Saudi and the Brics: a test case for multi-polarity

Reuters/Danish Siddiqui

I wonder if Baron O’Neill of Gatley wakes in the middle of the night in a cold sweat wondering what exactly he has done.

Back in 2001 O’Neill – then just plain “Jim” – invented a radical new category in global asset management, the Bric economies.

His thesis was that the potential for economic growth in Brazil, Russia, India and China qualified them to be regarded as a special investment opportunity.

South Africa was added to the grouping in 2010 to create the one we now know as the Brics, which is on the verge of a big expansion when the next summit of leaders takes place in August.

• Brics bank in talks to admit Saudi Arabia as member
• Egypt to join Brics’ development bank in coming weeks
• China-GCC FTA will be a game changer

According to reports, 19 other countries have applied formally to join the Brics, including Saudi Arabia and Iran. Others have expressed interest in future involvement, among them Argentina, the UAE, Algeria, Egypt, Bahrain and Indonesia, as well as several African countries as yet unidentified.

Exactly how many actually join is uncertain, but one thing is sure: the old acronym will not do for the future. Some branding agency somewhere is set for a big payday when the Brics are renamed.

When it was the original four Bric nations, there was an economic rationale that O’Neill explained eloquently and successfully. With big and growing populations, fast projected rates of GDP growth and aspirational middle classes, the Bric countries were set to take off – and Western investors with a taste for exotic emerging markets could profit from that.

The formula worked until 2008, when the global financial crisis hit them hard, along with the rest of the world. That was also the year Russia invaded Georgia, which first gave rise to worries about investing in ‘rogue’ Russia. Those fears have come full circle today with sweeping sanctions against Russia over its invasion of Ukraine.

Bloomberg recently calculated that returns from Brics investments over the past five years have underperformed other emerging market peers. So the overall investment case is inconclusive.

Imbalances within the Brics grouping have also become more significant. China was always the biggest by far of the four-then-five, raising the suspicion that it was merely a construct for China to secure energy sources, commodities and foodstuffs from its partners in exchange for Chinese manufactured goods.

It is important to understand that the Brics is not a free trade grouping like the European Union, or even the more limited moves towards economic integration by the likes of the Association of South East Asian Nations or the Gulf Co-operation Council.

Rather, its limited achievements have been confined to the financial sphere. In 2016, the five set up a $100 billion pool of foreign reserves, to be tapped by members in times of emergency.

They also established the New Development Bank (NDB), sometimes called the Brics bank, which has made some big investments in infrastructure in the poorer parts of the grouping.

Tentative plans to consider a Brics common currency will be discussed at the August summit, but an agglomeration of reals, roubles, rupees, renminbi and rand is not, on the face of it, an overwhelmingly attractive proposition.

Perhaps it has a possible future role as an instrument for intra-Brics trade, but for now the US dollar faces no serious challenge from the Brics as the world’s reserve currency.

One imminent development could be the inclusion of Saudi Arabia in the Brics bank, being discussed at the NDB’s annual meeting this week. From the Saudi side, that would further cement its growing relationship with China (the NDB is based in Shanghai) and would also help plug the gap left by sanctioned Russia when it comes to raising international funds.

How far the Brics go beyond that remains to be seen. There is a case for a global economic alliance, with Saudi and Middle East involvement, to counter-balance the West.

Multi-polarity is a fact of life in the modern world and the West has had its own way for too long via the International Monetary Fund, the World Bank, the G7 and other US or European institutions.

But is Brics the way to do that? Beyond the fact of anti-Western sentiment that seems to bind the five together – greatly heightened by the war in Ukraine – there is little of substance that unites them. That would be even more the case if the planned big expansion actually happens.

If the Brics grouping turns into another divisive agency on the global economic and financial scene, it would prove a big distraction from the enormous challenges the world faces.

It could turn into O’Neill’s own version of Frankenstein’s monster.

Frank Kane is Editor-at-Large of AGBI