Foreign ministers of the BRICS countries (Brazil, Russia, India, China, South Africa) held a meeting on June 1-2 in Cape Town to set the agenda for the August summit. They were joined by colleagues from Saudi Arabia, the United Arab Emirates (UAE), Egypt, Kazakhstan, Iran, Cuba, Argentina. This is no coincidence as the bloc discusses an expansion to 19 countries and the potential creation of a joint trading currency, with an eye to making it a reserve currency.
Economic turmoil in the US — inflation, huge national debt, high interest rates — made the US dollar vulnerable. The US policy of slowing down global trade in dollars and political destabilisation in disloyal countries led many to look for an alternative to the dollar. The BRICS countries are no exception, and the fact that many other countries are now looking up to the BRICS speaks of the growing power of the alternative association to the United States.
As much as 80 percent of the world trade is currently settled in US dollars, but the share of the dollar in reserves of central banks of many countries has declined to 56 percent.
A new common currency for settling payments between BRICS member states will simplify transactions. Accordingly, members of the bloc will have their own payment system.
Following the meeting in Cape Town, foreign ministers turned to the BRICS New Development Bank (NDB) with a request for recommendations on how the new common currency could work, Bloomberg said.
NDB President Dilma Rousseff said this week that the bank was looking to further expand the list of its membership. Bangladesh and the UAE joined the NDB in 2021, followed by Uruguay and Egypt later. Saudi Arabia is discussing accession.
South African Foreign Minister Naledi Pandor said that the bloc could be "transformative" as it could represent countries "that wanted to play a role in world affairs, providing benefits to the global South."
BRICS members refused to join organisations such as the G7 in imposing sanctions on Russia. This is a condition for joining the BRICS, the Russian side believes.
China is an important trading partner for most of the BRICS countries and the ones that want to join the bloc. An OMFIF Global Public Investor report published in July 2022 said that 31 percent of surveyed bank reserve managers planned to increase their yuan holdings within a year to two years.
According to Bloomberg, Russia will be buying $200 million worth of yuan a month for its foreign exchange reserves. The Chinese government is working on establishing a free trade area with the countries of the Gulf Cooperation Council (GCC) that includes the UAE, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait.
This will stimulate oil trading in yuan as well as investment ties. It is worthy of note that the accession of Saudi Arabia to the BRICS could be a game-changer for the fate of the petrodollar. Iraq also announced plans to start trading oil in yuan and join the BRICS.
Significantly, in March 2023, the yuan outperformed the dollar in China's cross-border transactions and accounted for 48.4 percent of all transactions, while the share of the dollar fell to 46.7 percent.
Beijing also launched offshore yuan markets in key financial centres, such as Singapore, London, Paris, Hong Kong and Luxembourg and signed bilateral local currency trading agreements with Russia, Brazil, Argentina, Kazakhstan, Bangladesh, Pakistan and Laos and plans to open new lines in the Middle East.
The trend is clear — an increasing number of countries will gravitate towards yuan trading.
If commercially viable alternative payment mechanisms emerge, they could challenge the dollar even more, especially if US inflation rises strongly later this year.
The yuan will not be able to oust the dollar overnight, of course, but this process could nonetheless happen faster, contrary to many forecasts in the West.
BRICS members today represent over 42 percent of global population, 23 percent of the world's gross domestic product and 18 percent of trade. Last year's GDP data shows that collectively, the BRICS economies, in PPP terms, are already larger than G7 economies combined. The share of the G7 in world GDP has been declining. Japan has not shown net growth in its GDP for 20 years. Italy is practically not growing. Therefore, the idea of G7 countries being something that the whole world follows is erroneous.