In August 2023, BRICS countries held its 15th summit in South Africa. BRICS is a group of fast growing nations who cooperate on economic and geopolitical matters. The members of the group are Brazil, Russia, India, China and South Africa. The five nations cooperate to boost investment and have increasingly grown into an informal political and economic alliance. They have even set up their own bank, the New Development Bank. Now, many consider BRICS as a potential rival of the western G7 forum. G7 is an intergovernmental organisation that consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
At the summit, there were some groundbreaking announcements made. Firstly, BRICS leaders agreed to admit six new countries to their group. Saudi Arabia, UAE, Argentina, Iran, Ethiopia and Egypt have now been accepted. BRICS will now account for nearly 50% of the world’s population and around 30% of the world’s GDP. Secondly, they discussed the creation of a new BRICS currency, to reduce dependence on the dollar.
The development of the BRICS bloc could have significant implications for the global political landscape. We discussed dedollarisation and its potential impact in our previous article but we will discuss the growth of BRICS could see a reduction in Western economic power and influence across the world. This article will explore how feasible the growth of BRICS is and the potential impact on the world.
Potential for a New World Order
There is huge potential for the BRICS to become a huge power in world politics. With six new countries joining, six of the ten largest oil producers will now be part of BRICS. Organisations like OPEC focus solely on oil markets but BRICS is designed to foster greater political and economic alignment. If successful, BRICS can reshape the global political landscape.
One of the key agendas of BRICS is dedollarisation. This refers to reducing reliance on the dominant US dollar for international business and trade. We will explore the potential for dedollarisation in light of the BRICS framework.
At the 2023 summit, Brazil’s President took the lead on pushing plans to launch a new currency. The currency could be backed by gold and would be used for trade between BRICS countries. He stated that a BRICS currency would increase payment options and reduce vulnerabilities for BRICS members. BRICS has already begun laying down the foundations for this project with its New Development Bank. Currently, the New Development Bank is designed only to invest in infrastructure projects across the developing world. BRICS also aims to account for 50% of GDP by 2050. If BRICS countries achieve this goal and decide to use this new currency for trade, this could drastically reduce reliance on the dollar.
That being said, a establishing new currency is still a difficult challenge and is unlikely to happen anytime soon. BRICS countries have not even agreed on a new currency as a concept, let alone any concrete plans. There are numerous obstacles preventing a new currency which will be discussed below. A more plausible and immediate threat to the US dollar has already begun. This is the use of non-dollar currencies for trade. BRICS bank already lends in Chinese yuan and plans to also lend in South African rand and Brazilian real. BRICS are likely to ramp up this trend to offer the developing world alternative currencies for trade. This will no doubt be a priority for countries such as Russia, China and Iran who face US sanctions and restrictions on dollars.
This could substantially reshape global politics. A large portion of the US’s strength lies in its control over the dollar and the dollars position as the currency of trade, particularly in oil. If the dominance of the dollar wanes, so does the power of the US. US sanctions levied on adversaries like Russia or Iran will become less effective. With more oil producers like Saudi Arabia and Iran joining BRICS, the possibility of dedollarisation looks much more likely.
One of the main road blocks for the development of BRICS is a lack of unity, both politically and economically. Much of BRICS’ potential rests on its ability to politically align themselves but achieving this is a huge challenge. Member nations have vastly differing political standings and ambitions so this may make decision making painfully slow. Currently, BRICS works on relatively uncontroversial business such as funding infrastructure project investment. They do so largely on a collaborative basis so there aren’t any significant power struggles among the countries. As BRICS becomes more political and proposals become more consequential, there is more room for division.
We have seen some division even to admit the six new entrants. Brazil and India had long opposed new joiners to BRICS as they feared their voices would be diluted. Russia and China had been pushing for new entries. The six new countries joining BRICS, exacerbate this potential problem. While they add more political muscle to the group, the new additions represent six new potential roadblocks to progress. Currently a consensus between members is required for proposals to be actioned. From 2024, achieving that consensus will be twice as hard. Without unity of both vision and action, BRICS will not be able to develop substantially.
BRICS will also face difficulty setting up its own currency anytime soon. Creating a development bank and payments infrastructure, as it has done, is a relatively uncontroversial process. Creating a central bank that produces an internationally recognised currency is as political as it is economic. Crucially, it would require closer macroeconomic convergence between BRICS nations. An exchange rate mechanism and new payments infrastructure would need to be established along with a well-regulated, stable and liquid financial market (link). Although the EU achieved this with the Euro in 1999, the political diversity between BRICS countries means that obtaining agreements will pose a challenge. Even if they achieved this, the likelihood that a new currency would challenge the dollar is slim. The majority of market participants across major industries such as trade and financial markets would need to adopt the new currency for business to achieve any significant progress to dedollarisation.
Another challenge facing BRICS is a backlash from the West. Russia, China and Iran are adversaries to Western powers and are all heavily sanctioned. For neutral countries who engage with both sides like India, Brazil and South Africa, this is problematic. The three nations are keen to join the UN Security Council. But in order to achieve this, western UN members could force them to restrict and cut ties with their adversaries, undermining the BRICS alliance.
Furthermore, BRICS and its New Development Bank are still highly dependent on the dollar to fund projects and provide financial aid. Their access to US dollars could be restricted via sanctions if they are seen as too close to Russia, China or Iran. There is no other currency with as much liquidity as the dollar and nearly 90% of all cross border transactions are done in dollars. The US still wields substantial political economic levers that it can use to hinder BRICS’ development if it sees the group becoming a threat.
BRICS is in its infancy but it has huge potential to become a major player on the political stage. It has high ambitions to account for 50% of global GDP by 2050 and from 2024 it will already account for 50% of the world’s population. It can offer developing nations a real alternative to the World Bank and western aid. Over 40 countries have applied to join BRICS meaning there is real potential for a large alliance. Achieving a sense of relative political unity however, like the G7, will be fundamental in determining whether it can achieve its potential or not.
The sounds from the summit in August 2023 are symbolic statements of intent rather than an imminent threat to the status quo. BRICS member states are still a long way from dedollarisation via the use of non-dollar currencies and even further away from setting up their own currency. There are a plethora of political hurdles to overcome before it can establish itself as a legitimate challenge to western hegemony.