BRICS expansion, a positive catalyst for stronger BRI collaboration

Executive Summary

The BRICS (Brazil, Russia, India, China, and South Africa) bloc of developing nations agreed in late August to add Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates (UAE) as new member countries.¹ This marks the first expansion in 13 years that aims to make BRICS a more influential group that could reshuffle the world order. While the latest inclusions are arguably more Middle East and energy centric, it has left the door open for future additions as other countries have also expressed interest in joining the bloc. We believe the new BRICS expansion will further strengthen the ongoing collaboration of BRICS countries on BRI (Belt and Road Initiative) projects and serve as a bridge for better future cooperation.

BRICS Expansion

The proposed new BRICS bloc is expected to include roughly half of the world’s population and account for about 30% of the world’s GDP.

The addition of Middle East economies is the most major shift arising from the BRICS group’s latest expansion. We believe this has been driven by a stronger strategic China-Middle East alliance since last year. As major Middle Eastern economies are already targeting an Economic Diversification 2.0 path  to diversify away from their old economic growth model which relies heavily on oil, becoming a member of the BRICS bloc can further help to advance this goal.

What does the BRICS expansion mean for China’s BRI?

BRICS countries are key partners with China and are crucial for promoting the BRI. Historically, there have been several cases where BRICS membership has enabled better cooperation on BRI projects for the nations involved. For example, a high-speed railway project is being constructed from Moscow to Kazan, Russia under strategic cooperation between the BRI and EEU (Eurasian Economic Union, led by Russia) and is being funded by the BRICS New Development Bank.² China also views the BRICS countries as sources of diversification of funding resources for BRI projects. Existing BRICS countries have already been made a part of the Asian Infrastructure Investment Bank (AIIB)³, one of China’s key financing mechanisms for the BRI. In recent years, China has shifted from leading specific projects on a national level to forming and leading multilateral institutions to execute projects according to institutional norms. This is part of China’s push to make BRI projects more transparent and sustainable in the longer term.

We believe the admission of new countries into the BRICS group will benefit the BRI and make the initiative more efficient.

First, we anticipate more cooperation on energy initiatives under the BRI. Saudi Arabia, the UAE and Iran ranked second, seventh and ninth respectively for global oil production in 2022. While China, India, Russia, and Brazil ranked second, third, fourth and seventh respectively in terms of global oil consumption in 2021. Given the favorable supply-demand dynamics we expect commodities trading activity among these countries to grow.

China is the largest customer for Saudi crude oil and the largest purchaser of Middle Eastern oil globally. Cooperation among these economies in the energy sector under the BRI has already begun. A recent example was the 27-year deal agreement signed by a Chinese state-owned energy giant to buy liquified natural gas from Qatar.⁴ The additions of Middle East economies to the BRICS group can therefore drive more energy cooperation projects under the BRI.

Second, we expect more trading activity under BRI. Similar to GDP, the current BRICS bloc and proposed new members account for around one-quarter of all merchandise trades globally. While trading figures for current BRICS members have not grown as quickly in the past two years as it has in the past two decades, merchandise trading activity among new member countries has been growing rapidly.

Specifically, China’s trade with the Middle East already supplanted the EU in 2020⁵, becoming the largest trading partner with the region. China-Gulf Cooperation Council (GCC) Free Trade Agreement negotiations have been ongoing since 2004.⁶ The additions of Middle East economies in the BRICS group could be a catalyst for the agreement to be finalized. In either case, the trading relationships between China and the Gulf region could be strengthened further under the BRI.

BRICS countries other than China have enjoyed greater economic cooperation and collaboration with in recent years. This is reflected in their trading activity. Aside from South Africa, India, Brazil and Russia all saw total merchandise export growth trend higher than the global average over the past 20 years.

Third, financial cooperation under the BRI may be tighter. Existing and new members of the BRICS bloc have stepped up their banking and payments systems integration with China in order to support trade and investment flows. Iran adopted the RMB settlement method with China in part of its oil trades in 2012. There are also reports that Iran plans to replace part of its US dollar reserves in overseas banks with the RMB.⁷Saudi Arabia was reported to consider accepting yuan instead of dollar payments for oil sales in 2022.⁸ China’s President Xi also called for the adoption of the PetroYuan at the Gulf summit in Riyadh last year.⁹ For Russia, the yuan surpassed the US dollar as the most traded foreign currency on the Moscow Exchange last October.¹⁰ Argentina has also stated in late April of this year that it plans to start paying for Chinese imports in yuan rather than US dollars.¹¹Brazil has already begun to accept trade settlements and investments in yuan, with an agreement reached among central banks in February of this year.¹² On top of this, China is actively promoting its cross-border payment system, CIPS (Cross-border Interbank Payment System)¹³ internationally, which could be extended to all BRICS economies in the future. The BRICS expansion and tighter cooperation between members could serve as a catalyst for more progress towards RMB internationalization.

Lastly, traditional and digital infrastructure cooperation under the BRI could be boosted further. We may also see more collaboration on clean energy and tourism.

The new members of the BRICS group, especially Middle East economies, means a larger market for Chinese goods, construction contracts, and investment opportunities in infrastructure, manufacturing, and the digital economy, which fits right into China’s Belt and Road Initiative. Under the Belt and Road Initiative, many investment projects in Middle East economies have been backed by Chinese money, such as the construction of Qatar’s Lusail Stadium¹⁴ and auto manufacturing in Saudi Arabia¹⁵. The additions of Middle East countries in BRICS bloc could create more opportunities for infrastructure cooperation projects under the BRI. China’s Digital Silk Road  strategy fits in well with the Economic Diversification 2.0 path given its focus on fintech and digitalization. During Chinese President Xi’s visit to Saudi Arabia in 2022, Saudi Arabia signed a memorandum with a major Chinese information and communications technology company on cloud computing and building high-tech complexes in Saudi cities.¹⁶Like digital development, clean energy is another area that Chinese policy makers are prioritizing. This could become a major sector where we see partnership between the BRICS countries. India is already cooperating with Middle Eastern economies on green initiatives. Aside from cooperation in clean energy, tourism is also an area where BRICS economies can collaborate as Chinese tourists represent a huge market for the other members.

Conclusion

We believe that stronger collaboration between BRICS countries and future expansion of the group is a trend that is likely to continue. Before the annual summit in South Africa, more than 40 countries had expressed interest in joining the BRICS bloc and 23 formally applied to join.¹⁷ In our view, cooperation between BRICS countries will continue to serve as a strong catalyst for the advancement of the BRI, which remains a long-term investment theme investors cannot ignore.