Brazil, Russia, India, China, and South Africa.
Russia is ready to develop a new global reserve currency alongside China and other BRICS nations, in a potential challenge to the dominance of the US dollar.
President Vladimir Putin signaled the new reserve currency would be based on a basket of currencies from the group’s members: Brazil, Russia, India, China, and South Africa.
BRICS is an acronym for five leading economies: Brazil, Russia, India, China, and South Africa.
The first four were initially grouped as “BRIC” in 2001 by Goldman Sachs economist Jim O’Neill,
But the effectiveness of the West’s sanctions against Russia has been a wake-up call for countries seeking to reduce their reliance on the US, while other regimes worry that they could be next if they cross Washington, Tomic said.
“A potential deal in yuan is a sign that the world is looking for some counterweight to the US dollar,” he said.
One reason Saudi Arabia is considering an oil deal in yuan is because it would create exposure to a currency other than the dollar, and affords the country a yuan-based hedge.
Another factor could be the Saudis don’t anticipate the dollar to be as stable moving forward, especially if the US increases its money supply in response to economic challenges, Tomic said.
Meanwhile, China has long pushed for the yuan to supplant the dollar, and the collapse of major financial institutions in Russia means chances are higher now than ever for a sea change, he said.
Plus, the international response to Russia’s invasion of Ukraine also looms
“An extreme view would be that it reduces China’s vulnerability to sanctions that the West may impose should China do something that the US and its allies oppose,” Tomic added.
But two things that must happen for China’s yuan to establish itself as a reserve currency. First, global faith in the dollar would have to wane. This could happen if the Federal Reserve fails to get inflation under control, or if it veers from its usual predictability, Tomic said.
Second, China would have to prove the long-term stability of the yuan to win the trust of other nations. But China devalues its currency occasionally to boost exports, and countries won’t want to hold a currency like that, he noted. So Beijing would have to commit to more responsible policy.
Still, China maintains global ambitions for the yuan, and Africa is the most likely place where it could displace the dollar, Tomic said. China plays an outsized role in African economies as the continent’s largest bilateral creditor and source of foreign investment.
And while President Biden was having his meeting with the kingdom’s de facto ruler Crown Prince Mohammed Bin Salman in Jeddah, BRICS International Forum president Purnima Anand reported on the same day that three more countries — which included Egypt and Turkey along with Saudi Arabia — could join the BRICS group “very soon”.
This followed earlier announcements that Iran and Argentina had formally applied for membership with Chinese support.
The accession of new countries was discussed by Russia, India and China at the 14th BRICS summit held (virtually) last month.
BRICS vs. G7
The acronym BRIC was coined by Goldman Sachs economist Jim O’Neill in 2001 to give an analytical lens to investors for a group of rapidly growing emerging markets (Brazil, Russia, India and China).
He believed that the BRICs would come to increasingly challenge the economic dominance of the developed economies of the G7.
The first formal summit of the group was held in 2009, with South Africa joining in 2010 to constitute BRICS.
The group accounts for 40% of the world’s population and just over a quarter of global GDP.
To put this in context, the G7 countries with a far smaller population base constitute just over 30% of global GDP on purchasing power parity.
The BRICS have been catapulted into a position of being the only constellation of forces that challenges the global economic dominance of the G7 developed countries bloc.
This might seem a far-fetched notion especially since the organization includes both China and India which have had simmering border tensions boiling over into active lethal engagements over the past several decades.
India is also a member of the Quad, along with US, Japan and Australia, motivated to contain Chinese influence in the Indo-Pacific.
And now both Iran and Saudi Arabia — not the most amicable of neighbours and embroiled in proxy wars in Yemen and elsewhere — are potential BRICS members.
China’s growing role in the Middle East of late has alarmed Washington.
This month alone, Beijing mediated a landmark agreement between archfoes Iran and Saudi Arabia that could help significantly ease Middle East tensions.
Saudi Arabia also significantly strengthened its energy ties with China by announcing on Monday a $3.6 billion deal to buy 10% of China’s Rongsheng Petrochemical, which would see it supply 480,000 barrels per day of crude oil to the company.
Analysts say that as the US’ rivalry with China and Russia intensifies in an increasingly polarized world, Saudi Arabia and other Middle Eastern nations are choosing to diversify their global partnerships.
But while states like Saudi Arabia may be getting closer to China, Beijing is far from becoming a US rival in the region, they say.
“The traditional monogamous relationship with the US is now over,” said Ali Shihabi, a Saudi analyst and writer.
“And we have gone into a more open relationship; strong with the US but equally strong with China, India, (the) UK, France and others.”
The Wall Street Journal reported recently that Saudi Arabia is in talks to sell oil to China and be paid in yuan, after trading crude exclusively in dollars for nearly 50 years. Both countries could benefit from a demotion of the dollar’s status on the world stage, according to Aleksandar Tomic, an economist, professor and associate dean at Boston College.
“While any deal would be symbolic, the Chinese are not alone in the search for a non-dollar reserve currency,” Tomic told Insider. “Other countries’ need for dollars exposes them to the US financial sector, and consequently gives the US political leverage.”
Some analysts have downplayed the chances of a yuan deal, pointing out that the Saudi riyal is pegged to the dollar, helping shield its economy from volatility.
And China already has considerable infrastructure in place in Africa, which isn’t as contested a market as Europe is, he explained.
But for China to supplant the dollar as a global reserve currency, its economic standing would have to rise while the US’s fell.
“If the US doesn’t do anything unpredictable, then other countries will continue to trust its currency,” Tomic said.
“Challenges to the dollar have come before, but none have taken hold because when things turn volatile, the US tends to be stable. So the dollar persists.”
President Biden’s visit to Saudi Arabia during his trip to the Middle East last week has little to show for it. Shortly after the Biden visit, the Kingdom made it clear that it would not act unilaterally outside of the OPEC+ group which includes Russia and allied smaller producers. Saudi Arabia and its OPEC allies would continue to value the cohesion of the group, the views of Russia and the needs of global market stability in its production decisions.
Biden’s trip was cast by Republican leaders as “begging for oil” from the Saudis amidst high gasoline prices, the worst inflation in four decades at home and abysmal popularity polls for the president.
That this happened while his administration wages a regulatory war on its own homegrown world-leading oil and gas industry is seen as particularly egregious. Following the optics of last week’s meeting,
one of President Biden’s critics found his attempt to “reset” relations with Saudi Arabia an “unequivocal display of a deeply weakened United States led by its exceedingly enfeebled president”.
These opinions might be dismissed as partisan politics but it is notable that news of Saudi Arabia’s interest in membership of the BRICS group came out in advance of President Biden’s visit.