by Olga Samofalova
April 14, 2014
from
RBTH
Website
The BRICS countries have
already agreed
on the amount of authorized
capital for the new institutions: $100 billion each.
Source: Shutterstock
Very soon, the IMF will cease to be
the world's only organization capable
of rendering international financial assistance.
The BRICS countries are setting up alternative
institutions,
including a currency reserve pool and a
development bank.
The BRICS countries,
-
Brazil
-
Russia
-
India
-
China
-
South Africa,
...have made significant progress in setting up
structures that would serve as an alternative to
the International Monetary Fund and the World Bank,
which are dominated by the U.S. and the EU.
A currency reserve pool, as a replacement for
the IMF, and a BRICS development bank, as a replacement for the World Bank,
will begin operating as soon as in 2015, Russian Ambassador at Large
Vadim Lukov has said.
Brazil has already drafted a charter for the BRICS Development Bank, while
Russia is drawing up intergovernmental agreements on setting the bank up, he
added.
In addition, the BRICS countries have already agreed on the amount of
authorized capital for the new institutions: $100 billion each.
"Talks are under way on the distribution of
the initial capital of $50 billion between the partners and on the
location for the headquarters of the bank. Each of the BRICS countries
has expressed a considerable interest in having the headquarters on its
territory," Lukov said.
It is expected that contributions to the
currency reserve pool will be as follows:
The amount of the contributions reflects the
size of the countries' economies.
By way of comparison, the IMF reserves, which are set by the Special
Drawing Rights (SDR), currently stand at 238.4 billion Euros, or $369.52
billion dollars. In terms of amounts, the BRICS currency reserve pool is, of
course, inferior to the IMF.
However, $100 billion should be quite sufficient
for five countries, whereas the IMF comprises 188 countries - which may
require financial assistance at any time.
BRICS Development Bank
The BRICS countries are setting up a Development Bank as an alternative
to the World Bank in order to grant loans for projects that are
beneficial not for the U.S. or the EU, but for developing countries.
The purpose of the bank is to primarily finance external rather than
internal projects. The founding countries believe that they are quite
capable of developing their own projects themselves.
For instance, Russia has a National Wealth Fund
for this purpose.
"Loans from the Development Bank will be
aimed not so much at the BRICS countries as for investment in
infrastructure projects in other countries, say, in Africa," says Ilya
Prilepsky, a member of the Economic Expert Group.
"For example, it would be in BRICS' interest
to give a loan to an African country for a hydropower development
program, where BRICS countries could supply their equipment or act as
the main contractor."
If the loan is provided by the IMF, the
equipment will be supplied by western countries that control its operations.
The creation of the BRICS Development Bank has a political significance too,
since it allows its member states to promote their interests abroad.
"It is a political move that can highlight
the strengthening positions of countries whose opinion is frequently
ignored by their developed American and European colleagues.
The stronger this union and its positions on
the world arena are, the easier it will be for its members to protect
their own interests," points out Natalya Samoilova, head of research at
the investment company Golden Hills-Kapital AM.
Having said that, the creation of alternative
associations by no means indicates that the BRICS countries will necessarily
quit the World Bank or the IMF, at least not initially, says Ilya
Prilepsky.
Currency reserve pool
In addition, the BRICS currency reserve pool is a form of insurance, a
cushion of sorts, in the event a BRICS country faces financial problems or a
budget deficit.
In Soviet times it would have been called "a
mutual benefit society", says Nikita Kulikov, deputy director of the
consulting company HEADS. Some countries in the pool will act as a safety
net for the other countries in the pool.
The need for such protection has become evident this year, when developing
countries' currencies, including the Russian ruble, have been falling.
The currency reserve pool will assist a member country with resolving
problems with its balance of payments by making up a shortfall in foreign
currency. Assistance can be given when there is a sharp devaluation of the
national currency or massive capital flight due to a softer monetary policy
by the U.S.
Federal Reserve System, or when there are
internal problems, or a crisis, in the banking system.
If banks have borrowed a lot of foreign currency
cash and are unable to repay the debt, then the currency reserve pool will
be able to honor those external obligations.
This structure should become a worthy alternative to the IMF, which has
traditionally provided support to economies that find themselves in a
budgetary emergency.
"A large part of the fund goes toward saving
the euro and the national currencies of developed countries.
Given that governance of the IMF is in the
hands of western powers, there is little hope for assistance from the
IMF in case of an emergency. That is why the currency reserve pool would
come in very handy," says ambassador Lukov.
The currency reserve pool will also help the
BRICS countries to gradually establish cooperation without the use of the
dollar, points out Natalya Samoilova.
This, however, will take time. For the time
being, it has been decided to replenish the authorized capital of the
Development Bank and the Currency Reserve Pool with U.S. dollars.
Thus the U.S. currency system is getting an
additional boost.
However, it cannot be ruled out that very soon
(given the threat of U.S. and EU economic sanctions against Russia) the
dollar may be replaced by the ruble and other national currencies of the
BRICS counties.