Consider This: Will BRICS+ dethrone the US dollar?

Preview

The “BRICs” concept was launched as a financial sector grouping of the then-major emerging market economies which were expected to grow faster than the “Group of Seven” or G7 economies.¹ The thesis was that as the BRICs economies grew quickly over the decade to 2001, their impact on the global economy and their fiscal policy would become increasingly important.² The leaders of the BRIC countries liked the idea, so the first formal BRIC ministerial meeting was held in 2006 at the margins of the UN General Assembly session in New York.

The group is not a formal multilateral organization like the United Nations (UN), World Bank or the Organization of the Petroleum Exporting Countries (OPEC). There are no permanent officers, nor is there a head office. The heads of state and government of the member nations convene annually, with each nation taking up a one-year rotating chairmanship of the group. All the BRICS are already members of the G20, which also includes the G7 countries. In 2010, South Africa was invited to join the original BRIC group, and five more countries joined in January 2024: Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE.

In this paper, we look at the recent developments within the emerging market countries known as “BRICs+,” and the implications for investors.

Key takeaways:

• The loose grouping known as BRICS (Brazil, Russia, India, China and South Africa) has demonstrated a higher degree of geopolitical ambition and doubled in size this year by accepting five new members (Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates [UAE]).
• The composition of “BRICS+,” its increased scale and the inclusion of heavily sanctioned regimes make it look like an explicitly anti-G7 grouping with potential to disrupt global economic activity.
• The factors mentioned above raise investor concerns around the ability of these countries to undermine the role of the US dollar as the world’s reserve currency, but the situation is complicated.
• There should be no doubt that the BRICS+ group aims to undermine the dominance of the US dollar, but the degree of commitment varies between Russia, Iran and China’s ambition, and the less-committed countries such as India and the UAE, where the preference is for their own currencies to take a bigger share. For Brazil and South Africa, settling trade with their biggest partner (China) in renminbi (RMB) is sufficient for now.
• The group’s combined fossil fuel production is equal to approximately 40% of global oil production, but because China, India, Russia and Saudi Arabia are also big consumers, BRICS+ represents 22%³ of the world’s export market volumes.
• The creation of the New Development Bank (NDB) as an alternative lender to the World Bank and the International Monetary Fund (IMF) affiliates suggests a desire to supplant the established multilateral institutions.
• The creation of alternative financial transactions platforms is at least partly aimed at insulating these countries from potential financial sanctions in future.
• It seems prudent to assume that these efforts continue to gain traction, effectively ringfencing economies from the established “Western” financial ecosystem of Society for Worldwide Interbank Financial Telecommunication (SWIFT) and Clearing House Interbank Payments System (CHIPS), as well as an attempt to use alternative currencies for intra-BRICS+ trade, other than the US dollar.
• Investors have a fiduciary duty to regularly re-evaluate the possibility that this trajectory eventually leads to a reduced appetite globally for US Treasury bonds, while the likelihood remains extremely low at present.
• These are the principal signposts for investors to watch for:
  • The development of alternative “financial plumbing” systems like Cross-Border International Settlement System (CIPS)
  • The level of acceptance of the RMB in intra-BRICS+ trade
  • The evolution of cross-border wholesale central bank digital currency (CBDC) projects like mBridge, which connects China, Thailand, the UAE and Hong Kong, and is expected to expand to 11 countries this year.⁴ This will be the real test case for a potential replacement of SWIFT in future.
• Ultimately, we see the US dollar remaining the preferred global reserve currency in the foreseeable future. Even as other currencies increase their participation in foreign reserves, trade invoicing and transactions, incumbency, liquidity, efficiency and confidence in the dollar mean none can likely challenge it in the medium term.