Will Russia Sanctions Accelerate Inflation, Devalue US Dollar and Strengthen Chinese Yuan?
Russia is a commodities superpower. The nation's Eurasian landmass is rich in all kinds of natural resources from food to fuel to metals. To punish Moscow for invading Ukraine, the US and G-7 nations have imposed sanctions on Russia. These sanctions have effectively removed Russian commodities from the global supply chain, triggering double digit price increases for food, fuels and metals. Will the G-7 actions leave the US dollar much weaker? Will the Chinese currency, backed by commodities, gain strength at the expense of the US dollar and Euro? Will the era of commodity-backed money return? In a note to clients, Credit Suisse investment strategist Zoltan Pozsar has answered some of these questions. He says "this (Russia) crisis is not anything we have seen since President Nixon took the U.S. dollar off gold in 1971". "After this war is over, "money" will never be the same again.....and bitcoin (if it still exists then) will probably benefit from all this,” he adds.
|Map of "International Community" Sanctioning Russia|
Post World War II History:
The current global financial system was created in Bretton Woods located in the US State of New Hampshire. Over 700 delegates representing 44 countries met in Bretton Woods in July 1944. The Bretton Woods System, now referred to as Bretton Woods I, required a currency peg to the U.S. dollar which was in turn pegged to the price of gold. This system collapsed in the 1970s but created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank. Zoltan Pozsar believes it is now time for Bretton Woods III. What is Bretton Woods III? Here's how Zoltan Pozsar explains it:
"From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities)".
|Russia's Commodity Exports. Source: Bloomberg|
Russia is a vast country. Russian landmass extends from Europe to East Asia. It is one of the largest suppliers of oil, gas, metals and wheat. Russia is also a major exporter of fertilizer. China will likely take advantage of the western sanctions to buy up Russian commodities at lower prices.
Pozsar argues that while Western central banks cannot close the gap between Russian and non-Russian commodity prices as sanctions lead them in opposite directions, the People’s Bank of China can “as it banks for a sovereign who can dance to its own tune.”
“If you believe that the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you could also believe in unicorns,” Pozsar wrote.
|Pre-Ukraine War Inflation in US. Source: Wall Street Journal|
Bretton Woods III:
Pozsar argues that the Bretton Woods II collapsed when the G7 countries seized Russia’s foreign exchange (FX) reserves, leading to a rise of outside money – reserves kept as commodities – over inside money – reserves kept as liabilities of global financial institutions.
|East vs West Economic Output. Source: Wall Street Journal|
"We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East (Chinese Yuan) that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West,” Zoltan wrote.
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Keeping Russian banks from using SWIFT is not the financial nuclear weapon some have suggested.
While the United States might fear the growth of new messaging services in the future, this case isn’t likely to bring significant blowback. Russia is unlikely to use alternative financial channels, because the existing ones all have problems. For example, executing transactions over telephone or fax, or by using credit or debit cards that fuse communications technologies with transactions. That’s outdated and will not scale to the degree Russia would need.
Alternative financial communication networks are either in their infancy or depend on the SWIFT network. The Bank of Russia created a financial messaging system (FMS) after the 2014 Ukraine crisis — but it includes only 400 users and therefore isn’t that useful. China’s Cross-Border Interbank Payment System (CIPS) has about three times FMS’s users — but SWIFT includes nearly 10 times as many users as CIPS. What’s more, CIPS isn’t an alternative to SWIFT; it depends on SWIFT for international messaging.
Russian banks not facing sanctions may turn to CIPS. But China may be reluctant to welcome sanctioned banks, lest it jeopardize its use of SWIFT.
Two days after Russia launched an attack on Ukraine, the United States, Canada and European allies agreed to disconnect a handful of Russian banks from SWIFT, the Society for Worldwide Interbank Financial Telecommunication. These “de-SWIFTed” Russian banks would no longer be able to use the financial interface to transfer money.
The long-standing, and controversial, threat to disconnect Russia from the SWIFT network has been touted as a centerpiece of the West’s retaliation. How big is it, really? And how will it affect the United States and its use of financial power in the future?
The limits of de-SWIFTing
SWIFT connects more than 10,000 financial institutions in a communications network where orders are sent and received. This messaging service enables participating banks to settle commercial, financial and foreign-exchange payments. Cutting banks off from SWIFT means they can no longer use the network to exchange information.
But keeping banks from accessing SWIFT is not, on its own, the financial nuclear weapon some suggest. Denying access to SWIFT, for example, does not stop banks from communicating or transacting with the 11,000 financial institutions outside the SWIFT network. Disconnected banks that do not face sanctions are free to use alternative messaging networks to settle payments.
In fact, without sanctions on actual money transfers, denying countries access to SWIFT could undermine the messaging service by encouraging users to rely on other financial communication networks.
Today, SWIFT continues to be dominated by major U.S. financial institutions, with 40 percent of recorded transactions occurring in U.S. dollars. Making the U.S.-centered financial order less attractive is precisely the type of collateral damage the United States seeks to avoid.
This assumes importance given the Western sanctions on Russia and PJSC Rosneft Oil Co. stating that Indian companies can acquire stakes in Russian projects and purchase Russian crude oil.
Rosneft’s production cost per unit is considered to be among the lowest globally.
“Rupee-ruble trade is very much on the cards. We are working on a currency arrangement to facilitate trade, especially as we also plan to increase oil purchase from Russia," said one of the two Indian government officials cited above, requesting anonymity.
The rupee-ruble trade mechanism will allow Indian exporters to be paid in rupees for their exports to Russia instead of dollars or euros.
Under this arrangement, a Russian bank is required to open an account in an Indian bank while an Indian bank opens an account in Russia.
Incidentally, the rupee-ruble payment mechanism with Russia has been attempted earlier on a small scale for a few items such as tea.
“We can look at a floating exchange rate system. A third currency can be taken as a point of reference, maybe yuan," said the official. He added that the arrangement would not require the exchange rate to be pegged to any currency, especially as the ruble has been depreciating. The ruble has fallen by as much as 39% this year against the dollar.
The local currency trade mechanism is key to resuming trading with Moscow as India buys a lot of defence and nuclear products from Russia, while India exports pharmaceuticals, engineering and agriculture items.
Payments worth close to $500 million to Indian exporters for goods already shipped to Moscow remain stuck.
Meanwhile, the Reserve Bank of India is consulting banks, including UCO Bank, to appoint a third party for facilitating payments. UCO Bank acted as a facilitator when sanctions were imposed on Iran.
Queries sent to India’s ministries of finance, petroleum and natural gas on Sunday remained unanswered till press time. Also, emailed queries to spokespeople for the Reserve Bank of India on Sunday evening wasn’t immediately answered.
Under the currency arrangement, the Russian currency will be converted into rupees at a specified exchange rate, and the money will be deposited into an Indian bank account.
“We are yet to finalize the Russian and Indian banks," said another government official.
Russian oil-related exports to India is close to $1 billion, but the exports are still very small given that the South Asian country imports 85% of its oil and 55% of natural gas requirements.
“Increasing oil purchases from Russia is definitely being considered at a discounted price. But we need to resolve a few issues to make that happen. One is we need to figure out the availability of shipping vessels. The other pertains to the high insurance premiums for imports from Russia," said the second government official. “High premiums will erode all the benefits of the discounted price. Also, the refining capability and cost will need to be assessed as we buy a different blend," the official added.
He added that India need not worry about buying oil from Russia as long as Europe continues to buy from there.
While the European countries have exempted Russian banks involved in energy trade from sanctions due to their heavy dependence on Russian oil, the US has announced a complete ban on the import of all Russian oil products from 8 March.
Oil prices have been elevated since Russia invaded Ukraine last month. On 7 March, Brent touched $139.13 per barrel, the highest since 2008. On Friday, the May contract of Brent on the Intercontinental Exchange closed at $112.67 per barrel.
China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.
China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince Mohammed bin Salman’s pet projects, such as Neom, a futuristic new city.
The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.
The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency.
It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.
Meanwhile the Saudi relationship with the U.S. has deteriorated under President Biden, who said in the 2020 campaign that the kingdom should be a “pariah” for the killing of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who U.S. intelligence authorities say ordered Mr. Khashoggi’s killing, refused to sit in on a call between Mr. Biden and the Saudi ruler, King Salman, last month.
It also comes as the U.S. economic relationship with the Saudis is diminishing. The U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration.
By contrast, China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs.
Islamabad strains ties with the west after refusing to condemn Moscow’s invasion of Ukraine
Khan visited Moscow on the same day Russia invaded Ukraine last month, the first visit by a Pakistani premier in more than 20 years. The EU, UK, Australia and others “urged” Pakistan to condemn Russia in a UN General Assembly vote. Pakistan abstained from the vote, with Khan attacking the western countries at a campaign rally for treating Pakistanis like “slaves”. Tarin said he hoped Russian officials would soon visit the country to finalise the deal for the Pakistan Stream pipeline following Khan’s Moscow visit. The pipeline, to be built by a collection of Russian companies, is estimated to cost more than $2bn. Recommended News in-depthOil & Gas industry The Soviet pipeline that keeps Europe hooked on Moscow’s oil Well before the latest surge in oil and gas prices, Pakistan was struggling with a widening current account deficit and double-digit inflation exacerbated by rising global commodity prices. Pakistan last month resumed a contentious $6bn IMF programme to stabilise the country’s balance of payments and shore up government revenues. But Tarin said the conflict presented a new “crisis” that would push up the cost of imports including energy and wheat, which Pakistan previously sourced from both Russia and Ukraine. Higher prices following the US’s ban on Russian oil and gas imports would affect Pakistan “very negatively” unless Washington unlocked alternate energy sources, he said. Energy makes up about a quarter of Pakistan’s import bill. He added that a nuclear deal between the US and Iran would allow Islamabad to revive a plan to build a pipeline delivering gas directly from Iran to neighbouring Pakistan, which is suspended because of international sanctions. “If there’s a deal . . . this is the cheapest [option]. It’s next door,” he said. “It’ll be very good for us.” Tarin said it was “only fair that people should respect” Pakistan’s “neutral” stance. The west “have been our allies for a very long time. We’re listening to them, but we told them, ‘Listen, we don’t believe in taking sides. We’re with you as much as China and others’,” he added.
In an economic Cold War pitting China and Russia against the U.S. and its allies, one side holds most of the advantages. It just has to use them.
In the years preceding its invasion of Ukraine, Russia set out to sanction-proof its economy by developing local substitutes for key foreign products, such as microprocessors. The only problem: Since it lacks advanced semiconductor fabrication capacity, production of these Russian-designed chips was outsourced, mainly to Taiwan Semiconductor Manufacturing Co. After the invasion of Ukraine, Taiwan joined the U.S. in banning the export of sensitive technology to Russia. TSMC immediately promised to comply.
Russia may be an energy superpower but Taiwan is a semiconductor superpower, and semiconductors are harder to replace than oil. Therein lies a critical insight about the emerging Cold War between Russia and China on one side and the West—the U.S. and its democratic allies—on the other. This Cold War will be much more of an economic contest than the first, and the balance of economic power favors the U.S. and its allies. And it’s not even close.
Chinese President Xi Jinping likes to boast, “The East is rising, the West is declining.” When the rivalry was limited to China and the U.S., this had some resonance: At current rates of growth, China will surpass the U.S. as the world’s largest economy as soon as 2030 despite U.S. gains in the last year.
But with China partnered with Russia and the West more united than ever, this is turning into a contest of alliances, and Xi couldn’t be more wrong. In this framing, “East” and “West” are not geographic, but geopolitical, labels. If “the East” is defined as those countries with which China is closely aligned (it eschews formal alliances), only China is any sense rising. Russia was a stagnating petrostate even before sanctions eviscerated its economy. The others, such as Kazakhstan, Belarus, Pakistan, North Korea, Cambodia and Laos, are poor, slow-growing, or both. The West, defined as the European Union, the anglosphere (the U.S., Australia, Canada, Britain and New Zealand) and East Asia’s three big, rich democracies, Japan, South Korea and Taiwan, may not be growing rapidly, but it is growing and has a gigantic head start. As former U.S. Treasury Secretary Henry Paulson said a Chinese official once told him: “You have all the good allies.”
By itself, China accounted for 18% of global gross domestic product at current exchange rates last year, based on International Monetary Fund data. Adding Russia and their assorted allies brings the total to just 20%. The U.S., meanwhile, accounted for 24%, and adding its allies vaults the total to 59%.
While sanctions on Russia demonstrate the West’s control of the global financial system, long-run economic advantage will come from technology and knowledge. In pure science—such as space travel and atomic energy—Russia and China certainly hold their own. But in commercially useful technology, Western companies lead in almost every field, from commercial aviation and biotechnology to semiconductors and software.
“If you have a coherent strategy across the major democracies, you’re in an enormously robust position in terms of financial, economic and technological leverage,” said former Australian Prime Minister Kevin Rudd, now president of the Asia Society think tank.
In an economic Cold War pitting China and Russia against the U.S. and its allies, one side holds most of the advantages. It just has to use them.
Of course the East plays a central role in the global economy. As recent market turmoil illustrates, Russia is a key supplier of not just oil and gas but metals such as palladium, used in catalytic converters, and nickel. China dominates manufacturing of countless goods whose value became abundantly clear during the pandemic, when demand for some, such as protective personal equipment, skyrocketed.
To a great extent these strengths reflect Russia’s comparative advantage in geology and China’s in factory labor. The West’s comparative advantage is in knowledge. That’s why Russia and China court Western investment. For example, to develop a complex liquefied natural gas (LNG) project in the Arctic, Russia relied on Norwegian, French and Italian contractors for essential expertise, research firm Rystad Energy notes.
Catching up with the West is no easy task, as semiconductors illustrate. Western companies dominate all the key steps in this critical and highly complex industry, from chip design (led by U.S.-based Nvidia, Intel, Qualcomm and AMD and Britain’s ARM) to the fabrication of advanced chips (led by Intel, Taiwan’s TSMC and South Korea’s Samsung ) and the sophisticated machines that etch chip designs onto wafers (produced by Applied Materials and Lam Research in the U.S., the Netherlands’ ASML Holding and Japan’s Tokyo Electron ).
Russia and China have made efforts to reduce this dependence. Russia developed locally designed microprocessors called Elbrus and Baikal to run data centers, cybersecurity operations and other applications. Though neither has achieved significant market share, they “represent the pinnacle of local design capability,” said Kostas Tigkos, principal at Jane’s, a defense intelligence provider. Russia hoped that they would eventually displace chips made by Intel and AMD, he said. “This would not only have been the foundation for diversifying their installed base, but a stepping stone for exports of those processors to other friendly nations.” But without manufacturers like TSMC to make the chips, Russia is facing “the complete disintegration of their aspirations to develop their own industry.”
China has a much bigger semiconductor industry than Russia, and its partly state-owned national champion, Semiconductor Manufacturing International Co. (SMIC), could in theory make Russia’s chips, but that would take at least a year, Mr. Tigkos said. Moreover, its efforts to catch up to its Taiwanese competitor have been set back by sanctions. In 2020 the U.S. required companies using American technology to obtain a license to sell to SMIC. This effectively limited its ability to acquire advanced equipment from Netherlands’ ASML, which is critical for “any country that wants to have a competitive semiconductor industry,” Mr. Tigkos said.
Why does all this matter to the outcome of the geopolitical contest? Over time economic weight, strength and vitality are what allow countries to sustain military capability, achieve and maintain technological superiority, and remain attractive partners for other countries.
In an economic Cold War pitting China and Russia against the U.S. and its allies, one side holds most of the advantages. It just has to use them.
Yet GDP does not automatically equate to strategic influence. To win a Cold War, it’s not enough for the West to hold the best economic cards, it has to know how to play them. Economic statecraft, as this is called, does not come naturally to the West: Its institutions are built on the assumption that companies are private enterprises, not instruments of the state. They do business wherever it’s profitable, regardless of their home countries’ strategic interests.
No such division exists in Russia and China. Russian President Vladimir Putin used state control of key industries such as natural gas to reward or threaten neighbors. The Chinese Communist Party insists that state-owned and even private enterprises give priority to the state’s interests. In return, China tilts the playing field in those companies’ favor at home and abroad. Chinese state-sponsored hackers steal commercial secrets from Western companies, the U.S. has alleged. China is a master of economic coercion, punishing countries such as Australia or Lithuania or companies that cross its diplomatic red lines by depriving them of access to the Chinese market, knowing other countries and companies will eagerly take their place.
China has also learned how to play companies and countries in the West off against one another—favoring whoever promises to share more of its technology with Chinese partners, or avoids criticism of China.
Western governments, such as Germany, exaggerate China’s economic power and underappreciate their own, said Luke Patey, an expert on China’s international economic strategy at the Danish Institute for International Studies. “Germany has a full house when it comes to geoeconomics but plays like it has a pair of threes,” Mr. Patey said. The West frets that Chinese companies lead in fifth-generation telecommunications equipment—such as Huawei Technologies—and electric vehicle batteries. But, he said, “We sell short the fact that up there with Huawei are Ericsson, Nokia and Samsung,” based in Sweden, Finland and South Korea, respectively. Meanwhile Japan’s Panasonic and South Korea’s LG “are making the most sophisticated electric vehicle batteries in the world.”
For the West to play this game, it will have to more skillfully employ its ample economic assets toward geopolitical ends. The sanctions on Russia show that it can: The West showed a remarkable breadth and unity in its willingness to sustain significant economic discomfort in order to punish Russia. When the Trump administration imposed export controls on China, Taiwan did not join in but its companies were forced to comply because they use U.S. technology. This time Taiwan itself locked arms with the U.S. “Taiwan strongly condemns Russia’s invasion of Ukraine. Our country joins the U.S., EU & other like-minded partners in sanctioning Russia,” its Ministry of Foreign Affairs tweeted.
In an economic Cold War pitting China and Russia against the U.S. and its allies, one side holds most of the advantages. It just has to use them.
The West makes up for the shortage of homegrown talent through immigration. A study by the Peking University Institute of International and Strategic Studies earlier this year lamented that 34% of China’s top artificial intelligence talents worked in China while 56% worked in the U.S., whose “relatively relaxed and innovative scientific research environment is…favored by scientific and technological talents.” Tech entrepreneurs are motivated by freedom and wealth, both of which are slipping out of reach in China and Russia.
Thus a key factor in whether the West can sustain its edge is whether it can remain a magnet for talent. Yet the West’s openness to trade and immigration and even its commitment to democracy have come under stress. In the last decade support in Europe and the U.S. has surged for right-wing populists opposed to immigration and free trade, skeptical of NATO, and admiring of Mr. Putin. These include Marine Le Pen, a contender for president in France’s elections this spring, and former U.S. President Donald Trump, who may seek the White House again in 2024. Democracy has backslid in Hungary, Poland and the U.S., according to the think tank Freedom House.
This points to the final and perhaps biggest challenge for Western nations. Having shown how effectively they can sever ties with Russia, can they be equally effective in strengthening ties with each other and unaligned players like India, Brazil and Vietnam—and thus be an attractive alternative to the autocratic East?
After World War II the U.S. used trade to strengthen other democracies and bind allies, and its reward was a democratic and prosperous West. Yet since the 2000s Americans have soured on this model, as expanded trade with the likes of China brought economic turmoil and little geopolitical benefit. Mr. Trump saw trade as a zero-sum game and hit allies and adversaries alike with tariffs. He pulled the U.S. out of the Trans-Pacific Partnership with 11 other Pacific rim countries, a pact covering not just tariffs but investment, intellectual property, data and the behavior of state-owned enterprises, intended as an alternative to China. Mr. Biden has resolved tariff disputes but pushed to expand “Buy American” regulations that penalize imports. He has offered no trade-agreement analog to his expanded military ties with allies in Europe and Asia, although he has promised a less ambitious “Indo-Pacific Economic Framework.”
In an economic Cold War pitting China and Russia against the U.S. and its allies, one side holds most of the advantages. It just has to use them.
Meanwhile, China is fast cultivating its own economic sphere of influence, via foreign investment, its “Belt and Road” infrastructure initiative, and trade agreements, even applying to join the TPP, renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
“China has studied very carefully the American postwar model of how their global and regional military domination was augmented by financial and economic domination,” said Mr. Rudd. China, he said, seeks to achieve its foreign policy aims by making countries throughout Asia, including American allies, dependent on its trade and investment, and eventually its currency. Mr. Rudd urged the U.S. to return to the TPP and revive a similar pact with Europe. The U.S. needs to recognize where its strategic advantage lies, “which is through free trade, open commerce and open capital flows.”
Losing access to some top-end chips from Asia over the invasion of Ukraine undercuts efforts to develop advanced weaponry, AI, robotics
Taiwan Semiconductor Manufacturing Co., the world’s biggest contract chip maker, said it is committed to complying with the new export-control rules. South Korea’s Samsung Electronics Co., a leading memory-chip maker and an electronics producer, said this month it has suspended shipment of all its products to Russia because of geopolitical developments and is monitoring the situation to determine its next steps.
Russia’s chip-building technology lags behind that of industry leader TSMC by more than 15 years, said Western semiconductor-industry executives who have studied the state of Russia’s industry. The country’s leading chip maker, Mikron Group, has said it is the only local company capable of mass producing semiconductors with 65-nanometer circuitries—a technology introduced to the industry for mass production around 2006. Mikron didn’t respond to a request for comment.
An international tech blockade threatens to deprive Russia of sophisticated semiconductors needed to power advanced weaponry and cutting-edge technologies like 5G, artificial intelligence and robotics, experts say.
In late February, the U.S. imposed a ban on selling high-tech products including semiconductors and telecommunications systems used by the defense, aerospace and maritime industries to Russia and its ally Belarus, days after Russia invaded Ukraine. The ban also extended to certain foreign items produced with U.S. equipment, software or blueprints.
South Korea and Taiwan, which dominate in high-end chips, and Japan, strong in chip-making materials and tools, have also banned exports of the items that the U.S. has put on its export-control list. Their moves cut off Russia’s access to many top-end chips, and materials and components needed to re-create production of such items locally.
For Russia, the impact from the coordinated sanctions will be significant, said Tom Rafferty, Asia regional director at the Economist Intelligence Unit. “The big export bans are going to be on semiconductors and high-end semiconductors in particular, for which Korea and Taiwan almost monopolize production. So there won’t be supply of that anywhere that Russia can lean on.”
While the sanctions would appear to limit Russia’s access to chip supplies, the actual impact couldn’t fully be determined. Russia’s Ministry of Industry and Trade, and the Ministry of Economic Development didn’t respond to requests for comment.
Russia continues to largely rely on foreign technology to design chips and has limited chip-production capabilities of its own. In 2020, Russia imported roughly $440 million worth of semiconductor devices, including components like diodes and transistors, and around $1.25 billion worth of electronic integrated circuits, or “chips,” built by incorporating various components, according to the United Nations Comtrade database.
While the majority of these imports come from Asian countries that aren’t imposing sanctions, Russia would still be left in the dark on high-end chips or homegrown chips. Taiwan produces most of the world’s cutting-edge semiconductors, with the rest produced in South Korea, data from Washington, D.C.-based trade group Semiconductor Industry Association showed. South Korea also dominates in memory chips, while Japan is a stronghold of semiconductor materials and manufacturing tools, both crucial for chip building.
Fed chief says China has been working on currency matters
Powell says Ukraine war may serve as accelerant to China moves
Powell: Fed Needs to Be 'Nimble' Amid Ukraine Crisis
Federal Reserve Chair Jerome Powell said the Ukraine war could have the effect of accelerating China’s moves to develop alternatives to the current dollar-dominated international payments infrastructure.
Powell was questioned Thursday in a Senate Banking Committee hearing on how China might view the U.S.-led efforts to isolate Russia’s economy, especially by damaging its ability to use the dollar.
Silicon Valley’s increasingly aggressive stance against Russia could fuel the growth of rivals there and in China, Iran, too
Withholding technology can be a soft-power weapon to potentially turn a population against its leaders. Yet it also can be costly to the U.S. economy, slow to deliver results and scattershot in its effects — much more likely to affect ordinary Russians using their iPhones than generals firing missiles into Ukrainian cities.
There is another cost, as well. The United States’ dominance of global technology, experts warn, was built over generations but could be eroded in just a few years as rival powers — and especially Russia and China — invest billions of dollars to develop alternative technologies at home, in part to decrease U.S. leverage at moments such as these.
Even as Russians furiously buy iPads, Android devices and Windows-based computers, President Vladimir Putin is pushing hard to wean the country from Western technologies. And if Russia and other U.S. rivals succeed, there also could be long-term damage to the ability of American intelligence agencies — particularly skilled in exploiting U.S.-made tech — to track developments in the next conflict, experts say.
The upshot is that although technology sanctions can be unquestionably powerful, it’s a power that, when deployed, can spark backlashes that undermine its long-term utility. Depriving rivals of American-made technology also threatens the future global prospects of an industry that has driven U.S. economic growth for most of this century. The rise of a Russian Google — or a Chinese Facebook or an Iranian YouTube — are not theoretical developments. They are happening already.
“When you cut them off from American tech, they will find alternatives,” said Peter Micek, general counsel for Access Now, a human rights group that lobbies to keep Internet services available to people worldwide.
U.S. officials and technology executives are attempting to navigate this chessboard of risk and reward as they assemble a potent set of punitive moves against Russia.
The result has been growing restrictions on hardware, with Apple joining others in blocking sales to Russia, and moves by major social media platforms to curb the spread of Russian propaganda through its state-funded RT information service — often in response to the demands of Western governments. Digital purchasing tools, such as Apple Pay, also have stopped working as Western sanctions cut off Russian banks for ordinary operations.
But calls by Ukrainian officials to deprive Russians in general of access to social media and even the Internet itself have sparked significant resistance from both the companies and digital rights groups, which argue that the likes of Twitter, WhatsApp and Telegram are key to delivering information in Russia. They often are the only sources of news on the horrors Putin is inflicting on Ukrainians at a time when his control over national news media is nearly total.
The Russian government, meanwhile, has been squeezing these same companies, throttling Facebook and Twitter, and threatening action against Google in retaliation for its YouTube subsidiary limiting access to RT in response to demands by Western governments.
But as this conflict plays out, the idea of depriving Russia of software updates or online support from U.S. companies has not gained traction, even though such moves could gradually erode the functioning of technological tools used every day by the Russian government and its citizens.
FRAMING the Russia-China alliance over Ukraine as a debate between democracies and autocracies, visiting US Under Secretary of State for Political Affairs Victoria Nuland told The Indian Express Wednesday that US was ready to help India move away from dependence on Russia for defence supplies. Excerpts from an exclusive interview:
On the Russia-Ukraine crisis, how do you read India’s statements?
We had very broad and deep conversations (Nuland met External Affairs Minister S Jaishankar and her counterpart Harsh Vardhan Shringla) about what’s in this war. Unfortunately, Indian students got trapped, and they were able to get out, but unfortunately one Indian lost his life which was very tragic.
The Chinese Vice Foreign minister drew a parallel between NATO’s eastward expansion in Europe and the Quad in the Indo-Pacific.
Obviously, China is trying to seek an advantage for itself in this conflict, as it always does. But again, what threatens China most: open and free societies who offer their people a different way of life than the Communist party of China offers for Chinese people.
So NATO is a defensive alliance, of voluntary alignment of countries who asked to join together to defend themselves. In the Indo-Pacific strategy, we are talking about the great democracies of the region, working together to protect themselves and to advance prosperity, and free and open commerce and navigation and all of these things. All of the things that the autocrats want to change, want to threaten. So I’m not surprised that the Chinese are trying to draw parallels here. Because, in both cases, we’re talking about trying to keep the world free for democratic governance.
Who is a bigger threat — Russia or China?
The worry now is that they intensify their efforts together. They learn from each other, whether it is how to coerce a neighbour economically, or militarily. Whether it’s about how to go in the UN system and undercut the rules of the road that the US, India and other democracies have built to favour freedom. Whether it is that they let each other off the hook by financing each other’s militaries.
All of these things are worrying. But I also think that this is an energizing moment for the democracies, because now we see very clearly what we are up against.
By M. K. BHADRAKUMAR
The unkindest cut of it all is that the Russian Defence Ministry chose Biden’s trip as the perfect backdrop to frame the true proportions of success of its special operation in Ukraine. The US and NATO’s credibility is perilously close to being irreparably damaged, as the Russian juggernaut rolls across Ukraine with the twin objectives of ‘demilitarisation’ and ‘denazification’ in its sights.
The Russian General Staff disclosed on Friday that the hyped up Ukrainian Armed Forces, trained by the NATO and the US, have sustained crippling losses: Ukrainian air force and air defence is almost completely destroyed, while the country’s Navy no longer exists and about 11.5% of the entire military personnel have been put out of action. (Ukraine doesn’t have organised reserves.)
According to the Russian General Staff’s deputy head Colonel General Sergey Rudskoy, Ukraine has lost much of its combat vehicles (tanks, armoured vehicles, etc.), one-third of its multiple launch rocket systems, and well over three-fourths of its missile air defence systems and Tochka-U tactical missile systems.
Sixteen main military airfields in Ukraine have been put out of action, 39 storage bases and arsenals destroyed (which contained up to 70% of all stocks of military equipment, materiel and fuel, and more than 1 million 54000 tons of ammunition.)
Interestingly, following the intense high-precision strikes on the bases and training camps, foreign mercenaries are leaving Ukraine. During the past week, 285 mercenaries escaped into Poland, Hungary and Romania. Russian forces are systematically destroying the Western shipment of weapons.
Most important, the mission to liberate Donbass is about to be accomplished. Simply put, the main objectives of the first phase of the operation have been achieved.
Apart from Kiev, Russian troops have blocked the northern and eastern cities of Chernigov, Sumy, Kharkov and Nikolaev, while in the south, Kherson and most of Zaporozhye region are under full control — the intention being to not only to shackle Ukrainian forces but to prevent their grouping in Donbass region. (See my article Dissecting Ukraine imbroglio, Tribune, March 21, 2022)
“We did not plan to storm these cities from the start, in order to prevent destruction and minimise losses among personnel and civilians,” Rudskoy said. But, he added, such an option is not ruled out either in the period ahead.
It stands to reason that Washington and European capitals are well aware that the Russian operation is proceeding as scheduled and there is no stopping it. Thus, the NATO’s extraordinary summit on March 24 confirmed that the alliance is unwilling to get into a military confrontation with the Russian Army.
Instead, the summit decided to strengthen the defence of its own territories! Four additional multinational NATO combat groups of 40,000 troops will be deployed in Bulgaria, Hungary, Romania and Slovakia on a permanent basis. Poland’s proposal to deploy NATO military units in Ukraine was outright rejected.
However, Poland has certain other plans, namely, to deploy contingents to the western regions of Ukraine to support the ‘fraternal Ukrainian people” with the unspoken agenda of reclaiming control over the historically disputed territories in the those regions. What Faustian deal has been struck in Warsaw on March 25 between Biden and his Polish counterpart Duda remains unclear. Clearly, vultures are circling Ukraine’s skies. (See my blog Biden wings his way to the borderlands of Ukraine, March 24, 2022)
Cash-strapped Pakistan can’t afford to buy fuel on the spot market and is either skipping purchases or turning to alternatives such as Afghani coal as it grapples with a worsening energy crisis.
State-owned Pakistan LNG Ltd. didn’t award a recent purchase tender seeking several shipments of liquefied natural gas through May due to high offer prices. Cement manufacturers, meanwhile, are buying coal from Afghanistan at roughly half the price of shipments from regular supplier South Africa.
Russia's invasion of Ukraine on Feb. 24 sparked sweeping sanctions that ripped the country out of the global financial fabric and sent its economy reeling.
A month on, Russia's currency has lost a large part of its value and its bonds and stocks have been ejected from indexes. Its people are experiencing economic pain that is likely to last for years to come.
Below are five charts showing how the past month has changed Russia's economy and its global standing:
In 2020, Russia was the world's 11th-largest economy, according to the World Bank. But by the end of this year, it may rank no higher than No. 15, based on the end-February rouble exchange rate, according to Jim O'Neill, the former Goldman Sachs economist who coined the BRIC acronym to describe the four big emerging economies Brazil, Russia, India and China.
Recession looks inevitable. Economists polled by the central bank predicted an 8% contraction this year and for inflation to reach 20%.
Forecasts from economists outside Russia are even gloomier. The Institute of International Finance predicts a 15% contraction in 2022, followed by a 3% contraction in 2023.
"Altogether, our projections mean that current developments are set to wipe out the economic gains of roughly fifteen years," the IIF said in a note.
Some of the accounts used fake profile pictures, raising researchers’ suspicions. Others racked up thousands of retweets on their pro-Putin posts, despite having few followers and low engagement on the rest of their tweets.
Although the activity suggested the accounts may be inauthentic, there was no hard evidence that they were part of a coordinated influence campaign aimed at shifting sentiment about the war in India. A Twitter spokeswoman said the company was still investigating.
The challenge of identifying influence campaigns is further complicated by the split of public opinion in India. While some people have vehemently opposed the war, others have vocally backed Russia and held marches to show support.
“Russia and India have longstanding and deep security and economic relations,” said Graham Brookie, director of the Atlantic Council’s digital forensic research lab. “If you’re Russia and you’re facing increased global scrutiny, increased global closure, you look to countries like India to at least abstain from as many efforts to isolate Russia as humanly possible.”
While India and Russia have long had close ties, researchers say there are signs that social media posts parroting Kremlin talking points may not be legitimate.
In the days after Russia’s invasion of Ukraine, thousands of Twitter accounts shared messages of support for Vladimir V. Putin, the Russian president.
They tried to deflect criticism of the war by comparing it to conflicts instigated by Western countries. Their commentary — along with tweets from other users who condemned it — made the hashtag #IStandWithPutin trend on Twitter in several regions around the world.
While some of the accounts said they were based in Nigeria and South Africa, the majority of those with a declared location on Twitter claimed to be from India and targeted their messages to other Indian users, researchers said.
The prevalence of accounts claiming to be from Indian users indicates that India’s social media landscape has become an important destination in the effort to influence public opinion of the war in Ukraine. Users who said they were from India made up nearly 11 percent of the hashtag trend in the two weeks after the invasion. Just 0.3 percent were from Russia and 1.6 percent from the United States during that time.
The death of an Indian student in the fighting in Ukraine this month brought into focus India’s challenge of evacuating nearly 20,000 of its citizens who were in the country when Russia’s invasion began. Hundreds of Indian students remained stuck amid heavy shelling at the time. India’s prime minister, Narendra Modi, who has avoided condemning Russia, appealed to Mr. Putin and his Ukrainian counterpart, President Volodymyr Zelensky, for help.
Russia’s local embassy used Twitter to instruct Indian media outlets to not use the word “war” but to instead refer to it as a “special military operation,” as media outlets in Russia have been forced by law to do. Some Indian Twitter users responded by mocking the embassy, while others chastised local media outlets as inept and needing instruction from Russia.
Pro-Russian sentiment has taken hold in right-wing circles in the United States, misinformation that has spread within Russia claims Ukrainians have staged bombings or bombed their own neighborhoods, and myths about Ukrainian fortitude have gone viral across social media platforms. But in India and other countries where social media users joined the hashtag, pro-Russian narratives have focused on ethnonationalism and Western hypocrisy over the war, themes that have resonated with social media users.
By VIR SANGHVI
Even while the war in Ukraine rages, however, we should be asking ourselves deeper questions. A few days ago, at the ABP Ideas of India Summit in Mumbai, I interviewed Fareed Zakaria. Fareed’s view was that over the last decade or so, India has become so inward-looking and obsessed with its own issues and divisions that it has not spent enough time thinking about its place in the world, going forward.
While we have been obsessed with headscarves and caste arithmetic, the world has rearranged itself. No matter what happens in Ukraine, Russia will come out of the war damaged. If it makes peace, then some of the sanctions imposed on it by the West may be moderated but it seems unlikely that Putin’s Russia will become a full-fledged member of the global economy for a long time.
In that case, it will have no choice but to move into the Chinese sphere of influence. One scenario sees Russia as a classic vassal state of the Chinese, supplying energy and raw materials to feed the Chinese military machine and its industrial complex. Pakistan and China are longstanding allies, so we will probably see the emergence of a Russia-China-Pakistan alliance.
India will then have two choices. Either we agree to accept China’s suzerainty over the East. Or we look for other options.
Should we choose the second path (and I imagine we will have to), then there really is nowhere to go but the West. At present, the West understands how India is constrained by its dependence on Russian weaponry. But in the long run, it will expect a greater measure of alignment. Is that something we have considered? Or are we too blinded by the rhetoric about anti-Hindu America and hypocritical Washington?
Sooner, rather than later, we will have to rescue reality from the rhetoric.
Unless the U.S. and its allies mobilize to save it, the second great age of globalization is coming to a catastrophic close.
The supply of basic commodities, from wheat to nickel to titanium to oil, has been disrupted. The West is doing everything it can to “cancel” Russia from the global economic system — sanctioning oligarchs, expelling Russian banks from the global financial plumbing, and preventing Russia’s central bank from accessing its reserves. There’s talk of throwing Russia out of the World Trade Organization.
Even when they haven’t been forced to do so by law, Western companies are boycotting Russia and closing down their Russian operations. Russian consumers can no longer use Visa, MasterCard and American Express. The McDonald’s in Pushkin Square is closed — along with 850 other branches. Photos have appeared on social media of Russians standing in interminable queues for sugar and other basic foods or else fighting over remaining scraps, just as they did in the Soviet days. For its part, the Kremlin has hit back by blocking access to Facebook and threatening to imprison or fine anyone suspected of spreading “fake” news, thereby essentially closing down Western news organizations inside the country.
We Didn’t Mean It
The Western policymakers meeting this week will say they have no intention of closing down the global order. All this economic savagery is to punish Putin’s aggression precisely in order to restore the rules-based system that he is bent on destroying — and with it, the free flow of commerce and finance. In an ideal world, Putin would be toppled — the victim of his own delusions and paranoia — and the Russian people would sweep away the kleptocracy in the Kremlin.
In this optimistic scenario, Putin’s humiliation would do more than bring Russia back to its senses. It would bring the West back as well. The U.S. would abandon its Trumpian isolationism while Europe would start taking its own defense seriously. The culture warriors on both sides of the Atlantic would simmer down, and the woke and unwoke alike would celebrate their collective belief in freedom and democracy. McDonald’s would be open again in Pushkin Square — and Keynes’s various serpents would slither out of the garden.
There’s a chance this could happen. Putin wouldn’t be the first czar to fall because of a misjudged and mishandled war. Many of Russia’s most powerful people are seeing their mansions, yachts and private planes confiscated, all for an invasion they weren’t consulted about. Younger Russians, particularly in the big cities, are more liberal than their parents. Russian shoppers don’t want to return to the Soviet era.
Meanwhile in the West, Ukraine has already prompted a great rethink. As German Chancellor Olaf Scholz has proclaimed, we are at a Zeitenwende — a turning point. Under his leadership, pacifist Germany has already proposed a defense budget that’s larger than Russia’s. Meanwhile, Ukrainian immigrants are being welcomed by nations that only a few months ago were shunning foreigners, and, after a decade of slumber in Brussels, the momentum for integration is increasing.
But this turning point can still lead in several directions. The chances of a regime change in the Kremlin remain slim, given Putin’s popularity and terror machine. Western Europe has heard pious words about integration and immigration before. And look at the West’s leaders! Joe Biden hardly conveys an image of world-changing dynamism; after his initial heroics, Olaf Scholz greeted Volodymyr Zelenskiy’s speech to the German parliament with pudding-like inertia; Emmanuel Macron is bent on winning an election while trying to look like Zelenskiy, in hoodie and stubble; while Boris Johnson has dared to compare the Ukrainian resistance to Brexit.
The Central Government on Thursday more than doubled the price of domestically produced natural gas for the six months beginning tomorrow (1 April), reflecting a surge in global prices.
The Petroleum Planning and Analysis Cell of the federal oil ministry announced the new prices today.
This will raise the prices of gas sold to households, the power sector, industries and fertiliser firms, adding to overall inflation.
As per a notification issued by the oil ministry's PPAC, the price of gas from regulated fields of state-owned Oil and Natural Gas Corp Ltd and Oil India Ltd will rise to a record $6.10 per million British thermal unit from the current $2.90.
The rate paid for difficult fields like deepwater will rise to $9.92 for April-September from $6.13 per mmBtu, the notification stated.
India links prices of locally produced gas from old fields to a formula tied to global benchmarks, including Henry Hub, Alberta gas, NBP and Russian gas.
High natural gas prices will boost earnings of producer ONGC, Oil India Ltd and Reliance Industries.
India's annual retail inflation exceeded 6% for the second consecutive month in February.
The chairman of an Indian think tank affiliated with the RSS — the parent group of India’s ruling BJP — floats the possibility of an India-Russia-China axis:
Ukraine crisis: The war that is changing relations, rules
S Gurumurthy, Chairman, VIF
The Ukraine war seems to have dented the US global leadership in more than one sense. First, it has delivered the most telling message that the US can’t protect its own protégé. Next, that it had to solicit a virtual meeting between Biden and Xi Jinping (XJP) to get China to the US side or to end the war itself, exposed its weakness. Donald Trump would perhaps have handled Russia and Ukraine differently, not allowed China to be the proverbial monkey between two tigers, the US and Russia.
Anyway the two-hour talk Biden had with XJP did not go well for him. XJP reportedly snubbed Biden saying “those who tied the bell to the tiger must untie it,” clearly blaming NATO for the war. XJP used the talk to advance China’s claim to be equal to the US, saying they should jointly shoulder “international responsibilities” for world peace and tranquility. According to a Chinese report, XJP seems to have said that one hand cannot clap, suggesting that NATO should have a dialogue with Putin and address his security concerns, implying NATO expansion as the issue. XJP, of course, has also spoken in support of the principles of sovereignty and territorial integrity of all states. He seems to have insisted on bringing the China-US ties under turmoil over a host of issues, including Taiwan, Hong Kong, Xinjiang and Tibet, on “right track” — something completely beyond the agenda of Biden on that day.
The US media had reported that Biden threatened XJP. On the contrary, he seems to have got snubbed. Biden’s effort to wean China away from Russia has failed at the minimum. If this is what the US got from China, The Wall Street Journal reported that Saudi Arabia and the UAE declined calls from Biden to ease oil prices unless the US supported them in Yemen and elsewhere. Arab allies of the US have refused to toe its line. Israel did criticise the Russian attack but its stand was so nuanced as not to take the side of the West. Turkey’s position is identical to Israel’s.
Al-Jazeera even sees a strong alliance between Russia and UAE. Another collateral setback to the US is Syrian president Assad’s visit (after 11 years) to UAE about which the US could only lament that it was “disappointed and troubled”. Syria and Russia are close. On top of it all, Saudi Arabia, whose oil has been priced in US dollars for five decades, is considering pricing it in Yuan for sales to China. One more important development. The Chinese foreign minister was invited for the first time to the meeting of the Organisation of Islamic Cooperation. These are not ordinary developments. The Ukraine war has undoubtedly eroded US influence over even its allies.
China and India have had border clashes for the last two years. Surprisingly, its foreign minister Wang Yi is visiting Delhi on March 25 — a significant development. India’s independent position on Ukraine is itself a message to China that India would withstand US pressure. If it can lead to some trust and understanding between China and India on the borders, that can pave the way for an informal Russia-China-India axis for future. Naftali Bennett, the Prime Minister of Israel, a US ally, is making a four-day long visit to India in April first week at the invitation of “his friend” Indian Prime Minister Modi. India is boldly going ahead with the purchase of Russian oil amid US sanctions on Russia.
Image without a caption
By Fareed Zakaria
...the unprecedented nature of these measures (US sanctions against Russia) is producing concerns around the world that the United States has “weaponized” its financial power and could lead, over time, to the decline of the dollar’s dominance, which is what gives America its financial superpowers in the first place.
I’ve been hearing about this firsthand from three sources I trust. The first, in New Delhi, recently told me about a conversation that took place at the highest levels of India’s government. The topic: how to make sure that the United States could never do to India what it has just done to Russia. The second, from Brussels, where staff at the European Commission has been tasked — even while working with Washington on the sanctions — with finding ways to reduce the role of the dollar in its energy imports. The third, an Asian observer of China, speculated that the overly severe lockdowns in Shanghai — which involved the rationing of food and basic supplies — might be part of an effort by Beijing to experiment with a scenario in which it faced economic sanctions from Washington (perhaps after an invasion of Taiwan).
A debate is raging around the world about whether the dollar’s total dominance of the international financial system is waning. Even Goldman Sachs and the IMF have warned that that might well happen. I tend toward the opposite view: Namely, that you can only beat the dollar if you have an effective alternative, which so far does not exist.
But it’s clear that many countries — from hostile powers such as China and Russia to friendly nations such as India and Brazil — are working hard on ways to reduce their vulnerability to Washington’s whims. None of these efforts has so far gained much traction, though it is worth noting that the share of global foreign exchange reserves held in dollars has declined from 72 percent to 59 percent over the past two decades.
Partly this is because the United States appears less stable and predictable in the use of its extraordinary privilege. In the two decades preceding Russia’s invasion, Washington massively ramped up sanctions for all kinds of reasons — by more than 900 percent. Many of these measures were overreactions and should be rolled back. After 9/11, Washington put in place highly intrusive measures aimed at tracking money going to terrorists. It has inflicted harsh punishments on banks that did not adhere to all U.S. sanctions. It has imposed sanctions on Iran, Venezuela, North Korea, Cuba and other countries often simply to satisfy domestic critics who wanted to “do something” without paying much of a price. This type of economic warfare has failed to change the regimes in these countries but has caused widespread misery for ordinary people in them. Sanctions against Russia are aimed at policy change, not regime change, and therefore could be more effective.
The dollar maintains its crucial role in the international system because the United States has the world’s largest economy. It also has the most liquid debt markets, its currency floats freely, and, crucially, it is regarded as a country based on the rule of law and not one prone to arbitrary and unilateral actions. That last criterion is not one that Washington has lived up to in recent years. Biden should make sure that, in fighting this battle against Russia, he does not erode America’s unique financial superpower.
‘We have a growing suspicion that India is becoming the de facto refining hub for Europe’: RBC’s Tran
In an unexpected twist, the European Union’s plan to ban imports of Russian crude in response to Moscow’s invasion of Ukraine appears to be transforming India’s role in the global oil trade.
“As the EU weans from Russian refined product, we have a growing suspicion that India is becoming the de facto refining hub for Europe,” said Michael Tran, global energy strategist at RBC Capital Markets, in a Tuesday note.
It’s all part of the seismic displacements taking place across the physical market for crude and products in the aftermath of Russia’s late-February invasion and the resulting rounds of sanctions placed on Moscow.
EU leaders agreed Monday to embargo most Russian oil imports into the bloc by year-end as part of new sanctions agreed at a summit. While the agreement marks a hard-fought policy victory for the West, the reshuffling of global trade flows are set to prove economically inflationary for all nations involved as long as the war drags on, Tran said.
That will make sourcing barrels more expensive and keep upward pressure on oil pricing, the analyst said. The U.S. oil benchmark CL.1, 0.44% CLN22, 0.44% ended the day lower on Tuesday after earlier trading near a three-month high just shy of $120, but ended may with a strong gain. Brent crude BRN00, +0.58%, the global benchmark, ended higher and was also up for the month.
Meanwhile, India’s new role comes as it loads up on discounted Russian crude, which it has been refining at a torrid pace and then exporting refined products (see chart below).
Here’s how the puzzle pieces fit together, according to Tran:
India is buying record amounts of severely discounted Russian crude, running its refiners above nameplate capacity, and capturing the economic rent of sky-high crack spreads and exporting gasoline and diesel to Europe. In short, the EU policy of tightening the screws on Russia is a policy win, but the unintended consequence is that Europe is effectively importing inflation to its own citizens. This is not only an economic boon for India, but it also serves as an accelerator for India’s place in the new geopolitically rewritten oil trade map. What we mean is that the EU policy effectively makes India an increasingly vital energy source for Europe. This was historically never the case, and it is why Indian product exports have been clocking in at all-time-high levels over recent months.
So does India’s example mean that Russian crude no longer bound for Europe will just end up elsewhere? That’s unlikely, according to Tran.
He expects the EU ban to back out around 1.2 million to 1.5 million barrels a day (mbd) of Russian exports. They will have to find a home elsewhere, particularly Asia.
So far, China has yet to increase imports, let alone Russian barrels, but scope for India, which has “already been backing up the truck and buying discounted Russian barrels in size,” to further boost purchases appears limited. Over time, Russian storage will fill and production will begin to falter, Tran said.
He noted that Russian floating crude storage now stand near 2 million barrels, down from 3.5 million a month ago, while refined products remain unchanged near 4 million barrels.
“This implies that barrels have continued to move in a relatively fluid state and storage levels have yet to be stressed, for now, but given the ban, the directional arrows of process would suggest that the wheels are in motion,” he said.
Bangladesh says it seeks to learn from India how it’s managed to import discounted Russia oil without being penalized by the US.
Smaller developing countries envy the exception given to India by the US. They see India as having its cake & eating it too.
Momen seeks advice from New Delhi on purchase of Russian oil
India’s oil purchases from Russia have more than doubled from last year, reports BBC
Foreign Minister AK Abdul Momen on Monday said he sought suggestions from India on how they are managing their oil purchases from Russia, noting that the energy issue has become a real problem for Bangladesh too.
“We are dependent on energy (import). Russia offered us energy and wheat. It has become a real problem. We are afraid of the energy crisis. We sought India’s suggestions on how they are doing it. This is more of a friendly discussion,” he told reporters, apparently keeping the fear of sanctions in mind.
Momen attended the two-day NADI Conclave in Guwahati on May 28-29, together with his Indian counterpart S Jaishankar.
According to BBC, the Indian government has defended the move to buy Russian oil, saying what it buys from Russia in a month is less than what Europe buys from Russia in an afternoon.
As calls continue for India to keep its distance from Moscow over the Ukraine issue, its oil purchases from Russia have more than doubled from last year.
India has taken advantage of discounted prices to ramp up oil imports from Russia at a time when global energy prices have been rising.
Without naming any country, Momen said: “You are seeing that they keep bossing us and you (journalists) also encourage them. Every day, they come up with new issues. We used to call them development partners. They do not pay for the development but keep giving advice.”
Momen also claimed that to impede the development, they put forward many things and added various conditions to create instability.
“These are not acceptable,” he added.
Responding to a question, the foreign minister said Bangladesh, being a peace-loving country, always welcomes stability in the world.
“We are very inter-dependent,” he said, adding that Bangladesh will get affected if there is instability in the USA and Europe – two big markets for Bangladesh’s export.
At the same time, if there is instability in the Middle East, Bangladesh’s remittance earnings will get hurt, he said.
“We do not want to get into any problem. We want peace in the world,” Momen said, adding that the rich countries will also be affected and it is good for all to end the war as soon as possible.
India's Russian coal buying May 27-June 15 up 6-fold-govt data
India's Russian oil buying May 27-June 15 up 31-fold-govt data
June Russia coal imports seen at multi-year high - Refinitiv
Bulk shipments of Russian thermal coal began third week of May
India's purchases of Russian coal have spiked in recent weeks despite global sanctions on Moscow, as traders offer discounts of up to 30%, according to two trade sources and data reviewed by Reuters.
Russia, facing severe Western sanctions over its invasion of Ukraine, warned the European Union in April against sweeping sanctions on coal, saying they would backfire as the fuel would be redirected to other markets.
India has refrained from condemning Russia, with which it has longstanding political and security ties, while calling for an end to violence in Ukraine. New Delhi defends its purchases of Russian goods as part of an effort to diversify supplies and argues a sudden halt would jack up world prices and hurt its consumers.
U.S. officials have told India there is no ban on energy imports from Russia but they do not want to see a "rapid acceleration".
Yet as European importers shun trade with Moscow, Indian buyers are lapping up huge quantities of Russian coal despite high freight costs.
Its purchases of coal and related products jumped more than six-fold in the 20 days through Wednesday from the same period a year earlier to $331.17 million, according to unpublished Indian government data reviewed by Reuters.
Indian refiners similarly have snapped up cheap Russian oil shunned by Western countries. The value of India's oil trade with Russia in the 20 days through Wednesday jumped more than 31-fold to $2.22 billion, the data showed.
India's trade ministry did not immediately respond to a request for comment on Saturday.
"The Russian traders have been liberal with payment routes and are accepting payments in Indian rupee and United Arab Emirates dirham," one source said. "The discounts are attractive, and this trend of higher Russian coal purchases will continue."
COAL BUYING TO CONTINUE
Offshore units of such Russian coal traders as Suek AG, KTK and Cyprus-based Carbo One in places including Dubai and Singapore offered discounts of 25% to 30%, triggering bulk purchases of Russian thermal coal by traders supplying to utilities and cement makers, the sources said.
The second source said the Singapore-based unit of Suek was also accepting payments in dollars.
Suek and KTK did not immediately respond to requests for comment. Reuters could not immediately reach Carbo One.
The EU ban has barred new coal contracts and by mid-August will force members nations to terminate existing ones.
India bought an average $16.55 million of Russian coal a day in the three weeks through Wednesday, more than double the $7.71 million it bought in the three months after Russia's Feb. 24 invasion, according to Reuters calculations.
Oil purchases averaged $110.86 million a day in the 20-day period, more than triple the $31.16 million it spent in the three months ended May 26.
Indian bulk buying of Russian coal is set to continue, with June imports expected to be the most in at least seven and a half years, Refinitiv Eikon ship tracking data showed.
Bulk shipments of Russian thermal coal started reaching India in the third week of May, with orders mainly from cement and steel firms and traders, according to shipping data compiled by an Indian coal trader.
India's biggest cement producer, UltraTech Cement, is importing a cargo of Russian coal and paying using Chinese yuan, according to an Indian customs document reviewed by Reuters, a rare payment method that traders say could become more common.
UltraTech is bringing in 157,000 tonnes of coal from Russian producer SUEK that loaded on the bulk carrier MV Mangas from the Russian Far East port of Vanino, the document showed. It cites an invoice dated June 5 that values the cargo at 172,652,900 yuan ($25.81 million).
Two trade sources familiar with the matter said the cargo's sale was arranged by SUEK's Dubai-based unit, adding that other companies have also placed orders for Russian coal using yuan payments.
The increasing use of the yuan to settle payments could help insulate Moscow from the effects of western sanctions imposed on Russia over its invasion of Ukraine and bolster Beijing's push to further internationalise the currency and chip away at the dominance of the U.S. dollar in global trade.
The sources declined to be identified as they are not authorized to speak to the media. UltraTech and SUEK did not respond to a request seeking comment.
"This move is significant. I have never heard any Indian entity paying in yuan for international trade in the last 25 years of my career. This is basically circumventing the USD (U.S. dollar)," a Singapore-based currency trader said.
The sale highlights how India has maintained trade ties with Russia for commodities such as oil and coal despite the western sanctions. India has longstanding political and security ties with Russia and has refrained from condemning the attack in Ukraine, which Russia says is a "special military operation".
It was not immediately clear which bank opened a letter of credit for UltraTech and how the transaction with SUEK was executed. SUEK did not respond to a request seeking comment.
India has explored setting up a rupee payment mechanism for trade with Russia, but that has not materialized. Chinese businesses have used the yuan in trade settlements with Russia for years.
For Indian trade settlements using the yuan, lenders would potentially have to send dollars to branches in China or Hong Kong, or Chinese banks they have tie-ups with, in exchange for yuan to settle the trade, two senior Indian bankers said.
"If the rupee-yuan-rouble route turns out to be favourable, the businesses have every reason and incentive to switch over. This is likely to happen more," said Subash Chandra Garg, a former economic affairs secretary at India's finance ministry.
India's bilateral trade with China, for which companies largely pay in dollars, has flourished even after a deadly military clash between the two in 2020, though New Delhi has increased scrutiny on Chinese investments and imports, and banned some mobile apps over security concerns.
An Indian government official familiar with the matter said the government was aware of payments in yuan.
"The use of the yuan to settle payments for imports from countries other than China was rare until now, and could increase due to sanctions on Russia," the official said.
Business units of Russian coal traders in Dubai have become active hubs for facilitating deals with India in the recent weeks, as Singapore has grown wary of provoking western nations that invoked sanctions against Russia, said multiple coal traders based in Russia, Singapore, India and Dubai.
U.S. consumer inflation rose to a new four-decade high at an annual rate of 9.1% in June, extending a year and a half stretch of persistently higher prices.
The consumer-price index’s rate of increase last month was the highest since December 1981, the Labor Department said Wednesday. It also eclipsed May’s annual rate of 8.6% that led Federal Reserve officials to shift to a faster pace of benchmark interest-rate increases in its campaign to bring down inflation.
The report likely keeps the Fed on track to raise its benchmark interest rate by 0.75 percentage point at its meeting later this month. Stocks dropped and bond yields jumped following the inflation report.
Core prices, which exclude volatile food and energy components, increased by 5.9% in June from a year earlier, slightly less than May’s 6.0% gain, the Labor Department said.
On a month-to-month basis, core prices rose 0.7% in June, a bit more than their 0.6% increase in May—a sign of inflationary pressures throughout the economy.
The report showed few signs of relief from higher prices. Costs were up broadly across the economy, with gasoline far outpacing other categories with an 11.2% gain over the prior month. Gasoline prices have been on a downward path in recent weeks. Shelter and food price increases were also major contributors to inflation, the Labor Department said.
“This report will make for very uncomfortable reading at the Fed,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Despite June’s inflation reading, economists point to recent developments that could subdue price pressures in the coming months.
Investor expectations of slowing economic growth world-wide have led to a decline in commodity prices in recent weeks, including for oil, copper, wheat and corn, after those prices rose sharply following the Russian invasion of Ukraine. Retailers have warned of the need to discount goods, especially apparel and home goods, that are out of sync with customer preferences as spending shifts to services and away from goods, and consumers spend down elevated savings.
The world, Blair said, was at a turning point in history comparable with the end of World War Two or the collapse of the Soviet Union: but this time the West is clearly not in the ascendant.
"We are coming to the end of Western political and economic dominance," Blair said in a lecture entitled "After Ukraine, What Lessons Now for Western Leadership?" according to a text of the speech to a forum supporting the alliance between the United States and Europe at Ditchley Park west of London.
"The world is going to be at least bi-polar and possibly multi-polar," Blair said. "The biggest geo-political change of this century will come from China not Russia."
Russia's invasion of Ukraine has killed thousands and triggered the most serious crisis in relations between Russia and the West since the 1962 Cuban Missile Crisis, when many people feared the world was on the brink of nuclear war.
President Vladimir Putin says the West has declared economic war by trying to isolate Russia's economy with sanctions and the Kremlin says Russia will turn to powers such as China and India.
The war in Ukraine, Blair said, had clarified that the West could not rely on China "to behave in the way we would consider rational".
Chinese President Xi Jinping has continued supporting Putin and criticised sanctions "abuse" by the West. Putin has forged what he calls a "strategic partnership" with China.
China in 1979 had an economy that was smaller than Italy’s, but after opening to foreign investment and introducing market reforms it has become the world’s second-largest economy.
Its economy is forecast to overtake the United States within a decade and it leads in some 21st century technologies such as artificial intelligence, regenerative medicine and conductive polymers.
"China’s place as a superpower is natural and justified. It is not the Soviet Union," said Blair, who was prime minister from 1997 to 2007. Its allies are likely to be Russia and Iran.
The West should not let China overtake militarily, he said.
"We should increase defence spending and maintain military superiority," Blair said. The United States and its allies "should be superior enough to cater for any eventuality or type of conflict and in all areas."
Russia is seeking payment in United Arab Emirates dirhams for oil exports to some Indian customers, three sources said and a document showed, as Moscow moves away from the U.S. dollar to insulate itself from the effects of Western sanctions.
Russia has been hit by a slew of sanctions from the United States and its allies over its invasion of Ukraine in late February, which it terms a "special military operation".
An invoice seen by Reuters shows the bill for supplying oil to one refiner is calculated in dollars while payment is requested in dirhams.
Russian oil major Rosneft is pushing crude through trading firms including Everest Energy and Coral Energy into India, now its second biggest oil buyer after China.
Western sanctions have prompted many oil importers to shun Moscow, pushing spot prices for Russian crude to record discounts against other grades.
That provided Indian refiners, which rarely bought Russian oil due to high freight costs, an opportunity to snap up exports at hefty discounts to Brent and Middle East staples.
Moscow replaced Saudi Arabia as the second biggest oil supplier to India after Iraq for the second month in a row in June.
At least two Indian refiners have already settled some payments in dirhams, the sources said, adding more would make such payments in coming days.
The invoice showed payments to be made to Gazprombank via Mashreq Bank, its correspondent bank in Dubai.
The United Arab Emirates, seeking to maintain what it says is a neutral position, has not imposed sanctions on Moscow, and the payments could add to the frustration of some in the West, who privately say the UAE's position is untenable and siding with Russia..
The trading firms used by Rosneft have started asking for the dollar equivalent payment in dirhams from this month, the sources said.
Rosneft, Coral Energy and Everest Energy did not respond to Reuters emails seeking comment.
Russia wants to increase its use of non-Western currencies for trade with countries such as India, its foreign minister Sergi Lavrov said in April.
The country's finance minister last month also said Moscow may start buying currencies of "friendly" countries, using such holdings to influence the exchange rate of the dollar and euro as a means of countering sharp gains in the rouble.
The Moscow currency exchange is preparing to launch trading in the Uzbek sum and the dirham.
Dubai, the Gulf's financial and business centre, has emerged as a refuge for Russian wealth.
India, also maintaining a neutral position, recongnises insurance cover by Russian companies and has offered classification to ships managed by a Dubai-based subsidiary of Moscow's top shipping group to enable trade.
India's central bank last week introduced a new mechanism for international trade settlements in rupees, which many experts see as a way to promote trade with countries that are under Western sanctions, such as Russia and Iran.
Countries tend to hold certain currencies as reserve assets mostly for economic, not geopolitical, reasons
ISABELLE MATEOS Y LAGO
"But ultimately, international reserves are held for specific economic reasons, not geopolitical ones: pegging or managing the exchange rate to another currency; paying for imports and international debt service; providing foreign exchange liquidity of last resort to domestic banks. So what will determine the extent of any shift in global reserve allocations is not the portfolio preferences of central bankers or the intrinsic properties of US dollar alternatives. It is whether new currencies come to play an important role in international trade and financial relations. The recent news of China negotiating with Saudi Arabia to pay for oil in renminbi is not, in itself, game-changing. If it finally happens and more of China’s inbound and outbound trade partners follow, it might well be"
Days after Russian troops invaded Ukraine, the G7 and a host of allies in Europe and Asia declared a freeze on the assets of the Central Bank of Russia. The move, unprecedented in its swiftness and scale, instantly incapacitated roughly half of its $630bn in international reserves. Up to this point, central bank reserves had only been frozen multilaterally after abrupt regime change — think of the Bolshevik and Chinese revolutions, or more recently Hugo Chávez’s Venezuela.
Immediately, warnings were uttered about unintended consequences, in particular the stability of the US dollar in the international monetary system. As many have convincingly argued, the Russian reserves freeze alone is unlikely to end the dominant role of the US dollar. But it might, over time, induce major shifts in global monetary relations alongside a broader rewiring of globalisation, making the last 30 years look like a lost golden age.
Prudence and deliberation are in central banks’ DNA. They do not make rash decisions. So while many central bankers privately felt shock or dismay at the reserves freeze, they do not appear to have significantly reallocated assets away from the dollar or euro.
Yet there is consensus among central bank reserve managers that something fundamental has changed: geopolitical considerations now need to be taken into account when assessing the safety and liquidity of a reserve asset. For most, this is an argument in favour of currency diversification, a trend under way already over the past 20 years at the expense of the US dollar and to the benefit of smaller advanced economy currencies such as the Canadian dollar or the Korean won. This might now accelerate, and possibly extend to additional currencies.
Might the renminbi be one of the beneficiaries, as suggested by a recent survey? In fact, when it comes to the attractiveness of Chinese bonds in reserve portfolios after the sanctions on Russia, geopolitics is a clear dividing line. By and large, central bankers I talk to in countries in or close to the sanctioning coalition are reviewing — but not yet retreating from — whatever exposure or planned exposure they had to the renminbi. Others seem more inclined to stick to their holdings and plans to ramp them up further over time.
In the near term there is little practical scope to overhaul trade and financing patterns, even if some countries want to. But other forms of rewiring may develop. Countries that see themselves as politically aligned may try to create a mutual aid system, separate from the sanctioning coalition. China’s recent creation of a renminbi liquidity facility at the Bank for International Settlements can be seen in this light. Discussions could also resurface between large reserve holders from the global south about swap arrangements, like those between the Fed, European Central Bank, Bank of England and a few others in the 2008 financial crisis. Cross-border payment systems to rival Swift will probably continue to grow.
In June, Indian buyers paid for at least 742,000 tonnes of Russian coal using currencies other than the US dollar, according to a summary of deals compiled by a trade source based in India using customs documents and shared with Reuters, equal to 44% of the 1.7 million of tonnes of Russian imports that month.
Indian companies are using Asian currencies more often to pay for Russian coal imports, according to customs documents and industry sources, avoiding the US dollar and cutting the risk of breaching Western sanctions against Moscow.
Reuters previously reported on a large Indian coal deal involving the Chinese yuan, but the customs data underline how non-dollar settlements are becoming commonplace.
India has aggressively stepped up purchases of Russian oil and coal since the war in Ukraine began, helping to cushion Moscow from the effects of sanctions and allowing New Delhi to secure raw materials at discounts compared to supplies from other countries.
Russia became India’s third-largest coal supplier in July, with imports rising by over a fifth compared with June to a record 2.06 million tonnes.
In June, Indian buyers paid for at least 742,000 tonnes of Russian coal using currencies other than the US dollar, according to a summary of deals compiled by a trade source based in India using customs documents and shared with Reuters, equal to 44% of the 1.7 million of tonnes of Russian imports that month.
Indian steelmakers and cement manufacturers have bought Russian coal using the United Arab Emirates dirham, Hong Kong dollar, yuan and euro in recent weeks, according to customs documents separately reviewed by Reuters.
The yuan accounted for 31% of the non-US dollar payments for Russian coal in June and the Hong Kong dollar for 28%. The euro made up under a quarter and the Emirati dirham around one-sixth, the data from the trade source showed.
The Ministry of Finance, which administers the customs board, did not respond to emails seeking comment confirming the documents. The Ministry of Commerce and Industry declined to comment.
The Reserve Bank of India also did not respond to requests for comment.
The RBI has approved payments for commodities in the Indian rupee, a move it expects to boost bilateral trade with Russia in its own currency.
Force 1: Globalization. Increased flows of trade, money, people and ideas flourished with the Cold War’s end and China’s entry into the international trading system in the 1990s. Multinational companies using new technologies constructed global supply chains focused on driving down costs by finding the cheapest place and workers to produce products. Worldwide competition drove prices lower for many goods.
This helped keep U.S. inflation stable. Over the 20 years that ended in 2019, U.S. goods prices rose an average of 0.4% a year, while services prices grew 2.6% annually, leaving “core inflation”—which excludes volatile food and energy prices—around 1.7%.
After the pandemic and the Ukraine war disrupted supply chains, many business leaders adopted new processes to increase reliability even if they cost more, such as by moving production closer to home or buying from multiple suppliers. And tensions between Western democracies and Russia and China raise concerns about a possible further retreat from globalization and rise of protectionism, which would raise production costs.
“If you had all of your supply chain in just one country, you have to question why take that risk in a world where pandemics could hit or country relations could deteriorate or wars could happen between countries,” said Richmond Fed President Tom Barkin, a former McKinsey & Co. executive. It is difficult to predict just how durable such changes will be, he added.
Force 2: Labor markets. In an August 2020 book, “The Great Demographic Reversal,” former British central banker Charles Goodhart and economist Manoj Pradhan argued that the low inflation since the 1990s had less to do with central-bank policies and more with the addition of hundreds of millions of low-wage Asian and Eastern European workers, which held down labor costs and prices of manufactured goods exported to richer countries.
Mr. Goodhart wrote that global labor glut was giving way to an era of worker shortages, and hence higher inflation.
Meanwhile, the U.S. labor force has roughly 2.5 million fewer workers since the pandemic began, compared with what it would have if the prepandemic trend in workforce participation had continued and after accounting for the aging of the population, according to an analysis by Didem Tüzemen, an economist at the Kansas City Fed. Its growth had already slowed before Covid-19, reflecting an aging population, declining birthrates and less immigration. The slower growth rate of the U.S. workforce could force wages higher, feeding inflation.
Wages rose about 3% annually before the pandemic. Average hourly earnings grew 5.2% in the year ended in July.
By Abhishek G Bhaya
Bangladesh is moving to trade in local currencies with two of its largest trading partners – China and India – in a decision that could well prove to be a test case for the end of the U.S. dollar's dominance in global trade.
Last week, Bangladesh allowed its banks to maintain accounts in Chinese yuan for overseas transactions to reduce dependency on the U.S. dollar as the South Asian country grapples to contain its dwindling foreign reserves.
And according to media reports on Monday, India's top lender, State Bank of India, has asked exporters to trade with Bangladesh in rupee and taka warning against settling deals in the U.S. dollar to avoid exposure to Dhaka's falling reserves.
The developments come amid calls from the Shanghai Cooperation Organization (SCO) – which has both China and India as its members – for increasing the use of national currencies for trade among the member countries at its leadership summit in the Uzbek city of Samarkand last week. Bangladesh is not yet an SCO member but has applied for observer status in the Eurasian organization.
The South Asian country's $416-billion economy is facing severe stress due to rapidly increasing food and energy prices with the prolonged Russia-Ukraine conflict further widening its current account deficit. Bangladesh is facing a shortage of foreign currency due to higher import bills and a steep fall in the Bangladeshi taka's value against the U.S. dollar in recent months.
The country's foreign exchange reserves fell from $48 billion last year to $37 billion as of last Friday, which is sufficient for import cover for only five months, according to data from Bangladesh's central bank.
No wonder, Bangladesh wants to lower trade dependency on the U.S. dollar and it does not see a problem in dealing in local currencies, as the country's Commerce Minister Tipu Munshi asserted last week. Responding to a query at an event in Dhaka, Munshi said that Bangladesh's finance ministry is studying the issue and working on ways to implement local currency trade with its key trading partners.
Last week, the Bangladesh central bank allowed local banks to carry out overseas transactions in Chinese yuan. It is important to note that China-Bangladesh bilateral currency cooperation dates back to 2018 when Dhaka had authorized dealers to maintain a foreign currency clearing account with the central bank in the Chinese yuan.
The Bangladesh Bank's latest decision followed demands from major business chambers such as the Metropolitan Chamber of Commerce and Industries (MCCI) of introducing a second currency besides the U.S. dollar for international trading amid the surging taka-dollar exchange rate.
The MCCI proposed the Chinese yuan as Beijing happens to be Dhaka's largest trade partner and also the largest source of imports. The fact that China already has a Cross-Border Inter-Bank Payments System (CIPS) with the Chinese yuan as the trading currency was also a factor in Bangladesh's decision.
If Bangladesh creates a mechanism for bilateral trade in local currency with India – its second largest trade partner – as well, as recent reports indicate, it will go a long way in reducing the country's dependence on the U.S. dollar for international trade.
NAGOYA, Japan -- Toyota Motor said Friday it will exit from automobile production in Russia, citing difficulties supplying key materials and parts in the country amid the war in Ukraine.
The automaker suspended operations at its plant in St. Petersburg on March 4, after the Russian invasion began.
"After six months, we have not been able to resume normal activities and see no indication that we can restart in the future," Japan's top automaker said.
A protracted disruption would hurt Toyota's ability to support its employees, leaving it no choice but to end production in the country, it said. Mounting geopolitical risks in the region are believed to have contributed to the decision as well.
Toyota had continued to pay its factory workers after suspending production, reassigning them to maintenance and other tasks instead. Details regarding the termination process and treatment of employees at the St. Petersburg plant will be ironed out at a later time.
Toyota holds a larger market share in Russia than any other Japanese automaker. It produced 80,000 vehicles and sold 110,000 in the country in 2021.
It began locally producing vehicles in 2007 at St. Petersburg. The plant's lineup included the RAV4 sport utility vehicle and the Camry sedan in 2021.
Nissan Motor, another Japanese automaker, has extended its production freeze at its St. Petersburg plant to the end of December from the end of September.
Europe needs "immediate action" to avoid a natural gas shortage in 2023, says the
⚠️ Europe faces a 30bcm shortfall next summer in gas needed to fuel its economy AND sufficiently refill storage
🇷🇺 Next year's challenge: lower Russian supply, higher Chinese LNG demand
Russia’s international reserves increased by 0.6% (or $3.6bn) in one week, the central bank reported on August 11. The CBR stopped reporting the monthly reserves figures at the end of January when total GIR stood at $630.2bn. (chart)
"International reserves amounted to $574.8bn as of August 5, up by $3.6bn, or by 0.6%, in one week due to positive revaluation," the regulator said on its website.
Foreign exchange is pouring into the CBR coffers after the current account surplus of Russia's balance of payments hit a new all-time high of $166bn in the first seven months of this year – triple its level in the same period a year earlier that was already a record high. Sanctions intended to reduce Russia’s revenue from energy exports have backfired, and after they sent prices soaring the Kremlin is earning more money than ever. Ironically, the highly effective bans on exports of equipment and technology to Russia have worked against the leaky energy sanctions as they have dramatically reduced imports to Russia that have only bolstered the current account surplus further.
Some $300bn worth of gold and foreign currency CBR reserves were frozen shortly after the invasion of Ukraine in February, but the soaring revenues from oil exports will cover a large share of that money by the end of this year, say economists.
Russians buy record amounts of FX on MOEX
The crisis-scarred population have also been reacting to the sanctions on currency transactions by moving their cash savings out of the traditional dollars and euros into other currencies of the “friendly” countries.
Individual purchases of currency on MOE overtook transactions by bankers for the first time ever in the second half of July, the CBR said in its latest financial market risks review.
Net purchases of currency by individuals increased 1.3-fold from RUB176.1bn ($2.9bn) in June to RUB237.1bn ($3.9bn) in July – a new record, according to the CBR.
Individuals mainly bought foreign currency at banks that could then send the money to accounts overseas.
The outflow of currency has also been visible in the ruble-dollar exchange rate, as the ruble weakened and was trading at RUB60.6 at the time of writing, down from its recent high of almost RUB50 to the dollar. As imports recover, further growth of foreign currency demands can be expected for market players, the central bank said.
The “yuanisation” of the Russian economy continues as a result of the Western sanctions imposed on Russia. The yuan became the third most traded currency in terms of volume of foreign exchange trading on the Moscow Exchange in July and will soon take second place, The Bell reported on August 8, as companies and individuals rush to get out of the dollar and into non-sanctioned currencies.
Banks have been building up large amounts of dollars and euros they can’t spend due to sanctions and have been actively trying to swap them for other currencies.
The government has been doing the same thing, signing trade deals with its partners in local currency and using other non-traditional currencies for international trade. Russia oil exports to India are now being settled in Chinese yuan, Hong Kong dollars and UAE dinars, according to reports.
Ordinary Russians have been moving their savings out of dollars. Balances at retail bank accounts in foreign currency declined in July by $3bn, the CBR reports. Just before the war there was only one Russian bank that offered deposit accounts in yuan; now there are 20, according to The Bell.
After an avalanche of climate pledges last year, 2022 was when governments and corporations started to grapple with implementation
In 2021, governments and corporations got drunk on net zero hype. 2022 was the year when the hangover kicked in and they started to grapple with what their promises meant and whether they were actually prepared to follow through.
Cop26’s slogan of “coal, car, cash and trees” was replaced by Cop27’s sober “together for implementation”. Russia’s invasion of Ukraine sent fossil fuel prices soaring and governments scrambling to secure them in the short term while moving off them in the long term. Many pledges made in Glasgow slipped off the top of governments and CEO to-do lists.
But the changing climate kept making the case for action. With large parts of Pakistan underwater and its people living for months by the side of the road, the case for loss and damage finance for climate victims finally became impossible to ignore. Here’s our run-down of what defined 2022 in the climate world.
Russia’s invasion of Ukraine
On Thursday February 25, Russian troops advanced towards Ukraine’s capital Kyiv. The invasion had huge global implications, particularly for energy. But its immediate impacts were local and personal. The day after the advance on Kyiv began, Climate Home spoke to a climate campaigner stuck in a huge traffic jam as she fled the city, a climate scientist who had to debate the IPCC’s summary for policymakers under rocket fire and a green energy promoter who feared that investment in Ukraine would now disappear.
The war highlighted how dependence on fossil fuels makes you vulnerable. Europe had to scramble to replace Russian gas with renewables and non-Russian gas. The latter sent energy prices around the world soaring and damaged the continent’s credibility as a self-styled climate leader. For the rest of the year, Europe tried not to pull a muscle pursuing a dash for gas at the same time as a renewables marathon. European divisions on whether to back foreign gas were laid bare at the G7 in June.
In September, two pipelines carrying Russian gas exploded in suspicious circumstances. Experts said this highlighted the inherent vulnerability of an energy system which relies on moving large quantities of stuff across the world rather than relying on the sun and wind, which are harder to disrupt.
Fossil fuel crisis
The economic impact of the invasion of Ukraine spread far beyond Europe. Countries like Sri Lanka, which has neglected renewables and relies on imported fossil fuels, were particularly vulnerable to the spike in the oil and gas price.
About month after Russian troops marched towards Kyiv, protesters in Colombo advanced on the presidential palace of Gotobaya Rajapaksa. A few months later, on 9 July, he fled to Singapore, although his disciple Ranil Wickremesinghe remains in charge.
Analysts told Climate Home that reliance on fossil fuel imports had contributed to the crisis. But that neither the government nor ordinary citizens have the money to invest in renewables and fix the problem. So Sri Lankans face power cuts, tourists stay away and the country struggles even more for foreign currency.
Loss and damage breakthrough
This year saw huge advances on the issue of loss and damage, which is UN climatespeak for funding for victims of climate change. Developing countries have been pushing for a loss and damage fund for decades – to firm opposition from rich polluters.
The issue was not even on the agenda at Cop26 last year or at the annual Bonn interim climate talks in June. But the Egyptian presidency backed its inclusion at Cop27. It became the main issue for climate campaigners and the global press.
Pakistan's envoy to the United Nations has expressed the need to establish alternatives to the current U.S.-dominated global financial system as he handed over the chair of a massive bloc of developing nations to Cuba.
Speaking to a small group of journalists ahead of the Group of 77, or G77, handover ceremony on Thursday, Pakistani ambassador to the U.N. Munir Akram asserted that, "as far as global governance is concerned, the greatest structural issue is the control of the international financial system by the United States."
He said "many other countries, including its allies and friends, are not happy with that," though Washington's position reflected the reality that "the United States is the dominant financial power in the world, and this will not change in the near future."
"But efforts to democratize the international financial architecture will be made," Akram said. "They should be made."
Asked by Newsweek to expand on the direction of these initiatives, the senior Pakistani diplomat pointed to the quota system instituted by the International Monetary Fund (IMF), which is based on economic status, prioritizing wealthier, mostly Western countries, while leaving poorer nations with the least say in how money is distributed.
He also called for reform in how sovereign debt is handled and for the U.S.-led World Bank to overhaul the borrowing system, using its preeminent credit rating to borrow on behalf of developing nations that would then be loaned the money.
"These are just a few issues that need to be addressed in order to change the international financial architecture," Akram said. "Whether we get there? It's a difficult issue. Obviously there are countries whose interests do not want that."
But as he prepared to conclude Pakistan's tenure as G77 chair along with leadership of an array of projects on issues such as fighting poverty, combating climate change and closing the technology gap for developing nations, he placed his confidence in Cuba to lead the way.
"I'm sure that they will have a plan of action. I think the objectives are clear and common," Akram said. "As such, it may be expected that they will push hard for a realization of some of the objectives."
Cuban Foreign Minister Bruno Rodríguez Parrilla outlined this plan of action hours later, addressing the U.N. group that has expanded to some 134 nations since its initial founding by non-aligned states amid the Cold War nearly six decades ago. Those present included representatives of the majority of nations spanning Asia, Africa and Latin America, with China holding a unique position as the world's second largest economy, leading the group to often be referred to as "the G77 and China."
"The great challenges imposed by the current economic order on the developing world have hit their highest point during these times of systematic crises," Rodríguez Parrilla said, "namely health, climate, energy, food and economic crises; escalation of geo-political tensions and renewed forms of domination and hegemony."
Among the issues that he argued still needed to be addressed by the international community were "unequal access to vaccines, the digital gap, the burden of the foreign debt, the structural reform of the international financial architecture, development financing flows, food insecurity, restrictive trade measures, climate financing and capacity building."
On the issue of restrictive trade measures, he argued that "more than 30 measures and systems of unilateral coercive measures against developing countries continue to be fully implemented," a trend he argued is "far from reversing" and "has exacerbated during the last few years."
Cuba has been subject to one of the world's longest-running sanction campaigns mounted by the U.S. While Washington has regularly been condemned by a near-unanimous consensus of the international community over these measures, America's leading role in the global financial network has generated caution among those potentially seeking to do business with the Communist-led island.
Western sanctions have had a similar effect on a number of other nations represented in the G77 and present at Thursday's gathering, including Iran, Myanmar, North Korea, Syria, Venezuela and Zimbabwe. The vast majority of these measures have come in response to allegations of human rights abuses and authoritarian policies.
Cuba's top diplomat vowed to pursue the G77 and China agenda "in a flexible and always constructive way, based on the broadest possible consensus, in order to implement the transformative vision defended by our Group." He asserted that "it will be our priority to foster international solidarity and cooperation in support of the post-pandemic recovery of our nations."
And Rodríguez Parrilla promised to establish a range of cooperative projects among nations in the Global South for health, biotechnology and education, three fields in which Cuba has ranked among the highest in the developing world, among other areas.
He also promised to challenge the most influential and wealthiest nations on the matter of global responsibilities.
"We will face any attempt to put on our shoulders the burden of unfulfilled promises by the most powerful nations, which allocate millions to the weapons manufacturing, not to development," he said. "We will promote tangible commitments in terms of financing under favorable conditions and capacity building for the countries of the South."
While U.S. President Joe Biden has yet to show any signs of easing sanctions on Cuba, a move partially pursued by the U.S. when he served as vice president to President Barack Obama only to be reversed by President Donald Trump, the current administration has acknowledged calls for reform.
Addressing Pakistan's push for changes to the International Monetary Fund quota regime, State Department spokesperson Ned Price deferred reporters to the Washington, D.C.-based global financial institution during a press briefing Thursday. He did state, however, that "we, of course, want to see Pakistan continue down the path of reform."
"We want to be a partner," Price said. "We will continue to be a partner to Pakistan when it comes to all of their priorities, whether it's security, whether it's economic in this case, or humanitarian in the case of the provision of the additional funding for the flood relief today."
U.S. Secretary of State Antony Blinken also weighed in last week on calls for debt reform for African nations on the heels of the U.S.-Africa Leaders' Summit.
"This is a subject, a theme that we've heard loudly and clearly here," Blinken said. "It's not new in the sense that this has been part of the conversation for some time. And there is no doubt that the rise of unsustainable debt burdens, especially in Africa, is a tremendous challenge, and it's one that we're committed to addressing."
"When you look at the debt crises that we've seen, they're devastating from a humanitarian standpoint, and they can be debilitating when it comes to effective economic development and inclusive growth," he added. "So, there are a number of things that we talked about and that we clearly need to move forward."
Among these steps Blinken highlighted was mobilizing both national and private sector creditors from other countries, as "it can't just be the United States." He said the U.S. was already supporting this through multinational platforms such as the Group of 20, or G20, a body comprising the world's top 20 economies and the European Union, and the Paris Club, which consists of 22 major creditor countries.
But another "concern" expressed by Blinken was "the growth of untransparent debt, including off-balance-sheet debt and debt that's hidden by non-disclosure agreements" drafted by other companies and countries. Though Blinken did not reference China by name, he and other U.S. officials have often accused Beijing of pursuing such practices in Africa and other parts of the developing world to China's own benefit.
Chinese Foreign Minister Qin Gang disputed the so-called "debt trap diplomacy" argument during a conference held Wednesday alongside African Union Commission Chair Moussa Faki Mahamat.
"The so-called China's 'debt trap' in Africa is a narrative trap imposed on China and Africa," Qin was cited by the Chinese Foreign Ministry as saying. "Projects and cooperation carried out by China in Africa contributed to Africa's development and the improvement of people's lives. The African people have the biggest say in this."
"China will continue to respect the will of the African people, and bring tangible benefits to the African people through China-Africa cooperation based on the realities in Africa," he added, "so as to achieve better common development."
Qin, who served as China's ambassador to the U.S. before his promotion was announced late last month, also argued that "Africa's debt problem is essentially an issue of development."
"The solution to the problem requires addressing not only the symptoms but also the root causes by means of debt treatment, among others, so as to enhance Africa's independent and sustainable development capacity," he added. "China's financing cooperation with Africa is mainly in fields such as infrastructure development and production capacity, with a view to enhancing Africa's capacity for independent and sustainable development."
The United States has reiterated that Pakistan can purchase oil from Russia at a discounted price even though it has not signed a Washington-backed price-cap on Russian petroleum products.
US State Department’s spokesperson Ned Price told reporters at a Tuesday afternoon news briefing that Pakistan can also take advantage of the concessions Washington has given to other countries for buying oil from Russia.
“So, we have encouraged countries to take advantage of that, even those countries that have not formally signed on to the price cap, so that they can acquire oil in some cases at a steep discount from what they would otherwise acquire from, in this case, Russia,” Mr Price said.
On December 3, 2022, G7 and EU countries set a price-cap of $60 per barrel on Russian oil to prevent Moscow from using the revenues to finance its war against Ukraine.
Since, Europe and the United States no longer import crude oil from Russia, the controlled purchase would only affect third countries, like Pakistan. Islamabad has not yet signed the accord, mainly because Pakistan does not import oil from Russia.
Mr Price said the US approach to the purchase of oil from Russia has been laid out in the price-cap mechanism that it worked out with other countries around the world, including the G7.
“And the virtue of the price cap is that it allows energy markets to continue to be resourced while depriving Moscow of the revenue it would need to continue to propagate and fuel its brutal war against Ukraine,” the US official said.
“We have made the point that we have very intentionally not sanctioned Russian oil. Instead, it’s now subject to the price cap.” The US, he said, has been very clear that now was not the time to increase economic activity with Russia.
“But we understand the imperative of keeping global energy markets well resourced, well supplied, and the price-cap, we believe, provides a mechanism to do that,” he added.
On Friday, Minister for Economic Affairs Ayaz Sadiq, and Russia’s Energy Minister Nikolay Shulginov said at a joint news conference in Islamabad that they hope to sign an oil deal by late March, enabling Pakistan to buy Russian oil at discounted rates.
A joint statement issued after their talks said that the two sides reached an in-principle agreement on the supply of Russian crude oil and oil products to Pakistan, with technical details to be finalised in March at the latest.
“We have decided that it would be a good idea for Pakistan to approach Gazprom and Novatek, two largest LNG-producing companies, in late 2023 to discuss the conditions” for buying LNG, the Russian minister said.
Energy-starved Pakistan imports approximately 430,000mt of motor gasoline, 200,000mt diesel and 650,000mt crude oil at a cost of $1.3 billion per month.
Market observers earlier this month warned Pakistan may face fuel shortages in the near future as importers struggle to secure dollars to close deals. The country’s foreign exchange reserves have dwindled to their lowest levels in almost nine years.
Buying oil from Russia at a discounted price could ease the pressure.
By Perry Mehrling
Charles P. Kindleberger ranks as one of the 20th century’s best known and most influential international economists. A professor of International Economics at the Massachusetts Institute of Technology (MIT) from 1948-1976, he taught cosmopolitanism to a world riven with nationalist instinct. He worked to relieve the fears of his fellow citizens through education, thinking that if people understood how the dollar system worked, they would stop trying to destroy it. His research at the New York Federal Reserve and Bank for International Settlements during the Great Depression, his wartime intelligence work and his role in administering the Marshall Plan gave him deep insight into how the international financial system really operated.
In the new book, “Money and Empire: Charles P. Kindleberger and the Dollar System,” Perry Mehrling traces the evolution of Kindleberger’s thinking in the context of a “key-currency” approach to the rise of the dollar system, which he argues is an indispensable framework for global economic development in the post-World War II era. The overall arc of the book follows the transformation of the dollar system, as seen through the eyes of Kindleberger.
The book charts Kindleberger’s intellectual formation and his evolution as an international economist and historical economist. As a biography of both the dollar and Kindleberger, this book is also the story of the development of ideas about how money works. In telling this story, Mehrling ultimately sheds light on the underlying economic forces and political obstacles shaping a globalized world.
India in the last year displaced Europe as Russia's top customer for seaborne oil, snapping up cheap barrels and increasing imports of Russian crude 16-fold compared to before the war, according to the Paris-based International Energy Agency. Russian crude accounted for about a third of its total imports.
NEW DELHI/LONDON, March 8 (Reuters) - U.S.-led international sanctions on Russia have begun to erode the dollar's decades-old dominance of international oil trade as most deals with India - Russia's top outlet for seaborne crude - have been settled in other currencies.
The dollar's pre-eminence has periodically been called into question and yet it has continued because of the overwhelming advantages of using the most widely-accepted currency for business.
India's oil trade, in response to the turmoil of sanctions and the Ukraine war, provides the strongest evidence so far of a shift into other currencies that could prove lasting.
The country is the world's number three importer of oil and Russia became its leading supplier after Europe shunned Moscow's supplies following its invasion of Ukraine begun in February last year.
Some Dubai-based traders, and Russian energy companies Gazprom and Rosneft are seeking non-dollar payments for certain niche grades of Russian oil that have in recent weeks been sold above the $60 a barrel price cap, three sources with direct knowledge said.
The sources asked not to be named because of the sensitivity of the issue.
Those sales represent a small share of Russia's total sales to India and do not appear to violate the sanctions, which U.S. officials and analysts predicted could be skirted by non-Western services, such as Russian shipping and insurance.
Three Indian banks backed some of the transactions, as Moscow seeks to de-dollarise its economy and traders to avoid sanctions, the trade sources, as well as former Russian and U.S. economic officials, told Reuters.
But continued payment in dirhams for Russian oil could become harder after the United States and Britain last month added Moscow and Abu Dhabi-based Russian bank MTS to the Russian financial institutions on the sanctions list.
MTS had facilitated some Indian oil non-dollar payments, the trade sources said. Neither MTS nor the U.S. Treasury immediately responded to a Reuters request for comment.
An Indian refining source said most Russian banks have faced sanctions since the war but Indian customers and Russian suppliers are determined to keep trading Russian oil.
"Russian suppliers will find some other banks for receiving payments," the source told Reuters.
"As it is, the government is not asking us to stop buying Russian oil, so we are hopeful that an alternative payment mechanism will be found in case the current system is blocked."
“The only reason that America can run the deficits that it does is because the dollar is the global reserve…As we move to a more multipolar financial system, it will be tougher for the US to run big debts.”
Why Biden is wise to reduce the deficit
Progressives are a bit too sanguine about debt levels
by Raana Foroohar
Anyway, although we all know that tax cuts and trickle-down economics haven’t created more broadly shared prosperity, I’ve long thought that progressives were a bit too sanguine about debt levels. Let’s say, just for argument’s sake, that a mild recession produced a 20 per cent decline in tax receipts over the next year or two, which is not an unusual outcome during a down cycle, according to one of my favourite market analysts, Luke Gromen, who wrote about the topic recently in an issue of his newsletter, The Forest for the Trees. Let’s also assume a 4.5 per cent interest rate on federal debt (which may be a conservative estimate if the Fed keeps hiking), and a 12 per cent increase in entitlement payouts (also conservative given the number of ageing Americans). Taking those figures, Gromen shows that the interest expense of government debt would go back to the Covid crisis peaks that resulted in a “crash” in the UST market, and subsequently pushed the Fed into more quantitative easing.
I’m not saying this is about to happen. But I am saying that it’s a tricky time in the economy, with the end of cheap money, cheap labour and cheap energy, and that makes it a potentially dangerous time for any country or company holding much debt. The failure of Silicon Valley Bank and the subsequent dominoes now falling has reminded us that there is plenty of hidden risk in the system at the moment.
The only reason that America can run the deficits that it does is because the dollar is the global reserve. That won’t change immediately, but I do believe that the balance of global reserves will change significantly over time, in part because energy autocrats have seen dollar reserves weaponised since the war in Ukraine. As we move to a more multipolar financial system, it will be tougher for the US to run big debts. We will eventually have to come back to the kind of guns and butter debates about spending that we stopped having from the late 1970s onwards. For this reason, I think it’s wise for the Biden administration to show it cares about debt. Ed, would you agree, and how will it play politically?
Edward Luce Responds:
Will the resulting deficits endanger the US dollar? I don’t see much sign of that. The US dollar has accounted for around 60 per cent of global central bank reserves for the last couple of decades and that share has barely shifted. Countries without reserve currencies run budget deficits of 5 per cent of GDP without the sky falling on their heads. The key is to ensure that US trend growth is higher than interest rates on federal debt in order to hold it at stable levels. If that proves impossible, then the greenback could lose its throne. Even were Armageddon to strike, however, Art Laffer would still be available for power point presentations on his magical curve.
Bank crisis not a credit quality problem but stems instead from now-impossible task of financing America’s ever-expanding foreign debt
By DAVID P. GOLDMAN
“The dollar reserve system will go out not with a bang, but a whimper.”
Good article on how foreign banks will slowly start unwinding their $18 trillion of dollar-based assets, including US treasuries.
Gold and Chinese Yuan will become vital players in global trade. (Local currency swaps too).
Those who pooh-pooh yuan don’t understand that petroyuan is already a reality — Russian and Iranian oil are being sold in RMB.
And consider Turkiye’s currency (Lira) which was on a precipitous downfall but was saved by the embrace of China’s yuan.
Other countries should have really started de-dollarization after the 2008 financial crisis, but they succumbed to geopolitical pressure.
The US banking system is broken. That doesn’t portend more high-profile failures like Credit Suisse. The central banks will keep moribund institutions on life support.
But the era of dollar-based reserves and floating exchange rates that began on August 15, 1971, when the US severed the link between the dollar and gold, is coming to an end. The pain will be transferred from the banks to the real economy, which will starve for credit.
And the geopolitical consequences will be enormous. The seize-up of dollar credit will accelerate the shift to a multipolar reserve system, with advantage to China’s RMB as a competitor to the dollar.
Gold, the “barbarous relic” abhorred by John Maynard Keynes, will play a bigger role because the dollar banking system is dysfunctional, and no other currency—surely not the tightly-controlled RMB—can replace it. Now at an all-time record price of US$2,000 an ounce, gold is likely to rise further.
The greatest danger to dollar hegemony and the strategic power that it imparts to Washington is not China’s ambition to expand the international role of the RMB. The danger comes from the exhaustion of the financial mechanism that made it possible for the US to run up a negative $18 trillion net foreign asset position during the past 30 years.
Germany’s flagship institution, Deutsche Bank, hit an all-time low of 8 euros on the morning of March 24, before recovering to 8.69 euros at the end of that day’s trading, and its credit default swap premium—the cost of insurance on its subordinated debt—spiked to about 380 basis points above LIBOR, or 3.8%.
That’s as much as during the 2008 banking crisis and the 2015 European financial crisis, although not quite as much as during the March 2020 Covid lockdown, when the premium exceeded 5%. Deutsche Bank won’t fail, but it may need official support. It may have received such support already.
This crisis is utterly unlike 2008, when banks levered up trillions of dollars of dodgy assets based on “liar’s loans” to homeowners. Fifteen years ago, the credit quality of the banking system was rotten and leverage was out of control. Bank credit quality today is the best in a generation. The crisis stems from the now-impossible task of financing America’s ever-expanding foreign debt.
It’s also the most anticipated financial crisis in history. In 2018, the Bank for International Settlements (a sort of central bank for central banks) warned that $14 trillion of short-term dollar borrowings of European and Japanese banks used to hedge foreign exchange risk were a time bomb waiting to explode (“Has the derivatives volcano already begun to erupt?”, October 9, 2018).
In March 2020, dollar credit seized up in a run for liquidity when the Covid lockdowns began, provoking a sudden dearth of bank financing. The Federal Reserve put out the fire by opening multi-billion-dollar swap lines to foreign central banks. It expanded those swap lines on March 19.
Correspondingly, the dollar balance sheet of the world banking system exploded, as gauged by the volume of overseas claims in the global banking system. This opened up a new vulnerability, namely counterparty risk, or the exposure of banks to enormous amounts of short-term loans to other banks.
America’s chronic current account deficits of the past 30 years amount to an exchange of goods for paper: America buys more goods than it sells, and sells assets (stocks, bonds, real estate, and so on) to foreigners to make up the difference.
America now owes a net $18 trillion to foreigners, roughly equal to the cumulative sum of these deficits over 30 years. The trouble is that the foreigners who own US assets receive cash flows in dollars, but need to spend money in their own currencies.
With floating exchange rates, the value of dollar cash flows in euro, Japanese yen or Chinese RMB is uncertain. Foreign investors need to hedge their dollar income, that is, sell US dollars short against their own currencies.
That’s why the size of the foreign exchange derivatives market ballooned along with America’s liabilities to foreigners. The mechanism is simple: If you are receiving dollars but pay in euros, you sell dollars against euros to hedge your foreign exchange risk.
But your bank has to borrow the dollars and lend them to you before you can sell them. Foreign banks borrowed perhaps $18 trillion from US banks to fund these hedges. That creates a gigantic vulnerability: If a bank looks dodgy, as did Credit Suisse earlier this month, banks will pull credit lines in a global run.
Before 1971, when central banks maintained exchange rates at a fixed level and the United States covered its relatively small current account deficit by transferring gold to foreign central banks at a fixed price of $35 an ounce, none of this was necessary.
The end of the gold link to the dollar and the new regime of floating exchange rates allowed the United States to run massive current account deficits by selling its assets to the world. The population of Europe and Japan was aging faster than the US, and had a correspondingly greater need for retirement assets. That arrangement is now coming to a messy end.
One failsafe gauge of global systemic risk is the price of gold, and especially the price of gold relative to alternative hedges against unexpected inflation. Between 2007 and 2021, the price of gold tracked inflation-indexed US Treasury securities (“TIPS”) with a correlation of about 90%.
Starting in 2022, however, gold rose while the price of TIPS fell. Something like this happened in the aftermath of the 2008 global financial crisis, but the past year’s move has been far more extreme. Shown below is the residual of the regression of the gold price against 5- and 10-year maturity TIPS.
If we look at the same data in a scatter plot, it’s clear that the linear relationship between gold and TIPS remains in place, but it has shifted both its baseline and steepened its slope.
In effect, the market worries that buying inflation protection from the US government is like passengers on the Titanic buying shipwreck insurance from the captain. The gold market is too big and diverse to manipulate. No one has a lot of confidence in the US Consumer Price Index, the gauge against which the payout of TIPS is determined.
The dollar reserve system will go out not with a bang, but a whimper. The central banks will step in to prevent any dramatic failures. But bank balance sheets will shrink, credit to the real economy will diminish and international lending in particular will evaporate.
At the margin, local currency financing will replace dollar credit. We have already seen this happen in Turkey, whose currency imploded during 2019-2021 as the country lost access to dollar and euro financing.
by Fareed Zakaria
The dollar is America’s superpower. It gives Washington unrivaled economic and political muscle. The United States can slap sanctions on countries unilaterally, freezing them out of large parts of the world economy. And when Washington spends freely, it can be certain that its debt, usually in the form of T-bills, will be bought up by the rest of the world. Sanctions imposed on Russia for its invasion of Ukraine combined with Washington’s increasingly confrontational approach to China have created a perfect storm in which both Russia and China are accelerating efforts to diversify away from the dollar. Their central banks are keeping less of their reserves in dollars, and most trade between them is being settled in the yuan. They are also, as Putin noted, making efforts to get other countries to follow suit.
China Says It Will Set up Yuan Clearing Arrangements in Brazil
BEIJING (Reuters) - China's central bank has signed a memorandum of understanding on setting up yuan clearing arrangements in Brazil, it said on Tuesday, in a move to help boost the currency's global clout.
The establishment of such arrangements for the renminbi (RMB), or the yuan, would be beneficial to cross-border transactions, and further promote bilateral trade and investment facilitation, the People's Bank of China said on Tuesday.
China has in recent months signed similar yuan clearing deals with Pakistan, Kazakhstan and Laos.
Two-way trade between China and Brazil reached $172 billion in 2022, according to data from Chinese customs.
China has been trying to boost the yuan globally since 2009 to reduce reliance on the U.S. dollar in trade and investment settlements and challenge the greenback's role as the world's major reserve currency.
Chinese Yuan is already a truly international currency. Here are some interesting facts about RMB:
🔹One of the five currencies that make up IMF’s SDR — international reserve basket.
🔹5th largest payment currency in the world
🔹5th largest reserve currency
🔹3rd largest currency in trade settlement
China’s delicate balancing act is to internationalize yuan, while managing its value — i.e., ensuring that it doesn’t get too strong.
Michael Goh 🇨🇳 🇷🇺
In 2021, yuan settlement jumped 20.7% to 5.77 trillion yuan for trade in goods, accounting for 14.7% of total cross-border goods trade settlement, according to the PBOC's 2022 RMB Internationalization
China and Brazil recently struck a deal to ditch the U.S. dollar in favor of their own currencies in trade transactions
Malaysia is reviving a decades-old proposal to create an Asian Monetary Fund to reduce dependence on the U.S. dollar, with China being open to talks about the matter.
Malaysian Prime Minister Anwar Ibrahim proposed the fund last week, Bloomberg reported.
"When I had a meeting with President Xi Jinping, he immediately said, ‘I refer to Anwar’s proposal on the Asian Monetary Fund’, and he welcomed discussions," Anwar, who also serves as the country's finance minister, told the Malaysian parliament on Tuesday.
"There is no reason for Malaysia to continue depending on the dollar," he added.
Anwar said he shelved forming an Asian Monetary Fund during his first stint as finance minister in the 1990s. At the time, the idea failed to gain traction as the U.S. dollar was still seen as strong, he said.
The dollar index reached a record-high in September 2022 as other Asian currencies hit multi-decade lows, the news report said.
Recently, China and Brazil struck a deal to ditch the U.S. dollar in favor of their own currencies in trade transactions.
Chinese Yuan overtakes US dollar as most-used currency in China's cross-border transactions for the first time in history.
Yuan-share rose to a record high of 48%, UP from nearly zero in 2010.
U.S-share declined to 47%, DOWN from 83% over the same period.
The dollar falls behind the yuan for the first time in Chinese cross-border transactions
The yuan overtook the dollar as the most used currency for Chinese cross-border transactions.
Its use in cross-border payments and receipts increased to 48% versus 47% for the dollar.
China is pursuing further use of the yuan to avoid currency mismatches in trade.
For the first time ever, the yuan has eclipsed the US dollar as the most used currency for Chinese cross-border transactions.
The yuan's use in cross-border payments and receipts rose to 48.4% at the end of March while the dollar's share slid to 46.7%, according to a Reuters calculation of data from China's State Administration of Foreign Exchange.
In 2010, the yuan's share was nearly 0% while the dollar's was 83%, according to Bloomberg. The reversal comes amid China's efforts to empower the yuan, also known as the renminbi, in trade and capital markets.
Meanwhile, Chinese bonds have seen greater inflows recently, alongside outflow increases to Hong Kong stocks.
Increased reliance on the yuan will reduce any risks of currency mismatches. For this reason, China's State Council is encouraging expansions in the renminbi's use for cross-border transactions.
But the dollar remains dominant beyond China's borders. For example, the yuan's share of global currency transactions for trade finance was just 4.5% in March compared to 83.7% for the dollar, per Reuters.
Still, the yuan has continued to make inroads, especially since Western sanctions that froze Russia's foreign exchange reserves highlighted the potential risk of holding dollars.
China has entered into non-dollar trade agreements with countries such as Brazil. And the yuan has overtaken the dollar as Russia's most traded currencysince Moscow was largely cut off from global finance after its invasion of Ukraine last year.
But analysts say the dollar is unlikely to lose its dominance in global markets in the foreseeable future. That's as the yuan is too tightly controlled by the Chinese government.
Read the original article on Business Insider
'I'd like to correct': Uday Kotak clarifies ‘financial terrorist’ statement about US dollar
In the March quarter, Kotak Mahindra Bank witnessed a notable increase in its standalone net profit, which rose by 26.3 per cent year-on-year to reach Rs 3,495.6 crore
Uday Kotak, the CEO of Kotak Mahindra Bank, has provided further clarification on his recent statement about the US dollar being the "biggest financial terrorist in the world." Kotak clarified in a tweet that his statement about the "financial terrorist" was not specifically aimed at the US dollar but rather at the disproportionate power that any reserve currency holds.
According to Kotak, the US dollar's status as a reserve currency gives it an unfair advantage in controlling global transactions, which could potentially result in other countries becoming overly reliant on it. He further elaborated that a reserve currency wields significant power, including the ability to dictate whether money in nostro accounts can be withdrawn, which can have a profound impact on the global financial landscape. Kotak believes that the world is actively searching for an alternative reserve currency and posits that India has the potential to promote the Indian Rupee as a strong contender to fill this role on the global stage. By doing so, he suggested that India can reduce its dependency on the US dollar and promote a more diversified, stable global financial system.
He clarified his previous statement in a tweet saying, "In a recent discussion on the US dollar, I inadvertently used words 'financial terrorist,' which I would like to correct. What I meant was that a reserve currency has disproportionate power, whether it is nostro account, 500 bps rate increase, or emerging countries holding $ for liquidity."
In the March quarter, Kotak Mahindra Bank - the second-largest private bank in India - witnessed a notable increase in its standalone net profit, which rose by 26.3 per cent year-on-year to reach Rs 3,495.6 crore. The bank's net interest income (NII) also saw a significant jump of 35 per cent YoY to reach Rs 6,102.6 crore.
A nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions.
Pakistan decides to purchase discounted Russian oil using the Chinese yuan, joining the global trend of de-dollarization.
The first shipment of over 750,000 barrels is expected to arrive in June, with Pakistan agreeing to a discounted per-barrel price of around $50–$52.
The decision follows sanctions imposed on Russia by the EU, G7, and their allies in response to Russia's invasion of Ukraine.
In a move reflecting the global shift towards de-dollarization, Pakistan has decided to purchase discounted Russian oil using the Chinese yuan.
As part of the BRICS economic bloc’s efforts to conduct international trade in currencies other than the US dollar, Pakistan’s decision signals another transaction conducted using an alternative currency.
Alternative payment for Pakistan amid sanctions
Pakistan is set to pay for Russian oil with the Chinese yuan, as local media report that the first cargo of over 750,000 barrels is expected to arrive in June.
Although the exact amount and mode of payment have not been disclosed, sources reveal that Pakistan has agreed to a discounted per-barrel price of around $50–$52, significantly lower than the G7 price cap on Russian oil of $60 per barrel.
This development follows sanctions imposed on Russia by the EU, G7, and their allies, including a ban on seaborne oil exports and a price cap on Russian oil.
These measures were in response to Russia’s invasion of Ukraine and aimed to distance the nation from the West. Amid the focus on the Chinese yuan, talks of a BRICS trading currency are expected to progress at the annual BRICS summit.
The growing influence of the Chinese Yuan
With the first shipment of 750,000 barrels anticipated to dock in June, Pakistan plans to pay for Russian crude oil using Chinese yuan. The Bank of China is expected to facilitate the transaction.
However, the mode of payment and the discount offered to Pakistan remain undisclosed, as publicizing such information is not considered beneficial for either party.
An official from Pakistan’s Ministry of Energy stated that Russia would supply URAL crude in the test cargo, which Pakistan Refinery Limited (PRL) will likely refine.
Meanwhile, other sources report that Pakistan has agreed to a per-barrel price of around $50-52, lower than the G7 price cap on Russian oil of $60 per barrel.
The decision to use the Chinese yuan for this transaction illustrates the currency’s growing acceptance in international trade, as well as concerns about the US abusing its dollar hegemony through sanctions.
The yuan’s stability, China’s economic strength, and its large consumer market make it an increasingly reliable choice for international settlements.
In recent months, several countries have expressed their inclination to settle trade deals in the yuan instead of the US dollar. Iraq’s central bank announced in February that it would trade with China using the yuan.
Argentina followed suit in April, declaring that it would start paying for Chinese imports in yuan rather than in US dollars.
According to data from multiple sources, the yuan became the most widely used currency for cross-border transactions in China in March, overtaking the dollar for the first time.
The yuan was used in 48.4 percent of all cross-border transactions, while the dollar’s share declined to 46.7 percent from 48.6 percent a month earlier.
This shift towards the Chinese yuan can be attributed to China’s ongoing efforts to open its financial sector, making it easier for global investors to participate in its domestic financial market.
As the yuan’s role in global payment and settlement, foreign exchange reserves, and investment and financing expands, the de-dollarization trend is expected to continue.
Rank Country Exports (Current US$)
1 China $2,723,250.43
2 United States $2,123,410.00
3 Germany $1,669,993.51
4 Japan $785,365.75
5 United Kingdom $770,478.62
6 France $733,165.40
7 Netherlands $711,504.80
8 Hong Kong (China SAR) $612,566.52
9 Singapore $599,216.28
10 South Korea $596,945.20
Profiles of the world's largest exporters
Aside from the European Union (which is a collective of many countries), China is the world’s largest exporter. In 2020, China exported an estimated $2.72 trillion worth of goods and services, primarily electronic equipment and machinery such as broadcast equipment, computers, integrated circuits, office machine parts, and telephones. In 2018, China’s exports made up about 10.78% of the global total.
2. United States
The U.S. is the second-largest exporter in the world, with an estimated $2.12 trillion in exports for 2020. The largest exports of the U.S. are crude and refined petroleum; integrated circuits; pharmaceuticals and medical instruments; and aircraft including planes, spacecraft, and helicopters as well as their replacement parts. One of the reasons that the United States lags behind China in exports is the cost of labor. Many goods cannot be produced, manufactured, or assembled in the U.S. for a price comparable to that in China.
Having exported an estimated $1.67 trillion worth of goods and services in 2020, Germany is the world’s third-largest exporter. As one of the most technologically advanced countries in the world, Germany’s main exports include automobiles (BMW, Mercedes-Benz, Porsche, Audi, Volkswagen), pharmaceuticals (Bayer), aircraft, machinery, electronics, and chemicals. Germany is the third of three countries to have exports exceeding $1 trillion, behind only China and the United States.
Japan’s exports for 2020 were valued at an estimated $785.4 billion. Japan’s major exports include automobiles (Toyota, Honda, Nissan, Mazda, Suzuki, more) and automobile parts, integrated circuits and electronic devices (Nintendo, Panasonic, Sony, and many more). Japan's largest export customers are China, the United States, South Korea, Taiwan, and Hong Kong.
5. United Kingdom
The United Kingdom ranked as the fifth-highest exporter in the world in terms of dollar value in 2020, shipping an estimated $770.5 billion in goods and services to international customers. The U.K.'s top exports include cars (Bentley, Jaguar, Mini, Rolls-Royce, more), gas turbines, gold, medicines, hard liquor, antiques, and crude petroleum (which is often first imported from Norway, then exported to the rest of Europe, as well as China and South Korea).