The group of five nations – Brazil, Russia, India, China, and South Africa, otherwise known as the BRICS – is making some intriguing financial, economic, and political moves.
They're committing tens of billions of dollars each to organize their own versions of an IMF and World Bank.
Many observers thought the BRICS nations would encounter too many obstacles to collaborate effectively.
But after announcing such plans just over a year ago, the next BRICS summit in July is likely to see the official launch of these institutions.
The implications are huge for investors…
Here's What Created the Original IMF and World Bank
In the aftermath of World War II, the IMF and World Bank were offspring of Bretton Woods in 1944.
According to the IMF's own website, they are "twin intergovernmental pillars supporting the structure of the world's economic and financial order."
But what purpose do they serve, exactly?
The IMF was established as a "voluntary and cooperative institution" to help counteract what were seen as lingering financial problems that led to the 1930s Great Depression, including abrupt and unpredictable currency exchange valuations and general protectionism.
More recently since the financial crisis, the IMF has made subsidized loans to troubled members, both developed and developing.
The World Bank, formally known as the International Bank for Reconstruction and Development, was initially set up to lend to Western European economies ravaged by WWII. Later, the Bank focused increasingly on developing nations. Its main aim is "to promote economic and social progress in developing countries by helping to raise productivity so that their people may live a better and fuller life."
So why would the BRICS be interested in setting up its own institutions?
If you consider that these five nations represent 41% of the world population and 20% of global trade, their reasons become a whole lot clearer.
The Drivers Behind the "BRICS Bank"
Proponents of the new currency reserve pool (as an alternative to the IMF) make no bones about why they are forging ahead with their plans.
Russian Ambassador-at-Large Vadim Lukov has commented that "given that governance of the IMF is in the hands of western powers, there is little hope for assistance from the IMF in case of an emergency. That is why the currency reserve pool would come in very handy."
Lukov speaks from recent, sobering experience.
The financial crisis led to multiple bailouts in Western European nations in particular, including Portugal, Ireland, Italy, Spain, Greece, and Cyprus.
But more recently, when the U.S. Fed finally said it would cut its $85 billion monthly stimulus, the taper tantrum hit emerging markets especially hard.
Hot money fled the BRICS, slamming their capital markets and weighing heavily on their currencies.
The proposed currency reserve pool would act as an insurance policy against such routs. Members could call on the fund if they face a budget deficit or other financial difficulty. An injection of foreign currency would help a member deal with a shortfall.
Although plans were already in the works, the emerging markets sell-off provided extra impetus to reach these goals sooner. Lukov has recently indicated that both institutions would be operational by 2015.
In fact, the members have even determined how much each will contribute: China will commit $41 billion; Brazil, Russia, and India each $18 billion; and South Africa $5 billion. Respectively they are proportionate to the size of each nation's economy.
But the BRICS are not only interested in helping themselves exclusively.
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.