In August, the BRICS summit was held in South Africa and headlines once again emerged about a new world order and the long-heralded end of the dollar’s reign. Let’s recall that the acronym – which stands for Brazil, Russia, India, China and South Africa – was coined by an economist from Goldman Sachs in 2001. Optimism about these economies became fashionable and they even founded a development bank in 2014.

BRICS, G7 and the dollar

The new BRICS Development Bank (NBD BRICS), housed in a luxury skyscraper in Shanghai, was supposed to reduce the dependence of developing economies on dollar financing and Western influence, while that of China increased. How is that project going?

It’s in June The Wall Street Journal reported that the NDB BRICS has stopped lending and is “fighting for its own survival, threatened by its own dependence on the US currency”. That report explains that after the bank was founded in Shanghai in 2015 with $10 billion in initial capital contributed by five founding members, it has encountered difficulties in raising the rest of the capital from Chinese banks and capital markets. So he began borrowing billions of dollars from institutional investors from Wall Street and Chinese state banks. While some of these loans were denominated in yuan, about two-thirds were in US dollars.

Brics: ‘light’ or hard version?

Starting in 2017, the bank’s lending grew strongly, rising from just $1 billion in 2017 to $30 billion early last year. Things got a lot more complicated for the bank after Russia invaded Ukraine. Investors were afraid to invest in a bank that is 40 percent owned by China and Russia, and interest in obtaining funds for NDB has quadrupled. China seems to have no interest in injecting capital due to the slowing growth of its economy.

As for the supposed end of the dollar standard, the BRICS common currency remains a pipe dream. Although the percentage of world reserves in dollars has fallen from 70% to 60% in the last decade, it is still well above the second currency, the euro (20%), with the yen and the British pound in third and fourth place. Only 2.6% of reserves are in yuan. Furthermore, according to one estimate, 88% of international transactions are done in dollars, 31% in euros, and only 7% in yuan (since a single transaction can involve two currencies, the total can exceed 100%). While China has the economic size and military power to match the United States, economist Tyler Cowen notes that its insistence on keeping its capital markets closed makes the yuan a weak contender to replace the dollar as a reserve currency. The United States, on the other hand, continues to have the deepest and most liquid financial markets in the world.

BRICS challenges the dollar

The replacement of the dollar with a common currency or another such as the yuan and the replacement of traditional multilateral ones – when they even have conflicts among the founding members – represent nothing more than courtship by a diverse group of democracies, autocracies, monarchies. (OR)