The recent summit of the Shanghai Cooperation Organization (SCO) highlights ongoing discussions among its ten member states to reduce dependency on the US dollar in international trade. Leaders often propose to “ditch the dollar,” yet these talks remain largely superficial. Without a viable alternative, the dollar continues to reign as the primary reserve and trade currency.
The SCO’s members include Belarus, China, India, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Russia, Tajikistan, and Uzbekistan. Despite the calls for dollar alternatives, the currencies of these nations are considered weak. None are fully convertible, which means they cannot be exchanged freely in global markets. For instance, the current exchange rates paint a stark picture: the Belarusian ruble stands at 3.37 per US dollar, with the Chinese yuan at 7.13 and the Pakistani rupee at 283.37. Such discrepancies illustrate the fragility of these currencies compared to the US dollar.
Efforts to cultivate a strong currency within the SCO or BRICS fail due to the inherent weaknesses of their respective currencies. An effective international currency must possess three essential features: it needs to be widely traded, supported by politically sound institutions, and accepted beyond its borders. The dollar and the euro meet these criteria. Conversely, SCO currencies suffer from strict government controls, high inflation, and a lack of institutional trust.
Four main proposals have been discussed to facilitate moving away from the dollar: a monetary union, a currency basket, a peg to a stable asset, and currency swaps. Each has its own flaws. A monetary union would require cohesiveness among members, which is unlikely given the vast discrepancies in economic stability and fiscal discipline among SCO nations. In Europe, the euro was adopted only after decades of institutional development and mutual agreements—neither of which exists within the SCO framework. Creating such a union would burden stronger economies with the weaknesses of the less developed nations, leading to potential crises far worse than the current state of the eurozone.
The notion of a currency basket, akin to the International Monetary Fund’s Special Drawing Rights (SDRs), also falters. The inherent volatility and non-convertibility of member currencies would render the basket untrustworthy and inadequate as a mainstream currency. Distrust regarding the weighting of currencies—especially fears of Chinese dominance—further complicates implementation.
Meanwhile, the idea of pegging a currency to a stable asset, like gold, ultimately undermines the goal of reducing reliance on the dollar. Members would still be tied to a global economic system they seek to escape. Pegging would also require member nations to hold substantial reserves, a burden exceeding even what China could feasibly manage. Sanctions further exacerbate the risks associated with such pegs.
Currency swaps are no more viable. Although designed to allow trade settlements using local currencies, practical realities hinder their execution. The economic disparities between stronger and weaker nations within the SCO create imbalanced responsibilities when entering swaps. Russia and Iran face heavy sanctions, leading to challenges in facilitating trade. As a result, even the yuan has limits on its convertibility, making it less attractive for foreign companies.
Operationally, establishing meaningful currency swaps would necessitate bilateral agreements among the ten SCO members, each demanding reserves and compliance monitoring—an undertaking fraught with complications. More critically, stronger economies would need to hold depreciating currencies, while weaker nations would lack the necessary resources to reciprocate.
Despite calls for an SCO Development Bank or a clearing mechanism, these proposals remain stagnant. While swaps could theoretically reduce USD use in a few isolated trades, like yuan-ruble exchanges between Russia and China, they cannot effectively scale to challenge the dollar’s dominance in global trade, especially in commodities.
In summary, all four proposals reaffirm a fundamental truth: SCO currencies lack the strength and credibility necessary to replace the dollar. The organization remains dependent on the US dollar, rendering its talks of de-dollarization mere posturing. Until meaningful reforms and advancements within member economies address these structural challenges, the dollar is likely to maintain its stronghold in international finance.
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