Is This A New Anti-Dollar Alliance?
In the last few years, we’ve seen many signs that the U.S. dollar is losing
importance in the international arena. For example, over the past several years,
many countries have made agreements that allow them to settle their trades in
their own currencies, cutting the dollar out of the transaction completely.
The most recent
challenge to the dollar is coming from the BRICS (Brazil, Russia, India, China
and South Africa) countries. And, it could have important implications for those
who hold assets denominated in U.S. dollars.
China and Russia Moving Away from the Dollar
You may have
heard about the historic energy deal recently made between China and Russia. In
short, Russia will export about $400 billion of natural gas to China over the
next 30 years. By 2018, this deal will be supplying about 25% of China’s energy
need. Why should you care? Well, these transactions will be made in Chinese yuan
and Russian rubles, not in U.S. dollars. In other words, this is a substantial
blow to the petrodollar.
China and Russia have also set up swap facilities that exclude the greenback
from other transactions. And, recent sanctions on Russia by the U.S. are
accelerating that trend. Many Russian companies are quickly switching contracts
from dollars to other currencies, partly to escape Western sanctions.
Gazprom, the famous Russian natural gas giant, provides a good example. It
has signed agreements with consumers to switch from dollars to euros for
payments. Alexander Dyukov, the company’s CEO, said: “Practically all — 95% of
our customers — confirmed their willingness to move to settlement in
And, it’s not just Russia and China. Brazil, India and South Africa are also
joining this anti-dollar trend.
The BRICS’ New World Order
Last June, Sergey Glaziev,
Vladimir Putin's economy advisor, published an article outlining the need to
establish an international alliance of countries willing to get rid of the
dollar in international trade and refrain from using dollars in their currency
It looks like that alliance is taking shape.
Recently, the BRICS countries
announced that they are “seeking alternatives to the existing world
order.”2 The five countries unveiled a $100 billion fund to fight
financial crises. This fund will be their version of the International Monetary
Fund (IMF). They will also launch the New Development Bank (NDB), which will be
their alternative to the World Bank. It’s a new bank that will make loans for
infrastructure projects across the developing world.
The BRICS’ version of the IMF will function around a currency reserve pool.
Each country will contribute to the fund according to the size of their
economies. It’s expected that contributions to the currency reserve pool will be
as follows: China, $41 billion; Brazil, India, and Russia, $18 billion each, and
South Africa, $5 billion.
The punchline, however, is that the dollar will play no role in that currency
reserve pool. Currency swaps between the BRICS central banks will facilitate
trade financing while completely bypassing the dollar. With these two new
institutions, the five countries are taking steps to effectively reduce their
dependence on the dollar and other American institutions, such as the Fed and
the IMF. As Brazilian President Dilma Rousseff told reporters, the five
countries “are among the largest in the world and cannot content themselves in
the middle of the 21st century with any kind of dependency.”3
To be clear, we don’t expect this BRICS anti-dollar alliance will destroy the
dollar’s global reserve currency status overnight. But, the trend is clearly
moving against the dollar. And, if this trend continues, most of the significant
global economies will gradually abandon the greenback.
These countries are essentially taking steps to move away from a dollar-based
global trade system. This is a big deal because the BRICS countries are all
expected to be future financial powerhouses. If they continue to kick the dollar
out of their economic relations, this could seriously hurt the buck.
This means that an increasing amount of global trade will be done in other
currencies, weakening the demand for dollars. As the buck continues to lose
status in the international area, there could be consequences for every
This process could take several years…or it could happen relatively quickly,
with a sudden dollar crisis. Under that scenario, U.S. dollar-based assets could
suffer a significant loss of value. U.S. investors could potentially protect
their portfolios against the risk of a sudden crisis simply by keeping a portion
of their assets in gold, silver and other hard assets.