Ariel Noyola Rodríguez

The countries which form the BRICS group are laying the foundations of a new financial framework through the Contingency Reserves Agreement and the creation of its own development bank. The day after the 2014 World Cup final in Brazil, the 6th BRICS group (Brazil, Russia, India, China and South Africa) Summit will be held in the country. Fortaleza and Brasilia will be the host cities for the event which will take place June 14 -16, to finally establish a new financial framework under the title, "Inclusive growth and sustainable solutions."

Unlike the Asian and South American financial regionalization initiatives, the BRICS countries, who don’t share a common geographical area and are less vulnerable to simultaneous financial turmoil, increase the effectiveness of their defensive mechanisms.

A monetary stabilization fund called the Contingency Reserve Agreement (CRA) and a development bank, known as BRICS Bank, will operate as a multilateral support mechanism for the balance of payments and a fund to finance investments. In fact, BRICS will distance itself from the International Monetary Fund (IMF) and the World Bank, institutions created 70 years ago under the orbit of the U.S. Treasury Department. In the midst of the world financial crisis, both initiatives open spaces for financial cooperation in the face of the volatility of the dollar and offers financial alternatives for countries in critical situations without being subjected to conditions which entail structural adjustment programs or economic restructuring.

The BRICS group, consisting of Brazil, Russia, India, China and South Africa, will convene for the 6th BRICS Summit in the Brazilian cities of Fortaleza and Brasilia from June 14-16, 2014.

As a consequence of the growing global economic slow down, it has become more difficult for the BRICS countries to achieve growth rates above 5%. The continued fall in prices of primary materials for industrial use, due to a reduced demand from the continent of Asia and the return of short-term capital flows to Wall Street, has negatively impacted foreign trade and exchange rates. With the exception of the slight improvement of the yuan, the currencies of the BRICS countries have fallen from 8.80 percentage points (Indian ruppee) to 16 (South African rand) as compared to the dollar, between May 2013 and June 2014. The BRICS CRA - with total capital of 100 billion dollars, announced in March 2013 based on a contribution of 41 billion dollars from China; 18 billion from Brazil, India and Russia; and five billion from South Africa – will once in operation substantially reduce volatility in trade relations and investment between members of the bloc.

Skeptics claim that the CRA will only have secondary importance and will only carry out functions matching those of the FMI. They ignore the fact that in contrast to the Chiang Mai initiative (made up of China, Japan, South Korea and 10 economies of the Association of Southeast Asian Nations), for example, the BRICS CRA will not need the support of the IMF to make its own loans, which will afford it greater political autonomy in regards to Washington. The currency war of the central economies against the economies of the capitalist periphery demands the implementation of the CRA as soon as possible.

Alternatively, the BRICS Bank has engendered great expectations. The bank, which will begin operations with 50 billion dollars of capital (with contributions of 10 billion and 40 billion in guarantees from each of its members), will have the possibility of expanding to 100 billion dollars in two years and 200 billion in five years. It will be able to finance up to 350 billion dollars for infrastructure, education, health, science, technology and environmental projects.

However, in the case of South America, the medium-term effects paint a dual picture. On the one hand, BRICS Bank could contribute to reducing financing costs and strengthen the countercyclical function of the Development Bank of Latin America (CAF), through increasing credits in moments of crisis, and thus rule out loans from the World Bank and the Inter-American Development Bank (IADB).

Brazil’s President Dilma Rousseff will host another important event - the BRICS Summit - as the World Cup comes to a close.

On the other hand, as a credit provider, the BRICS Bank will be competing with other financial entities which hold considerable influence in the region, such as the Brazilian National Bank of Economic and Social Development (BNDES), CAF, China Development Bank and Exim Bank of China – the Chinese banks with the greatest number of credits. And it seems highly unlikely that the aforementioned financial institutions could manage their credit offers in a complementary way without affecting their own loan portfolios. In the event that BRICS Bank loans are issued in yuans, the currency will advance in its internationalization and will gradually strengthen its position as a means of payment and reserve currency, to the detriment of other currencies.

Beyond the consolidation of a multipolar world, the CRA and BRICS Bank represent the seeds of a new financial framework, emerging in a period of crisis, full of contradictions, characterized both by cooperation and financial rivalry. (Excerpts from Voltaire)

Brazil, Russia, China and South Africa, the five most dynamic emerging economies on the planet, make up the BRICS group, a powerful association which represents 43% of the world population, 30% of the earth’s surface, 18% of the world Gross Domestic Product and 35% of the currency reserves.

BRICS members’ industries account for more than 50% of global economic growth over the last decade. Goldman Sachs states that by 2035 the BRICS group could become an economic bloc greater than the G-7, composed of the major industrial powers.