The Taiwan Banker

The BRICS grouping of Global South countries may be one of the least-understood recent developments in international affairs. Is it an economic forum? An attempt to end the Bretton Woods system of dollar hegemony? Or perhaps a reincarnation of the Non-Aligned Movement for a second Cold War? More to the point, which of its actual and aspiring members, as well as those who have rejected membership, believe which of those possibilities? Originally composed of Brazil, Russia, India, China, and later South Africa, BRICS expanded its geographic reach at the beginning of this year to also include the Middle Eastern and Northern African nations of Egypt, Ethiopia, UAE, and Iran (now known as BRICS+). Other countries around the world have applied for membership, while Argentina and Algeria have suspended their application processes. At the same time, India and Brazil have rejected China’s parallel Belt and Road initiative, maintaining their distance from China despite being original members of BRICS. Saudi Arabia, meanwhile, forms an interesting case. It has been accepted for membership but did not formally join the organization at its October summit in Kazan, Russia. Even if the petroleum superpower eventually joins, its calculus may shed some light on the geopolitical forces shaping the organization and its members. Future power struggles between the US and China will proceed in this manner, one country at a time, based on their own idiosyncratic interests. Dollar recycling The BRICS concept is inseparable from China’s search for an alternative to the US dollar as a reserve currency, which dates back to before the organization was conceived. A 2009 paper by Zhou Xiaochuan, then governor of the People’s Bank of China, first articulated this ambition, proposing to add the renminbi to the IMF’s special drawing rights. China is however highly unlikely to directly unseat the well-entrenched role of the US in the international financial system. The November election of Donald Trump for a second term as president provides an instructive event study, demonstrating the unchallenged financial power of the US consumer. The dollar had remained high since the pandemic, but it surged further upon expectations of inflationary policies, such as import tariffs, as interest rates priced in an expectation of a Fed response. This counterintuitive response to inflation partially undoes the effect of any possible tariffs on the trade deficit, returning spending power back to consumers, while inhibiting exports. One of the strongest recent long-term bearish cases for the US dollar has come from a steady increase in gold prices over the course of this year (until the election), driven in large part by purchases from China’s central bank. The concurrent strength of the dollar however suggests that the price appreciation in gold may have been driven more by a need to recycle foreign exchanges earned from exports to the US than any favorable factor internal to China’s economy. Food and fire Although it preceded the election, based on this structural reality, this year’s BRICS summit toned down its earlier ambitions to directly challenge the dollar, and instead focused more on ways to directly resist possible sanctions. Russia proposed a grain trading mechanism, addressing one of the levers of its geopolitical power which has been stymied the most by the post-2022 sanctions regime. Since the start of the full invasion, it has attempted to block Ukrainian exports of grain, often destined for the Middle East and Africa. Petroleum will be another important commodity related to the ultimate success of this initiative, forming an important object of non-dollar trading. Regarding a potential alternative to the SWIFT trading system, the challenges are not technical in nature, but rather economic. Some sort of alternative trading system will need to get off the ground and achieve sufficient scale, while avoiding regulation in the US or its allies, which make up essentially all of the developed world. SWIFT is of course not the only scaling challenge to overcome; if US jurisdiction is to be completely avoided, no dollars can be cleared by banks which do business in international trading hubs either. This is why Saudi Arabia’s delay in accepting BRICS membership is potentially significant. Even though China is the world’s largest oil importer, while the US has become a net petroleum exporter, the kingdom has decided against the risk of being seen as overly leaning toward China. It has no shortage of security concerns this year, each of which deeply involve the US. These range from an Israel-Iran conflict to a partially separate conflict with Houthi rebels in neighboring Yemen, who have successfully blocked a major portion of international trade through the Red Sea. The trouble is in the details The BRICS framework also includes various other initiatives of a nature more directly relevant to finance. The BRICS Interbank Cooperation Mechanism, one of the original schemes associated with the concept, has helped facilitate cross-national financing in local country currencies, another important source of financial flows which circumvent Western-leaning markets. This model can help avoid currency crises in emerging markets, but it also reflects a larger financial trend which is not unique to BRICS. Likewise, the New Development Bank, another older BRICS financial mechanism, has not managed to de-dollarize development financing, as most of its lending still occurs in more conventional currencies, according to analysis by the insurer ING. The prospect that China would fund infrastructure construction around the world has diminished with its weakening economic situation. Going forward, there may be further room for growth in payments, rather than in financing, representing an alternative model of financial infrastructure with more state involvement than would be needed in many advanced economies. mBridge, for instance, is an ongoing effort to link up multiple central bank digital currencies (CBDCs – i.e. short for “multiple CBDC bridge”), with participation originally including Hong Kong, mainland China, Thailand, the UAE, and the Bank of International Settlements (BIS). This year, BIS dropped out, while Saudi Arabia joined their efforts. Cross-border regulatory challenges have nevertheless proven daunting for this project. “So,is wholesale CBDC about to de-dollarise global payments?” asks Teunis Brosens, ING Head of Regulatory Analysis. “Here the well-known wisdom applies that we tend to overestimate short-term changes but underestimate the long-term impact. Wholesale CBDC platforms research and piloting has been ongoing for quite a few years already, with projects led by the public and private sectors. Yet while the business case is clear enough, putting things into practice is more complicated.” Middle powers on the margins It is indeed the long-term possibility of increased cooperation across the Global South which deserves the most consideration, even beyond specific financial instruments. The orientations of individual countries at the margins of BRICS+ form the most interesting objects of analysis. Different middle powers each play unique roles in the global financial system. The same is also true on the allied side – which includes not only the US dollar, but the next three largest currencies (euro, pound, and yen), as well as a number of other smaller advanced economy currencies. Even if it seems that the dollar defies gravity, only appreciating when coming under pressure, the same may not be true of all currencies in this camp. This opens up the question of potential financial attacks on weaker members of the coalition. In general, financial warfare has been conceived as a bilateral affair, such as China attacking Taiwan’s financial system. A more realistic scenario probably involves multilateral cooperation, on both the offense and defense, with a strong geopolitical flavor. Right now, as BRICS continues to sort out its membership, its greatest advantage is its flexibility, but in the future, a more cohesive organization may be able to take more specific actions to directly affect financial markets. Although this is likely a more distant threat, it is not too soon for the US and aligned countries to start thinking about solidarity in the face of coercion. Meanwhile, further trends in the price of gold will also bear watching.