Will BRICS+ Dethrone The United States Dollar?

Given the recent expansion of the “BRICS” countries to include five new members, “BRICS” concept was launched as a financial sector grouping of the then-major emerging market economies which were expected to grow faster than the G-7 economies.

The thesis was that as the BRICs economies grew quickly over the decade to 2001, their impact on the global economy and their fiscal policy would become increasingly important.

The leaders of the BRIC countries liked the idea, so the first formal BRIC ministerial meeting was held in 2006 at the margins of the UN General Assembly session in New York.

In this paper, Catechis looks at the recent developments within the emerging market countries known as “BRICs+,” and the implications for investors.

He says “This is a period of great change in the international system, with shifting relationships and different countries trying to realign with others to gain stability, or at least to avoid closing options in the future. In this context, it is natural that there is a degree of experimentation, as countries try to discern what advantage can be gained from one or another association.

“As a result, it is worth restating that there is a difference between de-dollarization, dethroning the dollar, the promoting of an alternative global financial system, or RMB internationalization. BRICS+ has enough critical economic mass to pursue an alternative to the existing dollar-based system. The motivations for these countries are principally geopolitical and geoeconomic, and they have already built some infrastructure. China, India, and Russia have developed their own domestic-oriented financial plumbing.

“And as they grow intra-BRICS+ trade, it is logical to try to reduce transaction costs by avoiding a third currency, as well as the currency exchange-risk cost, even with lower liquidity. But de-dollarization is very different from trying to promote an alternative financial system. And many countries have not committed to pursuing a de-dollarized world as the optimal outcome.

“China has benefited enormously from the existing system and would be a significant loser in a de-dollarised world. For Beijing, this is geoeconomics, and dethroning the US dollar is an objective that we think is best served by a shorter-term priority, the continued internationalization of the RMB, especially in the Global South, which fits the narrative of a more diversified global currency system. There are significant obstacles and enough diversity of opinion within this group to make progress dependent on the persistence, flexibility, patience, and risk appetite of their leaders.

“It seems clear that in seven of these countries, the authoritarian style of governance would appear to guarantee persistence, although the urgency is surely highest in Russia and Iran, subject to potential succession struggles in the future. Meanwhile the group’s expansion has resulted in more enmities (deep and historic) among members, rather than increased solidarity. That represents a unique and significant challenge.

“Investors are operating in a changed world, where we can no longer assume that economic logic prevails as it used to. Geopolitical tensions are structural, forcing economic decisions to be subject to non-economic criteria, like national security. If we are in the process of a return to some form of political economy, we need to be clear eyed in our risk assessments.

“The risk of significant erosion of the dollar’s hegemony is real, but we should not think of it as a short term or even a binary outcome.”

Key takeaways:

• The loose grouping known as BRICS (Brazil, Russia, India, China and South Africa) has demonstrated a higher degree of geopolitical ambition and doubled in size this year by accepting five new members (Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates [UAE]).
• The composition of “BRICS+,” its increased scale and the inclusion of heavily sanctioned regimes make it look like an explicitly anti-G7 grouping with potential to disrupt global economic activity.
• The factors mentioned above raise investor concerns around the ability of these countries to undermine the role of the US dollar as the world’s reserve currency, but the situation is complicated.
• There should be no doubt that the BRICS+ group aims to undermine the dominance of the US dollar, but the degree of commitment varies between Russia, Iran and China’s ambition, and the less-committed countries such as India and the UAE, where the preference is for their own currencies to take a bigger share. For Brazil and South Africa, settling trade with their biggest partner (China) in renminbi (RMB) is sufficient for now.
• The group’s combined fossil fuel production is equal to approximately 40% of global oil production, but because China, India, Russia and Saudi Arabia are also big consumers, BRICS+ represents 22% three of the world’s export market volumes.
• The creation of the New Development Bank (NDB) as an alternative lender to the World Bank and the International Monetary Fund (IMF) affiliates suggests a desire to supplant the established multilateral institutions.
• The creation of alternative financial transactions platforms is at least partly aimed at insulating these countries from potential financial sanctions in future.
• It seems prudent to assume that these efforts continue to gain traction, effectively ringfencing economies from the established “Western” financial ecosystem of Society for Worldwide Interbank Financial Telecommunication (SWIFT) and Clearing House Interbank Payments System (CHIPS), as well as an attempt to use alternative currencies for intra-BRICS+ trade, other than the US dollar.
• Investors have a fiduciary duty to regularly re-evaluate the possibility that this trajectory eventually leads to a reduced appetite globally for US Treasury bonds, while the likelihood remains extremely low at present.
• These are the principal signposts for investors to watch for:
  1. The development of alternative “financial plumbing” systems like Cross-Border International Settlement System (CIPS)
  2. The level of acceptance of the RMB in intra-BRICS+ trade
  3. The evolution of cross-border wholesale central bank digital currency (CBDC) projects like mBridge, which connects China, Thailand, the UAE and Hong Kong, and is expected to expand to 11 countries this year.
  4. This will be the real test case for a potential replacement of SWIFT in future.
• Ultimately, we see the US dollar remaining the preferred global reserve currency in the foreseeable future. Even as other currencies increase their participation in foreign reserves, trade invoicing and transactions, incumbency, liquidity, efficiency and confidence in the dollar mean none can likely challenge it in the medium term.

Endnotes

1. The Group of Seven (G7) is an informal group of seven of the world's advanced economies, including Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. The European Union is a “non-enumerated” member.
2. Source: “Building Better Global Economic BRICs.” Goldman Sachs, Global Economics Paper No.66. November 29, 2001.
3. Source: The Statistical Review of World Energy, 2023. Data as of 2022.
4. Source: Atlantic Council Central Bank Digital Currency Tracker.

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