Petrodollar be warned: Three Persian Gulf energy powers just joined BRICS

The leitmotif of the BRICS Summit meeting in Johannesburg on 22-24 August has been, expectedly, the expansion of the group to include six more member states. While this itself is a stand-alone event, in reality, it dovetails nicely into the group’s core agenda of global multipolarity and the creation of a fairer international trade and finance architecture that is crucial to economic growth. 

The Johannesburg II Declaration adopted at the end of the summit modestly mentions toward the very end of the document that the addition of six more members stemmed out of a “consensus on the guiding principles, standards, criteria and procedures of the BRICS expansion process.”

However, the list of six countries - Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE - also gives away some other important clues. For starters, this BRICS consensus is anchored in a profound Russian-Chinese understanding. Also, the BRICS is declaring itself to be a non-western grouping. There is no question that BRICS ascribes the highest importance to Africa and the Persian Gulf region, with Egypt and Ethiopia, the two ancient civilization-states, as the “lynchpin.” 

Russian Foreign Minister Sergey Lavrov later disclosed that the “consensus” was reached through some “lively discussions” and some serious considerations:

“The weight, prominence and importance of the candidates and their international standing were the primary factors for us. It is our shared view that we must recruit like-minded countries into our ranks that believe in a multipolar world order and the need for more democracy and justice in international relations. We need those who champion a bigger role for the Global South in global governance. Six countries whose accession was announced today fully meet these criteria.”

The BRICS expansion process was thought to be very controversial, but the unity of the group held nicely. The mother of all surprises has been India’s shift to a proactive role, belying all western predictions. This creates a new ambiance for the India-China relationship, as President Xi Jinping and Prime Minister Narendra Modi indeed broke the ice. 

Credit for this may need to go to Russian Foreign Minister Sergey Lavrov, whose diplomatic skill and sheer perseverance put together the algorithm behind the BRICS expansion. 

Lavrov has visited Pretoria no less than four times after Russia’s special military operations [SMO] began in February last year. To be sure, the Kremlin’s hearts and minds machine was steaming ahead: South Africa hosted a joint military exercise with Russia on the first anniversary of the SMO, and President Cyril Ramaphosa visited Moscow twice this year. Simply put, he held President Vladimir Putin’s hands as Russia asserted its “non-isolation.” The BRICS summit’s outcome bears testimony to it. 

Unravelling of the petrodollar  

But what truly stands out in the BRICS expansion is the preponderance of member states from the Persian Gulf region — Saudi Arabia, the UAE, and Iran. 

So, what has been the game plan in bringing on board three of the world’s most important energy superpowers? Putin has voiced more than once the Russian assessment that for a long time to come, the world economy, including the western economies, cannot do without hydrocarbons as a major source of energy to run efficient, cost-effective means of production. 

Russia and Saudi Arabia alone account for a quarter of the world’s oil production. Russia and Iran hold the world’s first and second-largest gas reserves in the world. 

If the Ukraine war has shown anything, it is that countries rich in commodities cannot be browbeaten. The issue here is about the willingness and space that these resource-rich states enjoyed to exercise their strategic autonomy. The Cold War era didn’t allow for any space. But the co-relation of forces has dramatically changed, especially as the post-Cold War “unipolar moment” has vanished. 

Saudi Arabia and the UAE exemplify this best. Having been close US allies for decades, they are now diversifying their external relations, including with China and Russia, whom Washington regards as sworn enemies. Iran, too, under the burden of extreme US and EU sanctions, today boasts a strategic partnership with both Moscow and Beijing. 

The salience here is that these three oil-producing countries are also open to trading oil in non-dollar currencies. What the US did to Russia last year by seizing its hundreds of billions of dollar reserves sent shock waves all across the so-called petrodollar states of the Persian Gulf and beyond.  

Kremlin spokesman Dmitry Peskov expressed satisfaction a few weeks ago that the process of de-dollarization in the global economy "is going relentlessly. The use of national currencies has already become a reality now, a reality growing at a global scale. Not merely countries facing sanction restrictions but also the ones not facing them are resorting to this practice - they understand the benefits of this regime in the foreign economic [activity].” 

In fact, in July, “non-sanctioned” India and the UAE signed an agreement to settle trade in rupees instead of dollars, boosting India's efforts to cut transaction costs by eliminating dollar conversions. One needs only to know that India-UAE bilateral trade last year was a whopping $84.5 billion. The first transactions between the two countries under the new agreement, including in oil and gold, have already commenced. 

All indications are that the possible creation of a single BRICS currency figured in the discussions in Johannesburg. Putin made a reference to it in his media statement, saying: “I believe that a single settlement currency definitely deserves our attention. This is a complex issue, but we have to move towards resolving it in one way or another.” 

There is every likelihood that this complex discussion will advance through the next two BRICS summits in 2024 and 2025 under the presidency of Russia and Brazil, respectively, two member states that are supportive of the idea of a common currency. 

In sum, with the induction of the three major oil-producing nations of the Persian Gulf, BRICS 2023 will mark the beginning of the petrodollar’s unraveling. This is a huge step toward a multipolar world. The new settlement mechanisms, common currency, et al, will steadily dethrone the dollar, liberating the world economy from the clutches of the US Federal Reserve. 

Fortifying the Global South

The rationale behind the induction of the three West Asian oil states — along with Egypt and Ethiopia — can also be assessed in terms of the imperatives of regional connectivity with the African continent, which Russia and China regard as being on the cusp of a historic economic transformation. By 2050, manufacturing spending alone is projected to reach $1 trillion in Africa, offering tremendous opportunities for global businesses.

But effective intra-African integration will be critical to the continent’s economic transformation. Russia hopes to connect the Persian Gulf region to the International North–South Transport Corridor, a 7,200-km-long multi-mode network of ship, rail, and road route for moving freight, and extend it further beyond to the African market. 

Moscow is discussing with Cairo the establishment of a special economic zone in the vicinity of the Suez Canal. Saudi Arabia is expanding a sweeping railway network connecting the north and south. A string of new ports is being planned along the Saudi and Emirati coastline.  

In the final analysis, the big question is whether what took place in Johannesburg is the expansion of BRICS as a “stand-alone” event. Certainly, the overnight appearance of six important states under its canopy – who will assume full BRICS membership from 1 January, 2024 - short-circuited all procedural, protracted procedures as is customary in the Shanghai Cooperation Organization (SCO) or the European Union. 

To be sure, much confabulation and quiet discussions between Russia and China paved the way. Russians are superb in distinguishing tactics from strategy, and in this case, they happen to blend with the world order that Moscow has been espousing. 

Taken together with the profound reform of trade and payments that is already in the works, what is happening is no less than the replacement of the international trading system that has been governed exclusively by the west for the past few centuries with the objective of transferring wealth from the rest of the world to their manicured “garden.” Unless the collective west shows the sagacity to adjust to new realities, weeds may soon start taking over its “garden” and turn it into a jungle. Europe’s economic recovery is going to be challenging.

Turbulent times ahead

In sum, the historical significance of the BRICS expansion needs to be weighed in the following terms: First, Iran and two erstwhile US regional allies, Saudi Arabia and the UAE, get much-needed space to negotiate an equal relationship with Washington based on mutual respect and benefit. Make no mistake, they are in a mood to capitalize on it. 

Second, the western dominance of West Asia is ending, in a historical sense, heralding a profound shift in the regional order. The process that China kickstarted - with quiet Russian support from behind the curtain - in mediating the Saudi-Iranian reconciliation will now advance toward its logical conclusion sooner rather than later. 

This means that the west’s colonial mindset of “divide and rule” will have no takers anymore among regional states. Thus, what happened in Johannesburg would be consequential for Israel and Turkey as well. 

Finally, most importantly, the de-dollarization process, which would have moved at a snail’s pace, will now accelerate. What Putin had warned when the Biden administration imposed the “sanctions from hell” against Russia — especially its ouster from the SWIFT payment system —namely, that there would be a very heavy price to pay by the United States, is coming true. The blowback is only beginning in the international financial and trading system. 

The west simply cannot win in the looming confrontation with the Global Majority. And the transition can be addressed by Washington only through reconciliation with Moscow and Beijing, not an easy poison for the Americans to swallow. 

That will have to begin with an end to the proxy war against Russia in Ukraine and a retreat or abandonment of the attempt to fuel tensions with China over Taiwan. On the other hand, any change of course in the US strategy away from its belligerent militarized policies will have long-term implications for the entire US-led western alliance system, while in the short term, impacting President Joe Biden’s re-election campaign, too. The humiliating defeat in the Ukraine war cannot be covered up any longer.  

The times ahead will be turbulent as the old, self-centered, hegemonic western mindset won’t surrender easily. As for the entrenched interest groups in the US and Europe, their basic instinct will be to manufacture delaying tactics to stall the march of history. But it won’t work if BRICS stays the course.