Photo taken on Sep 18, 2019 shows US dollar banknotes in Washington DC, the United States. File photo:Xinhua

There is an accelerating trend towards global de-dollarization. What's behind the phenomenon and when did it start?

A growing number of countries are fleeing the US dollar in international settlements, forcing Western politicians, business sectors and thought leaders to admit that weaponizing currencies like the US has done is backfiring.

What is De-Dollarization?

De-dollarization is the process of reducing the US dollar's hegemony in global trade and financial operations by shifting to alternative exchange methods, including national currencies and domestic payment systems, as well as modifying currency reserves.

For roughly 80 years, the US dollar has played the role of the major international reserve currency and the main means of payment in global trade. However, over the past two decades, the share of global reserves held in US dollars fell from 73% in 2001 to 58% in 2023, according to some estimates. Even though the greenback continues to dominate the world's trade - being on one side of 88% of all trades as of April 2022 - international players have been gradually shifting to alternative currencies.

The US dollar was established as the world's dominant reserve currency by the Bretton Woods Agreement which was signed by 44 countries in 1944. The agreement also set an international system of payments by defining all currencies in relation to the dollar. Prior to that, the UK's pound sterling was the dominant currency in much of the world in the 19th century and first half of the 20th century alongside gold. Between the 16th and 18th centuries, the Spanish silver real called the shots in world trade and financing activities, while the Venetian golden ducat and the Florentine golden florin were widely used by Europe and the Arab world from the 13th to 16th centuries. So, there's nothing new or tragic about the US dollar ceding its positions to the other more convenient means of payment, investment and holding.

Which Country Started De-Dollarization?

At a government level, the idea of de-dollarization was first formulated by Russia, China and countries of Latin America in the wake of the 2007-2008 global financial crisis triggered by cheap US credit and lax lending standards that fueled a housing bubble that eventually burst.

Prior to that, the Federal Reserve lowered the federal funds rate from 6.5% in May 2000 to 1% in June 2003. The domino effect of the US financial crisis spread to the rest of the world. Thus, believe it or not, the trend of weakening of the influence of the dollar was initially created by the United States.

In April 2008, then-Russian President Dmitri Medvedev announced the gradual transition to settlements in rubles, first of all, in the oil and gas sector. For his part, Vladimir Putin, then head of the Russian government, proposed to the head of the State Council of China to shift part of bilateral trade between Russia and China from dollars to rubles and yuan.

In July 2008, at the MERCOSUR summit, Brazil and Argentina decided to expand the use of the real and the peso in bilateral settlements with other Latin American states hailing the initiative.

In 2015 BRICS (Brazil, Russia, India, China and South Africa) announced that they had agreed to maintain close communication in order to develop cooperation in the monetary sphere in accordance with the mandate of the central banks of each country. This included currency swap transactions, settlements in the national currency and direct investments in the national currencies.

The de-dollarization trend was reinvigorated by the US sanctions spree: Washington's expansive restriction currently cover 29% of the global economy, including 40% of global oil reserves.

In addition to sanctions, the US Federal Reserve has substantially raised interest rates at a time when many developing nations owe external debt in dollars. To cap it off, the US and its allies restricted Russia's access to US dollars and froze the nation's central banks' assets in 2022, demonstrating to other countries of the world serious risks associated with the reliance on the greenback.

De-Dollarization Countries

About 85 countries have reportedly joined the de-dollarization trend, including members of BRICS and the Association of Southeast Asian Nations (ASEAN), Argentina, Turkiye, Iran, the United Arab Emirates (UAE), and Saudi Arabia. While BRICS is seeking to establish a common currency for the countries of the group, ASEAN is moving to settlements in local currencies by further enhancing the bloc's cross-border digital payment system.

Other countries are exploring alternative means of payment for global settlements such as the Chinese yuan or renminbi (RMB), the UAE dirham or Indian rupee. The Chinese currency is also seen by some players as a convenient reserve currency. For instance, Russia's Finance Ministry doubled the amount of RMB and gold in the national wealth fund, while some Russian companies, such as Rosneft, issued bonds denominated in renminbi.

BRICS De-Dollarization

BRICS has doubled down on de-dollarization after the collective West curbed Russia's access to the global dollar-based payments system, SWIFT, and froze its central bank's assets in the wake of the beginning of Moscow's special military operation in Ukraine. At the same time, the US Federal Reserve's aggressive interest rate hikes made the greenback both toxic and expensive for foreign borrowers and those who paid for foods, raw materials and other commodities in US dollars.

In January 2023, BRICS announced that it may soon explore the possibility of creating its own currency to bypass the US dollar. The idea was articulated on both sides of the Atlantic by Russian Foreign Minister Sergey Lavrov and President of Brazil Luiz Inacio Lula da Silva. A single BRICS currency could initially play the role of a unit of account for settlements in national currencies and conversion without the use of the dollar, as per Russian economic observers who project that in the future it could receive the status of a reserve currency not only for the bloc members, but also for other world players.

The idea of the common BRICS currency popped up before the Russian special military operation: in 2018 Russia's Valdai Club articulated the concept of an SDR-type currency basket composed of BRICS countries' national currencies. A potential new reserve currency was called "R5" - which represented the first letters of BRICS members' currencies (real, ruble, rupee, renminbi, and rand).

The 15th summit of the BRICS group in Johannesburg in late August 2023 is due to discuss proposals for a new common currency, while more and more international players are signaling willingness to jump on the bloc's bandwagon.

What De-Dollarization Means for the US?

For the US, de-dollarization means the loss of the dollar's dominant status as the major reserve currency and main currency for global trade. But that's only half the story.

In his earlier interviews with Sputnik, Dr. Paul Craig Roberts, an American economist and author, explained that the greenback's global dominance allows the US to print money and further inflate its already bloated national debt and government deficit. As long as the dollar is the reserve currency and is used to settle most international payments, the US deficits are financed by countries holding their foreign reserves in US dollar securities, Dr. Roberts explained.

"If the dollar starts losing this role and fewer and fewer countries use it for international transactions, how's the Fed going, or the government going to print dollars to pay its bills, if it's not the reserve currency, and is not in universal demand? So what happens if the dollar would - poof! - go down? That would mean a massive US inflation," the economist projected.

Likewise, the US' hegemonic role would shrink, making it just one of many global players.

According to Russian economist Mikhail Khazin, de-dollarization and the subsequent formation of several currency zones would mean that the US would turn into a regional power together with its allies with the greenback continuing to play a lesser role within its respective zone.

What are the Benefits of De-Dollarization?

Given that the US is using its reserve currency hegemony to promote instability all over the globe, stripping Washington of this dominance will help create a fairer and more inclusive economic system with equal opportunities for all to prosper, especially the Global South, according to Sputnik's interlocutors.

"The US 'trade wars' with China and Russian sanctions, and the G7 push for 'de-linking and de-risking' shows a formal Western policy of 'containment, very much along the lines of the Cold War period," Ashraf Patel, a senior research associate with the Institute for Global Dialogue and member of the South Africa BRICS Think Tank Network, told Sputnik earlier this month, stressing that de-dollarization will stop this practice.

In addition, global players would become immune to US financial crises, inflation and recession which have so far been "exported" to the rest of the world by the US, as in the case of the 2008 global financial crisis.

For his part, Prof. Michael Hudson, a US economist and former Wall Street analyst told Sputnik that creating an alternative to the US dollar is the only way to stop the global militarization spearheaded by Washington.

"When other countries keep their foreign exchange reserves in dollars - Europe, Russia, China - they hold these dollars safely in Treasury securities," Hudson told Sputnik. "Buying the Treasury Security has been the way of funding America's 800 military bases surrounding them. So, foreign countries have paid for America to surround them with military bases and to fund America's military, because the dollars that are in the world are the monetization of American military spending."

Therefore, US neocon zealots are advocating militarily forcing and destroying any country that wants an alternative to the dollar, according to Hudson. The end of US militarism would also mean the end of Washington's interference in global affairs in order to contain the development of any competitor to a super-power status. As per Patel, a politico-military alliance of the collective Western world has de facto been maintaining a global neo-colonial order which has to be replaced by a fairer and more perspective multipolar structure.