Future of the Brics states: growth and economic challenges

 

There were still just under two weeks until the start of the Brics summit, and this year’s host Russia was already setting the appropriate rhetorical framework for the meeting.

“The Brics states are the engine, the driving force of economic growth,” said Russia’s Finance Minister Anton Siluanov on October 12 at a conference in Moscow. The average annual economic growth of the Brics economies will be 4.4 percent this year and next, Siluanov said.

The G-7 countries, on the other hand, would only achieve growth of 1.7 percent. Siluanov said: “It is clear whose economic development is more dynamic.” It was a targeted broadside against the West.

The 15th Brics summit begins this Tuesday in Kazan, Russia, and Russia wants to push forward the integration of the still poorly formalized alliance. The reason for this is the comprehensive sanctions that the West has imposed on Moscow for its attack on Ukraine. To mitigate the impact, Russia wants to promote the exchange of goods and investments among Brics members.

Several new members

At first glance, the chances of this happening aren’t bad, as the alliance has gained a number of new members in recent years. In addition, the Brics states have recently moved closer together – driven by China.

In 2010, South Africa joined the union of Brazil, Russia, India and China. At the summit in South Africa last year, invitations were extended to Argentina, Egypt, Ethiopia, Iran, the United Arab Emirates and Saudi Arabia.

Only the Argentine government decided not to join the Brics alliance. Saudi Arabia wants to wait before making a commitment. However, the association is likely to continue to grow: twelve other countries have applied for membership.

“The crises of the recent past have given noticeable momentum to Brics expansion,” says a recent study by the Boston Consulting Group. Several large developing countries that are neither on NATO nor on Russia’s side have resisted pressure from the West to support sanctions against Russia.

Other countries complain that the G-7 states are hardly taking their interests into account when combating the climate crisis and the pandemic. Such sensitivities give the Brics network a boost.

With the expansion of the emerging market association to nine members, representing half of the world’s population, the economic weight has also increased. The Brics states account for more than 35 percent of global gross domestic product. In the G-7 countries the proportion is only 30 percent. The Brics countries also account for around two-fifths of global trade.

Growing influence in the energy sector

The influence of the Brics countries is particularly significant in the energy sector. If, as is widely expected, Saudi Arabia joins the group, the Brics states will account for 43 percent of global crude oil production and 32 percent of natural gas production. Should the accession candidates Kuwait, Kazakhstan and Bahrain join later, the shares would continue to rise. Led by China and India, the Brics countries also account for 38 percent of oil imports.

Such a development could have noticeable consequences for the West. “In times of increased volatility on the energy markets, an alliance of the most important energy producers and importers could give a parallel system for energy trading a boost,” write the BCG experts.

The integration of the countries can be seen most clearly in trade, which has stimulated economic development in the Brics states in recent years. The share of goods trade among the members of the association in global trade doubled to 40 percent between 2002 and 2022. One reason for this was China’s rapid economic development in recent years.

If you look at the mutual dependencies of individual countries, the economic integration that has taken place in recent years becomes even clearer. China’s importance as a supplier of industrial and consumer goods, for example, has increased significantly in recent years.

Iron ore and soybeans from Brazil

At the same time, the country is one of the largest importers of raw materials. China is importing iron ore and soybeans from Brazil on a large scale. Conversely, the Middle Kingdom supplies electric cars, solar modules and heavy machinery to the South American country.

The sanctions against Russia have also ensured that more Russian goods are now going to Brics countries – especially to India and China – instead of to Western countries.

The Brics countries have also rapidly gained in importance as an investment location in recent years. According to a study by Unctad, $84 billion flowed into the then four Brics countries in 2001. Twenty years later it was already $355 billion.

In 2021, the then five countries enjoyed 22 percent of global foreign direct investment; twenty years earlier the rate was only 11 percent.

A lot of money flowed into China, which was booming at the time

Of course, an above-average amount of money flowed into China, which was booming at the time. But the sums invested by investors in India, Brazil and South Africa also increased.

The years 2001 to 2011 in particular were characterized by a real boom in terms of foreign direct investment in the Brics countries. Investments grew by an average of 13.5 percent every year. In the years that followed, growth leveled off noticeably to just 1.7 percent per year. The main reason was the generally poorer global investment environment.

Despite the significant growth in economic influence in recent years, there is reason to be skeptical about further integration that the alliance could face an uncertain future.

The reasons for this are diverse. The countries in the Brics alliance sometimes have different political systems and different institutional frameworks. The states also differ in their economic models and cultural traditions.

There is a lack of an institutional framework

The alliance also includes geopolitical rivals such as China and India. All of this could reduce the economic and political clout of the Brics countries in the medium term. In addition, there are currently no firmly anchored institutions that provide the loose association with an institutional framework.

But other factors are also likely to stand in the way of the Brics countries’ further growing influence in the near future. China’s demand for raw materials from abroad has recently declined, and the Middle Kingdom is only recording slight growth in imports. The reason for this is the economic crisis, especially the collapsed real estate sector.

In addition, resistance to China’s export offensive in green technology, electric cars and steel is growing worldwide. Even Brics member Brazil has now imposed punitive tariffs on individual product groups from China.

Russia’s war against Ukraine, in turn, is likely to tie up more and more of the country’s resources in the coming years and thus potentially weaken the economy.

China and Russia are working on dedollarization

The Brics countries, primarily China and Russia, are working hard on one issue: the dedollarization of international payment transactions. As a first step, the countries founded the New Development Bank based in Shanghai in 2015. Among other things, the development bank should grant loans in currencies other than the US dollar.

Above all, Russia, which is under sanctions pressure, is putting pressure on the creation of a new payment system for the Brics states. Moscow’s plan calls for the creation of a so-called “multi-currency system” that would protect participants “from any external pressure, such as extraterritorial sanctions,” according to a report by the Bloomberg news agency.

To this end, Russia’s finance minister and the central bank are proposing to create a network of commercial banks that can process transactions directly in local currency. Moscow also wants to create centers for mutual trade in raw materials such as oil, gas, grain and gold. It can be assumed that Russia’s proposals will be intensively discussed at the Brics summit this week.