Contesting the hegemony of the dollar Premium

New supply chains and alternate currency chains are enabling dual/multiple circulation systems

The fact that the multipolar international system is fast unfolding is reinforced by clear trends in polycentric global geoeconomics. There is significant trade within the Global South; currency swap agreements; trade in national currencies bypassing the dollar; steps towards trading oil and gas in national currencies; the promotion of such arrangements by regional organisations; the setting up of special accounts for internationalising national currencies; and the setting up of financial communications systems. Is this multipolarity irreversible? Can the dollar hegemony be challenged?

Countries outside the West say they are operating in a multipolar system and are developing mechanisms for alternate currency exchanges to reduce risks and their dependence on the dollar. Trade wars against China since 2018 have set China on this path. The Russia-Ukraine war has hastened this development since Russia trades oil and commodities in ruble and national currencies, in a model similar to the rupee-rouble trade of earlier years.

The steady but unequal growth of the ‘emerging economies’ is the base for economic diversification. For example, the combined GDP of China, India, Russia, South Africa, Indonesia, Brazil, Iran and Turkey exceeds that of the G7.

Inter-Asian consumption is driving high levels of trade between Asian countries. India’s trade with Asian countries is higher than with the West. China’s trade with Asian countries more than doubled in the last few years, beating its trade with the West. The UAE, Iran, Turkey, Indonesia, Sri Lanka, Myanmar, Thailand, Malaysia and Indonesia are trading in local currencies with regional partners. Bilateral currency swaps among ASEAN countries, China, Japan, South Korea are $380 billion and rising. Similarly, the South African rand is used by several African countries. The Latin American countries are moving towards greater inter-regional trade.

With high exchange rates of the dollar, emerging economies have initiated trade in national currencies bypassing the dollar. Asian central banks have over $400 billion of local currency swap lines and trade amongst themselves. Since 2019, India has been paying Russia for fuel, oil, minerals and specific defence imports in rupees on an informal basis. It has worked out local currency trade with the UAE, Japan, Turkey, Korea and South Asian countries. In July 2022, the Reserve Bank of India (RBI) unveiled a rupee settlement system for international trade by allowing special vostro accounts in designated Indian banks, a step towards internationalising the rupee.

China developed the Renminbi in 2015 and offers clearing and settlement services for participants in cross-border yuan payments and trade. The yuan is being internationalised as the International Monetary Fund has given it Special Drawing Rights status in the currency basket. Russian banks have started using the China-based Cross-Border Interbank Payment System for international payments, as they are debarred from the SWIFT international system.

The BRICS’s New Development Bank encourages trade and investment in national currencies by disbursing up to 50% of its loans in national currencies since 2015. Other regional groupings such as the Shanghai Cooperation Organization and Eurasian Economic Union and partner-countries of the Regional Comprehensive Economic Partnership are setting up processes to conduct trade, investments and settlements in national currencies. The process of creating a common payment infrastructure and connecting national systems for the transmission of financial information is being put in place.