Thursday, July 10, 2014

BRICS Summit Coming Up - Here's a Primer on the BRICS

The BRICS summit will take place next week in Brazil. Because this bloc of nations now represents a significant portion of the world's GDP, trade, and population, it has been gaining more attention. There are two major projects underway that will move forward next week. One is the Continent Reserves Fund which will begin with $100 billion funding. The other is the BRICS Development Bank which will begin with capitalization of $50 Billion. 

For readers who want to get a basic idea of who the BRICS nations are and what there goals are, here is a good primer to read.

Below are a few excerpts from this article with some key parts in bold. Then a few followup comments.

"The acronym "BRICs" was initially formulated in 2001 by economist Jim O'Neill, of Goldman Sachs, in a report on growth prospects for the economies of Brazil, Russia, India and China – which together represented a significant share of the world's production and population."

"As of the First Summit, held in Yekaterinburg in 2009, the depth and scope of the dialogue among the Members of BRICs – which became BRICS in 2011 with the inclusion of South Africa – was further enhanced. More than an acronym that identified countries emerging in the international economic order, BRICS became a new and promising political-diplomatic entity, far beyond the original concept tailored for the financial markets."

"BRICS has evolved in an incremental manner, in areas of consensus amongst its members, strengthening its two main pillars: (i) coordination in multilateral fora, with a focus on economic and political governance; and (ii) cooperation between members."

"Regarding the first pillar, the efforts towards reforming the structures of global governance, especially in the economic and financial fields – Financial G-20, International Monetary Fund, World Bank – receive a special emphasis, as well the reform of political institutions, such as the United Nations."

"Negotiations are at an advanced stage for the creation of the New Development Bank, aimed at financing infrastructure and sustainable development projects in the BRICS and other developing countries. When created, the new institution will count initially with a subscribed capital of US$ 50 billion."

"Likewise, the BRICS will soon conclude the agreement that creates the Contingent Reserves Arrangement (CRA), a fund with an initial sum of US$ 100 billion, which the BRICS countries will be able to use to forestall short-term liquidity pressures."

"In view of BRICS' informal nature, the role of Secretariat is played by its pro tempore presidency. BRICS is cautiously and incrementally being consolidated, gradually moving forward the institution-building process."

We see from the above that a big reason for the BRICS nations to work together is to try and "reform the structures of global governance" at the G20, the IMF, the World Bank, and the UN. The BRICS nations view these organizations as US and Western dominated. They think they deserve more influence and power due to their growing contribution to global GDP.

Reform at these institutions has mostly stalled however due to resistance from the US and also somewhat from the EU. In the US there is quite a bit of pressure on Congress to scale back US funding due to the large US debt and what some see as a questionable use of US taxpayer funds. With the Republicans holding a majority in the House (and probably about to make gains in the Senate) there is not much political will to ramp up funding to global institutions or approve reforms that would increase prestige for Russia and China. The ongoing situation in the Ukraine has made relations between the US and Russia even worse.

So all eyes will be on the upcoming BRICS to see how they treat Russia and to see how they promote their agenda. Will they just meet and talk about how they will "gradually move forward the institution-bulding process"  without a lot of anti US rhetoric? Or will Russia use this summit to try and send a global message that the US system is in decline and the US dollar system is coming to an end? This is the message coming out of Russia lately through their media outlets like Voice of Russia and Russia Today.

We suspect that if any message sending is done, it will be done by Russia. China and the other BRIC nations prefer to avoid conflict and headlines. The Chinese don't like to do a lot of talking, but they do steadily move forward towards their objectives. It is very clear from recent news that China is solidly behind Russia and the other BRIC nations are either silent or quietly supportive of Russia.

The BRICS are giving every indication that they are serious about just moving away from the existing global financial institutions and starting up their own version. But they do admit the process will take time and they talk mostly in terms of years into the future (like 10-20 years).

We think the thing to watch over time is whether or not this split becomes real and permanent or if what we are seeing are just moves in the global financial chess game. Moves designed to pressure the US into accepting IMF reforms and a global monetary system less US dollar based. Note this quote from this article about the summit in Russia Today:

"BRICS leaders are also expected to discuss IMF reform that would give the emerging economies a louder say in the decision making process in the fund."

It will be interesting to see if the western media pays much attention to the summit. It is too early to tell how this will play out, but we might get some hints next week. We'll cover it here in depth and see what unfolds. If there are any fireworks, expect Russia to be involved. 

We think the BRICS will surely impact major monetary system change one way or another over time.

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