The current escalation of hostilities between Russia and Ukraine has given a boost to the de-dollarisation movement
In a startling mode, the BRICS group of countries - Brazil, Russia, India, China, and South Africa- is developing a new currency to compete with the US dollar. Moscow and Beijing are aggressively leading the charge toward de-dollarization. It is argued with this major development, the value of the dollar is going to lose its sheen very soon. Increased investment in BRICS countries would lead to an increase in spending and economic development. Consequently, it is predicted that if the BRICS nations follow forward with their plan and create a new currency, it might help stabilise their economies.
With no wonder, De-dollarization is the process of making the dollar less indispensable in international trade. Trading oil and/or other commodities, purchasing US dollars for the forex reserves, entering into bilateral trade agreements, and purchasing dollar-denominated assets are all examples of dollarization. Due to the dollar's extensive use, the United States enjoys disproportionate sway over other economies. The United States has traditionally employed the use of sanctions as a means to accomplish its foreign policy objectives. The goal of de-dollarization is to protect national central banks from geopolitical dangers associated with the United States Dollar's position as the world's reserve currency. The term "de-dollarization" has gained popularity in recent years as countries work to lessen their reliance on the US dollar and assert greater control over their economies. The economic and geopolitical difficulties experienced by many nations as a result of US sanctions or influence have been a driving force behind this pattern.
The reasons behind the dawn of De-dollarization are many. However, the current escalation of hostilities between Russia and Ukraine has given a boost to the De-dollarization movement. Russia's $300 billion in foreign currency reserves have been frozen and Russian banks have been barred from the Swift international payments system as punishment for Russia's invasion of Ukraine. The initiative gained momentum after Russian lawmaker Alexander Babakov, deputy chairman of the lower chamber of the Federal Assembly, was cited as claiming the BRICS countries were working on a new payment medium.
Importance of New Payment Medium: There are numerous equations about De-dollarization which are hovering around in the sphere of money, power and international relations. De-dollarization advocates argue that doing so will lessen countries' reliance on the dollar and the US economy, making them more resilient to the effects of economic and political shifts in the United States. Followers of De-dollarization also claim that it can lessen the likelihood of financial crises in developing nations by protecting them from the effects of variations in the value of their currencies and interest rates.
India’s Position and Re-position: India’s position and re-position in the time of De-dollarization have sparked scores of debates. China, Russia, Brazil, India, the ASEAN countries, Kenya, Saudi Arabia, and the United Arab Emirates are just some of the countries working toward de-dollarization. India, a longtime US partner, has joined China in advocating for the use of the rupee as an alternative to the dollar in international trade. The United States values India as a key partner and ally in the Indo-Pacific. Attempts by Russia and China to decrease dollar usage are seen as more ideological than practical by the Indian government, and the BRICS' mobilization to challenge the dollar's hegemony is not publicly supported by New Delhi. The two countries' recent military standoffs may also discourage India from backing China's goal to dethrone the dollar.
China has been a vocal challenger of the dollar's dominance. The deterioration of US-Chinese ties has drawn attention to the power of the US currency and its capacity to obstruct Chinese commerce and technology. These setbacks have prompted China to form a sphere of influence with the BRICS nations rather than participate in the US-dominated global order. Russia has long hoped to use the political might of the BRICS nations to forward the cause of de-dollarization. While India is not expected to play a direct part in any BRICS strategy to lessen the US dollar's clout, it may assist minimize dollar dependency by backing efforts to increase the use of local currencies in international commerce and finance.
In light of China's hostility towards India and her support for Pak-sponsored terrorist activities, it is in India's best interest to align with the United States, a democracy, rather than China under the dictatorial regime of Chinese President Xi Jinping. Experts argue that de-dollarization by India is doable with the right policies in place. India needs to achieve a trade surplus or a current account surplus so that the rupee may be used as a global trading currency. That will lead to an increase in demand for the rupee on the currency exchange market, ending its steady decline.
At the same time, Russia is accumulating up to USD 1 billion every month in Indian rupee assets that remain stranded outside the nation due to its unequal economic relationship with India. This adds to the stockpile of wealth it has accumulated overseas since the Ukraine war. Since the invasion, Russia has become India's primary source of petroleum imports. Because of the war, European consumers cut back on their spending, thus Russia had to accept a smaller percentage of commerce in home currency and shift goods to the East.
De-dollarization is of significance to India for reasons outside its trade policies. It has also been reported that the nation is interested in talking to Russia and China about finding an alternative to SWIFT. This might open the door for India to use its currency in commerce with nations that are subject to US sanctions. Russia's SPFS and China's CIPS will be integrated into India's local financial messaging system.
India's developing economic relations with Russia and China also factor into the country's interest in de-dollarization. India is already one of Russia's biggest buyers of crude oil, and the two nations have been trying to expand their commerce in other areas as well. Both India and China have been increasing their economic cooperation in recent years, and they have agreed to double their trade to $100 billion by 2022. Considering these circumstances, it's not unexpected that India is looking to strengthen its commercial connections with Russia and China and find alternatives to SWIFT. However, given the dominance of the US currency in the global financial system, it remains to be seen how effective India will be in encouraging the use of these other payment methods and lessening its dependency on the US dollar.
The US and Aftermath of De-dollarization: The de-dollarization trend is gaining momentum despite obstacles, which might have severe effects on the US economy. Because of its status as the world's primary reserve currency, the US dollar has long had access to favourable conditions such as low-interest rates on loans, high trade deficits, and widespread sway. In contrast, the United States stands to lose economic and geopolitical clout if the dollar loses its status as a global reserve currency and medium of exchange to other currencies.
If a new reserve currency or multipolar currency world is formed, it may threaten the US dollar's status as a haven asset and a global liquidity source, which could cause financial instability.
Need of the Hour: Amidst De-dollarization, India is mulling discussing the possible mechanism to cope with the changing situations. Governments may encourage domestic currencies to be used in international commerce by offering tax breaks and other benefits to companies that do so.
For some imports of petroleum, oil, minerals, and military hardware from Russia, India has been making informal payments in rupees since 2019.
Governments can work together to create non-dollar-based payment systems, such as the Chinese-led Asian Infrastructure Investment Bank. Governments may lessen their reliance on the dollar by forming economic relationships with other nations. Governments may invest in other currencies either to hedge against the risk of currency volatility or to challenge the United States Dollar's pre-eminence. Wait and watch this new medium of payment!
(The writer is HoD- Digital Marketing and Associate Professor at the School of Management, Presidency University Bangalore)
