A BRICS Alternative to the SWIFT Payment System Could Accelerate De-Dollarization
来源:www.fxstreet.com;发表于:2024-04-18;人气指数:38
Thursday, April
18, 2024
A BRICS Alternative to the SWIFT
Payment System Could Accelerate De-Dollarization
By Mike Maharrey
With Russia taking the lead, the BRICS
bloc is talking about creating a new payment system that isn’t controlled by
the United States and that is not dependent on the dollar.
Such a system could accelerate
de-dollarization.
BRICS is an economic cooperation bloc
originally made up of Brazil, Russia, India, China, and South Africa. As of
Jan. 1, 2024, the bloc expanded to include Saudi Arabia, Egypt, the UAE, Iran,
and Ethiopia.
More than 40 other nations have
expressed interest in BRICS membership.
The expanded BRICS has a combined
population of about 3.5 billion people. The economies of the BRICS nations are
worth over $28.5 trillion and make up roughly 28 percent of the global economy.
BRICS nations also account for about 42 percent of global crude oil output.
Russia assumed the chairmanship of the
bloc in January 2024.
Earlier this year, Central Bank of
Russia governor, Elvira Nabiullina said Russia is leading discussions with
other BRICS countries about developing a payment system to serve as an
alternative to the current system.
Currently, most global trade moves
through the Society for Worldwide Interbank Financial Telecommunication (SWIFT)
system.
In effect, SWIFT serves as a
"superhighway" facilitating global trade. It operates as a global
financial messaging service, facilitating cross-border payments. As the SWIFT
website puts it, “SWIFT is the way the world moves value.”
Since the dollar serves as the world
reserve currency, SWIFT effectively facilitates the international dollar
system.
It also gives the United States a
powerful tool to shape foreign policy. It can use SWIFT as a hammer, punishing
countries that don't do its bidding by locking them out of the system.
This is exactly what happened to Russia
after it invaded Ukraine.
Officials initially indicated Russia
wouldn’t be locked out of SWIFT, but a few days later, the United States, the
European Union, the UK, and Canada issued a joint statement announcing SWIFT
would disconnect “selected” Russian banks from the global payment system.
This wasn’t the first time the U.S. used
SWIFT and the dollar as a stick to advance its foreign policy goals. In 2014,
the Obama administration locked several Russian financial institutions out of
SWIFT as relations between the two countries deteriorated over Ukraine and
Crimea. A few years later, the Trump administration threatened China in an
attempt to force that country to join in sanctioning North Korea.
It should come as no surprise that
countries with less than friendly relations with the United States might want
to avoid depending on a system that requires American blessings and U.S.
dollars.
A BRICS alternative to the Dollar
payment system
Russia has created its own payment
system to compete with SWIFT. The Russians began developing the System for
Transmitting Financial Messages (SPFS) in 2014 after the U.S. locked Russian
banks out of SWIFT for the first time. By the end of 2020, 23 foreign banks
connected to the SPFS. Most of these banks are in developing countries and
nations with rocky relationships with the U.S., but they include banks in
Germany and Switzerland. According to Nabiullina, the SPFS currently has 159
foreign participants in 20 countries.
In her announcement earlier this year,
Nabiullina pointed out that “similar infrastructure exists in other countries.”
For instance, China has developed a
system known as the Cross-Border Interbank Payments System (CIPS). Russia would
like to see these systems integrated across the BRICS bloc, creating a powerful
alternative to SWIFT.
“We are holding discussions on the
interaction of such platforms, but here the interest and technical readiness of
our partners are important.
Forexlive.com head of currency strategy
Adam Button told Kitco News that creating an independent payments system is in
the best interest of the BRICS bloc because “SWIFT has been weaponized now.”
"A big portion of the world is
always under threat of U.S. or European sanctions, and it's in their interest
to create an alternative system. The initial promise or purpose of SWIFT wasn't
to be used in the sanctions system, and they changed the rules. My sense is
that an alternative to SWIFT would have happened a long time ago if it had been
weaponized.”
But can such a system succeed?
Button thinks so. After all,
“Transferring money from bank to bank isn't rocket science.”
“There are some standards to be agreed
on and it will take some time. Then a launch is always going to be slow and
maybe the system serves as more of a backup, or just for Iranian and Russian
transfers or whoever else is under sanctions. But I think eventually this
system will prove out, and a decent part of the world will use it.
Such a system could raise gold’s role in
the international monetary system. The BRICS countries own a lot of gold. Since
just before the 2008 financial crisis official gold reserves held by BRICS
nations have grown from just over 1,500 tons to just over 6,600 tons today.
As one analyst pointed out, even if
there is some distrust between BRICS nations in using each other’s currencies,
gold could fill the role of the dollar as an intermediary currency.
Would an alternative payment system be a
problem for the U.S.?
The short answer is yes.
Why?
Because it would pose a direct threat to
dollar dominance.
Beyond eroding America’s foreign policy
influence, a widely used BRICS payment system could also accelerate
de-dollarization.
In fact, during last year’s summit,
BRICS leaders emphasized conducting increased trade within the bloc using local
currencies as part of a move towards de-dollarization, with a stated goal of
reducing the U.S. dollar’s dominance in global trade and finance.
This isn’t just a slap in America’s
face. It could have significant economic ramifications.
Because the global financial system runs
on dollars, the world needs a lot of them. The United States depends on this
global demand to underpin its profligate borrowing and spending.
De-dollarization could lead to a dollar glut.
The only reason the U.S. can borrow,
spend, and run massive budget deficits to the extent that it does is the
dollar’s role as the world reserve currency. It creates a built-in global
demand for dollars and dollar-denominated assets. This absorbs the Federal
Reserve’s money creation and helps maintain dollar strength despite the Federal
Reserve’s inflationary policies.
But what happens if that demand drops
leading to a dollar glut? What happens if BRICS nations and other countries
decide they don’t want to hold dollars?
A de-dollarization of the world economy
would cause the value of the U.S. currency to crash and likely spark a currency
crisis. Americans would feel the impact through more price inflation eating
away at the purchasing power of the dollar. At the extreme, it could even lead
to hyperinflation.
This won’t likely happen overnight, but
the de-dollarization trend is clearly accelerating. And to whatever extent it
occurs is a problem for the U.S. There is already an overabundance of U.S.
Treasuries in the marketplace and this is driving up yields. That means higher
interest expense for the U.S. government.
It’s important to remember that nothing
guarantees the dollar will maintain its dominance forever. In fact, history
says it won’t.
Mike Maharrey - Market Analyst Money
Metals Exchange.
FX Street
Source: www.fxstreet.com