BRICS Expansion: Global Focus

Publish Date: 01 NOV 2023
Security & Geopolitical Analyst: TW
Contributing/Reviewing Authors: DS

Introduction

In August 2023, the BRICS countries held their fifteenth summit, and together they took a radical step in expanding the organization. BRICS stands for Brazil, Russia, India, China, and South Africa, and the organization was started as a counterweight to the G7 dominated by the West. At the fifteenth summit, BRICS formally accepted Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates into the organization, and their membership will start on January 1, 2024. With these additions, BRICS will constitute approximately 29% of global GDP. Corporations, investors, and others will all be impacted over the coming decade by this global realignment and rebalancing of the world order. Although BRICS has several geopolitical implications, especially considering the attempt to balance against Western powers, the primary implications of the expansion concern the global markets of energy and currency. Even though there are highly likely to be negative impacts, there will also be opportunities during this realignment. Therefore, this report will explore the BRICS expansion and its implications on economics, security, and technology.

World Order: A New Multipolarity

A driving force for expansion was Western sanctions on Russia following the illegal invasion of Ukraine in 2022. The US had Russia removed from SWIFT, probably the most devastating sanction that can take place on a country, and basically limited the amount of revenue derived from Russia's energy exports. Another catalyst for the expansion is member states’ focus on multipolarity and multilateralism, such as India and Brazil. Both are rising powers who have advocated for greater multipolarity in the international system to accommodate their foreign policy interests. While India and Brazil might be motivated by multipolarity, China is seeking a tool for global hegemony. China is clearly seeking to advance its hegemonic interests by combining the Belt and Road Initiative and BRICS in the hopes of challenging Western power. This is why Ethiopia was included in the expansion. Ethiopia is one of the largest beneficiaries of China’s BRI, and it will give China greater ability to control the geo-strategic area around the Horn of Africa.

Despite attempts to create an alternative to the Western institutions, BRICS has not itself been institutionalized, which will limit its effectiveness over the medium term. At best it is a forum for those who want an alternative rather than a competitor to organizations like G7, IMF, and World Bank. The only institution BRICS has successfully created is the New Development Bank which has only approved loans equal to about 4.5% to that of the World Bank and IMF combined. Egypt, Saudi Arabia, and the UAE remain close security partners of the United States, and those security arrangements are highly unlikely to be abandoned over the medium term. China will have to demonstrate its ability to support those countries before they would move away from the US entirely, but its power projection capabilities are extremely limited presently. India also remains problematic for rebalancing as the country is part of the Quadrilateral Security Dialogue with Australia, Japan, and the US, and India is part of the I2U2 forum with Israel (Now impacted), the UAE, and the US. BRICS expansion is an attempt to rebalance the world order, but this is only a first step. However, there are significant implications over the medium-to-long term of this rebalancing that will impact many US and European corporations. 

Economic Implications

One area of discussion at the summit was creating a “BRICS currency” as an alternative to the US dollar for purposes of trade. Though Brazil is the only real supporter of such a currency, there is significant debate about how to trade in currencies other than the dollar. For example, Russia, China, and Brazil have attempted to use gold as an alternative reserve currency to the US dollar. Other attempts include Saudi Arabia discussing with China of using the renminbi for payments, and in August 2023, India made its first payment to the UAE for oil using rupees. Importantly, Russia will take over the BRICS presidency in 2024 and is highly likely to focus on currency issues because of sanctions.

What BRICS+ is focused on is de-dollarization, but that is extremely unlikely to happen. De-dollarization of global trade has slowly been occurring over the past few decades, and in 2022 the dollar’s share of foreign exchange reserves fell to a 20-year low of 58%. It is important to note that thirty years ago the dollar was only 50% of FX reserves, and the US dollar remains part of almost 90% of all trade exchanges. Furthermore, the currencies of Saudi Arabia and UAE are pegged to the dollar. However, as the US loses its relative economic position, the dollar will inevitably become a smaller part of global trade.

There are too many problems to overcome in the next decade for de-dollarization to occur even in the medium term, though.

1. One of the problems with using local currencies instead of the dollar is payment imbalances. Russia now has billions of rupees that it cannot use because of a trade surplus.

2. Countries like China are entirely unwilling to relinquish the political control that comes with a floating currency necessary to act as a reserve. China has capital account restrictions that it will have to eliminate (unlikely), and the CCP will need to accept an inability to manipulate the renminbi for domestic political control (e.g., keeping the currency weak to help with exports).

3. The renminbi relies on the global liquidity market based on the dollar. Without the dollar, the weak consumption and high savings rates in China would prevent the renminbi from possibly being an alternative. No other financial market besides the US has the depth and liquidity to become the alternative.

4. Approximately 75% of the shift from the US dollar as a reserve currency has been towards currencies of smaller but highly stable countries, such as the Australian and Canadian dollars, Swedish krona, and South Korean won.

5. Any common currency would first need political unity between all BRICS countries, but as discussed below that is extremely unlikely.

Energy is the other major market that will be impacted by the expansion and is related to the currency issue. The choice of countries was not accidental. India and China have significantly increased imports of Russian oil since the sanctions, and they have paid in currencies other than the dollar (again, attempting to de-dollarize the global economy). The expanded BRICS will include 42% of the world’s known oil supply, which means that choices on currency and imports will have global impacts. Argentina is also important for energy because of its lithium reserves, and the country is expected to supply 16% of the world’s lithium by 2030. Adding Argentina to BRICS means that three of the five largest lithium producers (along with Brazil and China) will be in the group. Analysts will need to focus on tracking energy markets over the next three years to understand the long-term implications of the expansion. Indicators of negative impacts on the global market will include production caps/reduction, shifting imports/exports to Asia over the West, and mineral agreements between the bloc.

Technological Implications

Currency and energy markets along with geopolitical tensions are the largest areas of likely impact by the BRICS expansion, but there is also a long-term implication for technological development that will have negative impacts over the next decade. The expansion is likely to exacerbate the balkanization of technology when it comes to the competition over manufacturing and use of new initiatives, like semiconductors and green tech. According to CSIS, this BRICS expansion could potentially have negative impacts on technological development because of export restrictions. The new BRICS will have 72% of the world’s rare earths, such as 75% of the world’s manganese, 50% of the world’s graphite, 28% of the world’s nickel, and 10% of the world’s copper. This matters because of export restrictions by countries with minerals. OECD data shows that in 2021, both China and India had more than 30 export restrictions each on minerals. This will be combined with new restrictions in African and South American countries, which will limit US and European corporations from competing on those continents to extract resources.

Security Implications

BRICS expansion will have security concerns as the bloc essentially becomes a de facto anti-Western grouping even though India has specifically opposed this conceptualization. The addition of Iran, though, precludes other interpretations, with recent events in Israel likely having an impact on Iran's stated, and current role in the BRICS lineup. Essentially, the major issue will be a rebalancing of the world order away from Western powers, and that will limit both the US and Europe’s ability to secure their interests in South America, Africa, and the Middle East. For example, China is highly likely to expand its security impacts in the Gulf through two areas. First, China will increase defense technology transfers to encourage Gulf countries to use their weaponry rather than Western versions. The UAE and China will hold their first joint fighter drill together, and that is only the beginning. Second, Saudi Arabia is likely to join the Shanghai Cooperation Organization in the medium term, which will boost China’s security influence in Central Asia further.

A medium-to-long-term implication could be further reconciliation between Saudi Arabia and Iran. As their tepid reconciliation is incredibly recent, there is not sufficient data to speculate either way, but this is one possibility, being tested currently. If reconciliation is further entrenched, that will likely increase Iran’s use of force throughout the region because it will have to expend less effort to counter Saudi Arabia. Iran will likely begin moving resources towards Iraq, Syria, Lebanon, and Israel. The country will also likely increase its cyber efforts against the West and Israel.

One of the major geopolitical issues facing the bloc is that they have no coherent foreign policy objectives. In fact, with the addition of the new members, there will be multiple competing objectives, e.g., China vs. India, Brazil vs. Argentina, Egypt vs. Ethiopia, and Saudi Arabia vs. Iran. As C. Raja Mohan, a senior fellow at the Asia Society Policy Institute, put the issue, “These and other fault lines will make it much harder to turn the combined economic weight of the BRICS states into an influential political force in global affairs.” Although BRICS might want to create a geopolitical rebalancing, that will be a long-term project because of such internal tensions. The history of international institutions from the Sumerian henotheistic city-states to the Concert of Europe shows that expanding such institutions increasingly makes them less effective as disagreements arise without a punishing mechanism. BRICS is highly unlikely to significantly alter the post-World War II international order within the next five years.

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