From Dominance to Decline: The rise of BRICS and Petrodollar Collapse?

 

The petrodollar system was established in the early 1970’s. It was an agreement between oil-rich Gulf states and the United States. The terms were simple, Oil-rich states would sell their crude oil exclusively in dollars. In return, the United States will provide them with security from internal and external threats and also provide these countries with weapons and technology as well. The concept of the petrodollar was hailed across the United States because it provided stability and demand for U.S. dollars and became the most used currency in the world for international trade and commerce. While the petrodollar had its advantages for the United States it brought major troubles for the global south countries.

Drawbacks of petrodollar

Since oil-rich countries of the Gulf agreed they would sell crude oil only in U.S. dollars created problems for a lot of smaller countries. The main problem they faced was to hold significant amounts of dollars in their reserves if they wanted to buy crude oil. With this, the dollar price appreciated and demand increased for dollars as well. This led to a severe devaluation of currency for oil-importing countries. Furthermore, this brought high inflation rates as well as economic instability. This led oil-importing countries to borrow money from the International Monetary Fund (IMF) to buy crude oil. This is how many countries fell into the trap of petrodollars and tough interest rates meant they would be in debt forever. When smaller countries failed to pay the debt, they were forced to compromise their sovereignty to the International Monetary Fund. These institutions dictated the economies of smaller states. To tackle this problem, some states straight away refused and decided to stop using petrodollars but were unsuccessful. The case of Iraq and Libya was pretty much about the petrodollars. In recent times, the emergence of BRICS has posed serious threats to the petrodollar system. 

The Emergence of BRICS

Brazil, Russia, India, China, and South Africa formed a bloc in 2006 and their main goal was to enhance cooperation, increase trade, less reliance on the G-7 countries, and address common challenges they faced. Initially, these five countries started trading with each other and they also advocated that there must be serious reforms in the policies of the International Monetary Fund (IMF). This single move made BRICS more favorable to the global south states. Smaller countries felt their concerns were now raised in the international forums and this alone cemented the relation of BRICS with developing countries. Moreover, China intended to revive the ancient silk route and invested heavily in the infrastructure of the Central Asian countries. Chinese firms also invested heavily in African countries to build their infrastructure. While Russia started selling crude oil and gas at cheaper prices with easy payment cycles. With this approach, the bloc gained major partners on the economic front. As of 2023, more than 40 countries have shown willingness to join the bloc. Whereas, 22 countries have officially submitted their request to join the bloc. This number will increase with the time. On August 2023, 6 more countries officially joined the BRICS. Saudi Arabia, the United Arab Emirates, Iran, Argentina, Egypt, and Ethiopia were the new members of the bloc. It is predicted that Asian powerhouse Indonesia will join the bloc in the second phase. It is also reported that Algeria and Bangladesh will join in the second phase.

BRICS now officially control more than 80% of the global oil supply and this percentage will further increase because Venezuela has also shown interest in joining the bloc. Experts claim these developments will lead to petrodollar collapse. Because BRICS countries want to reduce their reliance on the dollar and are encouraged to begin trading in local currencies to strengthen their economies. Furthermore, the BRICS Development Bank has already announced that they will fund projects in South Africa and Brazil. This means Brazil and South Africa will not go to the International Monetary Fund anymore and instead will look towards the BRICS development bank. 

Inevitable Petrodollar collapse

The main aim of the bloc was to empower their economies and reduce the dollar reliance. As mentioned earlier, smaller states had to borrow dollars just to buy crude oil. Since, 2020, major developments have taken place and BRICS nations on multiple occasions have taken steps to bypass the U.S. dollar and begin trading in their local currencies.

Russia and China have already signed an agreement for bilateral trade. Chinese Yuan and Russian Ruble will be swapped to conduct trade and that’s how they have successfully dumped the U.S. dollar.

India and Brazil are already discussing how they can conduct trade in their local currencies and currently, both countries are working on forming some policies before they start trading in their local currencies.

For long China has pushed to establish the Chinese Yuan as the alternative to the U.S. dollar in the energy sector. Today, not only BRICS countries but also states outside of the bloc are conducting trade with China and are accepting Yuan for crude oil payments.

BRICS have also long worked to create their financial institutes to reduce the reliance on the International Monetary Fund and World Bank. The threat of petrodollar collapse is real this time and BRICS is not bluffing. To understand the power behind BRICS. Here’s a little comparison. BRICS is not just 5 states; it represents over 3 billion people making it over 40% of the world population. As of 2022, BRICS GDP exceeded 26 trillion dollars bypassing the GDP of the United States.

The future?

BRICS is expanding and six more countries have officially joined the bloc. Saudi Arabia, Egypt, Iran, Argentina, UAE, and Ethiopia have joined. What does this mean? It means that now, six of the largest oil-producing states are part of the bloc. Now, 80% of the global oil supply is directly under the control of the bloc. BRICS is not only challenging G-7 but soon will surpass G-7 on a lot of fronts. BRICS has also established its new development bank which will lend money to member states with much easier conditions. Many experts are considering this new development to be the end of the International Monetary Fund (IMF) and World Bank. It is already confirmed that the BRICS development bank will lend money for infrastructure in Brazil and South Africa. 

Furthermore, Indonesia, Bangladesh, and Vietnam have also officially applied to join BRICS. Latin America, Venezuela, and Honduras have also shown interest in joining BRICS. Currently, the main focus of Russia and China is to begin trading in the local currencies among the BRICS nations. 

This year India and the United Arab Emirates signed a deal and agreed that both countries will begin trading in their local currencies. In August 2023, India bought 1 million barrels of crude oil from the United Arab Emirates and the payment was made in Indian Rupees. It is only a matter of time before other states will start doing the same.