September 6, 2023/Cordros Report
The BRICS, a five-nation group of emerging economies encompassing Brazil, Russia, India, China, and South Africa, held its 15th summit in South Africa from 22 to 24 August 2023. At the meeting, the emerging markets bloc made a momentous decision to expand by inviting six nations – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates (UAE) – to join the group effective January 2024. The summit chair revealed in July 2023 that about 40 countries expressed interest in joining, whilst 23 countries applied formally to join the BRICS. It is pertinent to note that the last time the group was expanded was in 2010 when BRIC admitted South Africa to form BRICS. in this report, we examine the recent developments surrounding BRICS and discuss the potential impact of this development on the dominant status of the US dollar.
BRICS Expansion Signals a Move to Dominate the Global Oil Market
Although there are no explicit requirements for selecting members for the bloc, we think that one of the primary intentions of the group is to influence the global oil market, serving as a significant step in the BRICS’ push to counterbalance the Western-led international order. For context, among the founding BRICS countries, Russia is the sole energy-producing country, accounting for up to 22.1% of the total global oil supply as of July 2023. With the addition of Saudi Arabia, the UAE, and Iran, the expanded group will comprise four oil exporters and two of the largest importers (China and India). According to the International Energy Agency (IEA), as of July 2023, the new 11-member group accounts for 58.3% of the global oil supply. We believe this new position in the global oil market will ensure the group emerges as a geopolitical alternative to the Western-dominated oil market and may eliminate all sanctions preventing oil producer states from exporting oil. Moreover, some members of the OPEC+ have raised concerns that Western energy sanctions on Iran and Venezuela have constrained investment and export flows. Accordingly, while we think OPEC+ will remain a substantial determinant of oil market dynamics over the short-to-medium term, we believe the oil market dynamics may be redirected to the expanded BRICS over the long term even as the decisions of the said members may still be regarded as that of OPEC+. Thus, greater cooperation between Russia and Saudi Arabia and enhanced oil trading relationships among members could lead to more significant influence in controlling crude oil production, increasing long-term volatility in crude oil prices.
The “BRICS bank” Issued its First South African Rand bond
Meanwhile, on 15 August, the New Development Bank (NDB), a financial institution created by the core members of BRICS, issued its first South African Rand Bonds. The Bank offered to sell a total of ZAR1.00 billion to investors. The auction was well subscribed, with a total subscription level of ZAR2.67 billion. Eventually, NDB sold ZAR1.50 billion in bonds to investors through a five-year note: ZAR1.00 billion (USD52.30 million) and a three-year note: ZAR500.00 million (USD25.76 million). Despite the preceding, we highlight that the Bank still heavily relies on the US dollar for its survival, with local currency funding (primarily driven by Renminbi-denominated loans) as a percentage of the Bank’s portfolio at 22.0% as of May 2023. The NDB’s president stated that the Bank’s goal is that 30.0% of the Bank’s project financing volume will be denominated in the national currencies of its members by 2026.
Is the USD Under Imminent Threat?
The recent developments surrounding the BRICS forming a new currency and attracting new members have brought de-dollarisation to the forefront of public and private discourse, particularly as the greenback is the world’s most used currency. We discuss our opinion on this critical discourse in the following few paragraphs:
The desire for other countries’ currencies to dethrone the US dollar is not new, as it has been making the headlines for at least four decades. However, it gained more traction in the past few months, induced by (1) the West’s sanctions on Russia arising from the Russia-Ukraine conflict and (2) the restrictions on exports of semiconductor technology to China by the US. Yet, the greenback remains the world’s reserve currency, accounting for 59.0% of global reserves as of Q1-23 (see Figures 3 and 4). Notably, despite the Euro being launched in 2002 and currently used by 20 of the 27 member countries, helping to promote economic integration in Europe, the contribution of the Euro to global reserves has barely moved from its initial point. More specifically, the Euro contributes 19.8% of the international reserve as of Q1-23, marginally lower than in Q1-02 (20.0%), primarily due to the (1) inadequate supply of high-quality euro-denominated assets that foreign investors and central banks can use as a store of value and (2) lack of eurozone wide “safe” government-backed assets, according to the National Bureau of Economic Research (NBER). However, compared to BRICS, the Euro Area still has more marketable securities, more so that capital control concerns are pronounced in China, Russia, and India. Based on the foregoing, we think a BRICS common currency poses no imminent threat to the USD as the world’s reserve currency. Consequently, for BRICS to be a serious contender in the de-dollarisation agenda and have greater global acceptance, capital control restrictions must be considerably eased – capital controls undermine currency flexible convertibility.
Further corroborating our views that the BRICS pose no significant imminent threat to the USD are the complex political dynamics and economic power asymmetries within the BRICS. We believe these challenges could lead to setbacks with regard to (1) agreeing to an exchange rate mechanism and (2) having efficient payment systems to convince others that the new currency powered by BRICS is reliable.
In addition, the US dollar comprised (1) 46.5% of global payments as of July 2023, (2) 59.0% of global reserve as of Q1-23, (3) 88.0% of global foreign currency debt as of Q2-22, (4) 65.0% of international bank loans as of Q2-22, and (5) 40.0% of global trade invoicing as of 2020. The preceding further bolsters our position that the US dollar’s role in the international financial system remains robust and will not likely diminish significantly in the near term.
Overall, while de-dollarisation concerns are valid and should not be dismissed over the long term, we believe that a significant reduction in the global usage of USD for trade, payments, settlements, and reserves is unlikely for now. Therefore, we expect that unravelling the US dollar’s global supremacy will take a long time to materialise despite the recent BRICS activities and media attention.
