The SCO Follows the BRICS Footsteps to Counter Dollar Hegemony
After the BRICS countries established an alternative financial system to reduce their dependence on the US dollar, the member states of the Shanghai Cooperation Organization (SCO) have also decided to follow this path. Although the trade volume among member states is currently far behind their total external trade, establishing a unified development bank and payment system will provide protection for the countries, helping them to reduce their vulnerable reliance on the Western financial system.
The member states of the Shanghai Cooperation Organization (SCO) are ready to build a financial infrastructure system that can replace the US dollar, a path already explored by the BRICS countries. The SCO member states include China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, India, Pakistan, Iran, Belarus, and Uzbekistan.
The SCO member states have decided to establish a development bank for investing in their own projects. Vladimir Putin also proposed the issuance of joint bonds and the idea of developing a unified payment system for trade settlements, while emphasizing the importance of building a joint clearing and custody infrastructure. Putin stated, "All these measures will improve the efficiency of our economic cooperation and protect it from the impact of external environmental fluctuations." In 2024, the average economic growth rate of the SCO member states reached 5%.
Mikhail Gordinco, a professor at the Department of Financial Sustainability at the Plekhanov Russian University of Economics, said: "The above financial tools allow the operation of financial resources within the SCO framework to be independent of the West and at a lower cost. For Russia, this means resistance to sanctions in settlements, access to capital in the emerging financial ecosystem, support for its national currency, and the use of its own currency in trade."
This expert added that the SCO is building a unified capital market serving its own projects, while reducing currency and sanction risks, forming its own financing, insurance, investment standards, and even broader management and quality standards.
Kirill Chernovol, a researcher at the Best International Practices Analysis Laboratory at the Gaidar Institute, said: "These mechanisms reduce the cost of resource acquisition through the supranational status of capital and banks. Additionally, they expand the accessibility of medium- and long-term funds of member state currencies for infrastructure projects. The establishment of the SCO Development Bank will also promote the development of domestic capital markets."
Yulia Handoshko, CEO of the European brokerage company Mind Money (formerly "Tserekh"), believes: "Establishing a unified development bank similar to the European Investment Bank within the SCO framework is a more realistic step. Such a bank can direct investments toward infrastructure projects, thus stimulating mutual trade among member states."
Mikhail Gordinco said: "The SCO Bank is likely to develop its own project screening methods to ensure efficient and effective use of funds. For example, it may involve the construction of the North-South Corridor's infrastructure, the building of ports and logistics hubs, clusters of renewable energy, digital corridors and data centers, water infrastructure in Central Asia, and pipelines for natural gas and petroleum products."
Olga Ponomareva, an expert at the Fund for Economic Policy, pointed out: "For Russia, important projects are building a new logistics system oriented towards the Eurasian region with extensive priority partners in the east. For other SCO member states, especially those in Central Asia, it is important to integrate into regional and global supply chains, leveraging trade development to realize their transit potential."
The BRICS countries already have similar development institutions—the New Development Bank, which is already operational. For example, China has financed itself through issuing Renminbi bonds, reducing its reliance on the US dollar. This year, it has issued several billion yuan in Renminbi bonds multiple times.
Gordinco speculated: "However, after 2022, the New Development Bank of the BRICS countries officially suspended new transactions in Russia due to concerns about the risk of Western sanctions. The SCO Bank is likely to face similar choices: either consider the risk of sanctions and act cautiously, or confront the West politically while seeking the possibility of establishing its own financial ecosystem."
Gordinco noted that regarding the issuance of bonds (risk-free assets), it is likely that the SCO Bank will issue them. The EU does so, and its bonds have become highly liquid and rated instruments, whereas the BRICS countries have not yet issued sovereign bonds.
Gordinco believes: "For the SCO, this is also an opportunity to establish its own benchmark independent of the Western evaluation system. Central banks and funds of the countries can invest in these bonds, and on the other hand, bond issuance provides the organization's member states with a low-cost source of funding. For investors, this will be an asset with high liquidity and independent of the West."
One of the main goals of the SCO member states is undoubtedly to reduce the dominant position of the US dollar in international trade.
Handoshko believes: "If the countries within the SCO become each other's main trading partners, such a cooperative system might effectively counter the US dollar. However, the reality is that the trade volume of goods and services within the SCO is almost only one-eighth of the total external trade of each member state, which is a serious obstacle. Therefore, ambitious projects like jointly issuing bonds require a stronger economic foundation."
The total trade between the SCO member states amounts to 400 billion USD. However, it is stated that future trade between China and the SCO member states will reach 2.5 trillion USD.
Certainly, the easiest starting point is to establish a unified payment system within the SCO, which is a necessary financial basis for everything else. Domestic payment systems, such as MIR and the Cross-border Interbank Payment System (CIPS), are being actively developed. Gordinco said: "However, secondary sanctions and compliance requirements of Asian banks are actual limitations." A unified payment system helps facilitate financial settlements for Russians abroad, as well as settlements for domestic companies and export businesses.
Handoshko pointed out that when it comes to more complex issues, such as establishing a unified custodian institution, partners, especially the Chinese side, have begun to show caution.
Original article: https://www.toutiao.com/article/7545416864416023094/
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