BRICS countries try to get a place in the sun

In a scenario of global uncertainty, the leaders of the BRICS countries (Brazil, Russia, India, China and South Africa) are still working to set up the BRICS development bank. The idea is establishing a joint bank which could provide funding for infrastructure projects and sustainable development in the five countries and even for other emerging markets and developing countries.

At the same time, the BRICS development bank might be an alternate lender to the World Bank and other finance bodies. As well, the joint bank can help to unlock the growth potential of BRICS’ countries and strengthen the global financing safety nets. Today, Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global gross domestic product. Together, the five countries have the world's highest volume of reserves, which sums up to more than US$ 4 trillion. The joint development bank might be concluded next year.

This is one of many initiatives that the BRICS countries have been working on to minimize the euro zone effects on their economies. At the same time, it is a great opportunity for the bloc to gain political importance.

Some time ago, Brazil, Russia, India, China and South Africa agreed as well to form a virtual foreign-exchange reserve fund to allow currency swap operations with each other. It is a virtual fund where each country will commit a certain value, but the money will continue to be linked to the reserves of each nation. If it were necessary, in accordance to the rules, BRICs could use the money.

The idea is to create a platform to improve trade opportunities between the member countries. According to the BRICS policymakers, the idea is to strengthen the investors’ confidence in BRICS countries.

The swap currency arrangement gives the ability to the five countries to lend each other money in order to keep markets liquid. On the other hand, the BRICS’ pooling of foreign-exchange reserves can work as a contingency measure to avoid a large contamination by the eurozone crisis.

Brazil and China, for example, are planning to do a US$ 30 billion currency swap, which means R$ 60 billion will be exchanged for 130 billion yuans, and vice-versa. So, China is allowed to withdraw up to R$ 60 billion and the country can use this money for Chinese trading, as soon as Brazil can withdraw the equivalent amount in yuans. 

Last month, the BRICS nations took new measures to increase their political prestige. The five countries agreed to contribute to the International Monetary Fund (IMF). Brazil, Russia, India, China and South Africa have contributed with more than US$ 70 billion to the IMF fund. The Chinese government made the highest deposit: US$ 43 billion dollars.

The move occurred in a particular moment when the IMF was looking to boost its finances to help prevent any future financial crisis. As a condition for lending extra cash, the five countries demanded more power from the IMF for emerging markets.

The BRICS nations want IMF reforms its quota system to increase representation and voting shares for emerging economies, particularly the five countries in the bloc. The current voting policy in IMF does not reflect, for instance, the enormous changes in the global economy over the past few decades.

Do these initiatives show the BRICS countries are concerned about a possible contagion from the eurozone crisis? Guido Mantega, Brazil’s finance minister, said the BRICS nations were strengthening their financial integration to underscore the faith investors should have in their economies and the move should also improve global confidence. “By creating financial solidarity among us, we will be even safer and stronger than we already are,” Mantega said.

Time will answer the question…