The Signal August 1, 2023

BRICS Currency Is a Non-Issue, But BRICS Cooperation Is a Good Thing 

BRICS, a group of nations “seeking to offset the perceived hegemony of the US-led West in global affairs,” is considering a new currency to challenge the US dollar. It's not happening any time soon, if ever. It does, however, show that established models for global trade remain relevant in a fragmenting world.

Kevin O'Marah Avatar
Kevin O'Marah
Strategy

Supply chain strategy has decisively shifted away from a global to a regional orientation since 2019, with big brands from Apple to Adidas working to decouple from China and build more local responsiveness and system-wide resilience into business. One wild card to consider is the potential for new trading blocs to gain influence, including BRICS

The group will meet in Sandton, South Africa, for their 15th annual summit in August. Conceived as a collection of “nations seeking to offset the perceived hegemony of the US-led West in global affairs,” BRICS has floated the idea of creating a new currency to counter the dominance of the US dollar in global trade. Since the core group includes the economies of China, India, Brazil, Russia, and South Africa, it might seem reasonable to worry about how this possibility affects long-term plans for new plants, supplier relationships, and channels to market.  

Don’t worry. 

Making Money 

Money is a paradox. We like to talk about “cold, hard, cash” and “hard dollar” business cases as though money is immutable. In fact, money as we know it now is just an article of faith. It is worth something because trading partners believe it is worth something, which means it can buy real things in a virtuous circle of confidence. In principle, anything can be money if people believe in it – puka shells in pre-Columbian America, discs of rock on the island of Yap, salt in Ancient Rome. Money, at least since the end of the gold standard, is a confidence game.

BRICS, as a monetary authority, is in no position to play this game. As recently as this May, Russia and India (two founding partners of the group) failed to close a deal to settle bilateral trade because Russia didn’t want to get stuck with too many rupees. Confidence in the convertibility of the currency was not strong enough to do the deal. Instead, the majority of trade will remain in US dollars, despite the stated purpose of the BRICS coalition to challenge the US domination of world Forex trade.

The same is also true of China’s currency. Despite setting the tone for the world economy for twenty years, the renminbi was part of only 7% of Forex trades in 2022. Even the Euro, issued by a $17T economy, featured in only 31% of trades. The takeaway is that US dollar dominance is less a matter of economic power than it is about convertibility – trade makes money, not government printing presses.

Chart depicting foreign exchange market turnover by currency - the currencies being USD, EUR, JPY, and CNY. Source: BIS Triennial Central Bank Survey.

BRICS as a Frenemy to the West 

BRICS want to show that they don’t need the West to thrive. Some commentators have been harsh about its domination by China and de-facto role as a Chinese admiration society rather than a meaningful economic entity. It is oppositional by design, and yet for big companies wherever they are based, the prospect of cooperation and easier trade within this group is a win.  

Regional supply chain strategies like Unilever’s hub approach, TSMC’s forays out of Taiwan, or BMW’s Make-where-we-sell, source-where-we-make policy is not about reverting to country-based business unit structures. The idea is to minimize time and distance gaps between customer orders and raw material extraction. Establishing geologically or climatically efficient catchment areas for upstream mineral and agricultural commodities will be easier if BRICS facilitates trade among its members. Businesses that have customers and suppliers within the bloc should benefit. 

Potentially more important, though, is the move toward self-determination. China may be driving the BRICS bus, but India is bursting with opportunity for supply chain strategists, as is Brazil. And South Africa, as host, is especially keen to add members to the group from amongst its neighbors to spur the long-awaited regional growth in sub-Saharan Africa. Demographics are no friend to the developed world, with sub-replacement fertility in many countries, so anything that helps Africa’s surging population get a bit richer is good news for business.  

BRICS may feel like an attack on the West, but that’s missing the point. It proves that the system works as a path forward for world trade. After all, imitation is the sincerest form of flattery.