The BRICS Union has recently been in the center of attention and the media follow and cover its every step. But what its activities and goals actually are, is usually not very clear. What is BRICS anyway? How and why was it founded and what is the purpose of this group of countries? We’ll find out below.
What is BRICS?
Brazil, Russia, India, China and South Africa form the intergovernmental organisation known as BRICS – one of the (nominally) most powerful economic structures in the world. The bloc’s main goal is to strengthen trade and synchronise economic relations between member countries, as well as to reform the international economic order. Here is data illustrating the scale of this group:
BRICS in numbers:
- 26.7% of the total area of the Earth
- 41.5% of the world’s population (3.25 billion people)
- A total GDP of about $26 trillion
- 25% of world economic output
- $4.5 trillion in foreign exchange reserves (by 2018)
Source: World Bank
In terms of numbers, BRICS easily overtakes the EU or the USA economically, but still cannot reach the G7 in terms of total GDP.
The Creation of BRICS
Ironically, the term BRIC was introduced to the West by Goldman Sachs in 2001. It was originally used to refer to the growing economies of Brazil, Russia, India and China. Twenty years ago, these countries were seen as future superpowers, and it was expected that by 2050 they would catch up with – or even overtake – the developed economies.
The first formal meeting of BRIC (at that time South Africa was not yet a member of the alliance) was on June 16, 2009 in the Russian city of Yekaterinburg. At the time, the world was still recovering from the Great Recession of 2008, which hit most countries hard, including emerging economies. Its purpose was to strengthen economic cooperation between member countries, identify ways to improve growth prospects and reform the global financial system. The position that the BRIC(S) maintain to this day is that it is dominated by Western countries and is to the detriment of developing economies.
Already at the first meeting of BRIC, the need for a new world reserve currency was discussed. It should be more stable, predictable and fair than the US dollar, which is not directly blamed as a culprit, but that goes without saying. The BRICS agree to use their local currencies in trade with each other as much as possible to reduce their dependence on the dollar and support the purchasing power of their own fiat currencies.
Another of their goals is reform of the IMF and the World Bank. According to BRIC, these institutions are unfair and “predatory” towards developing countries.
The BRIC group states in words that it wants to become a single economic and geopolitical bloc that represents the voice of developing economies on the international stage. Despite its stated intentions, BRICS itself is a very disorganised organisation, without clearly defined mechanisms and structures. Most of its cooperation takes place at its annual meetings, where the parties discuss and agree on certain trends and policy plans. The most formal form of cooperation is implemented through joint projects, such as the New Development Bank, BRICS Pay (an international payment system for the member countries of the alliance), BRICS cable, etc. Here are the steps the union is taking to achieve its goals.
Development of BRICS
After the first meeting of BRIC, BRIC agreed to work on the the following activities:
- In 2011, China invited South Africa to join the organisation and thus BRIC became BRICS. In the same year, the BRICS Forum was founded.
- In 2012, the bloc announced the BRICS Cable project – an underwater fiber optic cable that will connect the countries of the group and the rest of the countries of the Global South. The main idea is to reduce the dependence of third world countries on the existing telecommunications system, which according to BRICS is under the control of the West.
- In June 2012, the organisation offered to invest $75 billion in the IMF investment, on the condition that the BRICS themselves receive a greater weight in the fund’s decision-making. As their plan failed, in 2014 they created their own financial institution, the New BRICS Development Bank, informally known as the BRICS Bank. It should be a competitor of the World Bank and the IMF, and in words it should be fairer than them, as it would not set political or fiscal conditions for the loans it grants. This would make the bank more attractive to developing countries, which find it difficult to meet IMF or World Bank lending requirements.
The initial capital for the bank is $100 billion, with all countries having an equal share. Neither party can increase its share without the approval of the other members. The BRICS Bank’s focus is on lending to finance infrastructure projects, “sustainable development” projects and developing relationships with other multilateral organisations and banks. Since its inception, it has funded 96 ventures with a total value of $34 billion. The figure may sound impressive, but in reality it is only a small fraction of the World Bank’s loans. For comparison, in 2021 alone, it allocated 98 billion dollars in the form of loans, grants and investments.
Not to mention that the World Bank has 189 members compared to the modest number of member countries of the New Development Bank, and we are not even including the scale of the IMF.
BRICS continues to strive for its original goals – deepening the financial and commercial relations of the member countries, bypassing the dollar in international payments (de-dollarisation) and limiting dependence on other international institutions (IMF, World Bank, G7, etc. ).
The idea of BRICS is that its large-scale members can provide each other with all the necessary resources, products and services. In this way, they want to reduce their dependence on the dollar and the US-led global financial system. This drive has increased significantly since the sanctions on Russia over the war in Ukraine. Countries and central banks around the world saw how quickly they could be cut off from the international financial system and set out to find alternatives.
This has prompted countries such as Argentina, Saudi Arabia, Ethiopia, Egypt, the United Arab Emirates and Iran to request to join the group this year. This will happen on January 1, 2024. But is the dollar’s backsliding feasible?
The Dollar Currently Dominates the Financial World
The dollar continues to be the world’s reserve currency. Since the Bretton Woods agreement in 1944, the US dollar has been the primary means of international trade. Then this happens because of the rapid economic rise of the US and the large gold reserves that support the US currency. And although America left the gold standard in 1971, the dollar continues to hold a dominant position in the world.
According to the Federal Reserve, between 1999 and 2019, the dollar was used in 96% of all trade transactions in the Americas, 74% in Asia and the Pacific, and 79% in the rest of the world. Last year alone, 88% of all international transactions in the world were made in dollars.
De-dollarization In The BRICS Member Countries
Against this background, the BRICS countries managed to achieve a certain level of de-dollarisation, which is also confirmed by the figures of the last few years.
We will start with Russia, bearing in mind that this country is currently sanctioned by the West and that avoiding the dollar is a leading political goal for it. The total share of transactions carried out in US dollars and euros in Russia’s imports from January 2022 to May 2023 fell from 67.3% to 35.9%. This is a significant drop, and it is important to note that Russia’s imports were not particularly affected by the sanctions. In 2021, Russia’s imports are about $260 billion, and in 2022 they are about $250 billion.
Russia also uses other currencies to carry out its international transactions – ruble, yuan, dirham (UAE) and Egyptian pound. Russia’s trade conducted in the other BRICS currencies, except the yuan, is limited because Russia’s central bank sees little use in them.
Another good example of de-dollarisation is the growing importance of the Chinese yuan, whose share in international transactions increased from 0.63% to 3.2% in the period from 2013 to January 2022, shooting it from thirteenth to fourth position among currencies in circulation. Forecasts are that this year its share will reach 4.5%. In March 2023, China agreed with the UAE to supply liquefied natural gas, with the deal settled in yuan on the Shanghai Oil and Natural Gas Exchange. This deal represents a turning point in international trade, as for the past 40 years the US dollar has been the main currency for trading oil and gas (the petrodollar).
Over the past 20 years, China has gradually reduced its foreign exchange reserves in US dollars: in 2005, the dollar accounted for 79% of the country’s total foreign exchange reserves, then it fell to 58% in 2014, and today it forms only 25% of them.
China hopes that the yuan will become the main trading currency for the BRICS countries as well as all developing countries. With the development of the other BRICS economies, as well as the countries of the third world, the significance and role of the yuan will grow.
Brazil’s newly elected president Lula da Silva said:
Every night I ask myself why is all world trade based on the dollar?
He is one of the most active advocates of the idea of creating a single BRICS currency and even a common currency in South America.
In May of this year, the leaders of all South American countries signed the Brazilian Consensus. The agreement seeks to stimulate investment and trade and eliminate unilateral trade measures between South American countries. Earlier this year, Brazil and Argentina proposed creating a single currency between them. Argentina hopes that in cooperation with Brazil it will avoid or mitigate its economic problems. At the moment, annual inflation in Argentina is 100%, and the dollars in its foreign exchange reserve are running out, and it cannot service its loans indefinitely, and the import of products is also difficult. Argentina’s dollar shortage is due to the Argentine Central Bank’s decision to sell the currency to prop up the value of the peso, something it has apparently failed spectacularly at.
In March this year, the yuan overtook the euro in Brazil’s foreign exchange reserves and is currently the second most important currency among them, despite its modest share of 5.4%. This is a sharp jump, as until 2018 Brazil had no yuan.
India is generally skeptical of most BRICS proposals in this area and cooperates cautiously. Although it sees the benefits of cooperation in the alliance as it allows it to develop its economy and trade more quickly and strengthen its currency, China remains India’s biggest rival in Asia and the country tries to maintain good relations with its Western partners. However, last year, India began negotiations with Russia to settle trade in Indian rupees. The talks were successful at first, but eventually failed as Russia saw no benefit in hoarding rupees.
It is important to note that, in addition to the examples mentioned, all future BRICS members also want to reduce their dependence on the dollar, which may increase the momentum of gradual de-dollarisation.
A Single BRICS Currency? (or just yuan in disguise)
This brings us to one of the most frequent BRICS topics – the creation of a single currency to circumvent the hegemony of the US dollar in international trade. Three possible approaches have been discussed so far. All three are speculations, as none of the BRICS member countries have spoken openly on the subject, except for Brazil.
Here are the decisions discussed regarding their single currency:
Brazilian President Lula da Silva spoke at the BRICS summit in Johannesburg about the importance of creating a single currency to avoid the dollar in international trade. He pointed to the euro as an example to show that the introduction of such a currency is an achievable goal. However, the other members remained silent on the matter, and the Indian government even stated that “there is no idea of a single BRICS currency.”
- Use of the Chinese yuan as the main trade currency between the BRICS countries
Logically, if the member countries of the bloc agree on the use of one currency for trade, it will probably be the Chinese yuan. China is the second strongest economy in the world after the US. Its GDP is twice the combined GDP of all other alliance members combined. The problem here is political in nature, as India sees China as its biggest rival and refuses to accept the yuan’s priority role in international trade.
- Use of individual national currencies for all trade between BRICS member countries
For now, this is the only possible and achievable path for the BRICS countries. This is an approach that all members have supported since the very foundation of the union. But this approach also has its drawbacks. Recently, Russia ended its negotiations with India to settle trade between them in Indian rupees. Russia has indicated that oil and coal exports to India will bring more than $40 billion in Indian rupees to its coffers. Russia’s central bank said such a development was “undesirable”.
For now, all information about a single BRICS currency is just speculation. Individual member states have given contradictory statements, and there is no official or formal framework for even discussing the introduction of a common currency.
BRICS as a “marriage of convenience”
As we can see, so far the BRICS countries have found it difficult to reach a consensus on many important issues – from currency and trade to political ambitions. This is not surprising, since the group functions as a “marriage of convenience”. There is no political or ideological consensus that would unite these nations, only certain international issues on which they share common views and interests.
China and India, the bloc’s two largest members, are serious political rivals. Military conflicts on their border are no stranger to them. India is also trying to counter China’s economic ambitions in Asia by attracting Western capital at the expense of the Celestial Empire, presenting itself as a democratic and friendly alternative for cheap manufacturing.
On the other hand, Russia is subject to sanctions and is excluded from global financial flows. Paradoxically, even the BRICS Bank, whose founders include Russia, stopped all future investments in the country. The financial institution is afraid of being penalised if it invests in it. In addition, only 22% of the assets of the BRICS Bank are in the national currencies of the member countries of the alliance, although it was supposed to be the engine of de-dollarisation. This example only shows how difficult it will be to circumvent US influence in the financial system, even in these countries.
Along with political issues, the economy of much of the bloc is stagnant or developing at a slow pace. Even China, which has become a leading economic superpower, is showing signs of slowing down.
Against the background of the problems in BRICS, the bloc continues to expand with the already mentioned Saudi Arabia, Egypt, Argentina, UAE, Iran and Ethiopia.
They hope to reduce their dependence on the dollar by trading entirely in the national currencies of the BRICS members. The US dollar is increasingly weighing on developing countries and their economies. The sharp rise in US interest rates and the strong dollar index over the past year have made it too expensive for them to trade in dollars, making their debt significantly more expensive.
14 years ago, the BRICS set out to create a new alternative international economic order to rival the US and the G7. Given its poor track record to date and significant political disagreements, it is unlikely to effectively compete economically with the West in the coming years in the form of a unified union. Right now it just looks like a scarecrow.
But as the group expands and efforts are made to resolve its structural problems, perhaps in the future we will see the development of an actual new economic bloc aimed at the Global South and East.
BRICS, an alliance of five major emerging economies, represents a significant shift in the global power paradigm. Endeavoring to fortify economic ties, challenge the dominance of the US dollar, and reduce reliance on long-standing international institutions, the BRICS nations are writing a new chapter in global economic history. However, the efficacy of their strategies and their ability to challenge the dollar’s dominance remains to be seen. What’s undeniable is that the steps taken by BRICS today will undeniably influence the global economic tapestry of tomorrow.