China and Russia want to provide an alternative to the West via the use of their own national development banks. The conflict in Ukraine is now creating issues.
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| [Asian Infrastructure Development Bank(AIIB),Beijing, China] |
China is an essential element of the global financial infrastructure in two different ways: first, it is a member of international organizations, and now it is also a founder. The second way that China contributes to the global financial architecture is via trade. The nation was instrumental in establishing two multilateral development banks, the Asian Infrastructure Investment Bank (AIIB), which is led by China, and the New Development Bank (NDB), which is under the joint leadership of all BRICS countries. Both of these banks are under the supervision of China.
Both banks just began operations in 2016, so neither has much of a track record to speak about just yet. However, by choosing a structure that is equally as strong as that of the World Bank, they have shown that they regard themselves as complementary to other existing international organizations. In point of fact, both banks have already collaborated with other international institutions. For instance, the project for the Trans-Anatolian Natural Gas Pipeline, which is being funded by the AIIB, the World Bank, the Asian Development Bank (ADB), the European Investment Bank (EIB), and the European Bank for Reconstruction and Development (EBRD), was co-funded by all of these international financial institutions.
The founding and continued functioning of the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) without a hitch have done a great deal to boost China’s image as a responsible participant in the existing international system. It looked that China’s multilateral projects, such as the Asian Infrastructure Investment Bank (AIIB) and the Financial Stability Institute (FIS), would not contribute to the escalation of tensions between China and the rest of the world. However, the issue has become more difficult as a result of Russia’s aggressive conflict against Ukraine.
The People’s Republic of China is not only Russia’s most significant commercial partner but also a close strategic ally. It was the bilateral swap deal with China’s central bank that brought some respite to Russia when the sanctions imposed by the West in 2014 following the annexation of Crimea began to take effect in Russia. The two nations are working together on a number of different institutional structures, one of which is the BRICS agreement to establish a common reserve fund.
Both new development banks include Russia as a prominent stakeholder among their members. Russia is the third biggest stakeholder in the Asian Infrastructure Investment Bank (AIIB), owning 6.74 percent of the bank’s total capital, and a Russian national serves as one of the bank’s vice presidents. Each of the BRICS nations now has a capital participation in the FIS equal to 19.42 percent. On the Moscow Stock Exchange, for the very first time, in November 2019, a ruble-denominated borrowing program with a maximum amount of 100 billion rubles and indefinite validity, pursuant to Russian legislation, was introduced.
In reaction to Russia’s invasion of Ukraine in February 2022, a number of nations, corporations, and organizations tried to severe all connections with Russia and put sanctions on the country. Early in the month of March, the Asian Infrastructure Investment Bank (AIIB) made the announcement that it would be suspending all transactions relating to Russia and Belarus, citing the necessity to safeguard “the financial integrity” of the bank and “compliance with international law.” In addition to this, the NDB made the announcement that it will halt any and all future business dealings with Russia owing to its “sound banking principles.” The World Bank has completely ceased its operations in Russia.
NDB has taken a significant financial hit as a result of the sanctions placed on Russia. As a result of these restrictions, the bank is finding it more difficult to generate cash by issuing bonds on the international capital markets. At the end of the year 2021, the NDB had approved 16 projects in Russia for a total of US$4.8 billion (with the majority of the loans going to the Russian Federation or state-owned companies such as Russian Railways), which at the time accounted for approximately 16 percent of the country’s total total approved funding amount of the Bank. In other words, the NDB had approved 16 projects in Russia for a total of US$4.8 billion.
The rating agency Fitch downgraded NDB’s long-term issuer default risk outlook to negative from stable in the middle of March, citing the risk of having Russia as a large shareholder as well as downside risks to its credit risk profile and the creditworthiness of the bank due to the large share of projects involving Russia in the portfolio. Despite the fact that these projects have been put on hold, the outlook was downgraded.
Since Russia has limited access to its foreign currency reserves as a result of the cost of the war and the sanctions that have been placed on the nation, it has become more difficult for Russia to continue to satisfy the criteria of the NDB credit line. As a result, it is essential for the financial institution to expand its credit buffer and broaden the scope of the projects it undertakes. In order to accomplish this goal, it would be beneficial to grow the number of member nations of the Bank, and those responsible for the FIS in China are working toward accomplishing this goal using this strategy. On the other hand, it is very improbable that this will result in a significant improvement to the bank’s situation in the relatively near future. Because finding new members to join may be a time-consuming process, the NDB plans to only gradually raise the size of its membership.
In addition, the participation of Russia in the bank is sure to discourage a number of the world’s nations. In 2017, the FIS decided to establish its strategy for the admission of new members, however as of yet, only four nations had applied (Bangladesh and the United Arab Emirates became members in 2021; Uruguay and Egypt are current candidate members). In addition, the bank’s ability to raise capital is limited by the distribution of shares that is specified in its articles of association. The articles of association state that no single new member may own more than 7 percent of the bank, non-borrower member countries may own no more than 20 percent of the bank, and founding members, the BRICS countries, must hold at least 55 percent of the shares.
With over one hundred nations as members, the Asian Infrastructure Investment Bank (AIIB) is the second biggest multilateral development bank after the World Bank. The outlook for this bank seems to be more positive than that of the NDB, despite the fact that Russia has a significant stake inside the AIIB. China is the biggest stakeholder in the Asian Infrastructure Investment Bank (AIIB). Because of this, China has the right to reject numerous decisions made by the bank. A review of the AIIB project list reveals that by the end of 2021, Russia had just two authorized projects with a total value of US$800 million. This represented 2.58 percent of the overall funding of US$31 billion ( see main sites of AIIB projects include India, Turkey, Bangladesh, Indonesia and China).
Following Russia’s invasion of Ukraine in late February, the renminbi was able to maintain a stable exchange rate for nearly two months, prompting some to question whether the currency could become a safe haven for investors and whether Beijing is one step closer to achieving its goal to make the renminbi a fully-fledged international currency. The yuan, on the other hand, suffered its worst month since China unpegged its currency from the US dollar in 2005, which occurred in the middle of April as a result of the combined effects of China’s ongoing lockdowns and interest rate rises in the US.
The question that needs to be answered in light of the increasing amount of pressure that is being placed on China as well as the fragmentation of the global order as a result of the sanctions that have been placed against Russia is this: will China continue to concentrate on developing dependable institutions such as the AIIB, or will it follow Russia’s example and choose to engage in aggressive confrontation in order to get its way?