Argentina is officially invited to join the BRICS: Are international economic relations shifting South?

On 24 August 2023, during the 15^th BRICS Summit, it was publicly announced that the Argentine Republic was invited to join BRICS as of 1^st January 2024. Current president of Argentina, Mr Alberto Ángel Fernández communicated that the BRICS membership is expected to open new markets, facilitate investment flow and increase exports for the state.

Background: What is BRICS and what is its economic relevance?

"BRICS" stands for the initials of its current members: Brazil, Russia, India, China and South Africa. It constitutes an economic and political association, whose main proclaimed goal is to strengthen cooperation among its members and with third parties.

The history of BRICS can be traced back to its first informal meeting in 2006 between its original members Brazil, Russia, India and China. At the end of 2010, South Africa was officially invited to join the association. The reach of BRICS is anything but negligible. It encompasses 42% of the global population and approximately 27% of the world's land surface. In economic terms, the BRICS accounts for around 25% of the global GDP and 18% of global exports.

The BRICS does not have international legal personality, a secretariat, headquarters, or clearly defined rules. However, the BRICS has created two economic instruments: the Contingent Reserve Arrangement (CRA) and New Development Bank (NDB).

On the one hand, the CRA was created pursuant to the Treaty for the Establishment of a BRICS Contingent Reserve Arrangement of 2014 among the BRICS members, which seeks to provide support and protection against global liquidity pressures. On the other hand, the NDB is operated by the BRICS members, with headquarters in Shanghai, and its main lending focus is infrastructure and sustainable development projects. The NDB is considered as an alternative to the International Monetary Fund (IMF) especially for emerging markets and developing states.

According to the United Nations Conference on Trade and Development (UNCTAD), the BRICS members' share in the world foreign direct investment (FDI) inflow is approximately 21%. The BRICS members have 246 investment treaties in force. China is heading the list with 128 investment treaties in place, and a recent focus on comprehensive free trade agreements covering other types of economic cooperation.

Interestingly, the BRICS members only have signed four bilateral investment treaties among themselves (i.e., Brazil-India, China-Russia, South Africa-Russia and China-South Africa).

New Economic Policies for Argentina

The perhaps most attractive advantage Argentina seeks with this new membership is the access to credit lines from NDB, which represents an alternative to the existing loans granted by the IMF. Only earlier this year Argentina and the IMF renegotiated the terms of loan repayments to prevent Argentina from defaulting. This is added to increasing tensions in the financial market that led Argentina's Central Bank to implement further foreign exchange controls in May 2023. It could be then expected that Argentina will see NDB as an additional source of financing to alleviate such issues.

With respect to policies, the BRICS members aim at coordinating their economic policies at the international level and have adopted several initiatives with the view of promoting intra-BRICS investment and sustainable development, for instance: Outlines for BRICS Investment Facilitation (2017), the BRICS MoU Trade and Investment Promotion (2019), the Strategy for BRICS Economic Partnership 2025 (2020), Intra-BRICS Cooperation for Continuity, Consolidation and Consensus (2021), and the Initiative on Trade and Investment for Sustainable Development (2022).

It is important to note that Argentina will not be the only new BRICS member as from 1 January 2024. The President of South Africa, Mr Cyril Ramaphosa announced the BRICS decision to invite Saudi Arabia, Iran, Ethiopia, Egypt and the United Arab Emirates along with Argentina. This is an unprecedented expansion of this association since its inception, which is expected to change the dynamics of foreign investment in the years to come. Just as an example, the United Arab Emirates has been the most active state in the recent years by concluding more than 50 new bilateral investment treaties in the last 8 years, including the Argentina-United Arab Emirates investment treaty of 2018.

Reactions in Argentina to the BRICS Membership

The invitation to join BRICS occurs in a political heated moment as the next presidential elections are scheduled in October 2023. Two of the main presidential candidates, Javier Milei and Patricia Bullrich, voiced their concerns about Argentina's membership in BRICS and have affirmed their intention not to follow through with the BRICS membership should they win the October elections. They have particularly condemned entering into agreements with Russia, China, and Iran. It appears that only if the governing party’s candidate Sergio Massa wins the elections, Argentina will likely move forward with BRICS.

Those in favour of Argentina joining the BRICS grouping have expressed that the strong commercial relation between Argentina and Brazil alone represents a justification for Argentina's BRICS membership. Similarly, it is held that the BRICS offers the possibility to exchange energy resources, minerals and food under more favourable terms of financing offered by the NDB. Additionally, President Fernández found the crisis of the multilateral economic system, the slowdown of the world economy, skyrocketing inflation, unsustainable external debt, and a deepening North-South gap as further reasons warranting Argentina's membership to BRICS.

Yet, some experts have cautioned that there is no immediate or direct economic benefit for Argentina by joining the BRICS. Indeed, the BRICS is solely a political association; it does not constitute a free trade area, nor does it grant any tariff benefits to its members. Thus, a BRICS membership by itself does not change the economic relations among its members.

Regional Implications on Argentina's BRICS Membership

Broader implications in Latin America are not envisaged at this moment. However, one may wonder whether Argentina's BRICS membership will further impose a stumbling block for the conclusion of the EU-Mercosur free trade agreement.

Mercosur was established in 1991 and comprises Argentina, Brazil, Paraguay and Uruguay. In 2019, the EU and Mercosur reached an agreement in principle for a comprehensive free trade agreement. The goals of this agreement are: (i) to increase bilateral trade and investment, and lower tariff and non-tariff trade barriers, notably for small and medium sized enterprises; (ii) to create more stable and predictable rules for trade and investment through better and stronger rules, e.g. in the area of intellectual property rights (including geographical indications), food safety standards, competition and good regulatory practices; and (iii) to promote joint values such as sustainable development, by strengthening worker’s rights, fight climate change, increase environmental protection, encourage companies to act responsibly, and uphold high food safety standards.

Negotiations between the EU and Mercosur have reached a standstill given the EU's concerns about the Amazon deforestation. In March 2023, the EU Commission proposed an addendum on deforestation and sustainability and is awaiting a Mercosur response. On this note, the president of the EU Commission Ms Ursula von der Leyen stated "we want that our investments come with the highest environmental and social standards". However, the EU proposal has been criticised by the Mercosur bloc, especially by Brazil, as they considered it to make agricultural production in Brazil unfeasible. A counterproposal was communicated to the EU on 14 September 2023.

If Argentina accepts the invitation to join the BRICS, Mercosur will have two BRIC members (i.e., Brazil and Argentina). As such, strengthening ties with BRICS members while trying to preserve them with West countries and blocs such as the EU might prove challenging, and it remains to be seen how these negotiations for an EU-Mercosur free trade agreement will evolve.

All in all, Argentina's BRICS membership may mark the beginning of a new landscape for foreign investment and international trade. Yet, Argentina's BRICS membership appears still subject to the October presidential elections, with the winning candidate having to quickly decide whether to accept the BRICS grouping’s invitation.

For further information, please contact Dr Patricia Nacimiento, Partner, Dr Andrés E. Alvarado-Garzón, Research Assistant, or your usual Herbert Smith Freehills contact.