BRICS Bank faces Hamlet dilemma: To be or not to be

Leaders of BRICS economies have notionally cleared the setting up of a BRICS development bank, but it is not likely to take formal shape any time soon even though they find the concept “feasible and viable”.

This was to be an expensive first baby costing the five members $50 billion in total. However, the BRICS members were unable to find so much money in their coffers to spare, as this writer argued here .

However, the BRICS leaders have batted for another very ambitious project of the grouping - a Contingent Reserve Arrangement (CRA), a proposed entity worth $100 billion. The leaders have noted that in their June 2012 meeting in Los Cabos, they had tasked their Finance Ministers and Central Bank Governors to explore the construction of a financial safety net through the creation of a CRA among BRICS countries.

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[caption id=“attachment_677362” align=“alignleft” width=“380”] As far as the BRICS bank proposal is concerned, the bloc found it difficult to pool in $2 billion individually. PTI[/caption]

This is a far more doable proposition than the BRICS bank because India is not averse to it. Moreover, the CRA will give an opportunity to BRICS members to gnaw into China’s mammoth forex reserves.

In their Durban declaration, this is how the BRICS leaders framed the CRA: “We are of the view that the establishment of the CRA with an initial size of US$ 100 billion is feasible and desirable, subject to internal legal frameworks and appropriate safeguards. We direct our Finance Ministers and Central Bank Governors to continue working towards its establishment.”

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As far as the BRICS bank proposal is concerned, the bloc found it difficult to pool in $2 billion individually - barring China. The grouping’s finance ministers, who met in Durban on 26 March ahead of the summit, were faced with tough questions about the size of the contributions by each member during these hard times. Leave alone a $10 billion contribution per member, the finance ministers found it hard to raise even $10 billion in totality.

Russian Finance Minister AntonSiluanov was quoted by ITAR-TASS news agency as saying: “It’s going to be 2 billion dollars for each member if divided by five. It’s big money. It’s going to be hard for us to debate this issue in parliament. I think that all the other states will also have this problem.”

Against this backdrop, the BRICS leaders, in their Thekwini Declaration, noted: “We considered that developing countries face challenges of infrastructure development due to insufficient long-term financing and foreign direct investment, especially investment in capital stock. In March 2012 we directed our Finance Ministers to examine the feasibility and viability of setting up a New Development Bank … Following the report from our Finance Ministers, we are satisfied that the establishment of a New Development Bank is feasible and viable. We have agreed to establish the New Development Bank. The initial capital contribution to the bank should be substantial and sufficient for the bank to be effective in financing infrastructure.”

Two contradictory reports emerged from the fifth BRICS summit in Durban on the status of BRICS development bank, the most ambitious project of the five-nation bloc spanning four continents.

The official website of the Durban summitcarried an AFP report on 26 March with the self-explanatory title “BRICS Reach Deal on Development Bank” and quoting South African Finance Minister Pravin Gordhan. “It’s done,” Gordhan was quoted as saying. “We made very good progress, the leaders will announce the details.”

But ITAR-TASS carried a contradictory report on 27 March quoting Siluanov as saying that the bloc’s finance ministers had failed to agree on the creation of the bank and on a host of key issues, including the amount of capital and the size of contributions to be made by each member-state.

That report quoted Siluanov as saying: “The sides also failed to reach a consensus on the principles of governance: whether it should be carried out on equal terms or be proportionate to the size of contributions made by each of the BRICS states… I can only say that Russia doesn’t claim that the bank be necessarily located in its territory. We certainly understand that other countries could be more interested…We agreed to work further. The decision will be made, if it is to be made, at the level of the heads of state.”

Indian diplomatic sources find the Russian finance minister’s remarks more credible. A senior Indian official told this writer that the BRICS bank is a good idea whose time has not come just yet because the member-states have to clear some very major basic issues like what the bank will do, how much its corpus fund will be to begin with and what the sharing principle for the five member-states will be.

Initial reports emanating from Durban in the run-up to the summit had suggested that the proposed bank would begin with a $50 billion corpus with each of the five member states shelling out equally.

The Indian official gave a sneak peek into what happened at the finance ministers’ meeting in Durban on 26 March. China evidently offered to pay a part of the obligations of members like Brazil and South Africa, who are more hard-pressed than others to pay their full contribution towards the bank seed capital. In fact, China even went to the extent of committing more money further to increase the corpus fund.

“India objected to this as it would be contrary to the spirit with which BRICS had been raised in the first place: the principle of equality,” the Indian official said. The BRICS bank will take years to come up even if the issue is clinched today, the official explained.

The proposed BRICS bank (whether it has a corpus of $50 billion or $10 billion) will take years to come by - if it ever does at all - given Indian concerns about the Chinese designs. This episode has brought home one important point. Politics has eventually entered BRICS. This was not unexpected. Perhaps the right question would be why the intra-Brics politics took so long to play out…

The present scenario about the proposed Brics bank is both tenuous and iffy. This can be a make-or-break point for India as long as it continues to be a member of the BRICS grouping. There is already a talk of India exiting BRICS: for instance, BBC has thrown up the idea that perhaps Indonesia would replace India as the ‘‘I’ in BRICS.

The writer is a Firstpost columnist and a strategic affairs analyst who can be reached at bhootnath004@yahoo.com