US dollar as a retiring currency: What will replace it?

The US dollar remains the main currency for international settlements on the global market. In April 2023, it accounted for almost 43% of transactions, with the number of euro transactions being almost a third lower. However, the American currency is giving ground, albeit slowly. Tools that can replace the dollar in settlements and the role of the crypto sector in this matter was discussed by the participants in the research and practical conference, Prospects for Creating a New International Settlement System Amid a Global Financial Turbulence and Macroeconomic Transformation. The event, dedicated to the Day of the Russian Ruble, was held at the Congress Center of the Russian Chamber of Commerce and Industry at the initiative of the Moscow International Monetary Association and the Community of Financial Market Professionals. Artem Genkin, Doctor of Economics, Professor, and founder of Invest Foresight, delivered a report.

Vladimir Trefilov / RIA Novosti

Global challenge

The monopolistic position of the dollar in the global economic system is under threat. According to Artem Genkin, we are seeing a global transformation of the geopolitical landscape, which will be inevitably accompanied by economic changes. The figures show, for instance, that the share of the US dollar in the global reserves reduced from 73% in 2021 to 47% in 2022.

“Last year, the share of the dollar in the global reserves was reducing 10 times faster than in the previous 20 years,” Artem Genkin says.

Also, in the past four years, the US’s national debt has grown by over 40%, from $23.1 tln in 2019 to $32 tln in 2023, the expert says. The proportion of the debt to GNP is also significant: the US ranks 7th in these terms among the developed countries (however, Japan, Singapore and Greece are in the more worrying situation). As of now, the US has over $ 2.3 tln in circulation, including outside the country.

Digital competitor

Cryptocurrencies are becoming an increasingly popular alternative to fiat money. According to Artem Genkin, they neutralize the risks of overheated liquidity on the fiat money market and act as a sterilizing tool for the potential inflation-affected dollar overhang in the global economy.

Could crypto tools compete with the dollar in settlements to dislodge it? There is a scope of barriers, Artem Genkin notes. Currently, no adequate crypto assets are available to this end, given their volatility and non-compliance with cybersecurity requirements.

On the other hand, the maximum capitalization of the cryptocurrency market was already approaching $3 tln back in November 2021, a figure comparable with the amount of cash dollars in global circulation as well as the annual growth rate of the US government debt ($2.2 tln in 2019-2023).

The expert predicts that the cryptocurrency sector is likely to see its NFT markets advancing – as well as stablecoins, which could serve as an alternative to traditional calculating tools. Stablecoins are already becoming a safe-haven asset that helps, among others, to counteract the effects of sanctions. In June 2023, the markets of NFT and stablecoins reached $17.3 bln and $128.5 bln, respectively.

The central banks in different countries may begin to actively build up reserves including through both precious metals and other fiat currencies as well as related denominated tools. These may also include digital currencies of central banks or new exchange assets,” Artem Genkin notes.

A rival from China

The process of replacing the dollar in global settlements will most likely go gradually, with a possibility of several different tools growing more widespread in parallel.

The dollar iceberg will be consistently dismantled,” Artem Genkin says.

We can already observe the increasing amount of transactions in the Chinese currency. SWIFT data shows that the yuan’s share of global trade settlements had doubled to 4.5% by February 2023. Russia is keen to use the new currency as well: in the summer of 2022, the country ranked 3rd as regards the use of yuan in cross-border trade.

The yuan can indeed become a global currency, according to Russia’s former minister of economy Andrei Nechayev.

“The only country whose currency may become the world’s reserve one is China,” he clarifies.

This will require China to develop its financial market and, most importantly, making full convertibility of its currency, which is still not fully convertible by international standards.

Focusing on national currencies

Within the next decade, countries may switch to widespread settlements in their own national currencies. Russia is leading the way: over 40% of Russian exports were invoiced in its national currency as of April 2023. The trend is observed in other regions as well, with Argentina and China carrying out such settlements.

This mechanism would allow Russia to substantially mitigate sanctions risks, according to Mikhail Ershov, Chief Director of Financial Research at the Institute of Energy and Finance. Additionally, it would increase the domestic market depth and the demand for rubles, and reduce exchange rate volatility – which may transform the concept of the exchange rate mechanism, the expert emphasizes.

“Exporters were keen to see the ruble devaluate: the cheaper the ruble, the higher the amounts received after converting dollars under export contracts,” the expert recalls.

As regards ruble settlements, exporting companies will seek a strong, high-valued national currency, Ershov notes.

Yet, the trend will largely depend on the willingness of all trade operation’s participants to do so, Andrei Nechayev notes. So far, a large number of countries that consider such an option are energy exporters – which means that settlements in national currencies may result in a trade imbalance.

Currency for BRICS

By 2028, BRICS economies – Brazil, India, China, Russia, and South Africa – will amount to nearly one third of global growth, according to estimations by the International Monetary Fund. A new currency may also emerge for settlements between these countries, says Denis Solovyov, Deputy Director for Financial Markets at the Russian Agricultural Bank (Rosselkhozbank). This currency may become supranational as well as gold-backed.

According to the expert, launching a new calculation tool will not be time-consuming, while the issue will be a focus at the upcoming summit in South Africa.

“It is quite possible that the BRICS will create a new currency within the next five years,” Denis Solovyov emphasizes.

Should it happen, the US dollar’s dominance in international settlements may see a drastic decline, the expert notes.

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