Nearly 22 years after Jim O’Neill, then an economist at Goldman Sachs, coined the BRIC acronym to capture the economic potential of Brazil, Russia, India and China, the group, called the BRICS since the addition of South Africa, contributes more to global GDP (in purchasing-power-parity terms) than the G-7. The International Monetary Fund forecasts that China and India alone will generate about half of global growth this year.
But with geopolitical tensions running high, and the weaponisation of the dollar for national-security purposes continuing to escalate, the BRICS have taken on new significance, offering trade diversion and other relief to weaken the effectiveness of sanctions and fast-tracking the transition to a multipolar world. Since 2014, Russia’s trade with G-7 countries has fallen by more than 36 per cent, owing to unprecedented Western sanctions, while its trade with the other BRICS has increased by more than 121 per cent.
Following the European Union’s ban on imports of Russian oil products last year, China and India have been the two dominant buyers of Russian crude. Bilateral trade between China and Russia has been particularly strong in recent years, hitting a record $185 billion last year.
Given their economic success, the BRICS are increasingly seen in the Global South as a far more viable force for multilateralism than the Non-Aligned Movement founded in 1961. More than 40 countries, including Algeria, Egypt, Thailand and the United Arab Emirates, but also key G-20 members such as Argentina, Indonesia, Mexico, and Saudi Arabia, have expressed interest in joining the BRICS, and 22 have formally applied for membership.
Expansion will be high on the agenda at the group’s 15th summit, scheduled for August 22-24 in Johannesburg, South Africa, as will trade and investment facilitation. The latter includes many issues on which the bloc’s views diverge from those of the G-7, such as sustainable development, global governance reform (especially reform of the IMF), and de-dollarisation.
As more emerging-market economies explore ways to conduct trade in non-dollar currencies, a growing number of experts, including senior US government officials, have recognized that the weaponisation of finance may threaten the greenback’s dominance. US Treasury Secretary Janet L. Yellen recently admitted that the use of “financial sanctions that are linked to the role of the dollar... could undermine the hegemony of the dollar”.
The desire for de-dollarisation has given rise to the idea of a BRICS-issued reserve currency that members could use for cross-border trade. But while the BRICS countries, which collectively enjoy a comfortable current-account surplus, have the financial wherewithal to establish such a currency or unit of account, they lack the institutional infrastructure to sustain such a project.
Even assuming that the bloc’s members are fully aligned on geopolitical issues and are more inclined to cooperate than compete, building that infrastructure is a tall order. Like the euro, a shared project of this magnitude would require achieving macroeconomic convergence; agreeing on an exchange-rate mechanism; establishing an efficient multilateral payment and clearing system; and creating regulated, stable, and liquid financial markets that are big enough to absorb global savings and have low-risk default assets where surplus funds could be parked when they are not used for trade.
Given these challenges, South Africa’s ambassador to the group reiterated in July that a BRICS currency will not be on the summit’s agenda; deepening trade and settlement in local currencies will be. In fact, the use of local currencies in cross-border transactions has already yielded significant benefits for the BRICS, including lower transaction costs; a buffer against global volatility; increased trade among members, despite a challenging operating environment; and an easing of the balance-of-payments constraint associated with dollar funding.
And even though border tensions between China and India have grown, both countries stand to benefit greatly from the increased use of local currencies. Saudi Arabia is considering signing a deal with China to settle oil transactions in renminbi, while India is expanding the use of local-currency settlement (LCS) for bilateral trade beyond the BRICS, inviting more than 20 countries to open special vostro bank accounts to settle trade in rupees. Earlier this month, India made its first oil payment to the UAE in rupees.
The good news is that the BRICS already have the institutions they need to create an efficient and integrated payment system for cross-border transactions. The BRICS Interbank Cooperation Mechanism facilitates payments in local currencies between banks based within the bloc. BRICS Pay, a multi-currency digital international payments system, eliminates the need for “vehicle currencies”, such as the dollar or the euro, in transactions among member countries, reducing costs dramatically. Lastly, the Contingent Reserve Arrangement provides liquidity support to those BRICS facing short-term balance-of-payment pressures or currency gyrations.
The New Development Bank, which is spearheading the creation of a BRICS currency, also plans to increase local-currency financing, from 22 per cent to at least 30 per cent of the bank’s portfolio by 2026, and, more generally, to support efforts to reduce the dollar content of cross-border trade and investment between BRICS countries. In the lead-up to the summit, it issued its first South African rand bonds earlier this month. The two bonds of R1.5 billion were oversubscribed, attracting R2.67 billion of bids in total.
If, as expected, the BRICS group agrees to admit new members at the upcoming summit (Saudi Arabia looks most likely), it risks a divergence of interests and coordination challenges. But the benefits outweigh the risks.
With expansion, the BRICS market will expand dramatically, creating scale and accelerating the transition from bilateral to multilateral clearing and, ultimately, to a BRICS currency. This will address one of the major challenges associated with using LCS for bilateral trade: the difficulty of deploying local currencies once imbalances arise.
To be sure, the stickiness of institutional arrangements, along with the breadth and depth of US financial markets, will ensure the dollar’s dominance for some time to come. But an enlarged BRICS group would create a geopolitical coalition with the power to accelerate de-dollarisation and lead the transition to a more multipolar world, a far cry from the loosely associated clutch of fast-growing emerging markets that O’Neill identified a generation ago. It seems likely, then, that the BRICS 15th summit will be the most consequential yet.
Hippolyte Fofack is chief economist and director of Research at the African Export-Import Bank (Afreximbank). Copyright: Project Syndicate, 2023. www.project-syndicate.org
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