Tag: Geopolitics

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Sovereign Debt

The Geopolitics of Sovereign Debt

EMDE sovereign borrowers walk a tightrope in the fragmented creditor landscape.

One of the main themes permeating the 7th edition of the Sovereign Debt Research and Management Conference – aka “DebtCon” – held in Paris on 29-31 May was the increasingly challenging environment that sovereign borrowers face in accessing international capital and managing their balance sheets. These challenges are numerous and complex, with some of the best-known ones being the more diverse creditor landscape, implementation problems of key policies such as the G20’s Common Framework of Debt Treatments beyond the DSSI, and geopolitical fragmentation.

The Chinese impact

DebtCon is a particularly useful forum for finding solutions to the day’s most pressing sovereign debt policy issues. Not only does it bring together stakeholders from across much of the sovereign space, including borrowers, creditors, academics, and practitioners, but the conference is also focused and small enough for participants to exchange ideas more efficiently than at larger, sprawling events.

One of the most impactful discussions was the closing panel, which addressed the geopolitics of sovereign debt and best encapsulated the myriad challenges in the space. Take, for instance, increased creditor diversity: one of the key newer features – alongside the emergence of bondholders – is that China has established itself as the world’s largest bilateral creditor to lower- and middle-income countries over the past decade plus. Resolving debt crises has become harder as a result, with more debt exposure to China making it less likely for a sovereign borrower to complete a Paris Club restructuring. Similarly, debt to China is associated with longer negotiating times for IMF programs.

United Nations voting patterns

Yet emerging and developing economies as a whole are much more geopolitically-aligned with China than they are with the US. Using the latest available data on countries’ voting patterns in the United Nations’ General Assembly, in 2019 only a few EMDEs voted in alignment with the US more than 20% of the time. None did so in more than 50% of votes.

Only a handful of US allies tend to vote with the US in UN General Assembly votes more than half the time: Israel, Canada, the UK, Australia.

In contrast, EMDEs tend to vote in lockstep with China, which, after all is still considered somewhat of an emerging market itself. Virtually no EMDE votes outside of Europe were misaligned with China in the UN more than 50% of the time in 2019. Geopolitics is of course more complex than suggested by UN voting, and the world is not reverting to Cold War-era bipolarity, with multipolarity seemingly emerging on the horizon instead.

Sovereign borrowers in the “Global South” are aligned with China more often than not in UN voting.

Walking a tightrope

Nevertheless, the above data suggests that sovereign borrowers are navigating a complex environment in which they have to walk a tightrope between managing relationships with Chinese creditors and maintaining access to IMF support and lending from the Paris Club and private creditors. As such, some EMDE governments may not see that it is in their best interests to ask their largest creditors, which are often Chinese, to take steep haircuts during debt resolutions as has often been the case with past Paris Club restructurings and the Common Framework.

Instead, countries in debt distress may prefer to ask China for maturity extensions and for maintaining exposure while they implement structural reforms to set debt on a more sustainable path. This approach has the potential drawback of conflicting with or delaying IMF program negotiations, which typically require financing assurances from key creditors. Even so, some sovereign borrowers – especially those that are among Beijing’s strategic partners – may judge that their relationship with China is more important in terms of resources than IMF program sizes.

Still others may prefer to rely more on the G20’s Common Framework and the IMF and World Bank. This is especially true considering that Chinese lending to EMDEs has slowed to a trickle over the past five years as Beijing reconsiders its Belt and Road Initiative ambitions.

A poorly-functioning global trading system

Yet the drawback of relying on G7 countries and the Anglosphere for sovereign lending is that, ultimately, among these only Germany and Japan run meaningful current account surpluses. And while bilateral aid from the G7 is non-negligible, external deficits in the US, UK, Canada, and (historically) Australia mean that global capital flows towards these countries rather than from them to the world, as is the case with China.

One way to increase capital flows from rich to poor countries would be for more rich countries to begin running current account surpluses, which would effectively overhaul the global trading system. This is a highly unlikely outcome over the short- and medium-terms, for many reasons but partly because doing so would affect the US dollar’s reserve currency status, the ability to weaponize the dollar via sanctions, and undermine the power of US banks. In these murky waters, it is a small wonder then that many EMDE sovereign borrowers will continue to prefer to hedge their bets by viewing China as at least as important as the IMF and other creditors combined.

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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.

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De-dollarization

The dollar-debt imbalance

One of the major announcements at last week’s World Bank/IMF Spring Meetings concerns the unsustainable rise in US government debt. While it’s old news that the budget deficit is large – $1.7tn / 6.3% of GDP in 2023 and a projected $1.6tn in 2024, I want to highlight how US debt relates to the the role of the dollar internationally. Besides, the Springs also mean there is new IMF WEO data to play with:

De-dollarization has become a hot topic in recent years, with many observers siding ideologically “against” the USD, e.g. Brazil’s president Lula asking why international transactions should occur in dollars. Many also claim that the yuan and other BRICS currencies are rising in importance. While it’s true that RMB is playing a greater role in trade invoicing and international reserves, this increase is limited to either specific countries (e.g. Russia) or has been less than the rising prominence of other G7 currencies.

Yet such grandstanding belies ignorance of why the greenback is so dominant. China scholar and Carnegie Endowment fellow Michael Pettis explains this with his usual brilliance.

Essentially, countries that run current account surpluses – (remember that the current account is the trade balance plus other sources of foreign income) – are subsidizing manufacturing. China and Germany are prime examples.

In contrast, deficit countries are subsidizing consumption. The US and – to a much lesser extent – the UK have the largest average current account shortfalls in dollar terms.

One way to think about current accounts is that they are equal to savings minus investment, on a national level. Savings is of course the difference between income and consumption. So, when a country has a positive current account balance, it is saving more than it is investing. The reverse is true for CAB deficits:

Current Account Balance = Savings - Investment

It follows that for a current account to rise, savings increases and/or investment decreases. For a current account to decline, savings decreases and/or investment increases.

Capital account

Another important piece of the puzzle is the capital account, which is open in the US and other G7 countries, but not in China. Investors understandably prefer to send their capital to countries with strong property rights, institutions, and rule of law. These robust investor protections is one of the reasons why the US and the UK and, to a lesser extent, Canada and Australia have such large deficits.

In other words, in countries with open capital accounts, when net international capital inflows are positive, the balance of payments means that the current account has to be negative (barring some potential temporary effects via international reserves dynamics).

Transfers, both internal & external

Surplus countries such as China, Germany, and Japan subsidize manufacturing at the expense of domestic consumers. Low interest rates and low wages, in China and Germany’s cases at least, result in net transfers from savers (i.e. households and workers) to manufacturing firms. Along with their manufactured goods, they are also “exporting” weak domestic consumer demand to other countries.

To resolve this external imbalance, deficit countries like the US and UK have to either decrease savings and/or increase investment. But, with companies either holding large cash balances or using them to buy back stock, there seem to be few signs of increasing investment. This means that savings must be negative. This can occur via increased unemployment, but, to avoid this, the government instead subsidizes consumption (at the expense of manufacturing) via increased household and/or government debt.

As such, exploding US government debt is partly a result of these external trade imbalances. This begs the question why the US accepts an undervalued yuan and large negative trade deficit with China, though the White House has certainly pushed back against this arrangement at various points.

Narrow interests

As is often the case, the status quo is a result that serves a specific set of narrow interests. With the US running such a large current account deficit, other countries acquire US financial assets denominated in dollars, meaning that the US exports its financial assets to the rest of the world. Doing so ensures the dollar’s status not only as a store of value but also as a medium of exchange internationally, which is what gives the US government power to levy financial sanctions and US banks power to dominate transactions.

Yet this situation is neither sustainable for the US government and households, nor is it desirable for most Americans. Even disregarding the overuse of sanctions, the effects of USD prevalence are negative abroad as well. For instance, greenback dominance has generally resulted in a strong dollar, which is not beneficial for global trade.

Unsustainable status quo: here to stay?

In fact, the global trading system works terribly. Ideally, wealthy countries would run surpluses, and EMDEs would run deficits in order to funnel rich-world savings towards domestic investment. But EMDEs present a variety of risks to investors, who prefer to have higher allocations to safer countries, e.g. the Anglosphere.

It is not the yuan or some other currency that will dislodge the dollar. Rather, it would be some combination of push and pull factors outside and inside the US. China and other surplus countries could stop incentivizing manufacturing and instead increase consumption and, in some cases, investment. US policymakers could reduce fiscal and household debt accumulation while encouraging exports of goods and services.

In both the surplus and deficit cases, restoring that balance between consumption and manufacturing would have broad-based economic benefits. Unfortunately, the prospects for either of these outcomes seem remote because of the political priorities of Beijing’s surplus maximization and of Washington’s dollar weaponization, both of which are cornerstones of this deglobalizing era. Yet since these imbalances are so unsustainable, something’s gotta give, someday.

Categories
Geopolitics

Wall Street’s fear gauge rises

The headline article in yesterday’s FT focused on the “soaring” Vix index, a well-known measure of investor skittishness.

Much ado about VIX

VIX rises when market participants expect more volatility in the S&P 500, as it reflects the cost of buying options used to profit from changes in stock prices.

It’s clear that markets are concerned that interest rates will be higher for longer in the US as the Fed grapples with sticky inflation and by escalating Iran-Israel tensions.

These are the reasons that pushed VIX this week to its highest level since October (see chart). That spike occurred amid investor worries over Hamas’s attack on Israel and before Fed chair Jerome Powell’s dovish end-of-year remarks.

VIX is actually quite low

While it is true that this could mark a turning point for markets, what stands out to me is how low VIX went in December and January. Upbeat sentiment around the Fed lowering rates by June or earlier would certainly have warranted somewhat of a decline.

But Israel’s retaliation against Gaza, Houthi attacks on maritime traffic in the Red Sea, and reversals on the battlefield for Ukraine’s military amid US Congressional delays on aid have punctuated the past several months. These should have dampened investor euphoria more than they did.

Moreover, taking the long view, VIX isn’t exactly “soaring” (see chart). Perhaps it should be higher than where it currently is, and may well rise.

But, frankly, with the pandemic and the wars in Ukraine and Gaza defining the decade so far, this modest rise in the VIX shouldn’t be at all surprising. This is what I believe is called, in the official parlance, a nothingburger.

As for the supposedly “soaring” VIX, for the FT I have only one question:

Categories
Geopolitics

Senegalese exceptionalism, for now 🇸🇳

Senegal's population is growing at a rapid clip.

Today’s spotlight is on Senegal’s presidential election in March 2024 and the spectacular rise to power of political novice Bassirou “Diomaye” Faye, a 44-year old former tax inspector who went from prison to the presidency in scarcely 10 days. Digging beneath the surface of the electoral results reveals some oft-neglected ethnic undercurrents at play in Senegal and elsewhere in the Sahel that investors and observers should keep front of mind.

Why democratic stability is so rare in the Sahel

One of the things that struck me when living and working in Africa was the yawning gap between the international press coverage of electoral politics and the realities on the ground, which were both obvious and patiently explained to me by local friends.

I am of course referring to the ethnic dimensions of politics that are ever-present in so many African countries but that mainstream international media so often ignores.

In Africa, ethnicity doesn’t explain everything, but nothing can be explained without ethnicity.

Bernard Lugan

Democracy wins

Last month’s presidential elections in Senegal were first and foremost about the Senegalese people expressing their desire for change. As things currently stand, it is also a positive story of the country’s institutions resisting to pressure.

Indeed, Senegal has come back from the brink, after outgoing president Macky Sall sought to delay the elections indefinitely, and which – thankfully – the Constitutional Council overruled. The vote on 24 March saw opposition candidate Bassirou “Diomaye” Faye win a resounding victory that precluded the need for a second round runoff. A former tax inspector and political novice, Faye had been released from politically-motivated imprisonment only days before.

Source: Senegal’s Presidential Office, via Reuters & Le Monde

Yet the triumph was above all for Senegalese democracy, with government candidate Amadou Ba conceding the next day. The country thus remains a beacon of democratic stability with peaceful transitions of power since independence in an otherwise fragile region that has recently suffered a wave of coups d’état: Mali, Burkina Faso, Niger, Guinea. Beyond West Africa, Sudan, Chad, and Gabon have each had recent, idiosyncratic, coup-like political instability as well.

Mapping the ethnic X factor

I don’t want to exaggerate the importance of ethnicity in this election. For all intents and purposes, the result is a clear repudiation of Sall’s government and his anointed would-be successor, Ba, and overrides potential ethnic considerations.

Nevertheless, comparing a map of the electoral results to an ethno-linguistic map of Senegal suggests that ethnicity is still important. Sall is Fula (in French: Peul) and has had his political stronghold in the northern parts of the country, where many Fula live. These voting patterns were borne out in March’s election, with Ba getting much of his support from Fula-populated areas.

Source: Wikipedia
Source: G.G. Beslier, Le Sénégal

In contrast, Faye was much more dominant in areas populated by the Wolof, the Mandé / Malinké in the southeast and south, and in the southwest. Faye was until recently the right-hand man of Ousmane Sonko, who was ultimately prevented from running in the election. Sonko hails from the southwestern city Ziguinchor, where Faye secured a strong turnout, and has been chosen as prime minister.

The Sahelian ethno-democratic-demographic doom loop

On a continent that crams some 3000 ethnic groups speaking around 2100 languages into a mere 54 countries, it is myopic to completely ignore the ethnic undercurrents at play, even in cases where it isn’t the primary driver. Yet analyzing the political salience of ethnicity in Africa is more than just a useful intellectual exercise.

Think how, for example, as the largest nomadic pastoral community in the world, the Fula are present in Senegal and Guinea, and in Chad and Cameroon, and in every country in between. As climate change drives the Sahara’s expansion ever southward through the Sahel, we can expect land use-driven tensions to continue rising between the more martially-oriented nomadic pastoralists of the north and the more numerous sedentary agriculturalists to the south.

To that point on demographics, Western democratic ideals imposed on an African context partly explains many countries’ breakneck population growth. Individualism is at the center of the one-person one-vote approach to electoral democracy and works well in many parts of the world. But traditions of individual liberty were only introduced to African countries recently, where, historically, communitarian-led structures of societal organization tended to dominate.

Senegal’s population is growing at a rapid clip.

Thus Western-style democracy has incentivized each ethnic group to vie for political power by growing its population. This makes complete sense if one recognizes the communitarian focus that continues to drive politics in so many African countries to this day. Case in point, as of 2023 Senegalese women give birth to four children on average, and 75% of the country’s population is under 35 years old. Of course, the usual caveat applies: no single factor is fully responsible for a demographic outcome.

The bitter irony is that democracy has destabilized several of Senegal’s neighbors precisely because it has inverted the power relationship between the previously-dominant nomads and the sedentary farmers. Historically, these fierce warrior-pastoralists didn’t really require strength in numbers to subjugate their more pacific southern neighbors.

But in a context where democracy excludes the nomads from political power, it should not be at all surprising that these peoples would try to revolt or secede. This is precisely the driving force behind the ongoing conflicts and instability across the near-entirety of the Sahelian arc, rather than some inchoate jihadism. The several Tuareg / Azawad rebellions that have occurred since the 1960s serve as a prime example. Senegal alone has been spared. For now.

With all that in mind, can a victory of democracy in an African context be anything other than a pyrrhic one? I certainly hope so, and Senegal’s institutions give good reason to. Yet even as this result is rightly celebrated, the specter of roiling demographics and instability throughout so much of the region looms large over West Africa’s future.

What next for investors?

Investors have so far reacted to Faye’s victory with caution, as he is in many ways an unknown entity. It is still early days, so investors ought to remain circumspect while waiting to see the shape that his economic policies end up taking.

For now, what we know from Faye’s inauguration is that the economic agenda will focus on reducing cost-of-living pressures and on tackling corruption, while also having to address the high unemployment rate in this youthful country. On the external front, Faye and Sonko have espoused sovereignty and deep change, including reforms to or a complete transition away from the CFA currency.

Abandoning the CFA could prove tricky, as the currency has been a source of stability throughout much of the region, aside from a sharp devaluation in 1994. On the other hand, Senegal likely has the policy credibility and institutional strength to pull it off. Moreover, the CFA is almost certainly highly overvalued, so the move to a more flexible currency could benefit export activity.

The French Connection

As for the relationship with France, Sall had kept close ties while also diversifying Senegal’s partners. It seems likely that Faye will keep Paris at arm’s length, without necessarily shutting the door entirely, if the cordial 30-minute conversation he had with Macron last week is anything to go by.

In the meantime, France’s net foreign direct investment stock in Senegal has remained above the €2bn mark in recent years, unlike declines in the French economic presence that have been registered elsewhere in francophone Africa. This level of FDI involvement in Senegal is close to 8% of GDP and represents nearly a fifth of FDI in the country, underscoring the ongoing presence that French economic interests are likely to have.

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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
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.