Russian President Vladimir Putin is set to host two major international meetings this week in Ufa: the BRICS Summit on July 8-9 and the Shanghai Cooperation Organisation Summit on July 9. Hit hard by Western sanctions and denied membership in the elite G8 club, some see this as Putin’s opportunity to show the world Russia is not isolated. The BRICS is set to finalize the creation of a joint bank, and Chinese President Xi Jinping and Putin will continue discussions on how to coordinate projects in Central Asia.
The Carnegie Moscow Center held a call to discuss the significance and potential outcomes of the Ufa gatherings, including the effects of the Greek referendum and announcement of the Asian Infrastructure Investment Bank establishment—both interpreted by Moscow and its friends as signs of Western decline. Speakers on the call were Carnegie experts Alexander Gabuev and Andrey Movchan. Svetlana Tugan-Baranovskaya, Carnegie Moscow Center’s communications manager, moderated.
SVETLANA TUGAN-BARANOVSKAYA: I think we are going to start right now. Hello everyone, this is Svеtlana Tugan-Baranovskaya from the Carnegie Moscow Center. We have 30 minutes today to talk about the upcoming BRICS summit in Ufa and I'm glad to have with me here Alexander Gabuev, who heads our Russia in the Asia-Pacific Program, and Andrey Movchan, who runs our Economic Policy Program.
This is on the record and I would like to ask you to keep your phones on mute when you are not speaking and please identify yourself before asking a question. First of all, I would like to ask our scholars to express their opinions on the topics. Let's start with Alexander if you don't mind.
ALEXANDER GABUEV: Sure. Hello, this is Alexander Gabuev, I am chair of the Russia in the Asia-Pacific Program at the Carnegie Center in Moscow here. I guess we'll start with three quick points. The one is on BRICS summit that the organization is maturing and developing at a natural pace, at which it should develop. Nobody expected that the creation of a new international bank would take several months or two years. So it was three years of negotiation. In Moscow we have seen the first outcome, the New Development Bank was formed, they managed to form the governance board, an Indian governor with four deputies. They have a physical space in Shanghai, so now there is going to be a long painful process of negotiating what the first projects are and how they use the funds which are available and it remains to be seen how they use the currency reserves pool. But it’s very pragmatic. Russia tried, being the president, to expand this group’s agenda beyond the traditional financial architecture issues. They put together about 130 different issues but that is definitely going to be of minor significance, so all eyes are on the international architecture piece. Shanghai Cooperation Organisation, well their major announcement is going to be the addition of India and Pakistan, which is agreed, and they will become the full members of the SCO. But beyond this scope and beyond the numbers that it now accounts for 25% of the global GDP and 40% of global population, you don't see that much practical cooperation or new pragmatic projects coming out of it. What will happen on the sidelines of the SCO summit in Ufa is continued discussion on how to combine the two projects which Russia and China have for Eurasia or Central Asia, the Eurasian Economic Union and “One Belt One Road,” Xi and Putin agreed in May in Moscow that they will merge or coordinate the two projects and in Ufa they will have continued discussion on how to do practically do that.
And my final remark will be that for Russia definitely the emotional and symbolic significance of the double summit is pretty high, probably higher than ever because Russia is facing isolation from the Western sanctions and this is the best course to prove that it has powerful and important friends and allies in the world. But it’s interesting that for China the significance of both formats, BRICS and SCO is either decreasing or stagnant, so it’s not growing, because China is definitely preoccupied with own initiative on global financial architecture tract, it’s AIIB, and on integration like Chinese economic influence promotion in Central Asia. It’s, “One Belt One Road” and not SCO anymore. Thanks.
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much. And now Andrey, I would like to ask you to say a few words about the upcoming summits.
ANDREY MOVCHAN: Sure. Good evening everybody. I would like to add a bit of a pure economic layer to the picture. If we look at the BRICS organization, which everybody considers as a sort of trade alliance, collectively it has over $17 trillion of GDP and $4 trillion in foreign currency reserves, but we will see a number of strange features, which make BRICS vastly different from the other two big unions, the European Union and the United States of America. International trade between BRICS members hardly exceeds $300 billion a year, and is likely to decline in years to come. And the turnover between European Union and the United States and BRICS is 6.5 times higher than the internal turnover in BRICS and if you take China only, its turnover with the rest of the world is 12.5 times higher than the inter BRICS turnover. It signals that trade relations between the BRICS members are pretty thin and weak. If we drew it out further, we see that all BRICS countries except in some sense for Russia, are too similar to have synergies providing for their active cooperation. They all have low external debt and high foreign reserves and they are not potential financiers for each other. They operate on a pretty much the same model of low cost production with close cooperation with more technologically developed countries, though even the goods produced are hardly traded between the BRICS members. Significant part of exported goods are being produced in BRICS by companies with headquarters and shareholders from the EU and the United States, and other top countries. But again—not from other BRICS members.
Then when we try to find a base for fruitful experience sharing between the BRICS members, we also have to recognize that because of very different historical and cultural roots, as well as economic structure and state, there is little BRICS countries can learn from each other economy-wise. We see that GDP per capita differs 3 times, GDP growth rate differs from over 7% to negative, index of economic freedom is different, if I’m not mistaken, from position 70 to position 150. Different BRICS countries even apply different standards to assessing its economy and social structure. In India 90% of the population lives on less than $4 per day, however Indian authorities assume that only 20% of population lives in poverty; at the same time in Russia, only 5% of population is living at $4 a day, and Russian authorities believe, that the share of citizens living in poverty is the same—20%. These figures suggest that BRICS as an economic union would hardly have much meaning for the members potentially except for Russia, which now has major structural problems in the economy (no surprise the idea of the bank and the idea of the more formal organization belong to Russia), and Russia potentially expects to benefit from such organizations at least by being able to borrow money whenever it needs from sources alternative to IMF, being able to stabilize its currency whenever it needs through the currency pool. At the same time the question is whether the force of the BRICS countries, now some $200 billion basically would be enough to compete for the position of the IMF and the WB and be enough to stabilize one of the countries of the block (presumably Russia is the first country looking for that, but we never know how the economies will work in the future and may expect any country to require external support in the future).
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much Andrey. And we are ready for questions. Probably I will start. You have already spoken about this but, the current crisis in Greece is proving the fallibility of the EU and the IMF do you think that these two new, alternative institutions (NDB and SCO) are willing and able to step up and take a leadership role in the world?
ANDREY MOVCHAN: Well maybe Alexander will add if he has something to say, but I will talk about pure mathematics. The Greece problem if you calculate it carefully amounts from $50 bill to about $500 billion in a period of 1-2 years depending on how the situation will unfold and how Greece will go through the crisis. A newly formed novice-working bank for BRICS countries has not more than $10 billion in capital and potentially $100 billion of committed assets which means that the situation in Greece is of another scale, it’s a degree bigger than the bank can match.
ALEXANDER GABUEV: And I will add the political layer. It was asked by deputy finance minister of Russia, Sergei Storchak, whether Greece could join. Openly it can join both the development bank and the currency reserve pool, if they apply and follow the procedure, but then he elaborated that first all five founding member states’ consent needs to be achieved and definitely there is no consent, so Russia was not willing to support the Greek government, China was not ready to support the Greek government bilaterally. And the conversation you have with the Chinese is that if Germans, with all the tools and all the reserves of the European Central Bank and IMF, didn’t handle the issue properly so why should we step in.
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much. And another question: what lessons from the current EU crisis should these summits take into consideration when finalizing their agreements? What do you think?
ANDREY MOVCHAN: Well again I will start with pure economic issues as well. I don’t think that there are any lessons suitable to the BRICS context because the economic pro forma of the BRICS countries is very different from the EU. They have low external debt, the budgets are mostly in the positive zone, Russia is the only exception now. The social expenditures are neither critical in size nor harmful for budgets in BRICS countries, and the economic growth is stable in all BRICS countries but for Russia, there probably is not much to talk about. There are talks among BRICS members about one currency, or at least about a unified currency for interstate trade, sort of we had in the Soviet Union with its satellite states, but BRICS never intended to implement such a thing and the major reason and the major cause for the European crisis in Greece is the unified currency, the unified monetary policy.
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much, Andrey. We have, as far as I can understand, somebody joining our conference, probably they have new questions for our speakers today.
JOURNALIST: Fred Weir, Christian Science Monitor. I wonder if Alexander could spell out a little bit more about how these two summits, being hosted by Russia this week, how they have a political impact both for Russia and for its geopolitical position in the world given the crisis given the attempt to isolate Russia. How successful can Russia be in countering that perception? What role do these two summits play both really and in terms of interpreted experience?
ALEXANDER GABUEV: Thanks for the question. I think that in terms of rhetoric, Russia will use all the different tools to create a narrative that we were kicked out of G8 but now we have a more interesting in perceptive flops, and what issues can it solve with G8 and G7, it’s all yesterday’s news and we are here, the great new world. This is what you see in the Russian television and this is what you hear from official comments from the majority of the Russian officials. So I think there will be an attempt to present itself as non-isolated but also as one of the poles that Russia presents this non-Western narrative. Russia is part of a creation of an alternative structure to Bretton Woods, Russia is promoting this Eurasian concept, so there will be a lot of PR and propaganda efforts. In reality you see growing partnership with China that is basically what you see as the optimum outcome of the Ukrainian crisis. It’s not that big in numbers because the trade is falling due to falling commodity prices and unfolding economic crises in Russia, but the pace of fall in trade with China is much less than the pace of fall in trade with the EU and other major partners. You have these gas flows from last year, which is proceeding, though much lower than anticipated. Several other contracts such as arms trade like the F400 missile defense systems which will be delivered to China, Chinese investment into Russia grew 2.5 times last year, so something is happening but definitely not as much as Vladimir Putin and other Russian officials say. Thanks.
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much, Alexander. Any other questions? Then I will ask another question. With troops withdrawing from Afghanistan and the Islamic State attracting many fighters from the Central Asian region, is this going to affect the SCO mandate? Is it going to take a more proactive role in regional or even global security?
ALEXANDER GABUEV: I think that the SCO was discussing this since the time the Obama administration announced withdrawal plans, but the problem is that the practical cooperation between the communities in the SCO is pretty limited. It’s Chinese and Russian war games which include some of the member states and “stans” and observer countries, but they try all different scenarios, probably countering terrorist attacks or movements like ISIS taking over towns, but the ISIS tactic hasn’t been properly studied. The crucial thing will be the intelligence sharing and here we see a lot of reluctance, particularly caused by Uzbekistan because the regional anti-terrorist structure of SCO, is not really well functioning because Uzbekistan is concerned that everybody is spying on it and it doesn’t get its share of intelligence. But Russia and China really see the Islamic State as one of the major threats to both Xinjiang/Uighur region and southern Russian regions but also to the stability of “stans” because the leaders are old, the social divisions are high and we see a withdrawal of responsible state holders in the region. But I actually expect much more cooperation on these bilateral tracts, Russia-China, and probably on the auspices of the organization for galactic defense treaty, the Russia-sponsored military bloc in Central Asia, than in SCO format.
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much, Alexander. Andrey are you going to add anything?
ANDREY MOVCHAN: Alexander covered pretty much everything.
SVETLANA TUGAN-BARANOVSKAYA: And do you think that this summit is attempting to provide an alternative to the West but are the participating economies really the most compatible with each other? What do you think?
ANDREY MOVCHAN: I don’t think that these summits in particular and organizations generally have any intention or potential in terms of substitution of the West in bilateral relations. Russia is now on bad terms with the West, but still the trade turnover with Europe is about 4.5 times bigger than trade turnover with China. It is the biggest trading partner to Russia. With regards to major export lines, oil and gas, Russia has much better trading relations with the West than with the BRICS countries. China is trading about $2 billion with the West, and about less than $200 billion with the BRICS countries. In this regard, it is very hard to talk about economy of substitution. We can talk about the union, which can allow members to collect and weigh these issues and to discuss issues before raising them in front of developed countries, but still we cannot expect neither the unity in opinions about many issues, nor the willingness to support each other in issues where natural unity of opinions does not exist. On the other part of the question, when we talk about the economy, I said that the economics are too similar to be synergetic, and I’d say that these countries generally compete for one position in global context. But if we go beyond that, beyond the issue of synergy, the economies differ much. Russian economy is based on mineral resources for export, the Chinese economy is based on the cheap labor, the Brazilian economy is based on development of diversified businesses based on geographic advantages, and the Indian economy is much more driven by internal consumption growth and again geography. But if you look at the group and the GDP per capita in these countries (Russia is in decline it’s difficult to talk about Russia now), but if you talk about India, for example, annual growth of GDP per capita is about $100 per person while in China it is about $400 per person. In Brazil it is more than $500 and if you look at the United States today, it’s about $1600 per person. You have to understand, all the countries are at different paces of growth and China, which seems to be the fastest growing economy, seems so just because it is a very big country and its economy is very big. Generally the growth per capita, GDP per capita in absolute numbers are quite low. Such economies just cannot serve as an alternative to the developed ones until they gain enough scale—and they have not yet.
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much that was very informative.
ALEXANDER GABUEV: I may add, I fully agree with what Andrey said. I see that in my discussion with the Chinese officials and experts, a lot of them would not say that in public, but they clearly see that BRICS bank and currency reserve pool is not an alternative to Bretton Woods. But it’s the testing model for what China is up to creating in the future, and the problem is that they really don’t know. They don’t know what the alternative they could offer. They see that the current system is not functioning well but whether they have any new creative ideas is an open question. So cooperating with other likeminded countries which also think in the same direction can give them a) new ideas for what they want to do b) experience in executing the development projects where they are taking the leading role and as far as I get a lot of the explanation for why AIIB was created so speedily and why the decision was so bold is probably that China learned a lot during these three years of negotiations behind the BRICS bank. So it’s all included in the AIIB package. Thank you.
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much. We have a couple of minutes; does anyone want to ask a question?
JOURNALIST: Yes, I could ask a question if I may. My name is _________________. I came in late and you could already discuss this. But do you think that the BRICS development bank that is being launched could play any role in relation to the Greek crisis? I know that certainly China has previously expressed some frustration about voting rights in the IMF and other things. Do you see China and Russia wanting to use this new development bank in this situation?
ANDREY MOVCHAN: Again as I said, it’s a purely mathematical issue. The size of the Greek crisis is much bigger than the BRICS development bank can handle now and could handle in the foreseeable future. The size of the bank as it is now, is about 9 times less than the size of the IMF. And five countries behind the BRICS development bank just do not have power to influence the EU politics, do not have power to finance one of its parts. With these regards, I would have to say, outside of the pure balance sheet issue, there is not much willingness for the members of BRICS to help Greece.
ALEXANDER GABUEV: Right, and the political position is very simple. If the Germans, having all the tools and all the expertise and the IMF backing, didn’t handle it properly, we definitely will fail. So, they don’t want to start the new organization’s track record with a failure and being swallowed by the Greek swamp.
SVETLANA TUGAN-BARANOVSKAYA: Thank you very much. Do we have any more questions? If no, then I think that we don’t have time and we have to wrap it up. Thank you very much for phoning in and the transcript will be available on our website tomorrow.