The Brave New World of BRICS?

Article by Mark Horner

To sit in the West and think that there is a credible alternative to the West’s political, economic and cultural global dominance is to sit and think a radical thought. Yet, recent geopolitical events are suggesting that BRICS might be taking a slice of the world, making it less Western and forging its own ‘brave new world’.

BRICS, apart from being an acronym for Brazil, Russia, India, China and South Africa is an association or club founded in 2006 as BRIC with South Africa joining in 2010 and suffixing an “S” to the acronym. The club is grounded on mutuality and peppered with the pioneering spirit which only a group of emerging markets can muster. It is framed by three pillars: (i) politics and security, (ii) economics and finance and (iii) culture and people-to-people exchange.

The Indian government describes BRICS as “an important grouping bringing together the major emerging economies from the world, comprising 41% of the world[‘s] population, having 24% of the world[‘s] GDP and over 16% share [of] world trade”. Clearly, we are talking about a large slice of the world!

Let’s give BRICS some context by comparing it with the West’s ‘A-team’, the US and EU. The US has 4% (BRICS, 41%) of the world’s population, 24% (BRICS, 24%) of world GDP and 20% (BRICS, 16%) of world trade. While the EU has 6% (BRICS, 41%) of the world’s population, 18% (BRICS, 24%) of world GDP and 16% (BRICS, 16%) of world trade. And yet, as we shall soon see, it is the nature of BRICS’ GDP and natural resources that will in the future further enhance BRICS’ power to split the world order in to East and West.

A bipolar world order
The crisis in Ukraine is a case in point and on one level BRICS is using the crisis to send the West a signal that BRICS’ members are willing to put forward alternative views to those of the West and back them up, for example, by mitigating the West’s strategy to punish Russia for its incursion in to Ukraine.

With respect to Ukraine there is a material difference in views. On the one hand, the West couches Russia’s incursion in terms of Russia’s first step to invading Western Europe. Whilst on the other hand, senior members of BRICS (China and India) support President Putin couching his so-called ‘special military operation’ in Ukraine in terms of a reaction stemming from Germany and France’s failure as guarantors to enforce the Minsk Agreement coupled with NATO’s strategy to move closer to the Russian border. Obviously, those contrasting views polarize or split the world, geopolitically.

The power of BRICS
Clearly, with (i) a population and commensurately a labour-force about 10 times that of the US and EU combined, (ii) 24% of world GDP, (iii) 16% of world trade, (iv) a critical mass, if not a majority, of future-facing commodities (see below) and (v) relatively low debt, BRICS has the economic-weapons to mitigate most, if not all, of the adverse effects of Western sanctions, now, and more so in the future as we transition to net-zero.

With respect to the Ukraine crisis, the West, thus far, has imposed a tsunami of nine rounds of sanctions on Russia including weaponizing SWIFT, the international financial transfer system, by disconnecting Russian banks from it, seeking to trash Russia’s main export income (gas and oil) and diminishing the value of Russia’s currency, the ruble (RUB). The blows from the West’s sanctions have hurt Russia. However, as the tsunami settles, the blows are turning out not to be fatal but, seemingly, merely a short-term flesh wound.

The aforementioned sanctions have been materially mitigated by Russia promoting the use of its own financial payment system (SPFS) which was developed by the Central Bank of Russia in 2014 in response to the US threat to disconnect Russian banks from SWIFT. Russia is in the process of transitioning sanctioned exports from the West to BRICS members (China and India), Middle East markets (Saudi Arabia and UAE) and African states. Also, Russia aggressively and successfully supported the RUB while engineering inflation down from its untenable peak.

Elvira Nabiullina, chair of the Central Bank of Russia and formerly voted the world’s best central banker (2015), has performed a masterclass showing how to use monetary policy to manage an economic crisis triggered by the West. In reply, Nabiullina aggressively hiked the central bank cash rate from 8% to 20% and pegged the RUB to a gold standard, and thereby freed the RUB from comparison with the US dollar (USD). Nabiullina also supported the policy which mandates Russia’s gas is purchased in RUB or foreign currency payments are exchanged for RUB so as to enhance the value of the RUB.

The data quantifies Nabiullina’s success. Prior to the economic crisis, the USD bought about 75 RUB while at the RUB’s weakest point during the crisis the USD bought about 140 RUB or about double the amount. Currently, Nabiullina’s mastery has elevated the RUB so that the USD now buys only about 60 RUB and which is less than the pre-crisis amount. With the RUB saved, the cash rate plummeted from 20% (March, 2022) to 7.5% (November, 2022) and which is less than the pre-crisis rate of 8% (January/February, 2022).

And Nabiullina’s monetary policy drove down unsustainably high inflation. Pre-crisis, the inflation rate was 9% and during the crisis it peaked at 18% (April, 2022). Seven months later, inflation is down to 12%, a fall of 6%. Relatively, Russia’s inflation rate is still much higher than US inflation (7.1%) but only marginally higher than the EuroArea (10%). Let’s give context to Nabiullina’s success: the US Federal Reserve’s monetary policy, for example, is also targeting inflation and has over the seven months only managed to reduce inflation by 1.2% compared with Nabiullina’s 6% reduction.

As to fiscal policy, throughout the conflict the Russian government’s Debt/GDP ratio has remained relatively constant at a very low 18% and such a scenario, rightly or wrongly, begs the question as to whether there is off balance-sheet debt. By comparison, the government Debt/GDP ratio in the US is perilously high at 137% and troublesome at 96% in the EuroArea.

BRICS and commodities
The following is a brief overview quantifying the relative economic power of each BRICS member in terms of GDP and natural resources or commodities, etc. Please note that the selection of commodities, primarily, has a future-facing and net-zero bias.

(a) Brazil has the world’s 13th largest GDP (US1.6tn) and the seventh largest reserves of natural resources (US$22tn). Its main reserves include bauxite (used in aluminum), platinum (used in fuel cells, solar energy and electronics, etc), copper (used in EVs, power generation and electronics, etc), gold (used in electronics, computers and storage of value, etc), iron-ore (used in steel), tin (used in solder, batteries and tin-copper alloys, etc), oil, uranium (used in nuclear energy, etc) and timber. Brazil is the world’s second largest exporter of soybeans (used in green energy and food, etc), second largest exporter of iron-ore and eight largest exporter of oil.

(b) Russia has the world’s 12th largest GDP (US$1.8tn), the world’s largest reserves of natural resources (US$75tn) and which is about 70% more than second place, the US. Russia is the third largest producer of oil, producing about 10% of world production. It is the world’s second largest producer of natural gas (a transition fuel) and has the world’s third largest gold reserves.

Also, Russia is a major producer of uranium and the world’s largest enricher of uranium enriching about 40% of world requirements, including 28% of US and 26% of EU requirements. Russia has the 4th largest copper reserves behind South America and Australia. It supplies 10% of the world’s nickel (used in batteries and stainless steel, etc), 12% of platinum and it is the world’s fourth largest exporter of tungsten (used in aerospace, turbine blades and electronics, etc). It is the fifth largest producer of silver (used in electrical contacts, batteries and solder). While Russia is also the world’s largest exporter of wheat, barley and fertilizer, and second largest producer of ammonia (used in fertilizer and cracked to make hydrogen (an energy source, etc) and nitrogen (used in fertilizer, etc)).

(c) India has the seventh largest GDP (US$3.2tn) and the world’s second largest population (1.38bn), and commensurately the second largest labour-force (529mn). Whilst not on the top-ten list of the largest reserves of natural resources, nevertheless, India is the world’s largest producer and second largest importer of coal. It is the largest producer of thorium (a source of nuclear energy). India is the world’s second largest producer of aluminum (used in EVs and computer technology, etc), second largest exporter of active pharmaceutical products (APIs) and fourth largest producer of ammonia. Other major exports include oil, automobile parts, machinery, biochemicals and technology.

(d) China has the world’s second largest GDP (US$18tn), second to the US (US$23tn), and the sixth largest reserves of natural resources (US$23tn). It has the world’s largest population (1.41bn) and commensurately the world’s largest labour-force (780mn) and which is about five times larger than the US labour-force (160mn). China is a manufacturing superpower: it is the second largest importer of commodities or raw materials and the world’s largest exporter of goods. Among it exports, China is the world’s largest exporter of broadcasting equipment, computers, integrated circuits and telephony. It is the world’s largest steel producer (2bn metric tonnes, pa) or about 50% of world steel production or about nine times more than the US and EU combined (230mn metric tonnes, pa).

And China is also the world’s largest producer of batteries (about 56% of global production of EV batteries and 34% of lithium batteries) and has about 90% of the world’s commercial reserves of rare earth minerals (used in magnets, motors, electronics, computer technology and batteries, etc). China is the world’s second largest producer of silver, second to Mexico. It is not only the largest exporter of solar panels but also the largest producer of solar power (307 GW), about three times that of its nearest rival, the US (95 GW). China has the 6th largest reserves of lithium (used in batteries and medication, etc), trailing South America, US and Australia. While China is the largest producer of ammonia (40mn metric tonnes, pa), four times more than its nearest rival, Russia. And it is the largest importer of coal, oil, soybeans, iron-ore, copper and the world’s largest exporter of APIs.

A fascinating observation that has implications for China’s ability to flex its economic power to support its geopolitical views is that whilst China is the world’s largest exporter it is not overly reliant on any one market or customer. For example, the US is China’s largest export customer (US$ 577bn, pa), yet China’s exports to the US represent only about 16% of China’s total exports (US$3.4tn) and about 3% of China’s GDP. While China’s government debt/GDP ratio (71.50%) is about half that of the US (137%) and about three-quarters of the EuroArea (96%).

(e) South Africa has the world’s 33rd largest GDP (US$420bn). It is the world’s largest producer of manganese (used in steel, batteries, fertilizer and glass, etc), the second largest producer of palladium and 12th largest producer of gold.

A BRICS reserve currency?
There are rumors that BRICS is on the cusp of implementing its own reserve currency. A reserve currency is a special purpose currency which is used for international transactions and is not used for domestic purposes. For example, the yuan (CNY) is China’s reserve currency whilst the renminbi (RMB) is its domestic currency, The BRICS reserve currency might likely be backed by a gold standard and the standard in turn backed by BRICS’s large gold holdings and reserves. This has important geopolitical implications for the West because a BRICS reserve currency would act as a de-dollarisation play by introducing a credible alternative to the USD denominated petro-dollar, pricing commodities in USD and trading in USD.

And further backing for BRICS’ reserve currency and boost to BRICS, itself, comes from the rumor that Saudi Arabia, the world’s second largest producer of oil, is contemplating applying for membership to BRICS. If so, then in effect at least 30% of the world’s oil might no longer be priced in USD. From that starting point it is a short step to de-dollarise a significant percentage of the world’s future-facing commodities and grains.

Final remarks
With a critical mass, if not a majority, of future-facing commodities, the largest labour-force in the world and low debt there is little doubt that BRICS will grow, organically, as the world transitions to net-zero. And if the rumors turn out to be true, then BRICS will de-dollarise and enter a membership growth phase by evolving in to BRICS+.

A universal truism is that economic strength induces the growth of political and cultural strength. In the case of BRICS that truism is encapsulated by its pillars and which as the above analysis shows are set on solid ground. And so an open-question for the West’s leadership group is: will the West’s long-term strategy be to accept a bi-polar world order or confront it?

Evidence points to Western leaders, at least in the short-term, confronting a bi-polar world order. For example, the West’s economic sanctions on Russia, US tariffs on China’s steel and aluminum exports and US policy to deny China the sale of high-end semi-conductors and equipment to make high-end semi-conductors.

An unintended consequence flowing from the West’s commitment to the ‘brave new world’ of net-zero is that the West will increasingly need to access BRICS’s rich supply-chain of future-facing commodities, absent alternatives or the West lowering its commitment to net-zero. And that need, in theory, incentivizes a long-term strategy to engage rather than confront what might become the ‘brave new world’ of BRICS.

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