One of our longstanding arguments about the folly of American policy on Iran-related sanctions is that it is incentivizing rising powers like China and the other BRICS countries (Brazil, Russia, India, and South Africa, along with China) to develop alternatives to U.S.-controlled mechanisms for conducting, financing, and settling the international exchange of goods, services, and capital. As the latest sets of U.S. and European Union sanctions against the Islamic Republic were going into effect, Neelam Deo (a former Indian diplomat who now directs Gateway House, the Indian Council on Global Relations) and Akshay Mathur (head of research and geoeconomics fellow at Gateway House) published a brilliant opinion piece in The Financial Times outlining precisely how such alternative mechanisms are likely to emerge, see here.
Deo and Mathur note at the outset of their article that “two recent developments—the $75 billion 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, however, “the BRICS must urgently organize to build institutions of mutual economic benefit”; the newest round of Iran-related sanctions from the United States “highlights the urgency of the issue.” The BRICS are “hostage to Western sanctions because the conduits of international finance, trade and transportation use 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 trade for crude oil futures contracts…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 [and insurance] options.”
Deo and Mathur note that “the BRICS are finding creative ways to pay Iran” and to provide insurance coverage for shipments of Iranian crude. But rising powers nonetheless face a daunting structural challenge. Deo and Mathur warn that “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.”
So what, then, can the BRICS do to rectify these structural imbalances that the United States and its European partners seem all too ready to leverage as a way of keeping rising powers subordinated to Western preferences? Deo and Mathur offer some genuinely creative answers:
“Apart from the already proposed multilateral BRICS Bank, should be a clearing union and insurance club to facilitate international trade, finance and transporation. For instance, though China and India have a deficit with Iran, Braizil and Russia do not. If a new trade settlement system is created—like the Asian Clearing Union establishied 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 [it earns from exporting oil to India and China] to pay Brazil, and not amass rice and toys. Brazil can use the same system to pay India fdor 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.”
Deo and Mathur acknowledge that “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 CRICS 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.
Deo and Mathur also acknowledge that “there will be resistance from the U.S. and Europe,” out to preserve “the almighty dollar” and their ability to leverage non-Western powers through hegemonic extraterritorial sanctions—in our assessment, clearly illegal, see here [link to June 27 post]. More broadly, Deo and Mathur admit that “the West has dismissed the workability” of BRICS-led international economic institutions. “But,” they conclude, “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.”
Read their article and get a glimpse at what is likely to be an important part of the future.
–Flynt Leverett and Hillary Mann Leverett