BRICS vs. SWIFT

Since the time the US dollar was chosen to be the world reserve currency, America has held an economic advantage over the rest of the world. Almost weaponising the dollar, America has been seen to periodically assert this dominance for its own personal gains. Recent geopolitical events such as the ongoing conflict in Ukraine and rising tensions in the South China Sea have further highlighted the strategic use of the dollar in international relations. But how exactly is the United States able to weaponise the dollar? It does so by utilising the international payment system, abbreviated SWIFT. For example, in 2023, the US imposed sanctions on several Chinese technology firms, restricting their access to SWIFT and significantly impacting their global operations. 

The ‘Society for Worldwide Interbank Financial Telecommunication’ otherwise known as SWIFT is what enables financial institutions worldwide to undergo financial transactions in a secure, regulated environment. In other words, this is what nations use to make payments and settlements across borders and since the dollar serves as the global standard currency, it is able to exploit and heavily influence this system.

If we turn back the pages of history, we will notice how America has employed this ‘weapon’ in the past against its opposition. The United States can lock countries out of the worldwide financial system, which it effectively controls using the dollar. When relations between Russia and the United States severed, several Russian banks were blocked from using this system. It had actively threatened to lock China out of the system if it failed to follow U.N. sanctions against North Korea in 2018. More recently, the West weakened Russia’s economy by hindering its access to the SWIFT system amid the invasion of Ukraine alongside several other economic sanctions.

Consequently, a number of countries have taken steps to limit their dependence on the dollar. Work to establish an alternative payment system is already underway as countries race to come out on top. To escape and diversify from the greenback, central banks are buying sizable amounts of gold. Not only American adversaries but also allies have grown tired of this economic bullying. In recent years central banks including those of Turkey and India have significantly increased their gold reserves, reflecting a growing trend to diversify away from the US dollar. According to the World Gold Council, global gold reserves reach a new height in 2023. 

One organisation that will no longer bear these consequences is the BRICS. BRICS is an economic alliance between its members, consisting of Brazil, Russia, India, China and South Africa. Their main aim is to provide each other with economic aid in times of need and help them develop. Notably, it is not only restricted to these five countries, as it has agreed to provide assistance to other countries. In 2023, Saudi Arabia and Iran applied to become permanent members of BRICS. It was a move that could further enhance the alliance's economic influence and provide substantial backing for a BRICS-based alternative to the dollar.

The move to employ heavy economic sanctions by the US against Russia has hampered the relations of developing countries in the Middle East and South Asia that were reliant on Russian trade for essential goods and services, along with suffering huge economic losses. This has led them to diversify their portfolios with other reserve currencies such as the Chinese Yuan, the Russian Ruble and the Indian Rupee as a way to escape the dollar hegemony. Former US President Donald Trump’s administration had already set a precedent for aggressive use of economic sanctions which has continued to influence US foreign policy. Trump's policies highlighted the vulnerabilities of relying heavily on the dollar, prompting countries to seek more resilient financial systems.In an interview with CNBC, Trump stated — “I hate when countries go off the dollar, I would not allow countries to go off the dollar because when we lose that standard, that will be like losing a revolutionary war, That will be a hit to our country.”

The BRICS were likewise confronted with this issue. Members are attempting to build alternatives to US payment systems such as SWIFT in order to address it. In addition, BRICS has made significant progress in developing its own payment system. This includes BRICS Pay which is aimed at facilitating transactions among member states without relying on the dollar. This endeavour is motivated by increased worldwide trade and a desire to discover non-dollar solutions for international payment systems vulnerable to US government sanctions and dollar dominance. Moreover, BRICS is also planning to release a new global reserve currency basket consisting of the currencies of its current member states, including Real, Roubles, Rupee, Renminbi and Rand, with the aim of dethroning the US dollar and increasing their own sphere of influence in the economic world. An important factor that determines the strength of a currency is the demand and supply of that currency in the foreign exchange market. The current market situation is in favour of the BRICS, as many countries are following an anti-US sentiment. Many countries, including Saudi Arabia and Iran, which have vast reserves of oil and natural gas, have already applied to become permanent members of the BRICS. This is critical because we have seen in the past with the dollar that strong support from necessities such as petroleum can considerably improve the strength of a currency. Presently, the BRICS nations control 26% of global oil reserves, 46% of wheat production and 50% of the iron ore used for steel production, clearly showcasing the world's dependence on these countries. 

So, what does this imply for the dollar's hegemony and the rest of the global economy? If it were to be released into the market, it would surely disturb the dollar’s dominance and fluctuate the conditions favourable to the BRICS and their supporters. However, many experts argue that this might only be a small phase and that the dollar will stand out as superior to others in the long run. This is due to the trust and confidence that the dollar has provided to central banks to date, as it has proved to be the only currency that has remained unshaken during many economic nightmares. This year will be crucial in deciding who comes out victorious - BRICS or SWIFT.