While a new BRICS currency is not officially on the cards yet, the Global South should anticipate the possibility that the current five member countries, which include South Africa, and a few new potential members, will move ahead with the use of local currencies to reduce reliance on the US dollar in trading with each other.
IMPACT OF BRICS-LED TRADE on THE DOLLAR
“The possibility of a BRICS-led partial de-dollarisation in the global trade system could potentially impact the dollar’s dominance in global trade and finance – sparking a series of significant knock-on effects in the financial and currency markets,” warns Citadel Global Director Bianca Botes. Citadel Global specialises in foreign exchange, treasury solutions and advice, as well as cash management, risk management and hedging strategies.
Brazil’s President Luiz Inacio Lula da Silva sparked global interest in the possibility of a BRICS currency at the BRICS Summit in Johannesburg this August when he called for the BRICS nations to create a common currency for trade and investment between each other, as a means of reducing their vulnerability to dollar exchange rate fluctuations. Not quite as committal, Russian president, Vladimir Putin has raised the possibility of the trade bloc using their national currencies instead of the dollar to trade with one another. China has in turn mentioned its eagerness for “the reform of the international monetary system”, but South Africa and India have yet to officially endorse either a BRICS currency or a national currency trade regime within BRICS.
AN ALTERNATIVE BRICS-LED CURRENCY
Ethiopia, Iran, Saudi Arabia and the United Arab Emirates, who were invited to join BRICS at the summit last month, are expected to officially join the group in January 2024. Commentators doubt whether Argentina, which was also invited, will join, given its strained relationships with Iran, Russia, China and Brazil.
Botes believes the facilitation of easier trade among BRICS nations using their local currencies could potentially positively impact the volume of global trade. “By reducing trade barriers, promoting cooperation, and enhancing market access within the bloc, it can lead to increased trade amongst BRICS countries. This could contribute to an overall increase in global trade volume, as it opens up new markets and opportunities for businesses within the BRICS bloc. However, the extent of this impact would depend on the scale and success of the de-dollarisation efforts by the BRICS countries. It will not be an easy feat.”
POTENTIAL TRADE CHALLENGES BETWEEN MEMBERS
Challenges and drawbacks to facilitating easier trade within the BRICS bloc do however, exist. “Some challenges include differences in regulatory frameworks, non-tariff barriers, infrastructure gaps, and varying levels of economic development among member countries. Additionally, protectionist measures, geopolitical tensions, and competition for market access can also pose challenges to seamless trade within the bloc. Addressing these issues requires effective coordination and cooperation among the BRICS nations,” says Botes.
Botes adds that the inclusion of some of these countries to the BRICS bloc, in particular those on sanction lists and those with anti-west agendas could strain South Africa’s relationships with Western trade partners, and we should be careful not to alienate existing relationships. The aim should be to enhance trade not to merely shift trade ties from one partner to another.
“We should also be cognisant of what the perceived association with these countries could mean for the South African currency. Earlier this year we saw what perceived friendliness to a “hostile” country such as Russia, could do to our country, and that breach of western sanctions could have a secondary sanction effect on South Africa.” says Botes.
Botes concludes: “As countries seek to diversify their alliances and reduce reliance on traditional global institutions, regional groupings like BRICS can provide platforms for cooperation and collective decision-making that reflect the interests of their member countries. However, the extent of their influence and impact will depend on the cohesion, effectiveness, and collective capabilities of these alternative blocs.
Written by: Citadel Global Director Bianca Botes