The BRICS grouping of emerging market nations — Brazil, Russia, India, China, and South Africa — have launched their $100 billion New Development Bank (NDB) — also known as the BRICS bank — and have signed an agreement on their $100 billion currency reserve pool — also known as the Contingent Reserve Arrangement (CRA) — ahead of the summit of SCO and BRICS being held in the Russian industrial city of Ufa on July 8-10, 2015.
The newly minted BRICS bank will be used to finance new infrastructure and development projects in the BRICS countries, in addition to other emerging market countries.
The launch of the BRICS bank is seen as a first step in breaking the dominance of the U.S. dollar in global trade, as well as dollar-backed institutions such as the IMF and the World Bank, both U.S.-based institutions that BRICS countries have had little influence within.
BRICS leaders. Photo courtesy of APEC.
BRICS will remain the key driving force of the global economy, China’s Deputy Foreign Minister Chen Goping told reporters on Monday.
“BRICS member states will retain the role of the main driving force of global economic growth in the future,” he said, adding that “after the difficulties caused by reforms, there are even bigger opportunities for growth opening up for BRICS.”
The BRICS Development Bank will become one of the world’s leading financial institutions, Russian Economic Development Minister Alexey Ulyukayev said on Tuesday during an interview with Rossiya 24 channel, Russia’s TASS news agency reported.
“This will probably be one of the world’s leading institutions, which will focus on infrastructure projects, on the most important areas that allow expanding the specific areas and to promote private and public businesses,” Ulyukayev said.
South Africa’s Finance Ministry said two weeks ago that it expected the new BRICS bank to be operational by the end of the year.
The BRICS currency reserve pool will primarily support the balance of payments of the member nations and help them to weather any financial squeezes.
China will commit $41 billion to the reserve pool, Brazil $18 billion, Russia $18 billion, India $18 billion, and South Africa $5 billion, according to Russia’s TASS news agency.
The currency reserve pool will be an “insurance instrument” for the five nations and will go into effect on July 30, Russian Central Bank Governor Elvira Nabiullina said in Moscow on Tuesday.
Emerging market nations hold around two-thirds of the $11.6 trillion in global reserves and have seen a drop in their holdings last year as a result of global Central Banks selling dollars to offset capital outflows and to shore up their currencies. Later this year they will face a crunch if the U.S. Federal Reserve raises interest rates, which will thus drain dollars from their markets.
The pool is intended to help solve “short-term problems with liquidity and problems with the balance of payments,” Nabiullina said.
During the 1998 financial crisis, when Russia defaulted on its local-currency debt, this is an example of when such a cushion would be needed, Nabiullina said.
BRICS 2014 summit participants: Russian President Vladmir Putin, India Prime Minister Narendra Modi, Brazilian President Dilma Rousseff, Chinese President Xi Jinping, South African Presdient Jacob Zuma. Photo courtesy of Wikimedia.
In July 2014, a historic milestone for the BRICS group was reached as the group signed a document to form the the $100 billion NDB in addition to the $100 billion CRA.
The new bank will be headquartered in Shanghai, and will first be led by India, followed by Brazil, and then Russia.
China has pledged to contribute a total of $41 billion to the NDB, which will give it the largest voting rights, at 39.5 percent.
In June, during the first-ever BRICS Parliamentary Forum held in Moscow, Zhang Dejiang, the Chairman of the Standing Committee of China’s National People’s Congress (NPC), said that the BRICS should move toward a single trade and economic market, in addition to creating and promoting projects and tools for global economy control.
“We must strive for moving towards the creation of a single market in trade and economic cooperation, the creation of a multi-level mechanism of currency agreements, new infrastructure projects and strengthening cooperation on the basis of the people’s support. The key tools here include the BRICS Bank and the BRICS reserve currencies pool,” said Dejiang.
Alexsey Pushkov, the head of Russia’s State Duma Foreign Relations Committee, said during the forum that the combined gross domestic product (GDP) of the BRICS group will exceed that of the Group of Seven (G7) member states in the next two to three years.
In addition to the new bank and reserve currency pool, Russia has recently proposed an alternate to the SWIFT global interbank payment system for the BRICS group in a move which would further ramp up de-dollarization efforts and threaten the U.S. dollar’s global hegemony.
A rating agency for the BRICS group is also being discussed at an expert level, as an alternative to the western dominated ‘big three’ rating agencies.
Last week the Chinese-led Asian Infrastructure Investment Bank (AIIB) officially launched, following a signing ceremony of the bank’s articles of association that took place in Beijing.
The AIIB will complement not only the NDB, but China’s broader regional infrastructure plan, known as “One Belt, One Road” initiative, or the New Silk Road project, which aims to increase connectivity by building infrastructure such as a network of railways, highways, oil and gas pipelines, power grids, internet networks, maritime, and other infrastructure links across Asia, Europe, the Middle East, Africa, and even as far as South America.
“This proposal was designed to meet Asia’s infrastructure development and promote Asia’s connectivity and also deepen regional cooperation for the sake of development,” Chinese President Xi Jinping said during the signing ceremony.
China’s Finance Minister Lou Jiwei said last week that he was confident that the AIIB will start operating by the end of the year.
Established in 2014, the AIIB, China’s alternative and potential rival to the Asian Development Bank (ADB) and the western-led International Monetary Fund (IMF) and World Bank is aimed to finance much-needed Asian infrastructure projects such as construction of roads, railways, and airports. The bank’s headquarters will be located in Beijing and English will be its working language.
The AIIB has 57 countries as its founding members from five continents, Asia, Oceania, Europe, Latin America and Africa.
The BRICS group was established in 2010, when South Africa joined Brazil, Russia, India, and China in what was previously known as BRIC. The BRICS group represents 42 percent of the world’s population and roughly 20 percent of the world’s economy based on GDP, and 30 percent of the world’s GDP based on PPP. Total trade between the countries is $6.14 trillion, or nearly 17 percent of the world’s total.
Very comprehensive summary of what the BRICS have been up to, from the self-bail out fund to compete with the IMF and (yet another) development bank to compete with the World Bank. If the BRICS’ influence in the world is to grow, though, more than just the Indian economy will have to accelerate. Otherwise, all of this high-flying diplomatic and political language will start to sound hollow, don’t you agree? (Here’s my free BRICS infographic based on World Bank’s Global Economic Prospects, its semi-annual GDP growth rate forecasts update: http://internationalinsights.org/infographics.html .)
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Posted by Daniel Friedheim | July 9, 2015, 4:27 pm