Source – marketrealist.com
– The BRICS countries (Brazil (EWZ), Russia, India (EPI), China (FXI), and South Africa) are slowly but surely drifting away from the 20th Century monetary and political structures setup by the U.S. (SPY) and Europe (EZU), as characterized by Russia’s G8 membership being revoked in the wake of the events in Crimea. The G7, as it is now known, is at odds with Russia’s Vladimir Putin, but that rift applies to the entire BRICS coalition — a group that seems to be growing stronger and more focused as leader of the Emerging Markets.

There have been a slew of recent moves within the BRICS network. Russia and China inked a $400 billion, 30-year natural gas partnership, forged a bilateral inter-bank agreement to deal in local currencies, and announced plans to create a new credit rating system to counter the Western agencies. China is diversifying away its U.S. dollar exposure, China and Brazil finalized a local currency swap, and leaders from the group of nations just met for the sixth annual BRICS Summit in Brazil.

China’s holdings of US treasuriesEnlarge Graph

Market Realist – The above graph shows China’s holdings of U.S. Treasuries (IEF), which have been declining consistently over the past year. China is steadily diversifying away from the dollar.

According to a government report released in June, China’s (FXI) holdings of U.S. Treasuries (TLT) declined for the third straight month in June 2014. China held 1.26 trillion in U.S. debt as of April 30, 2014, according to the report. This is an $8.9 billion decline from March. This fact is particularly significant given that China (FXI) is the largest foreign holder of U.S. Treasuries (IEF). According to data compiled by Bloomberg, analysts have seen this decline in holdings for three consecutive months.

China and Russia are also disintegrating from the standard credit rating procedures by agreeing to establish a rating agency on joint projects and international services. The rating agency would use similar tools and criteria for assessing creditworthiness as the existing agencies. This move came in response to the countries’ fears that negative feedback from agencies could prove harmful to their economies.

China and Russia also signed a momentous deal in May 2014. China agreed to purchase $400 billion of natural gas from Russia. This strategic deal comes as Russia finds itself isolated due to tensions with Ukraine. The deal should help China ease its gas shortages and reduce its dependence on coal.

The Russian government–controlled Gazprom will supply 38 billion cubic meters of gas annually to state owned China National Petroleum Corp., which will cater to almost one-fourth of China’s current annual gas consumption (150 billion cubic meters).

U.S. Treasury Secretary Jacob Lew has appealed to China to desist from taking steps that might be contrary to sanctions. However, the government has recognized China’s need for energy.

According to a joint statement from Russia and China on the partnership and strategic cooperation, Russia and China are planning to bypass the dollar and increase the volume of direct payments in their national currencies. This would threaten the dominance of the petrodollar and could be a huge blow to the economy if other nations follow suit.

Read on to the next part of this series to find out how the BRICS summit has led to setting up an alternative to institutions like the World Bank and IMF.
EPI $22.31 $0.38 1.73%
EWZ $48.41 $0.28 0.59%
FXI $41.03 -$0.44 -1.06%
IEF $104.49 $0.20 0.19%
TLT $116.45 $0.94 0.81%
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Part 2
Why the long-term prospects for the BRICS network are positive (Part 2 of 4)
Must-know: The BRICS alternative to the World Bank and IMF
By Mike Kane – Disclosure • Hedgeable • Aug 12, 2014 11:59 am EDT

The Summit produced some strong results, not least of which is the formal establishment of the New Development Bank after more than a year of speculative talks. This is truly a group effort, with the bank being headquartered in Shanghai and drawing its first president from India along with its first board chair from Brazil (EWZ). The bank is slated to reach the equivalent of 100 billion USD in capital, to be used for BRICS development and infrastructure projects.

Putin, among others, has been critical of institutions like the World Bank and the IMF for being biased toward the U.S. (SPY) and attaching unreasonable contingencies to capital. Fundamentally, the New Development Bank is a move away from the West and toward economic independence for emerging economies. Other countries will also be able to join the NDB, so it could grow substantially if it proves to be a viable alternative.

Capital base of banksEnlarge Graph

Market Realist – The New Development Bank would start with a capital base of $50 billion contributed by all the BRICS nations and aim to grow to $100 billion. The graph above shows you the approximate capital base of the major development banks currently existing around the world. The bank has less capital base than the World Bank and other major development banks currently.

The distinct feature of the National Development Bank is that the founding members would hold 55% of the minimum voting power at all times, unlike the World Bank, and future members can hold a maximum of up to 45%. The bank aims to provide money for infrastructure and development projects in its member countries. Every nation would have equal say irrespective of the size of its GDP, unlike World Bank and IMF.

The launch of the BRICS bank is momentous indeed. Many economists consider this the first step to breaking the dollar dominance in global trade.

The membership wouldn’t be limited to BRICS but could include other emerging nations (EEM) like Mexico, Indonesia, and Argentina.

Setting up the BRICS bank is significant primarily because of three reasons:

It shows that the BRICS are viable and dynamic emerging economies despite the recent lacuna in growth rates. The countries are all developing and working towards achieving a common goal—improving the living standards and infrastructure needs of their people.
No country dominates the bank and all founding members are on equal footing despite differences in GDP size.
The bank directly challenges the financial order set up by the U.S. (SPY) and Europe (EZU). China (FXI) and India (EPI) have failed to increase their influence in the World Bank and the IMF, and this new bank would help with reforms benefiting these nations. The formation of the bank should push the IMF and World Bank to become more transparent, open, and efficient.

Read on to the next part of this series to find out more about the outcomes of the BRICS summit.
EEM $44.65 $0.09 0.20%
EWZ $48.41 $0.28 0.59%
EZU $39.18 $0.21 0.54%
FXI $41.03 -$0.44 -1.06%
SPY $196.00 $1.16 0.59%
Part 3
Why the long-term prospects for the BRICS network are positive (Part 3 of 4)
Key highlight: The new BRICS Contingent Reserve Arrangement
By Mike Kane – Disclosure • Hedgeable • Aug 12, 2014 11:59 am EDT

Another highlight of the Summit was the Contingent Reserve Arrangement – a reserve pool worth 100 billion USD to be set aside for liquidity measures and crisis protection – which will work in tandem with the NDB.

This adds to other agreements like the Memorandum of Understanding on Cooperation, the Cooperation Agreement on Innovation, the BRICS Interbank Cooperation Mechanism, the BRICS Business Council, the BRICS Banking Forum, and the BRICS Exchanges Alliance. Putin has also proposed an energy independence scheme for the BRICS, including a pooled fuel reserve and a joint policy-making institution. Are you sensing the theme yet?

BRICS CRAEnlarge Graph

Market Realist – The graph above shows you the proportion that each founding country will contribute to the Contingent Reserve Arrangement. China (FXI) will contribute $41 billion, Russia, Brazil (EWZ), and India (EPI) will contribute $18 billion each, and South Africa will contribute $5 billion.

The idea spurring the creation of the CRA is to reduce dependence on the West and create a world that’s financially independent and multi-polar.

According to the Fortaleza Declaration, the BRICS stock alliance too has been formed to ease the way for investors keen to invest in emerging markets (EEM)(VWO).

All these measures—if efficiently executed—should make BRICS a cohesive force to reckon with.

Read on to the next part of this series to learn about the long-term prospects for BRICS.
EEM $44.65 $0.09 0.20%
EPI $22.31 $0.38 1.73%
EWZ $48.41 $0.28 0.59%
FXI $41.03 -$0.44 -1.06%
VWO $44.65 $0.04 0.09%
Part 4
Why the long-term prospects for the BRICS network are positive (Part 4 of 4)
Why the long-term prospects for the BRICS network are positive
By Mike Kane – Disclosure • Hedgeable • Aug 12, 2014 11:59 am EDT

Because of its burgeoning autonomy, long-term prospects are positive for the BRICS network as well as the other emerging economies that will inevitably join it – all of the pieces are in place for scalable growth and diminishing sensitivity to external global conditions.

If its members begin to act more like a conglomerate and less like individual nations, this could become a dominating force with about 20% of global GDP, over 40% of the world’s population, over 10% of global capital investment, and about 17% of global trade. That represents some serious economic clout.

World GDP shareEnlarge Graph

Market Realist – The graph above shows the size of economies as per world GDP on March 31, 2014. BRICS make up almost 20% of the world GDP and this figure is only set to go up. China (FXI) contributes almost 11.6%, India (EPI) contributes 2.7%, Russia contributes 2.7%, and Brazil (EWZ) contributes 3.4% to world GDP, as you can see above.

BRICS are likely to experience robust growth in the future. With the measures they’ve brought into effect, they could become a strong force to reckon with if they act as a union.

If the current BRICS trajectory is any indication, we may eventually see a weakening of the U.S. (SPY) dollar as a commanding leader in international dealings and, by extension, as a bedrock reserve currency. Whether that means a small decline or an all-out plunge remains to be seen, but neither is particularly good for the United States. Falling confidence in the dollar would make it more difficult for the government to borrow money and likely damper economic conditions across the world, while putting most Americans in a rough spot. And this would only accelerate the BRICS ascension.

An extreme scenario includes a shift in global power as the BRICS thrive and the rest of the world sinks with the dollar. China alone still holds over $1 trillion in U.S. debt which, if dumped, might instill a panic. Combined with the expanding economic fortitude of the BRICS nations and the growing independent infrastructure, this issue deserves some level of consideration, although any substantial changes are likely years away. One thing is clear: the BRICS are forging a bright future for themselves.

http://marketrealist.com/2014/08/must-know-brics-drifting-away-u-s-european-monetary-structures/