Neelam Deo is a former Indian ambassador and Director of Gateway House: Indian Council on Global Relations; Akshay Mathur is head of research; Geoeconomics Fellow at Gateway House: Indian Council on Global Relations:Two recent developments – the $75bn bailout contribution from the BRICS countries to the IMF, and the western push for sanctions against Iran – show how exposed the BRICS economies are to western financial policies.
For decades, they have been successfully co-opted to submit to western-dominated institutions, leaving them with little motivation to build their own. Now, the BRICS must urgently organize to build institutions of mutual economic benefit. The June 28 deadline that China faces on complying with Iran sanctions, highlights the urgency of the issue.
BRICS are a larger oil-importing bloc than the European Union. None are in confrontation with Iran, but are nonetheless hostage to western sanctions because the conduits of international finance, trade and transportation used for crude oil trade are controlled by the West.
The entire pricing framework is U.S. dollar based. The New York Mercantile Exchange (NYMEX) and London’s International Commodities Exchange (ICE) conduct the largest trades for crude oil futures contracts – $14 billion and $4.8 billion respectively in 2011. They derive the world’s leading crude oil pricing benchmarks: the WTI, and the Brent used by all nations except the U.S.
There is SWIFT, the global code for electronic banking transactions. In March, SWIFT banned Iran’s banks from conducting business, leaving oil importers like India lurching for payment mechanisms. Ditto with transportation options. London’s International Group of P&I Clubs which aggregates 80 re-insurers – like Lloyds – and insures 90% of global ocean-going tonnage, will not issue coverage to ships carrying oil from Iran starting July 1.
Without alternatives, the BRICS are finding creative ways to pay Iran. India worked through banks in Europe, Dubai and Turkey before finally using its own state-owned UCO Bank to pay its $10 billion annual oil import bill from Iran. Small banks hidden from the reach of the sanctions, like Russia’s First Czech-Russian Bank, China’s Bank of Kunlun and Iran’s Saman Bank, are available but charge hefty additional transaction fees.
Finding insurance is even harder. The Iran Insurance Company and the Chinese P&I, both not part of the London-based IG P&I which cover shipments to India and China, do not have the financial heft to make up for the shortfall.
As options, India and China considered paying in gold. There are bilateral currency swaps of the Iranian Rial with Renminbi, Rupees and Rubles. In return, Iran will use BRICS currencies to buy Chinese toys, Indian rice and Russian wheat. This is unsustainable. Iran has a trade surplus of $7 billion with China and $8 billion with India; trading in local currencies will leave Iran with huge unused local currency deposits.
The sanctions are an issue for energy exporters like Brazil and Russia too. The Western-dominated system that is strangling Iran, can do the same to others should their geopolitics be deemed inconvenient. Iran today, could be Russia or Brazil tomorrow.
What then, can the BRICS do? Apart from the already proposed multilateral BRICS Bank, should be a clearing union and insurance club to facilitate international trade, finance and transportation. For instance, though China and India have a deficit with Iran, Brazil and Russia do not. If a new trade settlement system is created – like the Asian Clearing Union established in Tehran in 1974 or the International Clearing Union proposed at Bretton Woods in 1944 – but with BRICS currencies, Iran can use the Rupees or Renminbi to pay Brazil, and not amass rice and toys. Brazil can use the same system to pay India for its bilateral trade, thereby facilitating multilateral local currency swaps for intra- and inter-BRICS trade.
New commodity exchanges can be promoted to enable alternate means of price discovery and benchmarking in currencies. Indian commodity exchanges already trade crude oil futures contracts. Iran launched its own Oil Bourse in Kish in 2008 for trading oil in non-dollar contracts.
Activating these regimes will require adjustments. China’s reserves are in dollars; it will have to balance preserving that value with internationalizing the Renminbi – a stated Chinese goal achievable under a new system. External partners like Iran will have to make an effort to increase trade with BRICS to avail of the new system’s benefits.
Net importer India will have to offer more competitive products and services within BRICS. In return, net exporters China and Russia may have to patiently hold weaker currencies like the Rupee until a balanced equation is achieved.
Unquestionably there will be resistance from the U.S. and Europe. Not only will they lose control of instruments like sanctions, but any alternative platform will be a direct threat to the almighty dollar and hit the near-monopolies of NYMEX and ICE.
Much will depend on how China reacts to the June 28 U.S. sanctions deadline. It has leverage: China is a member of the P5+1 negotiating group and is a major energy client for Iran.
The West has dismissed the workability of BRICS. But if 28 countries in NATO could unite to contain Russia, surely the five nations of BRICS can come together to ensure their geo-economic future.