BRICS vs. the US Dollar: Analyzing the Potential of a BRICS Reserve Currency and Leadership Challenges that may Arise

Abstract

Although there have been substantial changes in the global monetary structure since the 1960s, the US dollar continues to hold its position as the primary world reserve currency. For over six decades, several currencies, including the Deutsche Mark, Japanese Yen, euro, and recently the Chinese Renminbi, have been considered potential challengers but faced limitations. This thesis explores the potential for BRICS to challenge the US dollar's dominance as the world’s primary reserve currency and what leadership challenges could emerge from such a shift, mainly focusing on the investment perspective. This thesis uniquely integrates Economics with Leadership and Change to provide a fresh perspective on the subject of interest.

To understand what drives reserve currencies, we examine five key elements: (1) Economicmsize/dominance, (2) Credibility of the reserve issuer, (3) Transactional demand of reserve holders, (4) Inertia, and (5) Geopolitical and fundamental factors. Using a panel regression with data from five countries over 22 years, we find significant inertia in reserve currencies, creating substantial barriers for new currencies. Economic size (GDP share, stock market capitalization, FDI share), credibility (currency appreciation against SDR), transactional demand (trade share), and geopolitical factors (military expenditure, R&D expenditure, globalization) significantly impact reserve share as well.

While BRICS nations have growth potential and are reducing dependency on the US dollar, challenges such as inertia, internal economic inequalities, geopolitical tensions, and the need for robust financial infrastructures are some of the major elements for why we do not think a common BRICS currency would be nothing but a “new euro.” Furthermore, we will discuss the potential leadership challenges that could arise from such a shift, focusing primarily on the investment perspective. We will explore different strategies, mainly “Little Bets,” and supplement it with “Real Options” based on our findings, as we deemed it necessary. Although “Little Bets” are primarily used for innovation processes, this approach has proven to be highly flexible and can be universally applied and adjusted. This is particularly relevant due to the uncertainty of the object being investigated. It felt logical to choose a strategy that could benefit decision-makers in general.