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The Ukraine War's Unintended Consequences
War is a tragedy. And it is truly tragic that at the cusp of the 21st Century we are unable to settle differences between states without going to war. That, at a time when humanity is faced with glaring challenges from new viruses to climate calamities to water shortages, to name a few. Covid 19 and its impact on the world’s state of health and economy is the first episode in a protracted scenario of future catastrophes we will face collectively unless and until we get our act together. For the outside observer, it is difficult to ascertain with any degree of certainty how long Russia and the United States have been gaming Mr. Putin’s move on the Ukraine. What may seem as unintended consequences for some may very well have been part of a long and complicated set of calculations undertaken over time. The validity of the assumptions underlying such calculations, as well as the efficacy of the methodologies utilized to undertake the calculations, are and will continue to be subjects of debate for a long time after this tragic war is over. The swiftness with which Ukraine’s refugees were welcomed by the United States and Europe is heartwarming. Perhaps we did learn hard lessons from the way refugees from other parts of the world were and are being treated. However, the cries of some Western politicians and media that Ukrainian refugees are white Christians and, as such, more deserving of salvation, created an unintended consequence. In the minds of many in the developing world who are not “white” (as if such a yardstick can be used with precision) and are not practitioners of the Christian faith, or are white but practice other religions, these cries were a reminder that racism and religious bigotry still reign supreme in many parts of the world. It is often said that in politics perception is reality. Did the West’s moral authority and standing suffer with audiences in developing countries as a result of these public pronouncements? Will peoples of developing countries continue to rely on Western institutions as anchors and influencers in the former’s journeys towards modernity, liberalism, democracy, and universal human rights? Or is the perception of hypocrisy currently too glaring for comfort? And if the latter, how will this impact reform movements in various parts of the developing world? Less borrowing of theory and practice from the West and more locally developed methodologies? Rejigging the balance between local and imported inputs in a reform process may not be a bad thing - it adds momentum to existing efforts, as well as increases ownership and traction. The economic impact of the Ukraine war is beginning to be felt globally. The added strain on supply chains and additional increases in commodity prices and inflationary pressures, already with us as a result of the Covid 19 pandemic, do not bode well for many countries. The war’s impact on the global financial system is yet to be seen. However, the swiftness of economic and financial sanctions imposed by the West on Russia and many of its global business leaders will have several unintended consequences. As analysts have noted already, it should come as no surprise that attempts will be made to create an alternative to the SWIFT banking system. The new system (or systems) may be joined by not only Russia and China but many other developing countries as well, as the latter seek to hedge their economic and financial fortunes, and bets. Also expected is the rise of alternative currencies to the US dollar to use in global trade. To what extent will these currencies also become repositories of wealth and not just mediums of exchange remains to be seen. The freezing of assets and bank accounts of oligarchs and business folk close to Mr. Putin has moved swiftly on a global scale, including in countries that were previously considered safe havens for such individuals. An unintended consequence to this action is that not only oligarchs but wealthy individuals worldwide, whether their monies are clean or the result of corrupt practices and sweetheart deals, will start thinking twice about storing wealth in the West, or in other countries than their own. The global political winds are shifting too rapidly for comfort these days. Wealthy individuals from developing countries will start bringing monies back home and attempts at legitimizing ill-gotten wealth will commence. Tax amnesties will be enacted and financial settlements of economic crimes concluded under such banners as economic crimes laws. The sharing of wealth on a national level will accelerate as many political regimes seek to augment legitimacy by allowing citizens to have stakes and vested interests in the economic development of their countries. IPOs and stock markets will flourish. The political positions of many developing countries vis-à-vis the Ukraine war was made clear a few weeks ago in the United Nations when 35 countries, including China and India, abstained from voting to condemn Russia’s actions in the Ukraine. Perhaps this reflects a lack of a global moral consensus as to who is right and who is wrong in this war. And perhaps this reflects geopolitical realities a la Metternich’s real politik. Or both. Regardless, an unintended consequence to this tragic war may be the formation of something akin to the The Non-Aligned Movement; a group of developing countries that teamed in 1961 and declared their lack of alignment with either West or East. The founders of the Non-Aligned Movement are now household names and have come to signify standing for and defending the rights of the dispossessed and the underprivileged: the Indian Prime Minister Nehru, Yugoslavia’s President Tito, Egypt’s President Nasser, Ghanaian President Nkrumah, and Indonesian President Sukarno. If such a new coalition of developing countries comes to be, then we will see a multipolar Cold War II, not World War III.
May 3, 2022 · 5 min read
Pirates, Sugar, and Insurance Scams
News of increased policing of ships in and around the Red Sea brought back memories of a story I read in the Financial Times many years ago that the Swedish police were investigating the disappearance of a ship somewhere off the coast of Western Europe. The crew had reported being attacked by pirates off Sweden’s Baltic islands before they vanished, along with their Maltese-flagged general cargo ship, which was heading from Finland to Algeria. This reminded me of another story I heard in Turkey years before. I had come to know a Turkish businessman whose family started a manufacturing facility in the 1960s on what later became prime land in Istanbul. After some years, Mr F, as we shall call him here, developed other business tastes. He operated the factory on an ad hoc basis, only running the machines if there was a sizable order. And he became a loan shark. As a result, Mr F had a lot of cash and was always looking for ways to make more. Others knew this and someone approached him with what seemed to be an amazing offer to buy sugar from a certain South American country at prices well below the international marketplace. I used to call on Mr F when I had some free time during my visits to Istanbul. I found him and the whole environment that surrounded him fascinating; a character out of Kafka or Dickens. On one of my visits for tea in his office, Mr F was eager to explain to me the details of the sugar offer he received. The price was well below the international market, which meant that he could make a handsome profit selling it. He had to purchase a whole ship full of sugar, around ten or twelve thousand tons. He was asked to open a letter of credit and was told that he would only have to pay for the sugar when it arrived at the designated port in Turkey by a certain date, verified as per international shipping procedures. The South American company Mr F was dealing with told him that should the sugar not arrive, they would compensate him for the cost of the letter of credit, which for a ship of that size at the prices he was being offered amounted to something like twenty thousand US dollars. And they provided Mr F with an irrevocable bank guarantee to cover this cost. Mr F consulted with his lawyers and bankers and realized that he had nothing to lose by opening the letter of credit. If the sugar arrived, he would pay for it and sell it at much higher prices. If the sugar did not arrive, the bank guarantee from the seller in South America would compensate him for the cost of the letter of credit. It was a win-win situation. Several months later, I met Mr F again and he was eager to follow up on the sugar story. A few days before the ship was scheduled to arrive at the designated Turkish port, Mr F sent a few of his nephews to be there to meet and greet it. The date came and passed and no ship arrived carrying sugar for him. Mr F instructed his bank to make good on the guarantee and he did receive every penny he spent in fees for opening the letter of credit. Now, being a man of this world, Mr F knew that he was had, he just did not know how. His nose told him that something stunk in Hamlet-land and he wanted to know what happened. Mr F sent a small entourage of his nephews and business associates to the South American country to find out. The story they came back with was nothing less than fiction-like. Mr F’s nephews and business associates carried the news to him that the whole thing was an insurance scam. According to them, the selling company in South America bought an old ship that was scrap material, loaded it mostly with sand, got some corrupt official to validate that the shipment was all sugar of certain specifications, and insured the shipment value at official, international prices. Once the ship was beyond the horizon, a few speedboats appeared, the crew were taken back to shore and the ship was dynamited and sank. When the ship did not arrive at the designated port in Turkey, the seller claimed the insurance. The seller needed a willing buyer who could open a legitimate letter of credit to start the whole process. Mr F was incensed. And pleased. He was taken for a ride but he did learn something new!
Apr 26, 2022 · 4 min read
Monetizing Debt Obligations
Two recent Financial Times articles by The Editorial Board and Martin Wolf capped media coverage since the start of the pandemic on the financial impact of Covid on global finances. The recently released World Development Report by The World Bank adds emphasis to the need for smart restructurings of debt for many frontier and emerging markets – debt to GDP ratios have increased considerably as have the types and numbers of sovereign creditors. The ability of many developing countries to meet debt obligations is under strain, and will continue to be so for years to come. Since the start of the pandemic, economic and financial media coverage pointed out the need to increase borrowings, by everyone - governments, companies, international organizations, and individuals. No more telling were the additional trillions of dollars that the US Government borrowed to address the needs of an economy going through a Covid recession. It is easier for the printer of a super currency to borrow - the US Treasury issues bonds and the US Fed prints money and buys those bonds. Other countries with super currencies are in similarly favored conditions. These are super borrowers and their sovereign bonds are backed by a healthy amount of good faith and credit - their political and economic systems, their infrastructure, their abilities to tax and spend, and the fact that these countries are not going to disappear. The story is markedly different for many less developed countries. For lesser mortals, there is a cap on how much debt can be issued and how much money can be borrowed (and printed). Traditionally, when an economy is in recession, governments reduce taxes and interest rates to spur demand. Governments also increase borrowings to spend, preferably on capital expenditures, which leads to increased capital investments on the part of companies, and to higher levels of growth and employment. For less developed countries with heavy debt to GDP ratios, one way of increasing demand for goods and services within a given economy is to think of new ways of increasing the "velocity of money" without printing more currency or increasing the money supply – a relevant consideration when faced with various types of borrowing limitations and an inflationary cycle. As defined by many, the velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period. In other words, velocity measures the number of times one unit of currency is spent to buy goods and services per unit of time - the higher this number, the higher the demand is for goods and services within a given economy. For countries that do not have the luxury of printing more of their local currencies but need to increase demand within their economies, monetizing debt obligations (as opposed to securitizing debt obligations) might offer a way out, at least for the time being. Let us say, you are owed $1000 as a tax refund from your government. Instead of receiving those $1000 in currency, the government would issue you 1000 units of "payment credits". You can use these payment credits to pay for goods and services and make all sorts of purchases - to pay for your groceries, to pay your children's school tuition, to pay down your bank debt, etc. And those payment credits can be in digital form, utilizing new e-payment methods. The added benefit of increasing the banked portion of a population (increasing financial inclusion in developing countries) goes without saying. For debt stressed frontier and emerging markets, the issuance of payment credits would not constitute an increase in the money supply, leading to concerns of currency debasement and inflation. Monetizing debt obligations into payment credits would generate the desired effect of increasing the velocity of money within an economy without actually increasing the money supply. Traditional money issued by government has three main functions: it is a medium of exchange, a store of value and wealth, and a unit of account. Payment credits would only function as a medium of exchange and as such are not a currency in the traditional sense. The ability to monetize debt obligations and digitize these in the form of payment credits is something that we should consider, given that the borrowing environments for many frontier and emerging markets are becoming more challenging.
Apr 19, 2022 · 4 min read
Why Immigration, As We Have Come To Know It, No Longer Works
With the French presidential election around the corner and immigration a main theme and an issue of contest and one-upmanship between the candidates, I am reminded of a long August weekend in Paris, several years ago. Although I was warned beforehand that nothing happens in Paris in August, that all its inhabitants leave on vacation and the city fills with irritating tourists (like me!), I did manage to have a good time. Paris never disappoints, no matter the month, season or reason for being there. Paris did not disappoint but I did manage to irritate a good friend who chaperoned me through this beautiful city for four days. I had made what I thought to be a casual observation about French taxi drivers which led my friend to accuse me of being a racist. Needless to say, I was taken aback. I do not consider myself to be prejudiced and go out of my way to give each individual an equal amount of deference, respect and benefit of doubt regardless of race, ethnicity, or religion. So how did this happen. It was a warm August evening and my friend had selected an elegant yet casual restaurant in the 6th Arrondissement. We took taxis to and fro and afterwards I had commented on the different ways the two cabbies drove. The first cabbie, a Frenchman, was smooth, handled his cab deftly, and slowed down before he reached red traffic lights for a quaint halt. He seemed to be plugged into “the Paris traffic matrix.” The second driver exhibited signs of what I thought to be discomfort with the traffic system. He got too close to cars in front or on the side of him, was abrupt with the brakes, and veered off his lane too many times. He would constantly attempt to overtake cars ahead of him even though they were driving at reasonable speeds, and then would change his mind. The second driver was an immigrant; an Arab, most probably from North Africa. Juxtaposing the driving of the Arab cabbie with the self assured mannerisms of the French one, I wondered aloud why was it so. My friend, who is a person of the world, sensitive to issues of immigrants in France and someone who has witnessed firsthand some of the ills that plague many developing countries, was aghast. After successfully managing to offend my friend and guide to the French capital, I began to think why is it that we seem to relate to the same space we inhabit in different ways. Both taxi drivers were French, even though one was an immigrant, recent arrival and the other “more native.” Both were tested and licensed to drive a taxi in Paris by the same authority. Yet both related to the same space, that is the streets of Paris, in different ways. Many factors influence the way we relate to our environments, including the spaces around us. Many factors, yes, but ultimately it is our frame of reference that determines how we interact with that piece of human reality called space - not just physical space but other kinds of space as well: spiritual and religious, intellectual, political, social, and economic. Our frame of reference determine the way we live and conduct ourselves, the way we relate to universal human rights, our aspirations, our borders and boundaries and the borders and boundaries of others, and and much more. Whether we are conscious of it or not, each one of us has a frame of reference. A dictionary defines a frame of reference as a set of criteria or stated values in relation to which judgments can be made. Put differently, one’s frame of reference is the ultimate distillation of all those inputs that we have over the years absorbed, been subjected to, and digested. These include one’s religion, culture, tradition, language, political beliefs, the social systems we inhabit and our histories and experiences, both as individuals and as groups. And it has to do with taxi drivers in Paris because for immigrants to assimilate in their new countries and realize their full potential as citizens they need to absorb and integrate the frames of reference of their new societies. In the olden days, when immigrants left their countries for new and better lives elsewhere, they truly left. Once the journeys were made, the distances crossed could not be bridged back with ease. The only way to stay in touch with the “old place” was via slow and cumbersome mail systems. There were no phones, no airplanes, no email or internet. And travelling was long and expensive. Nowadays, when an immigrant lands in the United States, United Kingdom or any other destination, the umbilical cord connecting him or her to the motherland is not automatically severed. Rather, it is sustained and at times augmented by the various technological tools at our disposal. The immigrant can call home, increasingly for free, read most of the print and watch a good portion of the old country’s media on the internet, and join chat rooms with compatriots back home. Having saved some extra cash, the immigrant can find cheap flights to go back and visit. So, in a way, that immigrant never left; he or she can live on a virtual island within the new host country, while staying connected to the old one. To paraphrase the words of a leader of the Social Democrats in Denmark spoken on BBC Radio 4 a few years ago, for the systems of the state to function, be they welfare, or education, employment or what have you, a community needs to be in place with a common denominator. Although each of us has his or her unique frame of reference, individuals living in homogenous societies, in communities, tend to share similar frames of reference. A community is more than a group of people living together in one place. A common frame of reference, with shared values and ideals, is what makes for a community. In the past, immigrants burned the boats that carried them ashore and they had no choice but to absorb the new frames of reference of their adopted lands. Because of technology and what it has put at our disposal, immigrants nowadays are under much less pressure to do so. They can, if they choose, assemble from their new country's frame of reference what they need to get a job and get along, and discard the rest. Immigrants can do this not because they can live without a frames of reference but because they are still plugged into the frames of references of their old homelands. As a result, their moral compass may be influenced by a gravity centre different from the one that is physically sustaining them. Clearly, some immigrants are more in sync than others with the frames of reference of their adopted countries. Be it cultural or religious commonalities, shared languages and histories, geographic proximity, or certain influences during an individual's formative years, these immigrants have a better chance at becoming part of the mainstream community in a receiving country. Countries open up their borders to immigrants for a variety of reasons. Economic arguments tend to monopolize policy discussions but there are political, social as well as humanitarian aspects to this conundrum. So who do we let in and, more importantly, what to do with the immigrants already in but do not share the frames of reference of their new countries? This is a question that many countries are facing these days, including France. The situation gets more complicated because of racist attitudes and religious bigotry towards immigrants by some in the host countries - the inability of those racists and religious bigots to give the immigrants the “space” they need to assimilate and prosper. Technology has dealt us a wild card on immigration. If it is becoming increasingly difficult to assimilate immigrants in their new societies, how can immigration address the legitimate needs of countries and peoples? How hot would the pot have to get these days before its ingredients start melting and gelling together?
Apr 12, 2022 · 7 min read
The Middle East - Current State of Play
For investors and businesses, doing business and investing in frontier and emerging markets is all about assessing risk, and pricing it. In some ways, risk is in the eye of the beholder, and risk premia differ depending on who is doing the pricing. But to be able to price risk, one first needs to understand the underlying risk dynamics – deconstructing event clusters and filtering out noise in the process. What we are left with, we hope, is a bare-bones take on an otherwise complicated reality. The Middle East is rich in resources and human capital. And for those investors and businesses who are able to work with and in this region as it moves to realize its potential, rich returns will be realized. Fashioning an appropriate risk management and mitigation strategy is a prerequisite to such success. Risk can be viewed through more than one prism. Today’s Middle East exhibits elements of risk related to politics, economics, religion, language, development policies, culture, and history. Lack of democratic practices and traditions; a major monotheistic religion going through reformation; a language that refers more to itself than to reality; poverty, unemployment, economic inequality and a lack of an economic level playing field; the legacy of colonialism; a culture that suppresses and oppresses; and development policies that push agrarian communities into the information age bypassing an industrial prerequisite – add all of the above conditions and drivers together, in one region, at the same time, and we begin to understand the confluence of dynamics that is gripping the Middle East today and will continue to do so for the foreseeable future. The Arab Spring heralded a new era for the region and the genie that is out of the bottle is that of reform: political, economic, religious, cultural, and linguistic reform. And if world history is to provide any clues as to what will happen next in this region, the first couple of decades of reform will indeed not be easy. Competing schools of thought will drive reform movements, as different economic models and political formulae get tested and retested, as cultural givens are challenged, as Islam undergoes reformation, and as Arabs begin to struggle with their language in an attempt to have it serve their needs rather than assume a life of its own. Perhaps no other recent statement of principles is more relevant to the Middle East today than President Obama’s interview with the Atlantic Magazine a few years ago. Reading the interview, one comes away with several conclusions, chief among them are that advances in energy technologies have lessened the dependence of world economies on Arab oil (although the tragic war in Ukraine may have temporarily impeded this trend); that democracy cannot be exported to or parachuted into the region – it has to be homemade; and that large-scale military interventions in the Middle East are no longer something the US will consider. The downgrading of Islamic terrorism as a national security threat by the Biden Administration as it focuses on Russia, China, and home-grown nationalist terrorism is another reason the Middle East is no longer the priority it used to be. The Obama interview was not the parting words of a departing President; these principles shall come to define US and Western attitudes and policies in the Middle East for decades to come. President Trump may have tried to alter tactics but did not move far from this strategy. When people are ready for change, they tend to grab the nearest ideology and run with it. It is not ideology that causes change; it is people who utilize and use (sometimes abuse) ideology to catalyze and realize change. Since the collapse of the Ottoman Empire and the ensuing years of colonialism and Cold War, peoples of the Middle East tried to realize progress by utilizing different imported “ism-s”. Nationalism, socialism, and capitalism were used and abused and as a result are mostly discredited today by the region’s populations. The only ideology that has not been fully tested yet as a tool for change and progress in the Middle East is one based on religion. The rise of Political Islam is inevitable, given the lack of legitimacy that other ideologies have suffered in the Middle East. And the current intellectual void. But what kind or, more accurately, kinds of Political Islam? Will Islam-based political movements be militant or peaceful? Will reform, liberal, and conservative Islamic schools of thought be able to co-exist on one terrain? Will Middle East Muslim-based political movements secularize over time – like the Christian Democrats did in Europe, for example? The struggles within this major monotheistic faith will impact the world for decades to come. In his interview with the Atlantic Monthly, President Obama pointed out the need to rebalance US engagement with the rest of the world by tilting towards Asia, given China’s global ascent and rising aspirations. China has a sizeable Muslim population, centered mainly in the northwest part of the country; an area that is less developed and which has traditionally supplied a significant number of soldiers in the Chinese army. Which ideology will China’s Muslims grab and run with as they seek change and progress? Will it be that of the Chinese Communist Party, where decades of economic reform resulted in a political core in search of new meaning and philosophy? Or will it be one version or another of Political Islam at a time when this religion is in the throes of reformation? In this geopolitical context, and others throughout the world where religion could play a big role in conflict escalation and where weapons of mass destruction could end up in the wrong hands, it may not be the flutter of a butterfly’s wing but the flapping of an Arab cloak that will cause a typhoon halfway around the world. Islam’s presence in Asia, Southeast Asia, North America and Europe means that as this religion undergoes reformation and as the reformation process impacts and is impacted by political, economic, cultural and linguistic dynamics in the Middle East, Western engagement in this region will continue to be paramount to the individual and collective national security interests of Western powers. The language of President Obama’s interview with the Atlantic Magazine indicates that as the US reconfigures its mode of engagement with the Middle East, it will pursue the most effective approaches with the least possible cost structures. President Trump was hard pressed to alter this orientation. The Biden Administration will continue and amplify on this strategy. Language is important and perhaps nowhere more so than in Arab lands, given the history and culture of the place. Canvassing commentaries in the Middle East at the time, it is interesting to note how the words of the Obama interview were interpreted and understood. President Obama’s emphasis on the need for the peoples of the region themselves to undertake the needed reforms was viewed by some as an act of abandonment. His mention of the concept of tribalism as a dynamic inhibiting progress was understood to mean tribalism in its narrow sense – the extended family and the main social unit in many Arab societies; not tribalism as a state of mind – an allegiance to ideas and modes of behavior that impede progress. It was the writings of Wittgenstein that underscored the importance of language and its relationship to development and reform by posing the question of whether language refers to itself or to reality. Languages go through cycles; at times referring more to themselves than to reality; at others, they refer more to reality than to themselves. Reform efforts are usually aided and augmented when a language refers more to reality than to itself. The ability to transcend the religious metaphor, a key element in any religious reformation, cannot be easily realized if the language within which that religion is based is referring more to itself than to reality – as Arabic language is today. This was not always the case – when Arabic referred more to reality than to itself it powered the civilizational ascendancy of Arabs and Muslims. As these dynamics unfold over the coming decades, those with vested interests in the Middle East should pay close attention to the reformers – individuals who are fashioning and providing the intellectual underpinnings for new change ideologies, challenging violence and subjugation in the Arab and Muslim worlds. During Europe’s Dark Ages, it was the Muslim Civilization that housed and nurtured the works and intellectual achievements of Western thinkers, providing a vital link between Europe’s neglected past and its future enlightenment. Now, Western Civilization needs to undertake a similar effort – not just for the sake of enlightenment but also for the sake of world peace. In 1882, Nietzsche wrote “I greet all the signs that a more manly, warlike age is coming, which will, above all, bring valour again into honour! For it has to prepare the way for a yet higher age, and assemble the force which that age will one day have need of – that age which will carry heroism into knowledge and wage war for the sake of ideas and their consequences. To that end many brave pioneers are needed now…”. It is a good description of what is happening in the Middle East today. We need to find those brave pioneers and provide them with enabling environments. And that is a big part of what we all can do.
Apr 5, 2022 · 8 min read