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Canary in the Coal Mine? BRICS in the Global World Order

Updated: Mar 5

Paweł Płonka

BRICS seems to be growing in importance worldwide. Six new members. A higher share of the global GDP compared to G7. Voices advocating for a common currency. Is BRICS - the voice of the emerging and developing world - going to change the status quo and overthrow the hegemonic US dollar?

 

The Rules of The Game…

 

Since the aftermath of the Second World War, the dollar has become the linchpin of the global financial and monetary system. Upon the creation of Western-dominated international financial institutions of the World Bank and the International Monetary Fund (IMF), forty-four countries anchored the value of their currencies to the dollar, achieving its position as the global reserve currency. Despite various modulations of the existing order, including abolishing the exchange rate system based on gold, the dollar maintained its primacy.

 

Dollar’s ‘exorbitant privilege’ comprises the constant usage in international trade of major global commodities (such as oil), its market size and depth (incomparable to those of the euro or renminbi), great investability owing to perceived stability and its dominating place in the space of development financing and global corporate borrowing.


The overarching role of the dollar equips the United States with a plethora of powerful means for economic statecraft. Washington, possessing such formidable power and prestige in the form of the control of the dollar, has been dictating the rules of the game for the past decades. However, in the wake of the major financial crises in 1997 and 2007, the global outlook started to alter.

 

The emerging markets joined forces. In 2009, representatives of Brazil, Russia, India, and China, the countries considered a few years prior by Goldman Sachs to collectively dominate the global economy by 2050, gathered in Yekaterinburg to discuss solutions to the crisis and deliberate about the new financial system. A year later, South Africa also joined the forum, giving shape to the present name of the group - BRICS.


Despite being radically different from each other, these states are ‘reform-oriented rising powers, including strategic adversaries of the United States, that have expressed discontent with the existing US-led dollar-based global financial system,’ as noted by Zongyuan Zoe Liu and Mihaela Papa. Each of these countries was detrimentally affected by the US-centric international economic order, so each has a strong will to change the status quo. De-dollarization lies at the core of the group’s agenda.

 

…and The Means to Change Them

 

Weakening the dollar's dominant status requires numerous incremental policy initiatives. Mechanisms such as promoting the use of local currencies, reducing dollar reserves, and expanding non-dollar-based equity markets can aid in drifting away from reliance on the dollar. Most visibly, these principles were epitomized by the creation of the New Development Bank (NDB) and Contingent Reserve Arrangement (CRA), which are supposed to mirror the functions of the World Bank and the International Monetary Fund, respectively.

 

These new multilateral financial institutions increased the members’ autonomy by prioritizing loans in local currencies and allowing them to secure loans from global capital markets at significantly reduced rates, as the NDB enjoys a higher credit rating than most BRICS members. By the end of 2019, 27% of the NDB's total portfolio was in local currency loans, a notably higher percentage than other central multilateral development banks. CRA fills the gap of the institutional provider of reserves during the short-term balance of payment crises of its members due to the dollar shortage. Funds from both institutions are nearly condition-free in contrast to the World Bank and IMF, which also impose provisos such as improvement of the rule of law and governance reform.

 

BRICS’ multilateral institutions cannot compete with the existing ones yet, despite showcasing the coalitional strength and reforming the international financial infrastructure. However, the great potential is stored elsewhere - it lies in the innovations in the cross-border payment systems and the gradual establishment of the group's currency. As mentioned previously, to diminish the dollar’s dominance, BRICS could increase the number of transactions completed in their respective currencies. Native cross-border systems have already been established in China and Russia, creating alternative messaging systems to the omnipresent SWIFT.

 

BRICS collectively is willing to make another step towards de-dollarization by developing BRICS Pay - a unified contactless payment system that links the national payment systems of the member states through a consolidated cloud-based platform. The major advantage? As payments would be processed using the national currencies, the need to convert to the dollar and connect to international payment organizations such as SWIFT, Visa, or Mastercard would be vastly reduced. The following mechanism, which would further enhance these developments, is creating the BRICS common currency.

 

'The Historic Expansion’ (and R5)

 

During the 2023 BRICS Summit in Johannesburg, the group members agreed to expand it to include six more emerging global economies - Argentina, Ethiopia, Iran, Egypt, Saudi Arabia, and the United Arab Emirates. Albeit now, BRICS would comprise countries of even more divergent alliances and positions in the geopolitical landscape, the unifying component - the feeling of the unrepresentativeness of the international financial institutions - remains valid. Including the major oil exporters such as Saudi Arabia, which has been considering accepting other currencies instead of dollars for its goods, might be a sign of a more intensified progress towards de-dollarization.

 

The expansion has overshadowed almost every other issue, including establishing the common currency. Despite not being on the main agenda this year, it was mentioned by Brazil’s President Lula da Silva at the opening plenary session: ‘The creation of a currency for trade and investment transactions between BRICS members increases our payment options and reduces our vulnerabilities.’ Within a group, there seems to be a cleavage between the ones who advocate for the new instrument (Brazil) and those who downplay the possibility of such a solution (India and South Africa). No decision regarding it has been made during the gathering. However, given the enlargement of the group and the ground-breaking side of the proposal, the idea will remain in the debate. Is the project feasible?

 

According to Paulo Nogueira Batista Jr., the former Vice President of the NDB, the common currency named ‘R5’ (derived from the initial letters of the founding members' currencies) could be a new unit of account, similar to the IMF’s Special Drawing Rights, which would be used to set prices in international trade. Each of the five leading currencies would have its representation in the respective share in the currency basket.


Furthermore, R5 does not need to have a physical form, instead it can be entirely digital. Hence, the role of the central bank would be obsolete, according to the expert. The Russian Finance Minister reiterated some of these thoughts: ‘We see the potential to discuss the creation of unified settlement systems. This can be a unit of account for the BRICS member countries. Not a single currency like in the EU but an alternative to the dollar’. Nonetheless, the prospect of the BRICS currency is most likely far from the realization for now.

 

New International Order?

 

Despite the fact that the above-explained mechanisms, such as the NDB and CRA or BRICS Pay, are bound to cause a rupture in the international financial order dominated by the US, BRICS’ recent summit reminds us about its form - it is a flexible and informal gathering, not an alliance.


From the geopolitical point of view, BRICS comprises countries that might want to create a more representative international order, yet their ambitions in other areas are acutely divergent. Regardless of the effectiveness of cooperation between China and other countries in the group, there will always be an elephant in the room - the Sino-Indian rivalry. Both powers compete for influence in the region, experiencing a period of heightened diplomatic friction.


After all, Beijing and New Delhi continue to have military stand-offs along their disputed border. Most profoundly, India represents the strategy of the ‘multi-alignment’ in foreign affairs, managing various often counterintuitive amicable relations with countries of both the Global South and North. It is a reminder of a lack of political cohesion within the group, which now accepted more members with clashing broader interests.

 

This overflows onto the issue of inertia in advancing more comprehensive mechanisms. Some instruments, such as the analyzed R5, will remain in the geopolitical limbo. Putting aside conversations on the feasibility of the common currency, the consensus seems elusive as prominent actors reject the notion in itself. Hence, the group presumably will focus on developing the existing instruments collectively and individually as the founding members’ currencies are devoid of investability prospects and integration with the funding institutions.


Further policies contributing to de-dollarizing certain aspects of the international economic order, such as development finance and messaging networks, might be under consideration. The expansion might bolster it as more countries selling major global commodities have joined.

 

BRICS is unlikely to challenge the international order now. Nonetheless, the enlargement of the group and its growing appeal could be seen as a ‘gray rhino.’ Even though, ultimately, the bloc is what each member wants to make out of it, BRICS successfully presents itself as an alternative to the world subdued by the West. Countries in the Global South are ascending and want to exert influence in the global governance system as well. BRICS is only a harbinger of the inevitable - a progression towards a more multi-polar world.


Image: Shutterstock

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