BRICS: Transforming the global economic architecture will take time

by Mark Adomanis, The BRICS Post: 

There’s an awful lot on tap for the upcoming annual BRICS summit in Ufa, Russia.

Officially, at least, the Russians have laid out an enormously wide range of priorities for their tenure running the international group.

These self-identified priorities range from promoting “BRICS interests in the international arena” to “expanding social cooperation of the BRICS countries” to deepening “humanitarian cooperation in the format of BRICS.”

At least officially, there’s very little that’s not on the agenda.

The real action, however, is in the financial domain.

The highly-touted “New Development Bank” (previously called the BRICS Development Bank or simply the BRICS Bank) will be officially launched at Ufa.

The bank was chartered last summer with $50 billion in initial capital – $10 billion of which was paid-in and $40 billion of which was “callable,” or available upon request.

The bank’s creation has been widely interpreted by analysts, Russian and Western alike, as part of a concerted push-back against Western-led organizations such as the World Bank and the IMF.

However it’s worth noting that the $10 billion of paid-in capital wasn’t provided in a lump sum but, rather, is due to be provided to the bank over a six-and-a-half-year timeframe.

The bank’s founding members made an initial payment six months after the Fortaleza, Brazil summit last July, and will make a second payment 12 months after that, followed then by five additional annual payments.

Consequently, while you often hear it described as a “$100 billion bank” this terminology substantially overstates the amount of capital that it currently can lend or even the amount that it will be able to lend anytime over the next several years.

Changing the narrative

This doesn’t make the bank insignificant or unimportant. Simply by virtue of its mere existence it has already changed the contours of the debate about the functioning of international financial organizations.

But one should be careful not to exaggerate the rapidity with which the bank will be able to step in to fill the practical, real-world lending gaps left open by the World Bank or the IMF. The “BRICS Bank” is not yet a functioning replacement for those institutions and its primary role so far has been political rather than economic.

The summit in Ufa is also set to see the formal launch of the previously arranged “Contingent Reserve Arrangement” (CRA), a $100-billion pool of money that is designed to help alleviate exchange rate volatility.

Much like the BRICS Bank, initial information about the CRA also suggests that its immediate short-term economic impact is likely to be quite muted. Focusing purely on the overall size of the pool of money ($100 billion) does not answer the most important question, which is how much each country would be able to draw from the fund if the need genuinely arose.

Here the amounts on offer are much smaller: China is allowed to borrow up to $6.2 billion, Brazil, Russia, and India $5.4 billion, and South Africa $3 billion. Compared to the size of the respective economies, those figures are not enough to provide any meaningful support in the instance of a financial crisis.

Now it is possible, and perhaps even likely, that these figures could be modified in the future. It would not be surprising if an agreement was reached to modestly boost these figures.

But the initially low level of drawing rights is a testament to the caution and moderation with which the respective BRICS countries are entering into the arrangement. They are not in any hurry to throw money at each other.

For comparison’s sake, IMF programs of the sort that the BRICS CRA is trying to eliminate are, on an absolute scale, usually quite a bit bigger: the IMF’s recent bailout of Ukraine, for example, was roughly $17 billion, while past assistance programs to large countries have often been somewhere between $30 and $50 billion.

The CRA might be able to displace the IMF at some point in the future, but it will need quite a bit more capital in order to do so.

Allies … and friends

On a political level, Russia’s goal will be to demonstrate that – contrary to US and European claims – it is far from “isolated” on the world stage.

This goal will be achieved. Putin has extremely good relations with both the Indian andChinese heads of state, and he will take full advantage of the opportunity to showcase Russia’s growing linkages with the large emerging economies.

There is likely to be sustained rhetorical emphasis on the importance of multilateralism and the need for “peaceful resolution” of conflicts. It would be unlikely if the BRICS made any kind of formal endorsement of Russia’s actions with regards to Crimea, but neither will any of the governments in attendance voice any public criticism.

The contrast with Western depictions of Russia as a “pariah state” is hard to exaggerate.

The BRICS summit is a good chance to reflect on some deep-seated structural changes in the world, the “rise of the rest” that has seen Western economic power rapidly eclipsed by the global south.

Some of the work at the summit could potentially be very influential in future years if the development bank and the CRA work as intended.

But the process of institutional change plays out over years and decades: while the various BRICS countries have a vested interested in transforming the global economic architecture, this will continue to happen at a very modest (sometimes glacial) pace.

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