AN ALTERNATIVE

The global financial structure which has existed up until now was shaped after the Second World War and was based on the Bretton-Woods system with the dollar dominating as the world reserve currency. The most important component in this system was that mankind's main creditors were created at that time - the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF). But an alternative to this long-standing credit system may emerge in the very near future: this is likely to be the setting up of a New Development Bank (NDB), the initiative of the BRICS member-states.

A redistribution of finances

The creation of BRICS (a political and economic union of Brazil, Russia, India, China and the South African Republic) was initiated in 2006, but it was not until the organisation's summit in South Africa in 2012 that the proposal was first voiced that they should set up their own international financial institution for states with developing economies. In the view of its founders, the New Development Bank aspires to compete directly with the International Monetary Fund.

Such ambitious plans on the part of the BRICS members are based on a sufficiently weighty foundation. Thus, a number of experts assert that the economic potential of Brazil, Russia, India and China will already allow them to become the four dominant economic systems by 2050, catching up with the "G-7" countries in all economic indices. What is more, even today these countries boast extremely impressive natural and economic potential in total. The BRICS states have impressive amounts of hydrocarbon and mineral resources, more than 25 per cent of the dry land, as well as something like one third of the arable lands. Not to mention the fact that roughly 40 per cent of the planet's population live in the above mentioned states, offering a huge trading market. Well, and the main thing is their combined gross domestic product (GDP) amounts to the very considerable sum of 15.5 trillion dollars. In short, the potential of the BRICS member-states is more than sufficient to lay claim to a particular role in the world economy.

It is not surprising that the BRICS states intend to acquire their own international financial tool in the form of the New Development Bank. The agreement on setting up the New Development Bank was signed at the sixth summit of the organisation's member states in the Brazilian city of Fortaleza in July last year. Brazil, Russia, India, China and the South African Republic did moreover become the founders of the bank. The BRICS countries have agreed to submit the agreement on the bank to their national parliaments for ratification.

The NDB founders have arranged that the size of each country's contribution to the share capital should correspond to the size of the country's economy. It is proposed that China will contribute 41bn dollars to the fund, Brazil, India and Russia 18bn dollars each and the South African Republic 5bn dollars. It is expected that the capital that the New Development Bank will be permitted to issue will amount to 100bn dollars, the distributed capital to 50bn dollars, and these sums will be distributed among the BRICS countries in equal shares. Since the world's second largest economy, China, will assume the main financial burden in the BRICS union, correspondingly the bank's headquarters will be located in Shanghai.

Voting on the adoption of the decisions will also take place in accordance with the members' share in the bank's capital. The decisions of the bank's board of directors on key operational issues will be taken by a majority vote of the founding states.  In special cases, for example, in accepting new members into the bank, in revising the amount and structure of capital, the suspension of membership, the cessation of the bank's operation and the distribution of loans, a qualifying majority of three quarters of the votes is required.

In accordance with the preliminary estimates, the NDB's sphere of operation will primarily be aimed at granting loans for infrastructure projects such as the construction of ports, railways and highways, telecommunications networks, as well as undertakings aimed at the stable development of the BRICS member-states and other developing countries.

NDB versus IMF

What is the BRICS states' motivation in setting up their own credit structure, and to what extent is this undertaking connected with the desire for radical reform in the international financial system?

The fact is that the BRICS have several times proposed boosting the quota of developing countries in the IMF, but to increase the weight and representation of the developing countries, radical reform of the international financial system is needed. Alas, in the actual situation obtaining today, reforms of the IMF like this would apparently take a long time and be an extremely complicated affair. Today, the IMF quotas for China, Russia and India are four, 2.5 and 2.44 respectively. The USA has the largest share in this international organisation - a bit less than 17.7 per cent. The size of the quota affects a country's share of the vote; moreover, approval of key IMF decisions requires 85 per cent of the votes.

Thus, the USA and its closest partners do in fact have the right of veto in the organisation. Back in 2010 at a meeting of the "big twenty" a decision was adopted to transform the existing IMF quota structure; this process was moreover to be completed in 2014. But, taking advantage of its considerable share in the organisation, the USA blocked the adoption of the final decision. For Washington to alter its stand, a relevant decision of the US Congress is needed, but the American members of parliament in the Republican Party are categorically opposed to reforming the IMF quota system. 

Moscow, Beijing, Delhi and Brasilia have repeatedly stated that the quota formation scheme and distribution of votes among the IMF members is not to their liking. These countries are prepared to increase the size of their contribution to the IMF, but to have more say in the adoption of decisions.

Besides their disagreement with the practice of quota arrangement and distribution of IMF loan resources, Russian experts complain about the latent political activity of the forces backing the fund. In particular, critics of the IMF believe that this structure was initially created as a lobbying institution and defender of the interests of transnational capital and financial speculators. Correspondingly, the operation of this organisation has promoted the establishment of financial capital's control over the marketing sector of the economy of the world's developing countries. 

It is not surprising that, once they had failed to achieve reforms of the International Monetary Fund, the BRICS partners decided to create their own mini-IMF - the New Development Bank. The decision is being implemented in stages, in spite of the economic difficulties caused by the decline in world oil prices and the sanctions-related confrontation between Russia and the Western countries owing to the situation in Ukraine. Until recently the BRICS was an informal, primarily consultative union, which did not even have a head-quarters. Now, when the creation of their own financial structures is being discussed, the possibility is being examined of increasing the number of stake-holders in the NDB, to take in Argentina, Iran, Turkey and a number of other states, the experts note.

In the agreement on the setting up the NDB, it states that that other countries, UN members, can also join the bank, but on condition that the share of the BRICS founding countries in the bank's capital should not drop below 55 per cent.

At the same time, many Western experts are expressing doubts about the effectiveness of the joint economic initiatives of the five BRICS states. In particular, they are not convinced that the NDB with its potential 100bn-dollar capital is capable of competing with the IMF with its 188 members and its capital of one trillion dollars. The amorphousness of the BRICS and its structures, as well as the recommendatory nature of the decisions guiding the organisation's bodies may act as an impediment to it becoming a real competitor to the IMF. "At the present time, the BRICS largely remains a political club of the major economies of the non-Western world, and is only an economic union after that," the well-known political scientist and expert from the higher school of economics, Sergey Karaganov thinks.

Besides this, today the BRICS members are worried about the decline in their own economies. Of the countries in the organisation only the economies in China and India are growing. The Ecstrat economist John-Paul Smith notes that over the last few years the average GDP growth rate in all the BRICS members has dropped by more than two points. In Russia experts are definitely expecting a recession of 0.8 to 4 per cent owing to the sanctions, the drop in oil prices and the deterioration in the investment climate. If the same thing happens in Brazil and Russia over the next few years, by 2019 only India and China may be left out of the BRICS countries," the former head of Goldman Sachs, who coined the abbreviation BRICS, economist Jim O'Neill remarks ironically.

In either event, BRICS has several times demonstrated to the world that there is an alternative to the authorities in the European Union, the USA and the G7, both in the sphere of finance, as well as in the development of international institutions. Well, the prospects for forming an alternative to the IMF, the New Development Bank, whose development largely depends on the political will of Beijing, Moscow and Delhi, as well naturally on a favourable economic situation, first and foremost the ending the current phase in the decline in production and trade and the stabilisation of the oil market.