There has been a lot of discussion recently about the value of multilateralism. I am a strong believer that the multilateral system, which includes multilateral development banks (MDBs), plays many important roles to support the global community. The multilateral system does not conflict with the national agenda. At its root, the multilateral system relies on the coordination and support of national governments and their taxpayers.
At ADB, its long-term corporate strategy—Strategy 2030, published last year—set priorities to support our member countries and their people in line with major international commitments such as the Sustainable Development Goals and the Paris Agreement on climate change. These priorities include (i) addressing remaining poverty (including through better health, education and social protection), (ii) accelerating gender equality, (iii) tackling climate change, building disaster resilience, and enhancing environmental sustainability, (iv) making cities more livable, and (v) promoting rural development and food security. We support these by strengthening governance and institutional capacity in our member countries and fostering regional cooperation and integration. ADB seeks to be a knowledge center, and aims at incorporating digital technologies, artificial intelligence, satellite systems, and other advanced technologies in its projects, programs, and technical assistance.
For MDBs to effectively pursue their missions, they must continue to reinvent and reform themselves. Since the report by the G20 Eminent Persons Group (EPG) on Global Financial Governance was published last October, there has been renewed interest in how to reform MDBs. I would like to share my thoughts on three important areas mentioned in the EPG report.
First is collaboration among MDBs. Contrary to the perception that MDBs are not working in a coordinated way, MDBs have been strengthening their partnerships. The leaders of MDBs meet at least three times a year to discuss global issues and enhance their coordination. Departments within MDBs—spanning regional operations and sectors, private sector operations, strategy, legal issues, treasury, independent evaluation, human resources, and so forth—have regular meetings and telephone conferences. Moreover, MDBs have close donor coordination in member countries among our offices there together with relevant government agencies.
MDBs also work closely with the International Monetary Fund (IMF), especially when considering budget support for our member countries. When ADB considers policy-based lending (PBL), I always ask whether the IMF is supporting it. And ADB waits until an IMF program is agreed with the government before proceeding with a PBL if it involves balance of payment issues.
Indeed, strong collaboration is key to achieving greater development impact. MDBs must continue to enhance collaboration among themselves, including the EPG’s proposed launch of a country platform, to promote economic stability and sustainable growth in our member countries.
Second is a stronger focus on mobilizing private sector resources. MDB lending and equity investment to private sector companies generally has an outsized impact on mobilizing private resources as well as expertise. This is the reason that ADB is increasing its private sector operations, especially in frontier economies, start-up companies, and social sector projects such as in vocational education and healthcare, in addition to projects in renewable energy, urban transport, water, and sewerage. We must be mindful, though, that our private sector operations do not distort the market by crowding out private money or giving an unfair advantage to specific companies.
ADB also promotes public-private partnerships (PPPs) by providing transaction advisory services, even without using its financial resources. We established a PPP office in ADB to support the capacity building of governments and to help design and structure PPP transactions. We also must expand the use of credit enhancement instruments including guarantees.
At the same time, it should be remembered that regardless of sovereign or nonsovereign lending, MDBs are vehicles for mobilizing private resources by issuing bonds in capital markets, thereby leveraging our shareholders’ contributions to our equity. We should be proud that since their establishment, MDBs have achieved a lot in the development of poor countries by de-risking development financing through their high credit ratings (AAA in the case of ADB) and by recycling financial resources.
The third element of MDB reform is that, as the EPG report proposes, governance of MDBs themselves needs to be brought up to date, reflecting the complexity of MDB strategic challenges and the needed shift in their business models.
As part of ADB’s governance reform, we are reviewing the functional relationship between our Board and Management. We aim to enhance our effectiveness by reorienting the Board’s focus to strategic priorities and adopting a practical risk-based approach that delegates greater responsibility to ADB Management for project and program approvals. As the scale and complexity of ADB’s operations increase, we need a new model to achieve the dual targets of securing the role of the Board on the direction of ADB on the one hand, and enhancing efficiencies and speed in decision making on the other.
The perspectives provided by the Board collectively, and by their constituencies individually, are essential inputs to the good work of ADB. They represent various development priorities including quick and tailored responses to the needs of developing countries, the efficient use of taxpayer money of shareholding and donor countries, promotion of gender equality, and environmental and social considerations. I have a strong view that at ADB, the resident Board in Manila contributes to close and collegial discussions between Board and Management, even when there are differences in view between them and among Board members. We all share ADB’s mission of a prosperous, inclusiveness, resilient, and sustainable Asia and the Pacific.
In addition to these three broad areas of reform, ADB has been implementing various reform measures. These include (i) optimizing our balance sheet by combining ordinary capital resources and Asian Development Fund lending operations, (ii) establishing 15 sector and thematic groups supported by independent secretariats located in the Sustainable Development and Climate Change Department to enhance the creation and sharing of knowledge across departments, (iii) introducing guidance and procedures to ensure collaboration of sovereign and nonsovereign operations as “One ADB”, (iv) increasing the role of ADB offices on the ground in member countries, (v) modernizing business processes and IT systems, (vi) strengthening our human resources management by increasing mobility, improving talent management and career development, and promoting diversity including improving women’s representation in senior roles, (vii) better engagement with civil society organizations, and (viii) continued efforts to keep ADB efficient through the prudent management of our administrative budget.
National interests and multilateralism go hand in hand because in the longer run we need international cooperation and collective actions for the interests of people in all nation states. By reforming MDBs, we will continue to contribute to the improvement of people’s lives in the global community.
Rise of Billionaires In India, Lobbyism And Threat To Democracy
Let me start by asking you – Have you watched Oliver Stones’ 1987 masterpiece, ‘Wall Street’? Great! For those who haven’t, here is a quick reflection of its storyline. This movie is a premise with a promise, and exert its audience to seek an answer to one of the most neglected question in the philosophy of ethics and greed – ‘How much money is enough money?’. Michael Douglas plays an unsparing millionaire raider Gordon Gekko. Bud Fox, played by Charlie Sheen, is a stockbroker full of ambition, doing whatever he can to make his way to the top. Fox is enchanted by Gekko, and entice him into mentoring him by providing insider trading information. Although Fox is loyal to his mentor Gekko, throughout the film, he is seen asking the millionaire trader Gekko, “How much money do you need to be satisfied with? How much is enough?”. And each time Gekko ponders and thinks hard, but the truth is, he himself doesn’t know. There is a scene in the movie where Gordon Gekko uses Fox’s inside information to manipulate the stock of a company that he intended to sell off, while throwing its workers, including Bud’s father. When Bud hears about his father losing the job along with other workers, he experiences deep agony and immediately repents his participation in the millionaire’s duplicity and deception. He storms to his office and asks again, “How much is enough, Gordon?”
And, Gekko answers – (Source :Wall Street, 1987)
“The richest one percent of this country owns half our country’s wealth, five trillion dollars… You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now, you’re not naïve enough to think we’re living in a democracy, are you, buddy? It’s the free market. And you’re part of it.”
Now, what this scene exposes is the adrenaline rush of power that wealth provides. But, what this scene also highlights is how this power of wealth has created a society where corporate empires are thriving through lobbyism, while middle-lower class are palpitating in a life of destitution. And in case you are thinking how a 1987 American classic like ‘Wall Street’ is relevant to the rise of billionaires in 2021, here is the answer – wealth, national morality and democracy – all symptomatic of a thriving country. But, with the rise of billionaires in India, this is exactly what is at stake.
Corporate Political Activity (CPA) – When Corporations Colonizes The State
Luis Fernandez said, “Either we can have democracy or a great amount of wealth concentrated in the hands of few. We cannot have both”. So, what did he mean by this? For starters, hoarding of wealth not only gives you the liberty to buy luxury goods, but it also gives you the freedom to buy votes, laws, and legislation. How? Well, corporate involvement in any democratic ecosphere is usually manifested into a corporate political activity (CPA). This corrupts the democratic process by excluding the citizens from policy decision-making. Thereby, privatizing profits for corporation and socializing the loss among citizens(Daniel Nyberg,2021). So, how is this accomplished? It’s achieved through a specialized team of people called – Corporate Lobbyists. They act as a mediator between the political parties and the corporation they work for. But, what do these billionaires lobby against? Mostly tax deregulations. However, the devil hides in details – Most billionaire monopolists lobby against anti-force entrustments, giant banks lobby against risk regulations, polluters in the private sector lobby against environmental regulations, and private corporations lobby against public services. Each one of these is detrimental to the growth of any democracy because lobbyists act out in the interest of billionaires and influence government policy-making by taking in no account of public interest (Mehrsa Baradaran, 2019). In simple words – they suggest extraneous elements in decision-making and subvert the public interest in areas like infrastructure (highways, airports, and massive scale projects under the Jawaharlal Nehru National Urban Renewal Mission in 63 cities), natural resources, and energy (gas, oil, petrol, energy), telecom (3G and 4G technology),military (weapons and aircrafts), mining (where giant corporations have developed stakes making billions on India’s tribal heartland), and agribusiness (seeds, privatization of agriculture sector), etc. And, how does this work? Keep reading.
You must be aware of the ongoing farmers’ protest since last year. It is strictly against two issues. First being the ‘three new farm laws’ introduced by Modi government. Second, being the agitation against India’s two richest billionaires – Mukesh Ambani and Adani, who are close to Modi and is believed to profit from these new farm laws. These two billionaires have been eyeing India’s farm sector for a while now. In 2017, Ambani expressed his interest in investing in the agriculture sector. His Jio Platforms, today, is leveraging its partnership with Facebook to dilate into this domain with Jiokrishi app, which will ease out the farm-to-fork supply chain. The company’s records suggest that it source(ed) 77% of its fruit directly from farmers. Now, currently, the farmers take their produce to wholesale markets, governed by APMC (government body). APMC in every State decides the price it will pay to the farmers for their produce. Remember, this market becomes the central point for government acquisition of food grains. With the new farm laws, a giant corporation can directly approach the farmers, buy and pay for the produce at an agreed amount. In short, this new farm law aims to abolish this structural network and privatize it. But, this is just structural damage for farmers. As I mentioned earlier, the devil hides in details – The news laws do not make a written contract between the farmers and corporations mandatory. This means that if there is a conflict of interest between both parties, it will be extremely difficult for farmers to prove that a corporation has breached that agreement. Additionally, this law states that a farmer has no right to take these disputes to an independent judiciary for justice. Instead, they would have to reach out to two bodies – a conciliation board (district-level administrative officers) or to the appellate authority. Now, both of these bodies are dependent on government, which can potentially revert the case in favor of corporations. This law also has a grave danger of impacting the minimum support price that government bodies offer to farmers in case of a declined price fall for their produce during a particular season. The farmers here are sailing on a boat of uncertainty, economic chaos, and policy madness —- all favoring the interest of the giant corporates instead of the public; more specifically, the farmers, who are the beating heart of an agrarian economy like India.
Remember, The Rafael deal? The deal was given to a Ambani brother, who had minimal to no experience in aircraft. Rafael offset contract has been given to Reliance Defense, which was formed 12 days before the announcement of the Rafael deal. ‘Mediapart’, a French-language publication, quoted Francois Hollande (2018), “It was the Indian government that proposed this service group (Reliance), and Dassault which negotiated with Ambani. We had no choice. We took the interlocutor who was given to us.” Two weeks back, the French newspaper ‘LeMonde’ dropped a bombshell stating that the French authorities passed off Anil Ambani’s $162 million tax after Modi-led NDA government negotiated Rafael deal with France based Dassault Aviation. Another example- Back in 2018, when the Modi government approved the privatization of six airports, it also relaxed the prerequisite requirements. BJP allowed companies with no prior experience in this sector to present their bid. After deliberation, all six airports were given to Gautam Adani, the second-highest billionaire in India with no history of running airports. Today, in 2021, Adani Airports has acquired 23.5% stake in Mumbai International Airport Ltd(MIAL), and is set to extend the stakeholding percent to 74%, which will give Adani group the ownership of the upcoming Navi Mumbai airport in which MIAL holds majority stakes. His other ventures in sectors like Adani green energy, power, and transmission hold a close-by narrative. His Carmichael coal mine project in Australia has earned him an infamous ‘climate change villain’ title. Tax deregulations is the primordial goal of corporate lobbyists, and they seem to be winning. The Indian government last year announced that it had reduced the rate of tax for certain existing companies at 25.17% , the lowest since 2010. There is an extra tax deduction of 15% from earlier level of 25% for start-ups. One would argue that the low tax rate would increase international corporate investments. But recent studies show that businesses are moving to countries like Bangladesh, Vietnam, Indonesia for labor-intensive operations. Thereby, failing to bring employment to the country.
Figure 1: The rate of tax imposed on corporates by the Indian government in the last ten years
Figure 2: Mukesh Ambani’s $2 billion house overlooking the slums of Dharavi – The world’s largest slum. Source of the image : www.thecharette.org
Tax deregulation, tax invasion, and corporate lobbying are not the only problems that manifest with the rise of billionaires in India. The most chronic and malignant effect is the ever-widening gap between the rich and poor, threatening economic justice and social cohesion in a society. This economic gap is so dilated that it becomes a life of excess for these billionaires and destitution for the rest of the 1.38 billion Indians. According to Forbes magazine, the third richest Indians – Mukesh Ambani ($84.5 billion), Gautam Adani & family($50.5 billion) and Shiva Nadar($ 23.5 billion) own 60% of the country’s wealth. India’s top three richest people have added over $100 billion between them. In fact, since the initial lockdown in March 2020, India’s top billionaires increased their wealth by 35% during COVID-19 pandemic. According to Oxfam report, India’s top 100 billionaires witnessed their fortune increase by staggering number of Rs 12.97 trillion. This amount could have provided every 364 million poor Indians a cheque for ₹94,045 each. So, what was the economic status of the working class? They suffered abominably during COVID, while billionaires thrived. The study, ‘State of Working India 2021 – One year of Covid-19’, by Azim Premji University, revealed that the economic recession caused by the COVID-19 has pushed 230 million Indians below the poverty line. This number accounted for and contributed to the global increase in poverty by a whopping 60% in 2020. The study shows the loss in monthly income earning for all kinds of workers. The fall was 17% for temporary salaried jobs, 18% for self-employed, 21% for daily wage workers, and 5% for permanent salaried workers. This ever-widening gap of economic inequality in India goes against every fiber of true democracy, where public resources and rights like healthcare, education, COVID relief financial aids, etc., instead of being elevate, are subverted. Gabriela Bucher, Executive Director of Oxfam International said, “Rigged economies are funnelling wealth to rich elites who are sailing through the pandemic in luxury and ease, while those on the frontline of the pandemic — medical assistants, healthcare workers, and market vendors — are struggling to pay the bills and put food on the table”. Existence of these billionaires in any society is symbolic of a theocracy thriving and a democracy that’s palpitating. Times like these demand a moral obligation to question, resist and fight against the economic injustice, not just for ourselves, but for our children and many generations to come by. Remember, power seeks self-preservation first and foremost. The billionaires will do anything and everything to continue hoarding resource, wealth and pass it to their heirs. So, the question is not – when will this stop? But, what are you going to do about it?.
The light side (SMEs) and the dark side (virtual currency) in post-covid Italy
With a view to assessing the impact of the pandemic that has been afflicting Italy since the beginning of 2020, I think we should examine the careful analysis made by the National Commission for Listed Companies and the Stock Exchange (Consob) in its report on the year 2020.
2020 was one of the worst years for Italy in economic and social terms since the end of World War II. After experiencing a significant fall in GDP, the country has been moving towards economic recovery since the second half of the year and, more markedly, in the early months of 2021, and is showing its own willingness to tackle the unresolved problems, by also taking advantage of the change in the EU’s fiscal policy attitude, which is a necessary foundation for cohesion among Member States.
The 2020 results confirmed the assessment that savings and exports are the two pillars of the country’s economic and social strength. The protection of savings by public institutions follows rules that have been tested and perfected over time. Nevertheless, they need to be updated in the light of technological innovations in the financial sphere. The most solid protection, however, remains its anchorage to real activity, the progress of which is shaped in Italy by export performance. On the other hand, private consumption and public spending show that they have not the momentum they have in other major world economies.
One of the few positive aspects emerging from the report is that the savings ratio of Italian households compared to their disposable income grew by 50% in 2020. Excluding savings invested in listed companies, its yield remained rather low, close to zero.
Considering the amount of financial assets owned by Italian households, each percentage point of return can be estimated at around 30 billion euros, i.e. almost 2% of GDP, the size of a good public budget plan and fiscal manoeuvre of the past.
Taking into account the management charges, savings have contributed significantly to sustaining market stability, but without producing real growth, although this effect is now the result of a crisis that arose for particular and contingent reasons.
Exports experienced difficulties, declining in volume by about one-seventh compared to 2019, due to the concomitant effect of falling global demand and quarantine-related obstacles to domestic production.
Imports fell more sharply, thus enabling Italy’s foreign current account balance to remain positive and increasing slightly with regards to GDP.
In 2020 Italy’s international investment position improved further, showing a surplus for the first time in three decades. The international financial market only partially recorded and acknowledged this favourable structural position of the country.
In the first quarter of 2021, world trade rose to higher levels than pre-crisis levels and Italy’s exports continued to grow at double their rate, thus confirming the resilience and dynamism of Italian companies in the sector – a traditional cornerstone of our economy.
The financial account balance with foreign countries, which had recorded a slight negative balance in 2020, also turned positive, thus confirming the role of Italian savings as a pillar of stability – another Italy’s point of strength.
Confidence in the Italian economy’s ability to react has grown, as shown by the significant reduction in the spread between BTP and Bund interest rates. This is also the result of the decisions taken by the ECB to purchase significant amounts of public bonds and by the European Commission to suspend – albeit temporarily – the Stability Pact and launch the Next Generation EU Plan (NgEU).
The report under consideration, however, states that for the recovery phase to continue, we need to complement and supplement the decisions taken so far to boost companies’ risk capital in view of improving their financial leverage and making them more willing to undertake new initiatives.
This phase provides an important opportunity for the tax reform that has been urged for some time and reaffirmed in the framework of the National Recovery and Resilience Plan (NRRP) implementing the Next Generation EU Plan.
State intervention for social purposes has reached unusual forms and levels, without anyway reducing citizens’ pressure on public resources. This is not surprising because the rational content of human action leads to choose obtaining the best result at the lowest cost.
Private companies, especially the exporting ones, have been forced by competition to solve their problems without delay, so as to avoid being excluded from the market. Their ability to do so is a cornerstone of growth and a foundation for the good and smooth functioning of the democratic system, which has the power to correct the income distribution determined by productive and commutative activity through regulations, taxes and levies.
Conversely, when these forms are insufficient and savings are not used by private individuals, the State resorts to debt, but not always following a well-founded assessment of the intergenerational redistributive effects.
In this regard, the report insists on the fact that – on the basis of the yardstick provided by the laws in force – it is no longer possible to distinguish – with technical and legal certainty – of what currently currency and financial products legally consist – a content that is interrelated due to the connection ensured by the conversion platforms between virtual and traditional instruments.
The market uses a different yardstick from that of the existing legislation, which needs to be incorporated and integrated into it. The activity in movable assets, securities and forms that takes place in the field of financial information is also increasingly interfering with international relations and geopolitical equilibria, the stability of which plays an important role for exchanges with currency and nominal funds, especially as a result of the growing weight they have in a political scenario that is no longer at the height of the peace and prosperity achieved in the last thirty years of integration and cooperation between States.
However, the willingness expressed in various fora by government authorities to seize the opportunities opened up by technological innovations in capital movements and management should not be seen as acquiescence to the loss of market transparency, but as a desire to recover it by making use of the same financial innovations.
Therefore, the favourable attitude towards new techniques must be matched by clear rules on the emergence and exchange of encrypted instruments and their intertwining with traditional monetary and financial assets/liabilities, whether already digitalised or not, as an essential guide for operators managing liquidity and savings.
The spreading of virtual instruments has prompted the emergence of “technology platforms” enabling faster and cheaper ways for accessing payment and securities trading services than those offered by banks and other intermediaries and brokers.
We need to be careful, however, as the custody and exchange functions they initially performed have evolved to accommodate increasingly articulated and complex transactions, including the granting of credits secured by one’s own or others’ virtual instruments, or the conclusion of derivative contracts using cryptocurrencies (Altcoin, Crypto token, Stabe coin, Bitcoin, INNBC, etc.) as collateral, even for several transactions of the same type.
These new market segments are evolving rapidly and there seems to be a dangerous repetition of the experience before the 2008 crisis, when derivative contracts grew to ten times the size of global GDP.
Although with the necessary distinctions, it is likely that something similar is happening in the market for virtual monetary and financial products, especially the encrypted ones.
The use of these instruments in closed forms outside the participants in the initiative (permissionless) precludes private supervision (such as the one carried out by boards of auditors and certification bodies) or public supervision (by supervisory authorities). Without adequate safeguards (rules and bodies), the result is a deterioration in market transparency, which is the foundation of lawfulness and operators’ rational choices.
The well-known negative effects include the shielding that these techniques allow for criminal activities, such as tax evasion, money laundering, terrorist financing and kidnapping. The concentration in the possession of cryptocurrencies that has recently been ascertained may reflect this aspect of the problem.
For Italy, the problem raised has particular connotations compared to other countries due to the existence of a constitutional provision that attributes to the Republic the task of encouraging and protecting savings in all its forms, as well as the task of regulating, coordinating and controlling the credit exercise and operation.
It would be improper and inappropriate to attribute to the specific phrase “savings in all its forms’ and to the credit to be protected a connotation that would also embrace virtual instruments, without going through a specific regulation.
If this were to happen, the responsibility for the consequences suffered by savers could fall on the State, as has already happened in the past, because of the covert or overt legitimisation of their existence and the awareness that through financial innovations market manipulation and the consequent ruin of savers can be achieved.
Therefore, the existence and operation of a security system – even if left to private individuals – must be guaranteed and supervised by the State which, however, must bear in mind that the spreading of digital techniques in finance poses specific requirements and needs that must be addressed globally, otherwise its effectiveness will be reduced.
The legitimisation of the existence of “virtual savings”, in various forms, is now a reality that intersects with savings generated in the traditional way, i.e. without spending a portion of the income produced by labour or capital.
We are faced with radical changes that must be tackled being fully aware of their content and urgency in view of avoiding negative consequences on the micro and macro-systemic stability of the securities market and, in this way, on the savings and economic growth needed to protect them and use them properly.
An obligatory step is to reaffirm that the legal validity of contracts is only guaranteed by their denomination in sovereign currency. If – as it would appear to be the case – we intend to recognise the existence of private currencies, users must make it clear in a specific contractual clause that they are aware of the risks they are running in using non-public currencies.
Beyond Being Friends: Russia and China Need an Exclusive Trade Deal
RIAC’s 6th “Russia and China: Cooperation in a New Era” conference in early June showcased once again the will of the two countries to develop exclusive relations. Over the past 1,5 years, during the global COVID crisis, both sides have even strengthened mutual trust. In December 2020, Russia and China extended their agreement on notifying of missile launches for ten years. The document was first signed back in 2009. In March, the Treaty of Good Neighborliness and Friendly Cooperation was prolonged, an agreement that has been cementing relations between the two countries for the past 20 years.
Economy contrasted with diplomacy
However, despite the long-sustained foreign policy rapprochement, Russia and China are far from fully utilizing their bilateral economic potential. In 2020, according to the Russian Federal Customs Service, China accounted for 15% of Russian exports, slightly more than the CIS (14%), but significantly less than the European Union (41%). In the structure of Russian imports, China is also behind the EU (24% versus 35%), although European food producers have been excluded from the Russian market since 2014.
In turn, Russia’s share was only 2% in Chinese exports in 2020 (with the U.S. share at 17%), and only 3% in imports (compared to 7% for the U.S., according to the ITC).
The same proportions are typical of mutual investments. By the beginning of 2020, according to the Bank of Russia, China accounted for less than 0.1% of accumulated direct investment from Russia (with the share of UK and Germany at 4.7% and 2.2%, respectively). As for the accumulated direct investments in Russia (private equity and debt instruments), China’s share reached only 0.8% in early 2020, while the share of France stood at 4.5%.
State support and guarantees
So far, Chinese investments are mainly focused on energy projects, directly or indirectly supported by the state. Yamal LNG plant is a good example (20% owned by CNPC, 9.9% by Silk Road Fund): to launch construction, Novatek raised a loan from the NWF (the sovereign National Wealth Fund). Another example is the Amur Gas Chemical Complex (AGCC) of Sibur (40% owned by Sinopec)—the project will enjoy tax benefits as a resident of one of the Far Eastern territories of priority social and economic development.
Ensuring guaranteed demand is equally important, as is the case for AGCC, which is located in close proximity to the world’s largest consumer of polyethylene and polypropylene, the basic petrochemical products. It is no coincidence that Sinopec acquired the share in the Amur GCC in December 2020. By that time, it became obvious that the consequences of the COVID-19 pandemic would not undermine China’s growing demand for petrochemicals and gas chemicals: according to the ICIS forecast, China’s share in global polyethylene imports will grow from last year’s 35% to an even more impressive 43% by 2030.
Looking for viable opportunities
The lack of proper state support and guarantees restrains export in a number of other industries that could have enjoyed demand in the Chinese market. This is apparent in trade frictions between China and the U.S. (in 2019, China imposed a 25% duty on methanol imports from the United States) and Australia (in late 2020, China stopped buying Australian coal). And vice versa, it is possible to increase exports by searching for opportunities in the market niches where Russia’s sales potential is coupled with absolute competitive advantages, such as in helium market, where Russia may become one of the leading suppliers in the coming years.
Another option is the supply of Russian hydrogen, which may allow China to partially replace petroleum imports from other markets.
In 2018, according to the International Energy Agency (IEA), some 1,790 hydrogen-fuel vehicles were operated in China out of 12,952 vehicles globally; the Chinese fleet grew to 6,180 out of 23,354 units by the end of 2019. And by 2025, China plans to increase the number of buses and trucks utilizing fuel cells to 50,000, jumping to 1 million by 2030.
Moreover, in 2035, according to the official plans of the Chinese authorities, half of vehicles sold should be climate-neutral, while the other half should be powered by hybrid engines or fuel cells. A similar shift will have to occur in Japan, where the IEA forecasts the number of fuel cell vehicles to increase from 3,633 in 2019 to 200,000 in 2025 and to 811,200 in 2030.
Russia has its competitive edge in hydrogen energy development, taking into account both global leadership in natural gas reserves (used for blue hydrogen stored in ammonia) and 50+ years of experience in nuclear and hydropower, needed for production of yellow and green hydrogen. Understanding these advantages is already reflected in regulatory plans: for example, according to the Energy Strategy adopted last year, Russia will increase its hydrogen exports from 200,000 tons in 2024 to 2 million tons in 2035.
Towards a New Trade Deal
We need to admit though that a long-term strategy requires long-term investment, while the latter requires secure return. To ensure there is a horizon for planning your business, you do not have to necessarily rely on budget support: this is where exclusive trade agreements can step in. This is exactly what the Trump administration did in January 2020, concluding an agreement that obliged China to boost U.S. imports by $200 billion above the 2017 level within two years, including energy ($52.4 billion), industrial production ($77.7 billion) and agriculture ($32 billion). The deal, among other effects, has revived the U.S. oil exports to China: supplies grew to 482,000 barrels per day (bpd) after a drop to 137,000 bpd in 2019 amid trade wars.
An exclusive trade deal between Russia and China could be smaller in volume and longer in tenor (aiming to increase the trade turnover by $100 billion in at least five years) to help resume, for example, the Eastern Petrochemical Company project, in which ChemChina planned to participate previously but which remained on paper. In return, Russia could extend the tax benefits, which are now granted to residents of the territories of priority social and economic development (TOSER), to all projects with Chinese shareholding. Thus, the success story of cooperation between Sibur and Sinopec in the Amur GCC would be replicated and should provide a new impetus to bilateral relations.
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