BRICS nations eye expansion and shared currency, challenging global financial order

Economic bloc threatens to wrestle trade dominance away from greenback 
BRICS nations eye expansion and shared currency, challenging global financial order
BRICS nations

The BRICS nations, consisting of Brazil, Russia, India, China, and South Africa, are actively seeking to expand their alliance by inviting additional countries to join, forming what is referred to as BRICS+. Furthermore, there have been discussions within the BRICS group about the possibility of creating a shared currency called BRICS.

Until recently, the U.S. dollar was used in nearly all oil trades conducted by Saudi Arabia, Russia, India and China. Things, however, appear to be changing.

“Russia is already trading energy with India and China in rupees and yuan respectively. Saudi Aramco is building a $10 billion oil refinery in China and considering selling oil to China in yuan. Meanwhile, France and China have finalized their first-ever deal on 65,000 tons of liquefied natural gas in yuan,” Vijay Valecha, chief investment officer at Century Financial, told Economy Middle East.

China’s yuan recently replaced the U.S. dollar as the most traded currency in Russia as well as the most used currency to settle cross-border payments in the Asian country.

BRICS countries comprise around 42 percent of the world’s population and represent nearly 24 percent of global GDP. They account for 16 percent of world exports and 15 percent of world imports. It is estimated that by 2028, the G7 will only represent 28 percent of the global economy, while BRICS will make up 35 percent.

Saudi Arabia, the United Arab Emirates and Egypt are among 16 other nations keen on joining the BRICS bloc, with recent reports indicating that key member China aims to push the Chinese yuan as the de-facto currency in the bloc in order to de-dollarize trade.

Vijay confirmed that Chinese authorities will continue to push for the yuan to play a greater role in regional trade by promoting greater local currency settlement between the yuan and other regional currencies. “However, the potential introduction of a common BRICS currency is in sight,” he said.

John J. Hardy, head of FX Strategy at Saxo Bank, told Economy Middle East that “China aims to increase trade in the renminbi. However, using national notes as a reserve currency presents challenges as it requires free capital flows, which China currently restricts, as well as significant external deficits to bolster offshore liquidity.” It is worth noting that China operates with significant surpluses, which further complicates this endeavor.

U.S. dollar’s standing

The U.S. dollar represents nearly 90 percent of global exchange trading and just under 60 percent of all foreign currency reserves held by central banks, while over 74 percent of all foreign trade uses the U.S. dollar.

In early May, IMF Managing Director Kristalina Georgieva noted that there was no viable alternative among global currencies to replace the dollar in the foreseeable future despite a slow shift away from the greenback. Recent data indicates that the U.S. dollar’s share of reserves has declined from 70 percent to just below 60 percent. Furthermore, the recent U.S. banking crisis contributed to weakening the U.S. dollar.

Nonetheless, “currently, there are no viable alternatives to the U.S. dollar. It remains indispensable due to its global acceptance and the vast value of global assets, amounting to tens of trillions of U.S. dollars, and denominated in the greenback,” John said. “These assets would require conversion to a different currency if a transition to a new system were to occur. As a result, the U.S. dollar continues to maintain its position as the most liquid and irreplaceable currency for the foreseeable future.”

Vijai said a BRICS currency may come to play a greater role in regional trade in East and Southeast Asia, “but this is unlikely to transform it into a full-fledged reserve currency capable of rivaling the dollar or the euro in the short [or even medium] term.” 

Read more: BRICS bank reportedly eying Saudi for membership

NBD and AIIB vs. IMF and World Bank

In 2014/15, the BRICS countries came together to establish the New Development Bank with an initial capital of $50 billion. Subsequently, the UAE joined the NDB as a member following the enactment of Cabinet Resolution No. (19) of 2021.

In order to facilitate infrastructure investment in both BRICS and Asian nations, the NDB and the Asian Infrastructure Investment Bank are actively pursuing the utilization of national currencies for investment within their respective member states.

These institutions are often regarded as viable alternatives to traditional financial institutions like the World Bank and the International Monetary Fund.

“The aim of the BRICS NDB and Chinese AIIB is to mobilize resources to fill the large gap in infrastructure investment and to promote sustainable development in developing countries. Although the size and potential of the NBD and AIIB is smaller, it is not so different from the IMF and the World Bank,” Vijay explained.

“The prospect of alternative funding does not necessarily imply a shift away from the World Bank and IMF. Experts estimate that the developing world requires trillions of dollars in infrastructure investment. So, the AIIB and NDB could very well complement World Bank efforts, simply filling funding gaps.”

Looking at it from a different angle, John clarified that the NDB and AIIB are “organizations [that] could potentially become players in the ‘fragmentation game,’ or what some perceive as ‘deglobalization,’ a trend characterized by the emergence of fragmented interests in trade, supply chains and security alliances.”

“In this scenario, if a country determines that China is its primary trade partner and chooses to conduct trade in the renminbi, it may also seek funding for new development projects and financial assistance from these newly emerging organizations. While the future roles and influence of these organizations remain uncertain, their emergence could reflect the evolving landscape of global trade and economic relationships,” he explained.

BRICS nations

UAE and Saudi Arabia: What it means to join BRICS

China and India are important to both the UAE and Saudi Arabia as destination markets for their investments and vice-versa. Therefore, the decision to join BRICS would present new opportunities for these two countries.

“Saudi Arabia and the UAE are important regional and global players, and their addition to BRICS would provide a significant economic and political influence on the group,” Vijay said. “Saudi Arabia is a major player in the global petrochemical industry, with a production capacity of more than 70 million tons per year. The country’s admission to BRICS would provide its members with a reliable partner in the energy sector and would help promote stability in global oil markets.”

Vijay added that the UAE joining the BRICS group would provide it with new investment and trade opportunities, which would help to diversify its economy and reduce its reliance on oil. “The UAE’s addition to BRICS is particularly quintessential from the standpoint of the ongoing shift toward renewable energy sources, and would give it access to new technologies and expertise, which would be crucial for its efforts to diversify its economy and create new jobs.”

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