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Macro Insights: BRICS expansion means more coordination or chaos?
Summary: The decision from BRICS to add more members signals common underlying objectives to counter the G7 with increasing trade and economic influence. While de-dollarization is also a common agenda, that will have several stages to clear from being able to trade in a non-dollar based currency within the bloc to becoming a global trade benchmark before the replacement of the US dollar as a reserve currency could be perceived.
The emerging markets bloc BRICS – led by Brazil, Russia, India, China and South Africa – were able to reach a unanimous decision to onboard more members at the 15th BRICS Summit in South Arica this week. A total of six countries have been invited, and these include Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates. Although it was expected that the expansion would be considered, the decision has come in sooner-than-expected and suggests a common underlying mission.
Countering the influence of the West
The most likely underlying agenda for the expansion may be to increase the influence of the bloc as a counter to the West. China has been struggling to prop up its own economy and is likely even more focused on taking up leadership of the emerging bloc before the dependence of the bloc on China erodes. Russia needs more allies to push further for a common currency as well as voices that do not openly condemn its war on Ukraine. India was initially against the idea of expansion but colluded eventually as its increasing growth could make it a more influential part of the group. It also strived to improve its strategic defence partnerships with the likes of the UAE and Egypt.
Despite having found a common motivation to expand BRICS, the dynamics of the expanded group have become far more incongruent due to the expansion. The new members increase the divergence in the members’ stage of development, and therefore bring differing economic, political, monetary and fiscal conditions to be considered. This could mean that cooperation may become more unachievable.
Economic dominance could expand
The original BRICS bloc has taken over the G7, which comprises Canada, France, Germany, Italy, Japan, the UK, and the US, in terms of contribution to global growth since 2020. This can be attributed to the rapid economic growth and development in their countries, and was mostly led by the growth in China. With China shifting its focus away from achieving high levels of debt-driven growth to more productive and quality investments, it is likely to embark on a structurally slower pace of growth from here. However, India seems to be taking over with its significant demographic advantage and an increasing manufacturing share. However, Russia, Brazil and South Africa have fallen short of expectations, with their share of global GDP (at purchasing power parity) actually declining over the past two decades.
The expanded BRICS could further help the group sustain a lead over G7 growth. Brazil’s president Lula da Silva said that the new members will increase the BRICS’ share of global GDP from 32% to 37% on a purchasing power parity basis. The economic heft could increase further as trade and investment within the bloc develops, but this could face some delays and resistance due to the group members’ own personal agendas and mutual conflicts.
Trade, particularly in crude oil, in control
The inclusion of key oil exporters, Saudi Arabia, the UAE and Iran, will increase the energy dominance of the expanded BRICS group. Current BRICS members make up around 20% of the global oil output, and this number will go up to 42% with the expanded group. This could give weight to the de-dollarization debate, but still remains limited to the use of a non-dollar based exchange unit in the bloc rather than globally. Energy only accounts for 15% of global trade, and the inclusion of oil exporters in the bloc is likely more a flexibility on their end to keep relations with both the US and China rather than to pick sides in the geopolitical debate.
Eyeballs on de-dollarization
As the US weaponized the dollar in the Russian war and the Iran sanctions, there have been increasing calls by developing countries to seek alternative currencies for trade, investment, and reserves. It is reported that BRICS leaders have charged their finance ministers and central bank governors with developing measures to reduce their reliance on the US dollar in trade among their economies, and to report back next year.
Growing trade and economic clout of the BRICS could bring a threat to the use of US dollar as a trading currency. Russia is already using the Chinese yuan and Indian rupee in its trade settlements. The UAE and India last month signed an agreement enabling them to settle trade payments in rupees instead of dollars. However, the expanded BRICS will still control less than 30% of global exports and imports. Therefore, a BRICS-based currency would still only be an alternative to trade within the region rather than become a global trade currency.
Meanwhile, the threat to the dominance of the US dollar as a global reserve currency appears exaggerated for now given the potential lack of coherence in the bloc and the lack of institutional stability. BRICS currencies also do not offer the requisite stability to function as a store of wealth. The R currencies – Rand, Real, Renminbi, Ruble or Rupee – have all seen marked losses and tremendous bouts of volatility and are not yet ready to be considered an alternative to the USD reserve status. The alternatives would be to for the BRICS to use a basket of their currencies or keep the BRICS currency tied to Gold or other tangible resources. While this could mean increased polarization, such a move will have to wait for a substantial pickup in trade and investment within the group. In essence, the dollar dominance continues to be threatened, but is not an immediate risk.