by Prof Michel Chossudovsky
April 08, 2015
The financial media as well as segments of the alternative media are
pointing to a possible weakening of the US dollar as a global
trading currency resulting from
the BRICS (Brazil, Russia, India, China, South Africa)
One of the central arguments in this debate on competing World
currencies hinges on the BRICS initiative to create a development
bank which, according to analysts, challenges the hegemony of Wall
Street and the Washington based
Bretton Woods institutions.
The BRICS New Development Bank (NDB)
was set up to challenge two major Western-led giants - the World
Bank and the International Monetary Fund.
NDB's key role will be to serve as a
pool of currency for infrastructure projects within a group of
five countries with major emerging national economies - Russia,
Brazil, India, China and South Africa.
(RT, October 9, 2015)
More recently, emphasis has been placed
on the role of China's new Asian Infrastructure Investment Bank (AIIB),
which, according to media reports, threatens to,
"transfer global financial control
from Wall Street and City of London to the new development banks
and funds of Beijing and Shanghai".
Russia to invest $18
stabilization of BRICS
The decision to create general reserves
was made in July 2014
at the Sixth Summit of BRICS
at Fortaleza in
There has been a lot of media hype regarding BRICS.
While the creation of BRICS has significant geopolitical
implications, both the AIIB as well as the proposed BRICS New
Development Bank (NDB)
and its Contingency Reserve Arrangement (CRA)
are dollar denominated entities.
Unless they are coupled with a
multi-currency system of trade and credit, they do not threaten
dollar hegemony. Quite the opposite, they tend to sustain and extend
dollar denominated lending.
Moreover, they replicate several
features the Bretton Woods framework.
What is significant, however, from a geopolitical standpoint is that
China and Russia are developing a ruble-yuan swap, negotiated
between the Russian Central Bank, and the People's Bank of China,
The situation of the other three BRICS member states (Brazil, India,
South Africa) with regard to the implementation of (real, rand,
rupiah) currency swaps is markedly different.
These three highly indebted countries
are in the straightjacket of
IMF-World Bank conditionalities.
They do not decide on fundamental issues of monetary policy and
macro-economic reform without the green light from the Washington
based international financial institutions.
Currency swaps between the BRICS central banks was put forth by
"facilitate trade financing while
completely bypassing the dollar."
"At the same time, the new system
will also act as a de facto replacement of the IMF, because it
will allow the members of the alliance to direct resources to
finance the weaker countries."
(Voice of Russia)
While Russia has formally raised the
issue of a multi-currency arrangement, the Development Bank's
structure does not currently "officially" acknowledge such a
"We are discussing with China and
our BRICS partners the establishment of a system of multilateral
swaps that will allow to transfer resources to one or another
country, if needed.
A part of the currency reserves can
be directed to [the new system]"
(Governor of the Russian Central
Bank, June 2014, Prime news agency)
India, South Africa and Brazil have
decided not to go along with a multiple currency arrangement, which
would have allowed for the development of bilateral trade and
investment activities between BRICs countries, operating outside the
realm of dollar denominated credit.
In fact they did not have the choice of
making this decision in view of the strict loan conditionalities
imposed by the IMF.
Heavily indebted under the brunt of their external creditors, all
three countries are faithful pupils of the IMF-World Bank.
The central bank of these countries is controlled by Wall Street and
For them to enter into a "non-dollar" or
an "anti-dollar" development banking arrangement with multiple
currencies, would have required prior approval of the IMF.
Contingency Reserve Arrangement
The CRA is defined as a,
"framework for provision of support
through liquidity and precautionary instruments in response to
actual or potential short-term balance of payments pressures."
India Report April 7, 2015)
In this context, the CRA fund does not
constitute a "safety net" for BRICS countries, it accepts the
hegemony of the US dollar which is sustained by large scale
speculative operations in the currency and commodity markets.
In essence the CRA operates in a similar fashion to an IMF
precautionary loan arrangement (e.g. Brazil November 1998) with
a view to enabling highly indebted countries to maintain the parity
of their exchange rate to the US dollar, by replenishing central
bank reserves through borrowed money.
The CRA excludes the policy option of foreign exchange controls by
BRICS member states. In the case of India, Brazil and South Africa,
this option is largely foreclosed as a result of their agreements
with the IMF.
The dollar denominated $100 billion CRA fund is a "silver platter"
for Western "institutional speculators" including,
JP Morgan Chase
...et al, which are involved in
short selling operations on the Forex market.
Ultimately the CRA fund will finance the
speculative onslaught in the currency market.
An arrangement using national currencies instead of the US dollar
requires sovereignty in central bank monetary policy.
In many regards, India, Brazil and South
Africa are (from the monetary standpoint) US proxy states,
firmly aligned with IMF-World Bank-WTO economic diktats.
It is worth recalling that since 1991, India's macroeconomic policy
was under under the control of the Bretton Woods institutions, with
a former World Bank official, Dr. Manmohan Singh, serving
first as Finance Minister and subsequently as Prime Minister.
Moreover, while India is an ally of China and Russia under BRICS, it
into a new defense cooperation deal
with the Pentagon which is (unofficially) directed against Russia
and China. It is also cooperating with the US in aerospace
India constitutes the largest market
(after Saudi Arabia) for the sale of US weapons systems. And all
these transactions are in US dollars...
Similarly, Brazil signed a far-reaching Defense agreement with the
US in 2010 under the government of Luiz Inácio Lula da Silva,
who in the words of the IMF's former managing director Heinrich
"Is Our Best President."
"…I am enthusiastic [with Lula's
administration]; but it is better to say I am deeply impressed
by President Lula, indeed, and in particular because I do think
he has the credibility".
(IMF Managing Director Heinrich
Press conference, 10 April
In Brazil, the Bretton Woods
institutions and Wall Street have dominated macro-economic reform
since the outset of the government of Luis Ignacio da Silva in 2003.
Under Lula, a Wall Street executive was
appointed to head the Central Bank, the Banco do Brazil was in the
hands of a former CitiGroup executive. While there are divisions
within the ruling PT party, neoliberalism prevails.
Economic and social in Brazil is in
large part dictated by the country's external creditors including
JPMorgan Chase, Bank America and Citigroup.
Reserves and The External Debt
India and Brazil (together with Mexico) are among the World's most
indebted developing countries.
The foreign exchange reserves are
fragile. India's external debt in 2013 was of the order of more than
$427 Billion, that of Brazil was a staggering $482 billion, South
Africa's external debt was of the order of $140 Billion (World
Bank, External Debt Stock, 2013).
External Debt Stock (2013)
Brazil $482 billion
India $427 billion
South Africa $140 billion
All three countries have central banks
reserves (including gold and forex holdings) which are lower than
their external debt (see table below).
Central Bank Reserves (2013)
Brazil $359 billion
India: $298 billion
South Africa $50 billion
The situation of South Africa is
particularly precarious with an external debt which is almost three
times its central bank reserves.
What this means is that these three BRICS member states are under
the brunt of their Western creditors. Their central bank reserves
are sustained by borrowed money. Their central bank operations (e.g.
with a view to supporting domestic investments and development
programs) will require borrowing in US dollars.
Their central banks are essentially
"currency board" arrangements, their national currencies are
Development Bank (NDB)
On 15 July 2014, the group of five countries signed an agreement to
create the US$100 billion
BRICS Development Bank together
with a US dollar denominated "reserve currency pool" of US$100
These commitments were subsequently
Each of the five-member countries,
"is expected to allocate an equal
share of the $50 billion startup capital that will be expanded
to $100 billion. Russia has agreed to provide $2 billion from
the federal budget for the bank over the next seven years."
March 9, 2015)
In turn, the commitments to the
Contingency Reserve Arrangement are as follows:
As mentioned earlier, India, Brazil and
South Africa, are heavily indebted countries with central bank
reserves substantially below the level of their external debt.
Their contribution to the two BRICs
financial entities can only be financed:
by running down their dollar
denominated central bank reserves,
by financing their contributions
to the Development Bank and CRA, by borrowing the money,
namely by "running up" their dollar denominated external
In both cases, dollar hegemony prevails.
In other words, the Western creditors of
these three countries will be required to "contribute" directly or
indirectly to the financing of the dollar denominated contributions
of Brazil, India and South Africa to the BRICS development bank (NDB)
and the CRA.
In the case of South Africa with Central Bank reserves of the order
of 50 billion dollars, the contribution to the BRICS NDB will
inevitably be financed by an increase in the country's (US dollar
denominated) external debt.
Moreover, with regard to India, Brazil and South Africa, their
membership in the BRICS Development Bank was no doubt the object of
behind closed doors negotiations with the IMF as well as guarantees
that they would not depart from the "Washington Consensus" on
Under a scheme whereby these countries were to be in be in full
control of their Central Bank monetary policy, the contributions to
the Development Bank (NDB) would be allocated in national currency
rather than US dollars under a multi-currency arrangement.
Needless to say under a multi-currency
system the contingency CRA fund would not be required.
The geopolitics behind the BRICS initiative are crucial.
While the BRICS initiative from the very
outset has accepted the dollar system, this does not exclude the
introduction, at a later stage of a multiple currency arrangement,
which challenges dollar hegemony.