By Opposing SCO Development Bank, Is Russia Biggest Loser?

Reports that Russia is uncomfortable with the Shanghai Cooperation Organization (SCO) stepping into banking are nothing new. In particular, Moscow’s quiet efforts to block the creation of an SCO development bank that would funnel largely Chinese credit into Russia’s backyard have featured at the organization’s meetings in recent years.
But a thought-provoking analysis by Alexander Gabuev of the Carnegie Moscow Center, published last week by Russia in Global Affairs, suggests the Kremlin is mistaken, placing fears about appearing to be a junior partner over a sound geopolitical strategy that could give it a measure of control over China’s Central Asia policy.
The SCO – which groups China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan – has tried hard to convince the world it is more than just a club for dictators. China’s push to include economic initiatives on the SCO agenda was a part of this process, Gabuev notes, and a development bank has been on the table at SCO powwows since 2009.

In fact, the SCO Development Bank was seen as a miniature copy of the World Bank and the International Monetary Fund for the SCO. Chinese negotiators proposed forming the bank’s authorized capital from proportional contributions by each participating country. The size of a contribution would depend on the size of a member country’s economy (valued in nominal GDP or purchasing power parity), which would also determine the parties’ shares in the bank’s capital and the number of votes they would have in decision-making (the IMF has a similar management system). If those rules had been adopted, China would have got a dominant position in the new institution. According to the World Bank’s figures for 2013, China’s nominal GDP stood at $9.24 trillion, whereas the aggregate nominal GDP of Russia, Kazakhstan, Uzbekistan, Tajikistan, and Kyrgyzstan was less than $2.4 trillion (of which Russia accounted for about $2 trillion).

That did not sit well with Moscow. The Kremlin wanted a veto at any financial institution it signed up to, and suggested that instead China buy a stake in the Eurasian Development Bank it controls. The EDB has since become a key financial institution driving Moscow’s controversial Eurasian integration efforts. 

But that is unrealistic given China’s increasing domination over the Central Asia credit market. And while Russia remains obstinate, Chinese bilateral credit expands exponentially, often with conditions that are unfavorable to the region’s weaker states.

[S]tarting in 2012, discontent with Russia’s position has been growing, spilling over into public statements. Kyrgyz President Almazbek Atambayev has been especially vocal. In informal conversations many officials and bankers from other Central Asian countries, especially Kazakhstan, also express their irritation at Moscow’s “unconstructive position.”
The reason for their concern is understandable: Moscow’s torpedoing the SCO Development Bank idea not only fails to contain Beijing’s credit expansion in Central Asia but also allows it to take a form that is most unpleasant for countries in the region. In the absence of a multilateral institution with clear rules, as the SCO Development Bank could be, Central Asian countries have to turn to China for loans and negotiate with it one-on-one. As China is not bound by any legal commitments in such negotiations, it can easily push through its own terms. This process intensified after the global crisis of 2008-2009. The economic crisis in Russia and the fall of oil prices, which affects all, make the issue of access to Chinese loans increasingly important for the region.

Gabuev recommends Russia accept what it cannot change – namely China’s position as the region’s main creditor and economic champion – while lobbying to ensure that any future SCO bank works openly and transparently. That should allow both Russia and the Central Asian countries “to get maximum benefits from Chinese loans.”
Hopeful, perhaps. Because when forced to choose between hard influence and vanity, Russia can show narcissistic tendencies. Russia’s state-run Vnesheconombank (VEB) promised to fund construction of the third unit at Kazakhstan’s Ekibastuz GRES-2 power station, Gabuev writes. But in 2013, amid Olympic madness in Sochi, VEB ran short of cash. Kazakhstan turned to Beijing to finish the project.

By Opposing SCO Development Bank, Is Russia Biggest Loser?

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