De-Dollarisation

Saudi Arabia, UAE and 21 other countries officially expressed their desire to join BRICS. This could lead to 90% of oil sales no longer being settled in US dollars.

The BRIC acronym to capture the economic potential of Brazil, Russia, India, and China, the group – called the BRICS since the addition of South Africa – contributes more to global GDP (in purchasing-power-parity terms) than the G7. An enlarged grouping could lead the transition to a more multi-polar world.

The US dollar has been the world's reserve currency for over 50 years, but there are a number of factors that are leading to a decline in its dominance. The inclusion of Saudi Arabia and the UAE into BRICS could have a paradigm shift in the oil economy, as it could force other countries to drift away from the USD. Therefore, the first step of the de-dollarization process could begin with oil and gas sales.

Apart from Saudi Arabia and the UAE, Bahrain, Egypt, and Algeria are looking to join the BRICS. The five Arab nations represented 60% of the world’s oil reserves, and induction into BRICS could spell doom for the U.S. dollar. The expansion will be high on the agenda of the group’s upcoming 15th summit, scheduled for August 22-24 in Johannesburg, South Africa.

The International Monetary Fund forecasts that China and India alone will generate about half of global growth this year. Following the EU’s ban on imports of Russian oil products last year, China and India have been the two dominant buyers of Russian crude. Bilateral trade between China and Russia has been particularly strong in recent years, hitting a record $185 billion last year.

Given their economic success, de-dollarisation has given rise to the idea of a BRICS-issued reserve currency that members could use for cross-border trade. Saudi Arabia is considering signing a deal with China to settle oil transactions in renminbi, while India is expanding the use of local-currency settlement for bilateral trade beyond the BRICS, inviting more than 20 countries to open special vostro bank accounts to settle trade in rupees. Earlier this month, India made its first oil payment to the UAE in rupees.

Going forward, the BRICS will create an efficient and integrated payment system for cross-border transactions. BRICS Pay, would eliminate the need for “vehicle currencies,” such as the dollar or the euro, in transactions among member countries, reducing costs dramatically.

Dr. Deepak Kumar Sahu, President & CEO, VARINDIA