WILLIAM GUMEDE: Expect the dollar to have a little less clout after the war in Ukraine

The Russia-Ukraine war is likely to increase the de-dollarisation of the world, propelled aggressively by Russia to escape Western economic sanctions, but also by China, which sees an opportunity in Russia’s predicament to step up its own strategic goal of increasing the power of its currency, the yuan.

Brics (Brazil, Russia, India, China and SA) countries have tried to set up alternatives to Western-dominated global financial, trade and political institutions, including replacement of the dollar as the world’s reserve currency. But up to now their efforts have been largely ineffectual. One of the outcomes of the Russia-Ukraine war is very likely to be that the Brics countries’ activities to increase the global use of their currencies, and other alternatives to the dollar, will accelerate.

Western powers have frozen close to half of Russia’s international reserves, which stood at $607bn in mid-April 2022, and its foreign trade transactions — including those with some emerging markets — have been blocked. Seven of Russia’s banks have been excluded from SWIFT, the Society for Worldwide Interbank Financial Telecommunication, which oversees the world’s leading international payment messaging system for conveying messages on how payments should be made and received. A SWIFT ban means Russian banks cannot do digital cross-border transactions.

It has now become more urgent for Russia’s economic survival to integrate its payment systems with those of Brics and other developing countries, bypassing the dollar and expanding the use of its own and Brics and developing country currencies in global transactions. Russia has stockpiled $77bn (13.1%) of its foreign reserves in yuan since Western sanctions started in 2014.

Russian finance minister Anton Siluanov told a meeting of Brics finance ministers last week that it is urgent that the “existing international monetary and financial system based on the US dollar” must be changed. “This pushes us to the need to speed up work in the following areas: the use of national currencies for export-import operations, the integration of payment systems and cards, our own financial messaging system and the creation of an independent Brics ratings agency,” Siluanov told the finance ministers.

After Western sanctions against Russia over the annexation of Crimea in 2014, Russia in 2015 already set up its own banking messaging system, the System for Transfer of Financial Messages (SPFS), in anticipation of its future exclusion from the SWIFT system by Western countries. In competition to SWIFT, the SPFS includes countries that were members of the USSR, the former Union of Soviet Socialist Republics. In 2014, it also started its own card payment system, NSPK, to process domestic credit transactions.

In 2015, China set up its own payment system, the Cross-Border Interbank Payment System (CIPS), which is linked to its trade, loans and investments in developing countries. China has reported that 103 countries are now linked to CIPS, though very few Western banks have joined.  Furthermore, CIPS transactions are still done through SWIFT. In fact, CIPS transactions make up only 3.2% of global transactions.

Russia started negotiations with China in 2016 with the aim of integrating its SPFS with that of the CIPS. Russia also has a bilateral currency swap agreement with China’s central bank, the People’s Bank of China, that allows the two countries to exchange currencies at a fixed interest rate to reduce the effects of currency volatility on trade between the two countries. 

As the Russia-Ukraine war rages, Brics members India, China and Brazil have been buying oil, gas and fertiliser from Russia. China is exploring whether increased oil purchases from Russia could be paid for in yuan.

Russia has approached India to use its SPFS system for bilateral payments for the oil, weapons and goods the two countries trade. In the Russian proposal, roubles would be deposited into Indian banks and changed to rupees, and vice versa. Russia also wants India to link its Unified Payments Interface to the Russian NSPK payments system.

India has moved over the past few years to diversify its foreign reserves. It does not release the currency composition of its foreign reserves, but it is estimated that 30%-40% are nondollar currencies. In its diversification strategy, the Reserve Bank of India has been concentrating on buying euros, pounds, Japanese yen and Swiss francs. IMF data showed that by the end of 2021, the US dollar share in India’s foreign reserves stood at 59.15%, the euro at 20.48%, the yen at 5.83% and the yuan at 2.66%.

Brazil has reduced its holdings of US dollars. In March, Brazil’s central bank quadrupled its foreign reserves in yuan, of which, until 2018, it did not have any. Brazil’s holdings of yuan now stand at 4.99%, making it the third-largest behind the euro, which was reduced to 5.04%. Brazil has reduced its dollar reserves from 86.03% to 80.34%. Brazil has also increased its reserves of other countries, such as the yen, pound and Canadian dollar.

It is instructive that individual Brics countries do not have large foreign exchange holdings of the currencies of fellow members. Most of the Brics countries have traditionally stocked stable currencies supported by stable governments, such as the yen, Swiss franc and the euro.

As seen in Russia’s invasion of Ukraine, there are structural weaknesses in the political stability of the Brics countries, which undermines the stability of their currencies. Though China has experienced high growth over the past decades, its stability could be put at risk if it decided to invade Taiwan. Despite China’s dizzying global trade expansion, its yuan is not easily convertible, as it lacks the capital markets, market transparency and the supporting financial institutions, which for example supports the dollar, and which gives the dollar its stability.

Brazil has experienced regular political and economic upheavals and its currency has been prone to volatility. Similarly, the ANC government in SA has been mired in corruption, mismanagement and inefficiency, which has undermined the stability of the rand. Nevertheless, while it is very likely that after the Russia-Ukraine war, the dollar may not be toppled as the global reserve currency, its power will be reduced and new currency blocs, either of countries or of trading blocs, may be fostered.

• Gumede, an associate professor at the University of the Witwatersrand School of Governance, is author of ‘South Africa in Brics’.