BRICS face down global instability
July 8, 2015, 6:19 am

When BRICS leaders meet at Ufa, Russia today, they will be facing a world that has much changed since their last summit in Fortaleza, Brazil.

Atypically, this piece kicks off with a success story: In the past year, BRICS diplomats, top financial experts, and heads of state have overcome their differences and sticking points regarding the much-heralded New Development Bank (NDB).

The Bank launched yesterday, and will will be headquarted in Shanghai, China with an initial capital of $100 billion. The initial subscribed capital of $50 billion will be equally shared among founding members.

Indian banker Kundapur Vaman Kamath, an Asian Development Bank veteran, is its first president.

Russian Finance Minister Anton Siluanov is the bank’s first Chairman of the Board of Governors, while the first chairperson of the Board of Directors will be Brazilian. South Africa will establish an African regional center for the bank.

Last year, some media reports speculated that disagreements during the formative stages of the NDB could tear BRICS apart because of financial and political rivalries.

That this new financial system is about to enter operations and create a new paradigm to the existing order of the IMF and World Bank is no small feat; it disproves the naysayers.

In fact, not only is it the first alternative global banking regimen since World War II, but it rewrites the narrative on the economic system in the 21st Century.

But the great success of the establishment of the NBD could be overshadowed by the possibility that the global investors’ honeymoon with emerging markets could be coming to an end.

This is where BRICS finance and trade delegations will have to pull a few rabbits out of the hat.

At the height of the global financial crisis, emerging economies such as Turkey, India, China, Nigeria and Sub-Saharan Africa (to name a few) appeared as high-return markets. Foreign investment flocked to these countries and for a few years a great economic success story was being written.

Soon, emerging markets came to account for 40 per cent of the global economy; according to the IMF, more than $650 billion flowed into emerging markets between 2009 and 2013.

But by the end of 2013, the picture began to change as major investment firms began to feel uneasy about the increasing volatility in emerging markets. In that year, some $15 billion of FDI flowed out of emerging economies and was redirected back into US and European markets.

The golden age of investing overseas was coming to an end as the US Federal Reserve began tapering its quantitative easing stimulus program and cutting the amount of cash flow it generated in the local market.

EPFR Global, a US-based firm that tracks the flows and allocations of funds domiciled globally, found that emerging markets between January 1 and February 1 of 2014 had suffered an outflow of $12.2 billion in equity.

But by the end of the second quarter in 2015, outflow was increasing.

Between June 3 and June 10, outflow from emerging economies reached $9.3 billion – most of it from Asia. This was the highest outflow total in seven years.

Several factors have been exacerbating the rate of outflow.

The Euro has fallen by nearly 25 per cent since September 2014, making it cheaper to invest in Europe. At the same time, the European economy continues to grow at a dismal, lackluster rate.

The European Commission forecasts 2015 eurozone growth at just 1.5 per cent. The 19-member common currency bloc is suffering from rampant deflation – even economic powerhouse Germany is seeing prices falling.

The eurozone is also suffering from double-digit unemployment and stagnation, and declining consumer confidence. Economic forecasts for the eurozone continue to confound. For example, industrial output grew 0.1 per cent from March to April 2015. But this came after -0.4 growth between February and March.

While a low euro, fallen oil prices and the European Central Bank’s quantitative easing have helped the eurozone somewhat, it’s apetite for imports has fallen.

In March, China’s General Administration of Customs (GAC) said that exports for March 2015 fell 15 per cent compared to last year.

Most economists feel that such a large decline in Chinese exports likely signals that there is weaker global demand.

A drop in global demand, in turn, indicates that world economies are sputtering along and not in particularly good health.

The IMF says the world economy will grow 3.5 per cent in 2015 (it grew 3.4 per cent in 2014). In 2016, the global economy is expected to grow 3.8 per cent.

Add to that the as yet uncalculated impact of the Greek-EU crisis and the continuing instabilty and conflict in Ukraine (which have badgered Russia’s economy into near-recession), and the picture looks even more grim.

In a vicious circle, the European drag has affected markets in Brazil, Russia, India and China.

The BRICS economic planners need to carve out contingencies – no one could have anticipated at the 6th Summit in Brazil last year that Greece could have fallen into such crisis, or that a leftist government would be elected.

Let’s call it the Greece Factor – or the Ukraine sinkhole; either way these cannot be seen merely as speed-bumps. They are more in line with drastic detours that could derail engines for economic growth.

Ukraine: Microcosm of East-West relations?

Multilateralism has been a key component of Russia’s foreign policy and since 2009 has been a BRICS mantra [XInhua]

European and US sanctions on Russia for its alleged support of pro-Moscow separatists in Ukraine have become more stringent in the past year targeting critical sectors of the economy.

The Russian finance ministry says that the economy is losing around $40 billion every year the sanctions are enforced, and another $90 to $100 billion due to falling oil prices.

The US, EU and its allies have hit Russia’s top bank and leading energy and technology companies with sanctions to punish Moscow; every few months they draw up a new list of senior Russian diplomats and industrialists who are prevented from travel or conducting business in Europe.

Russia says it is committed to the Minsk ceasefire agreements and opposes military solutions to the Ukraine crisis. Both these positions are likely to be strongly endorsed by fellow BRICS members at Ufa this week.

Russia will also look to repeat its diplomatic victory at last year’s BRICS summit, by speaking “with one voice with its partners in the BRICS for the promotion of international stability in its various dimensions”.

Part of this includes strengthening the BRICS position that rejects “unilateral military intervention and economic sanctions”.

Western pundits have highlighted Russia’s isolation because of the Ukraine crisis; however, given how BRICS last year rallied around Russia in condemning one-sided economic and political measures by third countries (as outlined in a joint statement released after the July Summit), that assessment is now seen to be largely inaccurate.

If anything, relations between Russia and other BRICS members have only been enhanced and strengthened in the past year.

Ties with China, in particular, have stabilized and become a significant part of Moscow’s and Beijing’s foreign and trade policies.

Both countries see multilateralism as a means to counter a unipolar world dominated by Washington.

Pushing multilateralism

Shortly after the 6th BRICS Summit in Brazil last year, President Xi Jinping told Russian Prime Minister Dmitry Medvedev that “both countries should continue to enhance strategic coordination, maintain the authority of the United Nations and its Security Council, safeguard the purposes and principles of the UN Charter and the basic norms governing international relations, in a bid to jointly promote world peace, stability and development”.

Statements such as the one made by US Deputy Secretary of State Antony Blinken comparing the South China Sea territorial disputes with the crisis in eastern Ukraine only serve to reinforce the belief shared by both countries that they are under Washington’s scope and closer ties between them are in both their strategic interests.

It’s no surprise then that both countries see US anti-ballistic missile systems – purportedly as defense against North Korea – as targeting them.

It also helps to explain why the two carried out 11 days of joint naval exercises in the Mediterannean last May. Add to that the numerous oil and gas deals, the pipelines being built, Chinese multi-billion investments not only in Russia but the rest of BRICS as well and you begin to see a picture where these five countries are helping to prop each other up.

But the intra-cooperation between BRICS doesn’t end there. Just last week, BRICS members China, India and Russia became the three largest shareholders in the new Asia Infrastructure Investment Bank (AIIB), with a voting share of 26.06 per cent, 7.5 per cent and 5.92 per cent, respectively.

The idea of AIIB was first raised by China.

Brazil and South Africa are cofounding members. As are 51 other countries.

A financial, investment and infrastructure revolution in the making?

Indeed.

Global terrorism

But there are landmines to navigate and nowhere is this more pronounced than in the increasingly volatile Middle East – another significant geopolitical volcano that can threaten BRICS members.

When Brics leaders met at Fortaleza Summit in Brazil last year, the Islamic State of Iraq and the Levant (ISIL) had just seized Mosul and Raqqa and carved out a self-styled rogue territory spanning much of Iraq and Syria, respectively.

Since then, despite losing some villages and the city of Tikrit in Iraq, ISIL has shown that it has global reach. While it continues to govern a third of Iraq and more than 25 per cent of Syria, a number of Islamist extremist groups have declared allegiance to ISIL and started a wave of terror in Tunisia, Libya, Egypt, Lebanon, Nigeria, Yemen, Kuwait, Saudi Arabia and Afghanistan.

They now command influence and territory in several of the aforementioned countries.

This is naturally of grave concern to China, India and Russia. In China, the province of Xinjiang is restive due to a number of Islamist terrorist attacks which have killed hundreds in the past year.

India has suffered Islamist terrorist attacks as well – chiefly in Mumbai in 2006 and 2008.

Russia, which has dealt with Muslim Chechen violence in Dagestan, in its heart Moscow (Dubrovka Theater hostage crisis of 2002) and the Beslan school massacre in North Ossetia in 2004, has persistently warned that Islamist militias in Syria are a global, not localized, threat.

It is important to add that many of ISIL’s elite cadres are from Ingushetia and Chechnya.

BRICS nations must work with the UN and other international organizations to destroy ISIL. However, this is not the challenge.

According to recent statements from former Afghanistan President Hamid Karzai, the onus is on the US to work with its partners toward this goal.

“If it [the US] is sincere in the war on terror, then it should begin to be concerned with the countries in the region, especially the big countries of the region — China, India and Russia — and see it as a threat to all and begin a true international and regional cooperation,” Karzai said in an interview with Voice of America.

While much of the focus at the Ufa Summit will be on the NDB and the idea of a future free trade zone, among other economic and business issues, the challenges facing emerging economies, including the specter of extremist terrorism must not be overlooked.

By Firas Al-Atraqchi for The BRICS Post