Tag: Deglobalization

Categories
Macro

Is the G7 the new EM?

The past few weeks of political headlines have provided yet more confirmation of a long-term trend: the distinction between emerging and developed markets is less clear than it once was. Emerging and frontier markets are less politically stable, or so the old consensus goes.

Yet Emmanuel Macron has flown in the face of all that by dissolving France’s parliament and calling snap legislative elections. The prospects of extremist parties coming to power or of a hung parliament in France has sent European markets reeling.

Sadly, Macron’s folly is just the latest episode in a recent litany of rich-world self-sabotage. Cue January 6th, just about everything that Donald Trump does, Brexit, and the tenures of Boris Johnson and Liz Truss. To complement the Anglosphere’s masochism, add in the rise of the Italian far right, multi-faceted German despondence, and demographic reversals in Japan, Italy, and Germany. The result is something other than a pretty picture. At the recent G7 meeting in Italy, every leader save Prime Ministers Meloni and Kishida was speaking from a position of political weakness.

The upside-down global trading system

One of the driving forces behind this wealthy-country malaise is the absence of a well-functioning global trading system. Consider that savings is the difference between income and consumption. One would think then that advanced economies would have more savings than emerging economies, as they have greater income. Not so.

As a share of GDP, China, India, Indonesia, and sometimes Russia all have higher savings rates than G7 countries. In fact, only Germany and Japan have roughly equivalent savings rates, followed by Canada, France, and Italy. The US and the UK trail distantly.

The Chinese anomaly

The advantage of a high domestic savings rate is of course that a country can use these fund investments. China is an extreme example of this. By suppressing domestic consumption, Beijing has been able to jack up investment levels to dizzying heights without even running a current account deficit.

This is of course a significant problem because that abundance of savings ends up penalizing savers. The result is a vicious circle where the authorities discourage consumption in order to keep interest rates low for investment, which hurts people with money saved up in the bank. It’s a classic case of financial repression. Remember that the Chinese government directs a lot of investment from state-owned banks to inefficient state-owned enterprises. This is a recipe for slower growth, which China is currently experiencing.

Unfinished construction in a Chinese “ghost city.” Civic Data Design Lab

These chronically high savings end up “exporting” China’s weak consumer demand to the rest of the world, to the dismay of its trading partners. Juicing up savings to such levels results in over-investment domestically, without which the world’s largest current account surplus in dollar terms would be even larger. Remember that investment most typically reflects fixed capital formation, e.g. the construction of infrastructure and real estate assets. Hence the ghost cities that pepper the real estate landscape. Echoing US residential real estate pre-2007, many Chinese families had bought several apartments as investments during the boom years and are now enduring the ongoing property crisis currently afflicting the country.

CAB deficit, low investment, high consumption

The US and the UK are the best counter-examples to the Chinese model. In these countries, consumption is subsidized, partly through easy access to a diverse array of credit products at relatively low rates. Higher consumption naturally results in lower savings rates, which in turn mean some combination of:

  • Investment would have to decrease significantly for the current account to be at zero and/or
  • If investment doesn’t decrease by a lot, then there must be a current account deficit.

In reality both countries experience both low investment and current account deficits. This combination isn’t only an obstacle for directing resources towards badly-needed infrastructure maintenance and upgrades. Current account deficits make it harder for capital to flow from rich countries to poor ones that need it.

A deadly Amtrak train crash in DuPont, Washington in December 2017. Stephen Brashear / Getty Images

What we have is a world where the US, the UK, and other wealthy countries over-consume. France, Canada, and Australia are mostly in this camp as well. Over-consumption, external deficits, and financialization don’t only come at the cost of infrastructure investment and funding for international development. They also result in the outsourcing of jobs and entire industries because subsidizing consumption comes at the expense of production.

Exorbitant privilege, exorbitant cost

This status quo also reinforces the US dollar’s status as the reserve currency because US current account deficits mean that the US can flood the world with dollars. The US can do this because of well-entrenched, large global demand of US assets, whether financial, real estate, or other. This is what gives the US Treasury its “exorbitant privilege” to borrow significantly, at low cost.

Savers around the world are always keen to invest in highly-diversified economies with strong property rights. Open capital accounts across most of the developed world make it possible for capital to move around nearly seamlessly for buying and selling assets. This is one reason why asset valuations across much of the Anglosphere seem so stretched, whether stock market valuations or residential real estate prices. Local workers, even in wealthy cities like New York, Vancouver, and Sydney, are being priced out by global capital.

Moreover, a global economy awash in dollars is one where the dollar can be weaponized via sanctions. Dollar dominance also reinforces the power of US banks, which are already strengthened by domestic financialization.

This is also a system that benefits US dollar strength. While a strong dollar hurts US exporters, no one in the US government or Congress really seems to care about export competitiveness beyond lip service. Worse still is the fact that an appreciating dollar is associated with lower trade volumes and more expensive debt servicing costs on dollar-denominated debt for emerging market issuers.

CAB surplus, high investment, low consumption

On the flip side are the economies running current account surpluses. First and foremost China, but also Germany, Japan, Russia, and – sometimes – Italy. One thing that these countries all have in common is rapidly-aging populations. People in prime working years tend to consume more due to higher income levels and spending needs, including children.

China, Germany, and Japan also under-consume because they subsidize production at the expense of consumption. If you’ve ever wondered why Japanese unemployment rates are so low, consider that a relatively small working-age population has a lot of domestic exporting industries to choose from. Or why wages and real estate prices are lower in Frankfurt and Berlin than in London and Paris. Germany has kept wages and consumption low to boost manufactured exports.

Unsustainable consumption imbalances

The global trading status quo doesn’t only damage the developing countries that need access to rich-world capital. These imbalances are also causing rot at the heart of G7 economies. For the US and other deficit countries, consumption is too high. Jobs and industries have been outsourced, while asset prices have skyrocketed out of reach for workers.

In Germany, Japan, and Italy, consumption is too low in these aging societies with external surpluses. Domestic industry has survived, in part thanks to the typically-abundant savings of the elderly.

Balanced consumer demand is needed across advanced economies, in China, and beyond. Only then will more stable electoral politics return to the G7.

Categories
Geopolitics

Are geopolitical risks priced in?

Oil prices have actually declined in the wake of Iran-Israel.

In remarks made on Tuesday this week, JPMorgan Chase boss Jamie Dimon stated, among other things, that he’s surprised at oil not rising further amid recent geopolitical tensions.

Brent crude has mostly been trading in the $85-90 range over the past month, though that is still up significantly from around $75 at the beginning of the year.

The man certainly has a point here, especially if energy infrastructure suffers damage in the Middle East and Europe. Yet the Iran-Israel strikes over the past ten days haven’t had a discernible impact.

In fact, oil prices have declined from around $90 to $88 in recent days on the back of slower US business activity and easing concerns over the Middle East. The American cool-off makes good sense, at least.

But with war raging in Ukraine, disruptions to Red Sea maritime traffic, the ongoing Gaza situation, and a series of other conflicts around the world, perhaps markets are becoming desensitized to bad news. At least for now.

In any case, the geopolitical backdrop strikes me as exceedingly gloomy, and perhaps investors are getting complacent about geopolitics, just as they were about inflation around the turn of the year.

Speaking of which, with sticky US inflation and the possibility of another rate rise now on the cards, the double-whammy of an even stronger USD and even higher oil prices would be especially challenging for oil-importing emerging markets. This is not an outcome anyone should want, since the EM/FM universe is awash in dollar-denominated debt.

I’m not the only one in a risk-off mood, with gold currently at record highs. Though skittish sentiment isn’t full-fledged. One of the other main safe haven assets, the yen, is persistently weak, with PMI still below break-even despite some signs of recovery.

I wouldn’t be surprised to see the yen and oil rise in coming weeks given all the smoldering fuses currently inhabiting a geopolitical landscape of powder-kegs.

Categories
Geopolitics

Populist forces on the march

With so much of the world headed to the polls in 2024, a quick stock-take of results so far and a look ahead are in order. The outcome of each contest shapes broader international trends of deglobalization.

Of populists & liberals

The paradox is that both populist and liberal political parties have pursued policies leading to international economic fragmentation. On the populist side, trade tariffs à la Trump are the most obvious example. Populism has of course also lead to schisms in western cooperation, whether Republican reticence on NATO and Ukraine, or pro-Russian leadership in Hungary and, more recently, Slovakia (see below).

Liberal political forces are also responsible for deglobalization. The prime example is the widespread use of economic sanctions by the Biden administration and Western Europe against Russia. Yet the current US administration has not only kept the Trump era’s trade barriers in place, it has also introduced more protectionist measures through the landmark Inflation Reduction Act.

Moreover, the success of liberal parties in the broad West can benefit cohesion among allies at the expense of decoupling from opponents. Case in point, Finland’s new president comes from a pro-Europe, pro-NATO party, highlighting how joining NATO bolsters cooperation within the West while also – quite understandably – turning away from Russia.

Populism has the edge

Despite these nuances, a high-level view of electoral outcomes around the world sheds light on the direction that future international economic relationships will take. By the end of the year, the US, India, Indonesia, Mexico, and many other countries will have voted. The question isn’t so much whether the world will continue to fragment, but rather how, which is what monitoring elections can help answer.

So far this year, populist forces have advanced to varying degrees in Slovakia, Indonesia, Senegal, Poland, and will likely maintain power in India. The military continues to loom over politics in Pakistan, while Bangladesh’s authoritarian Awami League has left virtually no space for any opposition.

In contrast, results in Taiwan, Finland, and Turkey have favored more liberal political parties. Similarly, upcoming legislative elections in South Korea will likely see the center-left and center-right parties continue to dominate the political landscape.

Electoral highlights year-to-date

  • Poland: The nationalist, opposition PiS party came out ahead in local elections on April 7th, but Prime Minister Tusk’s ruling coalition will likely hold on to power in most regions.
  • Slovakia: The result of April 6th’s second round runoff in Slovakia are in, with the ascension of pro-Russian politician Peter Pellegrini to the presidency confirming the country’s pivot towards Moscow, after Robert Fico’s return as Prime Minister in October 2023.
  • Turkey: The victory of the opposition Republican People’s Party in local elections on March 31st were a setback to President Erdogan’s ruling AKP, with Istanbul’s mayor Ekrem Imamoglu strengthened by this outcome.
  • Indonesia: The general election on February 14th marks a turn away from incumbent Joko Widodo’s center-left PDI-P to the nationalist, right-wing populist Gerindra party under current defense minister Prabowo Subianto, who will be sworn in as president in October.
  • Pakistan: International media have contested the fairness of the February 8th elections, though former prime minister Imran Khan’s PTI secured the largest share of the vote despite being in prison. The PML-N’s Shehbaz Sharif is now prime minister of a coalition government.
  • Senegal: Political novice Bassirou Diomaye Faye rose to the presidency in the March 24th election, defeating the government-backed candidate. Although Faye has announced several significant policy changes, the composition of his economic team has reassured investors.
  • Taiwan: The results of the January 13th presidential election represent continuity for Taiwan in its opposition to the One China policy, with the center-left DPP’s Lai Ching-te to be inaugurated as president in May 2024.
  • Bangladesh: The US State Department claims that January 7th’s general election wasn’t free and fair. In power since 2009, incumbent Prime Minister Sheikh Hasina of the Awami League has won election for the fourth consecutive time.
  • Finland: The January 28th and February 11th two-round presidential election resulted in the victory of Alexander Stubb, of the pro-NATO, pro-European liberal-conservative National Coalition party.

April elections

  • India: While there is little doubt that Narendra Modi’s BJP will secure victory in the seven-round general election, the Lok Sabha, running from April 19th – June 4th, it appears voters are willing to accept some democratic backsliding in exchange for stronger economic growth.
  • South Korea: The center-left DPK holds the most seats in the National Assembly, while its historic rival, the conservative PPP, holds the presidency. These two main parties appear to be neck and neck in polling for the April 10th legislative election.
Categories
De-dollarization

On the hunt for Russia’s reserves

When it comes to appropriating Russia’s central bank reserves for supporting Ukraine, some influential Western constituencies seem to think that the G7 leadership can and should dish out punishment without considering trifling matters such as due process. Such has been the Western enthusiasm for championing the Ukrainian cause, that they might have been right about this – or at least they were until recently. Also, where in the world are the Bank of Russia’s frozen assets?

Back in 2022, some of the many sanctions that several Western countries imposed on Russia in response to its invasion of Ukraine ended up freezing a lot of Russian assets held in various jurisdictions. The Bank of Russia’s immobilized reserves stand somewhere in the $300-350bn range, though it’s not quite clear where exactly it is all held. The quantum rises further, to around $400bn, if one includes the $58bn of Russian billionaire money also currently under sanctions.

That’s a lot of cash, obviously: Ukraine’s nominal GDP is only about $160bn, after having dropped by a third in 2022. With much of Ukraine’s economy and infrastructure in ruins and amid some setbacks on the battlefield, calls for repurposing Russia’s reserves to support and rebuild Ukraine have gained traction in recent months.

Location, location, location

As with so many other examples of opacity plaguing the international financial architecture, it’s unclear where exactly all of the Bank of Russia’s frozen assets actually are. Location matters because it will have at least some bearing as to how any appropriation gets carried out.

The little we know

The chart below is based on a G7 finance ministers’ statement in October 2023 and information posted on Switzerland’s government website in May 2023. The total in the chart comes out to just under $290bn, using current exchange rates, with the Belgian central securities depository Euroclear holding the lion’s share.

Amid reports of $300-$350bn in immobilized Russian central bank reserves, it’s hard to tell where those other $10-60bn in assets might be – or if those numbers are just entirely made up.

Even the “identified” locations in the chart are ambiguous, with the “EU – Other” and “G7 – Other” categories accounting for nearly $80bn.

Detective work

It turns out I’m not the first person to be puzzled by the mysterious whereabouts of Russia’s frozen assets. Nor the second, nor the third.

Inspiring myself from those who came before, I’ve taken a look at BIS data on banks’ liabilities to residents of Russia. Generally speaking, these seem to usually be in the form of deposits owned by entities and persons residing in Russia.

And sure enough, some of those massive Euroclear deposits show up in the chart above, around $136bn. This is less than the $196bn identified by the G7 statement, presented in the pie chart on immobilized reserves, meaning that the difference is presumably because $60bn of the assets aren’t bank liabilities (or simply weren’t reported to the BIS).

The amount of bank liabilities to Russia located in Switzerland are of a similar amount to the ~$8bn in Bank of Russia reserves that the Swiss authorities have reported sanctioning. As with Belgium, this suggests at least partial overlap.

As for the “Other EU” category representing $22.9bn in the first chart, France looks like the primary EU location based on its sizable cross-border bank liabilities to Russia. Press reports appear to confirm this – and that Germany also has Bank of Russia assets.

But it’s still unclear where those $55.5 bn in “Other G7” are held, though there aren’t too many suspects.

Pre-war breakdown

It shouldn’t really come as a surprise that the Bank of Russia has stopped publishing some of its statistics since the war escalated in 2022. But it sure makes it harder – or downright impossible – to know where its international reserves are located.

The last publicly-available data point is from June 30, 2021 and comes from the bank’s last Foreign Exchange and Gold Asset Management Report, released in 2022. Multiplying the $585.3bn total by the published percentages yields the following breakdown in the chart below:

The total held in G7 (i.e. sanctioning) countries – Austria, Canada, France, Germany, Japan, UK, USA – sums to $284.4bn, which is roughly equal to the G7’s October 2023 statement.

Two things:

  • First of all, France held the largest slice of any EU country at the time. Although Germany had a sizable chunk as well, this reconfirms France as the leading candidate for “Other EU.”
  • Secondly, the $58.5bn of Bank of Russia reserves held in Japan in 2021 corresponds neatly to the $55.5bn in “Other G7” in the first chart, which is about as clear an answer as I can hope to glean.

To seize or not to seize?

On the face of it, the arguments for appropriating the reserves make good sense. Ukraine currently requires around $100bn of support annually, $40bn of which is for balance of payments and budgetary purposes and $60bn for the military. Moreover, estimated damage to Ukraine amounts to ~$650bn.

These are steep bills, to say the least, and Kyiv really needs all the money it can get. So, rather than having Western and Ukrainian taxpayers, and Ukraine’s creditors, foot the entire bill, using Russian money amounts to fair burden-sharing, or so the argument goes.

A poisoned chalice

Although there is a strong case for using Russian assets to help Ukraine, the counterargument is also valid. Seizing the assets could set a negative precedent and lead to further global fragmentation, in a world that is already suffering from the effects of deglobalization.

Ambivalence towards Ukraine in much of the non-Western world suggests that appropriating the Bank of Russia’s reserves would be poorly-received and erode trust in Western institutions and the international rules-based order. Worse still, doing so without a solid legal basis could backfire spectacularly in the court of global public opinion.

The irony is that the West would be perceived to be stealing from a regime that it itself views as a kleptocracy. Given their immense wealth, G7 member countries are not condemned to use the weapons of their Russian opponents against them. Despite budgetary pressures, inflation, and other economic challenges, US support for Ukraine pales in comparison to spending on past wars, indicating room for more support.

Outright appropriation could be a major win for the Kremlin, especially if done without a strong legal foundation, without really inflicting further damage on Russia since the reserves are already immobilized. Putin could use it as evidence of Western moral bankruptcy and institutional hypocrisy in outreach to receptive audiences in the Global South. Moscow’s kleptocrats would likely be gleefully rubbing their hands at a new excuse for expropriating any remaining Western businesses in the country.

Furthermore, in the case of seizure, it is unclear if any Western businesses, e.g. Danone, Carlsberg, will have a claim to compensation for their lost assets in Russia, or if all the money would end up going to support Ukraine.

Deep freeze

There are of course other intermediate solutions. The least controversial one is to send the €4.4bn in interest income earned by Euroclear in 2023 – and which belongs to Euroclear – on its sanctioned Russian assets to Ukraine. Another policy proposal is to use the assets as collateral for bonds, whose proceeds would be directed to Ukraine, though France and Germany – as well as the Euroclear CEO – have come out against it.

The most likely outcome seems to be that the assets remain frozen for the foreseeable future while Western policymakers find whether or not there is a path forward. There may not be, for the simple reason that Europe is reticent.

If Donald Trump returns to the White House next January, the prospects of collateralization or seizure would be even more remote. Even now, the Republican party has already abandoned its erstwhile fervor for the Ukrainian cause, holding up a $60bn aid package for Ukraine in Congress.

It’s all so unfortunate because Ukraine desperately needs support, including a Marshall Plan to rebuild. But the truth is that it needed a Marshall Plan 30 years ago, as did Russia and all the other post-Soviet republics.

By failing to help rebuild the post-Soviet space then, the West missed a unique chance to help foster stability in this part of the world and at a much lower cost – especially in blood but also in treasure. As a result, the price to pay is much higher today, whether or not Ukraine ends up getting Russia’s assets.

Categories
Geopolitics

Ukraine: two, ten, or thirty years on?

Today marks the grim anniversary of Russia’s full-scale invasion of Ukraine on February 24, 2022. Yet the conflict since 2022 is in many ways larger than the current military operations on the ground, both in terms of time and space. It is of course only the latest and most intense iteration of Russian aggression in the country, which started in earnest in 2014 with Russia seizing Crimea and launching military operations in the Donbas under the pretext of supposed separatism.

Spatially, events in Ukraine have global implications for geopolitical competition between the West and Russia, along with its allies of convenience – chief among them China but also pariahs such as North Korea and Iran. In tandem with the Covid-19 pandemic, the 2022 war in Ukraine marks the end of an era: the second of two death knells of the post-Cold War period.

Macroeconomic snapshot

Beyond the immense human toll, social disruption, and infrastructure destruction, the macroeconomic effects on Ukraine since 2022 have also been tremendous, obviously. The budget deficit went from a respectable -3.7% of GDP in 2021 to a gaping hole of nearly -30% in 2022, and possibly -20% in 2023. In 2024, the government’s shortfall is projected to reach $43 billion, which is probably equivalent to around a quarter of GDP.

Similarly, output dropped by about a third in 2022, with little in the way of recovery in 2023.

Output gaps have swung wildly in Ukraine since its independence. In percentage of potential GDP, IMF World Economic Outlook October 2023 data indicate:

  • These swung from positive double digits in 1992-1993 to negative double digits for the rest of that decade.
  • Actual output finally rose above trend in 2004, with the cycle accelerating until the global financial crisis forced a contraction in 2009.
  • Growth was recovering through 2013, until in 2014 Russia seized Crimea and began a covertly-led irredentist proxy war in Ukraine’s Donbas region. The output gap dropped to -10% in 2015.
  • From 2016 output rebounded again until the pandemic dampened activity in 2020, followed by a swift recovery to 2019 levels in 2021.
  • Since Russia’s full-scale invasion in February 2022, the output gap has once again plummeted, to -15% that year and to -10% in 2023.

Deglobalization, reglobalization, or slowbalization?

To be sure, deglobalization began at least as early as 2016, as that year saw the election of Donald Trump; the ensuing tensions with China and Iran; and Brexit. Global fragmentation has only worsened in the years since, with Covid; Ukraine and the related sanctions; and Joe Biden continuing Trump’s trade protectionism.

The world has now entered a new period in which countries are reconfiguring their trading relationships and supply chains in reaction to heightened geopolitical tensions, logistical frictions, and increased barriers to the movement of people and goods. The world’s borders have hardened, so cross-border movement is less fluid.

Hence the terms “deglobalization,” “reglobalization,” and “slowbalization,” though none of these encapsulates the nuances of what is happening. There is even evidence that international trade has rebounded strongly since the pandemic and that geopolitical alignment doesn’t explain much when it comes to international trade.

Still, the rafts of Ukraine-related sanctions; pandemic-related travel restrictions and supply chain disruptions; and trade reconfigurations such as “friend-shoring” or “near-shoring” are leaving their mark and, to a large extent, appear to have staying power. This is part of the reason I named this blog Sovereign Vibe.

21st-century global “stewardship”

It should come as no surprise that I, like Ukrainians and most of my fellow Westerners, consider the Kremlin to be at fault for the ongoing hostilities in Ukraine. Indeed, the Russian government is clearly responsible for seizing Crimea in 2014, jump-starting a war in the Donbas that same year, and fully invading the country in 2022. There are no legitimate justifications whatsoever for this aggression, Moscow’s propagandistic claims notwithstanding.

Yet the war in Ukraine is also symptomatic of Western, and chiefly American, failures in responsible global stewardship. Supporting Ukraine and opposing Russia is important in seeking an optimal outcome from a Ukrainian and Western point of view but provides no path forward on managing relations with Russia in the future.

The point is that there never should have been a war in Ukraine from 2022, or from 2014 for that matter. The heart of the problem is Russia’s revanchism under Vladimir Putin, which itself is an outcome in reaction to the Soviet collapse and ensuing chaos in Russia and the other newly-independent remnants of the USSR. This seems like an obvious point, but none of this was pre-ordained.

Geopolitical lessons

While authoritarianism under Putin is an outcome shaped almost exclusively by forces within Russia itself, the West missed a crucial opportunity in the 1990s to incentivize an erstwhile opponent into becoming an ally, much as visionary American and Western leadership did with Germany and Japan post-WWII. Although the USSR was not defeated militarily, observers should at the very least be able to imagine a post-Cold War order where Russia plays the role of a neutral cooperator, rather than an autocratic kleptocracy bent on geostrategic spoliation.

Shock therapy à la Dick Cheney

Western policy towards Russia failed miserably in the 1990s on at least two occasions. The first is in the immediate aftermath of the Soviet collapse, when Jeffrey Sachs and other Western economists advised the Russian government to adopt rapid market reforms, privatizations, and liberalization policies, known as “shock therapy.” Crucially, these advisors saw the need for significant Western aid to accompany these reforms, much as the Marshall Plan had helped Western Europe rebuild after WWII.

However, Dick Cheney, who was the US Secretary of Defense at the time, successfully pushed for shock therapy to be adopted without the aid. The predictable result was that, in the 1990s, Russia – and Ukraine as well as other former Soviet republics – suffered an economic and industrial collapse, a weakening of already-fragile institutions, a rise in poverty, and the emergence of robber barons who came to dominate the country’s politics.

“Dermocratia”

The second mistake of Western policy towards Russia flowed from the first. By the time Boris Yeltsin was up for re-election in 1996, Russian voters had become disenchanted with the economic suffering under the country’s new market economy and nascent democratic institutions. So much so that the term “dermocratia” was popularized, as a play on the words “democratia” and “dermo,” which mean “democracy” and “shit” in Russian, respectively.

Needless to say, Yeltsin was facing an uphill battle, but he had the support of the oligarchs, who were in fact more powerful than he was. Notably, Western governments also hoped to see him re-elected, as the chief opposition came from the Communist Party of the Russian Federation, which in some ways was the ideological successor to the Soviet leadership that had for so many recent decades been the US’s strategic foe.

To make a long story short, the election was marred by many irregularities, without which the communists might well have prevailed. Western capitals conveniently turned a blind eye to this meddling, further weakening the legitimacy of democratic institutions in the eyes of ordinary Russians.

No apologies

These Western mistakes in the 1990s are in no way an excuse for the authoritarian turn that Russia has taken under Putin. The Russian leadership alone is responsible for this outcome. Nor is the West somehow at fault for Russian aggression in Ukraine, Georgia, or beyond as a result of NATO expanding its European membership eastwards to countries willing to join of their own accord, as Putin apologists such as John Mearsheimer or Stephen Cohen claim.

But certainly American leadership in the 1990s under Bush and Clinton lacked the vision to try to bring Russia onside in the way that their more illustrious predecessors had done with Germany and Japan in the aftermath of WWII. Let this be a lesson for the future, as the West tries to imagine what Russia’s role in the world can and should be.

As tempting as it is to wish that Russia is a problem that would just go away, it won’t. Only by working backwards from “what good looks like” regarding Russia can Western leaders hope to address the root cause of the war in Ukraine, which is Russia’s revanchist position as international spoiler.

Categories
International Financial Architecture

Multilateralism limps onward in Marrakech

The World Bank Group-International Monetary Fund Annual Meetings drew to a close in Marrakech this past weekend, the first time these events have been held in Africa since the 1973 edition in Nairobi. While the Bank-Fund leadership expressed their usual endorsement of international cooperation and optimism for the future, this year’s agenda also explicitly aimed to address geopolitical fragmentation and fully acknowledged heightened threats to the goals of eradicating poverty; bolstering sustainable, inclusive growth; and preserving macroeconomic stability.

The main problem at this year’s annuals wasn’t a new one and goes by many names: geopolitical competition, fragmentation, deglobalization, trade frictions, or decoupling. A whole host of challenges to multilateral financing efforts stem from the political obstacles to international cooperation that have emerged over the past decade, with the 2007-2009 Global Financial Crisis marking the end of America’s “unipolar moment” and ushering in a new, more competitive era. The prospects for a new capital increase for multilateral development banks, innovative hybrid financing solutions to boost World Bank lending, and sovereign debt restructuring processes are all suffering from the fractured backdrop.

IMF Global Policy Agenda

The IMF’s policy priorities are a response to the main macroeconomic challenges in today’s global economy:

  • tame inflation
  • ensure financial stability
  • restore fiscal room
  • boost medium-term growth

Indeed, inflation has not yet reverted to central bank targets in many countries, while the rapid rise in interest rates in the past few years have strained parts of the US banking system. At the same time, expansionary fiscal policies have pushed up yields on government debt in various countries, with the return of bond vigilantes evident in the US in 2023. The prospect of higher fiscal deficits can also sometimes undermine financial stability, as exemplified by the UK mini-budget straining pension schemes in September 2022. Tighter fiscal policy will be necessary in many countries to guard against future shocks, while appropriate reforms are also widely-needed to revive the dimmed outlook of medium-term growth.

In parallel with the macroeconomic policy priorities, the Fund is pursuing complementary objectives. The IMF launched, with the government of Morocco, the Marrakech Principles for Global Cooperation, which include reinvigorating inclusive and sustainable growth; building resilience; supporting transformational reforms; and strengthening and modernizing global cooperation. These principles are a welcome attempt to stem the tide of global divergences, even if they are unlikely to meet with much success in the short term. In a similar vein, the IMF has attracted more funding for the interest-free Poverty Reduction and Growth Trust and for the climate change-focused Resilience and Sustainability Trust.

Of note, the IMFC Chair committed to concluding the 16th General Review of quotas by December 2023, in light of agreement on a significant increase of quotas this year. Crucially, there seems to be support for quota realignment by June 2025 to reflect current economic realities, including through an updated quota formula. The IMFC has also called for the creation of a third chair on the IMF Executive Board for Sub-Saharan Africa, in order to improve the continent’s representation.

Yet the IMF has not been able to deliver more in the way of impactful policy successes. One potentially high-impact policy area would be finding a solution for re-allocating SDR usage from the wealthy countries that don’t need them to the poorer countries that do. A further work-stream with outsized effects would be to do more to strengthen the Global Financial Safety Net, which includes the IMF’s toolkit, bilateral swap arrangements, regional financial arrangements, and international reserves – a tall order in the current environment.

Global Sovereign Debt Roundtable

The official sector has achieved a modicum of progress on improving the sovereign debt restructuring architecture in recent months. Probably of most importance to private creditors is improved information-sharing during restructurings, with new possibilities for private lenders to access debt sustainability analyses and related elements at the same time as official creditors, under certain conditions. The Fund has highlighted the increasing speed from staff-level approval to Board approval, from 11 months in Chad in 2022, to 9 in Zambia, 6 in Sri Lanka, and 5 in Ghana most recently, while recognizing that this is still above the 2-3 month average in the past.

The IMF maintains that external public debt strains are not currently as high as they were in the 1990s, even considering the existence of larger local debt markets, which has led to some observers wondering if there is a sense of complacency about pending risks in low-income countries. The IMFC welcomed progress in Zambia, Sri Lanka, and Suriname but called for more results in Ghana, Ethiopia, and Malawi, while also calling for stronger creditor coordination for sovereign debt restructurings occurring outside the Common Framework.

One of the main pieces of news to come out of the meetings was that Zambia’s finance ministry and its official creditor committee signed a memorandum of understanding, thus formalizing the agreement reached in June, and paving the way for Zambia to seek comparable treatment from its commercial creditors. It was also revealed that Kenya may be seeking exceptional access to IMF support ahead of a $2 billion bond maturing in June 2024.

There are some other minor new features in the sovereign restructuring framework, regarding cutoff dates (no later than staff-level agreement), state-contingent debt instruments (which shouldn’t be the norm), and the appropriate approaches to domestic debt (case-by-case) and SOE debt. Other areas remain contentious among the various creditor categories, such as appropriate discount rates to be used for NPV calculations for comparability of treatment. There is also no consensus on the treatment of arrears and on debt service suspensions during negotiations.

Show me the money: capital increases for MDBs?

Despite the ongoing efforts of senior staff to convince donor countries to provide more resources for development, the World Bank Group’s ambitions will continue to lack requisite firepower. The cause is an absence of political will in most of the G7 countries to make sufficient financial commitments to development, as evidenced by a succession of broken Western promises. To be sure, some efforts are under way, such as Japan’s pledge to significantly raise its contribution to the IMF’s zero-interest loan tool, the Poverty Reduction and Growth Trust. For its part, the US may transfer $2 billion in additional funding to the World Bank Group this year, though this is a far cry from the scale that is needed.

Additional annual financing required to meet the United Nations’ Sustainable Development Goals stands at around $3 trillion. The G20’s Capital Adequacy Review framework suggests that a general capital increase for the multilateral bank system, including the IBRD, could unlock $200 billion in annual lending, with a further $80 billion annually from balance sheet optimization (e.g. callable and hybrid capital). The Center of Global Development suggests that the international development finance system should boost its annual financing by $500 billion by 2030, with multilateral development banks providing $260 billion and national development finance institutions delivering the remainder. Private capital ought to match that half-trillion increase, for a combined public-private total of $1 trillion.

Yet these figures still fall well short of the additional $3 trillion needed annually. By the CGD’s calculations, each dollar of new equity in MDBs can be leveraged for $15 of external sustainable investment financing, of which $7 in direct MDB lending and $8 in private capital. Assuming that private finance can be crowded in to such a degree is likely overly optimistic, as the CGD’s own figures indicate that MDBs currently mobilize only 60 cents for each dollar lent. Even so, public and private stakeholders will have to come up with financing solutions to achieve the SDGs, and this should be possible with enough political will: just look at the over $100 billion raised for Ukraine.

The World Bank’s Evolution Roadmap

The World Bank Group’s recently-appointed president, Ajay Banga, has laid out a roadmap to enhance the organization’s effectiveness. More efficient balance sheet management should unleash $157 billion in additional lending over 10 years, while preserving the Bank’s AAA rating. These measures include increasing the loan to equity ratio, launching a hybrid capital instrument, and creating a portfolio guarantee mechanism. Similarly, management is also exploring solutions using callable capital and SDRs. An elegant approach to channeling some of 2021’s SDR 650 billion windfall could be to have the Bank issue SDR bonds, to be purchased by national central banks.

A number of other changes are in the works under Banga. These include setting up a Global Public Goods Fund to grow concessional resources by attracting funding from governments and philanthropies, exploring maturities of up to 40 years for social and human capital investments, and exploring energy transition solutions. More importantly, efficiency gains are at the heart of the new strategy. There is an objective to slash project review and approval times by a third by simplifying procedures, while partnerships with other MDBs are already being pursued more actively so as to amplify impact. Similarly, Banga’s team plans on scaling knowledge-sharing in order to more easily share impactful solutions, and a private sector investment lab has already been set up to galvanize private financing.

Banga’s plans to streamline processes seem like a requisite pre-condition for convincing donor countries to increase the Bank’s share capital, though even if his team can deliver, any new equity is far from guaranteed. Early signs of the new president’s first few months in the role have demonstrated his dynamism and communication skills, and future success in reforming the institution’s bureaucracy, while likely challenging to achieve, could yield significant development benefits. However, his team is reportedly difficult to approach internally, which could potentially delay progress.

Categories
Geopolitics

France’s FDI in Africa

The recent wave of coups in Africa has increased scrutiny of France’s role on the continent. Looking at France’s net stocks of foreign direct investment in its former colonies reveals some surprises for those not closely monitoring these trends, and helps provide some sense of where Paris’s relations are with this group of countries. A snapshot of Franco-African economic relations helps debunk the oft-exaggerated importance of French influence in Africa, despite it being too early for a Françafrique post-mortem. Using foreign direct investment as a proxy delivers useful context for observers wondering where the next coup might strike, not as a causal factor, but as an illustration of heterogeneity.

As a percentage of all FDI in Sub-Saharan Africa by country, France is best represented in Senegal, Côte d’Ivoire, Burkina Faso, Togo, the Republic of Congo, Cameroon, and Angola. Of these countries, only Burkina Faso has experienced a coup d’Etat in recent years. French FDI as a percentage of GDP is highest in Senegal, the Congo, the Central African Republic, and Angola, and was also significant in Niger in the mid-2010s. The point is that the French factor, especially in the economic sphere, fails to shed much light on why any of the coups in Gabon, Niger, Chad, Burkina Faso, Mali, and Guinea occurred, each of which has its own idiosyncratic explanations.

Coup’s next?

As for the prospects of further military takeovers in Africa’s Sub-Saharan francosphere, Senegal and Congo appear the least likely candidates. In Senegal, President Macky Sall is not seeking an unconstitutional third term in the 2024 election, in keeping with the country’s history of political stability. In Congo, President Denis Sassou-Nguesso’s apparently ironclad grip on the country has shown no signs of wavering. In Cameroon, President Paul Biya’s late August military reshuffle could offer him some temporary protection, though the ongoing conflict with separatist rebels in its anglophone region is a source of risk.

None of the countries in the Sahel are completely immune from another putsch. In Chad, Mahamat Idriss Déby Itno’s future will depend on his ability to exercise control to the same degree as his father, the previous president. In Burkina Faso, 34-year-old Captain Ibrahim Traoré has already done well to last a full 12 months, while in Mali the Touaregs are a perennial thorn in Bamako’s side. Facing no credible threat of foreign intervention, Niger appears to be under tight control – for now.

Côte d’Ivoire’s 2025 presidential election is an upcoming flashpoint in an ethnic powder-keg, with President Alassane Ouattara already having changed the constitution to enable a third term from 2020. Since the International Criminal Court in the Hague acquitted former president Laurent Gbagbo of all charges in 2019, it’s a politically-explosive resurrection given the context of ongoing ethnic favoritism in Ivorian politics. To complicate matters further, the largest of the country’s three main ethnicities – Ouattara and Gbagbo hailing from the other two – hasn’t held the presidency since 1999, setting the stage for further grievances.

France FDI timelines

The charts below present a snapshot of how France’s FDI presence has evolved in select Central and West African countries, where Paris is regarded as having the most influence in Sub-Saharan Africa. As can be seen from the map above, its FDI presence is weaker in East and Southern Africa, even where it once had a colonial presence (e.g. Madagascar, Comoros, Djibouti). The high-level overviews presented below focus only on broad aspects of France’s investment footprint in these countries and often overlook the activities of French groups with a pan-African presence, including Total, Bolloré Africa Logistics, Air Liquide, CMA CGM, and Castel, among many others.

Central Africa

With all eyes on Libreville following Gabon’s August coup, facile narratives of France’s relevance are overblown, historical, linguistic, and security ties notwithstanding. France’s FDI involvement in GDP terms was higher in Gabon than in any other Central African country at one point in the mid-2000s, though Congo has had more French investment stock as a share of its economy for most of this century. In dollars, however, Angola has attracted the largest quantity of French investment.

Use vertical slider to compare USD vs % GDP figures.

Gabon’s main economic drivers are the oil, manganese, and wood sectors, with a French presence in each of these and well beyond. The French oil major Total has ongoing but diminished activities, following its sale of some of its Gabonese assets to the Anglo-French oil company Perenco in 2021. The Euronext-listed metallurgical and mining company Eramet continues to operate the country’s chief manganese concessions, while the Rougier group is a significant wood processor and exporter.

Yet Gabon’s economic partnerships have been tilting away from France for over a decade. Singapore has been a major player in the country since the agri-business company Olam entered into a joint venture with the government in 2010 to create a Special Economic Zone. The Paris-listed oil junior Maurel & Prom continues to operate in Gabon but has been majority-controlled by the Indonesian state oil company Pertamina since 2017. In 2022, Gabon joined the Commonwealth, alongside Togo, another former French colony, even as Libreville’s trading relationships shifted away from France and towards Asian partners.  

France is a leading foreign investor in Angola, accounting for 60 subsidiaries and 45 local companies that employ around 10,000 people – trailing only Portugal and China on this metric. France has benefited from President João Lourenço’s efforts to rebalance economic ties away from Chinese, Russian, and Turkish interests in favor of Western partners. The French presence is concentrated in the oil and oil services sectors, with Total, Maurel & Prom, and Technip among the major players. Total alone accounts for 40% of Angola’s national oil production and is one of the country’s largest employers, alongside the French brewer Castel.

Total’s presence accounts for a large share of France’s FDI footprint in the Republic of Congo, where most French companies operate in the oil services and construction sectors. French firms currently employ around 15,000 people, though this is down from over 25,000 in 2015. Italy, the US, and China are the other main foreign investors in the country.

West Africa

Côte d’Ivoire accounts for France’s highest stock of FDI in francophone West Africa, followed closely by Senegal. The latter being the smaller economy of the two, France’s presence in Senegal is heavier in GDP terms. There was also a strong French economic presence in Niger in the mid-2010s, according to the data from the Banque de France below, though this has fallen off sharply in recent years.

Use vertical slider to compare USD vs % GDP figures.

France is the largest foreign investor in Côte d’Ivoire, with around 240 subsidiaries and some 1,000 companies owned by French citizens. These investments are spread across numerous economic sectors, reflecting the highly-diversified nature of the Ivorian economy.

France also has the highest proportion of foreign investment in Senegal, though its share has declined markedly since the mid-2010s. This involvement is also spread broadly across economic sectors, including banking, retail, telecoms, and industrials.

In Niger, China, France, and Nigeria comprise the main foreign investors, with a focus on extractive and manufacturing industries. French FDI peaked in the mid-2010s amid rail infrastructure investments by the Bolloré logistics group, road investments by the uranium miner Orano, and uranium transport investments by the Necotrans/R Logistic group.

Categories
Geopolitics

Quick take on Gabon’s coup d’Etat

I spent most of 2012 working in Gabon, a gem of a country well-endowed with some of the lushest rainforest on the planet, abundant natural resources – oil, manganese, wood – and a small population. Like many observers, I was aware of the concerns leading up to the August 2023 presidential elections as President Ali Bongo sought a third consecutive term, especially given the post-electoral violence in 2016.

Yet the military coup of August 30th still comes as a surprise because, in recent years, the military takeovers in Africa had largely been confined to the Sahel region: Niger, Mali, Burkina Faso, Chad, and Sudan. There were two other recent putsches, one in Guinea, on the Sahel’s doorstep, and another one in Zimbabwe.

These countries have much lower income/capita and larger populations. Unlike Gabon, most of them are landlocked and have arid climates.1Guinea is neither landlocked, nor does it have an arid climate. Zimbabwe is also not as arid as the Sahel. So what do these countries have in common with Gabon? Plenty, whether their colonial pasts under France2With the exceptions of Sudan and Zimbabwe. or the nitroglycerin-like combination of weak institutions and ethnic divisions.

CountryCoup d’Etat(s) dateGNI per capita – USDPopulation – mn
🇬🇦 GabonAugust 20237,5402.6
🇳🇪 NigerJuly 202361025.3
🇹🇩 ChadOctober 2022 & April 202169017.2
🇧🇫 Burkina FasoSeptember & January 202284022.1
🇸🇩 SudanOctober 2021 & April 201976045.7
🇬🇳 GuineaSeptember 20211,18013.5
🇲🇱 MaliAugust 202085021.9
🇿🇼 ZimbabweNovember 20171,50016.0
Sources: World Bank, author’s research

My analytical fallacy was to think about the coups in the Sahel as some sort of wave with common drivers, which would have a bearing in other parts of Africa and beyond. Not so, or at least not beyond the Sahel where several weak, poor states having trouble coping with terrorist insurgents is a commonality. Rather than a wave of African coups with a shared set of narrowly-defined underlying causes, a version of the Anna Karenina principle applies: “Each unhappy country is unhappy in its own way.”

Moreover, it is good discipline to keep ethnicity front of mind when analyzing African politics, as this helps reveal some of the political forces at play that make each country unique. Even though ethnic factors are often of secondary importance, as in the case of Gabon, considering ethno-linguistic and cultural differences also provides contextual granularity that is often absent from English-language coverage of francophone Africa.

Below, I also provide charts on France’s net FDI to each of the francophone countries as a simple gauge of its ongoing involvement in each economy. This simple measure does not explain the coups in each country, nor does it encompass the complexity of the bilateral economic, political, and security relationships, but it provides relevant context as observers ponder Paris’s links to the continent.

🇬🇦 Gabon

August 2023: The military overthrows Ali Bongo, who hails from the small Téké ethnicity (~<10% of the population) in the remote Haut-Ogooué region, minutes after his electoral win is announced. The takeover appears to have elements of both popular dissatisfaction and of a palace coup. The leader of the junta, Brice Clotaire Oligui Nguema, was head of the Republican Guard’s special services unit. Also a Haut-Ogooué native, Nguema had long served under the previous president, Omar Bongo, before being sidelined for several years after Ali came into office.

  • Omar Bongo had long relied on French support, while his son Ali had made some concessions to the larger Fang ethnicity (33% of the population) and others at various points during his terms.
  • In Africa, only the Seychelles and Mauritius have higher GNI/capita than Gabon, where 1/3 of the population lives below the poverty line.
  • Clearly, any wealth redistribution from the rapacious Bongo clan was insufficient for the population to allow him to continue pilfering the country indefinitely amid suspicions of electoral fraud in the current and previous elections.
  • Enfeebled by a stroke in October 2018, Ali Bongo – and his reportedly dissolute family members – provided a complacent atmosphere at the presidential palace, thus combining with popular discontent to set the ideal conditions for Nguema and his co-conspirators.
  • Of note, France’s net foreign direct investment stock in Gabon has been on a downward trend since the mid-2010s (see charts below), declining from around €1.8bn in 2013 to under €500mn in 2022. This is despite the global net FDI stock in Gabon rising over the same period, pointing to France’s diminished stature in the Gabonese economy. More detailed information on this topic will be available in future posts.

🇳🇪 Niger

July 2023: Junta leaders oust President Mohamed Bazoum, who is of Arab ethnicity ( < 0.5% of the population), purportedly for leniency towards islamist insurgents. This underscores the political importance of the security situation, as in several other countries throughout the Sahel.

  • Bazoum succeeded Mahamadou Issoufou (Hausa, 55% of the population), who completed two terms as president without trying to run for a third term, instead nominating Bazoum as his preferred successor.
  • Issoufou had himself come to power through elections a few years after a military coup ousted a previous president – Mamadou Tandja – who had attempted to stay on as president for longer than two terms, much like Ali Bongo in Gabon today.
  • As in Gabon, France’s net FDI stock in Niger has been on the wane since the mid-2010s, declining from over €1bn to under €500mn as of last year. The entirety of French exposure to the country appears to in the form of debt and other instruments, including in all likelihood intra-company debt.

🇹🇩 Chad

April 2021 – October 2022: Long-serving President Idriss Déby (Zaghawa, ~1%) had taken power via a French-supported coup in 1990 against then-president Hissène Habré (Gorane, aka Daza or Toubou, ~4-5%) and was fatally wounded in April 2021 during hostilities with insurgents, mainly of Gorane extraction.

  • Déby’s son Mahamat Idriss Déby (half Zaghawa, half Gorane, married to a Gorane, father of nine children) seized control of the country at the head of a military junta immediately after his father’s death with a commitment to an 18-month transition period to culminate in elections, which he postponed by two years in October 2022.
  • Despite limited French net FDI exposure to Chad, even here France’s presence is declining, from nearly €200mn in the early 2000s to around €100mn today.

🇧🇫 Burkina Faso

September 2022: Captain Ibrahim Traoré (b. 1988) overthrew Lieutenant-colonel Paul-Henri Sandaogo Damiba for not having followed through on the promises of the January 2022 coup and following several deadly terrorist attacks, notably in Gaskindé, where jihadists ambushed a provisioning convoy, resulting in at least 11 deaths.

  • Mutineering soldiers ousted President Roch Marc Christian Kaboré (Mossi, ~56%) in January 2022 following a crushing defeat of burkinabè armed forces by jihadists in November 2021, amid widespread disappointment at the government’s management of the conflict and failure to provide rations to troops. Lieutenant-colonel Paul-Henri Sandaogo Damiba succeeded Kaboré as transitional president.
  • In October 2014, a popular uprising ousted then-president Blaise Compaoré’s (Mossi, ~56%) upon his attempt to change the constitution and thereby allow himself to stand for a fifth term after 27 years in power. After a year of transition, Kaboré was elected president in November 2015.
  • In constrast to Gabon, Niger, and Chad, France’s net FDI stock in Burkina Faso has been rising steadily for the past decade, driven mainly by reinvested earnings into increasing shareholder equity. Overall exposure has jumped from ~€100mn in 2012 to ~€400mn in 2022.

🇸🇩 Sudan

April 2019 & October 2021: General Abdel Fattah al-Burhan seized power in 2021, placing Prime Minister Abdalla Hamdok under house arrest. The Sudanese Armed Forces ousted the long-reigning Omar al-Bashir in 2019 under the leadership of Ahmad Awad Ibn Auf.

🇬🇳 Guinea

September 2021: Amid widespread popular dissatisfaction with the government, military putschists arrested President Alpha Condé (Mandingo aka Malinké, 23%, second-largest group) as special forces commander Mamady Doumbouya dissolved the government and seized power as interim president. Of these recent coups, the Guinean case most closely resembles the current situation in Gabon.

  • France’s net FDI exposure to Guinea has been rising steadily since the mid-2010s, albeit from a low base, partly reflecting Conakry’s historically relatively cool relations with Paris. Up from €100mn in 2015, French FDI stock stood at ~€175mn in 2022.

🇲🇱 Mali

August 2020: A colonel in Mali’s special forces, Assimi Goïta (Minianka, ~7%, b. 1983) has been the country’s de facto leader since a successful coup ousting IBK in August 2020.

  • Ibrahim Boubacar Keïta (Mandingo, aka Malinké or Maninka, ~8%, d. 2022) is elected president in 2013 after the elections were delayed by a year, following the military putsch of 2012 and the ongoing war against islamist insurgents. He rejected the coup but agreed to negotiate with the junta, which adopted a neutral position towards him. In 2020, after months of political crisis stemming from economic pressures, the Peul/Fula-Dogon ethnic conflict, and the pandemic, a coup removed IBK from power.
  • Amadou Toumani Touré (Bambara, ~25%, largest group, d. 2020) was president from 2002-2012 after having been elected democratically and later ousted via military coup two months before the 2012 elections, in which he was not running. The coup was to denounce the management of the conflict in northern Mali between the army and the Touareg rebellion at the time. He had himself participated in a coup d’Etat in 1991 against the then-long-standing president Moussa Traoré (Malinké, ~8%, d. 2020).
  • France’s FDI exposure to Mali has essentially moved sideways over the past 20 years, standing at around only €100mn.
  • 1
    Guinea is neither landlocked, nor does it have an arid climate. Zimbabwe is also not as arid as the Sahel.
  • 2
    With the exceptions of Sudan and Zimbabwe.
Categories
De-dollarization

Russia’s trading partners steer clear of rubles

Building on a previous post on the de-dollarization debate, a snapshot of Russian trade invoicing data gives a sense of a potentially maximum speed of the dollar’s declining use in some quarters of the global economy, while also revealing how Moscow’s trading partners are willing to part with rubles but unwilling to receive them.

As has been widely reported, trade with Russia since the start of the war in Ukraine in February 2022 is being invoiced increasingly in Chinese yuan, at the expense of the dollar and euro. Russian imports in CNY have increased over 8x from January 2022 to June 2023, rising from $1.1bn to $9.1bn over that period. Meanwhile, USD and EUR fell from a combined $17bn to $8.5bn, with the USD experiencing a drop of around 60%.

And while these comparisons exclude seasonal adjustments, the trend is clear, and comparing year-on-year growth readings for June 2023 versus June 2022 tells the same story: CNY: +148%, USD: -57%, EUR: -35%.

In percentage terms, USD has declined in Russia’s import invoicing from 39% in January 2022 to a mere 16%, while EUR shrank from 26% to 16% as well. That is a combined 33 percentage-point drop for both currencies.

In the same period, CNY’s share rose 30 ppts, from 4% to 34%, almost entirely replacing USD and EUR. Moderate increases in the shares of other currencies and the RUB explain the remainder, though the fact that the RUB has only risen 1 ppt suggests that exporters to Russia are reluctant to accept Moscow’s currency.

Looking at the export side reveals a similar picture. Only $170mn Russian exports were invoiced in CNY back in January 2022, whereas in June 2023 these exceeded $8.1bn. While the USD and EUR each accounted for $25bn and $17bn at the time, these have fallen off to around $7bn and $2bn currently, respectively.

In contrast to Russian imports, where the USD’s decline was more precipitous, it is EUR that had the faster drop in the case of exports, likely due in significant part to the sharp reduction in Russian energy exports to Europe. Another difference is that, unlike Russia’s imports, which have remained somewhat stable over this period, the country’s exports appear to be on a declining trend, pointing to downward pressures on the trade balance.

Staggeringly, CNY now accounts for a quarter of payments that Russia receives for its exports, up from less than half a percent 18 months prior. The USD share is down from over half of all export receipts to some 23%, while the EUR has decreased from 35% to 7%.

Surprisingly, RUB has increased markedly, from 12% to 42%, though this makes good sense if one considers that foreign buyers are likely keen to reduce any long exposures they may have to the ruble. Such positioning currently appears to prescient, given the RUB’s significant weakening to ~100/USD at the time of writing.

Future posts will explore the implications for the dollar’s role and the bigger question of using frozen Russian assets for the reconstruction of Ukraine.

Categories
De-dollarization

De-dollarization musings

De-dollarization has become an increasingly popular topic in recent years, and for good reason. Indeed, the global economy has been gradually entering a period of deglobalization for the past decade or so, and, in parallel, the U.S.-led nature of the international economic order is facing challenges from geopolitical competitors and a disenchanted Global South.

Yet much of the ideologically-driven discourse on the greenback’s supposedly-imminent demise fails to account for the USD’s security and demographic underpinnings and the absence of viable alternatives. The U.S. dollar’s role is both a reflection of and a driving force behind the moral values governing the global financial architecture, with significant implications for global economic growth, international security, and the fate of Ukraine.

This article will be the first of many to explore de-dollarization and related phenomena, including sanctions, trade, and geopolitics. As a starting point, tracking the use of the U.S. dollar in international sovereign reserves and in international trade provides a solid foundation for further analysis.

Official Foreign Exchange Reserves

The chart above illustrates the prominence of the USD in governments’ international reserves, accounting for over $6.5 trillion as of Q1 2023 – nearly 60% of the global total.1The “unallocated” reserves in grey are merely the USD value of official FX reserve assets for which the IMF has no currency decomposition. The IMF collects this currency composition of reserves data from its member countries, many of which report it on an anonymized basis for public disclosure.

Unfortunately, a currency breakdown of reserves by country appears to be unavailable to the public via the IMF, which is partly understandable given geopolitical sensitivities that some countries may have in revealing this information. Still, this opacity is yet another of a plethora of examples of sovereign financial data transparency practices found wanting, even if currency composition may be available from some national sources.

While the first chart at the top of the piece shows absolute totals and is useful in seeing changes in global reserve quantities – such as the quarterly declines in 2022 – a proportional view is more helpful from a de-dollarization perspective. The interactive chart below shows that from a peak in this sample of over 72% in the early 2000s, for the proportion of reserves disclosed2The IMF designates these as “allocated” official FX reserves. by currency to the IMF, the USD slumped to a trough of just under 59% in Q4 2021, a 13-percentage points decline.

So which currencies did the USD lose ground to? China is indeed part of the story, with CNY having risen from nil to…a peak of merely 2.8%. That leaves 10 of the 13 ppts to account for. The euro also contributes to the USD decline but only modestly because, despite its share having risen in the middle years of the sample, in 2023 it only stands at ~1-2 ppts above where it started 24 years ago. The yen is certainly not the culprit, as it has actually lost some ground as well, albeit only 0.5-1 ppt depending on chosen measurement times.

It is in fact other currencies that explain most of the USD’s loss of share in official reserves, especially sterling and the Australian and Canadian dollars. GBP accounts for a nearly 2 ppts rise from 1999 to 2023. AUD and CAD are slightly harder to measure over the full sample period because the IMF clearly recategorized them both in 2012, moving them from the “Other” currency category into their own standalone categories, presumably because of their growing shares. In 1999, the “Other” category stood at some 1.6%, while summing “Other” with CAD and AUD in 2023 yields a figure of 7.7%, pointing to a 6 ppts difference, of which only 1.7 ppts came from currencies other than CAD and AUD. To simplify, CAD and AUD combined for a 4.3 ppts bite into the USD share.

The reality of other advanced economy currencies displacing the USD as a reserve currency stands in marked contrast to prevailing ideological narratives that the USD decline is related mostly or solely to the rise of emerging market currencies such as CNY. While there is ample evidence for central banks repatriating gold in the wake of U.S. sanctions against Russia and freezing of its reserve USD assets following Moscow’s invasion of Ukraine in February 2022,3https://www.reuters.com/business/finance/countries-repatriating-gold-wake-sanctions-against-russia-study-2023-07-10/ there has been no associated decline of the USD’s reserves standing. In fact, since the war began last year, the USD slice has risen from just under 59% to over 60% this year, while the yuan’s has fallen by 0.2 ppts.

Trade Invoicing

In 2020, then-IMF Chief Economist Gita Gopinath and colleagues published an IMF working paper4https://www.imf.org/en/Publications/WP/Issues/2020/07/17/Patterns-in-Invoicing-Currency-in-Global-Trade-49574 on the invoicing of international trade by currency, building on Gopinath’s prior extensive academic work in this area.

Here too there is broad-based evidence of a declining role of the USD. The greenback’s decline is most evident when comparing the early 2000s to the present day, though Gopinath, Boz, et al.’s dataset has less country coverage that far back. For this reason, the most recent year of available data – 2019 – is compared to 2010, to provide a snapshot of currency invoicing of exports and imports trends over the decade.

The two charts below show overall lower use of the USD in export and import invoicing in 2019 versus 2010 in most countries, although there are outliers on either side of the diagonal change demarcation line, e.g. Russia and Cyprus. As with official reserves, it appears that another advanced economy currency – the euro in this case – could be responsible for taking away USD market share, as many of the country declines are either in the Euro area or in Europe.

The situation is different for EUR, which saw its trade invoicing presence grow in most of the sample countries in the 2010s. This confirms the suspicions above that EUR was displacing the USD in the euro area and Europe but goes further by demonstrating EUR’s growing role outside Europe as well, e.g. Israel, Chile, Indonesia, Thailand.

These last two charts present the change in invoicing in currencies that are neither the USD nor the EUR and appears to include a country’s home currency, at least for imports.5The metadata in the dataset leaves room for ambiguity on this nuance. Here the picture is mixed, with a relatively even balance between increases and decreases across countries over the period. Yet some of the outliers provide compelling avenues for further research. For instance, Tunisia’s apparent switch from invoicing imports in its home currency in 2010 – prior to the Arab Spring, which had its tragically self-immolating spark in Tunis in 2011 – to USD by 2019 raises questions in need of answers, as do the cases of Russia, Ukraine, Cyprus, and Mongolia.

  • 1
    The “unallocated” reserves in grey are merely the USD value of official FX reserve assets for which the IMF has no currency decomposition.
  • 2
    The IMF designates these as “allocated” official FX reserves.
  • 3
    https://www.reuters.com/business/finance/countries-repatriating-gold-wake-sanctions-against-russia-study-2023-07-10/
  • 4
    https://www.imf.org/en/Publications/WP/Issues/2020/07/17/Patterns-in-Invoicing-Currency-in-Global-Trade-49574
  • 5
    The metadata in the dataset leaves room for ambiguity on this nuance.