“Market acceptance will be key test for alternative to dollar”

Former ambassador to Russia says the need for one is very real

Sentiment of the market will be the ultimate test for a new global reserve currency that the BRICS member states are considering as an "alternative" to the American dollar, said a leading expert of BRICS affairs.

Addressing a meeting of Indian and Russian experts of international relations, former Ambassador of India to Russia D.B. Venkatesh Varma said on Thursday that national currencies are likely to play a greater role for trade within BRICS, but it is "impractical" to expect them to lead up to "de-dollarisation".

"BRICS is taking a very important initiative in looking at alternatives, because the need for alternatives is very real. But the key issue is how quickly and with what acceptance the alternatives will be put in place in practice. Dollar has been dominant for a very long time. But particularly since February of this year, there is a greater realisation that over-dependence on a single currency — dollar as the global reserve currency — is a factor of increasing risk. But this risk cannot be addressed overnight," said Mr. Varma in his comments.

Mr. Varma hinted that the fate of an alternative reserve currency will be subjected to the market forces that are beyond the control of powerful governments. "Whatever mechanism the BRICS countries agree upon has to be finally accepted by the market, because the key test is whether the international market or the national markets within the BRICS countries accept this mechanism. The governments and central banks have an important role to play. But each central bank will assess each of these proposals in terms of whether it helps in risk management and whether the markets themselves will finally accept them."

The idea of a new reserve currency was presented by President Vladimir Putin on Wednesday during the meeting of the BRICS Business Forum. Following the launch of the “special military operation” against Ukraine on February 24, a series of western sanctions were unleashed on Russia that aimed at imposing a financial cost upon Moscow. This also adversely affected other major economies like India that have trade links with Russia but were unable to make payments in dollars. The role of national currencies and an alternative global reserve currency were discussed in this context.

India and Russia have been discussing alternative payment systems, including the RuPay card of India and MIR card of Russia, to circumvent the threat of sanctions that has made trade in energy and commodities difficult worldwide.

Mr. Varma acknowledged the role that national currencies can play to help facilitate bilateral trade with Russia within the BRICS, and said that India wants BRICS to "make a positive contribution in reducing conflict and increase cooperation and trade."