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BRICS Bank, Ukraine likely to dominate 2014 BRICS Summit
July 9, 2014, 6:21 am

The annual BRICS Summit in the Brazilian cities of Brasilia and Fortaleza on July 14-15 comes at a time in which the global political scene is arguably more unsettled than at any other point in the past 20 years.

Each of the BRICS member states brings to the Summit very different issues and concerns. Russia, for example, is in an open standoff with the West over Ukraine; this impasse risks turning into a reprise of the Cold War. Russia’s annexation of Crimea has been greeted with apoplexy in Washington DC and in many formerly communist countries in Eastern Europe.

Barack Obama, who came to office promising to “reset” relations with Russia, is under extremely heavy political pressure to impose a sweeping sanctions regime.

Cooperation between Russia and the West – never very large to begin with – has shrunk to almost nothing and now consists almost entirely of limited work on nuclear weapons and space exploration (i.e. what it did before Obama came to office).

From left, Brazil's President Dilma Rousseff gestures to India's Prime Minister Manmohan Singh, Russia's President Vladimir Putin, China's President Xi Jinping and South African President Jacob Zuma as they gather for a group photo after a BRICS leaders' meeting at the G-20 Summit in St. Petersburg, Russia, Thursday, Sept. 5, 2013 [AP]

From left, Brazil’s President Dilma Rousseff gestures to India’s Prime Minister Manmohan Singh, Russia’s President Vladimir Putin, China’s President Xi Jinping and South African President Jacob Zuma as they gather for a group photo after a BRICS leaders’ meeting at the G-20 Summit in St. Petersburg, Russia, Thursday, Sept. 5, 2013 [AP]

The Kremlin has also been troubled by its waning economy which is currently going through a protracted period of weakness and slow growth.

Things aren’t all that better in China, where ever-more aggressive attempts to assert influence in the East China Sea have led to heighted tensions with Japan, Vietnam, the Philippines, and the United States.

Geopolitical tensions in India are at a substantially lower level than in either Russia or China, and the sweeping electoral victory of Narendra Modi, who has quickly moved to jumpstart stalled structural reforms, has reignited optimism about the country’s long-term economic prospects.

In contrast to the optimism prevailing in India, South Africa is currently dealing with an enormous country-wide strike of metalworkers, which follows shortly after the resolution of equally significant strike by employees of platinum mining firms.

This kind of labor unrest runs the risk of ruining South Africa’s reputation among investors and costing the country badly needed foreign direct investment.

Meanwhile, despite significant concerns about slowing economic growth and the government’s inability to pursue badly needed labor and tax reforms, Brazil is basking in the warm glow of hosting not only the BRICS Summit but also the FIFA World Cup, which has proceeded smoothly and without any noticeable disruptions.

Given the inherent diversity of the BRICS members, each country will therefore – and understandably – pursue very different goals and agendas at the Summit.

BRICS vs Russia’s isolation

One of the most significant issues to watch for during the Summit will be the group’s treatment of Russia and the ongoing unrest in Ukraine.

Much has been said in the Western press about the “isolation” that Russia experienced after the annexation of Crimea and how the “world community” was working to make Moscow “pay a price” for its actions.

When it comes to the BRICS, though, the criticism of Russia has been so muted as to be non-existent. All of the BRICS countries have opposed the introduction of sanctions on Russia, and several have gone out of their way to avoid criticism of Russian actions. In public statements, Indian officials referenced Russia’s “legitimate interests” in Ukraine while South Africa’s stance drew praise from the Russian foreign ministry for its “balance.” Brazil’s government had no public reaction at all.

The absence of any public criticism of Russia would highlight the extent to which the member states see the world differently, particularly when compared with the West’s decision to kick Russia out of the G8.

It would also indicate how the West no longer has a monopoly on setting the international agenda.

Russian President Vladimir Putin very clearly wants to emphasize to the West that he has other options, and the BRICS summit presents a perfect venue for doing just that.

Building a bank

Another focus of the summit will be the creation of the BRICS Bank. Much has already been said about how this institution could present an immediate challenge to the United States’ dominance of the world financial system. By making loans not priced in dollars, the bank could help speed the dollar’s decline as a reserve currency.

This perspective, however, significantly over-estimates what the bank is capable of accomplishing in the short term. It is hardly a revelation that the BRICS are very different from one another: their economic structures, demographic profiles, political institutions, and basic geography all vary enormously. Countries with such huge differences can work together, but it’s highly unlikely that they will be able to successfully create an effective multilateral institution.

Different countries would want different things from the bank and it wouldn’t be able to deliver on all of them simultaneously. As just one example, China is currently trying to clamp down on excessively rapid growth of credit while Russia’s financial system is going through a period of extremely tight money. Both countries’ problems are real, but it’s hard for one institution to fix such different issues.

Many countries have tried to create powerful multilateral institutions, and very few have succeeded. At a very basic level, it is enormously difficult to get any country to give up sovereign decision-making, and the BRICS have (understandably) proved very wary of signing away any of their authority.

When thinking about the prospects of the BRICs bank, consider for a moment the extreme difficulties the Europeans faced in setting up and running the European Central Bank (ECB). The political, social, and economic differences between different members of the Eurozone, while real, pale in comparison to the differences between Brazil, Russia, India, China, and South Africa.

And, by the time they created the ECB, the Europeans already had several decades’ worth of practical experience in creating effective multilateral institutions. There is nothing preventing the BRICS from acquiring similar experience, but it will be a long and difficult process.

As with past BRICS summits, the practical accomplishments, such as concrete investment deals and agreements to cooperate in particular areas of research, that will come out of Fortaleza and Brasilia are likely to be underwhelming.

Yes, the BRICS bank will play a role, particularly at a time that most Western banks are retrenching and that there is increasing opposition to IMF and World Bank-imposed austerity.

Russian President Vladimir Putin, center bottom, and Chinese President Xi Jinping, center top, toast at a gala dinner ahead of the fourth Conference on Interaction and Confidence Building Measures in Asia (CICA) summit, in Shanghai China, Tuesday, May 20, 2014 [AP]

Russian President Vladimir Putin, center bottom, and Chinese President Xi Jinping, center top, toast at a gala dinner ahead of the fourth Conference on Interaction and Confidence Building Measures in Asia (CICA) summit, in Shanghai China, Tuesday, May 20, 2014 [AP]

But even in the most optimistic of scenarios it will not present a credible alternative for another 10 or 20 years. For the bank to become such an alternative it would have to gradually create a track record of success: it would have to prove to the world that it was every bit of capable as the IMF and the World Bank but that it wouldn’t extract such onerous terms. It would have to do this while also maintaining lending standards and ensuring that it wasn’t making loans to unreliable borrowers. It’s a tall order, to say the least.

Shifting global power

Other agreements on technical cooperation and mutual investment will also be signed, but past experience shows that their immediate real-world impact (while positive) is not especially great.

Nonetheless, the BRICS Summit matters because it is yet another clear and intelligible example of how the world is changing and how the West (and particularly the United States) continues to gradually lose its political and economic power and its previously unquestioned dominance on the international arena.

Relations between the US and most BRICS member states are at a low-ebb, but this simply hasn’t had much of an impact because the US (while important) is much less important than it used to be and cannot impose its will as easily as it did in the past.

Although the BRICS bank might not immediately become a heavyweight, and although it will likely suffer significant growing pains, the simple fact of its creation demonstrates the shockingly rapid pace of change of the past decade.

Ten years ago the creation of such a bank would have been greeted with open derision and laughter in Washington, London, Paris, and other Western capitals.

They’re certainly not laughing anymore.

 

The views expressed in this article are the author's own and do not necessarily reflect the publisher's editorial policy.

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