As the world’s seven richest nations, the G7, met last weekend to discuss how to tighten the screws on renegade Russia, in punishment of its Ukraine invasion, there hung in the air a quiet but potentially hugely disruptive statement by President Putin, a few days previously.
On 22 June, President Putin welcomed participants to the BRICS 2022 Business Forum, which was held in Beijing. BRICS is an acronym standing for Brazil, Russia, India, China and South Africa. Putin said a new international reserve currency “based on the basket of currencies of our countries is under review”. If serious, those words are the equivalent of threatening a nuclear strike against the US Dollar, and the International Monetary Fund’s (IMF) financial reserve, the SDR (Special Drawing Right).
It “may just be a trial balloon floated by President Putin” (as the ING bank says) or maybe Putin has in mind the creation of a kind of ‘shadow’ IMF and some means of displacing the SDR. Putin might yearn to displace the IMF because it’s dominated by the US; it has long been accused of imposing a US-centric view of the world on those nations who seek its help. The US is the biggest cumulative contributor to the IMF and it controls the biggest voting bloc in the Fund, meaning it has an effective veto for many decisions.
The SDR is not a currency but a reserve asset, a basket of claims on the top reserve currencies – the US Dollar, the British Pound, the European Union’s Euro, Japan’s Yen, and since 2016 China’s Renmimbi. The IMF allocated SDRs of 456.5 billion ($650 billion) in August 2021 during the Covid-19 pandemic’s height. About $275 billion of that newly minted money, which helped fire up inflation, went to emerging countries, with the rest given – SDRs do not have to be repaid – to the world’s biggest economies. The US Dollar is by far the biggest constituent of the SDR, with almost 42% of the overall weight. Challenging this kind of financial clout of the US is on the agenda of the authoritarian leadership of both Russia and China.
Currencies’ share in the IMF’s SDR
In 2001 Jim O’Neill, then an economist with Goldman Sachs, coined the term BRIC. O’Neill claimed that the BRICS – South Africa got tagged on in 2010 – would come to dominate the global economy by 2050. That prediction is looking a little awry today.
Last November O’Neill wrote of his disappointment at the patchy economic development of the BRICS. “China is the only BRIC country to have surpassed its growth projections, and India is not too far off from meeting its estimates. But… neither Brazil nor Russia have seen their nominal US dollar shares of GDP grow any bigger than they were back in 2001. The great challenge of how these countries successfully transition towards a higher income status for the whole of society remains unsolved”, he wrote. From the perspective of President Putin, one can see the attraction of a BRICS wall against the Dollar; his tanks are in Ukraine but a bigger target is US and the Dollar’s hegemony. Putin’s problem however, is that Russia is relatively weak in economic terms; it needs allies in its financial war.
Self-interest dictates policy
For both Presidents, Putin and Biden, Manichean views have come to dominate – the world is divided into black and white, good and evil. While Biden has succeeded in lassoing European and NATO allies into his pro-Ukraine camp, Putin is busily constructing an alliance of his fellow BRICS for support in the financial onslaught against the Dollar. The G7 have upped the rhetoric, promising to support Ukraine for “as long as it takes”, while India, Brazil, and South Africa have been largely non-committal; all have refused publicly to criticise Russia over its Ukraine invasion. Brazil, the Latin American agricultural superpower, is heavily dependent on Russian fertilizer imports – it won’t jeopardise those for Ukraine. South Africa’s President, Cyril Ramaphosa, has said that Washington’s dogged pursuit of NATO expansion has contributed to brewing a crisis with Russia in Europe that has eventually boiled over into war.
India has had a close relationship with Russia since the 1950s; Russia remains its biggest military supplier. India is taking advantage of the discounted price of Russian oil – about $30/barrel cheaper than Brent crude, one of the international benchmarks – to buy much greater amounts of it than before the start of the war; now 10% of all India’s imported crude comes from Russia, against just 0.2% prior to the start of the war.
China’s President Xi Jinping said at the BRICS forum that Western sanctions on Russia were “weaponizing” the global economy. He is all in favour of the BRICS nations cooperating generally. China has overtaken Germany as the single biggest buyer of Russian energy. For China, a BRICS wall against the Dollar has a strong appeal.
At the BRICS forum, President Putin said “Russian oil supplies to China and India are growing noticeably” and that despite all the sanctions imposed by the West, total trade with Brazil, India, China and South Africa rose 38% in the first three months of the year to $45 billion. He also pointed out that Russia is rapidly developing an alternative to the SWIFT international payments system, from which Russia has been largely excluded. He told the BRICS forum that the development of reliable alternative mechanisms for international settlements is being drawn up together with BRICS partners and he highlighted Russia’s Mir system. “Russia’s financial messaging system is open for the connection of banks of the five countries. The geography of Russia’s Mir payment system is being expanded”, he said. In 2014, after the Russian annexation of Crimea, several Russian banks were cut off from the Visa and Mastercard payment networks as a result of sanctions. Mir, Russia’s home-grown national payment system, grew out of that and has been a “phenomenal success story” according to one source, with almost 100 million cards issued by June 2021, and with a market share of more than 25% of the total payment transaction value in Russia. Mir payments by June 2021 were accepted in 11 countries.
Yet not everything is rosy – Russia has defaulted on about $100 million of missed payments on sovereign bonds. It won’t officially acknowledge this and is already disputing the designation, as the ratings agencies, which normally would issue a default declaration, are barred from doing business with Russia under sanctions. Russia argues this symbolic default, its first since 1918, is a technicality – it has the willingness and resources to pay but is prevented from doing so by the sanctions.
The sanctions imposed on Russia have “backfired more spectacularly than usual” says a commentator. The irony is that, by trying to punish Russia where it hurts (by edging towards banning imports of crude oil and gas) all the West has done is to remind President Putin of the strength of the cards he holds. Thanks to the sanctions, the international price of crude and gas (in Dollars, due to the Dollar’s reserve currency status) has soared and Russia is currently “raking in roughly $800 million a day”. Sanctions are such a good idea that Russia is now contemplating entirely cutting off its gas supplies to Europe, in the crucial period when Europe hopes to fill its storage tanks in the run-up to winter. Russia can always sell its oil to Asia, although finding alternative homes for its gas will not be easy or quick.
In 2021, Russia sold around 33 billion cubic meters (bcm) of gas to Asia, compared to a European market that typically imports 160 to 200 bcm of Russian gas. Two-thirds of the gas that Russia sent to Asia was liquefied natural gas (LNG): 14 bcm from the Sakhalin-2 project, going to Japan, Korea, Taiwan, and China, and 8.5 bcm from Yamal LNG, largely for China, but also Japan, Korea, Taiwan, and India. Russia also delivered 10 bcm to China through the Power of Siberia pipeline, which was launched in late 2019 and will eventually flow 38 bcm a year. Pivoting towards China and other parts of Asia will not be fast, but it will happen.
The world order is being re-shaped, as many have observed, by the Ukraine war. It has disrupted trade flows of grains, which on top of droughts and floods in many countries has heightened fears of food shortages. It has given an extra boost to inflation, which was already developing thanks to the massive injection of money by quantitative easing and Covid-19 aid packages. Rebuilding the destroyed infrastructure in eastern Ukraine will cost at least $21.7 billion according to the Vienna Institute for International Economic Studies. A former finance minister of Ukraine has estimated that the cost of a nationwide rebuilding of Ukraine “could be up to $1 trillion”. As the West struggles to demonstrate a united front against Russia, Russia thinks it already has its ducks in a row – and they are its fellow BRICS.