You may have heard a reference to the BRICS countries in the news. The previously used acronym was BRIC, introduced in the early 2000s by a Goldman Sachs analyst who referenced these expanding emerging market countries with many commodities and natural resources. He predicted certain countries would dominate the world economy by the mid-twenty-first century. These countries were Brazil, Russia, India, and China. South Africa was added in the last few years, turning BRIC into BRICS.
We will be hearing much more about the BRICS in the future because these countries are joining politically and economically in an increasingly organized fashion. We will care about them because the BRICS are starting to trade in their own currencies, at the exclusion of the Western world and the dollar. They will trade goods, specifically oil. At times, South Korea has been grouped with the BRICS. Many other countries are now interested in joining the BRICS, most recently and concernedly Saudi Arabia, with all its oil, and Mexico, right on our border.
The BRICS countries have been meeting annually since 2009. They have a political structure with a rotating presidency. They are discussing the development of a currency to be used amongst them, backed by gold and other commodities. There are many other countries interested in joining with them for trading and political alliances:
Current applicants: Argentina, Iran, and Algeria
Countries interested in membership: Saudi Arabia, Afghanistan, Egypt, Indonesia, and Syria
Countries in conversation about a future application: Kazakhstan, Nicaragua, Nigeria, Senegal, Thailand, and UAE
For the past 80+ years, most international trade has occurred in dollars. World trade is still primarily carried out in dollars, but the percentage is decreasing rapidly. The dollar has traditionally been perceived as the safest currency in the world and was trusted by most countries as a stable currency to trade with. When the U.S. got off the gold standard in the early 1970s, Henry Kissinger made a deal with Saudi Arabia; we would protect their kingdom from enemies by supplying defensive capabilities if they would sell all of their oil in dollars. That was the birth of the PetroDollar. Backing the dollar with oil instead of gold assured that the dollar continued as the world’s reserve, even though we were off the gold standard.
The dollar has dominated the oil trade for 50 years, but that grip has been slipping in the last couple of years due to political disagreements. The decline in the use of the dollar is accelerating, most likely due to the sanctions we have placed on Russia due to the war in Ukraine. Other countries ask themselves, what happens when the U.S. disagrees with us? Will they put sanctions on our goods and outputs? This concern is prompting these other countries to seek alternatives to the dollar for trade and for holding in their reserves. That’s one reason many of the BRICS countries have been adding to their gold reserves in the last ten years, replacing dollars.
More countries want to join the BRICS. In the last six months, Saudi Arabia started making their own agreements with China to trade goods in their currencies. Russia is selling oil to China and taking Chinese currency, the Yuan, in exchange, instead of dollars. Russia then sells the Yuan for gold, placing increasing amounts of the precious metal into Russian Central Banks. The world is watching the U.S. print increasing amounts of money, which is inflationary. They no longer want to hold dollars in their reserves since the value is decreasing due to the excess printing. Many BRICS countries are replacing dollars with gold in order to strengthen their currencies. (We will explore dollar devaluation deeper in another article.)
Why should we care about the rise of the BRICS? As the dollars injected worldwide return to the U.S. when BRICS countries sell their treasuries, more dollars will chase fewer goods back home, causing inflation. As treasuries decrease in value, also due to increased supply, their value decreases, resulting in the interest paid going up. This will increase the cost of borrowing for all of us, which can be recessionary.
No other currency currently in circulation will replace the dollar. For multiple reasons, it is much more likely that the dollar will compete with whatever the BRICS come up with for reserve status. The dollar will not be replaced as the reserve currency but will share the stage with others for the first time in more than 80 years. These transitions have happened regularly throughout history. They can be tumultuous, mainly for the country giving up its reserve status, causing inflation.
Everything described above is occurring as we speak. This should be discussed more in the national news, but it is not. These changes are happening incrementally and may take years before it becomes clear that the U.S. dollar is in noticeable decline as the world’s reserve currency. Watch for the BRICS countries to announce trade in a new commodity/gold/oil-backed currency. Watch for oil to be publicly traded with currencies other than the dollar. Watch for the price of gold to increase substantially in dollar terms. These will be signs that the dominance of the dollar is declining.