The De-dollarisation Debate Heats Up

A few weeks ago, the national secretary of the India Bullion & Jewellers Association told me he was expecting gold prices to be impacted by the BRICS countries (Brazil, Russia, India, China and South Africa) forming their own gold exchange.

“BRICS is also trying to bring in its own currency; the BRICS countries are trying to trade amongst themselves. So what will be the value of the US dollar? The de-dollarisation has already started taking place,” he pronounced somewhat ominously.

Was it, I wondered?

However, some 8,000 miles to the west, incoming US president Donald Trump must have heard him and similar voices because he released a dire proclamation over the weekend from Mar A Lago, his residence in Florida.

“Go find another sucker”, he said, vowing a 100% tariff on BRICS countries if they made any move to replace the US dollar.

He then sought a commitment from the BRICS countries “that they will neither create a new BRICS Currency, nor back any other currency to replace the mighty US Dollar or, they will face 100% tariffs and should expect to say goodbye to selling into the wonderful US economy.”

The trigger appears to be the BRICS summit that took place last month in Kazan, Russia, where participating countries made all kinds of noises about an alternative currency. They were evidently nudged by a report released by the Russian finance ministry and central bank, which hinted at finding an alternative to the ‘weaponised dollar’.

India’s external affairs minister quickly clarified that India had no intent to go against the dollar and also seemingly distanced himself from the concept of a BRICS currency. The second part is logical, of course, as the concept of a BRICS currency or similar appears wild at this point.

It is, however, a fact that Indian policymakers have been talking of a de-dollarised world for a while now. This is a fair objective, but many, including this writer, have argued this was too early in the game to be dreaming of the rupee as a reserve currency and so on.

Barry Eichengreen, professor of economics at the University of California, Berkeley, wrote a stinging piece two weeks ago saying that creating the euro took 34 years.

“It necessarily built on a half-century of other steps that deepened European integration and established shared political institutions,” he says.

But even then, he argues, the euro, in any case, has shown no signs of challenging the dollar or even of modestly denting its global supremacy.

So while India is right in thinking of a de-dollarised world, assuming all of this will fructify tomorrow, as any number of WhatsApp forwards would have you believe, is obviously in the realm of fantasy.

As Eichengreen says, policymakers in emerging markets have, in fact, offered a long list of possible substitutes for the dollar. None of their proposals has borne fruit.

He says how, in 2009, People’s Bank of China (PBOC) Governor Zhou Xiaochuan suggested replacing dollar reserves with the International Monetary Fund’s (IMF) Special Drawing Rights.

It soon became apparent that no one was particularly interested in holding—much less using—an artificial asset pegged to an arbitrary currency basket.

India's ambitions took flight with the somewhat exclusive and high-volume purchases of Russian crude oil in the last couple of years.

India also started settling part of the purchases in rupees— till it emerged that this was not working for the Russians.

“Russia has accumulated billions of rupees in Indian banks, which it can’t use,” Foreign Minister Sergei Lavrov said in May last year in a report in Bloomberg.

“This is a problem,” Lavrov told reporters in Goa on the sidelines of the Shanghai Cooperation Organisation meeting. “We need to use this money. But for this, these rupees must be transferred in another currency, and this is being discussed now.”

So de-dollarisation as a grand objective will perhaps take a back seat for some time, till the world figures out what is going on in Trump’s mind at any given point in time.

Trump’s weekend attack is a good time to also remind ourselves that we have many problems to fix before thinking of the Rupee as a reserve currency and equating it to arriving on the world stage amidst much pomp and glory.

India’s growth is slowing sharply, company earnings are falling, and economists are now using the word “normalisation” to mean that India does not really have the potential for blockbuster growth, at least right now.

We have to improve our own growth and economic prospects before thinking of projects that are presently beyond our means and capabilities

Even as we remind ourselves that Trump was voted in with the objective of ‘Making America Great Again’ and would thus serve his base ahead of all other considerations.