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NEW DEAL for the Balkans – China and BRICS

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Capital rich and ready to spend, China might be outplaying many Western rivals, even maybe Russia, in the Balkans. Chinese investments boost the influence, something already see in Africa. Is the Balkans next Chinese Africa – opportunities potent filed of contests with the west that loses its orientation, speed and grip?

Chinese Premier Li Keqiang will soon visit Europe again to participate in the Central and Eastern European (CEE) – China Summit to be hosted in Belgrade. This visit is a continuation of last year’s 16+1 initiative held in Bucharest which appeared to offer considerable promise. At that meeting, leaders called for wide-ranging multilateral cooperation aimed at doubling trade and investment in five years.

The outcome of last year’s forum was a four-point proposal for a comprehensive, friendly and cooperative partnership. The main pillars of the proposal included enhancing political trust between China and CEE countries, exploring economic and trade potential, creating a large number of cooperative projects, and strengthening cultural and people-to-people exchanges.
One must ask why China seems so interested in the Balkans. Although some countries – Greece and Serbia are examples – may seem to have some appeal, China is in fact showing an overall interest in the region.

That interest appears to go beyond markets – in fact, the Balkan markets could be considered insignificant for trade. It also seems to go beyond the need to secure a source of commodities, although the Balkans are rich in natural resources. Rather, it appears that China is focused on infrastructure and access to Western European markets.

China’s long-term strategy views Serbia as a strategic partner in the region, and it believes that Belgrade can fill the role of a European transportation hub. An agreement to construct a high-speed railway between Belgrade and Budapest was signed in November 2013. With construction set to begin in 2015 and finish in just two years, the railway highlights China’s interest in infrastructure projects. The project, worth 2.5 billion euro ($3.112 billion), will be financed by the China Development Bank and executed by Chinese state-owned enterprises. Of note is the number of Chinese workers engaged in the project.

Take a closer look, and this approach suggests a Chinese strategy of ensuring greater access to Western Europe to promote its own commercial activities. One of Beijing’s aims is to advance the New Silk road project by accelerating investments in regional infrastructure links and creating a large network of ports, logistic centers, and railways to distribute Chinese products and bolster the speed of East-West trade.

The starting point in this network is the port of Piraeus in Greece, which has attracted continued and significant Chinese investment since 2009, partly through COSCO Pacific, a global shipping giant. Piraeus has subsequently become the main entry point for Chinese goods in Europe, shortening normal shipping times by one week. China has also shown interest in the port of Thessaloniki (Greece), among others in the region, including Bar in Montenegro.

China’s efforts to set up logistics bases started with the Thriasis hub in Greece and then continued in other countries of the region. A new and efficient railway route through the Balkans is the perfect picture of a speedy distribution network.

However, given the low productivity of the Balkans, we can surmise that China is prepared to sacrifice short-term profits while it focuses on pursuing a trade-substituting investment strategy. This approach would allow the Chinese to set up shop on the edge of the EU. That in turn could potentially allow Chinese companies to circumvent trade restrictions and export products directly to a market of 800 million people, thanks to free trade agreements that Balkans countries enjoy with the EU.

China also has an interest in uncovering the Balkan Peninsula’s unexploited business potential through long-term strategic investments. It is aiming to do so by penetrating local strategic markets, not only in infrastructure but also in energy, telecommunications and agriculture.
Especially attractive is the Balkan’s energy sector, where major Western utilities are unwilling to make risky investments. This market is giving China the opportunity to roll out its green expertise and compete on a global scale, aiming to become a leader in the clean energy market niche, based on the Green Credit Directive, which just celebrated its second anniversary.

In fact, China has already initiated many investments in the energy sector in Serbia, where an agreement worth 2 billion euro was signed with EPS, Serbia’s power utility. Agreements have also been made in Bosnia and Herzegovina, through the Stanari project, worth 350 million euro, among others in the region.

On the other hand, the debt-burdened Balkans, in urgent need of major rescue packages and infrastructure investment, are courting foreign investors. Lack of greenfield investment has been the main problem for the transitioning Balkan economies, which have received less than 1 percent of the world total. The loose regulation practices, lax public procurement rules, and labor regulations of the Balkans make the picture more appealing.

The CEE-China initiative looks similar to other Chinese market penetration strategies, one example being the China-Latin America Permanent Forum.
Chinese trade with Latin America has grown more than 20-fold over the last ten years, with China overtaking the European Union as Latin America’s second biggest trade partner. In this region, China has the largest share of two-way trade, imbuing the markets with Chinese exports and importing natural resources back home. Chinese investment in Latin America is also expanding, principally in the energy and natural resources sectors, with the objective to get closer to the big market of the United States.

It is clear that the Balkan economies are in bad shape and urgently need investment. China seems to recognize this, but setting up shop on the edge of EU is the first step towards striking deals inside it. Beijing is building assets and buying future stocks in a region closely linked with Western Europe. Capital rich and ready to spend, China might be outplaying many Western rivals in the Balkans.

Chinese investment will no doubt present opportunities to buy influence – a fact that will need to be carefully assessed by EU concerns.

 

Permitted by and taken from the www.thediplomat.com  (under title: China’s Balkan Gamble – Why is China investing so much in the debt-burdened Balkans?)

Valbona Zeneli is the Chair of the Strategic Initiatives Department at the George C. Marshall European Center for Security Studies.

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Free-Market Capitalism and Climate Crisis

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Free market capitalism is an economic system that has brought about tremendous economic growth and prosperity in many countries around the world. However, it has also spawned a number of problems, one of which is the climate crisis. The climate crisis is a global problem caused by the emission of greenhouse gases, primarily carbon dioxide, into the atmosphere. These externalities are chiefly a consequence of day to day human activities, such as the burning of fossil fuels, deforestation, and conventional agriculture. The climate crisis is leading to rise in temperatures, sea levels, and more erratic weather patterns-The floods in Pakistan and depleting cedars of Lebanon are vivid instances for these phenomena, which are having a devastating impact on the planet.

One of the main reasons that free market capitalism has contributed to the climate crisis is that it prioritizes short-term economic growth over long-term environmental sustainability. Under capitalism, companies are primarily motivated by profit and are not required to internalize the costs of their pollution. This means that they are able to pollute without having to pay for the damage that they are causing. Additionally, the capitalist system is based on the idea of unlimited growth, which is not sustainable in the long-term. As long as there is an infinite demand for goods and services, companies will continue to produce them, leading to ever-increasing levels of pollution and resource depletion.

Another pressing issue that free market capitalism is recently going through is that it does not take into account the externalities of economic activities. Externalities are the unintended consequences of economic activities, such as pollution and climate change. Under capitalism, companies are not required to pay for the externalities of their activities, which means that they are able to continue polluting without having to pay for the damage that they are causing. In her book “This Changes Everything: Capitalism vs Climate” Naomi Klein argues that the current system of capitalism is inherently incompatible with the urgent action needed to address the Climate crisis.

To address the climate crisis, it is necessary to put checks and balances over the free market capitalism and/or make a way towards a more sustainable economic system. This can be done through a number of different effective policies, such as:

Carbon pricing: This can be done through a carbon tax or a cap-and-trade system, which would make companies pay for the carbon emissions that they are producing. In the article “The Conservative Case for Carbon Dividends” authors suggest that revenue-neutral carbon tax is the most efficient and effective way to reduce the carbon emissions.

Increasing renewable energy investments: an increment in the investments in clean energy technologies, such as solar and wind power, can result in the reduction in  the use of fossil fuels.

Regulating pollution: Governments can regulate pollution to limit the amount of greenhouse gases that are emitted into the atmosphere.

Encouraging sustainable practices: Governments can encourage sustainable practices, such as recycling and conservation, to reduce the use of resources.

It is remarkable that evolving Capitalism can be harnessed to address the climate change. The private sector has the resources and innovation to develop and implement new technologies and sustainable practices, but they need the right incentives and regulations to do so. Finding the balance between economic growth and environmental protection must be a priority for capitalists.

The free market capitalism has been the driving force behind global economic growth, but at the same time, it has contributed to the ongoing climate crisis. The solution to this problem is not to reject capitalism, but rather to reform it to the societies’ suitable demands. Government should consider providing a level playing field so as to make the probable transition from fossil-based energy systems to Green energy technologies possible. The capitalists should not consider short-termism over long term environmental sustainability. Government intervention to put a price on carbon emissions, invest in renewable energy, regulate pollution, and encourage sustainable practices is necessary to avoid the worst impacts of the climate crisis and build a sustainable future for all. However, here is the catch:  Is achieving net-zero-carbon emissions by mid-century a probable target? The answer is quite uncertain, however it is critical point to strive for in the face of  escalating Climate Crisis.

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Egypt’s “Too Big to Fail” Theory Once Again at Test

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Authors: Reem Mansour & Mohamed A. Fouad

In the wake of 2022 FED’s hawkish monetary policy, the Arab world’s most populous nation, Egypt, saw an exodus of about USD20bn of foreign capital.  A feat that exerted pressure on the value of its pound against the dollar slashing it by almost half.  This led to USD12bn trade backlog accumulating in Egypt’s ports by December 2022.

Meanwhile, amidst foreign debt nearing USD170bn, inflation soaring to double digits, and a chronic balance of payment deficit, Egypt became structurally unfit to sustain global shocks; the country saw its foreign debt mounting to 35% of GDP, causing the financing gap to hover at USD20billion. 

While it may seem all gloom and doom, friends from the GCC rushed to inject funds in the “too big to fail” country, sparing it, an arguably, ill-fate that was well reflected in its Eurobond yields spreads and credit default swaps, a measure that assesses a sovereign default risk. 

For the same reason in early 2023, the IMF sealed a deal worth of USD3bn, with the government, which unlocked an extra USD14bn sources of financing from multilateral institutions, and GCC sovereign funds, to fill in a hefty portion of the annual foreign exchange gap, albeit  a considerable amount averaging USD6bn per annum is yet to be sourced from portfolio investments.  

With the IMF stepping in, the Egyptian government agreed on a structural reform program that requires a flexible exchange rate regime, where the Egyptian pound is set to trade within daily boundaries against the US dollar, rationalize government spending, especially in projects that require foreign currency; and most importantly the program entails stake-sales in publicly owned assets, paving the way for the private sector to play a bigger role in the economy.

In due course, through its sovereign fund, Egypt planned initial offerings for shares in companies worth about USD5-USD6bn, and expanded the sale of its shares in local banks and government holdings to Gulf investment funds. 

Through the limited period of execution of these reforms, the EGP hit a high of 32 against the greenback, and an inflow of portfolio investments amounting to USD1bn took place, according to the Central Bank of Egypt. 

Simultaneously, Citibank International, cited a possible near end of the devaluation of the Egyptian pound against the US dollar.  Also, in a report to investors, Standard Chartered recommended to buy Egyptian treasury bills, and pointed to the return of portfolio flows to the local debt market in the early days of January, 2023. Likewise, Fitch indicated the ability of the Egyptian banking sector to face the repercussions of the depreciation of the pound, and that the compulsory reserve ratios within Egyptian banks are able to withstand any declines in the value of the pound because they are supported by healthy internal flows of capital.

While things seem to be poised for a recovery, the long term prospects may lack sustainability.  The Egyptian government needs to accelerate its plans to shift gears towards a real operational economy capable of withstanding shocks and dealing with any global challenges. Egypt, however has implicitly held the narrative that the country is ‘too big to fail”. This is largely true to the country’s geopolitical relevance, but even this has its limitations when the price to bail far outweighs the price to fail.

Former President George W. Bush’s administration popularized the “too big to fail” (TBTF) doctrine notably during the 2008 financial crisis. The Bush administration often used the term to describe why it stepped in to bail out some financial companies to avert worldwide economic collapse.

In his book “The Myth of Too Big To Fail” Imad Moosa presented arguments against using public fund to bail out failing financial institutions. He ultimately argued that a failing financial institution should be allowed to fail without fearing an apocalyptic outcome. For countries, the TBTF theory comes under considerable challenge.

In August 1982, Mexico was not able to service its external debt obligations, marking the start of the debt crisis. After years of accumulating external debt, rising world interest rates, the worldwide recession and sudden devaluations of the peso caused the external debt bill to rise sharply, which ultimately caused a default. 

After six years of economic reform in Russia, privatization and macroeconomic stabilization had experienced some limited success. Yet in August 1998, after recording its first year of positive economic growth since the fall of the Soviet Union, Russia was forced to default on its sovereign debt, devalue the ruble, and declare a suspension of payments by commercial banks to foreign creditors.

In Egypt, although the country remains to face a number of challenges, signs remain relatively less worrying than 2022, as global sentiment suggests that leverage will be provided in the short-term at least. Egypt’s diversified economy, size and relative regional clout may very well spare the country the fate of Lebanon. However, if reforms do not happen fast enough, the TBTF shield may become completely depleted.

Hence, in order to avoid an economic fallout scenario a full fledged support to the private sector’s local manufacturing activity and tourism is a must.  Effective policies geared towards competitiveness are mandatory, and tax & export oriented concessions are required to unleash the private sector’s maximum potential and shift Egypt into gear.

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Sanctions and the Confiscation of Russian Property. The First Experience

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After the start of the special military operation in Ukraine, Western countries froze the assets of the Russian public and private sector entities which had been hit by blocking financial sanctions. At the same time, the possibility that these assets could be confiscated and liquidated so that the funds could be transferred to Ukraine was discussed. So far, only Canada has such a legal mechanism. It will also be the first country to implement the idea of confiscation in practice. How does the new mechanism work, what is the essence of the first confiscation, and what consequences can we expect from the new practice in the future?

Loss of control over assets in countries that impose sanctions against certain individuals has long been a common phenomenon. The mechanism of blocking sanctions has been widely used for several decades by US authorities. A similar methodology has been adopted by the EU, Switzerland, Canada, Australia, New Zealand, Japan and some other countries. Russia and China may also resort to these tactics, although Moscow and Beijing rarely use them. In the hands of Western countries, blocking sanctions, however, have become a frequent occurrence. Along with the ban on financial transactions with individuals and legal entities named in the lists of blocked persons, such sanctions also imply the freezing of the assets of persons in the jurisdiction of the initiating countries. In other words, having fallen under blocking sanctions, a person or organisation loses the ability to use their bank accounts, real estate and any other property. Since February 2022, Western countries have blocked more than 1,500 Russian individuals in this way. If you add subsidiary structures to them, their number will be even greater. The volume of the property of these persons frozen abroad is colossal. It includes at least 300 billion dollars in gold and foreign exchange reserves.

This is not counting the assets of high net worth Russian individuals worth $30 billion or more which have been blocked by the G7 countries. However, the freezing of property does not mean its confiscation. Although the blocked person cannot dispose of his assets, it formally remains his property. At some point, the sanctions may be lifted, and access to property restored. In practice, restrictive measures can be in place for years, but theoretically, the possibility of recovering assets still remains.

After the start of the special military operation (SMO), calls began to be heard in Western countries to confiscate frozen property and transfer it to Ukraine. Confiscation mechanisms have existed before. For example, property could be confiscated by a court order as part of the criminal prosecution of violators of the sanctions legislation. However, such mechanisms are clearly not suitable for the mass confiscation of property. Blocking sanctions are a political decision that do not require the level of proof of guilt that is required in the criminal process. To put it bluntly, the hundreds of Russian officials or entrepreneurs put on blocking lists for supporting the SMO did not commit criminal offenses for which their property could be subject to confiscation. The sanctions have spurred the search for such crimes in the form of money laundering or other illegal operations. But the amount of funds raised in this way would be a tiny fraction of the value of the frozen assets. To implement the idea of confiscation of the frozen assets of sanctioned persons and the subsequent transfer of the proceeds for them, Ukraine needed a different mechanism.

Canada was the first country to implement such a mechanism. The 2022 revision of the Special Economic Measures Act gives Canadian authorities the executive power to order the seizure of property located in Canada which is owned by a foreign government or any person or entity from that country, as well as any citizen of the given country who is not a resident of Canada (article 4 (1)). The reason for the application of such measures may be “a gross violation of international peace and security, which has caused or may cause a serious international crisis” (Article 4 (1.1.)). The final decision on confiscation must be made by a judge, to whom a relevant representative of the executive branch sends a corresponding petition (Article 5.3). Furthermore, the executive authorities, at their own discretion, may decide to transfer the proceeds from the confiscated property in favour of a foreign state that has suffered as a result of actions to violate peace and security, in favour of restoring peace and security, as well as in favour of victims of violations of peace and security, or victims of violations of human rights law or anti-corruption laws (art. 5.6).

The first target of the new legal mechanism will be the Canadian asset of Roman Abramovich’s Granite Capital Holding Ltd. The value of the asset, according to a statement by Canadian authorities, is $26 million.

Roman Abramovich is on the Canadian Blocked List, i. e. his property is already frozen, and transactions are prohibited. Now the property of the Russian businessman will be confiscated and, with a high degree of probability, ownership will be transferred to Ukraine. This is a relatively small asset (from the standpoint of state property), but the procedure itself can be worked out. Further confiscations may be more extensive.

The Canadian experience can be copied by other Western countries. In the US, work on such a mechanism was announced back in April 2022. although it has not yet been adopted at the legislative level. In the EU, such a mechanism is also not finally fixed in the regulatory legal acts of the Union, although Art. 15 of Regulation 269/2014 obliges Member States to develop, inter alia, rules on the confiscation of assets obtained as a result of violations of the sanctions regime. The very concept of violations can be interpreted broadly. So, for example, Art. 9 of the said Regulation obliges blocked Russian persons to report to the authorities of the EU countries within six weeks after blocking about their assets. Violation of this requirement can be regarded as a circumvention of blocking sanctions.

There are several consequences of the Canadian authorities’ initiative.

First, it becomes clear that the confiscation rule is not dormant. Its use is possible and is a risk. This is a serious signal to those Russians and Russian companies that have not yet come under sanctions, but own property in the West. It can be not only frozen, but also confiscated. This risk will inevitably be taken into account by investors and owners from other countries, which could potentially be the target of increased Western sanctions in the future. Among them are China, Saudi Arabia, Turkey, and others. It is unlikely that the confiscation of Russian property will lead to an outflow of assets of these countries and their citizens from Canada and other Western jurisdictions. But the signal itself will be taken into account.

Second, the Russian side is very likely to take retaliatory measures. Western companies are rapidly withdrawing their assets from Russia. The representation of Canadian business in the Russian Federation was small even before the start of the operation in Ukraine. If the practice of confiscation becomes widespread, then the Russian side can roll it out in relation against the remaining Western businesses. However, so far, Moscow has been extremely hesitant to freeze Western property. While the US, EU and other Western countries have actively blocked Russians and their assets, Russia has mainly responded with visa sanctions. The confiscation could overwhelm Moscow’s patience and make the retaliatory practice more proportionate.

Finally, the practice of confiscation modifies the very Western idea of sanctions. It currently implies, among other things, that the “behavioural change” of sanctioned persons would result in the lifting of sanctions and the return of property. The freezing mechanism was combined with this idea. However, the confiscation mechanism contradicts it. Sanctions now become exclusively a mechanism for causing damage.

From our partner RIAC

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