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Separating Fact From Hype About BRICS
In late October, 37 nations met in the Russian city of Kazan, capital of the Tartarstan Republic, on the banks of the Volga River. Russian president Vladimir Putin hosted this summit of BRICS, an alliance established in 2009 originally including Brazil, Russia, India, China, and South Africa — but now numbering ten nations including those who have joined or been invited to do so. This has added Iran, Egypt, Ethiopia, and the U.A.E.; Saudi Arabia has hesitated to ratify its membership. BRICS represents another anti-Western block similar to China’s vaunted Belt and Road Initiative announced in 2013 to create a command and control system run by Beijing.
We can expect to hear more from BRICS as the member nations seek a countervailing force against the West.
The purpose of BRICS is to collaborate on economic and diplomatic affairs; circumnavigate sanctions imposed by the West; reduce the influence of the U.S. dollar and set up an alternative payments system; and end the dominance of certain Western institutions. With the exception of Russia, the BRICS countries generally constitute part of what is known as the Global South. (READ MORE from Frank Schell: From Harris, America Needs Action, Not Pablum)
BRICS is borne of resentment by emerging economies of their former colonial rulers and Western dominance of the prevailing rules for trade and investment designed after the end of World War II. Further, BRICS nations are disenchanted with Western dominance of the clubby G7, IMF with its stringent medicine, World Bank, and G20 — believing that the needs of developing economies are not being sufficiently recognized by these multilateral bodies.
The ten countries (including Saudi Arabia) represent one-fourth of world GDP, 40 percent of world trade, 40 percent of crude oil production and exportation, and half of the world’s population, according to the Boston Consulting Group. While united in their view of challenging the West, they are by no means overtly supportive of Russia’s war on Ukraine.
There is much media hype about BRICS, particularly the summit in Kazan which allowed President Putin to demonstrate his appeal and stature among several dozen countries, proving that he may be persona non grata in the West, but not in much of the rest of the world.
Questions continue to swirl around the value added of BRICS, and whether it can disrupt Western economic influence? The answers are nuanced, but in general BRICS has potential for diplomatic leverage in world forums, and it could, if it chose to do so, embargo some strategic minerals for the technology and defense industries of the West.
However, the financial leverage of BRICS is uncertain at best — and various members of BRICS are dependent upon trade and investment with the West. Further, to have credibility BRICS would need a lender of last resort to intervene should there be a liquidity crisis. Some Western central banks, however, do have currency swap lines with the People’s Bank of China to support trade and to constitute a stabilizing force.
First, there is no question that BRICS members can assist each other to evade Western sanctions. India, for example, ranks second in the world after China in oil importation, with imported oil constituting nearly 90 percent of its total requirements in 2023. Currently, India imports about one-third of its oil from Russia by one estimate, and India has enjoyed discounts for these purchases. But India, like other countries, can buy discounted Russian oil without being a member of BRICS, so there is no value added of this loose alliance in terms of evading oil sanctions.
Second, there is the question of political risk, generally defined as the availability of foreign exchange and the potential for decrees, fiats, confiscation of private property and direct investments, and civil commotion. To the West, BRICS hardly enhances the attractiveness of participating countries with regard to their cross-border risk profile, which is unchanged by membership.
Nonetheless, the BRICS nations are free to invest and trade among themselves, assuming that product quality, price, and after sales service are competitive with the West. For many BRICS countries, this competitive equivalence would constitute a leap of faith.
Third, there is the initiative to undermine the U.S. dollar, which represents almost 90 percent of transactions denominated in foreign exchange (FX) and nearly 60 percent of global FX reserves, according to the Atlantic Council. Few currencies are in a position to challenge the U.S. dollar, with the possible exception of the Chinese Yuan over the long term. Not only that, the U.S has substantial influence over the Society for Worldwide Financial Transactions (SWIFT), which is headquartered near Brussels. SWIFT constitutes the backbone of international currency transfers — settlements can be easily impeded through sanctions.
The value of BRICS currencies is set by a central bank, or linked to a single or group of hard currencies. The BRICS currencies are generally not traded much outside the countries of issuance, and accordingly there is no free market reference for their value. Western exporters are not about to accept these so-called soft currencies in payment of trade, and they will continue to require the U.S., Canadian, or Australian dollar, pound sterling, the Euro, Swiss Franc, or Yen. Moreover, BRICS countries will continue to welcome hard currencies in incoming direct investment for obvious reasons. (READ MORE: India’s Modi Wins a Third Term — But No Majority)
In “Fed Notes” published last year, the Board of Governors Federal Reserve affirms the stable dominance of the U.S. dollar over the past 20 years in terms of trade, capital flows, and currency reserves — the U.S. dollar continues to be an attractive store of value.
The Fed is quick to note that the dollar has declined from 71 percent to 58 percent of reserves since 2000, with the Euro now at 21 percent and attractive to Europeans and to China, with some smaller hard currencies added to official holdings. However, since world trade has nearly quadrupled since 2000 according to the German data firm, Statistica, at 58 percent the dollar has commanding scale.
Nonetheless, in its “Notes,” the Fed points out several long-term factors that could diminish the role of the U.S. currency — but with little impact by BRICS. Indeed, the use of sanctions exposes countries with U.S. holdings to asset freezes, for example.
However, if our European allies and Japan cooperate, as they have with regard to Russia, our adversaries will have limited alternatives to Western currencies. Further, increased European integration could limit the use of the dollar. Thus far we have seen currency integration and some effort toward political integration, but banking is still predominantly national in Europe.
Moreover, the ascent of China could be a long-term factor. However, reserve currency status requires scale of capital, free trade and capital accounts, credibility, and adherence to the rule of law, without fear of central bank or treasury intrusion — China does not qualify by these accepted criteria.
Fourth, the Fed Notes acknowledge the rise of cryptocurrencies, although world monetary authorities have expressed skepticism for years. (READ MORE: Facebook’s Cryptofantasy Is a Crypto Setback and Facebook’s Cryptofantasy).
We can expect to hear more from BRICS as the member nations seek a countervailing force against the West. While we will see more diplomatic initiatives and possibly pressure from BRICS in the United Nations and other forums, the economic and financial effects of this loose alliance are likely to be modest.
Frank Schell is a business strategy consultant and former senior vice president of the First National Bank of Chicago. He was a Lecturer at the Harris School of Public Policy, University of Chicago and is a contributor of opinion pieces to various journals.
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