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The current conflict in Ukraine has a decided international financial aspect. Russia, one of the five ‘BRICS’ nations (Brazil, Russia, India, China, and South Africa), faces new rounds of sanctions.
The West has frozen the assets of Russia’s central bank, to stop it from using its $630 billion foreign currency reserves. Although none of the other BRICS nations are participating in the economic sanctions against Russia, the multilateral bank established by the BRICS countries, the New Development Bank (NDB, sometimes called the BRICS Bank), has announced that it has put new transactions in Russia on hold.
Without any reference to sanctions or Ukraine, the NDB’s statement said, “In light of unfolding uncertainties and restrictions, NDB has put new transactions in Russia on hold.” However, NDB lists Russian projects worth around $ 4.86 billion, which have either been implemented or approved, indicating that they will not be affected by the halt in new business.
BRICS nations constitute the world’s five major economies and are a significant influence on international affairs.
In 2012, BRICS took the momentous decision to establish their own financing mechanism. Two years later, the NDB was established to mobilise resources for infrastructure and sustainable development projects in emerging economies. It also created the Contingent Reserve Arrangement (CRA), a framework for the provision of support through liquidity and precautionary instruments in response to either actual or potential short-term balance of payments pressures.
At a US Congressional hearing, Nathan Sheets, the Under Secretary of Treasury for International Affairs, acknowledged, “As the largest shareholder and the only member with veto power over major IMF decisions, our extended delay in approving the 2010 IMF quota and governance reforms has led our partners to question our commitment to the multilateral system.”
Shortcomings in the BRICS financial mechanisms
Although the impact of its creation has not been insignificant, nearly 10 years on, the shortcomings in these payment mechanisms have started to become obvious.
On a macro level, the dynamism of the BRICS has been affected by several factors: India and China’s acrimonious stance has weakened the mechanism; post Crimea-2014 Russia has been affected by sanctions making it difficult to lend money to its infrastructure companies; Brazil has been weakening both economically and politically; over $30 billion looted in corruption scandals have set South Africa back and it has shown a preference to approach the IMF, despite the onerous conditionalities of its loans.
In terms of functioning, the BRICS finds itself criticised for the lack of transparency although it was founded with the mission to make it an egalitarian banking structure, with all five members having the same voting rights.
BRICS bank has an authorised capital of $100 billion. The initial subscribed capital of $ 50 billion is equally distributed amongst the founding members. But other emerging economies like Mexico, Turkey, Indonesia and Nigeria will have to be included to make it sustainable.
NDB’s ability to reach its full potential
Despite these shortcomings, the BRICS financing innovations still hold great promise.
In 2020, the NDB received AA+ long-term issuer credit ratings from S&P and Fitch. In March, Fitch Ratings revised the outlook on NDB’s Long-Term Issuer Default Rating (IDR) to ‘Negative’ from ‘Stable’ because of “the presence and role of Russia as a large shareholder”. At the same time, it also affirmed NDB’s ratings at ‘AA+’ because of its strong credit fundamentals, including its large capital buffers.
NDB started expanding its membership in September 2021 with the admission of Bangladesh, United Arab Emirates (UAE) and Uruguay. In December 2021, Egypt was admitted as a new member.
The current crisis in Ukraine and the expansion of Western sanctions lend possibility to BRICS mechanisms finally breaking the hegemony of financing structures created by developed countries.
Can BRICS learn from its mistakes?
The Russia-Ukraine violence is a real test for the cohesion of the BRICS bank. The conflict is being called an “economic and financial war”, and sanctions against Russia’s central bank seem, if not designed to, then still destined to collapse the Ruble.
On the UN motion to demand an immediate end to the invasion of Ukraine, amongst the 35 nations that abstained are India, China and South Africa. However, Brazil voted against Russia. The current situation is an ideal time for a reckoning of the international relations of the BRICS nations, and in particular of their often problematic relations with the West.
Time and again, the five-member nations have agreed to extend credit facilities in local currency to each other. But this has not been so easy given that the US dollar is the current base currency in global trade.
For its part, India always had a Rupee-Ruble trade arrangement with Russia. However, it was suspended in 2005 because Russia was stuck with huge Rupee balances. Delhi switched again to Ruble in 2019 for the advance payment of S-400 defence systems to avoid the threat of US sanctions.
With the EU and the US blocking many Russian banks from accessing SWIFT, India must further strengthen the Rupee-Ruble trade arrangement. Within Russia, transactions are being carried out via its ‘Structured Financial Messaging Solution’ (SPFS) system, developed in lieu of SWIFT in 2015.
There is a possibility of India linking the Central Bank of Russia’s platform with a domestic financial messaging system. In China, the alternative SWIFT payment system in RMB Cross-Border Interbank Payment System (CIPS), run by the People’s Bank of China, is already in place with more than 690 banks as participants.
But in the main, it is the conservatism of the central banks of the BRICS nations that has to undergo change. Unless it is ready to move forward with transformative ideas, the NDB may never progress to its true potential. This has begun to manifest itself in innovation in some areas, such as lending in local currencies to protect borrowing countries from a stronger dollar, which was one of its founding features.
It accepts parameters for compliance with environmental and social standards designed by borrowers, respecting its members’ own policies. There was criticism that China has undue influence, with the bank headquartered in Shanghai, but it has installed its first regional centre in South Africa, with plans for another in São Paulo. China has, on several occasions, indicated that it deeply values the BRICS mechanism.
In 2019, though the bank approved over US $12 billion in loans, it disbursed less than $1 billion. In order to be sufficiently contemplated in international financial governance, BRICS need to emerge from the shadows, not as borrowers but as lenders. With the right political guidance, the CRA and the NDB can be driven to fulfil their original objectives which go beyond BRICS.
The current crisis is the right time for the BRICS nations, using the NDB platform, to launch an alternative to SWIFT, give momentum to national currencies and expand trade with countries facing Western sanctions.
In the beginning, the payment mechanism will have to be pegged to a third international currency to ensure that exporters don’t lose out, given the recent sharp volatility in the Ruble movement. Despite the hindrances, what cannot be ignored is the overwhelming impulse among emerging economies to change the currency situation of international payments and lending, from the hegemonic US dollar to local currencies.
Vaishali Basu Sharma is an analyst on strategic and economic affairs. She has worked as a consultant with the National Security Council Secretariat for nearly a decade.