Wednesday, July 16, 2014

What Do the BRICS Want?

This is the big question . Some say the BRICS are trying to take down the current US dollar based system to replace it with one they control. Others say the BRICS are just using their new bloc as leverage to pressure Western institutions into reforms they want. Which is it? Could it be some of both?

One of the keys for us to watch in this BRICS summit was if the they would come out with aggressive open attacks on the US dollar based system. After all, leading up to the summit Russian officials have been making statements essentially declaring open war on the US dollar. The Voice of Russia ran headline articles talking about the formation of the "anti-dollar alliance". The article quoted Russian officials plans to set up swap agreements between the BRICS nations to bypass the US dollar in trade. In addition, it noted they would likely fund the new reserve fund with US dollars reducing their national exposure to the dollar. A double slap in the face to the dollar. 

If you do any research at all on this topic on the internet, you will quickly find a host of analysts predicting that we are seeing the start of a major East-West confrontation over the future of the monetary system. Some even say the US dollar system is already mortally wounded and will collapse soon to be replaced by a new Yuan-Ruble based system. Some add it will be gold backed.

On the surface there is plenty of credible evidence to support this idea. The US and Russia are obviously at odds over the Ukraine. Both are vying for EU support. The US continues to try and ramp up sanctions and Russia continues to threaten to retaliate by attacking the US dollar based system. Some officials in BRICS nations do talk about replacing the US dollar often.

If we dig deeper however, we see that there are some hints at this BRICS summit that perhaps the BRICS are not planning on leaving the Western based institutions any time soon. First, we should note that the new BRICS Bank and reserve fund are at least a year away from really starting up. The Bank may not start lending until 2016. When BRICS officials discuss their future, they talk in terms of being a serious lender several years from now. That doesn 't sound like they will be leaving the western institutions any time soon. But the real clues are buried deep in the summit Declaration document. Let's take a look.

While the document does establish the new reserve fund and the new BRICS bank, it also makes it very clear that the BRICS plan to be deeply involved in the UN going forward. Bullet point after bullet point in the Declaration (you can read it here) talks about support for various ongoing UN programs. Here are just a few examples:

22. We reaffirm the United Nations Conference on Trade and Development’s (UNCTAD) mandate as the focal point in the UN system dedicated to consider the interrelated issues of trade, investment, finance and technology from a development perspective.

24. We underline that 2015 marks the 70th anniversary of the founding of the United Nations (UN) and the end of the Second World War. In this connection, we support the UN to initiate and organize commemorative events to mark and pay tribute to these two historical moments in human history, and reaffirm our commitment to safeguarding a just and fair international order based on the UN Charter, maintaining world peace and security, as well as promoting human progress and development.

25. We reiterate our strong commitment to the UN as the fundamental multilateral organization entrusted with helping the international community maintain international peace and security, protect and foster human rights and promote sustainable development. The UN enjoys universal membership and is at the very center of global governance and multilateralism.

29. We commend the efforts made by the United Nations, the African Union (AU), Economic Community of West African States (ECOWAS) and the Community of Portuguese-Speaking Countries (CPLP), among others, in support for the realization of legislative and presidential elections in Guinea Bissau,

The list goes on and on. The message is crystal clear. The BRICS are not planning on leaving the UN and in fact go out of their way to re affirm their support of it over and over in the statement.

But what about the World Bank? Do they mention that? Yes they do.

19. We welcome the goals set by the World Bank Group to help countries end extreme poverty and to promote shared prosperity. We recognize the potential of this new strategy in support of the fulfillment of these ambitious goals by the international community. This potential will only be realized, however, if the institution and its membership effectively move towards more democratic governance structures, strengthen the Bank's financial capacity and explore innovative ways to enhance development financing and knowledge sharing while pursuing a strong client orientation that recognizes each country's development needs. We look forward to initiating the work on the next shareholding review at the World Bank as soon as possible in order to meet the agreed deadline of October 2015. In this sense, we call for an international financial architecture that is more conducive to overcoming development challenges. 

Does not appear their are any plans to leave the World Bank either. Note the October 2015 project.

But what about the IMF? We know they are frustrated and upset that the reforms are stalled there. Do they talk about that? Yes they do.

18. We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness. The IMF reform process is based on high-level commitments, which already strengthened the Fund's resources and must also lead to the modernization of its governance structure so as to better reflect the increasing weight of EMDCs in the world economy. The Fund must remain a quota-based institution. We call on the membership of the IMF to find ways to implement the 14th General Review of Quotas without further delay. We reiterate our call on the IMF to develop options to move ahead with its reform process, with a view to ensuring increased voice and representation of EMDCs, in case the 2010 reforms are not entered into force by the end of the year. We also call on the membership of the IMF to reach a final agreement on a new quota formula together with the 15th General Review of Quotas so as not to further jeopardize the postponed deadline of January 2015.

Even here they are clearly still hopeful the IMF reforms will pass by January 2015 (an already extended deadline from January 2014). Who knows what they will do if January 2015 comes and the reforms are still stalled. History suggests they will just set another "deadline" and continue building their Plan B system. But there is nothing suggesting they will be leaving the IMF so far. Also, IMF and World Bank officials are already talking about "working together" with the new BRICS institutions "when they are actually setup".

There is another blog site that I read regularly that deals with these same topics we do here. The analysis there is good and is supported with factual data you can verify on your own (something important to us here).

That site takes the view that all the surface conflict between the BRICS and the IMF, World Bank, etc. is meaningless as to what will eventually happen. They believe that at the end of the day, after regional blocs are established first, they will all end up back at the IMF using an SDR based currency system as Jim Rickards predicts. You can get that view here where it is explained much better than we can do here.

So there are credible arguments for both views. Which is correct? How will all this end up in a few years? We don't claim a crystal ball here and we honestly don't know for sure. Our job here is to expose readers to factual information and what we think are the some of the best theories out there interpreting the information. We can see either path happening depending on a lot of factors we just cannot possibly predict. 

What we can do is try to share what we think is a plausible possible future path based on all the research we have done so far up to this point (after reading hundreds of articles and listening to a huge variety of theories on it all).  And after input from readers here that are in positions to know what the thinking is "inside" the present system.

In the next post we will try to summarize what we can make sense of right now based on all that. It might just be that the BRICS assist in speeding up the end of the present dollar system, but eventually participate in a new monetary system back under the IMF. It might involve the SDR, but also a new twist based on new technology that could bring gold back into the system and allow Central Banks and regular citizens to use a type of "everyman's SDR". That is not I term I made up. It is a term suggested to me by a very well informed reader here. We'll do our best to sum all that up in the next post. It's a lot to think about and this post is already pretty long.

--Udpate 7 am (cst) 7-17-2014: Just to make sure we get the point, this new article comes out this morning on BRICSPOST  titled "BRICS Bank not Against IMF - Brazil President". There you have it.

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