The Dollar Challenge: How Russia Seeks to Reshape the Global Financial System Through BRICS
The Dollar Challenge: How Russia Seeks to Reshape the Global Financial System Through BRICS
10-12-2024
Researcher Shaza Khalil*
Russia has recently become more vocal about its desire to weaken the dominance of the US dollar in the global financial system, especially within the BRICS group (Brazil, Russia, India, China, South Africa). As a country severely punished by the ongoing war in Ukraine, Russia is looking for alternatives to the dollar-based system and is seeking to develop a financial architecture that will protect its economy from external pressures. In this context, Russia proposes the creation of a multi-currency financial system for BRICS member states, aiming to break free from the constraints of the dollar and the current US-led global financial system.
Russia’s proposal is motivated by its need to circumvent Western economic sanctions that have weakened its financial capabilities. The United States and its allies have frozen Russian foreign assets and kicked major Russian banks out of the SWIFT system, a key infrastructure for international payments. Faced with these economic constraints, Russia is seeking to protect itself by reducing its dependence on the dollar and building an alternative system for processing cross-border payments.
The proposed system would enable BRICS countries to conduct transactions in local currencies, bypassing traditional dollar-based international payment systems. This shift involves using distributed ledger technology (DLT) such as blockchain to conduct these transactions. By eliminating correspondent banking networks and bypassing compliance checks associated with US financial oversight, BRICS countries could save billions of dollars annually. This could reduce costs and speed up the processing time of cross-border payments, estimated to save up to $15 billion annually, according to a report by the Russian Finance Ministry and the Bank of Russia.
Potential impact of the proposal
: Changing the dynamics of global trade: If the BRICS countries succeed in implementing Russia’s proposed financial system, the global trading system could see a major shift away from dollar-based transactions. The BRICS countries represent some of the world’s largest economies, and such a cohesive financial system could attract other countries to join, weakening the dollar’s influence in global markets.
Impact on US economic power: The dollar-dominated global financial system allows the US to exert significant control over international finance. If the BRICS countries were to build a multi-currency financial system, it could undermine the US’s ability to use economic sanctions as a foreign policy tool. If the dollar’s role as the world’s reserve currency were undermined, it could weaken US economic power and its ability to impose sanctions unilaterally.
The rise of cryptocurrency alternatives: Distributed ledger technology and cryptocurrencies could emerge as viable alternatives to traditional financial systems. By bypassing central banking systems, this decentralized model gives BRICS countries more autonomy in their financial transactions, potentially setting a global precedent for other regional groups.
Commodity trading hubs: Russia’s proposal also includes creating hubs for trading commodities such as oil, natural gas, gold, and wheat within the BRICS countries. This would shift control of resource trade to the BRICS countries, insulating their economies from US influence and allowing them to settle trade in local currencies rather than the dollar.
The US Role: Resistance or Weakness?
The US is aware of the far-reaching implications of Russia’s proposal and is likely to resist any attempts to diminish the dollar’s influence. Currently, more than 58% of international payments and 54% of foreign trade invoices are settled in dollars. This dominance not only gives the US unparalleled economic influence, but also enhances its leadership role in global trade.
In this context, the United States is likely to adopt different strategies to counter the Russian initiative, which may include:
Diplomatic pressure: The United States could use its alliances with other BRICS countries, such as India and Brazil, that still benefit from the dollar-based financial system, to persuade them not to fully commit to the Russian plan.
Economic incentives: The United States could offer financial incentives or strengthen trade agreements with BRICS countries to ensure their continued reliance on the dollar-based system.
Regulatory countermeasures: The United States could introduce tougher laws or sanctions targeting any financial institutions that participate in the BRICS payment network, especially if such transactions evade existing sanctions.
However, the United States’ ability to counter this proposal will depend on the unity of the BRICS in their commitment to moving away from the dollar. If the BRICS countries fully embrace this alternative, the United States could face significant challenges in maintaining dollar dominance.
Conclusion: The beginning of a multipolar financial world?
Russia’s proposal to create a new financial system for the BRICS countries could reshape global economic dynamics, creating a multipolar financial world where the dollar is no longer the sole dominant currency. Although the plan faces significant challenges, including the reluctance of some BRICS members to completely abandon the US-led system, the proposal represents a clear attempt to challenge the current order.
For the United States, this proposal poses a direct threat to its economic influence on the world stage. Whether the United States will be able to effectively counter these efforts remains to be seen, but Russia’s move signals a shift toward a more fragmented global financial system, in which the supremacy of the dollar is increasingly being questioned.
Economic Studies Unit / North America Office
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