BRICS expansion into Middle East marks new order in global economy

Midjourney; Kazinform
Midjourney; Kazinform

On January 1, 2024, the BRICS association officially expanded to include several more countries. What stands behind the BRICS and how the organization’s countries are trying to survive in the existing global financial system and more is in the latest piece of Kazinform News Agency.

Which countries joined the organization this year

The first official summit of BRIC was held in Yekaterinburg in June 2009, where participants discussed prospects for improving economic cooperation. Back then, it included Brazil, Russia, India, and China. In 2010, South Africa joined the group, renaming the organization to BRICS.

An important decision was to establish the new BRICS Development Bank in 2014 with a capital of $100 billion to overcome economic difficulties. BRICS finance ministers and central bank governors were tasked at the 15th summit in August 2023 in Johannesburg to consider the use of local currencies and payment infrastructure.

The organization expanded on January 1, 2024, adding Egypt, Iran, the United Arab Emirates and Ethiopia.

However, the increase in BRICS members was received ambiguously in the West. According to a survey by the Gallup International public opinion research institute, a negative attitude towards the expansion of the BRICS was expected to prevail in Western countries, with the highest level of negative assessments in Sweden (45%), Spain (30%) and the USA (30%).

Relations with West

Several BRICS countries - China, Russia, and Iran - have uneasy relations with the United States and are perceived as an anti-Western bloc. These countries have been under American sanctions for a long time. China was under embargo from 1949 to 1972, and in 1989, sanctions have been in effect since 2014.

Russia has been under sanctions since 2014; Iran—from 1979 to 1981, 1987. Sanctions were expanded in 1995, and new sanctions have been in effect since 2006.

After Iran and Russia disconnected from the international interbank payment system SWIFT in 2012 and 2022, countries began to look for currencies and payment systems alternative to the dollar. An interesting fact is that Russia uses the yuan not only in trade relations with the BRICS countries but also with Japan and other countries in Southeast Asia.

China launched its own Cross-Border Interbank Payment System (CIPS) in 2015, and by March 2023, more than 30 countries gradually switched to using the yuan in trade settlements with China.

Because of the difficulties of paying in US dollars due to sanctions, Iran began selling oil to China in yuan in 2012. In November 2022, China and the Russian Federation switched to payments in national currencies for energy supplies. Brazil and China reached an agreement on yuan trade in March 2023.

In May 2023, China completed its first oil and gas deal with the UAE in yuan. China and Saudi Arabia signed a currency swap agreement in November 2023 in the amount of 50 billion yuan (almost $7 billion) or 26 billion rials, which should strengthen financial cooperation between the two countries in national currencies.

In turn, Iran uses its SEPAM payment system, created in 2013, which was connected to the Russian SPFS (The System for Transfer of Financial Messages) system in 2023. It is an alternative to Western SWIFT. It is obvious that the use of alternative currencies and payment systems by Russia and Iran is a necessary measure to support their economies.

Another part of the BRICS countries—India, Brazil, South Africa, Egypt, the UAE, and Ethiopia—maintains good relations with the United States and does not regard BRICS as an anti-Western bloc.

However, examples of the removal of Iran and Russia from SWIFT and the freezing of their dollar and euro assets forced the leaders of developing countries to look for opportunities to reduce their risks from the dollar. In August 2023, the President of South Africa expressed concern that “global financial and payment systems are increasingly being used as tools of geopolitical struggle.”

Also, BRICS members are not happy with Western international financial institutions that do not solve the economic difficulties of emerging markets. The President of Brazil believes that the International Monetary Fund and the World Bank encourage inequality among countries, and unlike them, BRICS is fighting for a fair world order. In 2022, the IMF provided loans worth $160 billion to EU countries while only $34 billion to African countries. In this regard, South Africa and Egypt are interested in receiving support from the BRICS New Development Bank.

One of the reasons for the use of BRICS national currencies is the acute shortage of dollars in individual economies of developing countries. In 2023, dollar shortages in Argentina, Ethiopia and Egypt were so severe that the value on the shadow market was almost twice the official exchange rate. As a result of the lack of dollars in these countries, the ability to import food and energy is limited, causing prices to rise. In October 2023, the People's Bank of China (PBC) provided a RMB loan to the Argentine government to partially repay its debt to the IMF. In order to protect the Egyptian economy and reduce the dollar shortage, India intends to increase payments in rupees and the UAE - in dirhams.

Another factor causing dollar disappointment is the weakening American economy. Inflation in the United States demonstrates the depreciation of the American currency. The US Federal Reserve's high-interest rates of 5.25% and 5.5% expose emerging markets to serious risk of depreciation of their currencies and increased inflation. In October 2023, Argentina's inflation rate was 143%, Egypt's was 36%, and Ethiopia's was 29%. Also alarming is the huge US national debt, which currently stands at more than $34.2 trillion and is set to rise to $115 trillion over the next 30 years.

These factors contribute to the consideration of another 17 countries, including Algeria, Bangladesh, Bahrain, Belarus, Bolivia, Venezuela, Vietnam, Cuba, Honduras, Indonesia, Kazakhstan, Kuwait, Morocco, Nigeria, Palestine, Senegal, and Thailand, for joining BRICS.

Along with other BRICS members, India is also taking measures to strengthen its own national currency, which does not prevent it from maintaining good relations with Western countries. In 2023, the Central Bank of India allowed commercial banks from over 20 countries to open special rupee accounts with Indian banks. The rupee is actively used in transactions with Iran, whose exports of goods to India increased by 60% between 2021 and 2022. In July 2023, India signed a rupee trade agreement with the UAE and completed its first deal for 1 million barrels of oil in August of that year. Despite efforts to expand the use of the rupee, the volatility of the Indian currency is a barrier to its wider use. Another problem with the rupee is its convertibility, which did not allow India and Russia to reach an agreement in 2023 on the use of the Indian currency in trade, replacing it with the UAE dirham.

According to Indian political analyst Niranjan Marjani, India is pursuing an independent and multi-vector policy, where Western countries remain preferred partners at the international level.

India's strengthening relations with the United States, Japan, and Australia have led to the formation of the Quadrilateral Security Dialogue (QUAD) to address strategic and economic challenges in the Indo-Pacific region. India is also developing relations with Middle East countries.

Zhang Yun, an associate Professor at National Niigata University in Japan, notes that the expansion of BRICS does not signify the creation of an anti-American alliance or the disruption of the existing global governance structure. Instead, BRICS seeks reform within the international system.

As President Xi Jinping stressed in his speech at the summit, international rules should be written and preserved by all countries in accordance with the purpose and principles of the UN Charter, and BRICS countries should practice real multilateralism. The foreign minister of South Africa said it’s wrong to take BRICS expansion as an anti-West move.

“Moreover, five of the six new members are situated in the Middle East and North Africa region. Particularly significant are the memberships of Saudi Arabia and the UAE, traditional allies of the United States. Their inclusion in BRICS does not imply abandonment of their traditional alliances but rather suggests a shift towards more balanced positions and a strategic distancing from the US,” said Zhang Yun.

Günther Maihold, a nonresident senior fellow at the German Institute for International and Security Affairs, however, believes that there is a risk of a threat to Western countries, although not significant.

He suggests that the BRICS+ countries are capitalizing on their geopolitical opportunity by advocating for a united stance among emerging and developing nations. While Russia aims to assert its global standing, Maihold notes that anti-Western sentiments are not prevalent among BRICS+ states. Instead, there is a growing demand from the Global South for a new model of multilateral cooperation that prioritizes inclusivity and openness. This trend can pose a challenge for Western nations amid a period of uncertainty.

Will the BRICS countries have a single currency?

The BRICS countries do not plan to create a single currency, as stated in 2023 by Indian Foreign Minister Subrahmanyam Jaishankar and South African Ambassador to BRICS Anil Sooklal, as the main focus is on expanding mutual trade in national currencies.

According to Robert Greene, a fellow at the Carnegie Endowment for International Technology and International Affairs, BRICS members face significant restrictions on the widespread use of their national currencies in trade with third countries and costly exchange rates between BRICS currencies and the dollar.

Another factor limiting the use of local BRICS currencies is that most global commodity trade is valued and settled in dollars. This reinforces the dollar's importance in commodity-based economies such as Brazil, Ethiopia, Russia, Saudi Arabia, and the UAE.

The frequent use of the dollar in trade reinforces its use in finance. These dynamics contribute to the global dominance of the dollar as the standard for deferred payments. Thus, half of the external debt of China, India and Ethiopia is denominated in dollars. As a result, in 2022, the dollar was used in almost 90% of all international foreign exchange transactions. In many emerging markets, the dollar continues to be the most stable and common means of payment in cross-border trade.

Kazakhstan can join the international association

Wesley Hill, head of the International Program Manager for the Energy, Growth, and Security Program at the International Tax and Investment Center, notes that the new BRICS members admitted at the beginning of 2024 will not help strengthen the organization but rather demonstrate the redundancy of their members.

“BRICS has not achieved any unique achievements and a number of other international organizations, such as the Shanghai Cooperation Organization or the Eurasian Economic Union, are more effective. Another disadvantage is the lack of significant permanent institutions, budget or political influence of this organization, the expert expressed his opinion,” he said.

Joining BRICS is fully consistent with Kazakhstan’s multi-vector foreign policy.

“Kazakhstan strives to strengthen multifaceted cooperation with the BRICS countries and the African Union. Kazakhstan would like to contribute to the development of the potential of BRICS as a participating state. “I firmly believe that we need to increase collective efforts aimed at ensuring global security, sustainable development and inclusiveness,” said President of Kazakhstan Kassym-Jomart Tokayev at the BRICS summit.

Wilder Alejandro Sánchez, head of Second Floor Strategies, a consulting firm in Washington, D.C., and Radomir Romanov, the editor and publisher of a current affairs program for newsography.com website, believe that Kazakhstan's potential membership in BRICS could significantly benefit the alliance. They emphasize Kazakhstan's valuable contributions, including its energy industries, substantial resources, youthful population, commitment to carbon neutrality by 2060, and generally good international image. Additionally, Kazakhstan's strategic location offers access to the Middle Corridor, enhancing its appeal to BRICS.

They also highlight Kazakhstan's friendly relations with BRICS nations, particularly China, India, and Russia. They believe that by deepening engagement through various means such as trade, cultural exchange, people-to-people ties, and investment, BRICS countries can strengthen their relations with Kazakhstan further.

The BRICS countries are seeking to create a multipolar financial world, as the dollar and euro are increasingly seen as currencies that are subject to geopolitical risks associated with ever-expanding Western sanctions. The BRICS focus on using non-dollar currencies is directly related to the economic problems of the BRICS countries, as well as the dollar shortage because of the financial policies of Western countries, including sanctions.

BRICS is not focused on pursuing a policy of de-dollarization or creating an anti-Western bloc. The organization is currently seeking to increase the share of mutual trade in the currencies of member countries to protect their economies, which will take a very long time. But solving even this problem will require the parallel development of financial markets in the participating countries, the removal of restrictions on currency conversion and the creation of debt markets. At the same time, the American dollar continues to play a dominant role in international trade, including between BRICS members, due to the limited possibilities of using alternative currencies.

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