Listen to this article now
By Carlton Joseph
While the world focused on the destruction of Gaza and its people, Donald Trump’s bid to win the nomination to represent Republicans in the next U.S. Presidential election, war in Ukraine, and Biden’s relentless efforts to stop China’s economic rise (by imposing sanctions on high-end computer chips), Saudi Arabia confirmed its entry into the BRICS alliance. This under reported event represents a seismic shift in the landscape of global economics, and challenges the unipolar, so called “rules based” economic world order dominated by the United States and the G7.
This pivot from the West is a strategic maneuver in the complex game of global economics and upends the Saudi’s economic policy that was established in the US-Saudi agreement of 1945, whereby Saudia Arabia promised to use US dollars for oil contracts, and to be a reliable supply of oil to the US, in exchange for US security against external and regional powers. This agreement cemented the US dollar as the world’s reserve currency, giving it an oversized role in the global economy. Joining the BRICS indicates that the Saudis are uncomfortable with the old agreement, and does not believe that they can rely on the US for their security. They are examining America’s unconditional support for Israel and their inability to control Netanyahu, and are reevaluating their pending agreement to normalize relations with Israel. They are also holding the US responsible for destabilizing the region with the Iraq war and regime change in Egypt, that resulted in the ousting of former president Hosni Mubarak. They believe that America would unconditionally support Israel in war against any Arab country.
The unilateral imposition of sanctions by the West against Russia following the invasion of Ukraine raised inflation globally, especially in Germany and Italy whose economies depend on Russian gas, and Africa who depend on a stable wheat supply to feed its people (Russia is the world’s top exporter of wheat). The inflationary impact of these sanctions were so severe that even Europe, a party to the imposition of sanctions, sought ruble-euro trade arrangements to prevent any disruptions in Russian gas supply. In African and other developing nations, increased inflation levels resulted in balance of payments crises, and the toppling of some governments; African leaders began exploring ways to circumvent American sanctions and its secondary effects. Additionally, they were aghast that an American president could unilaterally freeze their funds over any type of dispute, and that too much dependency on the dollar made them vulnerable to US sanctions. They realized that although they were not sanctioned, the inflation created by the Russian sanctions had made the dollar more expensive for them, and they needed to begin trading in other currencies; therefore, BRICS became a serious alternative to the G7.
Understandably, the Saudi move to join BRICS will encourage a number of developing countries to reconsider their allegiances and economic strategies away from the US and the G7, and their International financial organizations like the IMF and World Bank, and their structural Adjustment loans. Loans that force countries to sell off their assets to multinational corporations, reduce the size of their public service sectors and leave the countries in huge dollar-denominated debt.
BRICS offers an alternative to the punitive measures of the West and, most importantly, does not demand that countries adopt the capitalist model of economic development; members of the bloc may deploy any economic model they deem essential for their development. BRICS, which has been promoting the need for countries to trade directly with each other in their own currencies, creates an opportunity for them to reduce their dependence on the dollar, thereby creating more flexibility and resilience in their financial systems. Russian sanctions had the unintended result of initiating the move to de-dollarization, which will diminish the role and importance of dollars, while creating a multipolar financial world; this will shift the balance of power among countries where more countries would have significantly more say in global affairs, with the potential to reshape the global economy and markets.
The impact of de-dollarization could lead to depreciation and underperformance of US financial assets. US equities might also be negatively impacted by divestment and reallocation away from US markets. The result would be loss of confidence and lower foreign investments in the US. However, a weak dollar could raise US competitiveness since its products would be less expensive, but the cost of borrowing would increase and create inflationary pressures in the US by raising the cost of imported goods and services. Most importantly, modifications to the global financial system would impact the US position as the sole superpower, would significantly change the geopolitical environment, and decrease or nullify the impact of sanctions on countries targeted by the US.
With Iran, Saudi Arabia and UAE as members, BRICS countries now produce about 44 percent of the world’s crude oil, and are asserting their position as a global oil power house. At the end of 2022, BRICS had loaned $32bn to emerging nations for new roads, bridges, railways and water supply projects; debtor countries were not forced to sell off their natural endowment resources or enter into other structural adjustment programs. Since 2018 trade between Brazil, Russia, India, China, and South Africa reached $422 bn, and with the new members this trading consortium, trading could be in the trillions; this will present a formidable challenge to the West and the dollar’s supremacy.
The Western alliance needs to understand that countries want a multipolar world order with a more inclusive reliance on local currencies, and cooperation on multiple issues, ranging from trade technology, decoupled from Western fiscal domination. The G7 has a choice – it can welcome these countries and work with them to create a more equitable global order, or watch American presidents, like Trump and Biden, continue issuing sanctions by edict. The latter choice would risk de-dollarization that could send shockwaves through the US economy, rattle the foundational dynamics of capitalistic economics, and the laws of supply and demand.
(Trinidad-born Carlton Joseph who lives in Washington D.C., is a close observer of political developments in the United States.)
The perspectives and viewpoints articulated by the columnist unequivocally do not represent or endorse the official stance or opinions of the publication.