The concept of “de-dollarization” has become an increasingly topical issue as countries seek to decrease their dependence on the U.S. dollar as the world’s primary reserve currency. Should de-dollarization occur, there are many countries that would like to step into the void left by the U.S. dollar in the global market. Some of those countries’ currencies, like China’s Yuan and India’s Rupee, have successfully acted as reserve currencies in international trade and represent potentially viable alternatives to the U.S. dollar.

Interestingly, there has also been conversation around creating a new reserve currency. Recent comments from Alexander Babakov, the Chairman of Russia’s State Duma, expressed Russia’s intent to create a new, gold and commodity backed currency with its fellow BRICS member nations. Those nations include four of the world’s twelve largest economies. 

If successful, the BRICS nations’ creation and adoption of this new reserve currency would significantly impact the global economy. In light of Babakov’s comments, this article aims to contextualize this potential plan by presenting a background on the nations, concepts, and reasoning involved.

Who?: BRICS Nations

BRICS is an acronym for the nations of Brazil, Russia, India, China, and South Africa. Goldman Sachs economist Jim O’Neill devised the term, originally BRIC, in 2001 to refer to the emerging economies of Brazil, Russia, India, and China. The BRIC nations’ heads of state held their first formal summit on June 16, 2009, in Yekaterinburg, Russia. South Africa joined the group in December 2010, thus expanding the acronym to BRICS. 

At the sixth BRICS Heads-of-State Summit in 2014, the BRICS nations signed an agreement to create the “New Development Bank.” The bank began with $100 billion in initial capital investment. The BRICS nations made an initial subscription of $50 billion, which the bank equally dispersed between them. The BRICS delegates also signed an agreement to form the “Contingent Reserve Arrangement.” Established in 2015, the Contingent Reserve Arrangement is a $100 billion monetary fund that Vladimir Putin has touted as an alternative to the International Monetary Fund. Similar to the IMF, the BRICS Contingent Reserve Arrangement loans money to member-nations in times of financial crisis.

Empowered by the New Development Bank and the Contingent Reserve Arrangement, China, Russia, and the other BRICS nations may be seeking to decrease global dependency on the U.S. dollar and usurp its position as the world’s primary reserve currency.

What?: The History and Significance of the U.S. Dollar as the World Reserve Currency

A reserve currency is defined as a “globally-recognized national currency commonly used in international trade and global finance.” National treasuries and central banks hold reserve currencies in their foreign exchange reserves. They use reserve currencies to regulate the value of their own national currency, pay debts, withstand economic shocks, and purchase imports. Countries hold the global reserve currency to facilitate international trade, which is often denominated in the global reserve currency, and to fulfill debt payments valued in that currency. In Q4 of 2022, roughly 58% of the allocated international foreign currency reserves were in U.S. dollars. This means that the U.S. dollar is the world’s primary reserve currency.

The U.S. dollar’s ascension to its current position as the world’s primary reserve currency began during World War I. As a late entrant into World War I, the United States expended fewer resources on the war effort than its allies and was thus able to extend loans to the Allied forces as a creditor. This increased the amount of U.S. dollars in foreign national reserves. 

During WWII, the U.S. dollar again benefited from the United States’ late entry into the conflict. Prior to its entry, the United States manufactured supplies for the Allied forces and accepted gold in return. This led to the United States owning the majority of the global gold supply, while many other nations lacked sufficient gold reserves to continue backing their currencies with the gold standard. 

In response to the widespread inability to use the gold standard, representatives from 44 countries met in 1944 to pass the Bretton Woods Agreement. The agreement created the Bretton Woods System, which designated the U.S. dollar as the world’s reserve currency. The Bretton Woods System chose the U.S. dollar as the world’s reserve currency because the United States was able to back the dollar with its large gold reserves

In 1971, President Nixon took the dollar off the gold standard due to inflation and an impending global gold run. Despite losing its gold standard backing, the U.S. dollar has remained the world’s primary reserve currency. 

Today, the United States enjoys many advantages from the U.S. dollar’s status as the world’s primary reserve currency. These benefits include lower international transaction costs, the ability to sanction other nations by restricting their access to the dollar, and an increased demand for United States government bonds. The impact of the U.S. dollar as the global reserve currency is significant: it enables the United States to both levy disproportionately powerful financial sanctions on opposing countries and to borrow money internationally at a lower cost. 

Why?: Reasons for a BRICS Global Reserve Currency

There are compelling reasons for the BRICS nations to establish a new reserve currency. The de-dollarization of the global market would insulate the BRICS nations from the threat of economic sanctions similar to the ones that the United States recently imposed on Russia and Iran. In addition, the U.S. dollar’s value has been volatile, and the BRICS nations may benefit from relying on a different, more predictable reserve currency. Perhaps most importantly, decreased global reliance on the U.S. dollar would weaken the United States’ geopolitical power. This would provide the BRICS nations with an opportunity to supplant the U.S. dollar as the global reserve currency. Consequently, the BRICS nations could increase their influence. 


Author Biography: John Darby is a Moderator of the International Law Society’s International Law and Policy Brief (ILPB) and a J.D. candidate at The George Washington University Law School. He has a Bachelor of Arts degree in Economics & History from Vanderbilt University.

Editor:  Zachary Burgoyne, GW Law J.D. Candidate, 2024.