Architecture of the New World
The first decade of the SCO existence was mainly associated with its organizational and political formation. Despite the fact that the economic aspect is also one of the SCO main activities, for many years it has been far behind security cooperation. To a certain extent, this is logical: among the SCO members, four states, that is, half of the current composition, possess nuclear weapons.
From trade to finance
The main function of ¬ensuring economic cooperation in the SCO is performed by meetings of heads of ministries and departments engaged in relevant issues: economy, trade, transport, industry, agriculture, customs regulation and so on. At the same time, meetings of ministers responsible for foreign economic and foreign trade activities are held annually and prepare both fundamental documents and additional measures (creation of expert groups, a website for regional economic cooperation, etc.).
Compared to cooperation in trade, the process of interaction in finance is still slow and unproductive. The number of meetings of finance ministers and chairs of central (national) banks is still small. In fact, recently it has been possible to agree only to continue work on the creation of a Development Fund (Special Account) and a Development Bank. At the same time, there is still no agreement on the definition of mechanisms for follow-up and supporting project activities by the SCO Development Bank and the SCO Special Account. It can be noted that the divergence of viewpoints, first of all between China and Russia, is caused by the very model of formation of these financial structures.
Insufficient effectiveness is still demonstrated by non-governmental structures such as the Business Council and the Interbank Association. Despite the fact that the Business Council concentrates the most authoritative representatives of the SCO business community, and the Interbank Association strives to provide financing and banking services for investment projects, the impact of these structures is still insufficient to expand ties between entrepreneurs and investors.
At the same time, under the conditions of various kinds of international sanctions and approaching recession in a number of developed countries, the SCO gives dynamism to the Russian economy, activating mutual trade and opening wide access to material, monetary, financial, trade, investment and other resources. SCO member states with lower gross economic indicators can also receive significant economic benefits, primarily through decreasing their raw material orientation due to the import of high-tech products.
New economic opportunities are emerging for India and Iran in the context of intensifying the intraregional division of labor, increasing the investment attractiveness of the countries, improving the transport and logistics network, participating in large infrastructure projects, stimulating the development of the high-tech industry, medical and educational services.
On the high-tech track
As seen, most of the SCO member states are aimed at using the organization's capabilities in order to develop their own high-tech industry, manufacturing industry and service sector. For both Russia and Central Asian countries, the predominance of the raw material orientation of their national economies anyway leads to losses due to market volatility and turbulence of the economic situation in the region. At the same time, China, on the contrary, is interested in maintaining the raw material orientation of the economies of neighboring countries, which will allow it to make extra profit and enhance its position in the region.
The issue of interfacing the SCO and the EAEU remains no less important. In the latter, a free trade zone is functioning between the states, and there is a tendency to build a full-fledged single economic space with a coordinated macroeconomic policy. But it, to some extent, limits the possibilities for the integration of the EAEU members with the rest of the SCO members.
Despite the fact that full-scale economic cooperation between the EAEU and the SCO has not yet been observed, there is a consistent expansion of ties between educational, scientific and research institutions (joint research programs and projects are being implemented), as well as strengthening the protection of interests in customs relations through the exchange of information on goods and vehicles transported across the customs border.
The expert community is beginning to formulate the opinion that the SCO, given the sanctions pressure on Russia and China's trade wars with the United States, in not too distant future will be able to serve as the foundation for the integration of the EAEU and the Silk Road Economic Belt.
Building cooperation with the Silk Road Economic Belt, the EAEU countries and other Eurasian states currently see their interest mainly in the transport and logistics sector. An example is the creation of a North-South transport corridor connecting Russia through Azerbaijan with Iran, and in the future with India. On the basis of the project, a trilateral strategic partnership between Russia, Iran and Azerbaijan has been formed, which is supported by cooperation within the framework of the Organization of Caspian littoral states.
In addition, quite clear messages for resolving the contradictions between Russia and China come from their intention to work on the preparation of a draft agreement on the Eurasian economic continental partnership. This agreement will provide for freedom of movement of goods, trade facilitation and freedom of capital movement, and work on the preparation of the agreement will be carried out within the framework of the SCO, the EAEU and bilateral contacts between China and Russia. The EAEU and the SCO have already begun work on the preparation of an agreement on economic continental partnership, and back in December 2015, the SCO Council of Heads proposed the concept of the SCO free trade zone.
Summarizing the results of the analysis, the following can be noted. The SCO opens up wide opportunities for the practical application of new methods and forms of economic cooperation. The key economic benefits of the member states are related to trade, energy cooperation, the creation of a favorable investment climate, and the regional division of labor. However, the uneven economic potential of the member states generates imbalances and contributes to losses due to their raw material orientation, low financial margin of safety, underdevelopment of modern market institutions, as well as a result of the weakening interest of the leader of the organization – China – in narrow Eurasian cooperation.
Opportunities and priorities
The main trend in the context of which the SCO developed at the beginning of its formation was associated with the deepening of globalization processes. At this stage, on the contrary, the issues of confrontation between unipolar and multipolar approaches to world development come to the fore. A favorable background for the multipolar approach prevalence is the formation of a number of other ¬regional integration associations (Customs Union, EAEU, BRICS).
Despite the fact that the SCO is a regional Asian international platform with which our country is not geographically connected in any way, the formation of a multipolar configuration of international relations pushes our small open economy to participate in various integration formats.
In the context of a tough confrontation with the West, Russia benefits from Belarus' full participation in the SCO and reliance on this organization as an element of international support. Anyway, cooperation with the SCO countries is a channel to reduce the effect of sanctions and an opportunity to replace Western suppliers and markets.
At the same time, given the new sanctions realities, our country needs to rethink the strategy of participation in the SCO, since it will be quite difficult to become a link of the common economic space in Eurasia (a kind of "western gate" or a transport hub connecting the SCO and the EU).
Given the "reduction" of the Western vector of foreign trade, we proceed from the fact that after India and Pakistan joined the SCO, its space expanded to almost a quarter of the land area, which is home to about 3.4 billion people, which means it will be able to act as a giant market capable of swallowing almost all our products.
The emergence of new types of e-commerce promises a significant increase in the efficiency of trade and economic cooperation in the SCO. There is also a positive example — the creation of the National Pavilion of Belarus on the Chinese platforms Jingdong and Douyin. It is possible to significantly reduce the transaction costs of cross-border trade and the time to establish contacts with Belarusian suppliers within the framework of the SCO. To date, since the test launch, the total number of subscribers of the ¬National Pavilion of Belarus has exceeded 210 thousand people, and revenue has reached more than 1.1 million yuan.
Now the goods of Belarusian confectionery factories are available to Chinese consumers, and the assortment will be constantly expanding. But when building exports, it is necessary to rely on the structure of demand, especially in China.
In particular, taking into account information from public domains, in the next five years China will import goods and services worth $ 10 trillion. Based on 2019 data, almost a quarter of the total volume of Chinese imports accounted for electrical equipment, more than 16 percent — for oil and petroleum products. Therefore, it is logical in the medium term to move towards scaling up export projects in the field of electrical equipment, innovative petrochemical products and environmentally friendly synthetic materials.
Considering that China, despite the growth in import volumes, will remain an export-oriented country and will concentrate a large number of finishing plants for the sale of products, including on the domestic market, it is advisable to focus on the supply of innovative intermediate import products in the field of electrical equipment. We are talking mainly about key nodes and components with high added value. In the future, we will follow the path of developing the element base of microelectronics, choosing the necessary balance between functional complexity, increasing reliability and service life, reducing overall dimensions and weight, cost and energy consumption. Taking into account the expected digitalization of the economy and industries of a number of SCO countries, as well as the fact that in order to ensure the functioning of devices of a certain segment (5G and backbone network switches, smart home devices) it is not necessary to be in the mainstream of the technological process, it is necessary to move at an accelerated pace towards creating innovative infrastructure and maximum support for Belarusian enterprises in the high-tech sector.
The policy of supplying own raw materials is reasonable, but it is not enough. The bet on specialization in the field of agricultural exports is risky, since the industry is influenced by price conditions, has low entry thresholds and tends to establish perfect competition.
Focusing on the high-tech sector, it is necessary to take into account the change associated with the decline in the importance of the industrial structure in its pure form. Today, the challenge is not to produce products, but to sell them. Without access to foreign markets, cheap financing and influence on consumer motivations, even with the most efficient production, the enterprise will be doomed (unless, of course, a conditional enterprise produces standard products in a competitive segment). And vice versa, you don't have to be the best to succeed in the market. Not letting others in is enough. Since at the moment we do not belong to the main centers of power within the SCO, we do not have such leverages. The only way out in this case is to use the market power that innovative products give, as well as modern platform tools for their promotion.
Considering that at the moment the mechanism for promoting domestic products is mainly exhibitions, it is critically important to produce and demonstrate high—quality presentation materials and videos (in all languages of the SCO member states), reflecting not only the range of applications of products, their quality and innovative properties, but also possible financial instruments in the near future, facilitating access to Belarusian products in the markets of the SCO countries (factoring, bank guarantee and others).
Replacing dollarization with integration
If we talk about finance De-dollarization, of course, belongs to the systemic conditions for improving the quality of our trade. For example, Iran's Deputy Foreign Minister for Economic Diplomacy Mehdi Safari said that the SCO should pursue de-dollarization and the use of national currencies in trade. He also noted that trading in national currencies with a number of countries can become the basis for swap trading.
In general, the structure and mechanism for the implementation of swaps in settlements have certain features that allow market participants to effectively manage risks in various, including financial transactions. In fact, a swap is a temporary exchange of assets during trading on an exchange. The parties can exchange securities, currencies and payments. In addition, they undertake to return the same securities to each other after a certain time or make reverse payments under pre-determined conditions.
According to SCO Deputy Secretary General Janesh Kane, the SCO countries are developing a system that will allow its participants to use national currencies not only for settlements among themselves, but also as a reserve currency. Therefore, it is extremely important to propose the concept of a digital regional means of payment. The development of central bank digital currencies (CBDC) of a number of SCO countries is in full swing, but the principles and mechanisms for their circulation on the international market and making cross-border payments have not yet been formed. This is really important, especially in view of the high CBDC potential to mitigate the risks from the application of financial (and other) sanctions.
In general, the way money moves around the world depends on a variety of intermediaries, which in turn increases the time and cost of the transaction. One of the main difficulties is that traditional payment systems are more designed for domestic use and often turn out to be incompatible with similar systems in other countries (differences in legislation, technical architecture and working hours).
CBDC is only the beginning of addressing the problem, since it also needs a "hub" that directs payments and allows national systems to interact, despite the fact that they are based on different technologies. In this case, different distributed registry technologies that can be used by each country will be able to join a "hub" that splits a payment from subject A to subject B into two payments: for example, one passes in Belarusian CBDC from subject A to an exchanger in Belarus, and the other – in Russian CBDC from an exchanger in Russia to subject B. These two payments are coordinated using a digital contract (with Hashed Timelock Contract – HTLC). The payment from subject A to the exchanger in Belarus will be executed only if the exchanger in Russia pays to subject B. If no exchanger can exchange Belarusian CBDC for Russian CBDC, then the "hub" will find an intermediate currency at the most favorable rate for the payer.
The proposed concept will overcome the restrictions of traditional payment systems and financial message transmission systems, in other words, it will not allow a repeat of the situation with SWIFT — when the resource of a centralized system is used for political or non-economic purposes.
In fact, the new configuration of ¬regional finance should become the track along which the locomotive of specific scientific projects, technologies, investments and trade flows will travel, strengthening the BRICS, the EAEU and the SCO and allowing the countries participating in integration associations to realize their economic potential on a fair basis and to the fullest.
Vitaly Demirov, analyst of the Belarusian Institute of Strategic Research