US President-elect Donald Trump has warned the BRICS countries that they will be hit with 100% tariffs if they attempt to set up an alternative currency to the dollar to settle trade deals.

“Do not even think about creating your own BRICS currency, or the US will slam 100% tariffs on you,” Trump said in an angry tweet.

“The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these Countries that they will neither create a new BRICS currency, nor back another Currency to replace the mighty US Dollar, or they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful US Economy. They can go and find another ‘sucker!’,” Trump wrote.

The US weaponised the dollar after SWIFT sanctions were imposed on Russia only days after its invasion of Ukraine, effectively banning Moscow from the using the US currency. Russia has begun settling most of its trade with China and the other Eurasian Economic Union (EEU) members using national currencies in the meantime. Russia and China have even suggested abandoning money altogether and reintroducing barter trade as an extreme solution.

More recently, US financial sanctions have been tightened and have caused many of Russia’s partners to cut off banking services for fear of bringing down secondary sanctions on themselves.

Russia has been casting about of an alternative means of settling its international trade deals and suggested a “BRICS Pay” cryptocurrency solution at the recent BRICS summit in Kazakh in November.

“This system links commercial banks via BRICS central banks and uses blockchain for secure currency exchanges. In theory, it protects members like Brazil, India, and Saudi Arabia from unilateral US pressure. But there are major challenges,” says Alexandra Prokopenko, a political economy analyst with Carnegie Endowment for International Peace. “BRICS trade is highly asymmetric: Most members rely on China.”

Prokopenko goes on to list some of the issues that need to be fixed before BRICS Pay can become a viable alternative to the dollar.

• No Synthetic Currency: Stabilizing exchanges without a tool like the IMF's SDR is hard.
• Capital Controls: Russia, China, and India use restrictions on capital flows, making cross-border transactions harder.
• Raw materials: Apart from India, all BRICS countries are tied to Chinese demand for raw materials.
• Inflation: While inflation in China is stable, it is more volatile in other countries, leading to a desynchronization of monetary policy.

“Because of this, and not of Trump's threats, a BRICS currency and payment system is unlikely to become a reality. However, Trump's determination to weaponize the dollar will only encourage attempts by US rivals to develop financial alternatives, which means increasing fragmentation,” Prokopenko concludes.

Nevertheless, the idea was well received by the  other BRICS members and the Global South in general as central bankers around the world are now nervous of their exposure to the dollar and the power that gives the White House over them, now that it has shown it is willing to use the currency as a potent weapon.

The Russian ruble has been particularly hard hit in just the last week after the US added the state-owned Gazprombank to its sanctions list, the only big Russian bank that had been exempted in order to settle Russia surviving oil and gas sales to Europe. The Central Bank of Russia (CBR) has been forced to take desperate measures to try to halt the slide of the national currency, which crashed through the psychologically important RUB100 to the dollar barrier last week. Sanctions imposed in the middle of summer have also caused a shortage of yuan liquidity in Russia, which has become most important foreign exchange currency used by Russia as a reserve currency and in international trade.

The US aggressive use of its currency has already led to the dollar’s share in global reserves to fall to a 30-year low, as of the second quarter of 2024, as central bankers around the world reduce their exposure to the now politically vulnerable greenback. The dollar's share in international reserves dropped to 58.22% in the first quarter – its lowest level since 1995.

Companies are much more reluctant to dump the dollar, and it remains pre-eminent as the foreign currency of choice for settling international commercial trade deals, accounting for 96% of all contracts in the Americas and 74% of deals in the Asia-Pacific region. The dollar is weaker in Europe, where two thirds (66%) of deals in the EU and neighbours are settled in euros.

Nevertheless, in the last three years more deals are being denominated in other currencies, a trend fuelled by Global South and BRICS countries in particular, as they start to settle more of their trade in their mutual national currencies. Russian President Vladimir Putin said recently that 88% of all Commonwealth of Independent States (CIS) trade was settled in mutual currencies, made easier as these countries run relatively flat balance-of-trade regimes and so have use for each other’s currencies.

Still, the moves to set up alternatives is ongoing. Brazilian President Luiz Inácio Lula da Silva has suggested setting up a pan-Latin American currency to facilitate trade amongst members of Mercosur, but little progress has been made.

Remarkably, Lula has long championed the creation of alternatives to the US dollar for global trade and finance. At the 2023 BRICS summit in South Africa he stressed the need to reduce vulnerabilities of member states tied to dollar dominance, and such sentiments were echoed during last month’s bloc summit in Kazan.

However, Brazil's broader position is more nuanced. Sources within the government indicate that while the country supports exploring other options, it stops short of calling for a complete ditching of the US dollar. The approach is described as pragmatic, balancing ambition with economic realities, and walking a tightrope so as not to damage important ties with the West.

India would also be a willing participant, as the rupee is only partially convertible, which causes New Delhi headaches in settling its trade with Russia; oil exports to India from Russia have mushroomed, but Russia imports little from India, leaving New Delhi with a $40bn trade deficit with Russia that needs to be financed in something other than rupees.

Working against India at present is a deliberate effort by New Delhi to refrain from making any comment one way or the other on the subject, at least for now. Questions were raised on December 3 in the Indian capital following the comments by Trump, although a tepid response merely pointed to Russia using its presidency of BRICS to prepare a report covering various possibilities vis-a-vis existing currency systems and potential alternatives.

The solution suggested in Kazan is to launch the BRICS Pay cryptocurrency that would be backed by physical commodities, including oil, gas and metals, that are the subject of the bulk of this trade and would give the currency some real value. However, experts say that the technical and legal problems that need to be overcome mean the very earliest the coin could appear is 2028, if then, and working BRICS currency system is unlike to appear until the end of Trump’s next term in office.

Experts agree that it will take years, if not decades, for the rest of the world to unwind their dependence on the dollar, which was built into the international financial system when the world abandoned the gold standard at the Bretton Woods meeting in 1944 that put the dollar at the centre of a fiat currency system.

While moving from the dollar to using the yuan or euro to settle trade deals is theoretically possible and relatively straightforward, the situation is made far more complicated by fact that international borrowing is also largely denominated in dollars and the rest of the world has some $12 trillion of US-denominated debt outstanding.

BRICS countries cannot walk away from the dollar without inflicting huge pain on themselves, as by leaving the dollar they would cause a liquidity scarcity, because their companies would still need dollars to service and repay their dollar-denominated debt. Defaulting on this much debt is also not an option.