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Putin's plan to weaken the dollar involves a strategic move during the BRICS summit. Find out how this strategy can violate the imposed sanctions and the impact it can have on the global economy!
Vladimir Putin, the president of Russia, is posing for photos with the leaders of approximately 24 countries, including figures of great global geopolitical importance such as Narendra Modi, from India, and Xi Jinping, from China. One of the objectives of the BRICS meeting is clear: to reduce dependence on the dollar.
The event takes place during the summit of BRICS, headquartered in Kazan, on the banks of the river Volga. This event marks a turning point not only for the bloc, which the previous year expanded its membership from five to ten, but also for Putin, who had to avoid attending the summit in Johannesburg due to an arrest warrant issued by the International Criminal Court in The Hague.
Unlike the past event, this time Putin, President of Russia, will be present and will seek to exercise a leadership role, while the BRICS tries to consolidate itself as an alliance capable of challenging Western hegemony on the global stage.
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This bloc, which initially united Brazil, Russia, India, China and South Africa, has faced significant challenges throughout its 15 years of existence.
However, with expansion to include more members such as Egypt and Iran, Putin believes that the BRICS may finally gain the weight needed to reshape the world economic order.
BRICS Bridge: The new global payments strategy and the end of dependence on the Dollar
One of the main themes of this summit will be the advancement of the proposal for a global financial system as an alternative to the Dollar. This system, named BRICS Bridge, aims to allow its members to conduct economic operations without depending on the dollar or the euro, currencies traditionally controlled by Western powers.
According to Sergei Lavrov, Russia's Foreign Minister, this system would allow the bloc's economies to carry out transactions without being subject to sanctions imposed by the United States or its European allies.
The idea of BRICS Bridge revolves around digital platforms managed by the central banks of member countries. This digital payments system aims to bypass current financial networks, which are largely dominated by the West, especially the United States. The proposal is that this new system will be fully operational within a year.
The centrality of the Dollar and the financial dominance of the USA
After World War II, the United States emerged as the greatest global economic and military power, consolidating the dollar as the reference currency for international transactions.
This American financial centrality has allowed the country to exercise significant control over global transactions.
Nearly 60 percent of global foreign exchange reserves are still denominated in dollars, a reflection of both the stability of the American financial system and investor confidence in the dollar as a safe haven against inflation and expropriation.
The dollar's dominance has also allowed the United States to create a complex web of interconnected payment systems, placing American banks at the center of global commerce.
The most common analogy to explain this system is to compare it to international flights: if two airports do not have a direct connection, passengers need to make a stopover at a large connecting hub.
In the case of global finance, that hub is the United States, where banks around the world convert foreign currencies into dollars so they can be used in international transactions.
However, this centrality gave the American government immense power, often called “panoptic effect"and "choke point".
Since nearly all banks that deal in dollars must operate through correspondent banks located in the US, this allows the US government to monitor global transactions and impose sanctions with relative ease.
Rather than resorting to military conflict, the US has significantly increased its use of economic sanctions to exert geopolitical influence. A notable example was the exclusion of Iran from the SWIFT system in 2018, which virtually paralyzed the Iranian banking system.
Rapid response to the conflict in Ukraine
However, the West's financial response to the Russian invasion of Ukraine in 2022 was of unprecedented magnitude.
The United States and its allies froze $282 billion of Russian assets in foreign banks and disconnected major Russian banks from the SWIFT system, significantly hampering Russia's ability to conduct international transactions.
Furthermore, the US government threatened to impose secondary sanctions on any bank or country that helped Russia circumvent these measures.
The impact was so severe that even Europe, which supported the sanctions, was alarmed by the speed with which companies like Visa and MasterCard ceased operations in Russia.
These events have prompted Moscow to accelerate its search for alternatives to the Western financial system. Russian President Putin hopes that the BRICS Bridge will help ease the economic hardships Russia faces by enabling transactions outside the dollar-dominated system.
For Putin, the BRICS Bridge is not just a geopolitical strategy, but an urgent necessity. Russia, which now relies almost exclusively on the yuan for international transactions, is facing a shortage of foreign currency.
In an attempt to overcome this crisis, Russia has had to resort to unusual trade exchanges, such as the recent trade of tangerines with Pakistan, which were paid for with chickpeas and lentils.
China's role in payment system reform
While Russia faces challenges with sanctions, China sees technological advancement in the financial sector as a solution to reduce American power.
The Chinese strategy is based on developing payment technologies that can bypass the traditional system, dominated by the US.
The BRICS Bridge, which can speed up and make international financial transactions cheaper, is part of this broader strategy.
Second The Economist,, advances in this field are closely watched by both emerging nations and Western powers, concerned about the possibility that these systems could be used to circumvent sanctions and strengthen the position of geopolitical adversaries.
The BRICS Bridge project appears to have been inspired by another project known as mBridge, an experimental digital payments platform developed by the Bank for International Settlements (BIS), in collaboration with the central banks of China, Hong Kong, Thailand and the United Arab Emirates.
mBridge has proven to be extremely efficient, reducing transaction times from days to seconds and virtually eliminating costs. This efficiency has attracted the attention of many emerging economies, which are increasingly interested in alternative solutions to the current financial system.
The fragility of the global financial system
The centrality of the dollar as the world’s reserve currency creates a vulnerability for countries that do not have direct control over it. This was acutely demonstrated in the case of Russia, which was quickly excluded from the global payments system after sanctions.
China, on the other hand, has for years expressed concerns about its financial system’s overreliance on the dollar. The sanctions on Russia have served as a reminder of the vulnerability many countries face when relying on a currency that can be “weaponized” in geopolitical conflicts.
President Putin, President of Russia, sees the creation of the BRICS Bridge is a way to alleviate the pressures Russia is currently facing by allowing member countries of the bloc to conduct transactions without having to go through the American financial system.
Discussions over the creation of a credit rating agency and a reinsurance insurance system for Russian oil carriers also demonstrate the bloc's intention to move away from Western-controlled systems.
However, creating a global alternative system to the dollar is not a simple task. In addition to technical barriers, such as ensuring sufficient liquidity to sustain the system, there are political and diplomatic issues.
The project to create a common currency for BRICS, for example, faces resistance from India, which is suspicious of China's growing power.
Lack of trust among members can be a significant obstacle to the implementation of a fully integrated financial system.
The future of digital payment systems
The discussion around the BRICS Bridge reflects a broader trend in the financial world: the growing adoption of digital currencies.
Around 134 central banks around the world are currently exploring or developing their own digital currencies. While most of these projects are focused on the domestic market, a growing number of countries, especially after the invasion of Ucrania, is examining how digital currencies can be used for international transactions.
The current system is often criticized for being slow and expensive. For many countries, especially developing ones, the promise of a more efficient system is attractive.
However, for the West, the creation of new payment systems represents a direct challenge to the hegemony of the dollar. US authorities, for example, have already expressed concern about the mBridge project, warning that it could be used to undermine the dollar-based system.
The world in transformation
What is at stake at the BRICS summit in Kazan goes far beyond discussions about new payment technologies.
The BRICS bloc represents an attempt to reshape the global financial order by creating alternatives to the Western-centric system and the US dollar.
While it is still too early to predict the real impact of these initiatives, growing global dissatisfaction with the current system, combined with technological advances, suggests that significant changes are on the way.
For Russian President Putin and his allies, the BRICS Bridge is more than a financial tool; it is a political statement. By creating a system that enables financial transactions outside the reach of Western sanctions, the bloc is directly challenging the global power structure.
However, the success of this project will depend on the ability of BRICS to overcome its internal differences and create a system that inspires confidence among its members and the rest of the world.
Article made with information originally published in The Economist,.
