The BRICS union was established to counteract the financial policies of the United States and its dominance over the global economy. Member states are actively working toward “de-dollarization.”
Emergence of BRICS, De-dollarization, and the Global Economy
The BRICS union was formed to challenge the financial and economic dominance of the United States. Member states are striving to diminish the influence of the U.S. dollar as the global reserve currency. This article provides a brief history of BRICS, its significance, objectives, blockchain-based payment systems, and the latest developments in the BRICS cryptocurrency.
Table of Contents
After the Cold War ended, the United States emerged as the sole superpower, dominating the global order. However, starting in the early 21st century, this unipolar dominance faced challenges due to the rise of major powers like China and India and Russia’s resurgence.
Amid emerging powers in recent decades, the formation of the BRICS group and its multidimensional capacities—economic, political, military, and global reach—has become a topic of interest in academic circles and international decision-making, particularly regarding how this group influences the existing global order.
Over the past decade, BRICS has steadily strengthened, creating an opportunity to significantly influence and reshape the international order.
The concept of BRICS (Brazil, Russia, India, China, South Africa) was introduced by Jim O’Neill, chief economist at Goldman Sachs, in a 2001 study titled Building Better Global Economic BRICs. In 2006, it became part of the foreign policies of Brazil, Russia, India, and China. South Africa joined in 2011, completing the acronym BRICS.
This group was designed to unite major developing countries to challenge the political and economic power of North America and Western Europe.
Following the acceptance of the council, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates were invited to join on January 1, 2024. Argentina was also invited to join, but Javier Milei, the then-president of Argentina, withdrew from this position in December 2023, shortly after assuming office, and Argentina was unable to join the BRICS group.
Theoretical Framework
Over 60 years ago, the “Power Transition Theory” by Abramo Organski described shifts in global power dynamics. This theory posits that a significant increase in a country’s economic power enables it to rise within the international system. Unlike traditional realist theories, Organski’s framework emphasizes a stable global order under the dominance of a singular power.
The theory suggests that peace prevails as long as a dominant power maintains control. Stability arises from the hegemon’s alliance with key satisfied allies, creating a balanced system resistant to upheaval. BRICS appears to be leveraging this theory, as its increasing influence disrupts the existing unipolar order.
BRICS Secretariat and Bureaucracy
BRICS is not supported by a secretariat or a permanent office. The president of BRICS is selected annually in a rotating manner among the member countries according to their acronym order. The president sets the priorities and event calendar for the year, as well as hosts the summit and all related meetings. He also develops his annual priorities in close consultation with other BRICS members, based on his agenda and previously agreed decisions in line with the ongoing cooperation of BRICS.
As a group, BRICS has an informal character. There is no charter, it does not operate with a permanent secretariat, nor does it have a budget to finance its activities. Ultimately, what sustains the mechanism is the political will of its members. However, BRICS has a degree of institutionalization, defined as the five countries intensifying their interactions.
An important stage in strengthening the vertical institutionalization of BRICS was the elevation of political engagement, which began in June 2009 with the Yekaterinburg summit (a city in Russia), reaching the level of heads of state/government. The second summit, held on April 15, 2010, in Brasília (Brazil’s capital), advanced this process.
The third summit, held on April 14, 2011, in Sanya (a city in China), demonstrated that there was still political will for dialogue among the countries, even at the highest decision-making level, reinforcing BRICS as a space for dialogue and consensus on the international stage.
Moreover, it amplified the voice of the five member countries on global agenda issues, especially those related to economics, finance, and the identification and development of specific joint projects in strategic sectors such as agriculture, energy, science, and technology. The fourth summit took place in New Delhi (India’s capital) on March 29, 2012, and the fifth summit in Durban (South Africa) on March 27, 2013.
In addition to vertical institutionalization, BRICS has opened doors to horizontal institutionalization by including several practical fronts in its scope. The most developed front that respects the origins of this group is the economic-financial front. Finance ministers and central bank governors from the allied countries have met several times, and topics like food security, agriculture, and energy have also been discussed at the ministerial level.
In summary, BRICS provides its five members with a space for (a) dialogue, identifying convergences, and consultation on various issues; and (b) expanding contacts and cooperation in specific sectors.
Why Does BRICS Matter?
BRICS consists of major global powers like China and Russia, along with influential countries such as South Africa and Brazil, which play pivotal roles in their respective continents.
BRICS brings together the world’s largest emerging economies, encompassing 41% of the global population, 24% of global GDP, and over 16% of global trade.
In recent years, BRICS nations have been the primary engines of global economic growth. The member states collaborate on critical issues across political, security, economic, financial, cultural, and people-to-people dimensions.
With the inclusion of Iran, Saudi Arabia, and the UAE, BRICS nations collectively produce around 44% of the world’s crude oil.
Despite this, BRICS contends that Western nations dominate key global institutions such as the International Monetary Fund (IMF) and the World Bank, which provide loans to governments.
To counterbalance this, BRICS established the New Development Bank (NDB) in 2014, aimed at funding infrastructure projects.
By the end of 2022, the NDB had disbursed nearly $32 billion to emerging economies for external projects, including roads, bridges, railways, and water supply systems.
Goals of the Major BRICS Players
According to Professor Padraig Carmody of Trinity College Dublin, BRICS serves as a strategic platform for China.
China seeks to expand its power and influence, particularly in Africa, and position itself as the leading voice for the Global South. -Padraig Carmody
However, another major global power in this group has a different goal:
Creon Butler from the London-based think tank Chatham House says, “Russia views BRICS as part of its struggle with the West, which helps it overcome the sanctions imposed after the invasion of Ukraine.”
He also believes that Iran’s membership could enhance the anti-Western nature of BRICS.
Objectives of the 5 BRICS Member Countries
India’s Objectives in BRICS:
India, by forming an alliance among the five countries and exchanging experiences, has achieved significant progress and is now emerging as a global economic technology hub.
China’s Objectives in BRICS:
As a developing country, China is seeking new partners. Facing competition from the US and Europe, which aim to manage its development, China is looking for partnerships that align with its communication strategy to drive its own growth.
Through interactions with other countries, China has accelerated its development, found new markets, and gained new partners on the international stage, marking a major success for China.
South Africa’s Objectives in BRICS:
South Africa is focused on development and seeks to grow its GDP, economic strength, and presence on the international stage. It is the latest member of BRICS to join the group due to the successes of the other BRICS countries and its own developmental aspirations.
After joining BRICS, South Africa has made significant progress in domestic investment, GDP growth, global export management, and privatization, as evidenced by World Bank data, showing a positive economic trend.
Russia’s Objectives in BRICS:
After the collapse of the Soviet Union, Russia experienced economic confusion. The economy was the main factor in the collapse, and the bankrupt and corrupt economy of the Soviet regime led the Russians to struggle with the leftover problems after the dissolution.
After the collapse of the Soviet Union, Russia had the worst economic condition in terms of domestic production. Moscow faced a decade of challenges due to global competition, pressure from the European powers, and the global economic environment. However, with the formation of the BRICS organization and the membership of these five countries, Russia was revitalized and gradually overcame these problems, benefiting from the experiences of these countries in integrating into the global trade system.
In this context, Russia, with its raw materials, oil, gas, mineral reserves, and technological capabilities, was able to enter the global market through economic, commercial, and technical exchange, learn the principles of trade, and become a powerful country. Although Russia was expelled from the G7 (due to the Ukraine issue), the reality is that Russia is a global power, and the expulsion was more political than economic.
Brazil’s Objectives in BRICS:
Brazil was one of the most indebted countries in the world just 30 years ago, but it is now the sixth-largest economy in the world. Thanks to the policies of Brazil’s Workers’ Party and the management of former President Da Silva, the country transformed into an industrial power. It became the sixth-largest economy in the world in 2013, effectively overtaking the United Kingdom in the global economic rankings. One of Brazil’s priorities in its development plan was to combat financial and administrative corruption.
Brazil focused on supporting domestic production, creating quick-return enterprises, and establishing cooperative production and agricultural initiatives. With the cooperation of BRICS member countries, Brazil achieved these goals. Brazil is now one of the world’s strongest countries in agriculture, livestock, industry, and engineering, and through its participation in BRICS, it has secured a prominent position.
The BRICS countries hold significant economic weight in the global arena, which is why the position of this group—both as a collective and the individual countries as members of such an important organization—is crucial for Iran, especially given the conditions created by so-called superpowers today. It seems that the alliance of these countries could form an economic bloc in opposition to the Western hegemonic powers.
Iran’s Membership in BRICS
Iran has seriously sought membership in this group under the 13th government. On September 23, 2023, the official announcement of Iran’s membership in BRICS was made public alongside the visit of Ayatollah Seyed Ebrahim Raisi, the President of the 13th government, to South Africa.
Russia to Host the Next Summit
Russia has currently increased the use of national currencies in its trade with friendly countries to 75% and is set to host the upcoming BRICS summit in Kazan, Russia, this summer.
This is not a new BRICS currency but an analog of SWIFT for cross-border transactions in national currencies in digital form, working on blockchain technology.
This currency is expected to integrate with digital versions of the ruble, yuan, rupee, and others, which are anticipated to be developed soon.
Russia has accelerated its plans for digital currencies that operate outside the control of international regulators. Interestingly, the Central Bank of Russia (CBR) is working on developing a Central Bank Digital Currency (CBDC), or digital ruble, which is expected to be launched in 2025.
According to new regulations in 2023, the Central Bank of Russia acquired the status of the digital ruble platform operator. The regulator will also be responsible for the security of circulating digital rubles and the organization and operation of the platform around the clock.
A Central Bank Digital Currency is not a blockchain-based coin like those issued by other blockchain projects; rather, it is an electronic currency, as the Central Bank of Russia controls the issuance of tokens under its supervision, just as it issues and regulates fiat currencies.
In August of last year, the Central Bank of Russia began offering a digital ruble as a pilot project with several commercial banks as it prepares for the official release of digital currency. The Central Bank of Russia has also issued a set of guidelines on digital currency titled “Digital Ruble: What It Is and How to Use It.”
BRICS Blockchain-Based Payment System for a Unified Currency
The BRICS countries have long been working to reduce their reliance on the dollar by expanding international relations among their members, but the creation of a common currency has not been feasible due to China’s economic dominance within the group. This means that any common currency would essentially be the yuan.
As part of its efforts to expand relations with other countries worldwide, the spokesperson for the Kremlin recently announced the BRICS group’s plans to increase its membership.
Dmitry Peskov, spokesperson for the Russian Presidency, stated that the expansion of BRICS will be on the agenda for the upcoming summit in August 2024. Peskov emphasized that this topic will be discussed at the upcoming BRICS summit in South Africa.
Peskov told reporters at the Kremlin: “Expansion is a very important issue, as we are seeing more countries express their intentions to join this group.” He also noted that there are minor disagreements among BRICS members regarding the expansion of the group.
However, Yuri Ushakov, an aide to the Kremlin, in an interview with TASS, stated that a solution for this issue had been proposed: “Instead of a currency, a new blockchain-based payment system called ‘BRICS Pay’ will be used.”
He said: “We believe that creating an independent BRICS payment system based on advanced tools such as digital technologies and blockchain is an important goal for the future. The key is to ensure that this system is affordable, convenient, and free from politics for governments, ordinary people, and businesses.”
Ushakov said that this year’s goal is to increase BRICS’s role in the international monetary and financial system. In 2023, members stated in the Johannesburg Declaration (in South Africa) that they would work on increasing settlements in national currencies and strengthening banking networks to secure international transactions. The Kremlin aide noted: “Work will continue to develop a potential store of value contract, primarily regarding the use of currencies other than the U.S. dollar.”
Robert Kiyosaki, author of Rich Dad Poor Dad, tweeted: “In Johannesburg, South Africa, BRICS announced a gold-backed digital currency. The US dollar will be destroyed. Gold, silver, and Bitcoin will reach $120,000 next year. Be sure to buy.”
Why BRICS Digital Currency Could Perform Better Than the US Dollar
Support from Major Countries:
In recent years, trust in the US dollar has been declining. This is due to various factors such as the increasing debt of the United States, inflation, and the Ukraine war. In this context, BRICS digital currency can benefit from the support of BRICS countries.
Resistance to Sanctions:
This could be a significant advantage for BRICS countries, often targeted by US sanctions. These countries could use the BRICS digital currency to bypass sanctions and conduct international transactions without the need for the US dollar.
Bright Future of Blockchain:
Blockchain, the underlying technology of digital currencies, has great potential to change the way transactions are conducted. This technology can be used for faster, cheaper, and more secure transactions. BRICS digital currency can leverage this potential to offer new and innovative financial services, which could help it become more attractive compared to the US dollar.
Possible Scenarios for the Future of BRICS Digital Currency
Optimistic Scenario:
BRICS digital currency grows rapidly and becomes a serious competitor to the US dollar, leading to a reduction in the dollar’s dominance and an increase in diversity within the global financial system.
Moderate Scenario:
BRICS digital currency is accepted to a limited extent and is a secondary alternative to the US dollar. This could reduce the US dollar’s dominance, but not entirely.
Pessimistic Scenario:
BRICS digital currency faces numerous technical and legal challenges and cannot be widely adopted. This could lead to its failure and the continued dominance of the US dollar.
Time will tell what the future holds for BRICS digital currency. However, even if the new BRICS currency doesn’t fully succeed, it could still have a significant impact on the global financial system.
BRICS De-Dollarization
Now, we examine de-dollarization in terms of the actual use of the dollar and its short-term implications.
In recent years, there has been intense debate about whether the US dollar will lose its status as the world’s primary currency. This discussion distinguishes between the dollar’s role as a primary reserve currency and its use as the main currency for transactions. Additionally, we assess the likelihood of reduced use of the dollar for transactions and as a store of value.
The dollar is firmly established as the world’s principal store of value. Numerous reasons support this position, suggesting it will remain unchanged for at least a decade or longer.
First, the United States remains the largest and strongest economy in the world. China is growing, but the United States is still the global economic hegemon, holding the most developed financial markets and being the world’s financial center. The United States also has the largest national debt in the world, which it can easily make available to anyone who wants to hold it. In contrast, China and the renminbi (or yuan) do not possess any of these characteristics.
The dollar is recognized and accepted globally for transactions and as an alternative currency. It is the most convertible currency in the world. Meanwhile, the United States is facing stagflation and rising public debt. However, these are not reasons to abandon US debt. Business cycle fluctuations, such as recessions and stagflation, increase short-term demand for the dollar simply because it remains a safe-haven currency.
Another important factor explaining why the dollar cannot quickly lose its global position is that the majority of US debt holders are from the G7 countries and the European Union (G7/EU), which together form a significant portion of the global economy and are unlikely to abandon the dollar. Therefore, a complete abandonment of the dollar seems highly unlikely.
There is no clear answer to the question of which currency could replace the dollar as the primary store of value. Currently, no currency exists that can replace the dollar as the main store of value.
Therefore, the argument that the dollar will lose its position as a reserve currency is, at best, weak and, at worst, implausible. However, replacing the dollar as the main currency for transactions and the primary store of value is something that BRICS countries, particularly China, do not want. It is well known that the dollar cannot be replaced as a reserve currency, but its use for global transactions can be significantly reduced. This is what China and BRICS countries are genuinely hoping to achieve.
The US government estimates that nearly half of US dollars are held outside of the United States. On the other hand, BRICS countries have stated that they will create a parallel currency to the dollar or move toward increasing the use of local currencies for transactions. In either of these cases, the use of the dollar will decrease, but it will not be completely eliminated.
An Example of Dollar’s Use in Transactions
To understand the implications of a reduction in the use of the dollar, let’s briefly examine its transactional use.
Let’s consider a company that participates in international trade. If the transaction is conducted in dollars, the company must hold some cash in dollars to carry out the transactions. Sometimes, depending on its business, the company may buy or sell a portion of its dollar assets.
If, subsequently, this company introduces another currency into its trade, its need for dollars decreases, and it sells its dollars in the open market, exchanging them for the new currency used in the transactions. This is an example based on one company, but if many companies around the world decide to reduce their dollar holdings, global foreign exchange markets will experience an increased supply of dollars, leading to a reduction in the dollar’s value.
The key point is that a decrease in the dollar’s value would increase inflationary pressures in the United States, as essential goods become more expensive.
The next point is that the dollars leaving the country will not return to the United States. Currently, the Federal Reserve (FED) is implementing a restrictive (contractionary) monetary policy. The target federal funds rate is between 5% and 5.25%, with at least one more 0.25% increase expected this year. The FED is also undertaking quantitative tightening (reducing its balance sheet) at a rate of $95 billion per month ($60 billion in Treasury securities and $34 billion in agency mortgage-backed securities).
The return of US dollars to the United States would increase the amount of money within the country, intensifying inflationary pressures. The FED would have to keep interest rates high for a longer period and continue reducing its balance sheet for longer than anticipated a year ago. Maintaining higher interest rates and engaging in quantitative tightening would have significant impacts on the US economy. Higher interest rates would push the economy toward recession, while the FED’s balance sheet reduction would increase the floating debt of the US (the federal debt ceiling).
A combination of an increasing US budget deficit and the FED’s decision to shrink its balance sheet (Soft Landing) will flood global markets with US debt. This will raise long-term US interest rates and lead to even slower economic growth. As a result of recession, increased debt, and higher interest rates, the United States will be forced to implement fiscal consolidation. Fiscal consolidation, at a time when BRICS countries are becoming more united, will further slow US economic growth.
As demonstrated here, de-dollarization may be a long-term goal of the BRICS group; however, in reality, it has significant short-term consequences, including weakening economic growth in the G7 countries and rising interest rates. The weakening of the G7’s position in the global economic and political scene will become even more evident.
Conclusion
We have pointed out that a complete abandonment of the US dollar as a global currency for trade, banking transactions, and as a store of value is not feasible in the near future. We also demonstrated that the immediate goal of the BRICS group is not to remove the US dollar as the global primary currency and store of value. In the short term, the process of de-dollarization is leveraging the current business cycle in the United States and the European Union. A small reduction in the number of transactions conducted in dollars as the unit (value) would lead to a decrease in the dollar’s value and a long-term rise in interest rates in the United States, along with quantitative tightening, all of which would weaken the economic position of the United States, the EU, and other G7 countries.
Sources:
https://www.epw.in/journal/2017/11/commentary/brics-and-new-financial-architecture.html
https://academic.oup.com/book/27452/chapter-abstract/197334096?redirectedFrom=fulltext
