Originally posted by Nomi Prins on her substack, Prinsights:
The 16th BRICS Summit kicks off on October 22nd, in Kazan, Russia.
It could be the most important one yet. Understanding both the history and what it means for the future of the U.S. dollar can help you better understand the future of the geopolitical world, finance and your money.
First, “BRICs” was a term coined by my former Goldman Sachs colleague, economist Jim O’Neil in 2001. In 2006, its four original members, Brazil, Russia, India and China, made the acronym a reality. South Africa would later join the group in 2011, rounding out the ‘S’ for the group. This intergovernmental block has since added Egypt, Ethiopia, Iran, the United Arab Emirates with a pending addition of Saudi Arabia as well.
The BRICS’ intent was to challenge the economic and policy dominance of the U.S. and European centric G7 financial power system. And it has the economic and political weight to contend.
Meeting with Brazilian dignitary, Paulo Nogueira Batista, former VP of New Development Bank (now BRICS Development Bank) in Shanghai
The BRICS+ now account for almost 25% of global GDP, an estimate 40% of global trade and 50% of the global population. China and India, are the second- and fifth-largest economies in the world. Meanwhile, Brazil’s economy is bigger than that of G7 members Canada and Italy.
Geopolitics and Invasion Upped the Ante
On February 4, 2022, Russian President Vladimir Putin and Chinese President Xi Jinping met in Beijing to craft a 5,000-word statement. It would signal new battle lines against U.S. policies and the hegemonic power of the dollar. They stressed the need for a “redistribution of power in the world.”
The BRICS power agenda intensified when Russia escalated its war on Ukraine three weeks later, on February 24, 2022. The U.S. and its allies condemned this invasion. In response, the U.S. and its allies levied financial sanctions against Russia. This included freezing assets including two of the largest state-owned Russian banks with international exposure. The move included sanctions on nearly 90 financial institution subsidiaries around the world and targeted nearly 80 percent of all banking assets in Russia
Two days later, the U.S. and EU requested that the Society for Worldwide Interbank Financial Telecommunications (SWIFT) international payment messaging system ban seven Russian banks from participation. The move effectively blocked them from international markets.
Why is SWIFT Important?
It doesn’t move money. But SWIFT member transaction instruction messages get cleared immediately so that money can move. SWIFT access is crucial for conducting global business. To put it into perspective, in 2021, the SWIFT platform processed more than 10 billion messages and facilitated trillions of dollars in cross-border payments.
So, when the Russian banks were banned from SWIFT and cut off from the main system for transmitting funds, their systems became slower, less secure, and largely confined to Russia.
However, it did not shut down the Russian economy entirely; it just made them more difficult to work with for its partners. In practice, that led to more foreign participants joining Russia’s System. It also showed governments outside of the West that financial tools beyond sanctions could be used against them.
That shift both strengthened the dollar-independence or de-dollarization trend.
De-dollarization Infrastructure
Today, it represents 58% of the value of global reserve holdings globally. But that figure is about 22% lower than its 71% height in 1999.
The euro is the world’s second-largest reserve currency, comprising 20% of global reserve holdings. Gold isn’t counted as a currency, but would represent 15% if it were. That means swipes at its lead position aren’t dethroning the greenback any time soon. But they are indicative of major shifts to come as de-dollarization continues.
Nearly all global oil trading has been completed in U.S. dollars since 1973, when the U.S. and Saudi Arabia established the Petro-dollar. Oil is crucial to trade because, for centuries, it served as one of world’s most important resources.
By 2023, one-fifth of global oil trades had been completed in non-U.S. dollar currencies. That spans 12 major commodity contracts in 2023, from seven in 2022 and two between 2015 and 2021.
Those 2023 deals included one between the UAE and India for crude oil and a $7 billion currency swap between Saudi Arabia and China, Saudi Arabia’s largest crude oil importer.
And while the BRICS+ aren’t ditching the dollar tomorrow, and they don’t have a common digital currency (yet), planning for non-dollar payment systems plans is underway. China currently leads one of the greatest attempts at rivaling the dollar – and it has blockchain to help push it forward.
BRICS Pay: A Powerful Anti-Sanctions Block Emerges
The system would utilize blockchain technology in an effort to modernize payments. As Reuters reported last week, “The system would use blockchain technology to store and transfer digital tokens backed by national currencies. This shift, in turn, would then allow those currencies to be easily and securely exchanged, bypassing the need for dollar transactions.”
BRICS Pay would be an independent payment messaging system, like SWIFT. That would make it one of the biggest decentralized, non-dollar global payments systems in the world – and a clear alternative to SWIFT.
Why Gold Remains King
For individuals, just like central banks, diversifying your portfolio is a great idea to consider based on your own situation. You can consider diversifying from the dollar by investing in real assets like gold and gold miners, as we’ve detailed in our latest Premium issue.
