A decade after the Kremlin pinched the BRICS idea from Goldman Sachs and reinvented it as a diplomatic club for emerging regional powers to challenge Western dominance of global economic institutions, the skeptics have been proven wrong. These BRICS are not made with straw and have not fractured from their considerable diversity or economic ups and downs. This week’s gathering of the leaders of Brazil, Russia, India, China, and South Africa for their 7th BRICS Summit in Ufa, Russia shows more than the fact that Russia is not isolated by Western sanctions. This summit marks the transformation of the BRICS club into a nascent non-Western concert of major powers that focuses on their priorities, not those of Washington or Brussels. Concerts are known to involve deep international cooperation among major powers, but they are distinct from alliances and don’t eliminate competitive power politics.
The BRICS will now be bolstered by their own institutions that are intended to operate parallel to the U.S. led order created at Bretton Woods in 1944. On July 7, 2015 Russian Finance Minister Anton Siluanov, in his capacity as the new Chairman of the Board of Governors, convened the inaugural meeting of the BRICS New Development Bank (NDB), led by an Indian president, a Brazilian chairman of the board of directors, and five vice-presidents from each of the BRICS countries. All possess extensive international experience; some have held prominent positions at the International Monetary Fund (IMF) and World Bank. NDB operations will then shift to Shanghai, the bank’s home port, reflecting China’s role as the new anchor of a club that serves simultaneously to advance and shield its rise. China is more than one and a half times the size of the other BRICS combined but so far Beijing has not been overbearing, conceding to equal shares and rotating leadership positions in the NDB, in contrast to its new Asian Infrastructure Investment Bank (AIIB) in which China controls the largest number of shares at 26 percent. At best, the BRICS, the AIIB, and the “One Belt, One Road” initiative, meant to connect Asia by land and sea, loosely form part of a developing larger strategy to secure China’s geoeconomic interests and cement its position as a global power.
Paradoxically, China and the four other BRICS have benefited from participating in Western economic institutions. Yet, they are keen to build their own capacity to serve their development needs which they see as often neglected or adversely impacted by advanced countries’ policies. They accept the value of emulating many best practices and international standards, such as a transparent regulatory framework and creditworthiness for the NDB. At the BRICS Academic Forum held in May, a vice president of the research arm of the China Development Bank, who has also been a visiting scholar at the World Bank, cited Western estimates that the gap between the demand for infrastructure investment and available funds is about $1.5 trillion annually. He suggests that the NDB will emphasize loans and infrastructure investment in developing countries across different continents, and that both the NDB and AIIB could learn from the experiences of the World Bank. The recent flap over a harshly critical World Bank report on China’s financial system doesn’t diminish the value of such interaction, but shows how public criticism may fuel backlashes from powerful vested interests and cause authoritarian governments loss of face. Moreover, although the NDB and AIIB undoubtedly seek good ratings and a return on investments, it is unlikely that they will be totally divorced from Chinese and other BRICS’ geoeconomic interests, any more than the World Bank and IMF are from American and European compelling priorities.
Washington has found it difficult to understand the BRICS’ dual strategy of affirming the existing governance structure even as they build alternative institutions that challenge it from within. Though the BRICS countries avoid frontally attacking American hegemony, they contest the West’s pretensions to permanent stewardship of the existing system, particularly since the 2008 financial crisis, scandals like the manipulation of Libor (the benchmark to set payments on global financial instruments from mortgages to derivatives), and the persistent threat of Western economic sanctions. The BRICS intend to be the governors of their new institutions, both as formal ruler makers, and also informally in the jockeying behind closed doors for comparative advantage that pervades all cooperative endeavors. Their revisionist aims, of course, hinge on an erosion of the West’s multilateral ability to steer the emerging multipolar world, which is far from foreordained despite a loss of credibility since the start of the financial crisis. Washington has repeatedly shown its ability to divide and co-opt BRICS members, even persuading them to contribute new funds to the IMF to bail out European countries in 2012. Similarly, while all the BRICS are now focused on the World Trade Organization and a Brazilian, Roberto Azevêdo, won the Secretary General position in 2013, America has shifted its focus to conclude new regional trade agreements in the Pacific rim and Europe to maintain its dominance. As an Indian participant in the BRICS forums astutely observed, these agreements are meant to “exclude BRICS countries” and “the U.S. and other western countries are not going to cede space on the global trading giants table easily.”
Experts agree that the United States and European Union are partly to blame for the emergence of a parallel non-Western economic architecture. A principal shared BRICS grievance featured in all communiques is that the United States and Europe have denied them governance roles commensurate with their larger global economic weight. Yet so long as the U.S. Congress continues to block a 2010 reform of voting shares in the IMF that would help address such objections, Brazil has fewer shares than Belgium, through its economy is five times larger. China’s share is only 60 percent of Japan’s though its economy passed Japan’s in 2010 and now accounts for more than 12 percent of world GDP. Combined, the BRICS account for more than 20 percent of global economic activity but control only 11 percent of the voting power in the IMF.
The allocation of voting rights is determined by a country’s GDP and a host of other macroeconomic policy variables. Since consensus on a policy or action is achieved at 85 percent and the U.S. holds about 17 percent of the votes, it can veto policies it doesn’t favor. At Ufa, the BRICS will call again for breaking the deadlock on the long-stalled IMF reform and other changes. But the rebalancing of quotas and voting shares negotiated in 2010 that bolsters the BRICS is widely considered too little too late. Liberal economists from BRICS countries show how the formula that determines quotas is stacked against the rising economic powers, and that if greater weight was given to each country’s international reserves and its economic size in proportion to the world economy, there would be a significant rise in BRICS’ voting shares. Because such a reform would adversely impact European positions and cost the United States its veto power, it’s a non-starter.
Some participants in BRICS meetings speculate that China no longer would be satisfied being second to the United States in Bretton Woods institutions, and now prefers to focus on building parallel institutions. Besides the NDB, there is also a Contingent Reserve Arrangement (CRA) to help the BRICS countries forestall short-term balance of payments pressures and tide over member countries in financial difficulties. Unlike the IMF, the CRA is structured as a web of bilateral promises to make $100 billion of foreign reserves available to BRICS countries in need, with each country able to draw a multiple of its contribution. However, the CRA doesn’t fully demonstrate BRICS willingness to go it alone, or without conditionality, as it requires an IMF arrangement for countries to gain 70 percent of the maximum access of funds. Other initiatives include a BRICS credit rating agency, building on Chinese and Russian ventures, increased bilateral currency swaps, and expanded mechanisms for enabling and settling BRICS cross-border trade in local currencies. Already 25 percent of bilateral trade between Russia and China is now settled in yuan.
The BRICS have come in for considerable criticism for their limited success to date. They have coordinated voting in the UN but were unable to advance a common candidate when the leaderships of the IMF and World Bank last changed. Intra-BRICS disagreements, domestic political factors, and inertia inevitably impede collective action. For instance, Russia seeks an expansion and greater institutionalization of BRICS activities while India is more selective and Brazil is wary of BRICS acquiring an anti-Western bias since it considers itself part of the West. All three plus South Africa want to harness China to support their respective interests. The BRICS structure of incentives is strongest in the economic area, but it is impossible to swiftly create an alternative governance order when the present architecture has not been destroyed by a great power war or similar shock, and only the allies of the current hegemon are significantly declining. The prevailing reality is best captured by the continued strength of the U.S. dollar, which despite a multitude of American sins, still accounts for about 85 percent of foreign-exchange trades and retains its supremacy as the world’s reserve currency.
The BRICS favor a reduced international role for the U.S. dollar, a bulwark of American primacy, but the NDB will initially denominate loans in dollars, before it can move to a multi-currency basket. The internationalization of the yuan is supported by the BRICS as a means to weaken the dollar, not only in trade but also to dilute the impact of Western sanctions. Despite their different political systems and values, the BRICS strongly share a commitment to protect their sovereignty, autonomy and freedom of action, especially from an overbearing Washington that is perceived to act first in its own interests and pass costs to others. Before the end of this year, Beijing plans to launch the China International Payments System (CIPS), China’s equivalent to SWIFT, the electronic financial-messaging system that makes possible and tracks the transfer of trillions of dollars globally. This potential new mechanism in the BRICS toolbox could increase these countries’ independence from the Western system. The long term risk for the other BRICS countries—which they fully appreciate—is that competition in financial institutions and a shift away from the Western financial architecture will not lead to greater autonomy and prosperity but instead, as a leading Indian specialist warned, to becoming trapped in a Chinese-dominated order.
Cynthia Roberts is Associate Professor of Political Science at Hunter College, CUNY and an adjunct Senior Associate at the Saltzman Institute of War and Peace Studies, Columbia University. She is currently completing a book (with L. Armijo and S. Katada) on The BRICS and Collective Financial Statecraft.