China with a new opportunity to hedge against growing dangers. Positioned within an international organisation featuring the most powerful developing countries, wielding a BRICS currency that coexists with the US dollar, and commanding significant global capabilities in energy, resources, and industrial manufacturing, China will enhance its ability to drive changes in the international political and economic order. So too will the representation and influence of the Global South increase in international affairs.

Bibliography

Author’s Notes