Are the BRICS building a wall to contain the power of the US dollar?

What do a couple of democracies, several authoritarian states, monarchies and a theocracy have in common? Not much, other than unease at the dominance of the United States and its currency over global trade and geopolitics.

Much has been made of the expansion of the “BRICS” group of emerging economies last week to add Saudi Arabia, the United Arab Emirates, Iran, Argentina, Egypt and Ethiopia to the original BRICS members – Brazil, Russia, India and China. (Hence the acronym).

President of China Xi Jinping on the last day of the BRICS Summit in Johannesburg last week.
President of China Xi Jinping on the last day of the BRICS Summit in Johannesburg last week.Credit: AP

Where it might superficially appear that the expanded membership – the inclusion of the two big Middle Eastern oil producers in particular, with claims there are another 40 countries queuing up to join the club – represents a direct threat to American hegemony, in many respects it makes “BRICS-plus” even less of a threat than it has been since the group’s formation (at Russia’s instigation) in 2009.

The expansion makes it more heterogenous and unwieldy, and even less likely than the original BRICS to find consensus on contentious issues.

Within the expanded group, the Saudis and Emirates rely on the US defence umbrella and Egypt, Brazil, South Africa and Argentina appear to want to remain non-aligned amid the tensions between China, Russia and the West. Iran wants to circumvent the net of US-led sanctions it has had to live with, on and off, for decades. India has been involved in military clashes on its border with China and, while arguably closer to the West than the East, wants to retain its ability to act independently.

China, of course, wants to use the expansion of BRICS to expand its sphere of influence and, it hopes, create a counter to the US and its allies within the G-7.

Russia would share that latter aspiration, but also wants to demonstrate that it isn’t a pariah state and expand its trade relationships to escape the web of Western sanctions throttling its economy.

About the only thing these countries have in common is that they are developing or lesser developed economies, and that they all want a greater say in the governance of multinational institutions such as the World Bank, the International Monetary Fund and the United Nations, which influence global affairs and, in some instances, their own economies.


There’s also a common disquiet at the demonstration the US and its G-7 allies have provided of the power of the US dollar via the expanded nature and effectiveness of the financial sanctions imposed on Russia and on certain types of third-party trading with Russia in response to its invasion of Ukraine.

There is no institutional framework or infrastructure supporting the BRICS grouping.

The expansion makes it more heterogenous and unwieldy, and even less likely than the original BRICS to find consensus on contentious issues.

Essentially, it’s an annual summit where the members can share their grievances and aspirations. The disparate nature of the expanded group and the countries’ motivations and ambitions for their membership make it unlikely that, in the near to medium-term at least, they will achieve much beyond some modest trade gains and a shared desire to have more influence over multinational institutions and discussions.

The expansion does add to the potential international clout of the group if it can generate consensus on particular issues.

The original BRICS represent about 40 per cent of the world’s population, about 23 per cent of global GDP and 20 per cent of the world’s oil output. They produce about 23 per cent of global exports and 19 per cent of imports.

BRICS-plus will account for about 46 per cent of the world’s population and about 30 per cent of global GDP. The addition of the Middle Eastern oil heavyweights – the Saudis, UAE and Iran – will lift their share of global oil production to nearly 42 per cent.

By comparison, the G-7 contains only about 10 per cent of the world’s population but nearly 31 per cent of global GDP.

The inclusion of the oil producers, notably the Saudis, has swollen discussion about the prospects of “de-dollarisation,” given that oil has been priced in US dollars since the 1940s, when the Saudis agreed to price their exports in dollars in exchange for US aid and military protection.

With the Saudis already exploring selling their oil to China in exchange for yuan, the prospect of a major shift away from the pricing of oil in US dollars to customers’ currencies would appear possible, although the fact that the Saudi riyal is pegged to the greenback would add some complexity to any significant shift.

It’s also worth noting that oil represents only about 15 per cent of global trade and therefore even a material move away from the US dollar in settling transactions would have only a limited impact on the currency’s dominance.

There’s also issues of convertibility, security and access to financial markets.

China and Russia have been trading in their own currencies since the West’s sanctions were imposed on Russia after it invaded Ukraine. The trade isn’t, however, balanced. China has been buying more from Russia – mainly oil – than it sells to Russia, which means it has a mounting store of roubles that have limited appeal to the rest of the global financial system.

An oil trade dominated, for example, by China would see massive volumes of yuan flowing to the Middle East. Would the Saudis or the UAE want to hold vast quantities of yuan, or would they prefer US dollars?

While the US dollar’s share of central bank reserves has been edging down, it is still the dominant currency. It is also still dominant in global trade and finance and in securities issuance.

It dominates debt markets, with a global market share of foreign liabilities of about 53 per cent and nearly 60 per cent of the global market for debt securities, according to the Bank for International Settlements. If a developing economy needs to borrow, it needs to be able to access US dollar-denominated debt – and service that debt with US dollars.

While China’s yuan has been making minor inroads into the US dollar’s dominance, the network effects of that dominance and the lack of the deep and highly liquid US Treasury and corporate debt markets (along with a trusted legal system and absence of restrictions on capital flows) means there is currently no competitive substitute for the US dollar in international trade and financial activity.

China and Russia would obviously like to challenge that situation, and there has been a lot of discussion about how the BRICS-plus group might be able to develop a common currency backed by gold or something akin to the IMF’s special drawing rights (a weighted basked of world currencies that can be held as a reserve asset).

If such a thing could be created, it would be dominated by China, given the disproportionate size of its economy relative to the rest of the BRIC-plus members.

That would be good for China, perhaps, but replacing US dollar-driven hegemony with China’s wouldn’t necessarily sit comfortably with a lot of the other BRICS members, and the loose nature of their relationships means it is unlikely they could ever agree on a concept that would necessarily tie not just their currencies, but their economies and economic independence, to China’s ambitions.

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