What would BRICS expansion mean for emerging markets? | [term:name] 2022

– The BRICS are considering accepting several emerging markets into the grouping

– High energy prices and US interest rates encourage expansion

– Trade between Russia, China and India has increased significantly since March

– Food and renewable energies offer great potential for cooperation

As emerging markets recover from the Covid-19 pandemic and face financial headwinds from rising US interest rates, the BRICS group – Brazil, Russia, India, China and South Africa – seeks to expand its membership to address common challenges.

At the 14th BRICS summit held in July, China, Russia and India discussed the potential entry of Egypt, Saudi Arabia and Turkey, which are said to be in the process of prepare applications.

The announcement came after it was revealed in June that Iran and Argentina had already applied with Chinese backing. Additionally, international media have reported that Algeria, Bangladesh, Indonesia, Mexico, Nigeria, Sudan, Syria, Pakistan and Venezuela have expressed interest in joining the organization.

A China-hosted online meeting in May of potential BRICS+ candidates included the foreign ministers of Argentina, Egypt, Indonesia, Kazakhstan, Nigeria, United Arab Emirates, Saudi Saudi Arabia, Senegal and Thailand.

It is unclear who will join and when, as there is no formal process for welcoming new members, and any expansion would likely be piecemeal. However, the expansion of the BRICS could offer emerging markets the possibility of creating new economic synergies.

Coined in 2001 as a term to describe a group of high-potential emerging markets, the BRICS have become central engines of the global economy. As of December 2021, they accounted for 40% of the world’s population, 25% of nominal GDP at $16 trillion, 30% of land mass, and 18% of total trade flows, while holding a total of $4 trillion in currencies.

Bilateral trade growth

Russia’s invasion of Ukraine and Western sanctions are causing China and Russia to attempt to abandon the US dollar as a form of exchange and to increase bilateral trade, especially in the all-important hydrocarbon sector.

Since March, the volume of trading in Chinese yuan and Russian ruble has increased. Yuan-ruble trading in foreign exchange markets hit a daily record at the end of July at $1.2 billion, surpassing euro-ruble trading volumes, while Russia bought $6.7 billion worth of goods from from China that month.

The surge in purchases of yuan-denominated goods in Russia was also fueled by the continued strength of the rouble, supported by high hydrocarbon prices.

Chinese imports of Russian crude oil hit a record high in May, up 55% yoy. However, the spot price of Russian oil was around 29% lower than before Russia’s invasion of Ukraine, according to Reuters estimates. Additionally, Russia had to offer a discount of $10 a barrel to Middle Eastern suppliers such as Saudi Arabia to attract customers.

Russia is also reportedly looking to buy the yuan, Indian rupee and Turkish lira as reserves for its sovereign wealth fund as those currencies have weakened and Russia’s energy sales have increased.

India’s trade with Russia has also increased, paced by rising oil imports. In April, India imported 25,000 barrels per day (bpd), but this increased to 600,000 bpd in May and June.

In July, India’s central bank announced a plan to allow domestic importers to purchase goods in rupees, which will then be credited to an account held by the exporting country, usually to enable smoother transactions with Russia.

More recently, in early August, Reuters reported that Turkey had also agreed to boost cooperation with Russia by buying its gas imports in roubles.

China and India now account for more than 40% of Russia’s total crude oil exports, up from around 21.7% last July. While remarkable, Russia’s dependence on the two countries could create new challenges, and there are already signs that this cooperation has reached its limit with the drop in imports in June and July.

The recent rally in trading between the rouble, yuan and other emerging market currencies may ultimately signify a long-term trend, but a drop in the US dollar is not imminent.

The US dollar accounted for 58.8% of global government foreign exchange reserves at the end of June 2022, compared to 59.4% year-on-year, according to the IMF. More tellingly, 88% of currency trading in 2019 was in the US dollar, according to a triennial Central Bank survey conducted in December 2019.

Cooperation with emerging markets

Reflecting the potential that building unity and trade between emerging markets can facilitate economic growth, calls for BRICS expansion began in 2013 and received further impetus when China was chair of the grouping in 2017. However, these initiatives failed to gain traction. .

Critics argue that this current push for BRICS expansion is driven by China’s intention to gain a bigger footprint in the global economy as it once again chairs the grouping. While Russia and South Africa support expansion, Brazil and India have shown little enthusiasm.

Nevertheless, the urgency of solving the global challenges of food security and climate change may outweigh these concerns and encourage cohesion among potential BRICS members.

Concerns over global food security could prompt existing and new BRICS members to create a food exchange comprising major member exports such as Argentine maize, Indian rice and wheat, Russian barley and sunflower oil , Chinese cereals and cotton and Brazilian soybeans. Such an exchange could later include agricultural products from other emerging markets.

Food importers such as Saudi Arabia could then gain food security, while opening the door to higher volumes of energy sales. In March, the Saudi Agricultural and Livestock Investment Company, a wholly-owned subsidiary of the Kingdom’s Public Investment Fund, acquired a 35% stake in Olam Agri, one of the world’s leading suppliers of grains, oilseeds, rice and animal feed.

An increase in green energy cooperation could also have significant effects on the global fight against climate change. The percentage of electricity generated from renewable sources in BRICS countries has increased from 19% in 2010 to 37% in 2020.

As countries shift from fossil fuels to cleaner energy sources, there are many opportunities for BRICS countries to increase cross-border electricity trade and maritime hydrogen trade.

The New Development Bank, created by the BRICS in 2014, began to prioritize investments in renewable energy projects – including $811 million in 2016 – but has suffered from a lack of transparency in recent years. However, the establishment of the BRICS Energy Research Platform in 2018 and the publication of a roadmap for energy cooperation in 2020 demonstrate that the grouping has the institutional capacity for an expansion in this field.

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