The New Development Bank is a Linchpin for the BRICS' Countries

July 15, 2015International Organizationsby Deena Zaidi

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China, the biggest of the BRICS, is home to the NDB and AIIB.

Greece was the first non-member to be offered BRICS membership, even though ironically the association of the emerging economies is yet to take off. The New Development Bank (NDB) operated by the five member-countries of Brazil, Russia, India, China and South Africa (BRICS) is all set to take off with an intention to develop economic relations amongst developing countries. It is considered to be an important institution since it is the first to be created by emerging countries with the hope to finance many important projects. The BRICS bank will be financing projects by the year’s end, with special focus in the member countries. The launch of the bank was on July 7, 2015, just ahead of a summit held in Ufa, an industrial city of Russia.

The bank comes as a boon to Russia since the country suffers from western sanctions and losses from falling oil prices. Russia’s diplomacy brought the dates of the two summits pretty close. The two blocs of BRICS and Shanghai Cooperation Organization (SCO) could be a hope for struggling economy of Russia. Ufa summits were attended by many members that were at least a member to one of the organizations that focused on regional development. While SCO has member countries of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan, BRICS consists of emerging economies.

Interestingly, India and Pakistan, the two countries with years of growing tensions since partition are the new approved members of SCO, the membership of which will begin in 2016. SCO focuses on activities related to political, economic and military organization. It emphasizes on promote democracy, equality and regional security from rising threats due to terrorism, separatism and extremism.

The Contingent Reserve Agreement of $100 billion may not be used immediately by any of the fours member countries of Brazil, India, China and Russia with an exception of South Africa. The contribution made by each member country towards the bank is:

i. China – USD 41 billion

ii. Brazil – USD 18 billion

iii. Russia – USD 18 billion

iv. India – USD 18 billion

v. South Africa – USD 5 billion

The biggest question remains will it deliver with the same amount of enthusiasm with which it formed?

The New Development Bank starts its funding next year and it potentially will be giving loans to those projects that probably have been rejected for funding by the international funding organizations like those of World Bank and IMF. These projects could turn into bad loans creating further problems for the emerging markets.

While the nations involved remain very optimistic about getting co-operation especially during meetings, it might not be as simple and easy as it seems. While emerging markets have their own tale to tell and could be struggling economically, things might appear difficult in the long run.

BRICS largest contributor China: China enjoys the benefit of having the headquarters of both New Development Bank (NDB) and China-led Asian Infrastructure Investment Bank (AIIB) in Shanghai and Beijing respectively With China being the largest contributor for BRICS, the ailing country itself had a $3 trillion crash in the main stock market from the peak just about three weeks ago with real estate markets getting affected. China’s stock investors are selling their homes to cover up the losses from stock market crash, which could trigger a concern over the real estate market. While 58% of China’s issues remain suspended, the entire nation seems to be facing a crisis, a term it was unaware of just last year.

China currently faces two damages that could occur simultaneously: stock market crash followed by a real estate crisis. While the amount of money lost in the Chinese stock market varies, it seems most had invested in the markets. The volatility of China’s markets is greater since 80% of investors are retail investors and the cost of government intervention to stabilize markets was at a very high cost. China also remains a member of both blocs of BRICS and SCO. Many critics are of the opinion that New Development Bank is formed to stop the growing influence of developed nations of the West through international organizations like IMF and World Bank. While this may be true, China still continues to be a buyer of US Treasury bills with a record holding.

Russia remains a member of BRICS, SCO and EEU (Eurasian Economic Union consisting of mostly northern Eurasia). The country has a lot to worry about at the moment when it comes to its economy and it seems it is willing to take up the challenge. Russia has big worries: Western sanctions over Ukraine crisis; trouble with its domestic currencies, the rouble; its trade ban with 28-nation EU, Russia’s first trading partner and falling oil prices (oil being its main export). Russia had banned foods from EU in response to Western sanctions but maintained good relations with Hungary, Cyprus and Greece.

For Russia, BRICS brings back some hope for its falling economy. In June 2015, European Union governments extended economic sanctions on Russia until January 31, 2016. The ties with the western world keeps getting worse for Russia and its membership with various Asian associations seems to be a positive sign for the country. However, on the whole, the country wants to establish its position at a global level by looking towards Asia-Pacific and Eurasia region.

South African economy, also one of the surprising entries in BRICS, is stumbling and may probably be in urgent need of loans once the New Development Bank starts lending next year. It is hindered by a debt crisis and a national criminal wave.

Brazil still faces massive corruption levels especially a recent case of Petrobras, an energy giant that accounted for 10 percent of Brazil’s annual economic output. Brazilian economy is very weak hovering at about 1%.

India, a pro-US nation could be challenged by the intentions of both Russia and China, which is more to do with establishing a comparative institution to the likes of International Monetary Fund and The World Bank. India could have conflict of interests with the emerging nations, not soon but in the coming years of NDB’s functioning.

Conclusively, BRICS might just be another bloc that will initiate the plans for growth and development across the region but how far it will go is difficult to tell. However, with each individual country either facing economic or political turmoil, sooner or later all of the member countries might be looking at project funding from the BRICS-bank. For BRICS to remain strong and reach a global level, it would require at least one member country to be extremely strong, both economically and politically and not only in the Asia-Pacific region but at a global level.

BRICS: United We Stand, Divided We Fall is republished with permission from The Financial Keyhole