The BRICS alliance initially was a theory put forward by a Goldman Sachs economist in 2001 proposing that a group of promising, developing economies would significantly grow to outperform the G7’s cumulative GDP within a decade. While at the time this theory was ridiculed in economic circles, decades later, the countries put forward in this hypothesis account for 40% of the world’s population, 16% of its trade, and a quarter of its GDP.
BRICS – which stands for the economies of Brazil, Russia, India, China, and South Africa – is now an alternative formidable power in a rapidly changing geopolitical landscape. The economist behind the theory – Jim O’Niell – mainly justified his theory based on the basis of purchasing power parity since the original four economies were all larger than Canada and ranked at the time among the top ten largest economies. This is significant because the rate at which one country’s currency has to be converted into that of another’s to buy the same amount of goods and services has a tremendous effect on GDP. Since the countries in question were developing ones, where non-traded goods are much cheaper than in developed countries, using PPP to weigh their economies made perfect sense.
BRICS is attracting more attention now with several developing countries interested in joining the group due to the comparatively strong US dollar. Because of the demand and strength of the USD, countries are experiencing higher prices for imported products, fleeing foreign investors, and higher interest rates that not only add to their debt but also slow down growth. An overly strong US dollar could also result in higher debts and imported inflation for developing countries. But could the BRICS alliance provide an alternative for countries seeking relief?
BRICS Alliance vs. the USD
A perfect example of a country hit hard by the USD’s strength this year is Ghana. The country depends heavily on imports of food and oil. It also depends on loans, which it has to pay back in USD plus interest. Because of the strength of the USD and rising interest rates, the amount Ghana has to pay back has already multiplied. As a result, Ghana’s currency has lost 45% of its value and the country suffers from imported inflation as well as debt equivalent to 78% of its GDP. The debt situation combined with the USD weighing down Ghana’s Cedi, has driven the Ghanaian government to announce plans for buying oil products with gold rather than the United States’ dollar reserves.
Ghana’s gold-for-oil initiative is what economists like to call de-dollarization, or the process of substituting the US dollar as the currency used for trading oil or other commodities. BRICS has been the biggest adopter of de-dollarization; not only is it using local currencies for trade within the BRICS alliance, but it’s also using them to trade with other developing countries. This is appealing to countries like Ghana and many other developing countries which have shown interest in joining the BRICS alliance this year. If the strength of the USD continues to affect developing economies negatively, then BRICS could quickly expand – possibly overturning the post-war world order in the process.
The Origin of the BRICS Alliance
In order to understand if BRICS has the potential to overturn this system, it’s important to first understand how the group came to be. Looking back, Jim O’Neill – an economist and former minister in the David Cameron government – was well ahead of other economists for his time. He was inspired by the implications of globalization which led him to share his hypothesis in papers published in 2001 and 2003. These papers predicted that the four economies of Brazil, Russia, India, and China, would outperform the G6 excluding Canada by 2050. Later, the theory was revised, changing the deadline to 2032 and adding South Africa to this list of countries.
O’Neill argued that with these quickly developing economies, changes would have to be made to global governance to make a more representative G7. O’Neill hypothesized that due to these countries’ large populations, economic potential, and the governments’ willingness to develop, they would emerge as major economies. However, very few experts agreed with this theory, pointing out that Russia and Brazil heavily rely on their natural resources whose volatile prices could make them a risky bet.
Up until 2009, O’Neill’s theory was largely overlooked. But his theory was eventually proved correct when the countries of Brazil, Russia, India, and China came together for the first BRIC summit held in Russia that year. Putin called for the meeting saying the countries should meet to discuss how to “overcome the [2008 financial] crisis and establish a fairer international system”. This eventually led to annual meetings of the G20 summit, which includes the four BRIC members, to create a more representative global governance as O’Neill had predicted.
While O’Neill later said he got it right with China and India, he wasn’t as lucky with Russia and Brazil which, as critics had postulated, were too reliant on natural resources for their economies. As a Brazilian once told O’Neill, “we all know that the only reason the B is there is because without it there is no acronym”.
New BRICS Alliance Members
Acronyms aside, the BRICS alliance now accounts for 25% of the world’s GDP, 16% of its trade and 40% of the Earth’s population. Its role in the world economy will likely continue to grow since expansion was the headline of this summer’s meeting. Russia and China appear to be using the new member applications to show that despite the Ukraine War and weakening US-China relations, these world powers still have clout. Therefore, adding new members might be an opportunity to make BRICS more China-centric although this would require consensus from all members including India which could use its vote to reign in China’s influence.
Seeking a “new economic world order where parity and equity between countries will reign”, Iran, Argentina, and Algeria were this year’s applicants to the BRICS alliance. Algeria is likely one of the most contentious applicants following its $7 billion arms deal with Russia in September which led to demands that Algeria be sanctioned. However, Algeria is still Africa’s biggest exporter and Europe’s third largest provider of natural gas. This means the country has played an important role in supplying Europe with gas after the Russian invasion of Ukraine. With Europe realizing Algeria’s importance and China taking the position of Algeria’s largest trading partner, the country could be a good fit for BRICS membership. However, its acceptance could provoke a reaction from the US.
Looking ahead, Nigeria, Egypt, Turkey and Indonesia are the next countries slated to apply for membership according to Russia’s Foreign Minister. In addition to these countries, South Africa announced that Saudi Arabia intended to apply for BRICS membership – a move which could aggravate US relations with the BRICS alliance even more.
Ending the Petrodollar?
Saudi Arabia’s OPEC+ announcement that it would be cutting oil production by 2 million barrels a day may have hurt its relations with the US, but things between both countries could become dire if Saudi Arabia is given BRICS membership. Admitting Saudi Arabia into the BRICS alliance would likely undermine the US’ “oil for security” policy – threatening the petrodollar in the process.
However, the Kingdom’s souring relationship with Washington could spell good news for China as the Saudis look elsewhere for economic partnerships. The Saudis have been a major contributor to the USD’s strength thanks to the petrodollar. But, as relations with the US worsen and as Russia and China maintain close ties with the Kingdom, they might be able to get the Saudis to give up on the US dollar. This would have a tremendous effect on the US currency and with this possibility in mind, Saudi Arabia joining the BRICS alliance could quickly make governments like the US wonder how dangerous the alliance could be.
As is, the major threat BRICS poses is to the USD, especially now that the group announced its plans for an inter-country payment system and an alternative reserve currency. In 2019, BRICS Pay, a single payment system that allows for the use of different currencies and links cards to e-wallets, was in development. Following the West’s sanctions on Russia this year and its exclusion from global USD-backed financial systems like SWIFT, Russia wanted to take it a step further. Asking its allies to use local currencies in their trades, Russia has since urged for the integration of payment systems and cards within BRICS. If Russia is successful, we could see the start of de-dollarization as some of the world’s most powerful economies endeavor to replace the USD with local currencies instead.
De-Dollarization
As the name suggests, de-dollarization means the US dollar would no longer be the world’s dominant currency. Some concerns were raised about the US dollar’s dominance after the 2008 financial crash, but BRICS’ attempts at de-dollarization have been ongoing for a few years now. The share of the US dollar in trades between Russia and China fell from 90% in 2015 to 46% in 2020. Both countries have also been dodging the US dollar backed SWIFT payment system in their trade for a while now. Considering that the US dollar dethroned the British Pound as the world’s most prominent currency in 1944, it could happen again with the USD.
So how does de-dollarization work? In their academic paper, Liu and Papa formulate a framework for de-dollarization called Pathways to De-dollarization. The framework entails two methods the BRICS alliance can use simultaneously to successfully de-dollarize the global financial system. The first method – “go-it-alone” – has already been adopted by BRICS countries which have been forming alternative financial institutions where the US dollar is not as prominent. The strategy means their economies are no longer overly dependent on the US dollar, so it diversifies their portfolio of foreign currencies and waters down the effect of economic sanctions. The second strategy – “reform-the-status-quo” – involves BRICS, along with other developing countries, negotiating changes to the existing financial systems. This would allow for more representation of other currencies and weaken the US dollar’s dominance in financial systems.
Relationships within BRICS Alliance
But how realistic is this? Unity among BRICS members is clearly an important component of either strategy, however ties between these countries are not as strong as you might expect. China and India have had several military standoffs over the borders of Kashmir. Despite their friendly relationship now, China and Russia are not expected to remain friends for long as both countries compete for the title of “second largest world power”.
It’s also important to note that not all BRICS countries have bad relations with the US and the West. Brazil and South Africa are notable exceptions and both countries benefit a lot from the US. The US is Brazil’s second largest trading partner and second largest provider of oil. South Africa is the US’ largest trading partner in Africa and the two countries have maintained strong bilateral relations since 1994. Some members are still heavily dependent on the US dollar in their reserves, so a weakening dollar would be a loss for them. China, for example, holds $1 trillion in treasury debt, so an immediate move towards de-dollarization by them is very unlikely. So while there might be consensus for the USD taking on a less pivotal role in the global financial systems, consensus for outright de-dollarization among BRICS members is likely not there yet.
However, some have highlighted that BRICS’ role could be more geopolitical than economic. According to “pathways to de-dollarization”, in the event of de-dollarization, economic sanctions by the US would not impact their targets as intended since the dollar would have less power. This could even weaken US national security which depends heavily on the strength of its dollar for sanctions. In this case, countries like Russia and China which are often at odds with the US would have a lot to gain from de-dollarization on a geopolitical level.
One recent BRICS applicant is actually barred from using the US dollar and has been subject to US sanctions. It has also recently signed a deal with Russia, where both countries would be able to trade together using their own currencies. While Iran would be a very controversial addition to the BRICS alliance, it is a country which would stand to benefit considerably from de-dollarization.
Our Takeaway…
The actions taken by these countries and BRICS’ potential role in de-dollarization have long-term implications but right now the BRICS alliance is not a major threat to the US dollar’s dominance. Even if it were to be, the world would likely fall back on the Euro given it’s the world’s second largest reserve currency. Other currencies like the Japanese Yen and the Chinese Yuan could offer alternatives in the unlikely event that both the USD and Euro are replaced as the largest reserve currencies.
But to assume that the USD can easily be dethroned, underestimates the currency. The US can afford to run a massive trade deficit and its currency would still appreciate because its often portrayed as a safe haven investment. Even the Chinese government invested in US bonds in the wake of the 2008 financial crisis. Now the currency appears stronger than ever as a result quantitative tightening which has helped strengthen it compared to the British Pound and the Euro.
In the long term, however, the jury is still out. China has been the main driver behind BRICS’ growth, but as the Chinese economy slows down due to its zero-Covid policy and looming real estate crisis, BRICS economic strength could begin to wane. However, that might not be the case if the BRICS alliance accepts new members.
The USD’s strength amidst cycles of booms and busts has caused economic distress for developing countries. But China on the other hand, has been giving out loans to developing countries and is heavily invested in their infrastructure. The possibility of using local currencies in trade, which even some developing countries have started doing with Russia, paints BRICS membership as an alternative to accumulating greater and greater debt. Using alternative currencies in international trade would not only entice struggling economies to join, but it has also attracted relatively big players like Algeria and Saudi Arabia. These two countries joining, and possibly abandoning the petrodollar, could cause a tectonic shift in global financial systems.
As is the BRICS alliance still represents some of the top ten largest economies – a few of which are also endowed with huge amounts of natural resources. In terms of the global population, these five countries make up almost 22% of the global population, demonstrating their continued potential for industrial and economic growth. This could create headwinds threatening the USD’s dominance in the coming years if the group seriously pursues de-dollarization.
As for the post-war world order, should de-dollarization continue in the long term, developing countries will look East rather than to the US. This shift could threaten the United State’s place in the international order especially since de-dollarization would stymie the strength of its sanctions. Economic sanctions are routinely used as a tool by the US government for establishing national security and enforcing certain policies, if it is no longer able to enforce its policies through economic sanctions then its position internationally would be weakened to a degree.
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