Will BRICS Replace the U.S. Dollar?

/

On Sunday November 30th, President-elect Donald Trump said on his social media platform that he was going to slap a 100% tariff on any of the BRICS countries that tried to move away from the U.S. dollar as the World’s standard currency. But what is BRICS, and what chance do they have of creating a rival currency to the dollar? Let’s look deeper into that group, and whether they’d be able to overtake the mighty dollar.

BRICS is an acronym for a group of five countries: Brazil, Russia, India, China and South Africa. Together, these five countries make up more than 40% of the World’s population, and more than 25% of the World’s economy. At first, the term BRIC was just an idea formulated in 2001 by Jim O’Neill, the chief economist at Goldman Sachs, in a study titled "Building Better Global Economic BRICs." It became a useful term to categorize the combined economic, financial, business and media influence of the four major countries of Brazil, Russia, China and India. In 2006, the concept began to be incorporated into the foreign policy of those four nations, and in 2011, on the occasion of the Third Summit, South Africa was installed as its fifth member, which completed the acronym as the current BRICS.

In the past few years, at the urging of both Russia and China, the BRICS countries have pushed to have a greater influence in world markets. Many other nations have expressed interest in joining the current group, including Iran, Saudi Arabia, Argentina, Ethiopia and Bolivia, among others. But there are problems within the founding five nations that need to be ironed out before any new members could be considered.

What are those problems? Well, first off, they’re significant. At the top of the list are the struggling economies of both Russia and China. 

Russia’s economy, after dealing with the sanctions resulting from its invasion of Ukraine, combined with the loss of upwards of 750,000 young men in the war and the emigration of more than a million young people after conscription was introduced, has brought on a labor shortage that has the economy teetering on the brink of collapse. The average Russian today is dealing with a staggering one-two punch of 19% inflation and a 21% prime lending rate, one of the two highest pairings in the world, after the near-freefall economies of Argentina and Turkey. 

There are reports that prices are so high on butter in Russia that they've had to place individual packages in plastic anti-theft boxes. Butter’s price has soared almost 26% in the past year, with prices on other staples like potatoes increasing even faster. And it gets worse. The value of the ruble has fallen so low that the Russian Central bank decided to stop purchasing foreign currency on the internal market until 2025, in an attempt to support the ruble. This move followed a slide in the ruble’s value of 113 to the U.S. dollar, down nearly a quarter since August of this year. 

As bad as Russia’s economy is, China’s is not doing much better. Where Russia can’t find enough workers for its jobs, causing higher wages and driving inflation skyward, China can’t find enough jobs for its workforce. Unemployment reached a sixth-month high in August at 5.3%, while the urban youth unemployment numbers rose to a staggering 17.1%, an increase of thirty percent since June’s 13% figure. 

But China’s economic woes don’t end there. They’re facing a massive problem in their real estate market, which has been propped up for years by investment from the Chinese Central Bank, but which is now either unwilling or unable to staunch the flow of massive real estate failures. Led by the catastrophic demise of the massive Evergrande corporation, China saw an evaporation of more than $300 billion in value in that company alone, much of it invested by the Chinese government, along with the life's savings of millions of average Chinese workers. 

Evergrande, however, was only the tip of the iceberg, as more large real estate corporations began to tumble, causing Goldman Sachs to ask publicly, “Has China’s Property Market Reached the Bottom?” The problem with that question is that no, the Chinese real estate market hasn't hit bottom yet, and seems to be sinking even further. This has driven down many other sectors of China’s economy, as there are more vacant homes in China than could be filled by the country’s 1.4 billion people. 

The problem is that China’s construction and housing markets are a staple of its economy. The real estate sector alone until 2021 accounted for 25 percent of China’s GDP, 20 percent of fiscal revenue, stored 70 percent of household wealth, and took in 25 percent of bank loans. As these sectors stagnate or even vanish almost overnight, as with Evergrande, so too does China’s once-vaunted economy begin to shrink. These reductions lead to the unemployment numbers mentioned above, and China so far has no answer to this growing problem.

Meanwhile, both China and Russia have upside down population pyramids, meaning a larger number of older pensioners being supported by a smaller number of younger wage-earners. In China, the economy is seeing an unprecedented era of ‘growing old before getting rich,’ while its falling birthrate and pension crisis, combined with its ongoing housing crisis, has many older workers and retirees clamoring for the government to rescue them from ever worsening conditions. 

If neither China nor Russia can be the economic leader of BRICS, who will step forward? Not Brazil, nor South Africa. Brazil’s economy is too small, and is based on the extraction of raw materials, not the strength of its economic production. And South Africa is itself dealing with numerous problems, from soaring crime rates to its extreme level of economic inequality. 

That leaves only one country: India. And in our next article, we’ll explore why India will not rise to the leadership that BRICS so desperately needs.