Senior Research Scholar, Center on Global Energy Policy, Columbia University
Sept. 1, 2023
South Africa hosted the annual summit of the BRICS countries in Johannesburg on Aug. 22–24. BRICS — made up of Brazil, Russia, India, mainland China and South Africa — is more of a forum than an institution, though its key outcome in the last meeting was an expansion of membership. Inclusion in the bloc does not require a policy or financial commitment, but rather signals a cohort of political economies open to different models of economic development and finance. The BRICS summit is like a Davos for developing countries and their leadership, more performative than substantive in international agreements. The expansion of the cohort included the admission of Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates as members from January 2024. The formal institution affiliated with BRICS is the New Development Bank (NDB - previously known as the BRICS bank), yet the BRICS summit did not include any formal convening of the NDB or address applicants to its membership. However, one of the political aspirations of the group is to increase trade in currencies outside of the US dollar, and South African President Cyril Ramaphosa requested that member states' finance ministers and central banks might work on reducing dollar use in trade, and to report on that progress at the next summit in 2024.
Argentina, Iran, Egypt and Ethiopia are countries with some combination of high external debt obligations, poor credit access or severe limitations in access to international capital markets, either because of sanctions or because of past default. They will not be good candidates to join a dynamic development finance institution.
However, the inclusion of Saudi Arabia and the United Arab Emirates is notable in the BRICS group. For an American policy audience, it creates an impression of the Gulf states leaning outside of the US orbit and closer to China in more than just trade and investment flows, signaling a political goal of amplifying the role of non-democracy middle powers as a class of emerging market developing economies with ample capital to deploy.
Second, Gulf leadership in the NDB would be more consequential, as an alternative development finance institution that models a state-led capitalism and development model to compete with the Western-created post-World War II institutions of the World Bank and International Monetary Fund. The World Bank lends for infrastructure projects, while the IMF provides balance of payment support for governments as direct lending to central banks or ministries of finance. Though the NDB is in no position to act as an alternative to the IMF or World Bank, the model of a development finance institution that does not prioritize governance or accountability, or open markets and rights of investors, is a direct challenge to a model of democratic capitalism.
The NDB is growing; after Bangladesh and the United Arab Emirates joined the NDB in 2021, Egypt was admitted in early 2023.
If Saudi Arabia also joins the NDB, it and the UAE would add a much-needed capital injection, but also then have decision-making power on how the NDB lends, and what infrastructure projects it might support (with incentives to endorse contracts awarded to power projects developed by their own national champions, for example) across member states.
For now, the NDB is capital-starved and not in a capacity to make large loans, as reporting from the Wall Street Journal has detailed. The NDB froze lending to member state Russia after its invasion of Ukraine. Recently the NDB has also found efforts to raise capital through a bond issue to be costly, and has passed on its cost of capital by doubling the premium it charges members to borrow, and as the WSJ argues, "the bank’s loan disbursements have slowed to a crawl."
In comparison, the Asian Infrastructure Investment Bank (AIIB), founded in 2016 by China to support its Belt and Road Initiative in infrastructure and energy development, is better capitalized with a larger membership (with over 100 member countries by 2020), including the UAE, Oman, Saudi Arabia and Qatar, along with non-regional members such as the United Kingdom, France, Germany and Canada. This discrepancy demonstrates that engagement with OECD economies is a better source of capital and a more reliable mechanism of exchange in dominant currencies like the US dollar. AIIB has stronger (AAA) credit ratings than the NDB and better access to capital at lower cost, with a more transparent governance structure.
Scenario 1: BRICS becomes a podium for grandstanding and organization of anti-American and anti-Western development institutions, but garners little cohesion or ability to deploy capital or policy framework agreements among its members.
As a source of ideas and identity cohesion in international politics, BRICS is a risk to the status quo and could beckon a new transition to broader leadership in the United Nations Security Council. On the ability to provide lending and a lifeline to members in balance of payments crises, BRICS is not a sustainable platform.
Scenario 2: Beyond a membership in BRICS, with potential new capital injections into the NDB, the Gulf states — namely Saudi Arabia and the United Arab Emirates — begin to rival Chinese leadership as an arbiter of development finance options, both in their ability to deploy capital through the bank and separately as investors and infrastructure developers.
A Gulf model of economic development and mechanisms of Gulf finance, through sovereign wealth funds and multilateral finance mechanisms (through the AIIB, NDB and even traditional institutions like the World Bank) begins to emerge. This model privileges Gulf state-owned operators in the power sector, especially in the provision of finance for the construction of clean energy.
Scenario 3: The BRICS cohesion starts to fray with disagreements between major members China and India, and a demonstration of failure or state collapse in Russia. Domestic economic pressures draw China away from its development finance commitments and outward deployment of infrastructure projects. The BRICS connection to the NDB flounders and the bank's solvency is under threat.
In this scenario, the Gulf states may suffer some reputational risk in association, but have hedged with membership and accelerated stake holding (e.g., increases in SDRs, or special drawing rights, in the IMF) in Western-linked development finance institutions like the World Bank and IMF.
Conclusion - Most Likely Scenario:
In all three of these scenarios, the Gulf states gain traction in their status and stake holding as providers of both a model of economic growth and development and in the mechanisms to provide capital, either directly as investors or indirectly as lenders to emerging market economies around the world. Even in a scenario in which the framework of BRICS and leadership under China is challenged, the Gulf states come out in a stronger position. What threatens this capacity in leadership of development finance institutions is a drastic shift in their own fiscal positions, which could be caused by a collapse in hydrocarbon prices that could go hand in hand with a deep economic crisis in China.
Karen E. Young is a senior research scholar at the Center on Global Energy Policy at Columbia University. She was previously founding director of the Program on Economics and Energy at the Middle East Institute. She was a resident scholar at the American Enterprise Institute, and taught courses on the international relations and economy of the Middle East at George Washington University and at the Johns Hopkins School of Advanced International Studies. Before joining AEI, she served as senior resident scholar at the Arab Gulf States Institute, a research and visiting fellow at the Middle East Centre of the London School of Economics and Political Science, and an assistant professor of political science at the American University of Sharjah in the UAE.
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