Building with BRICS: An Unstable Foundation

“So much barbarism, however, still remains in the transactions of most civilized nations, that almost all independent countries choose to assert their nationality by having, to their inconvenience and that of their neighbors, a peculiar currency of their own.” - John Stuart Mill

Competition to the U.S. Dollar’s (USD) dominance as the standard in global trade and finance has been widely debated for a while now.  This discussion has revolved around fears of an unsustainable national debt, concerns over the Federal Reserve’s stewardship of currency, and more recently, competition from abroad. The Euro, with the collective backing of the European Union and its diverse economies, was once expected to rise to the challenge, but the USD persevered.  Now, a new contender, at least in the eyes of some pundits, has emerged in the form of the relatively nascent BRICS collective - composed of Brazil, Russia, India, China, and South Africa - and its perceived goal of reclaiming geopolitical and economic dominance from the developed West.

The recently concluded 15^th annual BRICS Summit, their first in-person meeting since COVID, provided useful insight into the future of the bloc. Notably, formal invitations were extended to several new members, representing the first expansion in a decade. This is being hailed as a massive success by China and Russia, both of which have long envisioned the future of BRICS as fundamentally an anti-Western entity, and is causing many to start taking this venture more seriously. We argue, however, that despite grandiose speech and lofty goals, these expansionary developments will only serve to stress an already shaky alignment of the member nations, weakening, rather than strengthening, any attempt to challenge the USD.

A Growing Global Order

“Ever since the Brazilian and Russian foreign ministers proposed the idea of creating a formal BRIC political grouping in 2009, I have questioned the organization’s purpose, beyond serving as a symbolic gesture.” – Lord Jim O’Neill, originator of the BRIC acronym

The BRICS collective, oddly enough, did not originate with a recognition of the included nations’ shared culture, history, or even that of interdependence or shared utility –the types of things that tend to hold international organizations together. The term, which was originally without South Africa (BRIC), was actually coined in a 2001 research paper by Goldman Sachs Chief Economist Jim O’Neill, in which he highlighted the group’s potential to drive the global economy in the 21^st century. Recognizing a useful moniker, the included nations picked up the BRIC(S) banner and ran with it, hosting their first summit in 2009 and solidifying the group as a player on the global stage. Today, the BRICS nations, led ideologically and economically by China and Russia,ⁱ are being perceived as a geopolitical counterweight to the prevailing dominance of the U.S. and the West in finance, trade, and world affairs. This stance has been expressed by a few BRICS members in a push for “de-dollarization,” or a reduction of their reliance on the USD as the preeminent trade and settlement currency. This shift, it’s believed, would potentially reduce the capacity of the West to “weaponize” financial transactions, as when Russia was locked out of the premier international payment and settlement system, SWIFT, after the invasion of Ukraine. The objective would be to mitigate the impact of U.S. or EU economic sanctions and to “make global governance more just and equitable.”ⁱⁱ

According to Russian President Vladimir Putin, this move away from the dollar is “objective and irreversible”ⁱⁱⁱ due to a few key developments:

• The establishment of the New Development Bank^iv to provide BRICS-specific development funding.
• Oil transactions have been conducted in Indian rupees.^v
• The development of a currency basket to augment trade.
• A push to expand BRICS membership (with China leading recruiting efforts) to further bolster the size and clout of the group.

And as of this writing, the collective is poised to add 6 new members – Saudi Arabia, the UAE, Iran, Egypt, Ethiopia, and Argentina. Combined, this BRICS+, as we will refer to it until they develop a new name, will account for nearly 50% of global GDP (the G-7, meanwhile, only accounts for around 30%).^vi

The Reality of the BRICS Expansion

“If Beijing wants to build a bigger anti-Western tent, it can’t do it when the BRICS tent already has so many friends of the United States inside it.” – C. Raja Mohan, Asia Society Policy Institute

In our opinion, however, this “progress” simply isn’t adequate. While a country’s desire to reduce over-dependence on any foreign currency may seem obvious, that does not necessarily mean it is feasible or even, especially for smaller nations, beneficial.  The dominance of the U.S dollar in global finance results from unique characteristics that make it more stable and more reliable than any alternative. There is a reason, despite the recent increase in rhetoric surrounding de-dollarization, SWIFT transactions conducted in USD just hit a record high.^vii  Similarly, Argentina is seeing dollarization, not de-dollarization, as its population loses faith in the local currency.^viii As a global reserve and standard for stability, the USD is quite simply in a league of its own.

This is perhaps why there is such a focus on BRICS expansion – it would allow these nations to settle trades in local currencies which can at least insulate them somewhat from potential USD-based sanctions. The recent inclusion of Saudi Arabia, the UAE, and other oil producers is a potential step in this direction, which could theoretically change how global oil markets are priced and settled - with something like a “petroyuan” supplanting the currently dominant “petrodollar.” But even this does not seem like a realistic expectation. For one, the UAE sees no reason for an exclusive BRICS trade bloc, but instead continues to strengthen its bond with the U.S. and broader West.^ix  Saudi Arabia, alternatively, would be sacrificing U.S. provided regional security, something that neither China nor Russia likely has the capacity to replicate. And if those reasons alone aren’t enough, neither the yuan nor the rupee (the only two currencies being considered in the context) have the stability, liquidity, or prudent policy backing to instill the confidence required of a primary trade medium.    

Ironically, the most damning issue faced by the BRICS+ collective is not even the relative strength of the USD – it’s the inherent incongruency of the group itself. This is not only rooted in historical tension (such as the long-strained relationship between Iran and Saudi Arabia), but in some cases, present conflict. The ongoing violent border clashes between BRICS heavyweights China and India, for example, will likely only worsen with President Xi’s recent snubbing of India with his public decision to skip the next G20 summit in Delhi.^x Strategic absence of this sort – for example, Xi noticeably skipped a major business forum during the BRICS summit – has led some to speculate that China wants to ensure its geopolitical vision isn’t muddled with that of others, which has raised questions about its true commitment to the cohort overall.^xi   

Beyond internal member conflict, BRICS membership itself overlaps with other dominant cohorts, including the G7 and G20. President Putin, for example, didn’t attend the South Africa summit due to his standing arrest warrant from the International Criminal Court, which South Africa would have been compelled to execute as a signatory to the court.^xii The fact that the bloc consists of nations with varying degrees of democratization, and some even being fully authoritarian, implies the potential for many such significant challenges to multilateral cooperation.

Perhaps the biggest struggle faced by the group is the absence of any shared vision, which stems at least partially from the fact that BRICS is less a collection of states in equal standing, and more two distinct ideological groups. In one group, you have the large geopolitical players (namely, China and Russia) who see this is as an opportunity expand influence in a seemingly bi-polar landscape.  As such, they are pushing rapid expansion to bring more nations into the fold, with de-dollarization as a primary policy goal for all of the reasons previously explained. On the other side, you have the smaller, less economically stable nations (South Africa, Venezuela, and the host of other nations that are interested in joining) who see this as an opportunity to reap the economic rewards associated with potential trade agreements. At the same time, they worry that expansion will dilute their already subordinate role in the collective, leading to something closer to the United Nations as opposed to a concentrated structure with relatively equal standing for members.  And unlike the dominant group, these nations have little interest in warring with the West,^xiii not only because they have more to lose by ignoring the usefulness of the USD, but also because of the prospect of a Cold War-esque outcome. At the end of the day, it seems the only near-consensus (Brazil is sole outlier)^xiv is that there are no plans to introduce any sort of BRICS currency (like the Euro).

Clearly, developing an accord among nations with such disparate histories, cultures, geographies, and resources (both capital and natural) is a tall order. When disagreements occur between members, as they inevitably will, there must be some “glue” that holds the collective together. For example, the EU has seen its fair share of internal strife and conflict, but the close historical bond and intertwined economies of its members have allowed it to persist. Even the U.S., which was literally split in half just 150 years ago during the Civil War, was able to rebuild on a shared vision of the future. However, there simply doesn’t appear to be, in any real sense, a BRICS “glue,” which means prospects for drastic progress on any front may be hampered.

Conclusion

Upon leaving the BRICS Summit in South Africa last month, leaders were tasked with considering “the issues of local currencies, payment instruments, and [payment] platforms”^xv to enhance dealings between partner nations, but not how to compete with SWIFT and other existing institutions.  This is hardly the outcome many pundits, and even some BRICS nations themselves, expected. In fact, discussion of de-dollarization, which was expected to be the primary focus of the entire event, was simply tabled for the time being.  

Geopolitics will continue to shift, and regimes will change. But while no country or currency is invulnerable indefinitely, the relative power of the USD is often underestimated. As it stands, despite the national debt, policy missteps, and most importantly, competition from abroad, the USD’s reign continues. As for BRICS+, any speculation about its imminent domination of global economies appears to be completely unfounded. Let’s just say that Aristotle’s wise adage may not apply in this case –the whole of BRICS+ may be weaker than the sum of its parts.

ⁱ https://thediplomat.com/2023/08/brics-a-china-led-group-looking-for-relevance/
ⁱⁱ https://www.reuters.com/world/chinas-xi-calls-accelerated-brics-expansion-2023-08-23/
ⁱⁱⁱ https://fortune.com/2023/08/23/putin-claims-war-on-dollar-working-brics-economic-conference/
^iv https://www.ndb.int/about-ndb/
^v https://www.reuters.com/business/energy/india-makes-first-crude-oil-payment-uae-indian-rupees-2023-08-14/
^vi https://economictimes.indiatimes.com/news/international/world-news/brics6-to-control-30-of-global-gdp-46-population-note/articleshow/103181021.cms?from=mdr
^vii https://markets.businessinsider.com/news/currencies/dedollarization-suffers-blow-swift-usd-share-global-payments-hits-record-2023-8#:~:text=Data%20from%20the%20Society%20for,dollar%20in%20July%2C%20per%20Bloomberg
^viii https://markets.businessinsider.com/news/currencies/dollarization-argentina-firms-tech-sector-dollar-peso-milei-greenbacks-currency-2023-8
^ix https://www.bloomberg.com/news/articles/2023-08-28/uae-says-brics-membership-isn-t-hedge-against-western-alliances?in_source=embedded-checkout-banner
^x https://www.reuters.com/world/chinas-xi-likely-skip-g20-summit-india-sources-2023-08-31/
^xi https://www.cnn.com/2023/08/23/china/china-xi-skips-brics-business-forum-speech-intl-hnk/index.html
^xii https://apnews.com/article/russia-putin-brics-summit-icc-warrant-1d2c52944bc3c20fa73eb5f8684e7419
^xiii https://www.bloomberg.com/opinion/articles/2023-08-21/the-brics-are-not-the-anti-west-and-not-even-a-bloc
^xiv https://www.reuters.com/markets/currencies/what-is-brics-currency-could-one-be-adopted-2023-08-23/
^xv https://www.reuters.com/world/africa/brics-payment-system-would-not-replace-swift-safrica-finance-minister-2023-08-24/

The information in this report was prepared by John Weitzer, Chief Investment Officer, Matt Wiley, Vice President of Investment Management, and Matt Conner, Investment Advisory Consultant of First Command. Opinions represent First Command’s opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual advisor. All statistics quoted are as of the date of this publication, unless otherwise noted. First Command does not undertake to advise you of any change in its opinions or the information contained in this report. This report is not intended to be a client specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Should you require investment advice, please consult with your financial advisor. Risk is inherent in the market. Past performance does not guarantee future results. Your investment may be worth more or less than its original cost. Your investment returns will be affected by investment expenses, fees, taxes and other costs.