'BRICS' nations to form development bank to rival World Bank, IMF

By Vincent Bevins
Economy, Business and Finance

'BRICS' nations to start development bank that will be located in Shanghai Bank to be formed by 'BRICS' nations is expected to make loans for development and infrastructure projects

The so-called BRICS countries agreed to form an international development bank with aspirations to challenge the dominance of the World Bank and the International Monetary Fund.

Leaders of Brazil, Russia, India, China and South Africa said Tuesday that the New Development Bank will start with $50 billion in capital and $100 billion as a currency reserve fund for liquidity crises. Operating details still need to be resolved.
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Still, the BRICS bank, which could add more member nations, represents a bid to expand the influence of the BRICS emerging markets and act as a counterbalance to institutions run by the U.S. and other developed nations, experts said.

"This is about the consolidation of BRICS 2.0," said Marcos Troyjo, professor of international and public affairs at Columbia University and co-director of the BRICLab Center. "If BRICS 1.0 was about capturing investor attention to the scale of their economic relevance, BRICS 2.0 is about embarking on institution building."

The BRICs acronym was coined by Goldman Sachs Group Inc. economist Jim O'Neill in 2001 to describe the four large emerging markets — Brazil, Russia, India and China — that could play a large role in global economic growth. They began meeting for periodic summits in 2009, and were later joined by South Africa.

As developing countries began playing a larger role in the world economy, their leaders repeatedly complained that they have not been given correspondingly larger voices in international financial institutions such as the World Bank and the IMF, both based in Washington. The U.S. typically appoints the World Bank president, and European countries appoint the IMF chief.

"International governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness," said the official statement signed by the BRICS leaders, who met in Fortaleza, Brazil, on Tuesday. "We believe the BRICS are an important force for incremental change and reform of current institutions toward more representative and equitable governance."

Brazilian President Dilma Rousseff, Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Chinese President Xi Jinping and South African President Jacob Zuma hammered out some of the final details before signing the agreement Tuesday.

Among the terms are that the bank will be in Shanghai, its first president will be from India, and the first chair of the board of directors will be from Brazil.

On Wednesday, the BRICS leaders will meet with the heads of South American countries through the intergovernmental Union of South American Nations, which was founded in 2008.

The new bank is expected to make loans for development and infrastructure projects. It also will function as an incubator for development expertise from other emerging economies.

Other countries, such as Indonesia, Mexico or Turkey, could eventually join the bank, Troyjo said, noting that BRICS countries have seen their growth slow over the last few years from the peak of international investor interest in emerging market countries.

"The only thing they may have in common is the use of some kind of state capitalism in their growth," he said. "The BRICS are needing to reinvent themselves, and it's unlikely their route forward can be the same route that got them here."

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BRICS set up bank to counter Western hold on global finances

By Alonso Soto and Anthony Boadle

FORTALEZA Brazil Wed Jul 16, 2014 4:56am IST

(Reuters) - Leaders of the BRICS emerging market nations launched a $100 billion development bank and a currency reserve pool on Tuesday in their first concrete step toward reshaping the Western-dominated international financial system.

The bank aimed at funding infrastructure projects in developing nations will be based in Shanghai and India will preside over its operations for the first five years, followed by Brazil and then Russia, leaders of the five-country group announced at a summit.

They also set up a $100 billion currency reserves pool to help countries forestall short-term liquidity pressures.

The long-awaited bank is the first major achievement of the BRICS countries - Brazil, Russia, India, China and South Africa - since they got together in 2009 to press for a bigger say in the global financial order created by Western powers after World War Two and centered on the International Monetary Fund and the World Bank.

The BRICS were prompted to seek coordinated action following an exodus of capital from emerging markets last year, triggered by the scaling back of U.S. monetary stimulus. The new bank reflects the growing influence of the BRICS, which account for almost half the world's population and about one-fifth of global economic output. The bank will begin with a subscribed capital of $50 billion divided equally between its five founders, with an initial total of $10 billion in cash put in over seven years and $40 billion in guarantees. It is scheduled to start lending in 2016 and be open to membership by other countries, but the capital share of the BRICS cannot drop below 55 percent. The contingency currency pool will be held in the reserves of each BRICS country and can be shifted to another member to cushion balance-of-payments difficulties. This initiative gathered momentum after the reverse in the flows of cheap dollars that fueled a boom in emerging markets for a decade. "It will help contain the volatility faced by diverse economies as a result of the tapering of the United States' policy of monetary expansion," Brazilian President Dilma Rousseff said.

"It is a sign of the times, which demand reform of the IMF," she told reporters at the close of the summit.

China, holder of the world's largest foreign exchange reserves, will contribute the bulk of the contingency currency pool, or $41 billion. Brazil, India and Russia will chip in $18 billion each and South Africa $5 billion. If a need arises, China will be eligible to ask for half of its contribution, South Africa for double and the remaining countries the amount they put in. Negotiations over the headquarters and first presidency were reached at the eleventh hour due to differences between India and China. The impasse reflected the trouble Brazil, Russia, India, China and South Africa have had in reconciling stark economic and political differences that made it hard for the group to turn rhetoric into concrete action.

"We pulled it off 10 minutes before the end of the game. We reached a balanced package that is satisfactory to all," a Brazilian diplomat told Reuters.

Negotiations to create the bank dragged on for more than two years as Brazil and India fought China's attempts to get a bigger share in the lender than the others.

In the end, Brazil and India prevailed in keeping equal equity at its launch, but fears linger that China, the world's No. 2 economy, could try to assert greater influence over the bank to expand its political clout abroad. China, however, will not preside over the bank for two decades.

Facing efforts by leading Western nations to isolate Russia for annexing Crimea and stirring revolt in eastern Ukraine, the BRICS summit provided President Vladimir Putin with a welcome geopolitical platform to show he has friends elsewhere, economic powers seen as shaping the future of the world.

The BRICS abstained from criticizing Russia over the crisis in Ukraine and called instead for restraint by all actors so the conflict can be resolved peacefully.

(Editing by Tom Brown and Jonathan Oatis)

Putin seeks BRICS moves to protect against U.S. "sanction attacks"

MOSCOW Tue Jul 15, 2014 2:37am IST

(Reuters) - Russia will press other BRICS emerging market nations to agree measures to prevent "sanction attacks" by the United States to "harass" countries opposing its policies, President Vladimir Putin said.

Putin said he would urge Brazil, China, India and South Africa to draw "substantive conclusions" from sanctions imposed on Russia over its role in the Ukraine crisis during a two-day BRICS summit in Brazil starting on Tuesday.

"Recently Russia has been exposed to a sanction attack by the United States and its allies," the Kremlin leader told Itar-Tass news agency in an interview.

"Together we should think about a system of measures that would help prevent the harassment of countries that do not agree with some foreign policy decisions made by the United States and their allies, but would promote a civilized dialogue on all points at issue based on mutual respect."

Putin gave no details but said the BRICS should cooperate more at the United Nations, where Russia and China have the right of veto, and work together more closely to combat security threats.

The Russian leader, who attended the World Cup final in Brazil on Sunday, wants the emerging powers to play a bigger role in world affairs to counter U.S. influence.

"Any attempts to create a model of international relations where all decisions are made within a single 'pole' are ineffective, malfunction regularly, and are ultimately set to fail," he told Itar-Tass.

Putin has stepped up criticism of what he says is U.S. meddling in other states' affairs as the former Cold War superpowers clashed over Russia's annexation of Crimea in March and its political support of separatists in eastern Ukraine.

The United States and the European Union have imposed visa bans and asset freezes on some Russian officials and companies, and have threatened more sanctions if Moscow does not do more to de-escalate the crisis.

The BRICS nations will sign off at the summit in the coastal city of Fortaleza on a development bank and emergency reserves fund, a big step for a diverse group known more for its anti-Western rhetoric than coordinated action.

(Reporting by Alexei Anishchuk and Lidia Kelly, Writing by Timothy Heritage, Editing by Mark Heinrich)

The biggest challenge for BRICS success? Big brother China

By Alonso Soto

FORTALEZA, Brazil, July 15 Wed Jul 16, 2014 1:55am IST

(Reuters) - In two years of tough negotiations to create the new BRICS development bank, the main stumbling block was not a lack of resources or commitment, but fellow partner China.

The Chinese initially wanted a bigger share of the bank that was formally launched on Tuesday by the leaders of the five BRICS countries in a direct challenge to the West's tightly-held grip over global finances, officials involved in talks said.

In the end, Brazil and India prevailed in keeping capital participation equal among members, but fears linger that China, the world's No. 2 economy, could try to assert greater influence over the $100 billion bank to expand its political clout abroad.

"It is inevitable that the Chinese will dominate the new bank," said Riordan Roett, a political scientist at Johns Hopkins University. "The Chinese don't get involved in these ventures unless they are going to have, not total control, but a significant amount of influence."

Known for their striking differences in economics and politics, the BRICS face the challenge of containing China's drive to control institutions that were supposed to give each partner an equal voice.

Internal discord became evident on Tuesday when the group struggled to overcome a last-minute stalemate in negotiations as China and India vied for the headquarters of the bank. To overcome the snag, Brazil withdrew its request for the bank's first presidency in favor of India, a senior official involved in the discussions said.

The bank will be based in Shanghai, China's business hub.

The objective of the bank is to break away from a model that gives little voting rights to emerging economies and perpetuates the dominance of the United States and Europe over the International Monetary Fund and World Bank.

"This is a big challenge for the BRICS. Sometimes when you get down to the actual negotiations and countries want more say, they forget about some of their lofty aspirations when they were criticizing the IMF and World Bank," said Kevin Gallagher, professor of international relations at Boston University.

China already has the largest share of the new reserve fund, also launched on Tuesday and known as the Contingent Reserves Arrangement. It pledged $41 billion while Brazil, Russia and India promised $18 billion each and South Africa $5 billion.

CHINESE CLOUT

Although China's economy has slowed in recent years, it remains the world's main engine of growth. Brazil, India and Russia have slowed even more sharply since the group's first adopted the BRIC acronym in the past decade. Much-smaller South Africa joined the group in 2010.

China's economy is bigger than that of all the other BRICS combined and represents the bulk of the group's foreign trade.

"It is only natural for China to have more influence at the bank because of the importance of its economy," said Paulo Wrobel, professor at the Pontifical Catholic University of Rio de Janeiro's BRICS Policy Center.

China's economic might has at times put it at odds with some of its own BRICS partners.

An avalanche of Chinese manufactured imports into Brazil over the last three years prompted the South American country to raise trade barriers to keep its manufacturers from going under.

In private, other members have frowned at China's slow-moving liberalization of its currency, the yuan, which makes its exports much cheaper.

So officials from the other smaller economies have tried to prevent China from growing too powerful in the new institutions. The bank's internal rules seek to prevent any single member from holding too much sway.

"The idea is to have a professional institution ruled by the best banking practices and shared governance that will keep that risk at bay," Luciano Coutinho, head of Brazil's own development bank BNDES, told Reuters on the sidelines of the summit.

The BRICS will hold a minimum stake of 55 percent at the lender, but some analysts say China could increase its hold by bringing in new member countries from its sphere of influence.

However, others argue that is in China's best interest to be a team player - at least for now.

"For China there is interest in making it look like this is not a Chinese dominated bank because that will allow it to finance projects that otherwise it couldn't," said Oliver Stuenkel, a professor at the Getulio Vargas Foundation in Sao Paulo. "The bank is a way to depoliticize Chinese credit." (Additional reporting by Anthony Boadle; Editing by Todd Benson and Tom Brown)

So here is my takeaway.

1. They didn't like losing the easy and cheap investment money when the US began to taper quantitative easing. In reality, the US didn't just bail banks out, but the whole world. Just look at the protests that arose from CL and other world financial leaders when the US began to contemplate cutting back on QE2 last year.

2. They see this as a way to pressure the IMF and WB to give them a bigger say. The problem is, votes are proportional to support provided, and guess where most of the funding comes from. But they want more say without more pay.

3. They, Russia and China especially want protection from any US influence, i.e. sanctions. Both have certain ... ambitions if you will. Russia to regain control of certain strategic resources, and reestablish the influence they once had. China has what can only be described as imperialistic ambitions. They see the Pacific as their private pond and resent US influence there. Also, they have their eyes on certain areas containing important strategic resources close to their border but claimed by other countries. This is clearly evident in the second article.

The 500 LB gorilla that all are ignoring in all of this is China. The last article says it best toward the end.

The BRICS will hold a minimum stake of 55 percent at the lender, but some analysts say China could increase its hold by bringing in new member countries from its sphere of influence.

However, others argue that is in China's best interest to be a team player - at least for now.

"For China there is interest in making it look like this is not a Chinese dominated bank because that will allow it to finance projects that otherwise it couldn't," said Oliver Stuenkel, a professor at the Getulio Vargas Foundation in Sao Paulo. "The bank is a way to depoliticize Chinese credit."

For now China is playing nicey nicey ... for now.