Last week, Russia’s President Putin hosted the BRICS summit of emerging market economies in Kazan, at a time when the economic and political power of the bloc is continuing to grow.
The BRICS group originally consisted of Brazil, Russia, India, China, and South Africa but has now expanded to include Egypt, Ethiopia, Iran, and the United Arab Emirates. These countries collectively represent more than a third of global GDP – surpassing the 29% share which the Western-dominated G7 group accounts for. Many more countries are reported to be applying to join the group, including Saudi Arabia, Nigeria, and Indonesia, suggesting that the BRICS’ share of the global economy could continue to grow in the years ahead.
The meeting in Kazan was clearly political significant for the Russian president, who was determined to demonstrate that he is not as isolated as Western powers would like to believe. The fact that several leaders actually spurned opportunities to appear at Western fora in order to travel to Russia instead – such as India’s Narendra Modi, who decided to attend the BRICS summit instead of the Commonwealth leaders meeting in Samoa – particularly hammered home this point.
However, it was in the realm of economics and international trade policy that the BRICS summit was arguably the most meaningful. BRICS leaders agreed to start implementing several policies which could serve to reshape the global economic order in the years to come.
Perhaps the most eye-catching proposal was for the BRICS to create a “BRICS Clear” system in order to facilitate settlements and clearing between BRICS members and a broader zone of “partner countries.” Transactions would work through the use of a stablecoin issued by the New Development Bank, the Brazil-based BRICS financial institution, and be settled in local currencies. The idea is to allow BRICS members and partner countries to settle trades without the use of the US dollar or Western institutions such as the SWIFT payments network, which Russia was banned from using in the aftermath of its invasion of Ukraine in February 2022.
For trade to be conducted safely and with the confidence of both parties, there needs to be insurance underpinning the transaction. To this end the BRICS group have also agreed to establish their own insurance company – the BRICS (Re)Insurance Company – in order to diversify away from traditional Western institutions.
Taken together, the BRICS Clear framework and the associated BRICS (Re)Insurance Company essentially represent a new global trading bloc which incentivises BRICS members and partner countries to trade with each other, using their own currencies and financial institutions, rather than engaging with Western institutions and economies.
Jacques Sapir, a French economist and expert on the Russian economy, noted that this will cause “trade flow diversion due to preferential conditions for intra-BRICS trade and between BRICS partners.” He predicts that “the export loss for “non-BRICS” and Western countries will amount to 5-7% of volume for Western countries” and says that “while this figure isn’t very significant, the proportion could vary greatly by country and have destabilising consequences for some.”
The longer-run impact of this could also be to undermine the US dollar’s status as the world’s reserve currency. Particularly since the unprecedented sanctioning of Russia after its invasion of Ukraine – through which the US was able to lock Russia out of whole swathes of the global financial system thanks to the US dollar’s central role in it – countries such as Russia and China have viewed diversifying away from the dollar as crucial for securing economic security and political independence.
Sapir wrote that “intra-BRICS trade and trade with partner countries represents 35-40% of global trade. While some is already conducted in local currencies, it seems very unlikely that this portion exceeds 20% of intra-BRICS trade and trade with partner countries. This means that 28-32% of global trade, currently conducted in Dollars and Euros, could gradually be transformed within the BRICS Clear framework into trade independent of the Dollar and Euro.”
There are already signs that Russia, China, and other countries are looking to ramp up their use of alternative reserve currencies to the dollar. This includes gold. Indeed, the price of gold has surged to record highs this year, having gained over 30% since January alone. This is despite the fact that cooling global inflation and lowering interest rates would usually suggest that the price should decline as investors rotate out of their hedges against inflation.
As financial commentator Mohammed El-Erian wrote in the Financial Times recently, “something strange has happened to the price of gold over the past year.”
“In setting one record level after the other, it seems to have decoupled from its traditional historical influencers, such as interest rates, inflation, and the dollar. Moreover, the consistency of its rise stands in contrast to fluctuations in pivotal geopolitical situations.”
As Disruption Banking wrote in January, “gold prices are no longer being driven by considerations over inflation or geopolitical uncertainty, but instead by central bank purchases. The central banks of Russia, China, and other emerging markets are increasingly looking to de-dollarise in light of the States’ decision to sanction Moscow’s central bank and weaponise the greenback. Indeed, research has shown that the price of gold is continuing to decouple from Treasury Inflation Protected Securities (TIPS) and has effectively become a “sanction hedge” for central banks.”
It has become fashionable in Western political and economic circles to assume that the BRICS group does not represent any significant challenge to the existing world order. While it is true that we are still some time away from a “de-dollarised” world, the Kazan BRICS summit demonstrates that some of the world’s fastest growing economies are increasingly looking to carve out new economic structures which, in their eyes, better reflect their interests.
Author: Harry Clynch
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