One of the main themes in the speech of Mohammad-Bagher Ghalibaf, the Speaker of the Iranian Parliament, at the BRICS Speakers’ Summit in St. Petersburg, Russia, was the emphasis on the role of BRICS member countries in de-dollarization and the use of alternative currencies.
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The basis for this opinion is the diminishing belief in the necessity of the dollar’s dominance in trade among BRICS countries and the severing of one of the main tools of U.S. pressure on countries’ economic relations, a situation that is not exclusive to Iran.
Following the BRICS summit in Johannesburg, South Africa, and in light of the statements by the leaders of Russia and China on the need to counter U.S. unilateralism, some have suggested that emerging powers within BRICS could destabilize the dollar’s dominance in the global economic system by creating an alternative currency or by establishing new financial mechanisms based on national currencies.
Global Motivations for De-Dollarization
While the United States benefits greatly from the dollar’s dominance in global financial markets, the dollar’s dependency has created multiple challenges for other countries, the most significant of which are the depreciation of national currencies and inflationary shocks.
In return, not only does the U.S. benefit from the ability to evaluate other countries’ national currencies against the dollar in bilateral and multilateral trade or financial decisions in regional and international institutions, but the pegging of foreign currencies to the dollar also makes foreign goods and services cheaper for U.S. consumers. In contrast, citizens of other countries are compelled to hold their assets in dollars to maintain value.
However, the most significant reason for the rising global demand for de-dollarization is the political exploitation of the dollar’s dominance by the U.S. to punish other countries. From a political standpoint, even America’s allies wonder when it will be their turn to face sanctions; any deviation from U.S. strategic plans can lead to economic punishment. The first successful example of de-dollarization is the creation of the Euro in the European Union.
Historically, efforts toward de-dollarization can also be traced back to economic attempts within the Eastern Bloc during the Cold War and among Latin American countries in the 1980s. However, the process of de-dollarization has gained more attention in the 21st century with the development of the European Union and the rise of U.S. unilateralism, becoming more of a regional initiative.
Currently, at least a quarter of the world’s population is under U.S. economic sanctions, and there is a strong international inclination to diversify the global reserve system, incorporating other national currencies.
In such a context, de-dollarization has become a component of bilateral cooperation between countries. Many experts argue that reducing dependency on the dollar would lead to lower currency volatility, decreased vulnerability to U.S.-Western sanctions, and greater global economic security.
BRICS’ Capacity for De-Dollarization
It appears that financial agreements within the BRICS member countries and the Shanghai Cooperation Organization, coupled with financial processes created by Russia, China, and even India, have substantial potential to support de-dollarization.
BRICS is currently developing its internal institutions for greater cohesion, increased economic power, and geographical expansion within the non-Western world. These institutions’ primary aim is to support member countries’ development agendas and strengthen their regional and international standing. However, establishing independent financial institutions from Western entities can be considered the most significant potential for BRICS in advancing the de-dollarization process.
Russia, as one of the founding members and key policymakers of BRICS, has become a leader in de-dollarization diplomacy. Following the 2014 Ukraine crisis, Russia initiated a non-Western financial payment system that was significantly welcomed by other countries, particularly China and India, two other BRICS members.
The agreement between Russia and China to eliminate the dollar in order to protect against currency fluctuations was a major step in reinforcing the de-dollarization process and is one of Russia’s diplomatic successes with China.
In 2014, Russia signed a three-year currency swap agreement worth 150 billion yuan with China, which has been regularly extended by the central banks of Russia and China. Currently, one of the key elements of the economic relationship between Russia and China is the yuan swap.
As of February 2022, Moscow has significantly increased its use of the yuan in two ways: increasing the yuan’s share in Russia’s reserves and shifting to direct ruble-yuan trade instead of using the dollar as an intermediary. This seems to have strengthened the yuan’s position against the ruble, but Russia has accepted this risk.
One reason for the facilitation of trade relations between Russia and India is the use of rubles and rupees. Accepting new financial mechanisms, such as trading with rubles and rupees, is seen as a forward-looking strategy by India to avoid conflict with the U.S. and shield itself from potential U.S. sanctions.
Russia and India are developing a local currency payment system for continuing bilateral trade despite broad international sanctions against Russia, so Indian companies trading with Russia can use Russia’s central bank payment system as an alternative to SWIFT. However, it appears that using the rupee and other payment mechanisms in trade relations with India is part of New Delhi’s strategy to minimize costs in potential adverse future scenarios.
The de-dollarization process also seems to be underway in Africa. It can be argued that the development of this initiative within BRICS could enhance the group’s international position, as it is openly opposed to U.S. hegemony. This would reduce the impact of Western sanctions on countries critical of the U.S.
Despite all these issues, we must remember that the U.S. dollar still primarily dominates global foreign exchange reserves because competition among other national currencies for regional and global dominance continues alongside the de-dollarization process.
Statistical analysis shows that nearly 60% of global foreign exchange reserves are held in dollars, while the euro, as the second-most dominant currency, holds about 20% of global reserves, ranking second. Almost 70% of foreign exchange market transactions are also conducted in dollars.
However, despite the ongoing dominance of the dollar, internal and international challenges to it are increasing. Global foreign exchange reserves have been gradually moving away from the dollar, and initiatives to reduce dependency on the dollar in regional and global trade and economic equations are expanding.
Iran and the De-Dollarization Program within BRICS
Since the expansion of U.S. and Western sanctions against Tehran in 2010, Iran has shown a strong inclination toward taking the initiative in de-dollarization. Accordingly, Iran has made significant efforts over the past decade to join non-Western regional and international organizations. The primary goal of Iran’s membership in BRICS was to gain access to financial resources through the New Development Bank (NDB) and the BRICS Contingent Reserve Arrangement (CRA) and reduce Western sanctions’ pressure on the Iranian economy.
Although U.S. financial sanctions have made access to the resources of these two institutions difficult for Iran, BRICS has adopted various methods in the de-dollarization process to provide loans and services to its members. These methods can help reduce the impact of sanctions on Iran’s cooperation with BRICS financial institutions.
The New Development Bank offers loans in the national currencies of BRICS member powers, cryptocurrencies, and currency swaps to provide services to members. In this context, Iran has focused its economic diplomacy with BRICS members on presenting new initiatives to arrange economic exchanges without using dollars. This shared objective between Iran and Russia to increase consultations on expanding these initiatives has impacted the strengthening of Tehran-Moscow cooperation.
Final Remarks
As the Speaker of the Iranian Parliament mentioned on the sidelines of the BRICS Speakers’ Summit, the recent financial agreement between Iran and Russia is one of the new examples of cooperation between the two countries in de-dollarizing their bilateral relations.
It seems that expanding cooperation between Tehran and Moscow in organizing new money transfer processes with other BRICS (and Shanghai Cooperation Organization) members, as well as developing trade corridors for the exchange of goods and services, are significant capacities that should be prioritized in the two countries’ agenda. In fact, Iran could view Russia as a bridge to connect with the global de-dollarization process and other world powers.
