By: Shatha Kalel
Russia has been increasingly vocal about its desire to weaken the dominance of the U.S. dollar in global finance, particularly within the BRICS (Brazil, Russia, India, China, South Africa) group of countries. As a heavily sanctioned country due to its ongoing war in Ukraine, Russia has been searching for alternatives to the current dollar-based system, seeking to develop a financial structure that shields its economy from external pressures. In light of this, Russia is proposing a multi-currency financial system for BRICS members, aimed at breaking free from the constraints of the dollar and the global financial architecture that the United States currently leads.
The rationale behind Russia’s proposal is driven by its need to navigate around Western-imposed economic sanctions that have crippled its financial capabilities. The United States and its allies have frozen Russia’s foreign assets and expelled major Russian banks from the SWIFT system, a critical infrastructure for international payments. Faced with these economic constraints, Russia aims to protect itself by reducing its dependence on the dollar and building an alternative system to process cross-border payments.
The suggested model would enable BRICS countries to conduct transactions using local currencies, bypassing traditional dollar-based international payment systems. This shift would involve utilizing distributed ledger technology (DLT), such as blockchain, to conduct these transactions. By eliminating correspondent banking networks and bypassing the compliance checks inherent to U.S. financial oversight, the BRICS nations could save billions annually. The move could result in cost reductions and faster processing times for cross-border payments, with potential savings of up to $15 billion a year, according to a report by the Russian Finance Ministry and the Bank of Russia.
Possible Effects of the Proposal
A Shift in Global Trade Dynamics: If the BRICS nations successfully implement Russia’s proposed multi-currency payment system, global trade could see a significant shift away from dollar transactions. BRICS represents some of the world’s largest economies, and a cohesive payment system could entice other nations to join, further diluting the dollar’s influence in global markets.
Impact on U.S. Economic Power: The global financial system, long dominated by the dollar, allows the U.S. to exert considerable control over international finance. A new BRICS system could challenge the ability of the U.S. to use economic sanctions as a tool of foreign policy. If the U.S. dollar’s role as the world’s reserve currency is undermined, it could weaken the U.S.’s economic power and its ability to impose unilateral sanctions.
Growth of Digital Currency Alternatives: Distributed ledger technology and digital currencies could emerge as viable alternatives to traditional financial systems. By bypassing centralized banking systems, this decentralized model offers the BRICS countries more autonomy over their financial interactions, potentially setting a global precedent for other regional groups.
Commodity Trade Centers: Russia’s proposal also includes the creation of BRICS commodity trade centers for essential goods like oil, natural gas, gold, and grain. This would shift control of resource-based trade to BRICS nations, further insulating their economies from U.S. influence, and allowing them to settle trades in local currencies instead of the dollar.
The Role of the United States: Resistance or Weakening?
The United States, recognizing the far-reaching consequences of Russia’s proposal, is likely to resist any attempts that diminish the dollar’s influence. Currently, over 58% of international payments and 54% of foreign trade invoices are settled in dollars. This dominance not only gives the U.S. unparalleled economic influence but also solidifies its leadership role in global trade.
Given this context, the U.S. will likely employ various strategies to counter Russia’s initiative. These could include:
Diplomatic Pressure: The U.S. may leverage its alliances with other BRICS members, such as India and Brazil, which continue to benefit from the dollar-based financial system, to dissuade them from fully committing to Russia’s plan.
Economic Incentives: The U.S. could offer financial incentives or bolster trade agreements with BRICS nations to ensure continued reliance on the dollar-based system.
Regulatory Countermeasures: The U.S. could introduce stricter regulations or sanctions to target any financial institutions that participate in the BRICS payment network, especially if these transactions evade current sanctions.
However, the U.S.’s ability to counter this proposal will depend on how unified the BRICS bloc becomes in its commitment to moving away from the dollar. If BRICS nations fully embrace this alternative, the U.S. might face significant challenges in maintaining the dollar’s dominance.
Conclusion: The Beginning of a Multi-Polar Financial World?
Russia’s proposal for a new BRICS financial system has the potential to reshape global economic dynamics, creating a multi-polar financial world where the dollar is no longer the singular dominant currency. While the plan faces significant hurdles, including reluctance from some BRICS members to fully abandon the U.S.-centric system, the proposal marks a clear attempt to challenge the current order.
For the United States, this proposal poses a direct threat to its economic leverage on the global stage. Whether the U.S. can effectively counter these efforts remains to be seen, but Russia’s move signals a shift toward a more fragmented global financial system, where the dollar’s supremacy is increasingly under question.
Economic Unit/North America Office
Al Rawabet Center for Research and Strategic Studies