BRICS+ and changing global alliances: Exploring opportunities and challenges

BRICS is contemplating expansion and a common currency, yet it faces complex challenges in achieving this specific goal.

With 40% of the world’s population and a quarter of global GDP, BRICS intensified discussions on expansion and a common currency.

Originally comprising Brazil, Russia, India, and China, BRICS was coined by Goldman Sachs in the 1990s to encourage investment in emerging economies. South Africa, the first non-original member, aptly led a summit centered on group expansion.

BRICS expanded its wings

The BRICS meeting concluded, and the good news is that they are happy to shake hands with 6 more countries- Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates (UAE).

Currently, the core BRICS countries control around 23% of global exports and 19% of global imports, and the new members would add 3.7% and 3.0% respectively, with Saudi Arabia being the biggest individual new member in terms of exports and the UAE the biggest new importer.

What BRICS+ have now?

This alliance includes six leading crude oil producers—Saudi Arabia, Russia, China, UAE, and Iran—yielding substantial energy and geopolitical influence.

It unites three top African economies—Egypt, South Africa, and Ethiopia—and South America’s key players, Brazil, and Argentina.

Strikingly, this coalition bridges the divide between ideological rivals: Sunni-majority Saudi Arabia and Shia-majority Iran.

With a diverse mix of economic, energy, and political dynamics, this alignment reflects a complex global landscape where nations with disparate interests find common ground, underscoring the intricate interconnectedness shaping today’s international relations.

Saudi Arabia, China, Russia, India, and other nations have rapidly bolstered trade and relations. Saudi Arabia expressed openness to join BRICS alongside Turkey and Egypt this year.

Brazil and Argentina are exploring a common currency, while the UAE and India are considering using rupees for non-oil trade. Russia and Iran collaborate on a gold-backed cryptocurrency. A recent development involves contemplating a common currency among BRICS members.

What is the need for a common currency

The idea of a common currency among BRICS nations stems from the desire to streamline economic transactions, foster closer economic ties, and enhance trade relations.

A common currency could potentially reduce transaction costs, exchange rate risks, and the complexities associated with multiple currencies in trade dealings. Additionally, it might facilitate greater intra-BRICS investment and promote economic stability within the member nations.

Dollar’s dominance may not vanish easily

In the last quarter of 2022, the greenback’s share of official FX reserves dropped to a 20-year low of 58%, adjusting to 47% with exchange rate shifts, per IMF data.

Despite this, the dollar remains dominant in global trade, featuring in about 90% of forex transactions, as per the Bank of International Settlements.

The process of de-dollarization would necessitate widespread cooperation from exporters, importers, lenders, borrowers, and currency traders worldwide, making it challenging given the current evolving dynamics.

Who are in favour or against forming a common currency

Allegedly, China spearheads BRICS’ expansion, aiming to diminish the U.S. dollar’s supremacy. The Chinese government actively urges global nations to embrace the forthcoming BRICS currency, seeking to challenge the dollar’s global reserve status.

Russia unequivocally supports de-dollarization. Brazil advocates a new common currency within BRICS, replacing the dollar. South Africa emphasizes enhanced cooperation for non-dollar trades but dismisses new currency creation.

India firmly rejects a BRICS currency proposal, prioritizing the Rupee strengthening. Being the only bloc member excelling in GDP on its merits, India maintains valuable relations with the U.S. and Europe, emphasizing trade and military deals.

The nation remains cautious about risking these ties by embracing the yet-to-bereleased BRICS currency.

Challenges in creating a common currency

Like the euro was created to promote growth, stability, and economic integration in Europe and replaced the domestic currencies of many member states, it came with its own pros and cons.

Though it helped promote trade, encouraged cross-border investments by reducing the foreign exchange risk, and granted mutual support during crises, it had its own drawbacks. A single currency like the euro implies that all the countries within the union have the same monetary policy and the same basic interest rate.

Countries therefore are left unable to respond to negative external shocks lowering interest rates depending upon what suits their environment best.

Similarly, introducing a common currency in BRICS faces substantial hurdles due to divergent economic structures, development levels, and inflation rates among member nations. Ensuring currency stability amid such diversity is intricate.

The move would necessitate relinquishing some monetary policy autonomy to a supranational entity, potentially challenging national sovereignty.

Additionally, consensus among five countries with distinct economic priorities could hinder decision-making. China’s economic dominance might spark concerns regarding fair benefit distribution and currency influence.

Consider Brazil, a nation accumulating USD FX reserves due to its commodity exports exceeding imports. This reserve influx enters the domestic banking system, with the local Central Bank tasked with maintaining the safety and liquidity of these US Dollars. Thus, it would be difficult for Brazil to apply Bloc currency or select de-dollarization.

However, many central banks offloaded their dollar reserves last year and switched to Gold at the fastest pace since 1967. It’s enlightening to remember that Russia’s debt-to-GDP ratio stands at only 16% as of March 2023. China’s is 77 percent.

The current BRICS without Russia is at 78 percent. BRICS+ including Russia may average only 55 percent. Strong productivity ahead will come from a BRICS+ supported by a gold and/or commodities-backed currency and a different payment system that bypasses the US dollar.

Conclusion

In a rapidly evolving global landscape shaped by the Russia-Ukraine conflict, BRICS has transcended its original purpose.

With Saudi Arabia, Iran, Egypt, Ethiopia, Argentina, and the UAE joining, this coalition has expanded its economic and geopolitical influence, while also aiming to challenge the dominance of the US dollar. However, the journey towards a common currency within BRICS faces challenges due to economic disparities, monetary policy complexities, and divergent national priorities.

While some members advocate for de-dollarization, others prioritize their existing ties. As BRICS+ gains momentum, the prospect of a gold or commodities-backed currency could reshape the international monetary landscape, potentially bypassing the dollar’s stronghold.

Diversifying reserves to gold or maybe having a common currency could mitigate dollar-related risks but the odds of de-dollarization anytime in the near-term future seems limited.

Written by Amit Pabari. The author is MD, CR Forex Advisors

Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the stand of this publication.