Can the New Development Bank Break out of the City of London System?

The BRICS summit in Johannesburg, from Aug. 22 to 24, will be much more important than anyone would have guessed one year ago. In the meantime, given their growing economic clout, 23 countries have officially applied for membership in the group. And the South African government has invited the leaders of 67 other countries, including all those in Africa, to attend and meet with the leaders of the five member nations in an outreach session. (The guest list, however, will not include the name of French President Emmanuel Macron, who had openly requested an invitation….).

The power centers of the bankrupt trans-Atlantic financial system and their media are playing up the divisions inside the group to claim that no signficant decisions will be reached, but they are increasingly considered irrelevant by those concerned.

According to South Africa’s Finance Minister Enoch Godongwana, among the many important issues to be discussed (cf. below and SAS 32/23), is the need to increase “fundraising and lending in local currencies” by the New Development Bank (NDB – the bank of the BRICS). “It is not doing as much as member countries require, but that is the strategic direction we are pushing the bank in,” Godongwana told Reuters last week. The press agency oddly uses the phrase “local currency fundraising” to mean seeking new capital contributions for the NDB from all eight current members (the original five plus Bangladesh, the UAE, and Egypt) in their own currencies, as well as from potential new members such as Saudi Arabia, Algeria and Uruguay. Should Saudi Arabia and Algeria join, the equivalent of $4 billion or more could be raised in new capital from those two nations.

The NDB plans to issue $80 million in rand-denominated bonds in South Africa on Aug. 15, and to issue rupee-denominated bonds in India before the end of this year. The issuance of bonds to the bank by existing and new member nations, backed by their own gold reserves, could greatly expand the NDB’s ability to fund development projects, and could overcome the strong fluctuations in member nations’ currencies which have kept the bank’s capital low — and its borrowed capital exclusively in dollars and euros — up to now. (The Federal Reserve’s recent interest rate hikes have also lowered the exchange values of the NDB’s member nations currencies, thus making dollar debt more costly.)

Since the conflict in Ukraine began, the NDB has been under sanctions, meaning that it could no longer operate under its Wall Street-like “business model” used up to that time. Russia being a 20% shareholder in the Bank, developed nations stopped purchashing the bank’s bonds, followed by a downgrade of its credit rating by Fitch Ratings Service. Dollar and euro purchases of the Bank’s bonds had accounted for 90% of the NDB’s total lending of $33 billion since its inception. Under its previous, Wall Street-oriented president, the NDB ended project lending to Russia and froze existing Russian credit. Under its new President Dilma Rousseff, the bank can become the central credit institution for development of “global South” nations.