Why Trump’s threat to punish BRICS+ over de-dollarisation is premature

President-elect Donald Trump recently warned BRICS+ — a group of nine developing economies constituting more than 37 percent of the global economy — against creating a rival currency to the “mighty US dollar”.

“The idea that the BRICS countries are trying to move away from the Dollar while we stand by and watch is over,” Trump wrote on social media, threatening 100 percent tariffs that would make it effectively impossible for the countries to sell any goods and services in the US.

The economic bloc originally consisted of Brazil, Russia, India, China and South Africa. It recently admitted Iran, Egypt, Ethiopia and the UAE as members.

With the possible inclusion of Saudi Arabia, BRICS+ is set to become an unrivalled commodities trader as its members would control 42 percent of global oil production and 35 percent of total oil consumption.

The alarming tone of Trump’s statement suggests that a BRICS+ currency is just around the corner, ready to upend the decades-old dollar-dominated system of global payments.

However, there is little progress on that front, with BRICS+ members showing little interest in setting up a joint currency to replace the dollar in the immediate term.

Analysts say that none of the member countries are inclined to or ready for a common currency.

“The BRICS+ currency is a far-fetched idea,” says Herbert Poenisch, senior fellow at Zhejiang University and former senior economist at the Bank for International Settlements.

Speaking to TRT World, Poenisch says Trump’s statement is meant for domestic audiences.

“Even Putin admitted at the Kazan summit that a common (BRICS+) currency is years away,” he says while referring to the Russian president’s statement from two months ago in which he acknowledged there were “no plans to create a special system” for cross-border payments for trade among BRICS+ economies.

Poenisch says the idea of a euro-like currency for BRICS+ economies is not realistic mainly because of the diversity of the member countries.

He says Germany acts as the paymaster within the Eurozone, which consists of 20 homogenous countries with a strong political will to surrender their monetary autonomy for a common currency.

In contrast, BRICS+ has no paymaster and China is in no mood to take on the role for a common currency, he says.

Only weaker countries within the economic bloc are pushing for a joint currency as they look for a strong paymaster to help them, he adds.

Why is the dollar the dominant currency?

The dollar maintains its singular status worldwide because of its relative stability and the creditworthiness of the US government.

With a share of 88 percent in global foreign exchange transactions, the dollar is the universally accepted currency for trade. Nearly 60 percent of foreign reserves holdings worldwide are dollar-denominated, making it the world’s preferred reserve currency.

Its wide acceptability makes it easier for countries, especially those with less stable currencies, to transact without worrying about exchange rate risks. Extremely large transactions can occur daily without significantly affecting the exchange rate, which reduces transaction costs for countries with volatile currencies.

Another key reason for its popularity is that major commodities like oil and gold are priced in the dollar. This creates a standard benchmark for global trade, further reinforcing the dollar’s use in transactions.

Why does the US want the status quo to continue?

Trump wants the world to stick to the dollar as everyone’s trade and reserve currency mainly because it means a perpetually low borrowing cost for the US government.

The US borrows heavily from the rest of the world mainly by issuing treasury securities, considered a “safe haven” asset by global investors.

A huge international demand for US treasuries allows Washington to borrow funds at extremely low interest rates.

Because the dollar is widely used in trade and financial transactions, the US can sustain larger trade deficits without immediate pressure to balance its accounts. This flexibility allows the US to run never-ending deficits to fund domestic consumption and investment, thus increasing the size of its overall economy.

The dollar's dominance in trade and finance reinforces US geopolitical power. As was witnessed in the case of Russia, sanctions enforced through the dollar's role in global financial systems provide the US with a powerful tool to influence global behaviour.

What’s driving the anti-dollar sentiment?

The demands for the so-called de-dollarisation of the international trade and payments system have become louder in the last decade or so. That is because the US government has resorted to a more frequent use of the dollar as a tool to punish its foes.

The US froze Russian foreign exchange reserves in February 2022 in the most aggressive weaponisation of the dollar to date. As a result, Russia’s central bank assets of roughly $300 billion currently lie immobilised in European capitals.

Russia hasn’t been alone in getting the short end of the dollar stick. The US has also raided the central banks of Libya, Iran, Venezuela and Afghanistan and withheld their foreign exchange reserves on one pretext or another.

“BRICS+ countries are a bit alarmed at the way the US and other Western countries have weaponised their financial system, weaponised their financial powers,” says Gulshan Sachdeva, professor and Jean Monnet Chair at the Centre for European Studies in New Delhi’s Jawaharlal Nehru University.

“They are fully aware that that kind of possibility is there, that the West could basically create a serious problem for them (by blocking) all international transactions, as they have done for Russia. They are trying to build safeguards,” he tells TRT World.

But that doesn’t mean that the economic bloc is aiming for its own currency anytime soon, he says. Almost all countries should be at a similar level of economic development in an optimal currency area, he adds.

“Depending on political rhetoric, people will keep using it. President Putin may use it, President Trump has used it. But the way BRICS+ has evolved so far, I don't see any realistic possibility in the foreseeable future,” he says.

“India may need more fiscal deficit than, say, China… It means you have to agree on a certain number which, at the moment, doesn’t exist. So I don’t see a political or economic rationale for a single currency within BRICS+.”

Why don’t countries use their own currencies for trade?

India has been using its own currency to pay for Russian oil imports since the start of the Russia-Ukraine war. That’s mainly because Russia is under Western sanctions, which stop it from making transactions in major currencies or using SWIFT, the mainstay of the global payments network that banks rely on to process cross-border trade.

Russian exports to the world’s fifth-biggest economy grew six-fold in just two years, from less than $10 billion in 2022 to over $61 billion in the 2024 fiscal year ending in March.

Indian banks circumvent the US sanctions by using the Indian rupee instead of the dollar to pay for imports of Russian goods, mainly crude oil.

But the unusual payment mechanism is far from sustainable. Russian banks end up with loads of Indian currency. But unlike the dollar that’s universally accepted as a medium of exchange, there are few takers of the Indian rupee outside of India.

The difficulty of converting the Indian rupee into dollars makes the post-February 2022 spurt of bilateral trade unsustainable in the long term.

A somewhat similar problem exists in the case of China and other BRICS+ countries — each of them trades heavily with China but little with other member countries.

China: the reluctant paymaster

In order for the renminbi to grow into the role of the official BRICS+ currency, China will have to provide credit in renminbi to countries like India and South Africa that run trade deficits.

That will mean setting up institutions, bridging liquidity shortfalls and providing a reserve facility to deposit surplus funds, Poenisch says.

In addition, it would need to remove obstacles to the “fungibility” – or ready conversion – of the renminbi.

But doing so would increase the pressure on China to liberalise its financial account—something it has been resisting for decades.

Liberalising the financial account, which records transactions between residents and non-residents, could possibly lead to large-scale capital outflows from China. It will put downward pressure on the renminbi, depleting its foreign exchange reserves.

“China wants to control the onshore and offshore renminbi market. It will lose control if it becomes the paymaster,” Poenisch says.

New payment mechanisms as opposed to a common currency

BRICS+ members are shifting their focus away from a common currency and towards new cross-border payment systems.

According to the Dollar Dominance Monitor of the Atlantic Council, China is leading this effort by accelerating its development of the Cross-Border Interbank Payment System (CIPS)—a renminbi settlement mechanism.

As opposed to the Western-backed SWIFT that facilitates trade in dollars, CIPS enables direct payments in yuan between China and other countries.

To ensure that the countries importing stuff from China use the Chinese currency instead of the dollar, Beijing has been opening “swap lines” with the central banks in BRICS+ nations.

Under a swap line, for example, the Russian central bank would exchange its currency with the Chinese central bank.

Subsequently, the Russian central bank will provide the Chinese currency to local commercial banks, which will then facilitate renminbi-denominated transactions on behalf of Russian companies trading with China.

A Chatham House report noted that the renminbi is making progress as a means of global exchange. By mid-2024, 27 percent of China’s total trade in goods was settled in renminbi, up from 17 per cent in early 2022.

Similarly, Russia’s trade with China has doubled in the past couple of years to over $20 billion per month.

All of it is now settled using the renminbi, it adds.