Why Throwing BRICS Won’t Break the Western Economic Order

In late October, a group of disparate developing economies got together in Russia to hold economic talks. Yes, this was another BRICS Summit, and like earlier get-togethers, it has some commentators we follow wondering whether its growing ranks challenge the global economic order—and upend the US’s supposed dollar hegemony. But as we will explain, we think this is faulty logic that miscasts what the BRICS actually are. We see little chance the BRICS undermine the greenback in the foreseeable future.

What are the BRICS nations? The original term, coined by a Wall Street economist, was an acronym for Brazil, Russia, India and China—a grouping of would-be up-and-comers.^[i] South Africa joined later, adding the S. Yet in recent years, the original BRICS decided to meet more formally and discuss shared economic interests. They even expanded, adding Iran, the United Arab Emirates, Ethiopia and Egypt this year, with some outlets we see now calling the group BRICS+.

Our research shows they aren’t—and never were—a coherent economic or political bloc, though. There is no overarching BRICS treaty or alliance.^[ii] Not even a BRIC-bloc free-trade deal. We find their economies also vary widely in character, from a manufacturing powerhouse and burgeoning IT-services behemoth to mainly commodity exporters (oil, metals and coffee). Whilst some run open, market-orientated economies, others are communist. Still others are pariah states sanctioned by much of the West (see Russia and, to a lesser degree, Iran). Politically, their governments run the gamut as well, from democracies like India to authoritarian regimes, a theocracy and a monarchy.^[iii] And some have unresolved gripes with one another.^[iv] We think it is a mostly symbolic grouping.

Disparate grievances with the West seem to unite them more than any particular desire for greater financial cooperation or trade integration.^[v] Yet they talk up banding together to challenge supranational Western institutions ostensibly governing the globe.^[vi] So there was lots of chatter at the conclave about creating a securities and deposit clearing network, a global payments alternative to the western-led Society for Worldwide Interbank Financial Telecommunications and grain and metal exchanges—which they would control.^[vii]

But we think these are all likely long slogs to lure participants from existing—and working (for most)—arrangements. And what we didn’t see much of was any firm commitment to make them a reality. What it really was, in our view: Gripes from the sanctioned countries (Russia, Iran) about their inability to fully access securities markets and assets financially walled off in other nations. But building overt ways around sanctions would put many BRICS+ nations like India, Brazil and South Africa in a bind, given ties to the West.^[viii] So we wouldn’t recommend holding your breath for BRICS+ clearing.

Nor have we observed much follow through from their prior 15 gatherings. For example, conspicuously missing to us this time around: discussion of a BRICS currency. Widely touted in the past, it wasn’t even mentioned in the joint communiqué.^[ix] Instead, it appears they have quietly pivoted to (presumably more workable) “local currency” initiatives.^[x] When asked about the erstwhile common currency, Russian President Vladimir Putin—who hosted this year’s shindig—demurred, saying it was “premature.”^[xi]

Putin also says BRICS+ countries are driving global growth, and 30 more are interested in joining.^[xii] As a share of global GDP, the five chief BRICS are 24.5% and, with new members, BRICS+ are all of 25.8%.^[xiii] That alone, though, doesn’t make an effective counterweight to Western institutions. The only functioning BRICS+ agency is the New Development Bank (aka BRICS Bank) with a US $50 billion capitalisation—what members have chipped in.^[xiv] The Western-founded IMF and World Bank have $1.3 trillion and $318 billion, respectively.^[xv] Moreover, of the NDB’s $30 billion in approved lending, two-thirds is in US dollars. As its CFO said, “The bank’s operating currency is dollars for a very specific reason, U.S. dollars are where the largest pools of liquidity are.”^[xvi]

We think this underscores the yawning divide between reality and sentiment toward alleged dollar threats. Consider how the US dollar’s share of global currency reserves continues to dwarf all others, as Exhibit 1 shows. Although it dipped to a record low 58.2% in Q2—to much fanfare—that is still nearly triple the euro’s, the next closest currency. China’s yuan has the largest share among BRICS+, but at only 2.1% of the total (down from a high of 2.8% in Q1 2022), it remains quite small.^[xvii]

Exhibit 1: USD Still Dominates as Global Reserve Currency

Source: IMF, as of 31/10/2024. Percent of allocated reserves in US dollars, euros, Japanese yen, British pounds and Chinese yuan, 1995 – 2024.

So where has the dollar’s gradually shrinking share gone? According to the IMF, other “nontraditional reserve currencies,” such as the Australian dollar, Canadian dollar, South Korean won, Singaporean dollar and the Nordic currencies.^[xviii] That is, mostly developed market countries the IMF describes as “small, open, well-managed economies,” not BRICS+.^[xix] Despite this shift, as the IMF also notes, the dollar “remains the preeminent reserve currency.”^[xx]

Beyond currency reserves, look to currency trading. Currencies always trade in pairs, so currency shares sum to 200%. The yuan’s usage? About 7%. (Exhibit 2) The dollar remains on top, involved in 88% of foreign exchange trades.

Exhibit 2: USD Still Dominates in Global Currency Trading

Source: BIS, as of 27/10/2022. Percent of global currency trading for US dollars, euros, Japanese yen, British pounds and Chinese yuan, 1989 – 2022. Note: Currency trading shares sum to 200% because currencies always trade in pairs.

But above all this, we think it is worth noting America gets very, very little from the dollar’s big role. There is no brokerage fee paid to the Treasury. Despite legend, the dollar’s centrality to reserves and global trade doesn’t confer it any “exorbitant privilege” to borrow more cheaply.^[xxi] Japan, for instance, has a much higher debt-to-GDP ratio and much lower 10-year sovereign yields.^[xxii] France and Italy have higher debt-to-GDP ratios, too, and lower rates.^[xxiii] We don’t find any realistic sign dollar hegemony underpins American economic heft.

So what does? By and large, the same factors that make the dollar so central to the global economy, in our view: The world wants what the US offers. The value of money is what people can buy with it.^[xxiv] If you want American oil and natural gas, you need US dollars to purchase them.^[xxv] An F-35 fighter jet? US dollars.^[xxvi] The stock of 9 of the world’s top 10 companies?^[xxvii] US dollars. The list goes on. Of course, that could change, but it seems highly unlikely to us any time soon.

This is the source of the dollar’s resilience, in our view. It isn’t the easily shattered glass house many commentators we follow think—a reality we find is underappreciated.