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Choice of money: will there be an alternative to the dollar in the short term

Choice of money

Many countries are actively switching to national currencies in settlements. Does this mean that an alternative to the dollar will appear in the near future?

Today there are many objective and subjective prerequisites for de-dollarization. The subjective factor is the use of the dollar as a sanctions weapon against Russia and Belarus. This circumstance has pushed Russia, China, other SCO and BRICS countries to create their own payment systems that do without the dollar. At the same time, the experience of circulation of digital currencies gradually leads to the idea of introducing digital currencies of central banks, which are positively perceived in the United States and other developed countries. The transition to such currencies may also change international settlement systems.

President of Belarus Alexander Lukashenko:

— As soon as own currency appeared in the European Union, the euro, a competitive currency, the Americans in fact started to strangle their subjects who already had little sovereignty. Further — more… You saw that all over the world (and we felt it) it was equal: the dollar, the euro. Do you remember? We don't actually need them now. We must observe fine subtleties happening in the world in general, and especially in the West. And this process will get worse. New countries and new currency unions are emerging. The time will come — and people will give up the dollar.

In address to the Belarusian people and the National Assembly, March 31, 2023.

Petrodollars rule everything?

The US dollar has been the world's reserve currency since 1944 and continues to be so due to the fact that it is the dollar that dominates both international reserves and international settlements.

According to the IMF, in the first quarter of this year, the dollar's share in the international reserves of central banks was 59 percent, the euro - 20 percent. The Japanese yen and the British pound each occupy about 5 percent, the share of the Chinese yuan and the Canadian dollar — 2.5 percent, the other currencies account for about 6 percent of international reserves.

The share of the dollar in international settlements, which are the result of international trade in goods and services, remains higher in comparison with the share in reserves. According to the Bank for International Settlements (BIS), over the past 30 years, the dollar's share in international settlements has fluctuated in the range of 80-90 percent.

The widespread use of the dollar in international settlements is associated with the concept of "petrodollar". It is so accepted that oil in the world is traded for dollars, the largest volumes of trade in raw materials and futures go through the New York and London exchanges. The annual volume of oil trade is USD2.1 trillion, which is more than twice the annual volume of trade in all metals — iron, copper, aluminum, gold.

Meanwhile, we are witnessing a change in the payment system in international trade. Since 2022, Russia has started to supply raw materials with payment in rubles, introducing this as a response to US and EU sanctions, as well as due to restrictions on the use of dollars.

Деньги на выбор: появится ли в ближайшей перспективе альтернатива доллару

Alternative solutions

The use of alternative currencies to the dollar in international settlements is expanding.

In particular, the supply of raw materials from Russia to China is most often paid in yuan. Russian oil supplies to India are also paid in yuan, UAE dirhams and other currencies. According to experts, it is the transformation of the dollar into a weapon that forces the world to look for an alternative. The precedents of refusing payments in dollars are manifested not only in payments for raw materials.

Last month, Argentina paid the International Monetary Fund a loan equivalent to $2.7 billion, without the use of dollars — in Chinese yuan and banknotes with Special Drawing Rights. At the moment, we are talking about one-time transactions and insignificant settlement volumes by world standards, which are poorly visible in statistics, but everything can change very quickly.

We can list several threats to the hegemony of the dollar: first, it is the possible introduction of a common currency within the framework of the BRICS, SCO, EAEU, and second, the innovations of the central banks of developed countries themselves.

At the recent SCO summit in India, a lot of attention was paid to improving financial settlements between the participants of this organization. Prospects for de-dollarization based on introducing the gold standard are also being discussed at the BRICS level.

It is expected that during the BRICS summit in August in South Africa, a statement will be made on the introducing a single BRICS gold-backed currency. This BRICS statement is the most notable public challenge to the US dollar on the world stage in recent times.

However, if this decision is made, its consequences for the global financial system remain unpredictable. There is an opinion that the introduction of a BRICS gold-backed currency will devalue, first of all, the fiat currencies of the BRICS members themselves, and not the dollar. According to the Minister for Integration and Macroeconomics of the EEC Sergey Glazyev, the idea of the BRICS supranational currency is to create a system of fundamentally new financial relations based on an international agreement. An example of a supranational currency can also be called the euro. At the same time, the BRICS countries are significantly ahead of the EU in terms of GDP, mutual trade, and even more so in terms of population.

Currency goes into digits

There is a possibility that the reorganization of the international financial and monetary system will not happen due to the dollar rejection by developing countries, but will be an initiative of the United States and other developed countries themselves. In particular, the Federal Reserve is already working on the idea of a digital dollar that can give the government unprecedented control over citizens' spending. Similarly, according to analysts, the Bank of England's digital pound will be a "complete restructuring" of the current financial system and may give the government more control over how people use their money (this promising digital currency is jokingly called britcoin).

On July 11, the Russian State Duma adopted in the third reading a bill on the digital ruble, which is expected to serve as a means of payment and transfer, but not as a means of saving.

Introducing digital currencies of central banks will make it possible to use the extensive possibilities of digitalization and artificial intelligence for both consumers and sellers of goods and services.

It is expected to create special applications that recommend to consumers where and when it is better to spend their digital money. The most negative side of introducing CBDC will be the strengthening of state supervision over the choice of people's spendings and their behavior in general.

It is difficult at the moment to predict all consequences of the transition to the CBDC, including the consequences for international settlements. But it may eventually turn out that paper money will fade and the system of monetary circulation will fundamentally change.

As for Belarusians, those of them who are used to keeping savings in paper dollars may at one moment face a partial loss of savings. It does not matter what the reason will be — introducing an alternative world currency or the United States transition to digital money with fundamentally new properties and circulation mechanisms. But there is also a positive moment. If people have a question about what currency is the best to keep their funds suggests that they have free money.

Alexey BYKOV, Doctor of Economics, Professor, BISR analyst.