The recent BRICS summit, hosted by South Africa, was perhaps the most meaningful yet, inviting new members and announcing plans on de-dollarization, development funding and trade relationships. Many challenges and questions remain about the implementation of planned new financial and trade infrastructure given the difficulties building new financial plumbing, the competition within the group and potential new members and the interests that these countries still have within major developed economies. As a result, the impacts are likely more rhetorical and long-term, highlighting the interests that members have in highlighting their national interests.
- The BRICS meeting reinforces the interest than many emerging economies have in hedging and in finding new venues to highlight their national interests, as many aim to balance between the West and China.
- Planned expansion involves two sets of countries, capital rich countries (Saudi Arabia and UAE) who aim to set terms on energy security, global finance and new trade channels, and capital poor ones that are highly reliant on current and potential future BRICS members. This diversity will amplify existing divergence within the group.
- de-dollarization plans still more rhetoric than meaningful action, because of inertia effects. pilot projects especially digital ones will likely increase, but the lack of FX convertibility, concerns about loss of control on monetary/FX policy (especially China) will persist, making the creation of a new unit of account, much more difficult that the BRICS rhetoric would indicate. Catalysts that a more extensive move are underway would include significant expansion of CIPS systems, greater usage and expansion of CBDC bridges, and of course much more trade invoicing and settlement outside of dollars.
- Overall, de-dollarization into local currencies is likely to be much more of a medium and long-term trend. The Euro and other G10 currencies are not real options for these EM given the coordination with the US, while there are limits in both recipients and Chinese interest in using the RMB and the externalities.
- A key test case will be around expansion of the New Development bank (the BRICS bank), which will have many new clients in some of the new members, and would welcome capital injections from other new members. The group is aiming to create new units of account. The NDB has been struggling to fully utilize the financial system due to the sanctions on its member country, Russia, and also challenged by the incrementally lesser interest in development funding from China. Many of the new members are ill-equipped to push for reshaping the global economy given their dire financial straits.
Expansion will keep coordination difficult
An increasing number of countries have expressed interest in joining the BRICS, a group originally created based on an investment theme, at a time when estimates for EM growth were much much higher, but one that has been more limited in economic and financial deepening. At this meeting the group decided to extend invites to a motley crew of new members – Saudi Arabia, United Arab Emirates, Egypt, Ethiopia, Iran and Argentina. The group includes a diverse set of countries – a few surplus countries with high per capita income well over the current group average (Saudi Arabia and the UAE) and several countries which are well in need of such capital, many of whom are already heavily reliant on funds either from current members China (Argentina) or potential new members from the GCC (Egypt, Ethiopia) or subject to extensive sanctions.
The political structure remains very mixed, joining the existing group of autocracies and spectrum of troubled democracies, highlighting the fact that political structure was not a major criteria. These countries are all ones that at least ostensibly would push for the Chinese mantra of non-interreference in other countries domestic affairs, however, the not so historical examples of GCC intervention in regional affairs, might give pause.
Many have noted that it includes several critical energy producers – especially fossil fuels (KSA and UAE who join their OPEC+ peer Russia), as well as smaller producers like Egypt and Argentina, the latter of which has not only natural gas but also lithium deposits that are under consideration for investment. Both developments, and indeed Argentine entry in the BRICS would seem to be contingent on election outcomes. After all, joining the BRICS would not seem to meet opposition candidate Milei’s optimistic plans to step away from Brazil and China and towards the US, but that’s a topic for another day. Overall, it seems that bilateral relations and other groupings are more likely to be the place for energy governance, but it is an interesting grouping of majority commodity exporters (Brazil, Russia, Saudi Arabia, UAE) and some of their most price sensitive (India, China) buyers.
If anything who is absent may be as interesting as who was asked to join. Additional Asian countries are notable by their absence, though Indonesia has been public about its request for a deferral to consult its ASEAN colleagues – in practice its hopes to increase US market access are likely a bigger deterrent. So too are populous countries in West and East Africa or any others in Latin America, such as Bolivia which was public about interest. Other countries such as Turkey would seem to be a no-go given NATO membership, though it would likely be interested in coordinating given its ties with many of the key historic and new members. Overall, the varied nature of the new BRICS membership will only reinforce some of the divides within the group and suggest instead that it may be a testing ground and place for pilot projects on financial issues.
Some of those extended membership may also try to play for time – some Saudi proxies suggested that they needed to better understand exactly what they are signing up to. This may reflect efforts to boost leverage in their ongoing discussions with the US and Israel as well as watching closely what membership might imply in terms of their nascent agreements with Iran.
Not afraid of Sanctions
With the BRICS doubling down on their ties with Russia in the last year, it perhaps shouldn’t be a surprise that they have welcomed an even more sanctioned country into their midst – Iran. Many countries either maintain select economic ties with Iran (Russia, China) or have expressed interest in expansion (Lula’s Brazil). Saudi Arabia’s recent Chinese-brokered agreement with Iran is still in early days, with confidence building measures on the security side and challenges on the economic side. Sanctions yes, which limit all countries from investment, but also the newness of the agreement and Iranian domestic policy. Overall, joining the BRICS would likely add to the Raisi government’s rhetoric about its shift to the East, the region and emerging economies even if economic benefits are limited by sanctions. The US focus on its Plan C or ‘understanding’ with Iran is set to allow more access to admittedly limited and restricted frozen funds,
This grouping will likely have a lot of interest in both pushing back on Western coercive statecraft per se, and in developing channels for humanitarian trade. The latter (including food and medical items into sanctioned countries and food/fertilizer out of Russia) is supposed to be legal despite sanctions, but faces meaningful de-risking challenges in which banks are reluctant to engage in transactions. To avoid new semi-licit channels opening up managed outside of G7 interests, the G7 should take some steps to make sure to open up some channels and prepare for how they might alleviate this derisking… and prepare for any more general sanctions relief. The political preconditions for broad sanctions relief still seem a long ways off even for Venezuela (despite recent reporting) and perhaps even more so in Iran and Syria, but proving that humanitarian channels can open up is a key part of pushing back against anti-western rhetoric.
De-dollarization: Greater Will, Tough implementation
The Johannesburg Statement concluding the meetings included plans for more dedollarization and trade relationships. Details will be to come, but there are a lot of challenges building out this infrastructure and institutions. While desperate countries (Russia) were forced to move away from the dollar and were glad for earlier moves, there are difficulties increasing volumes. For example CIPS, the Chinese payment system is still connected to SWIFT (limiting its role as an alternative) and despite increases, still accounts for much more modest global turnover. Recent reporting has suggested that CIPS was not an option for Bangladeshi attempts to pay for Russian resources and other arrears.
The interest in less reliance on the dollar (and to a lesser extent other G10 currencies) has increased massively over the last few years, as the concerns about US weaponization of the US dollar have interacted with long-standing annoyance from EM central banks about the dominant role of the Fed in setting global rates. The global drivers of liquidity and illiquidity prompted cries of currency wars a decade ago and have constrained the degree of monetary easing for some EM. Still, domestic economic choices including fiscal expansion are arguably a bigger concern.
Even if the logistics of the global financial system bring inertia to the dollar’s role and the US ability to borrow in domestic currency, the increase in interest in non-dollar alternatives is concerning. It increases the likelihood that more countries than Russia may invest in non-dollar assets or financial transactions that are more costly and sub-optimal to hedge against future risks. It also highlights the importance of continuing to coordinate with partners, even if not allies to avoid pushing more trade into the dark undercurrents of the global economy. Pushing forward with digital alternatives including CBDCs to catch up and stay up on the technology curve will also be important.
BRICS as a hedging tool not an anti-western alliance?
The BRICS expansion is but one of the changes in architecture, following expansion of security arrangements such as the Shanghai cooperation agreement and several smaller groupings ranging from I2U2 and various quads, as well as new trade configurations, particularly in Asia. The plethora of such groupings reflects both a desire to create new entities to deal with global challenges but also to test out how best to meet domestic interests. Some of these groupings including the BRICS will struggle for coherence and a larger group may limit broad coordination, making it even more difficult. The expansion of groups like this likely increase the opportunity for China to socialize its preferred standards, engage in technology transfer and push back against US/G7 efforts to stick with alternate standards.
A number of these members are seeking to use these venues to increase their bargaining power, trying to balance between different groups. The rhetorical weight tho could result in posturing that can undermine economic interests. A key potential case in point is South Africa, which currently trades much more with the US and Europe than with the BRICS even China, and on a recent trip many folks expressed considerable concern about the risk of an AGOA non-renewal which could reduce preferential access to the US. KSA and UAE, both of which are looking to make major technological advancements, seem to be trying to get as much technology transfer from China but also stockpile US chips, and continue to benefit from the stability of investment in developed economies. The balancing act will likely get more complicted.
The expansion of the BRICS shouldn’t be met with over-reaction, but should help light a fire to create the kind of partnerships needed with key countries including those essential in the critical mineral supply chains. US trade policy and investment tools in particular could use a revamp to appropriately respond to some of these challenges. There’s not need to react to all challenges, but it’s a key time to actually think about implementing friendshoring not just talking about it.
Ziemba Insights 