BRICS Currency Swap: Too Small and Complex to Dethrone the Dollar

15th BRICS SUMMIT, Public domain, via Wikimedia Commons

A BRICS currency swap agreement is the new solution for BRICS countries to de-dollarize, but it is too small and too complex to have any meaningful impact on the dollar or to be expanded to future BRICS members.

The China-led BRICS grouping has been trying to end their dependence on the US dollar for some time now.

The main issues standing in their way, however, is that the BRICS, which now includes Saudi Arabia, Egypt, Ethiopia, Iran and the United Arab Emirates all have relatively weak, non-convertible currencies ( not accepted for most international trade) and most of which have steadily lost value against the dollar over the past five years.

This makes it difficult to price international trade in these currencies because of currency value fluctuation.

The Saudi and UAE currencies have maintained their value against the dollar, but this is because they are pegged to the dollar and backed by dollars.

This means that neither could displace the dollar as the global trade currency since both derive their value from the dollar.

The only international currency in the grouping is the Chinese yuan which is also partially pegged to the dollar and suffers from the same problems of non-convertibility and weak exchange rate to the USD.

Additionally, none of the central banks of BRICS countries are willing to hold large amounts of BRICS currencies as reserves and they are largely useless for international trade with other countries.

To solve this problem, BRICS has decided to implement a currency swap arrangement.

A currency swap is a financial agreement between two countries to exchange a set amount of one currency for an equivalent amount of another currency, based on a pre-determined exchange rate.

This allows the countries involved to use each other’s currency for trade and investment, bypassing the need for a third-party currency like the US dollar.

The aim is to facilitate smoother bilateral transactions and reduce dependency on global reserve currencies.

A recent news report claimed that BRICS was establishing currency swaps with 29 Countries Worth $550 Billion.

Many saw this as the beginning of the end of dollar dominance, but actually, it illustrates how improbable it is that BRICS swaps could dethrone the dollar in trade. They are making $550 billion in swaps across 29 countries, but each country has to make swaps for each currency.

This means each pair will have a very small number of billions in trade compared to the total trade of 29 countries, which is a spit in the ocean compared to the estimated $6 trillion in trade these countries are doing.

With a currency swap, the exchange rate is typically locked in for the duration of the agreement.

If China and India agree to a $20 million swap, they each deposit $20 million worth of their respective currencies in each other’s central banks.

When they trade, the settlement is made using these deposits.

However, the goods would still likely be priced in dollars for stability and consistency, necessitating conversion back to the dollar value for final pricing and settlement.

Consequently, the exchange rate of the two currencies against the dollar remains a significant factor.

It determines how much currency the buying country would need to use to pay for the trade and how much the selling country would receive.

If BRICS wants to get rid of the dollar altogether, they would need to conduct currency swaps worth trillions of dollars.

Each country would have to send large amounts of its currency to the other 29 countries involved in the swap scheme, and each of the 29 central banks would need to hold those currencies in reserves.

These currencies are among the weakest, losing value against the dollar, and none of them are fully convertible. On global markets, everything would still be priced in dollars, and the other 160 countries of the world would require dollar payments for their products.

Additionally, BRICS members issue their foreign debt in dollars and must service it in dollars. Normally, they obtain dollars through trade to pay these debts and for commodity imports.

But with these swaps, they will not be receiving dollars for trade; instead, they will have local currencies that cannot be used to pay off dollar-denominated debts or to pay for commodities and imports from countries outside the BRICS swap agreement.

In short, they would be holding currencies that serve no purpose other than BRICS trade. Even BRICS countries do not want to buy sovereign debt of other BRICS countries unless it is denominated in dollars, so all 29 countries would still need dollars to service foreign debt.

So, even in the best de-dollarization scheme that BRICS came up with, currency swaps, three of the currencies are still pegged to the dollar, and the value of each of their currencies is expressed in dollars. The price of their swaps is set in dollars and is dependent on the value of each currency against the dollar, and the trades are priced in dollars.

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Dr. Antonio Graceffo, PhD, China MBA, is an economist and national security analyst with a focus on China and Russia. He is a graduate of American Military University.

You can email Antonio Graceffo here, and read more of Antonio Graceffo's articles here.


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