The BRICS group, consisting of Brazil, Russia, India, China, and South Africa, has emerged as a prominent coalition of influential developing nations. This dynamic alliance brings together diverse economies and cultures, with a shared goal of challenging the established global order. The recent news of BRICS’ expansion to include six new members on January 1, 2024, highlights the group’s ambition to build a stronger coalition, while also amplifying its efforts to champion the interests of the Global South on the international stage. This move not only carries significant geopolitical implications but also underscores the group’s aspirations for greater representation, economic heft, and a redefined financial landscape.
BRICS expansion:
The latest news on BRICS (Brazil, Russia, India, China, and South Africa) is the group’s plan to add six new members on January 1, 2024. The new members include Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates. This expansion aims to build a stronger coalition of developing countries to better represent the interests of the Global South on the world stage.
The decision to expand BRICS is a significant move that could reshape the global political and economic landscape. The addition of these six countries will increase the group’s economic heft and amplify its declared ambition to become a champion of the Global South. The expansion is seen as a victory for China’s leader, Xi Jinping, who has long pushed for the enlargement of the bloc, despite reservations from other members such as India and Brazil. The decision to expand BRICS reflects a pivotal step toward rebalancing the global power dynamics. By incorporating nations like Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates, BRICS seeks to fortify its influence and diversify its representation.
The BRICS leaders’ declaration at the summit repeatedly called for “greater representation of emerging markets and developing countries” in international institutions, such as the United Nations, the International Monetary Fund (IMF), and the World Bank. The expansion is considered “historic” and “a new starting point for BRICS cooperation” by Xi Jinping.
However, the addition of new members also brings challenges, as the group will need to navigate the diverse economic scales and foreign policy goals of its members. The consensus decision-making model of the bloc gives each member a de facto veto, which could lead to more disagreements and difficulties in making decisions. Despite these challenges, the expansion of BRICS demonstrates the growing interest of other countries in joining the group and the potential for the bloc to further challenge Western dominance in global affairs.
De-Dollarization:
The impact of De-dollarization remains a key focus for BRICS leaders, who are exploring ways to reduce their dependence on the US dollar in international trade and finance. China, Russia, and South Africa have been particularly vocal in pushing for new members to be admitted to the alliance, as they believe that a larger and more diverse group of countries can better challenge the dominance of the US dollar in the global economy.
De-dollarization efforts within the BRICS nations include promoting the use of their national currencies in bilateral and multilateral trade, as well as exploring the potential of digital currencies and other financial instruments to bypass the US dollar. These efforts are aimed at reducing the vulnerability of BRICS economies to fluctuations in the value of the US dollar and the impact of US monetary policy decisions.
The recent decision to expand the BRICS group by adding six new members is expected to further strengthen the bloc’s ability to pursue de-dollarization initiatives. The expanded group will represent a larger share of the global economy, increasing its influence and bargaining power in international financial institutions and negotiations.
However, the process of de-dollarization is complex and faces numerous challenges, such as the need to establish efficient and reliable payment systems, as well as addressing the concerns of countries that are heavily reliant on the US dollar for trade and investment. Despite these obstacles, the BRICS nations’ continued focus on de-dollarization highlights their determination to reduce their dependence on the US dollar and reshape the global financial landscape.
"The BRICS leaders' declaration at the summit repeatedly called for 'greater representation of emerging markets and developing countries' in international institutions, such as the United Nations, the International Monetary Fund (IMF), and the World Bank."
Local Currency Usage:
The New Development Bank (NDB), established by the BRICS countries, is focusing on increasing local currency fundraising and lending to mitigate the impact of foreign exchange fluctuations. This move comes amid the effects of sanctions against Russia, one of the founding shareholders of the bank. South Africa’s finance minister, Enoch Godongwana, emphasized the need for the NDB to provide more loans in local currencies, stating that this is the strategic direction they are pushing the bank towards.
The NDB aims to raise the share of funding in local currencies to 30% from less than 20% . CFO Leslie Maasdorp clarified that this does not mean they are de-dollarizing or moving away from the dollar, but rather raising more local-currency financing. The bank is targeting bond issuances in the local currencies of India, the United Arab Emirates, and Brazil. Maasdorp also mentioned that the bank plans to increase local currency lending from about 22% to 30% by 2026.
The use of local currencies for trade and finance is not a new concept for the BRICS bloc, which consists of Brazil, Russia, India, China, and South Africa. By increasing local currency usage among NDB members, the bank aims to reduce the impact of foreign exchange fluctuations rather than completely de-dollarize. This strategy is expected to be discussed further during the upcoming BRICS leaders’ summit in South Africa.
BRICS currency proposal:
Brazil’s President has called for the creation of a common currency for trade and investment between BRICS nations to reduce vulnerability to dollar exchange rate fluctuations. The proposal aims to strengthen economic ties among the BRICS countries and promote financial stability within the blo
The idea of a common currency for the BRICS nations is not new. In the past, Brazilian President Luiz Inacio Lula da Silva has advocated for a common currency in the Mercosur bloc of South American countries and expressed support for the implementation of a shared currency within the BRICS group. BRICS leaders have expressed their desire to increase the use of their respective national currencies instead of relying heavily on the dollar.
However, officials and economists have pointed out the difficulties involved in such a project, given the economic, political, and geographic disparities between the BRICS countries. A common currency would require a strong track record of joint currency management to convince others that the new currency is reliable.
Despite these challenges, the proposal for a common BRICS currency serves as an important indicator of the desire of many nations to diversify away from the dollar. The creation of a new joint BRICS currency is expected to be discussed further during the upcoming BRICS leaders’ summit in South Africa. The potential for a BRICS-issued currency to dislodge or at least shake the U.S. dollar’s dominance as the reserve currency of BRICS members is a topic of ongoing debate.
The recent decision to expand the BRICS group by adding six new members is expected to further strengthen the bloc's ability to pursue de-dollarization initiatives. The expanded group will represent a larger share of the global economy, increasing its influence and bargaining power in international financial institutions and negotiations.
Intra-BRICS trade:
The BRICS nations are aiming to increase trade in national currencies instead of the US dollar. This move is part of their efforts to reduce reliance on the dollar and promote financial stability within the bloc. Currently, about 30-35% of all transactions among the BRICS nations are conducted using their respective currencies, with the bulk still relying on the US dollar.
The BRICS countries have been discussing the use of local currencies in intra-BRICS trade for some time. They have also explored the possibility of creating a common payment system and a potential joint currency. However, there are no immediate plans to replace the US dollar as the world’s de facto global currency.
The push for increased trade in national currencies is expected to be discussed further during the upcoming BRICS leaders’ summit in South Africa. By promoting the use of local currencies, the BRICS nations hope to achieve greater self-sufficiency in international trade and challenge the US dollar’s dominance in the global financial system.
US Dollar Dominance:
The US dollar continues to maintain its dominance in the global financial system, despite China’s yuan making minor inroads. The network effects of the dollar’s dominance and the lack of deep financial markets in other BRICS countries make it difficult to challenge the dollar.
China’s yuan has been making progress in Latin America, recently surpassing the euro as Brazil’s second foreign reserve currency, but it still only accounts for 5.37% of Brazil’s total foreign reserves, compared to the dollar’s 80.42%. The yuan’s share of global currency transactions for trade finance was just 4.5% in March, compared to 83.7% for the dollar.
While the BRICS nations have expressed interest in diversifying away from the dollar, there is currently no competitive substitute for the US dollar in international trade and financial activity. The idea of a BRICS currency has been discussed, but it would require a strong track record of joint currency management to convince others that the new currency is reliable. Furthermore, replacing US dollar-driven hegemony with China’s might not sit comfortably with other BRICS members.
In conclusion, despite China’s yuan making some progress, the US dollar’s dominance remains strong due to its network effects and the lack of deep financial markets in other BRICS countries. While the BRICS nations are exploring ways to reduce their reliance on the US dollar, it will be a challenging task to dethrone the dollar in the global financial system.
Long Term Agenda:
A common BRICS currency is on the longer-term agenda, but certain development points need to be passed before it can be established. The BRICS nations have been discussing the possibility of a common currency for trade and investment to reduce vulnerability to dollar exchange rate fluctuations.
However, there are several challenges that need to be addressed before a common BRICS currency can become a reality. These challenges include the economic, political, and geographic disparities between the BRICS countries. Additionally, a common currency would require a strong track record of joint currency management to convince others that the new currency is reliable..
Despite these challenges, the idea of a common BRICS currency serves as an important indicator of the desire of many nations to diversify away from the dollar. The potential for a BRICS-issued currency to dislodge or at least shake the U.S. dollar’s dominance as the reserve currency of BRICS members is a topic of ongoing debate. The upcoming BRICS summit in South Africa is expected to discuss the push for conducting more trade among BRICS nations in local currencies and reducing reliance on the US dollar.
Challenging the US dollar:
Experts believe that it will be an uphill climb for BRICS to dethrone the US dollar, even if they create a common currency. A potential BRICS currency may eventually work similarly to the Euro, which has not seriously challenged the dollar’s dominance. The US dollar has dominated all other currencies for 80 years, and despite the desire of BRICS nations to diversify away from the dollar, there is currently no competitive substitute for the US dollar in international trade and financial activity.
Creating a common currency for the BRICS nations would require overcoming several challenges, such as economic, political, and geographic disparities between the countries, as well as establishing a strong track record of joint currency management. Additionally, replacing US dollar-driven hegemony with China’s might not sit comfortably with other BRICS members.
In conclusion, while the idea of a common BRICS currency is on the longer-term agenda, experts believe that it will be a challenging task to dethrone the US dollar, as even a common currency may not seriously challenge the dollar’s dominance in the global financial system.
Increasing operational use of non-dollar currencies:
One way of responding to the challenge of the US dollar’s dominance is to increase the operational use of non-dollar currencies. More countries, including Brazil and Southeast Asian nations, are calling for trade to be carried out in other currencies besides the US dollar. This shift is driven by changing global economic dynamics and the desire to reduce reliance on the US dollar, which can benefit local economies in various ways. Trading in local currencies allows exporters and importers to balance risks, have more options to invest, and have more certainty about revenues and sales.
The rise of nontraditional reserve currencies, such as the Australian dollar, Canadian dollar, Chinese renminbi, and Japanese yen, is another example of this broader shift. These currencies offer higher returns with relatively lower volatility, making them increasingly appealing to central bank reserve managers. New financial technologies, such as automatic market-making and automated liquidity management systems, also make it cheaper and easier to trade the currencies of smaller economies.
While the US dollar remains dominant in global forex reserves and international transactions, the push for increased operational use of non-dollar currencies signifies a growing desire among nations to diversify away from the dollar and promote financial stability.
Conlcusion:
The BRICS expansion, coupled with determined de-dollarization efforts, reflects a transformative shift in global dynamics. The addition of new members underscores a united Global South seeking enhanced influence. However, challenges persist in reducing US dollar dominance, requiring strategic coordination to navigate intricate geopolitical and economic realities. As BRICS navigates these paths, it marks a pivotal moment in the evolving landscape of international relations and financial stability.
Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.
