The biggest story in the world happened recently in Moscow. Xi Jinping and Vladimir Putin, the two leading members of the BRICS alliance, signed a whopping 14 different documents during their meeting, the most significant of which dealt with trade and currency. Before we analyze the impact of this document on the global world order, it is important to discuss the BRICS alliance.
WHAT IS BRICS?
BRICS is an acronym that consists of the first letter of every country in the alliance of emerging economies, which seeks to challenge the West and NATO. It was initially coined by Jim O’Neill, a Goldman Sachs economist, in 2001 and stands for Brazil, China, India, and Russia. A few years later, in 2010, South Africa joined the alliance, thereby completing the BRICS acronym, at least for now.
In a report published in 2003, Goldman Sachs claimed that the global economy will be dominated by the four (at the time) BRIC economies by 2050. The main reason for such a claim was that China, India, Brazil, Russia, and (later) South Africa were ranked among the world's fastest-growing, and emerging market economies. Their fast-paced industry and population growth was deemed a future threat to the west and to NATO. Nowadays, four out of the five BRICS members are among the world's ten largest countries by population, by area, and by GDP.
When analyzing the BRICS alliance in numbers, we can see that it has a total of 3.24 billion people in the five member states, which compose a total of 41.04% of the world's population. The total population of NATO, on the other hand, is just 954.55 million, which is a mere 12% of the global population, despite being an alliance of 31 member states. Furthermore, in recent years, 50% of the economic growth achieved in the world was achieved in these 5 BRICS nations. In terms of defense, even though BRICS does not yet identify as a military alliance, as of 2023, NATO had approximately 3.36 million active military personnel compared with 1.33 million active military personnel in just the Russian military (the total active military personnel in the BRICS alliance is noted to be over 5 million).
In terms of defense spending, BRICS was noted to spend $349 billion, in comparison to NATO's $1.1 trillion. However, despite this difference in their budget, the BRICS nations have a stockpile of 7,000 nuclear weapons, in comparison to NATO’s 6,485. When it comes to the leaders in both alliances, Russia and the United States possess roughly 90% of the world's nuclear weapons, with over 5,500 weapons each. However, there is no information how many of the nuclear weapons are fit for use since most of them were built during the Cold War.
Nuclear weapons have been the subject of heated discussion because to their great destructive capability. The Treaty on the Prohibition of Nuclear Weapons was ratified by the United Nations General Assembly in July 2017. It was attended by 124 countries, of which 122 supported the pact, 1 opposed and 1 abstained. However, as the projected budget for the United States' nuclear weapons program from 2022 illustrates, spending in this field are rising rather than reducing.
WHAT DOES BRICS SEEK TO ACCOMPLISH?
The 5 BRICS nations currently seek to expand their global economic and political influence. Believe it or not, in many ways, this expansion can be viewed as a defense mechanism. Everything began with the onset of renewed tensions that arose between Russia and the US with the onset of the Russian annexation of Crimea in 2014. This event saw many Western economic powerhouses sanction the Russian government in an effort to weaken its economy. This weakening of the Russian economy manifested in the drop in the value of the Russian ruble. As the value of their currency declined, Russia was forced to ramp up production of just about everything that they produce (and export) - from oil, to uranium, to nuclear fuel and natural gas.
To put it simply, the Russians were forced to ramp up production in order to sell more goods on the global market, in an effort to compensate for the drop in the value of the ruble. In fact, Russia became the dominant exporter of many of these goods, right around the time that the sanctions were inflicted. Even the US is dependent on Russian Uranium exports, for example.
THE DECLINE OF THE US DOLLAR
The onset of the annexation of Crimea by Russia can also be attributed as a starting point for the decline of the influence of the US dollar. As mentioned before, the onset of Western sanctions caused Russia to ramp up production. Meanwhile, in the US, the manufacturing base saw a decline under President Obama, as the trade deficit with China, at the time, eliminated 2.8 million jobs, 1.9 million of which were manufacturing jobs. Unfavorable tax policy and increased regulations further made the US a bad place to do manufacturing business, which resulted in many companies shifting production to the East.
The increase in the production of oil, at the time, also put pressure on the global oil market, due to the fall in oil prices. This fall in prices led to a decrease in the demand for US dollars. The trend of a decrease in the demand for dollars when the production of oil increases occurs due to the position of the dollar (the “petro-dollar”) as the global reserve currency. Essentially, whenever a country seeks to purchase oil from an exporting country, it must do so in dollars. This is also the reason why US sanctions have always been so effective - most global market exchanges are done in dollars.
The petro-dollar system was established in the 1970s, (right around the time the gold standard was dropped) when the US made a deal with Saudi Arabia to price oil in US dollars. The agreement made it necessary for other countries to hold large amounts of US dollars in order to purchase oil from OPEC countries, which of course helped support the demand for the US dollar - making it the world’s dominant currency. This system let the US go into large amounts of debt because it was sure that there would always be a country to buy up this debt. The dollar, in effect, gives Washington an unrivaled, for now, economic and political muscle, seeing as unilateral sanctions on countries are enough to freeze that country out of large parts of the world economy, and Washington can spend freely knowing there is always a country willing to buy up its debt. This weaponization of the US dollar, seems to be the very thing leading to its demise.
This brings us to the current war in Ukraine, which resulted in even tougher Western sanctions on Russia. The sanctions have crushed trade between Russia and the US and its allies. This has further led to a decline in economic growth and a decline in the value of the US dollar. Currently, the Federal Reserve in the US is even forecasting negative GDP growth and a likely recession. In Russia, however, the opposite is happening. The International Monetary Fund (IMF) has estimated GDP growth in Russia, despite the sanctions, and the value of the Russian ruble has hit record highs.
Russia is not the only strong economic power in the BRICS alliance. China - which recently became the world's second largest economy, according to the IMF - is increasingly trying to increase its global political influence in addition to its economic power. For example, China has recently established itself as a peacemaker, brokering a historic peace accord between Saudi Arabia and Iran - Sunni, and Shia Muslims, that have been sworn enemies for decades. The peace deal consists of an ambassador exchange between the two nations, as well as a commitment by Iran to stop further attacks on Saudi Arabia and curtail support for militant groups that have targeted the kingdom. Perhaps because of these events, Saudi Arabia is now openly talking about settling their oil trades in the Chinese currency yuan, which would replace the US dollar.
China has also brokered a recent trade deal with Brazil, will enable the two nations to conduct their massive trade and financial transactions directly in their own currencies instead of going through the dollar.
Recently, Russian President Vladimir Putin claimed:
“We are in favor of using the Chinese yuan for settlements between Russia, and the countries of Asia, Africa, and Latin America.”
In effect, the world’s second-largest economy, and its largest energy exporter, are together actively trying to dent the dollar’s dominance as the anchor of the world’s international financial system. This turn of events is likely the result of Russia’s exclusion from SWIFT, the messaging network used by 11,000 banks in 200 countries to make cross-border payments.
Being cut off from the global financial system has led Russia to develop its own system called SPFS - the Russian equivalent of the SWIFT financial transfer system, developed by the Central Bank of Russia. At the end of 2020, there were 23 foreign banks connected to the SPFS from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan, and Switzerland.
A FIGHT OVER AFRICA
Recently, the African continent has been a central battleground for influence between the West and BRICS. The American Vice President, Kamala Haris, recently visited Ghana, in an attempt to salvage Western relations with the continent and slow down the influence of BRICS. So, why is the African continent becoming increasingly attractive to different countries around the world and what does this mean for business and economic development on the continent?
This trip from the Vice President included Ghana, Tanzania, and Zambia, and follows French President Emanual Macron’s “friendship tour” of Africa a few weeks prior. This has been noted by diplomatic experts to be a preemptive measure by the West, to try to get ahead of President Putin, who plans to visit Africa to make a major push to align Africa with BRICS later this year. The alignment of the African nations with the BRICS alliance would give the alliance a major strategic advantage over the West. This alignment is becoming ever more likely, as Russia and China have been noted to make significant inroads in various African nations, centered around massive infrastructure projects. The current western friendship offensive, seeks to convince the African nations to reject future infrastructure and business deals from Russia and China.
At this point, the results of this battle for influence in Africa can only be speculative, as the negotiations are still ongoing, and both sides remain strategically tight-lipped. Nevertheless, predictions can be made on the offers that are likely to be made, and which side is perhaps more favorable to business in Africa. BRICS nations, most notably Russia and China, are most likely offering the African nations a combination of energy, and transportation infrastructure, grain, and help in developing African manufacturing, among other such things. In exchange, the BRICS nations are likely looking to continue to establish a business foothold in Africa and receive a revenue stream from the various infrastructure projects through tolls and surcharges. In addition, Africa will allow BRICS access to the various resources of the African continent. The ultimate goal of these initiatives would be to decrease Western influence in the continent.
The West will likely be a bit less transparent, and will offer foreign aid with strings attached, including developmental loans from the World Bank, more American visa lotteries for African citizens, as well as implied military protection. In exchange, the US and its allies will expect Africa to conform more to Western social norms, allow Western companies access to African economies and, of course, limit African involvement with the BRICS nations. This is fundamentally a continuation of previous Western relations with the African continent, with, perhaps, a more friendly approach.
On the surface, the BRICS nations appear to be offering a much better deal for the African economies. The infrastructure and energy deals appear to offer the prospects of a much-needed economic boost to the continent, without the typical political and social baggage the West pushes. From a business standpoint, it seems that BRICS is the winning choice if you are an investor in Africa. However, the devil is in the details, and we do not know whether the BRICS nations will maintain a neutral business relationship with Africa indefinitely, or whether they will attempt Western-style political intrigue if BRICS influence becomes more entrenched.
Either way, it certainly must be an interesting time to be an African. After centuries of colonial influence and second-class country treatment, the African nations now find major powers of the world attempting to win their favor, putting the Africans in a much stronger negotiating position than they enjoyed in the past.
BUT MAYBE NOT YET
But before jumping to conclusions, we should keep in mind the positions of the other BRICS members. Different member states are giving various signals to the idea of creating a common currency that would destabilize the dollar and suspend its position as the world currency.
Brazil
In an 2019 interview, Brazil's current President Lula Da Silva said that:
"BRICS was not created to be a tool for defence, but to be a tool for attack. To be able to create our own currency that becomes independent of the US dollar in our trade relations; to create a development bank, which we did - but it is still too timid - to create something strong, capable of supporting the development of the poorest parts of the world."
However, Brazil's economic situation is in poor shape and it could not afford to confront the dollar any time soon. Brazil's dependence on the US dollar is evident, as around 90% of its export invoicing is denominated in dollars, even though the US only receives 17% of Brazil's overall exports.
Before Lula Da Silva became president again after the 2022 elections, his predecessor and far-right politician Jair Bolsonaro maintained closer relations with the US. Brazil's foreign policy and trade with China and Russia under his rule were limited and more conditional than under Da Silva. Ideological differences and similarities play an important role in this case, as Lula is a far-left politician.
Over the past decade, bilateral trade between China and Brazil has increased significantly and reached $150.4 billion last year. This growing economic relationship is based on China’s purchase of Brazil’s agricultural commodities and minerals and its investment in Brazil’s consumer marked and infrastructure sector. As a result of this trend, both countries are pushing for greater use of their currencies in bilateral trade.
“Who decided that our currencies were weak, that they didn’t have value in other countries?" Lula said in his speech while vising China.
Brazil’s economic ties with China and its reliance on the US dollar means that it probably will not take the lead in the BRICS de-dollarisation plans. Nevertheless, Brazil acknowledges the potential advantages of such initiatives as they can facilitate trade relations with China and other significant economies such as India and Russia.
India
Contrary to expectations, India is still playing the renegade in the 5-nation alliance. India believes that the idea of weakening the dollar is more an ideological issue rather than a practical one. India also continues to regard both China, because of its dispute with it over borders, and the US as a threat to its national security. However, India is trying to balance the influence of these world powers in its region.
In the past, India has examined strategies to decrease its reliance on the US dollar. For example, in 2012, the Ministry of Commerce and Industry established a task force to investigate the possibility of using the Indian Rupee in bilateral trade, particularly in trade with oil-exporting nations.
Despite being one of the most dollarized countries in trade invoicing, the surge in currency volatility worldwide has prompted India to move away from the dollar. However, this endeavor will be difficult since 86% of India's imports are invoiced in US dollars, despite only 5% of India's imports originating in the US. Similarly, while only 15% of India's exports were to the US, 86% of India's exports were invoiced in US dollars.
CONCLUSION
The above critical analysis of the current changing global political landscape leads to the conclusion that, although the BRICS nations are growing stronger in their influence, the current economic power of the West and the US dollar is likely to remain for years to come.
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