BRICS Trade Coalitions Under Financial Sanctions

This paper studies when financial sanctions induce BRICS countries to coordinate alternative trade settlement regimes. I develop a dynamic quantitative gravity framework in which countries trade under a dominant dollar-based settlement regime and face stochastic financial sanctions that raise the effective cost of dollar-settled transactions through payment-system frictions. Countries may instead coordinate on an alternative trade settlement arrangement that insulates intra-coalition trade from the sanctions wedge but entails scale-dependent network costs together with one-time switching costs and smaller return costs. Equilibrium wages, prices, and welfare are computed in an Eaton--Kortum general equilibrium, and forward-looking regime choice is determined by value iteration in a persistent sanctions environment. The model generates endogenous switching thresholds corresponding to economically meaningful trade-cost shocks, roughly equivalent to 20–25% reductions in trade under dollar settlement, together with coalition formation dynamics under collective and sequential arrangements. Quantitative results show that collective adoption becomes optimal at moderate sanctions intensity, while bilateral initiation typically requires higher sanctions because marginal costs remain elevated in small coalitions. The founding bilateral coalition is China--Russia, whose combined trade scale generates sufficient marginal cost compression to trigger an immediate cascade to the full BRICS bloc. Coordination frictions between the collective benchmark and the self-enforcing full-coalition threshold are small, and redistribution can sustain coordination over a somewhat wider range of sanctions intensities. Evaluated at current country-specific sanctions intensities, the model is consistent with the observed bilateral shift in China--Russia trade settlement while explaining the absence of switching among other BRICS pairs. The framework provides a tractable approach to studying trade coalitions and financial sanctions in a geoeconomic environment.