The desire of the Latin American states to leave or, at least, significantly reduce their level of dollar dependence has not yet enjoyed success. All projects implemented by them in order to increase the use of national currencies in mutual trade basically relied on the US dollar due to the lack of an alternative to replace it. In the current conditions of transformation, not only of the international relations system, but also of the global monetary and financial system, in the future, the currencies of the BRICS countries may serve as such an alternative, writes Anna Tsibulina, Associate Professor of the Integration Processes Department at MGIMO University.
At a certain point in time, the concept of an economy undergoing “dollarisation” took on a very negative connotation. Dollarisation in its most simplified form means the use of any foreign currency by any state. Another issue is that the scale of dollarisation can vary significantly: from full dollarisation, when the state officially accepts the currency of another country for all financial transactions, to partial dollarisation, when only some of the transactions are carried out using the currencies of other countries.
The dollarisation of the economy can bring some degree of stability, especially for countries with high and volatile inflation. For example, in 1999, Argentine President Carlos Menem proposed to accept the US dollar and thus to get rid of the dilemma of choosing the optimal monetary policy. In 2000, amid a deep political and economic crisis in the country, the authorities of Ecuador abandoned the use of their national currency in favour of the US dollar. In general, in the early 2000s many respected economists advocated dollarisation of not only developing, but also some industrialised countries.
With the onset of the 2008 global financial crisis and the start of quantitative easing in the US and the euro area, the benefits of dollarisation for a number of countries, including India and Brazil, became less clear. Other leaders of the BRICS states also spoke about the need to create a more just and balanced global monetary and financial system. After the United States began actively imposing sanctions on the Russian Federation in 2022, the issue of reducing dependence on the US currency became even more urgent. Currently, every tenth country in the world is under US sanctions, and tens of thousands of individuals and legal entities are excluded from the global banking system due to violations of the so-called “Washington Rules”. In April 2023, French President Emmanuel Macron called on the leaders of European countries to reduce their dependence on the US dollar in order to avoid becoming US “vassals”. A little later, Brazilian President Lula da Silva appealed to the leadership of the developing countries to step up work to abandon the dollar for the use of national currencies in foreign trade operations.
However, in the regional integration associations in Latin America and Africa, attempts were made to increase the role of national currencies in mutual settlements and reduce dependence on the US dollar long before vocal statements about the need for de-dollarisation. Within the framework of the Central American Common Market, which was created in 1960 by Guatemala, Honduras, Nicaragua and El Salvador, from 1962 to 1980, 92% of all settlements related to intra-regional trade were carried out using the Central American peso — a collective unit of account equal in value to the gold content of the US dollar. The settlement system ceased to exist in the early 1980s due to the accumulation of colossal debts by Nicaragua, which has been unable to meet its settlement obligations.
In 1965, an agreement on mutual payments and credits (Convenio de Pagos y Creditos Reciprocas — CPCR) was signed within the framework of the Latin American Free Trade Association (Argentina, Brazil, Chile, Mexico, Paraguay, Peru and Uruguay). The agreement provided for the establishment of a payment system in which the central banks of the participating countries provided loans in national currencies, and mutual settlements were made three times a year, i. e. it was essentially a multilateral clearing house. By the end of the 1970s, more than ¾ of settlements on transactions within the framework of intra-regional trade happened via CPCR. But it is worth paying attention to the fact that the multilateral repayment of the balanced amount of all loans was made in US dollars.
Since the early 1990s, the volume of transactions made through the clearing house began to decline due to the growth of intra-regional trade and the early repayment of obligations of participants in trading transactions. However, CPCR still exists after the 2017 reform. MERCOSUR, which includes Argentina, Brazil, Uruguay and Paraguay, has long had discussions about moving towards dollarisation or abandoning the fixed exchange rate regimes of member countries. But in the 2000s, the idea of reducing the role of the dollar in Latin Amercian economies began to gain popularity. In 2008, the central banks of Argentina and Brazil signed an agreement on the creation of a payment system in national currencies (Sistema de Pagos en Monedas Locales — SML), which was joined in 2014 by Uruguay, and in 2018 by Paraguay. Individuals and legal entities of the countries participating in the agreement can make settlements via SML without converting national currencies into US dollars. This system turned out to be especially attractive for small and medium-sized companies. In the early years, quite a few settlements went through SML, and by 2013 the annual number of settlements on export-import transactions reached nine thousand. SML has proven to be effective and viable for increasing the use of national currencies and reducing dependence on the dollar. However, perhaps the most ambitious project was the Unified System of Clearing Payments (Sistema unitario de compensacion regional de pagos — SUCRE) in the framework of ALBA, created in 2009 with the participation of Venezuela, Ecuador, Cuba, Bolivia and Nicaragua.
At that time, Venezuelan President Hugo Chavez was determined to limit US influence in the region and intensify intra-regional trade, including by reducing dependence on the US currency. SUKRE created its own virtual clearing unit of account — the sucre — based on a basket of member countries’ currencies, which acted as a means of payment. But it turned out to be impossible to completely abandon the use of the US dollar in the calculations. First, the US dollar was legal currency in Ecuador. Second, countries that had a trade deficit under the System had to cover it in American currency. Yes, the value of US dollars in trade was declining, but dependence still remained. Moreover, the main participants in SUCRE were Venezuela and Ecuador, whose trade accounted for about 89% of trade in ALBA. The functioning of the System was complicated by the fact that the mutual trade of these two countries was far from balanced: the lion’s share of Ecuador’s exports went to Venezuela. This state of affairs led to the systematic accumulation of a sucre surplus in Ecuador and a corresponding sucre deficit in Venezuela, which required US dollars to cover. Despite the fact that in the early years the number of transactions in the System steadily increased, by 2016 the number and amounts of transactions began to steadily decrease and SUCRE practically ceased to exist. Under SUCRE, neither balanced trade nor a reduction in dollar dependency has been achieved. It turns out that the political will of the leaders of the countries is insufficient to solve the set tasks in the absence of economic prerequisites for this kind of advanced monetary cooperation.
The desire of the Latin American states to leave or, at least, significantly reduce their level of dollar dependence has not yet enjoyed success. All projects implemented by them in order to increase the use of national currencies in mutual trade basically relied on the US dollar due to the lack of an alternative to replace it. In the current conditions of transformation, not only of the international relations system, but also of the global monetary and financial system, in the future, the currencies of the BRICS countries may serve as such an alternative.