Russia is facing the biggest external debt crisis denominated in foreign currencies since its last default in 1998 when the rouble collapsed. The economy of the world’s second-biggest oil exporter has been dealt a heavy blow by the oil price crash, which after the last few years of stability has been plunging this year. The price of crude oil has fluctuated between $50-$65 a barrel in the last few months. Its trillion-dollar economy has failed to diversify over the years, with commodity exports like oil and natural gas still accounting for half of the government revenue, making it vulnerable to even the slightest changes in their prices. Further, the economic sanctions following the Russian intervention in the Ukraine crisis in March last year have hit the economy hard.
The problem does not start and end with Russia in the interwoven world economy. The sheer size of its economy could well rattle the economies of its largest trade partners, notwithstanding that some of these countries might briefly benefit from the steep drop in global oil prices.
Much has changed in the last 16 years when the Federal Reserve came to its rescue during the last currency crisis. The trillion-dollar club BRICS, a loose conglomerate of the top five emerging economies of the world—Brazil, Russia, India, China and South Africa—stands tall today. But is this outfit strong enough to bail the Russian economy out this time?
Collectively, BRICS economies represent an estimated GDP of $20 trillion. All of them, but for Russia, had sustained their economic growth in the aftermath of the 2008 financial crisis, and in some ways steered the global markets from plunging further. Their combined foreign reserves stand at nearly $4.5 trillion. Bilateral trade among BRICS nations is on the rise, with the total trade between the countries accounting for nearly 17% of the global total.
However, while all these emerging economies are of consequence individually, there is scepticism about the group as a cohesive bloc. The bloc has acted more like a disconnected group of countries whenever it was required of them to show their unity. At the 2009 Copenhagen climate summit—with the exception of Russia—China, India, Brazil and South Africa, on the one hand, and the United States on the other, brokered a deal in a back-room meeting, piquing the EU and other developing countries for not upholding the principles of multilateralism and universal participation. A repetition of uncoordinated decision was seen in 2011 and 2012 when the countries failed to support a joint candidate at the IMF and the World Bank respectively, and Russia chose not to toe the line with the other BRICS countries.
Moreover, there is more internal competition and strategic rivalry than with the world outside BRICS. Though, in recent times, at the geopolitical level, BRICS have been making the right noises and shielding Russia on the Crimean crisis.
Dispelling doubts about the group’s unity, a $100 billion Contingent Reserve Arrangement (CRA) was announced at the sixth summit in Brazil in 2014 to cater to such contingencies by infusing liquidity into the troubled markets through its framework for bilateral currency swaps, bypassing dollar. In a much-needed break with the Bretton Woods system, all countries in the bloc are assigned one vote, and there is no provision for veto power. China and Russia are, however, the only countries with a swap line and the CRA is yet to be fully established. In such a situation, the only cushion could come individually from the other BRICS countries.
Cooperation between the BRICS could again be limited by the slowdown in these economies. The Chinese economy, which dwarfs the other BRICS economies, recorded its lowest growth since the 2008 global financial crisis. It is widely believed that over the years, China has been targeting a transition from an export and investment-oriented growth to a consumption-driven economy to reduce its reliance on volatile external markets, resulting in the downturn of its manufacturing sector that is primarily responsible for making China an economic giant today. This is putting additional pressure on the economy which is still reeling from a scaled-down demand for Chinese exports from the developed countries. Nonetheless, the Chinese government has offered assistance through a three-year currency-swap agreement to the tune of 150 billion yuan—widely seen as a rebuff to the IMF as the existing global economic saviour, and promotion of yuan as an alternative to the US dollar.
Like Russia, Brazil’s economy relies excessively on commodity exports like minerals and agricultural products, making it vulnerable to volatile prices. While the last decade saw a remarkable rise in its exports—courtesy favourable commodity prices—its economy has been contracting sharply since 2010 amid global slowdown and a flagging demand from China, its main trading partner. Last September saw its budget deficit widening to a record. Brazil and Russia together, thus, are the weakest links in the BRICS grouping.
As compared to the currencies of other emerging economies, the rupee has been stable and performing well. Its fiscal deficit is the lowest in the last seven years. But India, with its “commodity-consuming market”, in fact, is benefitting from the steep drop in commodity prices, including oil, and faces no real threat from the falling rouble.
South Africa, the latest entrant in the club, is yet to convince the world of its economic clout and its inclusion in the group, considering its minuscule economy as compared to the other BRICS countries.
The BRICS providing a solid security to the Russian currency would be a sure sign of BRICS carving out a viable alternative to the Western-dominated global financial infrastructure at least between them, and thus compelling a shift from the Washington Consensus, and the reform of the existing economic order. And if BRICS can save Russia from a collapse, the larger world’s notion of a broken BRICS will be dispelled.
By Geethanjali Nataraj & Garima Sahdev
Nataraj is Senior Fellow, ORF, and Policy Lead , Knowledge Partnership Programme, DFID-IPE Global and Sahdev is Researcher, ORF