Monday, June 15, 2009

The BRICs´ First Summit

On June 16, the BRICs – Brazil, Russia, India and China – will hold their first annual summit. The meeting will focus on developing a common position on international financial reforms and climate change. However, despite a common interest in role that indicates their weight in the global economy there are also significant divides between BRIC countries, with Russia and to a lesser extent Brazil being more reliant on commodity exports and China and India being net importers. Lately, we have seen comments by Russian, Chinese and Brazilian officials about moving away from the U.S. dollar, using more domestic currency in bilateral trade and alternate reserve currencies. While these countries, especially China may take some steps to allow more internationalization of their currencies, shifting away from the dollar is happening only on the margins and given the new inflows to EMs especially the BRICs, reserve accumulation has been on the rise.

The idea that China and Brazil may use their own currencies when they are trading might be the first step towards the convertibility of these currencies. Another aspect is the different reasons that each of the BRICs has regarding its reserve positions. India seems to regard its reserves most traditionally; an insurance against future calamities. Brazil and Russia are more willing to use reserves for domestic purposes and operates in the foreign exchange market daily. China’s massive reserves, more tan a quarter of the world’s reserves, are as much a sign of its successes as its failures.

According to the IMF, the BRICs respond for 25% of the world economy in 2008, as compared to 16% ten years ago. BRIC countries have agreed to buy IMF bonds to help raise funds. Indeed, the idea was that China would buy $50 billion, and Russia, India and Brazil have contributed to buy $10 billion each. However, according to Reuters, president Lula has announced the IMF loan one week before he was set to meet his counterparts from key emerging markets in Russia, where leaders of the so-called BRIC nations will gather for the first time to discuss ways to assert a new world order that reflects their growing influence. It seems that it is not a coincidence that the announcement came on the same day that Russia announced it would gradually reduce its holdings of the US treasuries. Clearly, such an announcement drove the US dollar down. In turn, it may be the case that Brazil decided to anticipate the decision regarding the IMF loan as a way of saying that the loan does not intend to weaken the US dollar.

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