11th January 2024  - Gary Mead  - in Economy, USD

More BRICS in the wall

More BRICS in the wall

A new year has arrived with reinvigorated threats to the US Dollar’s status. The BRICS group of countries (Brazil, Russia, India, China and South Africa) formally expanded on 1 January with Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates joining, in a concerted move that went almost unremarked by mainstream media. Argentina’s new President decided against joining the bloc because the timing is “not opportune” he said. For ease of reference we’ll call the expanded group BRICS+ rather than BRICSEEISU.

Some analysts suggest this expansion is more about politics than economics but it’s actually about both. Politically the BRICS+ are united in at least one way – they view the world with an anti-US prejudice. Whether it’s Iran selling drones to Russia or attitudes towards Israel, the BRICS+ nations share an ideological standpoint, which is to provide a counterweight to the G7 group of nations (Canada, France, Germany, Italy, Japan, the UK and the US) and in particular by-passing US global hegemony. The phrase ‘global south’ has gained currency as shorthand for this attitude but it’s an inadequate term – is Russia part of the ‘global south’, or China?

For years the original BRICS group was moribund, more interested in promoting regional economic integration (at which it was only patchily successful) rather than developing serious competition to the G7. The group lacked a common cause. Some members – India and China most obviously – have a history of intense rivalry. And from being economic tigers and aspirational models their growth rates have slowed considerably. On average their growth rate since 2013 has been less than 1% annually for Russia, Brazil and South Africa, and around 6% for China and India. Individually they face serious economic problems. China’s property sector is in deep trouble and youth unemployment is approaching 30%. The International Monetary Fund (IMF) forecasts Russia’s economy will barely be more than 1% this year; South Africa’s the same. India is the only stand-out and is growing fast.

Phantom Threat

At the moment the BRICS+ group represents more of a phantom threat to the G7 than a real one. That’s despite the fact that BRICS+ has about 45% of the world’s population, about a third of the global economy, and produce some 44% of the world’s crude oil. Not that the G7 countries are all headed for staggering growth this year – Luis de Guindos, vice-president of the European Central Bank (ECB), said this week that the Eurozone economy was in a recession in the second half of 2023 with “weak prospects for the near term”. The World Bank this week forecast that the global economy will slow this year; heightened global tensions might weaken growth prospects even more, and certainly the rocket attacks on shipping in the Red Sea, forcing it to take the much longer route via the tip of Africa, will give an unexpected kick to inflation.

Inexorably however the phantom is becoming a reality, with moves on both the economic and political fronts. Economically, Russia and Iran – both were banned from SWIFT, the international payments system in 2022, after the US pressed for sanctions – have decided to shun SWIFT altogether. They have decided to settle transactions directly in each other’s currency. China is leaning on Zambia to accept the Chinese Yuan to accept payment, instead of the Dollar, for its copper exports to China. Russia is reportedly using China’s Yuan to settle a quarter of its global trade; it’s now the most active client of China’s central bank. In 2023 the Yuan overtook the Dollar as China’s most used cross-border currency. BRICS members are already by-passing the US Dollar.

Politically, straws in the wind are accumulating and will soon amount to a haystack. South Africa has brought a case to the International Court of Justice (ICJ) accusing Israel of genocide, backed by many countries including the 57-member Organization of Islamic Cooperation (OIC). This case will be difficult to prove and probably take years to get through the court, but for South Africa and its supporters that’s not important; the significance is that Israel is a proxy for US power and undermining that power is the ultimate BRICS+ aim.

US Dollar on a pedestal

US power is synonymous with the US Dollar. Knocking the US Dollar off its pedestal as the world’s reserve currency is a key step in humbling the US. This won’t happen overnight – the Dollar still accounts for some 60% of global foreign exchange reserves and almost 90% of foreign exchange transactions according to the Atlantic Council.  But if the Dollar’s pedestal is starting to wobble, what (if anything) will replace it? The Council posits six indicators of what it takes to amount to a fully reserve currency; China ticks only one of its boxes, having a “sizeable domestic economy”. So the Dollar seems secure, for now at least. Or is it? If one word will sum up 2024 it will be ‘fragility’. Half the world will vote for a government this year; that amount of possible change inevitably creates a sense of fragility. With the rise of BRICS+ there is a danger that economic power is moving towards autocracy. In the US there’s a real prospect that November’s Presidential vote will be a Biden v. Trump re-run, with neither candidate being much in favour. According to a recent Gallup poll the US voting public is more dissatisfied with democracy than for many years; that is shocking but it isn’t surprising.