Two news events of interest on 24 August got global coverage. First was the death of Yevgeny Progozhin, head of the Wagner private military organisation. Much more interesting to shipping was the announcement in Johannesburg that Brazil, Russia, India, China and South Africa (the BRICS) had invited several other countries to join their organisation. They are Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates. They all accepted the invitation.
The BRICS are not a natural grouping. First imagined by Jim O’Neill at Goldman Sachs in his November 2001 report, “Building Better Global Economic BRICs” and excluding South Africa, he wrote, “Over the next 10 years, the weight of the BRICs and especially China in world GDP will grow, raising important issues about the global economic impact of fiscal and monetary policy in the BRICs.” In other words, how the BRIC governments taxed their populations, spent money and set interest rates would have increasing and wider effects.
In 2004 when at HSBC I wrote a paper suggesting that shipping and trade would benefit from the BRITVICS (using a brand of soft drinks as an aide-memoire). This added Turkey, Vietnam, Indonesia and Sub-Saharan Africa to the mixture, noting their increasing role in manufacturing and trade as well as their strong population growth.
In my 2021 publication Five Tiers of Transition: A Shipping PESTO Analysis (updated in 2022 and available on the Shipping Strategy website), I suggested that a better S in BRICS would be Saudi Arabia, the leading oil supplier to the world and a nation which under the leadership of Crown Prince Mohammed bin Salman was diversifying both its industrial base and its global client base: “In the BRICS we might replace South Africa with Saudi Arabia, still in the top three of oil producers and now the strongest Arab nation politically and economically, with global reach and rising soft power as well as a modernised military capable of operating in the near overseas and an entente with Israel which would have been unthinkable at the turn of the century.” Since then Saudi Arabia has reached a China-brokered entente with Iran as well, cementing its position as the Middle Eastern keystone.
in the 20 years since O’Neill first put the BRICs into one basket, this disparate group has emerged as a club due to some common characteristics. Many are flawed democracies if not outright autocracies. They all prefer a multi-polar view of the world to the so called established world order, though Brazil and India say that the group is not necessarily anti-Western. China meanwhile prefers to think of an expanded BRICS as a counterweight to the G7 group, the US led international rules based order and the overwhelming might of the US dollar as the global trading currency. Moreover, China sees itself as the natural leader of this club.
On this point, as I wrote in my 2021 ebook The Rise and Rise of Chinese Shipping 1980-2040 (also available online at www.shippingstrategy.com/shop) part of China’s grand strategy to replace the US as global hegemon by the middle of this century is to replace the USD as a trading currency. The first steps were in bilateral trade with Russia and Brazil. At the Russia Calling event in Moscow in 2019, President Putin called for more bilateral investments along the BRI to be done in rubles and renminbi, while Wang Yanzhi, executive director of the Silk Road Fund, called for Russia and China to use the renminbi a swap against the US dollar by Russia and China, noting both countries’ risks in dollar-dependence on their ability to grow their economies.
Sanctions and war in Ukraine have made Russia’s need to circumvent the USD more pressing. Political and trade barriers have led to the US sanctioning a number of companies and countries, making it harder for them to do business in dollars. For these entities, another currency is required. The EU has tried dealing with Iran in Euros, with limited success. When Saddam Hussein proposed selling oil in Euros, the US invaded Iraq on spurious claims of finding weapons of mass destruction. When China proposed paying for gas from Russia in yuan, the US was in no position to do anything about it.
In November 2019, Brazil’s mining champion Vale signed a physical spot deal to supply Shandong Laigang Yongfeng Steel Trade Corporation with iron ore using the iron ore price from the Dalian Commodity Exchange. Yongfeng paid for the iron ore basis the exchange’s May-2020 yuan price of iron ore. This was a further development in trading in yuan as it accepted the Chinese commodity exchange as the key price discovery mechanism for a contract and traded the commodity in yuan. Vale exports about 75 per cent of its iron ore to China.
Why should the Chinese not insist on paying in their own currency? They have a precedent in the US. In 1974, Saudi Arabia agreed to sell its oil to its biggest customer, the US, for US dollars. Now that Saudi Arabia in in the expanded BRICS and sells most of its oil to China not the US, why should it not agree to price its oil in yuan? From there it is a short move to paying for freight in yuan. Open your account today.
It is generally believed that the US agreed to guarantee Saudi Arabia’s security in exchange for getting a dollar price for oil. A more valid explanation is that currencies behave better when they are linked to a hard asset which has intrinsic value. At that time the US had broken the link between its currency and gold in order to liberate its central bank to make monetary policy. Its deal with Saudi Arabia linked the value of the dollar to a hard asset – oil. Will China agree to take over as Saudi Arabia’s security guarantor? We may be some way from that, but the String of Pearls – a group of Chinese PLA Navy bases from Malaysia to Morrocco - shows how China’s international security role is evolving. Meanwhile China already pays yuan for oil from Russia, Venezuela and Angola. Its currency is already linked to hard assets in the energy and raw materials it buys.
There’s another reason why freight will be quoted in yuan in time: an accelerating proportion of the charterers and the ship owners are Chinese. Recently it was reported that China has overtaken Greece as the biggest ship owning nation in Gross Tonnage terms. The Chinese port and terminal companies now operate internationally. Chinese banks and leasing firms provide around one third of global ship finance, and the proportion is increasing. Chinese shipyards build more and more of the ships themselves. As the global shipping markets become ever more Chinese in character, we can expect them to switch to operating in the Chinese currency.