BRICS countries to set up their own IMF
The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant progress in setting up structures that would serve as an alternative to the International Monetary Fund and the World Bank, which are dominated by the U.S. and the EU. A currency reserve pool, as a replacement for the IMF, and a BRICS development bank, as a replacement for the World Bank, will begin operating as soon as in 2015, Russian Ambassador at Large Vadim Lukov has said.
Brazil has already drafted a charter for the BRICS Development Bank, while Russia is drawing up intergovernmental agreements on setting the bank up, he added.
In addition, the BRICS countries have already agreed on the amount of authorized capital for the new institutions: $100 billion each. “Talks are under way on the distribution of the initial capital of $50 billion between the partners and on the location for the headquarters of the bank. Each of the BRICS countries has expressed a considerable interest in having the headquarters on its territory,” Lukov said.
It is expected that contributions to the currency reserve pool will be as follows: China, $41 billion; Brazil, India, and Russia, $18 billion each; and South Africa, $5 billion. The amount of the contributions reflects the size of the countries’ economies.
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By way of comparison, the IMF reserves, which are set by the Special Drawing Rights (SDR), currently stand at 238.4 billion euros, or $369.52 billion dollars. In terms of amounts, the BRICS currency reserve pool is, of course, inferior to the IMF. However, $100 billion should be quite sufficient for five countries, whereas the IMF comprises 188 countries — which may require financial assistance at any time.
The BRICS countries are setting up a Development Bank as an alternative to the World Bank in order to grant loans for projects that are beneficial not for the U.S. or the EU, but for developing countries.
The purpose of the bank is to primarily finance external rather than internal projects. The founding countries believe that they are quite capable of developing their own projects themselves. For instance, Russia has a National Wealth Fund for this purpose.
“Loans from the Development Bank will be aimed not so much at the BRICS countries as for investment in infrastructure projects in other countries, say, in Africa,” says Ilya Prilepsky, a member of the Economic Expert Group. “For example, it would be in BRICS’ interest to give a loan to an African country for a hydropower development program, where BRICS countries could supply their equipment or act as the main contractor.”
If the loan is provided by the IMF, the equipment will be supplied by western countries that control its operations.
The creation of the BRICS Development Bank has a political significance too, since it allows its member states to promote their interests abroad. “It is a political move that can highlight the strengthening positions of countries whose opinion is frequently ignored by their developed American and European colleagues. The stronger this union and its positions on the world arena are, the easier it will be for its members to protect their own interests,” points out Natalya Samoilova, head of research at the investment company Golden Hills-Kapital AM.
Having said that, the creation of alternative associations by no means indicates that the BRICS countries will necessarily quit the World Bank or the IMF, at least not initially, says Ilya Prilepsky.
In addition, the BRICS currency reserve pool is a form of insurance, a cushion of sorts, in the event a BRICS country faces financial problems or a budget deficit. In Soviet times it would have been called “a mutual benefit society”, says Nikita Kulikov, deputy director of the consulting company HEADS. Some countries in the pool will act as a safety net for the other countries in the pool....