Date: May 19, 2023     Updated: October 7, 2023

DeDollarization and BRICS Special Drawing Rights. Is BRICS Gold Backed Special Drawing Rights As World Trade Currency really coming soon or just speculation?

Many experts doubted the viability of such an arrangement. While many countries are truly interested in moving away from the USD, there is no genuine alternative available yet. Due to the frequent exercise of financial sanctions, people in the world are worried that it could be applied to anyone at any moment. There is an understandable urgency in the desire to move away from the USD. But until lately, there is no real alternative. There is no other currency in the world people can put enough faith in, and can comfortably keep as a foreign exchange reserve. Now it looks like all the necessary conditions are present for it to become true.
But it may not happen after all! After Biden had a long talk with Modi, India would object to any expansion of the BRICS. And if BRICS is not expanding its reach, it will become just a toothless social gathering club.

Real possibility for Dedollarization to happen

If the BRICS grouping finally decide to expand, there is a real possibility for Dedollarization to happen. Experts believed that a gold backed BRICS Special Drawing Rights (B-SDR) may be a good substitute as a foreign exchange reserve currency for the BRICS members and the problems that comes with Dedollarization may finally be solved.

A BRICS Gold Backed Special Drawing Rights as Foreign Exchange Reserve (B-SDR)

This is how it works: A BRICS Gold Council (BCG) will control the issue of B-SDR. Any BRICS member country could choose to become a BCG member by setting up a secure BCG gold vault within its own country, holding its own gold reserve (DE-Centralized BRICS Gold Vault).

BRICS Gold Council DE-Centralized Gold Vault

The BCG gold vault will be under the joint custody of the individual member government and BCG. Access to it can only be granted with the joint governance of the two parties. This is to eliminate any undocumented tampering of said gold deposit without the consent of either party.

Each BCG member will be granted B-SDR according to the amount of gold stored in its BCG gold vault. This B-SDR will then be used as Foreign Exchange Reserve by each BCG member country. They can continue to use their existing currency for internal and international trade. The relative strength of their local currency will fluctuate with the totality of their B-SDR and the amount of currency they issued.

B-SDR could be traded among BRICS members

As all BRICS countries should have bilateral trade and currency swap agreements with each other, they can continue to trade using their bilateral currency. When country-X accumulates too much of country-Y's currency, it can be converted to B-SDR and settle through BCG, which will debit country-Y's B-SDR account and credit it to country-X's B-SDR account. Country-Y cannot continue to use up its B-SDR without financial consequence. It has to make money by somehow trading with a country-Z and thus replenish its B-SDR from country-Z. Or country-Y can purchase more gold from the open market to put in its BCG gold vault. If country-Y cannot do so, that means its B-SDR is depleting and its national currency will subsequently depreciate.

This will continue to function circularly and provide a complete international trade and currency exchange cycle. When a country encounters financial problems, it can borrow B-SDR from another country through bilateral negotiation and agreement.

All BRICS member currencies are backed by Gold stored in its own country

There is not enough gold to support a developing and expanding world economy. But that is easy to fix because BCG can adjust the unit amount of gold relative to the unit amount of B-SDR. If it doubles the amount of B-SDR for the same amount of gold, that means world market gold price will rise for the same relative percentage.

And any BCG member can purchase gold in the open market to increase it foreign exchange reserve.

Since the gold is saved within one's own country, there is no worry about putting it in another country's vault and later find it impossible to repatriate back home. Remember, in November 2018, the Bank of England refused the withdrawal of 14 tons of gold owned by the Central Bank of Venezuela at the request of US officials. Since the BCG gold vaults are also under the joint custody of BCG, no government, no matter how corrupt it may be, will not tamper with it unilaterally. The moment it tries, its currency will collapse immediately with the nullification of its B-SDR.

Minimum disruption, smooth implementation

This arrangement causes minimum disruption. Countries can continue to trade with USD and gradually move to the B-SDR system while building up their gold reserve in their BCG gold vault. Much of the world would still use USD for a long time to come but at a rate of gradual diminishment.

Geopolitical conflicts among BRICS members will not hinder the smooth implementation as no country's ego is hurt and there is no reserve currency from any particular country.

The problems with transacting in physical gold

1. Gold is bulky and the purity of its content is subject to dispute. Assurance that the collateral is actually there could also be an issue. Possible physical damage and loss increases its inconvenience.
2. It is hard to split into small units for minor business transactions.
3. Gold stored in someone else vault may not be retrievable.
4. Cannot be transferable electronically with high degree of certainty the collateral is actually there.

This B-SDR arrangement solved all problems with transacting in physical gold. Provided collateral verification, and eliminated the issue of trust.

B-SDR system will work because BRICS GDP outweighs the entire G-7 put together

As of 2023, BRICS GDP outweighs the entire G-7 put together, and 19 more countries are reportedly interested in joining the BRICS.

The geographic diversity and economic complementarity of the BRICS members makes things workable. The BRICS members are not united by shared territorial borders. Its members are able to produce a wider range of goods than those that are defined by geographic proximity, such as the Euro-zone.

The size and weight of the BRICS members, the wide range of goods and resources each member produces means that the members can source most, if not all, of their needs within the BRICS community and achieve self-sufficiency in international trade. And as the BRICS becomes such an economic heavyweight, countries around the world would be willing to do business using the BRICS currency and hold it as reserves because they will be able to buy most anything they need using the BRICS currency.

Most BRICS countries already have bilateral trade and currency swap agreements

Most BRICS countries already have bilateral trade and currency swap agreements to facilitate exchange without the USD. Without using the USD as a reserve currency, BRICS countries can now park their earned excessive income or money when not in use for trade. They can either buy gold directly to increase their B-SDR, or buy any other BRICS country's currency or its B-SDR.

Gold is a safe reserve asset, but it does not pay interest. Countries loaning out B-SDR can charge interest from the borrowing country. Countries can issue B-SDR backed interest bearing bonds. Settling international trade with physical gold is difficult, cumbersome and impractical but settling with B-SDR is convenient and workable.

BRICS countries can continue to issue debts denominated in their own currency. The debts of some BRICS countries may have to set the interest rate higher and maturity date shorter to compensate for the different levels of default risk.

After the implementation of this scheme:

A country's central bank can split their foreign reserves between gold and other reserve currencies depending on its portfolio, with the goal of gradually shifting more to gold.

For individuals and businesses, if their own country is a member of the BRICS gold SDR system and their local currency is fully backed, they can save the majority in local currency to earn interest. Or they can continue to shift money between foreign currencies to earn the highest interest with the lowest risk.

For import oriented businesses, they can allocate more to the currency of countries where they buy their products from, if those specific countries are members of the BRICS gold backed SDR scheme. In any event, they can continue to hold USD, Euro or Japanese Yen to facilitate trade with non BRICS countries.

Basically, it should be business as usual, with the goal of gradually shifting to currencies that are fully backed by gold SDR.

The B-SDR arrangement will solve many trade problems

Bangladesh has to pay a Russian nuclear power developer $318 million for the implementation of the Rooppur nuclear power plant project. It can't pay with USD due to sanction. And Bangladesh does not have enough Ruble to pay for it. Finally, after lengthy negotiations, in May 2023 Bangladesh and Russia agreed to settle the transaction with RMB, and transferring the money through the Chinese Cross-Border Inter-bank Payment System (CIPS). The payment has yet to be made as of June 2023, and reports have surfaced that Bangladesh's largest trading partner, the United States, is threatening sanctions on companies involved, as a warning to Dhaka against the move.

In May 2023 Pakistan received its first cargo of discounted Russian crude after a bilateral deal. The payment was made in USD. To avoid complications with sanction, Pakistan wanted to pay for future deliveries in RMB.

Russia has a trade imbalance with India, as India purchases a huge amount of Russian energy. As of April 2023 Russia has accumulated billions of Rupees that are sitting in Indian banks. Moscow needs to convert the Rupees into another currency.

Russia traded with China mostly in RMB and accumulated a lot of excess RMB. But it cannot source all of its imports from China. So Russia wants to park the proceeds in USD-denominated assets to buy other products it needs from the rest of the world, which still uses the dollar for trade.

If the B-SDR system is implemented, Russia will have no need to do so. Russia would be able to buy the rest of its imports from other countries through the use of the B-SDR.

A historical perspective to the issue of Dedollarization

The USD share of global reserves was 73% in 2001, 55% in 2021. That represented an average loss of ~1% per year. In 2022, the share was 47%. That means it lost 8% between 2021 and 2022, which is 8 times faster than the average of the previous two decades. This is mainly due to the freeze of Russia's over 300 billion USD foreign reserves in February 2022. Since then, every other country started to worry about its own saved dollars and started to find alternative. The global reserves share of USD is projected to be 30% by the end of 2024. With the implementation of the gold backed B-SDR system, such share could only shrink further and sooner.

August 2023 BRICS Summit in South Africa and BRICS-11

While China and Russia were earnest about the expansion of BRICS, India, after Modi's meeting with Biden, was lukewarm about the idea.

India, which standing astride the 2 competing camps, in the end cannot resist the insistence of both Russia and China.

Finally, a compromise was made. Six countries, including Iran, Saudi Arabia, the U.A.E., Egypt, Ethiopia and Argentina were invited to join the BRICS on January 1st, 2024. BRICS will then have 11 members and will become BRICS-11.

The expansion was regarded as a significant victory for the two leading members of the group, China and Russia. This expansion of BRICS is likely the first step in the long road to Dedollarization.

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• Hindu2014 [2023-08-25] said ...

  BRICS-11 is going to make a big difference. Now the group has expanded despite India's possible objection. The first step in dedollarization has been taken!

• Ross Yaung [2023-08-01] said ...

  The price of Gold will go thru the roof. better buy now. But too bad, have no spare money for it.