The BRICS come of age

Nearly 22 years after Jim O’Neill, then an economist at Goldman Sachs, coined the BRIC acronym to capture the economic potential of Brazil, Russia, India, and China, the group – called the BRICS since the addition of South Africa – contributes more to global GDP (in purchasing-power-parity terms) than the G7. The International Monetary Fund forecasts that China and India alone will generate about half of global growth this year.

But with geopolitical tensions running high, and the weaponisation of the dollar for national-security purposes continuing to escalate, the BRICS have taken on new significance, offering trade diversion and other relief to weaken the effectiveness of sanctions and fast-tracking the transition to a multipolar world. Since 2014, Russia’s trade with G7 countries has fallen by more than 36 percent, owing to unprecedented Western sanctions, while its trade with the other BRICS has increased by more than 121 percent.

Given their economic success, the BRICS are increasingly seen in the Global South as a far more viable force for multilateralism than the Non-Aligned Movement founded in 1961. More than 40 countries – including Algeria, Egypt, Thailand, and the United Arab Emirates, but also key G20 members such as Argentina, Indonesia, Mexico, and Saudi Arabia – have expressed interest in joining the BRICS, and 22 have formally applied for membership.

Expansion will be high on the agenda at the group’s 15th summit, scheduled for August 22-24 in Johannesburg, South Africa, as will trade and investment facilitation. The latter includes many issues on which the bloc’s views diverge from those of the G7, such as sustainable development, global governance reform and de-dollarisation.

As more emerging-market economies explore ways to conduct trade in non-dollar currencies, a growing number of experts, including senior US government officials, have recognised that the weaponisation of finance may threaten the greenback’s dominance. US Treasury Secretary Janet L. Yellen recently admitted that the use of “financial sanctions that are linked to the role of the dollar … could undermine the hegemony of the dollar.”

The desire for de-dollarisation has given rise to the idea of a BRICS-issued reserve currency that members could use for cross-border trade. But while the BRICS countries, which collectively enjoy a comfortable current-account surplus, have the financial wherewithal to establish such a currency or unit of account, they lack the institutional infrastructure to sustain such a project. Given these challenges, South Africa’s ambassador to the group reiterated in July that a BRICS currency will not be on the summit’s agenda.

The good news is that the BRICS already have the institutions they need to create an efficient and integrated payment system for cross-border transactions. The New Development Bank, which is spearheading the creation of a BRICS currency, also plans to increase local-currency financing, from 22 percent to at least 30 percent of the bank’s portfolio by 2026, and, more generally, to support efforts to reduce the dollar content of cross-border trade and investment between BRICS countries.

If, as expected, the BRICS group agrees to admit new members at the upcoming summit (Saudi Arabia looks most likely), it risks a divergence of interests and coordination challenges. But the benefits outweigh the risks.

But an enlarged BRICS group would create a geopolitical coalition with the power to accelerate de-dollarisation and lead the transition to a more multipolar world – a far cry from the loosely associated clutch of fast-growing emerging markets that O’Neill identified a generation ago. It seems likely, then, that the BRICS 15th summit will be the most consequential yet.

-- Project Syndicate

Mr Fofack is chief economist and Director of Research at the African Export-Import Bank