Can the BRICS New Development Bank Revive Russia?

Francisco A. Laguna & Annapurna Nandyal

The Russian Federation, formerly part of the Union of Soviet Socialist Republics (USSR) is the largest country in the world, sharing its borders with 14 countries spread over diverse geographies. It is the fifth largest economy in the world. In 2013, Russia was among the top three most attractive countries for investors and foreign direct investment, following the US and China, respectively. Russia’s status, however, has changed drastically. In March 2014, pro-Russian forces annexed Crimea, which shocked the international community. Countries like the US, Canada and Australia, as well as the European Union (EU) and international organizations have since imposed a series of sanctions against Russian businesses and individuals. Feeling isolated, there can be no better time for Russia to look for support from the BRICS countries.

Map of Russian Federation

Map of Russian Federation

Russia is unusual among the major economies in the way it relies on energy revenues to drive growth. Oil and natural gas are abundant and account for major exports from Russia to Western Europe countries. After the Crimean crisis, the West has completely banned imports from Russia, which has affected the Russian Ruble to an all- time low. Russia was also expelled from the G8 group of leading industrialized nations. In light of increasing international isolation, the creation of New Development Bank (NDB) is of particular significance for Russia: it opens new avenues for investment opportunities.

BRICS and non-BRICS countries want to tap China’s vast financial resources. Recently, Russia announced a mega natural gas deal with China worth U$ 400 billion creating a historic landmark between both the countries. This is a symbolic victory for Russia as it seeks shift to exports from Western energy markets to Asia.

100 Ruble Note

100 Ruble Note

In addition, to reduce western dominance over the global fuel economy, Russia has suggested the creation of an energy association of BRICS with a corresponding reserve stock of fuel.

Another important feature of the NDB is that the BRICS economies can trade in their local currencies rather than the often-preferred US dollar. This is a small step to reduce the dollar’s domination as the international reserve currency. Taking advantage of this, Russia’s second biggest financial institution, VTB, signed a deal with the Bank of China to exclude dollar-payments and adopt their domestic currencies. As a result, the natural gas deal between both the countries will be denominated in rubles and renminbis. The impact of this agreement has far-reaching significance as more emerging powers could enter into similar deals with either countries and change the face of the trade economy. This development is now limited to the BRICS group, but there is a potential wave to spread to Middle East, Asia and Africa.

Moscow Photo Credit: Dcoetzee via Wikimedia Commons

Moscow
Photo Credit: Dcoetzee via Wikimedia Commons

Undeterred by western sanctions, the mood of Russian investors is upbeat on the BRICS bank theme. They are willing to invest in BRICS countries as well as other territories. At the BRICS summit held in Brazil this year, Russian President met with leaders of South America and the Caribbean in an attempt to boost its influence in the Western Hemisphere, including setting up large-scale development contracts in the energy field and export of oil reserves in Argentina and Cuba.

Overall, the NDB is now seen as a geo-political alternative for Russia to increase its role in global affairs after a 30-year decline. Russia (and Putin) seeks to demonstrate that it is indispensable in achieving the goals and principles of the bank.

TransLegal has correspondent offices in each of the BRICS. Contact us with your questions concerning doing business in Brazil, Russia, India, China and / or South Africa.

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