Expansion of BRICS | all news

What is BRICS?

The term BRICS means the union of five countries with large territories: Brazil, Russia, India, China and South Africa.

The acronym first appeared in 2001 after the publication of a Goldman Sachs report authored by Jim O’Neill. The involvement of investment banking during the formation of BRICS is not insignificant, as the emphasis on the great growth potential of these countries subsequently generated a large flow of investment into the stock and bond markets of these countries. It should be noted that Russia’s aggression against Ukraine has caused many asset managers to remove the “R” from B(R)ICS.

But let’s go back to the genesis and activities of BRICS. Although the term was used at the very beginning of this century, it was mainly from 2011 that BRICS became an official group, with regular summits and the inclusion of South Africa.

Indeed, the BRICS group has since taken the form of a full-fledged diplomatic conference, leading to an annual summit held by each of the five nations in turn. The purpose of these summits is to confirm the main place of these countries in the international arena and to emphasize their economic and political weight, especially in relation to other states or groups of states, such as the United States or the European Union.

Economists see this new currency proposal as an opportunity to break free from the US and the West.

The BRICS group is not a free trade bloc. However, members coordinate on trade issues and have created a supranational bank, the New Development Bank (NDB), which finances infrastructure loans. Established in 2014, the bank aims to offer alternative credit mechanisms to the structures of the IMF and World Bank, which its members consider too focused on the US. The Asian Infrastructure Investment Bank (AIIB) was created by China around the same time and for the same reasons. Both the NDB and AIIB banks are rated triple A or double A and are capitalized at USD 100 billion. The shares of NDB bank are allocated equally to each of the five members. Collectively, the BRICS group, as it currently stands, accounts for more than 40% of the world’s population and almost a quarter of world GDP. By 2030, the GDP figure is expected to double to 50% of global GDP. BRICS expansion can accelerate this process.

BRICS+

While the West wants major developing countries to distance themselves from Russia (and turn BRICS into BICS), Moscow clearly sees things from a completely different perspective.

In early November 2022, Russian Foreign Minister Sergey Lavrov said that more than a dozen countries had formally applied to join the BRICS group, following the group’s decision to allow new members earlier this year.

Mr. Lavrov said that Algeria, Argentina and Iran have applied, and it is already known that Saudi Arabia, Turkey, Egypt and Afghanistan are interested, as is Indonesia, which is organizing the G20 summit in Bali.

According to the Silk Road Briefing, other possible candidates for membership are Kazakhstan, Nicaragua, Nigeria, Senegal, Thailand and the United Arab Emirates. The finance ministers of all these countries participated in the BRICS enlargement dialogue meeting held in May 2022.

Chart: “BRICS+” geographical presence

Source: Silk Road Briefing

“BRICS Corner”

The robustness and intensity of exchanges within the BRICS+ bloc can be enhanced by the creation of a new currency.

Last summer, Vladimir Putin said that he was in the process of developing a new reserve currency based on the BRICS currency basket (a BRICS coin?). This is not the first time that this project is called, the BRICS countries have already started to integrate more local currencies for payments in their bilateral exchanges. For example, India and Russia held discussions over the summer to accept RuPay and Mir payment systems.

Economists see this new currency proposal as an opportunity to break free from the US and the West. This is to correct the notion of American hegemony over the IMF for BRICS (and its future members) and allow BRICS to establish its own sphere of influence and its own currency within BRICS (or BRICS+).

Another advantage: creating an alternative to the US dollar as a reserve currency. The speed with which Western powers and their allies froze Russia’s foreign exchange reserves after the invasion of Ukraine certainly took Moscow by surprise. Russia’s central bank has indeed acknowledged this, and certainly some BRICS countries, including China, have taken note of the speed and breadth with which the US Treasury is moving. As a result, the BRICS countries have expressed the need for an alternative reserve currency to the IMF’s SDR (Special Drawing Rights) equivalent. The IMF SDR is not a currency per se. Rather, it is a basket of claims against major reserve currencies such as the dollar, euro, pound sterling, yen and renminbi.

Credit Suisse strategist Zoltan Pozsar highlighted a very interesting feature of the future “BRICS coin”. Indeed, Sergey Glazyev, a member of the National Financial Council of the Central Bank of Russia, Minister of Integration and Macroeconomics of the Eurasian Economic Commission, spoke about this international reserve currency as follows: “If [une nation] reserves the part [ses] natural resources to support the new economic system, [son] the corresponding weight of the new currency in the currency basket will increase accordingly, which will allow this country to have more money reserves and credit capacity. In addition, bilateral swap lines with trading partner countries would provide them with adequate financing for joint investments and trade financing.

Raw materials will play a key role in the coming decades

The importance given to raw materials in the constitution of the currency basket of a possible “BRICS coin” underlines the strategic role that natural resources will play in the coming decades.

Eurasia’s major powers, China and Russia, are united by “special ties” and these two giants have good relations with every major power in the Middle East.

As we see in 2022, the big countries of the planet must ensure their access to energy resources (oil, natural gas, etc.). Unlike Europe, the US is self-sufficient. On the other hand, superpowers like China and India are net importers of energy. BRICS expansion will strengthen their strategic cooperation with OPEC+. And not only in terms of importing crude hydrocarbons. Here we are talking about building a real emancipation strategy compared to the West. Thus, Chinese capital is deployed in OPEC countries to develop their refining and conversion capabilities into higher value-added products. Western-based petrochemical companies (including in Europe) could lose market share and make importing petrochemicals even more expensive (with inflationary consequences we know…).

But the importance of providing raw materials is not only related to energy. In early 2022, Indonesian President Widodo (a member of OPEC since 1962) demanded the creation of an OPEC-style cartel for the metals needed to make batteries for electric cars. On November 3, 2022, Canada ordered three Chinese companies to stop lithium production. Simply put, this unbridled competition for raw materials results in the creation of strategic alliances and nationalistic reflexes by states, all aimed at controlling access to natural resources.

Will “BRICS+” and “BRICS corner” see the light of day?

For such an expansion to be effective, of course, members must agree, or at least be able to discuss and negotiate. But in the current situation?

Eurasia’s major powers, China and Russia, are united by “special ties” and these two giants have good relations with every major power in the Middle East. There is also a strategic partnership between China and Iran. Relations between Latin American and Eurasian countries, as well as Middle Eastern countries, are in good condition. India and Russia have boosted their trade relations in 2022 after the sanctions against Russia.

Then there is the matter of relations within the Middle East. Indeed, Saudi Arabia and Iran have appealed not only to BRICS+, but also to the Shanghai Cooperation Organization (SCO), the Eastern equivalent of NATO. Relations between Riyadh and Tehran have been tense for years. But the prospects of BRICS+ and other SCOs are moving the lines. the Financial Times Recently, the foreign ministers of Saudi Arabia and Iran have entered into friendly talks, which will further boost the various strategic and economic alliances mentioned above.

It is simply a continuation of this East-West divide discussed in the same columns last year (cf. Allnews, September 20, 2022: “East-West: the gulf is widening”). The objective of the powers of the East (and the South) is clearly to be free from the West in terms of economic exchange, currency, and geostrategic level. In conflict situations (including cold wars) “enemies of my enemies” can become “friends”. A maximum that could accelerate the birth of BRICS+ and BRIC coins.

Findings

What consequences could the enlarged BRICS and “BRICS corner” have on the macroeconomic and financial markets?

Of course, the countries that make up this union can benefit from it. Both countries that export raw materials and countries that have an obligation to provide access to resources (China, India, Turkey).

On the other hand, the West may suffer the consequences of such an alliance. First, greater difficulties in accessing and processing natural resources could put upward pressure on imported commodities and therefore inflation. On the other hand, the creation of an alternative reserve currency to the dollar could dry up the G7 sovereign bond investments of the enlarged BRICS countries. The years ahead will be both exciting and full of uncertainties.