The future of BRICS and de-dollarization: obstacles and solutions
A look at the future of BRICS and the challenges ahead
A look at the future of BRICS and the challenges ahead
The BRICS group has taken a significant share of the world economy, and it will include about 32% of the world economy in 2023. This amount is a significant percentage compared to the 30% share of the seven major industrialized countries of the world known as G7. The five countries of China, Russia, India, Brazil, and South Africa are even big economies on their own, and with the addition of countries such as Iran, Saudi Arabia, the United Arab Emirates, Egypt, and Ethiopia to the BRICS confederation in the future, this block will become much more powerful. But the question is, can this large economic group carry out its trade exchanges within the bloc with a currency other than the dollar or settle payments with another currency? In other words, can BRICS somehow achieve independence? Can BRICS play a role as an economic weight in global equations? Certainly, such conditions are desirable for countries that have distanced themselves from the West or are under US and Western bloc sanctions, but to what extent is this demand realistic in the current situation?
Most economies of the BRICS countries are largely dependent on the dollar, and this dependence has continued until now. Meanwhile, the governments that the we and its allies have sanctioned have reduced their dollar reserves and tend to replace them with gold or other currencies such as the euro. At the same time, the names of four BRICS members appear in the list of ten countries that have the largest foreign exchange reserves in the world. China has the highest amount of foreign exchange reserves in the world with 3.2 trillion dollars. The countries of India, with 521 billion dollars, Russia, with 446 billion dollars, and Brazil, with 317 billion dollars, are ranked fifth, seventh, and tenth, respectively. These statistics show that BRICS is also a powerful bloc in terms of currency support (Source: US Council on Foreign Relations website).
Experiences from the global financial crisis have pushed the emerging economic powers more toward the horizon of de-globalization and regionalism. In this regard, China has taken successful measures to increase the level of exchanges with its trading partners, including the Association of Southeast Asian Nations (ASEAN) and even the European Union. More constructive interaction and improvement of the level of Beijing's economic exchanges with the countries of the Middle East and West Asia is also a smart goal that China has been paying more attention to recently. Its prerequisite is the establishment of peace and stability, especially in important economic bottlenecks and energy transmission highways. Based on this, Beijing's political movements in this region have increased and its mediation in the restoration of relations between Iran and Saudi Arabia is also evaluated in the same direction.
The main advantage of the financial system that replaces the dollar in economic blocs is the diversification of the monetary system. During the great financial crisis in 2008 and 2009, the then chairman of the People's Bank of China asked Western economies to work hard to reform the international monetary system. Promises were made in meetings with Westerners in this regard, but they did not go beyond this. Therefore, efforts were directed towards the creation of institutions such as the New Development Bank (NDB), the Asian Infrastructure Investment Bank (AIIB), China's New Belt and Road Initiative (BRI), and planning for new currency regulations.
Many analysts believe that BRICS, as a relatively new economic pole, is not basically looking to replace the dollar but realistically wants to diversify its monetary system, which is more compatible with today's global economy. In fact, economic rationality dictates being realistic about the state of global trade relations and the international economic chain.
According to the latest data of the International Monetary Fund (IMF) (related to the third quarter of 2023), currently, 59% of the world's foreign exchange reserves are in dollars. Euro has second place with a 19.5% share of foreign currency reserves of the countries, followed by the Japanese yen with 5.45% and the pound sterling with 4.83%. Despite China's high economic power, only 2.37% of the world's foreign exchange reserves are in yuan, which ranks after the Canadian dollar (2.50%). In fact, among the BRICS powers, only China's official currency, with 2%, is included in the main category of foreign currency reserves of the IMF, and the currencies of other countries, such as Russia and India, are not counted as all and have no place. Most of the trade in the world is done in four currencies: dollar, euro, Japanese yen, and pound sterling.
Another study shows that the trade volume of BRICS member countries with the US is about one trillion dollars, with a positive trade balance in favor of BRICS. Among BRICS member countries, the US's exports to China are about 154 billion dollars, 53.5 billion dollars to Brazil, 47 billion dollars to India, 6.5 billion dollars to South Africa, and 1.7 billion dollars to Russia (Total BRICS imports from the US: 262.5 billion dollars). On the other hand, the US import from the BRICS group also reaches a figure equal to 737.2 billion dollars, of which the largest share is related to China with a significant export of 575.7 billion dollars to the US. After China, India exports 91 billion dollars to the US annually. The next three countries in the number of exports to the US are Brazil (41 billion dollars), Russia (15 billion dollars), and South Africa (14.6 billion dollars) (It is natural that the volume of trade between the US and Russia after Russia attacks Ukraine and Moscow's sanctions have a significant decrease and reach the minimum possible amount) (Source: tradingeconomics).
With regard to those above, it can be said that the dependence of the BRICS member countries on the dollar has made the path to de-dollarization difficult, if not impossible, due to the two indicators of the dominant foreign exchange reserves of the countries and the volume of significant trade exchanges with the US. In addition, other economic blocs, except the US, also prefer to do their trade with dollars, and this component should be considered in the interaction of BRICS countries with other countries. Therefore, at present, the idea of gradually replacing the dollar with digital currencies in the new international monetary system has gained more power. The strengthening of the position of digital currencies such as Bitcoin shows that investors have welcomed it. Although digital currencies like gold and silver are mostly used for holding assets and investments, with a value of one trillion dollars, they are currently used in many commercial transactions. Suppose one day, the countries that export goods and services to the US and other countries in the BRICS group can collect a part of their demand in the form of digital currency. In that case, we can hope for a gradual movement towards currency independence. Still, BRICS members in other large economic blocs, such as G20, have also been present. Sometimes, their economy is mixed with the economy of the Western bloc, and the conditions for change, even in the medium term, become very difficult. In addition, it should be noted that the membership of the BRICS members in other economic blocs and the limited degree of convergence among the members of this bloc is one of the issues that has placed the future success rate and prospects of this institution in an aura of uncertainty. The issue that has made the US not worry about the effects of BRICS on its economy. Moreover, this view is quite evident in official positions and US media analysis at the same time as the sectional movements of BRICS.
The experience that should be valuable for the BRICS confederation is that in the form of the dollarization project, the powerful national currencies of other countries have no replacement capacity. Even the Euro of the European Union has not been able to succeed in this regard. On the other hand, digital currency like Bitcoin has gradually found its place in some large economies such as India, Great Britain, and even Turkey, so it seems that moving towards currency diversification by giving priority to digital currencies is currently the best option for the BRICS economic block.
In general, the argument of the analysts who are very optimistic about the future of BRICS is that the member countries have dynamic and growing economies. The development of this bloc and the increase of members will increase the incentive for de-dollarization and independence. But the existence of a banking and financial union, convergence in the macroeconomics, reduction of ideological gaps, resolution of trade disputes, reduction of the debts of candidate countries to international institutions such as the IMF, the establishment of a permanent BRICS charter and secretariat, are all preconditions necessary for the growth of this group, which itself indicates the difficult path ahead of BRICS.
Reza Haghighi, an expert at the Institute for Political and International Studies
(The opinions expressed are those of the authors and do not purport to reflect the opinions or views of the IPIS)