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UPSC MainsGeneral Studies Paper IIInternational RelationsPractice question

BRICS Alternative Payment Systems and De-Dollarisation

“BRICS’ push for alternative payment systems is less about de-dollarisation and more about reducing transaction costs and financial vulnerabilities.” Examine.

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Introduce the context of BRICS payment initiatives highlighted in recent summits like the Kazan Declaration. Analyse how alternative mechanisms reduce transaction costs and mitigate financial vulnerabilities. Critically examine why outright de-dollarisation remains secondary due to structural constraints and divergent geopolitical interests, concluding on financial multipolarity and systemic redundancy.

Model answer

349 words

Introduction

The BRICS push for financial settlement platforms—such as BRICS Pay, BRICS Bridge, and local currency trading frameworks reiterated in the 2024 Kazan Declaration—reflects pragmatic risk-hedging rather than an ideological campaign to overthrow the US dollar. Developing nations are primarily seeking functional alternatives to insulate their economies and streamline cross-border trade.

Lowering Transaction Costs and Mitigating Financial Vulnerabilities

  • Lowering Transaction Costs: Cross-border trade through conventional dollar-denominated routes involves high intermediary fees and foreign exchange friction. Bilateral settlement frameworks, such as the Reserve Bank of India’s Special Rupee Vostro Accounts (SRVA) and the India-UAE Local Currency Settlement System, eliminate double-conversion currency losses and delays in Western correspondent banking.
  • Shielding Against Unilateral Sanctions: The weaponisation of the US dollar and the exclusion of nations from the SWIFT messaging network demonstrated the fragility of concentrated global financial architecture. Decentralised and interoperable payment rails preserve economic sovereignty and cross-border trade continuity under geopolitical stress.
  • Macroeconomic Insulation: Reliance on dollar liquidity exposes emerging markets to the monetary policy cycles of the US Federal Reserve. Settle-in-local-currency mechanisms buffer developing economies against dollar shortages, exchange-rate volatility, and imported inflation.

Why De-Dollarisation Remains Secondary

  • Dominance of the Dollar: The US dollar accounts for nearly 90% of global foreign exchange transactions and constitutes the overwhelming share of global central bank reserves. Displacing it is impractical without deep, liquid, and open capital markets in alternative currencies.
  • Structural and Regulatory Bottlenecks: Major BRICS currencies like the Chinese Renminbi and Indian Rupee are not fully convertible on the capital account. Shallow domestic bond markets and capital controls prevent these currencies from serving as universal global reserve assets.
  • Divergent Geopolitical Interests: BRICS is not a monolithic geopolitical bloc. While Russia and Iran seek systemic disruption of the Western financial architecture, democratic members like India and Brazil pursue strategic autonomy and multi-alignment. Specifically, India strongly opposes replacing Western financial centrality with a Yuan-centric monetary system.

Conclusion

BRICS payment systems do not aim to dismantle the Bretton Woods architecture overnight, but rather serve as instruments of systemic redundancy. By fostering interoperable cross-border payment rails, they advance financial multipolarity, reduce transactional friction, and enhance national economic resilience.

Key facts to remember

definition
Special Rupee Vostro Account (SRVA)

An account opened by a foreign bank with a domestic bank in India to hold Indian Rupees, allowing cross-border trade settlement directly in local currency without routing through foreign exchange conversions.

statistic

The US dollar features on one side of roughly 85% to 90% of all global foreign exchange transactions.

— Bank for International Settlements (Triennial Central Bank Survey)
scheme
BRICS Pay Initiative

A proposed digital payments framework aiming to allow cross-border transactions among BRICS members in national currencies without relying on traditional Western correspondent networks.

Frequently asked questions

Why is BRICS not actively pursuing a common anti-dollar currency?

A single currency requires fiscal coordination, capital account convertibility, and deep integration that BRICS lacks. Moreover, members like India seek multi-alignment rather than anti-Western confrontation, and resist creating a Yuan-dominated regional bloc.

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