Tuesday, July 15, 2014

BRICS Bank Details Released

No surprises but today the details for the new BRICS bank were announced. Also it was announced the Bank headquarters will be in China as Russia leaked earlier. India will hold the Presidency of the Bank for the first six years and there will be a regional office in South Africa.

Here is the full article pasted below with just a small comment added below that:

"After some tough rounds of negotiations, BRICS nations (Brazil, Russia, India, China and South Africa) have created not only a new $100 billion Development Bank, but also a $100 billion foreign currency reserves pool.
The announcement was made after a plenary meet of the five BRICS heads of state in Fortaleza on Tuesday.
Shanghai finally won the bid to host the Bank while India will get the presidency of the Bank for the first six years. The Bank will have a rotating chair. The Bank will also have a regional office in Johannesburg, South Africa. All the five countries will have equal shareholding in the BRICS Bank.
The five Finance Ministers will constitute the Bank’s board which will be chaired by Brazil.
The Bank will initially be involved in infrastructure projects in the BRICS nations.
The authorized, dedicated and paid in capitals will amount to $100 billion, $50 billion and $10 billion respectively.
The idea of the BRICS Bank was proposed by India during the 2012 Summit in New Delhi.
BRICS have long alleged that the IMF and World Bank impose belt-tightening policies in exchange for loans while giving them little say in deciding terms. Total trade between the countries is $6.14 trillion, or nearly 17 percent of the world’s total. The last decade saw the BRICS combined GDP grow more than 300 per cent, while that of the developed word grew 60 per cent.
Apart from the new development Bank, the group of five leading emerging economies also created a Contingency Reserve Arrangement on Tuesday.
BRICS central banks will keep their resources in their gold and foreign currency reserves.
China will fund $41 billion, Brazil, India and Russia $18 billion each and South Africa with $5 billion. The funds will be provided according to a multiple. China’s multiple is 0.5, which means that if needed, the country will get half of $41 billion. The multiple is 2 for South Africa and 1 for the rest.
BRICS Finance ministers or central banks’ governors will form a governing body to manage the CRA while it will be presided over by the BRICS President.
The BRICS CRA will not be open to outsiders.
Meanwhile, at the Summit in Fortaleza, Russian President Vladimir Putin said BRICS must form an energy alliance.
“We propose the establishment of the Energy Association of BRICS. Under this ‘umbrella’, a Fuel Reserve Bank and BRICS Energy Policy Institute could be set up,” Putin said on Tuesday."
My added comments:
Just a couple of notes from this news. First the BRICS bank will authorize up to $100 Billion which is a fairly significant number. It will ramp up over time though and probably not start lending until 2016 based on earlier reports.
The most interesting thing to me about this Bank and the Contingency Reserve Arrangement (CRA) is that it will apparently mostly consist of US dollar assets (the article notes that the BRICS Central banks will hold their resources in gold and foreign currency reserves). So it looks like this will be a way for these countries (especially China) to reduce US dollar exposure in their own reserves while using US dollars to fund lending and sort of buy influence around the world. If you step back and look at what they are doing (especially China) you can see they are reducing US dollar exposure at the same time they are increasing gold reserves. If they are doing that, maybe we all should think about doing that ourselves to some extent. The US dollar is likely to suffer in all this change so hedging it to some degree with hard assets makes sense as China and the other BRICS are clearly doing.
The article notes that the reserve fund will only be available to the BRICS nations to use in case of an emergency where liquidity is needed to stablize things. 
We'll have more on the BRICS summit the next few days and will try to summarize what the overall impact of the BRICS may be based on media reports and also input from some of our readers who are plugged into the current financial system. We will examine closely what the real agenda is for the BRICS. A desire to collapse the exsiting US dollar based system or do they just want some respect within the existing system? There are solid arguments for both positions.

Additional note: Here is Jim Rickards twitter reaction to the CRA which agrees with what we stated above about reducing US dollar exposure.

"Significance of new BRICS "Contingency Reserve" is members can hold fewer dollars, but still get partner help in a crisis. #Dollar Exit Plan."

Update 10:00 pm (CST) - Here is the official 6th BRICS Summit Fortelaza Declaration. This is a long statement and we will devote a full post to it tomorrow. One thing we see immediately is that the BRICS are making it clear they have not yet given up on the IMF, the UN, and the World Bank. We will try to cover all this and introduce you to an interesting theory about where the BRICS really intend to go with all this. The BRICS are making it clear they support Russia, but at the same time they are not looking to irritate the West. It's interesting to watch as it unfolds.

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