In today’s Finshots, we dive into the proposed expansion of the BRICS bloc to include six more countries — Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE.

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The Story

In 2001, Jim O’Neill, an economist at Goldman Sachs conjured up a new catchphrase that took the world by storm.

Okay, that’s a bit of a stretch but the acronym certainly created a ripple. It was called BRIC.

See, the world was reeling from the terrorist attacks in the US and needed something positive to cling to. And investors were on the lookout for countries that were growing. That’s when O’Neill put his thinking cap on, ran through his financial models, and said, “Look, I might just have an answer. I think these four countries — Brazil, Russia, India, and China (BRIC) — will deliver stupendous growth over the next few decades.” It was meant to be an investment thesis. Tell people that these regions could provide a juicy money-making opportunity.

Or at least, that’s what everyone assumed the paper was about.

Either way, the acronym evolved from that utility. Because 5 years after the paper, Vladimir Putin called on the rest of these BRIC countries. He told them they needed to band together. That they needed to be allies and create a new world order. And thus, the BRIC bloc was born — you know, the kind where countries sit together at a table to see how they can pursue common goals of trade and investment.

In 2010, they invited South Africa to the table too. The group expanded because they wanted representation from the African continent. BRIC became BRICS. Just imagine — 40% of the world’s population and around 25% of the world’s economic output under one roof.

And that made sense, right?

But here is the thing. It doesn’t seem like the BRICS has had much impact. They kept up with tradition and met each year. They talked about their dreams and ambitions. But nothing practical came out of it. They didn’t double down on trade with each other either. They couldn’t even cooperate and agree on stuff when the pandemic ravaged the world. And maybe that’s partly to do with 3 things.

  1. The group didn’t form organically. It was birthed by a paper that simply spoke about economic prospects. That meant the group didn’t have other shared interests. It’s quite apparent when you think about the fact that just a year into the bloc, they immediately called an 'outsider' — South Africa.
  2. The growth amongst the countries was haphazard. See, in the past decade, only China and India have really grown. The others are tottering along — for instance, China’s output of $19 trillion this year will be 50 times that of South Africa’s. This means they have more clout in how to conduct affairs too. And when that happens, interests don’t often align.
  3. Let’s just say that if you put India and China in the same room, they’re not going to agree on much either.

At the end of the day, it seems like there’s only one thing of note that has emerged from BRICS — a bank called the New Development Bank.

Think of this as an alternative to the World Bank or the International Monetary Fund which people complain is often dictated by Western interests. When these folks grant aid and loans, it comes with too many strings attached. And that might suffocate the growth prospects of the country. The NDB was meant to solve the problem. They wouldn’t have any T&C for a loan. And as of the end of 2021, the NDB had approved 82 projects worth $30 billion.

But people say that that money is just a drop in the bucket. And maybe that’s why Jim O’Neill (yup, the same guy from 2001) boldly claimed [BRICS has] never achieved anything since they first started meeting.”

So, you have to ask — why will adding more members make the BRICS more successful now? How will it be better?

Well, one argument is that a lot has changed in the past couple of decades. And now, there’s a common enemy for everyone to unite against. We’re talking about the US dollar.

See, back in May we wrote about the concept of de-dollarization. Countries were getting annoyed at the dollar's dominance. They were uneasy about how the US was flexing its powers to cut off access to foreign exchange reserves. And a trust deficit began to build. Countries wanted alternatives.

Also, let’s not forget that Russia is a pariah now. No one wants to deal with it. Then there’s China which is in a mess of its own. It’s slowly losing the trust of global manufacturers who are looking to set up shop elsewhere. So the BRICS expansion is simply their way of getting more non-Western countries on their side. The geopolitical role seems to be clearly anti-West.

And for starters, the NDB wants to start dealing in non-dollar currencies. They expect 30% of loans to be handed out in local currency. So if India wants some money, NDB will give it in rupees and not dollars. Countries can sidestep all the currency fluctuations this way.

Also, the thinking is that if enough countries band together, they’ll be more amenable to trading in each other’s currencies. As Brazilian President Lula asked: “Why does Brazil need the dollar to trade with China or Argentina? We can trade in our currency.”

Now that’s something that India will back to the hilt. We’ve been trying to get Russia to accept payments for oil in rupees. We want to internationalize the use of the rupee.

Maybe these countries will open up trade in local currencies to each other. And that will increase the attractiveness of such a club. It will attract even more members. And we end up with a self-perpetuating network effect of sorts.

Also, when new members come in, the economic resources available to the group could inch up. For instance, think about Saudi Arabia, Iran, and the UAE being a part of this bloc. That means BRICS+ could end up controlling 42% of the world’s oil output.

Then, the West might have to listen to their demands.

So yeah, it does seem like there’s a possibility for BRICS+ to finally have an impact and break the Western world order. But for that, they first need to find the will to cooperate and work together. It can't be just on paper.

Until then…

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