Whatever happened to Brics common currency
The fact that geopolitics now occupies more mind space than economics in Brics is evident from the near silence in the declaration on its once-flagship initiative — a Brics common currency. The focus has quietly shifted to a more modest, though still ambitious, goal of promoting trade and settlement in local currencies.
Meanwhile, US President Donald Trump has threatened 10% additional tariffs on Brics countries for what he labels 'anti-American' policies. (And, on Monday, when the Shanghai Cooperation Organisation was meeting in Beijing, he threatened 100% tariffs on Russia and secondary sanctions on countries buying oil from Russia, among them India.) His frustration is not unfounded. The Brics effort to reduce reliance on the dollar directly challenges American economic dominance. The dollar's centrality in global finance gives the US a structural advantage. As the world's primary reserve currency, the dollar allows America to borrow more cheaply in global markets. The world's demand for dollar assets effectively provides the US with an endless supply of low-cost credit. For example, if you carry $100 in your pocket, you are in effect giving America an interest-free loan of $100. That is the essence of what former French finance minister (and later president) Valéry Giscard d'Estaing famously called America's 'exorbitant privilege'.
That privilege goes beyond economics. It gives the US the unique power to weaponise the dollar, using financial systems like Swift and dollar-clearing banks to impose sanctions and exert political pressure. Brics's move toward de-dollarisation is, in part, a pushback against this power.
Still, for all the motivation, a Brics common currency remains a difficult project. Unlike the eurozone whose members are geographically contiguous and share broadly similar political and economic institutions, Brics countries are scattered across continents, with stark differences in governance, development levels, GDP sizes, and strategic interests.
Even assuming political will, formidable technical and institutional hurdles remain.
A common currency requires a common interest rate. But how do you calibrate monetary policy that works at the same time for China and South Africa, or Brazil and India, given their vastly different growth and inflation dynamics? More critically, are these countries ready to cede monetary sovereignty and expose themselves to the risk that economic instability anywhere in the bloc could mean economic instability everywhere?
An even more complex issue is the China factor. With China contributing roughly 70% of the bloc's combined GDP, any common currency arrangement will inevitably be dominated by Beijing. In trying to escape the hegemony of the dollar, would Brics willingly embrace the hegemony of China, an authoritarian state with questionable transparency, weak institutional checks, and limited commitment to the rule of law?
While the common currency vision stalls, the motivation to break free from dollar dominance remains strong, and is growing. The biggest driver is trade. A large proportion of intra-Brics trade is still settled in dollars, adding avoidable transaction costs. Eliminating these costs by using local currencies could boost intra-Brics trade.
There are also deeper concerns. Brics countries see dollar dependence as a source of systemic risk to their financial stability. The Global Financial Crisis (GFC) of 2008 was triggered by reckless risk-taking in the US housing and banking sector. Had this happened in an emerging economy, its currency would have collapsed. But the dollar, paradoxically, gained value during the crisis. Global capital, in search of safety, fled emerging markets and rushed into US assets, a phenomenon economists call the 'safe haven effect'. Ironically, it was emerging markets that paid the price for America's excesses.
The GFC wasn't a one-off. The taper tantrum of 2013, the Covid-19 shock of 2020, and even recent US interest rate hikes have repeatedly exposed emerging economies to capital flight, currency volatility, and inflation — all collateral damage of an American centric global finance.
Against this backdrop, Brics's pivot towards trade in local currencies seems pragmatic. While less radical than a common currency, it is a tangible step towards financial autonomy. For instance, if India and Bangladesh settle their bilateral trade in rupees and takas, both benefit by cutting out the dollar intermediation costs. However, local currency trade works best when bilateral trade is roughly balanced. But if the trade is lopsided, the arrangement falters.
That's what happened with India-Russia trade. When Russia agreed to accept rupee payments for its oil exports, it quickly began accumulating rupee balances far beyond what it could spend on Indian goods. With no outlet for those rupees, Russia backed away from the deal.
Can Brics still push ahead with local currency trade, especially under threat of punitive US tariffs? It's worth remembering that the dollar's status as a global reserve currency is not backed by any formal treaty. There's no international law obliging nations to use it. So under what legal basis can Trump, or indeed any American president, mandate Brics countries to stay within the dollar-based system?
Yet, as we have seen over the last few months of Trump 2.0, US tariffs, no matter how whimsical, are hard to defy.
This puts India in a delicate spot. As the US prepares to assume the presidency of the G20 next year, India will need to carefully navigate between supporting the Global South's push for a more multipolar financial system and maintaining stable relations with America, its most important strategic partner.
Duvvuri Subbarao is a former governor of the Reserve Bank of India. The views expressed are personal.
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