This video is brought to you by Morning Brew. Sign up to their free newsletter using the link in the description. You've probably seen the headlines over the past year or two claiming that more and more countries are quote ditching the US dollar and while some of it might sound like media hype there's actually a lot of truth behind these moves and it's a story worth understanding. The dollar is a dominant international currency and this gives the US an enormous amount of power when it wants to invoke financial sanctions.
At the forefront of this shift are of course the BRICS nations. Brazil, Russia, India, China and South Africa. But let's be real, the major players driving this change are Russia and China. In response to Western sanctions on some members, BRICS countries have accelerated the development of an independent international payment system. But to understand the gravity of what's currently happening with these BRICS countries, we first need to understand what it means for the US to be the world's reserve currency.
And the best way to start talking about this is by talking about global trade. Most of the transactions that occur as a part of trade between countries happen in US dollars, and that gives the US enormous leverage. In fact, 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region, and 79% in the rest of the world is conducted in USD. The only exception is Europe, where the euro is dominant.
Commodities like gold and oil are priced in US dollars, regardless of where they come from. And ultimately what this dominance means is that countries need to keep a stash of US dollars to be able to buy and sell stuff in this international trade system. It's kind of like if I went to the US and I tried to buy a Big Mac with my Australian dollars.
They're not going to take that. I need to buy US dollars to then buy the burger. I need to have a reserve of USD to make sure I can buy the things that I need.
So that's the first element. The second is that when these trade transactions take place between countries, not only are they most commonly cleared in US dollars, but they most commonly take place through US-based banks. And this is really the secret sauce that gives the US so much global power. Why?
Because, well, if they get cranky, they can block these trade transactions. And in a lot of cases, that's what's predominantly happening when the US imposes financial sanctions on a country. For example, the United States has imposed extensive trade sanctions on Iran for decades, primarily in response to concerns over Iran's nuclear program, ballistic missile development, and support for terrorism.
Now, in 2022, the U.S. prohibited American banks and institutions from processing dollar-denominated transactions involving Iran. Now, this effectively barred Iran from accessing the global dollar-clearing network, as all dollar transactions must pass through the U.S. banking system. Now, that wasn't the only thing that was only way the US flexed their muscles to impose sanctions on Iran, but just that one factor alone meant that Iran's ability to sell oil internationally was drastically reduced. In fact, have a look at this timeline of Iranian oil exports. The US imposed sanctions here in 2012, exports dropped dramatically.
Then in 2015, Iran signed a nuclear deal with the US, UK, France, China, Russia and Germany and sanctions were lifted. Their oil exports rose from a million barrels per day in 2015 to over 2.5 million barrels per day by 2017. And then in 2018, Trump reinstated the sanctions once again and their exports fell to 330,000 barrels a day in late 2019. This is the kind of power the US has just by being the world's reserve currency. They can totally manipulate the economy of a country on the other side of the world just by clicking a few buttons.
If in fact we can get a deal. then we should embrace that. If we can't get a deal, then we'll have to make a set of decisions and apply even stronger measures against Iran.
This is what's referred to when people talk about the weaponization of the dollar. And it's true. Over time, the U.S. has used its control of the reserve currency as a weapon.
In 1950, there were just two countries under sanctions from the U.S. And as you can see by this chart, well, now it's a hell of a lot more. Over time, the US has gotten more and more comfortable using its position in the world's financial system to control and punish other countries it doesn't get along with.
And before we talk about the implications of that in today's geopolitical environment, I want to tell you about Morning Brew, who are very generously sponsoring this video. I know a lot of you guys already use Morning Brew, but if you haven't heard of it, they provide a completely free newsletter sent straight to your inbox every day, and they cover all the big headlines in the world of... business and it explains how it affects your work and your day-to-day life.
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And I hope what I was talking about before gives a bit of context as to how the US uses its reserve currency status to further its own agenda. But, as you can imagine... As you squeeze more and more countries with sanctions, more and more countries are going to get kind of tired of this cheat code to global control, and they're going to start to work together to find alternatives.
And that brings us to a much more recent example, which is of course Russia. As we know, with Russia's invasion of Ukraine a few years ago, the US responded by imposing heavy financial sanctions on Russia. They cut off major Russian banks from transactions involving US dollars. they froze assets and bank accounts that were held in the US, and ultimately these banks were cut off from the US financial markets. In March 2022, key Russian banks were also banned from using the SWIFT international payment system, which is the critical messaging infrastructure between international financial institutions that helps cross-border transfers happen.
Around $300 billion of Russia's foreign currency reserves were frozen as they sat in US domiciled bank accounts, which meant that the money couldn't be used to to settle trade transactions with other countries that want to be paid in US dollars. US investors were prohibited from purchasing or trading Russian government bonds, making it harder for the Russian government to raise more rubles to make up that shortfall. US firms and individuals were prohibited from making new investments in Russia, restricting Russian corporations from raising more money.
The list of sanctions was extensive and it had a massive impact on the Russian economy. According to the IMF, Russia's economy contracted by 2.1% in 2022, and output was expected to be 7% lower over the medium term, thanks to the severity of the sanctions placed on them and the ability to choke Russia's trade capabilities. But the interesting thing about this situation is that despite the US imposing very heavy sanctions on Russia, the story of the last year or so has been around Russia's economic resilience.
While Western sanctions have most certainly heavily impacted their economy, Russia, at least partially, has been able to work around them and that has been largely thanks to trading with China. By selling oil to a massive foreign superpower like China, Russia has bypassed the need for that transaction to happen in US dollars. In fact a year ago the Russian Prime Minister noted that over 90% of trade between the two countries is settled in yuan or the ruble.
Russia has now leapfrogged Saudi Arabia to become China's main oil supplier and this has greatly helped the Russian economy. They can now circumvent the US and EU sanctions, sell their oil, make more money, and thus fund their war effort. The same has happened with Russia and India. Russian oil sales to India surged 22-fold in 2022, and in 2023, over 90% of Russia's oil was bought by either China or India.
Now, this was all done in the face of Western sanctions, so it's a pretty clear message that in terms of global trade, these BRICS nations, Brazil, Russia, India, China and South Africa, are seriously committed to working together to get around the need to transact in US dollars. Alongside SWIFT, there now exists CIPS, China's cross-border interbank payment system, which was introduced in 2015 supporting transactions in Chinese Yuan. Russia launched their version of SWIFT called SPFS in 2014, deliberately to circumvent SWIFT sanctions. BRICS nations are now also looking to buy up a lot of gold reserves, a move that gold investors have been very happy with as it sent the spot price surging to new all-time high after new all-time high over the past year or so.
China's central bank, the People's Bank of China, started accumulating more gold back in November 2022 and continued buying for 17 consecutive months with the PBOC adding a total of 314 tonnes of gold by March 2024, bringing its official holdings up to 2,262 tonnes. Now, as of October, The PBOC has paused its gold purchases for six consecutive months, likely due to the sky-high gold prices. But the major increase in gold holdings is a pretty obvious sign that they're bolstering non-US dollar reserves, reducing their dependence on the dollar and thereby mitigating exposure to geopolitical risks.
Russia has also been increasing their gold purchases, with Russia's finance ministry announcing in September that they were upping their gold purchases from 1.12 billion rubles per day to 8.2 billion rubles per day for a month, specifically noting that that increased revenue from oil and gas sales was the source of funding for the gold purchases. As of October 1st, 2024, the monetary value of Russia's gold purchases increased by $10.95 billion, bringing gold to 31.5% of the country's total reserves. And as I'm sure you can start to understand, all of this gold buying further weakens these BRICS nations'dependence on the US dollar for global trade. If they all hold large amounts of gold, they all hold a common trading asset that isn't the US dollar. And some have even speculated that this accumulation of gold could even factor into the creation of a new BRICS currency system.
And that brings us to something that happened very recently. The BRICS Summit, which was held in Russia, from October 22nd to 24th. BRICS actually expanded welcoming Egypt, Ethiopia, Iran and the UAE as new members expanding the group's representation and influence but beyond this there was significant discussions about alternative international payment solutions among BRICS nations to decrease their reliance on the US dollar namely BRICS pay.
Now BRICS pay is designed to be a bigger better BRICS version of the swift payment messaging system so it will be the payment messaging system to facilitate transactions between BRICS nations using their national currencies. You also probably heard that they're hoping to use blockchain technology to ensure transparency and security and also to speed up processing times. But the main thing you need to understand about this proposed system is not the intricacies of how it's going to work.
The more interesting story is why it's being proposed. And while people may not say it officially, the number one reason to create something like this... when a perfectly functional US-backed system already exists, is to make sure US sanctions don't affect you.
If your country was to get blocked from SWIFT, it wouldn't matter because most of your trade is carried out through BRICS pay in your local currency. The current international system of payment, so-called SWIFT, is under control of the West. So we as BRICS are well advised to move forward into creating an alternative to SWIFT. And that's what the Russian authorities, together with other BRICS countries, are pursuing right now.
So that's what's being proposed by the BRICS nations. And if it's successful, this would be a really big deal. With the additions of Egypt, Ethiopia, Iran and the UAE, BRICS now accounts for 37.3% of global GDP, versus G7 at 29.9%.
They'll have 44.35% of global oil reserves. BRICS nations will cover 36% of the Earth's surface. an area twice that of the G7 countries. Its total population will be 45% of the global population, more than four times as large as the G7's population. BRICS will account for almost half of global food production and 38.3% of total global industrial production versus the G7 at 30.5%.
This is a very, very large alliance of countries. And should they be unified under a BRICS pay system that enables easy trade outside of America's influence, While the US dollar may maintain its place as the world's reserve currency, its effectiveness as a weapon will be diminished, and America's power as the global policeman will be greatly reduced. But with that said, let me know your thoughts down in the comments, and please be sure to subscribe to the channel as well if you have not done so already. We're actually really, really close to a million subscribers right now, so if you would like to support our work, please do so by subscribing.
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