Liam Halligan in London -
In early July, the leaders of Brazil, Russia, India, China and South Africa assembled in Ufa, around 700 miles east of Moscow, for the seventh annual BRICS summit. Overshadowed by Europe’s currency imbroglio and China’s stock market nosedive - along with the usual plethora of summer sporting events - this diplomatic gathering in the Bashkirian capital deserved far more media attention.
Ufa was the most significant BRICS summit since the first - held in Yekaterinburg, also in the Urals region, back in 2009. Since then, this cluster of big emerging economies has evolved from a symbolic upstart into a group showing signs of genuine organisation and permanence.
There are still big divisions, of course. Tensions remain between China and India, given on-going disputes over the Himalayan border and Beijing’s refusal to back Delhi’s bid to join the UN Security Council. Russia and China, also, despite recent displays of unity, have a long history of mutual suspicion across their 2,600-mile land border.
The five BRICS are at rather different stages of economic development, with Russia’s $12,600 annual GDP per head twice that of South Africa and no less than eight-times bigger than in India. And while some of the BRICS are relatively well-functioning democracies, others still don’t see fit to grant universal suffrage.
Despite frequent bad-mouthing in London and Washington, the BRICS club is now more institutionalised, and has lately shown rather more purpose, than the G7 group of leading Western economies. This trend towards formality and concrete cooperation was certainly apparent in Ufa.
Russia used its presidency of the BRICS to merge the Ufa summit with the annual meeting of the Shanghai Co-operation Organisation, a six-nation Eurasian political, economic and military alliance dominated by China and Russia. Combining these two brought the Central Asian states into the meeting, as part of Moscow’s effort to counter Western claims of “Russian isolation”. The joint BRICS-SCO summit also allowed the gathered leaders to present themselves as the champions of a “multi-polar” world - a system that doesn’t revolve solely around the United States.
During the Ufa summit, Russia’s Finance Minister Anton Siluanov was appointed chairman of the New Development Bank (NDB), which will finance infrastructure projects across the five BRICS as well as other developing nations. Negotiations regarding the financing and governance of this Shanghai-based institution were finalised in Ufa, before the formal launch two weeks later.
Widely known as the “BRICS bank”, NDB boasts seed capital of $50bn and is headed on a rotating leadership, with Indian banker KV Kamath installed as the first president. Seen as an alternative to the World Bank and the International Monetary Fund, it was conceived in 2012, after the US Congress persistently vetoed previously agreed reforms to IMF voting rights designed to grant the emerging markets decision-making powers better-reflecting their growing share of global commerce.
“Our objective isn’t to challenge the existing system, but to improve and complement the system in our own way,” remarked Kamath, as NBD was launched. Yet the BRICS bank wants to close its first deals by early 2016, with the clear intention that all loans will be denominated in currencies other than the US dollar. “The NBD illustrates a new polycentric system of international relations,” said Russian Foreign Minister Sergei Lavrov, showing less diplomacy, but rather more transparency.
This NDB launch comes soon after the founding last October of the Asian Infrastructure Development Bank, based in Beijing and with its own $50bn war chest, similarly earmarked for infrastructure investments. The AIIB, though, allows membership from across the world, including Western nations. Concern about AIIB’s future power led the US to discourage key G7 allies such as the UK and France from joining - advice that was roundly ignored.
Whatever gloss is put on it, the combination of the NDB and the AIIB marks the start of a BRICS-based challenge to the US-led multilateral institutions set up after the Second World War. Ufa also saw the formal launch of a $100bn reserve pool, with the BRICS initiating mutual non-dollar foreign exchange swaps to create an IMF-style contingent reserve facility so they can help each other when facing extreme currency volatility.
There were other lower-key initiatives to boost intra-BRICS collaboration. At last November’s Asia-Pacific Economic Co-operation summit, hosted in Beijing, the Chinese unveiled a $40bn Silk Road Fund (SRF), to finance rail and air links between China and Central Asia - an area where America has long asserted political and military influence.
In Ufa, the SRF signed a memorandum of understanding with both Russia’s Direct Investment Fund and India’s Infrastructure Development Finance Company. While there will be much Western scepticism, and announcing agreements is much easier than the grind and compromise of implementation, the BRICS are clearly determined to demonstrate they can operate among themselves, without relying on Western know-how and finance.
This is hardly surprising. These countries between them account for well over a fifth of the global economy and almost half the world’s population. While Russia and Brazil are flirting with recession, and China has slowed, the BRICS are still set to expand far faster than the Western world during the next 10 years and account for over half of global growth.
Beyond their economic muscle, the large emerging markets are also keen to display diplomatic clout. Perhaps the most eye-catching development at Ufa was the acceptance of both India and Pakistan as full members of the Shanghai Co-operation Organization. These were the first new countries to join the Eurasian bloc since it began in 2001, extending its geographic reach and geopolitical significance. Since the SCO’s founding, member states have signed over 100 trade concessions and other agreements, with a stated aim of ultimately creating a free trade zone.
Part of the attraction for India, of course, is that SCO membership should provide its burgeoning economy with easier access to Russian and Central Asian oil and gas - going beyond the energy deals signed when Prime Minister Narendra Modi welcomed President Vladimir Putin to India last December. There have also been joint military exercises, with some suggesting the SCO’s principal aim is to act as a non-Western counterweight to Nato.
Whether or not that transpires, orchestrating the entry of nuclear-armed enemies India and Pakistan into the same supra-national body is a diplomatic coup for Moscow and Beijing. With Islamabad on board, the SCO could address the vexed question of Islamic extremism in Afghanistan and Pakistan. India’s SCO membership may also lessen Sino-India rivalries, giving Delhi the confidence to scale back its post Cold-War alliance with the US.
Iran wants to join the SCO too - a desire that’s become more vocal under President Rouhani, who was also in Ufa. While Moscow and Beijing insist Tehran must first sign a sanctions-ending deal with the West, eventual membership looks as if it will happen. That would give the SCO control of 20% of the world’s oil reserves and 40% of all known natural gas - a thought worth that makes some Western strategists jumpy.
The BRICS grouping, and the SCO within it, is at the heart of a broader trend - not just the rising long-term economic strength of the emerging markets, but their increasing trade among themselves. Back in 1990, such “south-south” trade flows were just a few percentage points of global commerce. By 2004, they’d surged to a fifth and business between emerging markets now accounts for almost a third of all cross-border trade flows.
Chinese trade with Brazil has ballooned from $6bn to $90bn during the decade from 2003, with China replacing the US as Brazil’s biggest trading partner in 2009. Sino-Russian trade is also fast-expanding, now almost $100bn annually, up seven-fold since 2002. Even China and India are overcoming historic tensions, their bilateral trade up from $35bn to $50bn since Modi took office in 2014.
The BRICS’ strength is far from guaranteed. By delaying structural reforms, they’ve allowed their economies to accumulate risks and imbalances. China is involved in over four-fifths of intra-BRICS trade, with an economy almost twice as big as the other four members combined - which could, unless Beijing exercises great care, cause resentment and undermine the group’s cohesion.
Yet with consumption markets already worth $4,000bn, more than the Eurozone, the BRICS will be home to over 80% of the world’s middle classes by 2030, commanding the lion’s share of the global market. Despite the tendency of mainstream commentaries to deride them, future Western prosperity depends on good trading relations with the BRICS.
Follow Liam on Twitter @liamhalligan
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