The 2024 BRICS Expansion: Risks & Opportunities
With its 15th summit on August 2023 BRICS gained increased attention. The main focus of the summit was on the potential enlargement of BRICS by admitting new members. During the summit, it was announced that 6 countries - Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates - had been invited to join the group, with their official entry into the bloc set to take place in January 2024.
The expansion of BRICS has raised questions regarding the implications for international politics and economics. And while most analysts seem to agree that it means something significant, it remains unclear what exactly. This report, therefore, analyses the potential risks and opportunities of the expansion, with a particular focus on the commodities sector. Our analysis addresses questions regarding the interests of BRICS+ countries, the challenges and opportunities for the bloc itself, and the wider commodities sector.
“De-dollarization” – A Teaser
In February 2023, the yuan’s share of global trade increased to 4.5% — close to the Euro at 6% — from less than 2% no longer than a year ago. Simultaneously, the dollar share of central bank foreign reserves fell to a 20-year low of 58% in the same period (IMF). This situation followed the sweeping sanctions imposed by the West on Russia after its invasion of Ukraine, notably freezing Russian dollar reserves through the SWIFT payment system. The financial blockade has naturally led Russia to seek alternatives to the dollar to conduct international trade, rapidly making the Chinese yuan the most traded foreign currency on the Russian exchange.
Beyond Russia, Western sanctions have acted as a shock therapy for emerging economies, with numerous countries announcing their intentions to diversify their currency usage, and multiplying bilateral trade agreements denominated in their own currencies. For instance, Saudi Arabia has reportedly entered into active talks with China to price some of its oil sales in yuan. Similarly, Brazil has positioned the yuan as the second foreign reserve currency, ahead of the Euro, while Banco BOCOM BBM—a Brazilian bank controlled by China's Bank of Communications—became the first bank in Latin America to sign up as a direct participant in China's competing settlement agreement, CIPS, in March 2023. India is also slowly departing from the dollar, multiplying regional trade agreements settled in its own currency.
This movement away from the dollar system reignited the debate around “de-dollarization,” an hypothesis which has featured economic debates since former US President Richard Nixon upended the original Bretton Woods agreements in 1971. However, macroeconomics pundits call for moderation: Money is first and foremost a game of trust, it requires users’ confidence to work. Countries do not hold a foreign currency if their trade partners are unlikely to accept it as payment for their exported goods. On this benchmark, the US dollar is expected to remain the game in town in absence of deep structural changes. Indeed, its closest competitor—the Chinese yuan—is a closed currency: It cannot be exchanged for other currencies without the CCP’s approval, which maintains a tight control over international capital flows. This fundamentally limits the ability for central banks to accumulate yuan as reserve and to use it to trade internationally. As the liberalization of the Chinese financial system would pose major challenges on its economic governance, most believe that the convertibility of the yuan represents an unrealistic scenario for the foreseeable future.
Yet, the underlying trend seems to be clear: BRICS countries are gradually developing into a trading alliance. On August 22nd, the BRICS will hold a meeting in South Africa to explore the possibility of introducing a new shared currency. Such a solution would tackle one of the main impediments of de-dollarization through bilateral agreements. Through a shared currency, the BRICS would tap into a geographically diversified basket of commodities and manufactured goods, making a compelling argument for parking said-shared currency as a central bank foreign reserve, rather than converting it back to US dollars or Euros for international trade.
Would this shared currency be a credible threat to the US dollar in the long-run? Yes. Under its current organization, BRICS countries have outgrown the G7 on a PPP basis. Their geographical diversity would allow a level of self-sufficiency and production range beyond current monetary unions such as the Eurozone, while BRICS’ combined trade surplus would underpin the currency’s stability (FP). Furthermore, as regional economic powerhouses, BRICS could influence their local trade partners to adopt their currency, allowing goods to circumvent any potential bilateral trade restrictions through third countries, thus ensuring global trade continuity. With 19 other commodity-rich countries—such as Argentina, Iran, Egypt, Indonesia, and, most importantly, Saudi Arabia—interested in becoming part of the BRICS association, the challenge to dollar hegemony appears increasingly tangible.
To achieve global acceptance, the BRICS would need to demonstrate successful joint currency management. This would, evidently, be a long and challenging undertaking for the BRICS. However, initial steps toward this vision have already been taken with the creation of the BRICS Interbank Cooperation Mechanism and BRICS Pay, a cross-border payment system that avoids conversion to dollars, while talks of aligning Central Bank Digital Currencies have also been floated. While past efforts to establish ambitious projects have often fallen short of expectations, such as the BRICS credit rating agency or the BRICS’ New Development Bank, the group remains steadfast on de-dollarization, having a history of overcoming internal crises. Despite significant upheavals between its members, the BRICS group has intensified its collaboration and persistently expanded the breadth of policy matters it tackles, a phenomenon which should sound familiar to our European readers. Having now identified de-dollarization as a common goal, it appears unlikely that the group deviates from its trajectory.
On July 7th, the Russian Embassy in Kenya declared on Twitter that “the BRICS countries are planning to introduce a new trading currency, which will be backed by gold,” propelling the yellow metal to $1954 per ounce, along with silver. While Russia’s bombastic announcements should be approached with caution, this path is not unlikely. By tying their currency to gold, BRICS countries could introduce a degree of confidence into their shared currency, harkening back to pre-Bretton Woods monetary arrangements. In today’s fragmented international order, commodities are reclaiming the center stage, as global demand for resources surges amid industrial onshoring, and increased emphases on energy transition and energy security in advanced economies. Those emerging needs are pushing nations to secure strategic reserves and developing their local processing capacities, thereby reshaping antiquated trade dynamics. In this scenario, commodity-rich countries, once sidelined, are finding themselves in positions of increased influence against debt-laden, service economies. As investors reinterpret what constitutes a good sovereign debt collateral, a shift from fiat back to a commodity-backed monetary system could provide the necessary impetus for the BRICS shared currency plan to gain traction and begin the slow erosion of dollar dominance.
Regardless of what will come out of the next BRICS meeting, stay posted for the next joint release from London Politica Global Commodities Watch and Business and Market Watch. We will explore in depth the likelihood, as well as the consequences, of de-dollarization on world politics.
Brazil-China: Trade Relations and their Impact on Commodities
Brazilian President Lula's recent trip to China has stoked tensions between Brazil and the West. From both a geopolitical and financial point of view, Lula’s actions surrounding the trip represent a marked change from his predecessor Bolsonaro. Where Bolsonaro had backed ally President Trump’s aggressive rhetoric on foreign policy, Lula is not only trying to reestablish Brazil’s role in global diplomacy, but is also toeing a more neutral line in the developing cold war between China and the US. Lula seems to be aligning himself with the other BRICS (Brazil, Russia, India, China, and South Africa) nations, but due to rivalries between the member nations, it is the bilateral economic deals that will have a more visible effect on the world, rather than empty foreign policy promises.
Alongside 240 Brazilian business leaders, Lula headed to China for the inauguration of former Brazilian President Dilma Roussef as head of the New Development Bank, a multilateral development bank established by the BRICS to help fund infrastructure projects in developing countries. This set the financial tone for the rest of his visit, in which 15 deals worth about $10 billion were signed between Brazil and China. China has long been Brazil’s largest export market and Lula wants to leverage this relationship to help with the reindustrialization of Brazil. With US companies leaving Brazil, the symbolism of Ford seeking to sell its plant to BYD cannot be understated. This coupled with talks between BRICS to dethrone the dollar as the currency for international trade will come as a blow to Biden, though it is unlikely that China will want the Yuan to become an international currency. Lula’s comments surrounding the Russo-Ukrainian war sparked more controversy in the West after he offered to join China in mediating peace talks while also placing partial blame for the conflict on the US.
Overall, Lula’s visit is most surprising as it marks a shift in Brazilian foreign policy, though this is only surprising when looking at the policies of his predecessor. Indeed, Lula is known to be a staunch leftist and had started cultivating a relationship with China in his previous presidency, so we can assume that this relationship will only be strengthened under his administration. President Xi has made it clear that Brazil is a key part of his plans of challenging US global hegemony, and this is shown by bilateral trade increasing by 10.1% from 2021 to 2022. A key commodity being sold by Brazil is beef, as China has a huge demand for it with 55% of their imports coming from Brazil and 10% of Brazil’s sales being to China. However, Brazil is also a key part of the iron, soybean, and crude petroleum markets. In addition to this, Brazil was the single largest recipient of Chinese FDI in 2021. This is part of Xi’s plan of integrating Brazil into the Belt and Road initiative, to increase China’s influence in Latin America, so we can expect trade to grow in coming years.
The markets for each of Brazil’s main commodities, beef, soybeans, and crude petroleum could change drastically by the end of the year. Both beef and soybean sales are interconnected. Soybeans are instrumental for feeding beef cattle with cattle feed making up 18% of soybean sales in the US and 52% of the oil gathered from soybeans are used in the food industry. With growing demand for beef from China opening up, we can expect beef sales to increase through restaurants reaching pre-pandemic levels of demand and pushing soybean prices up as restaurants need more oil for frying food, while farmers will need more soybeans to feed growing cattle numbers. While some feared stricter controls on cattle rearing in the Amazon with the election of a left leaning President, Lula has been unwilling to change his predecessor's profitable policies. While Lula has talked about placing people and nature in front of profits, this philosophy has not yet reached the agricultural sector, but this does not necessarily mean it will enjoy projection for the rest of his term. For now the only thing which has stopped the flow of Brazilian beef has been cases of mad cow disease, but suspensions were normally lifted within a few months of being placed.
Iron ore makes up the largest portion of Brazil’s exports and its price shifts are harder to predict. In the short term, prices will increase as China opens back up. As it eases its coronavirus policy and its real estate sector gradually recovers, it is likely that demand for iron will increase from Brazil’s main trading partner. However, as the markets recover their supplies from India and Brazil, it is likely by the end of the year that prices could decrease. There is even the chance that Russian and Ukrainian supplies flood back into the market, which could drastically change the price of iron ore but it is unclear if a peace settlement can be reached anytime soon.