No, it’s not a typo people, and we didn’t spell the word ‘BRICKS’ wrong either.
Wondering what BRICS is? Let’s dive into a bit of geo-politics!
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BRICS - THE ECONOMIC FUTURE
BRICS is an acronym for a group of five major emerging economies: Brazil, Russia, India, China, and South Africa.
All five countries differ in terms of location, culture, geography, history, and polity – but one common factor that binds these nations together is their economy.
And by economy we don’t mean to say that they follow the same economic structure, but the fact that these countries have been defined as the fastest growing economy in current times.
Even with their different economic structures, they have many factors responsible for their promising economic future.
Some have a large, young, growing population. Some have significant natural resources. And some have a good strategic geo-political advantage compared to the rest of the world.
The BRICS countries account for about 42% of the world's population, 27% of the global land area, and 23% of the world's GDP (measured in purchasing power parity terms).
They are also among the top ten largest economies in the world – having a combined GDP of more than $18 trillion!
THE GAME PLAN
Since the formation of the BRICS group in 2006, the member countries have held annual summits to discuss issues of common interest and to coordinate their policies on global economic and political issues.
The group has also established various initiatives to enhance their economic cooperation, such as the New Development Bank (NDB), which provides financing for infrastructure and sustainable development projects in member countries.
They have been very dynamic in pursuing strategies to boost up their economic growth, such as reducing their dependence on the US dollar, establishing new trade free zones etc.
Since the last few years, the idea of a separate currency has been floating around in the yearly summits, and why not? Given the promising future of the economies of the BRICS countries, it is understandable that they want to reduce their dependence on the US dollar.
But have you ever wondered why and how the US dollar dominates the global economy?
THE US DOLLAR DOMINANCE
The US Dollar's dominance as the prime currency is due to a combination of historical, economical, and geopolitical factors.
It is the most widely held reserve currency in the world, accounting for approximately 60% of global foreign exchange reserves. This is due in part to the stability of the US economy and political system, as well as the strength of the US financial markets.
Now, because it is perceived as a stable currency, with a low risk of inflation and strong backing from the US government, it is widely used in international trade and investment, with many commodities such as oil and gold priced in US dollars.
This perception of stability makes the US dollar a preferred currency for international transactions, especially in times of economic uncertainty.
To know more on how the US Dollar rose to throne, stay tuned for our upcoming twitter thread!
DOLLAR, DOLLAR, EVERYWHERE
The dominance of the US dollar in the global economy can have significant effects on emerging economies in several ways.
👉 The US dollar, as the world’s reserve currency, is widely used in International trade. This means that the monetary policy decisions made by the US Federal Reserve can have a direct impact on the cost of borrowing for emerging economies.
For example, let's consider a hypothetical emerging economy, Country X, which has borrowed a significant amount of US dollars to finance its infrastructure projects. If the US Federal Reserve raises interest rates, it can lead to a stronger US dollar, causing the value of Country X's currency to weaken. As a result, Country X will need to pay more in its local currency to service its US dollar-denominated debts, as the cost of borrowing increases. This can put pressure on Country X's economy, leading to reduced investment, lower economic growth, and potential financial instability.
👉 Emerging economies may have limited policy options to manage the impact of the US dollar dominance. For example, they may be limited in their ability to adjust interest rates or currency values to manage inflation or support economic growth due to concerns about the impact on capital flows and exchange rates.
Let's consider an emerging economy, Country Y, which has a significant portion of its debt denominated in US dollars. Country Y's central bank may want to lower interest rates to stimulate economic growth and manage inflation. However, if the central bank lowers interest rates, it can potentially lead to a decrease in the attractiveness of Country Y's currency for foreign investors, as lower interest rates may reduce the returns on their investments.
This can result in a decrease in capital inflows into Country Y, as investors may choose to invest in other countries with higher interest rates, causing a potential outflow of funds from Country Y. This, in turn, can put pressure on Country Y's exchange rate, as the demand for its currency decreases, potentially leading to a depreciation of its currency.
👉 Since the international market trades in US dollar, fluctuations in the value of the US dollar can have a significant impact on the exchange rate of other currencies, which can impact the competitiveness of exports and the cost of servicing foreign debt.
ESCAPE FROM THE US DOLLAR
To manage these challenges, policymakers in emerging economies may need to focus on building resilience through diversification, improving domestic economic fundamentals, and enhancing financial and monetary cooperation with other emerging economies – namely a separate currency to rival the US dollar dominance such as the BRICS Currency.
If anything is to go by the current events, Russian lawmaker Alexander Babakov states that the BRICS nations are in the process of creating a new medium for payments - established on a strategy that "does not defend the dollar or euro".
Since the commencement of the Russo-Ukrainian War, Russia has been facing heavy sanctions imposed by the West restricting its global market and increasing its financial load.
To make up for the financial losses, Russia has taken steps to trade in national currencies with China and India. Russian President Putin adopted a new foreign policy that put India and China at the forefront.
The announcement also came mere days after Chinese Premier Xi Jinping visited Moscow to further cement the "no limits" partnership announced last year. China’s yuan has also replaced the US dollar as the most traded currency in Russia.
Russia and China boycotting trading in the US dollar might be the onset of a new economic order!
And although this may look like a potential economic take over, things are not so smooth sailing as they seem to be.
FAULTY ESCAPE PLANS
The idea of a common currency among the BRICS nations has been debated for years, but it faces significant challenges.
One of the main hurdles is the vast differences in the economic size and structure of the member countries. China's economy is much larger than the other BRICS nations combined, and its currency, the yuan, is already a global player. In contrast, Brazil, Russia, India, and South Africa have smaller economies and less international influence in currency markets.
Another challenge is the lack of institutional infrastructure to support a common currency. The eurozone, for example, has a centralized monetary policy and a common regulatory framework. The BRICS nations would need to establish similar structures, which would require significant political will and coordination. This might become a reason for India's disagreement due to China’s aggressive economic policies.
How can one expect this type of political coordination when China is rounding up the world with debt-trap policies?
Not just that, Russia’s oil trade with India in their national currencies have no doubt increased significantly since the last few years but India might not be onboard with the ‘Common Currency’ plans due to its significant tilt towards the West.
If you wish to learn more about India’s oil deals with Russia, check out our recent thread.
Furthermore, a common currency would require significant economic convergence among the BRICS nations, including similar inflation rates, levels of economic development, and fiscal policies. This goal can be near impossible to achieve given the diverse economic structure of these nations.
In conclusion, one can say that it would be a dream come true for these growing economies to have a boosted advantage of a currency that is not dominated by the USA.
But at the same time, we can agree that this needs a lot of work, cooperation, and non-interference in the internal economy policies of each country in order to bring a common currency to the table.
On the other hand, one can also conceive the recent trade relation agreements between Russia-China, Russia-India, China-Brazil as something to look forward to because it sure has wavered the US dollar dominance.
Interesting times ahead for sure!