By Raffaello Pantucci
First published in the South China Morning Post, July 15 2015
Late last week, the leaders of almost half the world’s population gathered in Ufa, Russia. The collision of the BRICS and Shanghai Cooperation Organisation (SCO) summits was orchestrated by Russia to guarantee exposure and attention, and highlight to the world how many friends Russia has. Dig below the shallow surface, however, and the links between the countries of the two international organisations are barely skin deep, with everyone attending for their own reasons.
For China, the two summits provide another opportunity for global engagement, as well as helping Beijing advance two international financial institutions. A timid player in many ways on the international stage, Beijing has found that its capital is one lever that it can use without raising too many hackles, and the meetings in Ufa gave it another opportunity to flex these financial muscles.
Fixating on the slow path to SCO membership for India and Pakistan, the world largely missed the key takeaway from the summits: China’s growing financial domination of Russia and its immediate backyard.
In the wake of the first Ufa summit, greater clarity was cast around the BRICS development bank, a new financial entity to emerge from the grouping of Brazil, Russia, India, China and South Africa, with an initial market capitalisation of US$50 billion. The leaders also created a US$100 billion currency exchange reserve, of which US$41 billion was offered by China, while Russia, Brazil and India each gave US$18 billion, and South Africa contributed US$5 billion.
A day or so later, the SCO members agreed once again to try to advance the concept of an SCO development bank or at least a joint fund.
China has been pushing the idea of an SCO financial institution for some time.
Seeing economic engagement as its major advantage in Central Asia, many years passed before Chinese interlocutors first presented the idea of an SCO development bank.
However, the idea has never quite taken off, with Russia in particular concerned that the vehicle would simply leave the door to Central Asia wide open for Beijing.
We live now, however, in different times, and, rather than be concerned, Russia has opened the door to Beijing. Indeed, Moscow appears to be helping to hold the doors open as China uses its lever in Russia’s backyard. Already endowed with the Silk Road Fund (focused on China’s western partners in Central and South Asia) and the Asian Infrastructure Investment Bank, China’s external constellation of economic firepower has been further enhanced by Ufa.
Russia itself has further opened up its own economy to Chinese investment, offering Chinese state-owned firms majority stakes in its oil and gas fields.
Eager for foreign investment and unable to look west anymore, Moscow is reaching east and apparently willing to throw open not only its backyard, but also Central Asia’s.
The result is a further strengthening of China’s hand in Central Asia, as the country pours finance and infrastructure into a part of the world that is crying out for it.
While in the short term there is little to worry about this investment (these are infrastructure-poor countries that will benefit from China’s appealing combination of low-cost construction firms and cheap loans), over the longer term, Chinese leverage will certainly offer Beijing a grip over the region. The lesson from Ufa is that the region’s one great resistor, Russia, has largely lifted its objections and is now welcoming all the Chinese investment it can attract.
Raffaello Pantucci is director of international security studies at the Royal United Services Institute