Tuesday, June 16, 2009

Amidst the wreckage, a giant stands tall: China and the Shanghai Cooperation Organization

Forget the fact the the Shanghai Cooperation Organization is named after a Chinese city. China's real stamp-of-power in this multilateral grouping, which includes China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, is economic.

Up until the beginning of the crisis, which came on the heels of the precipitous drop of global oil prices, Moscow and Beijing were managing the organization as equals - more or less. But the global financial crisis, which has hurt rich and developing countries alike, will have important ramification on the SCO's internal power configuration. This will not come from any explicit Chinese efforts to assert dominance, but instead from differences in economic power and structure. Simply put, China can channel its massive accumulated wealth inwards to stimulate its domestic consumer because its economy is based on manufactured goods. Russia does not have that option, as 40% of its GDP comes from commodities such as oil, gas and minerals. Chinese consumers can buy more Hello Kitty and electronic devices, Russian households cannot simply consume more gas, iron and aluminum.

Here's how Russia's former Prime Minister and well-known scholar Yevgeniy Primakov puts it:

"Russia will not come out of the crisis anytime soon. Russia will most likely come out of the recession in the second echelon - after the developed countries. The trap of the present crisis is that it is not localized but is worldwide. Russia is dependent on other countries. That lessens the opportunity to get out of the recession in a short period of time." "In China too, as in Russia, exports make up a significant part of the GDP. The crisis smacked them and us. The difference is that China exports ready-made products, while on our country [Russia] a strong raw material flow was traditional. What are the Chinese doing? They are moving a large part of the ready-made goods to the domestic market. At the same time, they are trying to raise the population's solvent demand. On this basis, the plants and factories will continue to operate and the economy will work. We [Russia] cannot do that. If raw materials are moved to the domestic market, consumers of such vast volumes will not be found. Raise the population's solvent demand? That merely steps up imports."

China is stepping up its role as the primary 'donor country' in the organization. It has recently extended a $10 billion loan to the SCO, following its $25 billion loan to Russia and $15 billion loan to Kazakhstan the past two months. On the surface, these Chinese gestures are undertaken in a spirit of 'cooperation and mutually shared interests'; Germany's intelligence services calls it a 'geopolitical metamorphosis'.

Regardless of China's ultimate goals, the old adage still holds true, "the hand that lendeth can also easily taketh away."

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