Speaking on the sidelines of the BRICS summit, which took place in Brazil in mid-November, President of the Russian Direct Investment Fund (RDIF) Kirill Dmitriev came up with a proposal to create a common crypto currency for servicing a unified payment system of the member countries. According to RBC, the idea of a unified payment system has already received the backing of the BRICS Business Council. The parties concerned held a heated discussion on the possibility of using a single digital currency for conducting payments.
Virtual currencies or crypto currencies, and the blockchain technology that underlies them have been major trends in the information technology market since the early 2010s. Experts deem the blockchain technology as revolutionary: we are talking about a distributed electronic database (a register, ledger), in which each “cell” contains information about all others. Cryptographic methods are used to ensure the functioning and protection of the “register”. Such characteristics of block chain technology as its distributed decentralized nature and the availability of information about all transactions make it useful in those areas of business where many participants are involved who are not able to verify the credibility of counterparties. Resources transferred via a blockchain cannot be blocked (or arrested), even temporarily, by anyone except their owner. Meanwhile, what remains a major problem of all private and corporate crypto currency projects is their credibility.
If a digital currency is issued by the state or a community of states, then most, if not all, problems private crypto currencies are faced with are solvable. In this case, the advantages of Bitcoin and the underlying block chain technology are preserved, while the risks, such as the anonymity and simplicity of uncontrolled cross-border operations, which evoke the anxiety of authorities around the world, are neutralized. The issue of crypto currency would make it possible for the authorities to assume control of the technology that can otherwise reinforce global speculators, and even, according to critics, undermine the very existence of states in their classical format.
Meanwhile, many capitals have been keeping a close eye on the growing concern of the US authorities over the prospect of a global spread of crypto currencies. Washington’s major fears are that the “foes of America,” be it states or non-state entities, will be able to create a financial network independent of the US dollar. In this case, the United States would lose the most important instrument of non-military pressure that it uses to influence its opponents.
At present, more than 85 percent of all currency exchange transactions are made in dollars. All Washington has to do to block unwanted financial transactions is just add suspicious individuals, organizations or states to the “black list” which is sent to all banks in the world. For fear of falling under sanctions or losing the ability to make payments in dollars, the overwhelming majority of financial institutions have until now been following the instructions of the American authorities. In May this year, Republican Brad Sherman submitted a bill which proposes to ban US citizens from buying or selling crypto currency. In July, a number of Congressmen from the Democratic Party drafted a bill that prohibits online platforms and social networks with an annual income of at least $ 25 billion from providing financial services and issuing crypto currencies. According to commentators, the authors of both bills make no secret of the fact that their initiatives are motivated by by geopolitical considerations. For one, Congressman Sherman argued during the hearings: “Crypto currencies must be nipped in the bud also because the lion’s share of our international influence is based on the fact that the dollar is the standard of the international financial system. For oil and other transactions, it is vital that they be cleared by the federal reserve … Crypto currencies undermine our international policy … ”.
According to RT columnist Max Keiser, an ever more number of countries are beginning to understand what influence the United States has on other states only because the dollar is the principal currency for commercial and intergovernmental settlements. In addition to gaining profit from the dominant role of the dollar in international trade, Washington possesses levers of influence that affect the policies of most countries through sanctions or threat of sanctions and are beyond the reach of anyone else. Keiser deems sanctions as an “act of aggression,” because, in his opinion, the dollar has long turned into a weapon. Not surprisingly, countries that value their sovereignty are looking for ways to minimize or completely neutralize America’s ability to exert pressure through denial of dollar transactions. Before the arrival of crypto currencies, gold was a major protective shield. Nowadays, national digital currencies are considered a new powerful tool, devoid of many shortcomings of gold in terms of everyday use.
Given the circumstances, as reported by one of the most authoritative Russian resources in the field of crypto currencies, DeCenter, all BRICS members are either on the point of issuing digital fiat money, “or are looking into such a possibility.” The BRICS countries are thereby following the global trend as the prospect of issuing digital currencies by central banks, the Central bank digital currency (CBDC), has been attracting the attention of governments in an increasing number of countries. On November 26, Vice President of the European Commission Valdis Dombrovskis spoke about plans of the European Union to launch a EU digital currency by the end of 2021. One of the problems that could be solved with the help of such a system, according to ECB Board member Benoit Kere, is putting an end to Europe’s dependence on US-based international payment services, such as MasterCard, Visa, Apple, PayPal and Amazon.
What could serve as an example for the rest of the BRICS members is the position of Beijing, which has changed its attitude to crypto currencies by “180 degrees” over the past few months. According to Leonid Kovachich of the Moscow-based Carnegie Center, “President Xi Jinping refers to blockchain as a breakthrough technology, while major Chinese media outlets are talking at length about the benefits of blockchain and urge the community not to miss the historic opportunity to challenge the global hegemony of the dollar.”
This fall, representatives of the People’s Bank of China said they were “considering the possibility of launching a digital yuan at an early date.” President of the Digital Currency Development Center of the Central Bank of China Mu Changchun has identified the basic criteria for issuing the crypto currency of the PRC. “CryptoYuan will not function only on the basis of blockchain, the issue will proceed in two stages: from the Central Bank to commercial banks and then into further circulation.” The digital yuan will replace the M0 aggregate, while the processing capacity of the payment system will be “up to 300 thousand transactions per second”. As an official currency, the digital yuan will be issued on a centralized basis and regulated by the government. The digital yuan is set to incorporate the best characteristics of crypto currencies, including minimum transaction time, “reliability, invariability and irreversibility”, and fiat money – its sovereignty and liquidity guarantees.
The fact that the Central Bank and the Ministry of Finance are considering the possibility of introducing crypto currency in Russia was reported by Kommersant back in 2016. In June 2017, Deputy Chairperson of the Central Bank of the Russian Federation Olga Skorobogatova announced prospects for launching a national digital currency. Skorobogatova said Central Bank specialists had started work on a digital ruble project. Similarly to the digital yuan, it is assumed that the issue of the Russian virtual currency will be strictly regulated, its exchange for rubles and other currencies will be possible only on special electronic platforms and the identity of the crypto currency buyer will have to be established. According to DeCentre, the draft law on digital financial assets (DFA) was adopted by the State Duma in the first reading in 2018. However, amendments have been made and continue to be made since then, also regarding the very definition of crypto currency.
Russian experts view the digital ruble as one of the options to respond to the intensifying Western sanctions. As Iran’s disconnection from the SWIFT banking system at the request of the United States demonstrated, the creation of an interbank payment system that can replace SWIFT is “of paramount importance for the BRICS countries”. As an instrument for conducting mutual payments in such a system, the central banks could issue a limited volume of digital currency and all transactions in this currency will be registered in a single register and will be verified by agents appointed by the authorities of the BRICS countries. The use of a common crypto currency would make such a payment system universal and would safeguard payments against foreign sanctions.
In this respect, at the initial stage, the BRICS digital currency may not become a payment instrument in the full sense of the word. A couple of years ago, Russian venture investor Evgeny Gordeev called for launching a government program to attract investments and ensuring the safety of capital at the blockchain level. Technically, such an investment mechanism would enable Russia’s foreign partners interested in investing in Russian assets to avoid the legal consequences of the sanctions that have been imposed on the Russian Federation in recent years. A member of the State Duma’s expert panel, Nikita Kulikov, believes that a common crypto currency that is currently being considered by BRICS experts could become a means of “fixating obligations”, a conversion tool, and an instrument to ensure the “autonomy of interstate remittances”.
Thus, as experts continue to speculate about the extent to which crypto currencies are capable of revolutionizing the entire system of financial relations, the changes that have occurred in the economic and monetary policies of some of the world’s leading states in recent years demonstrate that they are beginning to take crypto currencies more and more seriously regarding them as a useful tool to strengthen their national economic sovereignty.
From our partner International Affairs
Global Warming and the Future of Investing
On January 14th, the world’s largest investor, BlackRock, sent two historic letters, one addressed to “Clients” (basically the world’s wealthiest individuals and their financial advisors) and the other to “CEOs” (the heads of the firms in which the world’s largest investor invests), and they both announced the now inevitable earthquake that’s coming to global capitalism. The letter didn’t say precisely when it will hit, but did say, “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” Here’s more from the two letters:
As an asset manager, BlackRock invests on behalf of others, and I am writing to you as an advisor and fiduciary to these clients. …
I believe we are on the edge of a fundamental reshaping of finance.
The evidence on climate risk is compelling investors to reassess core assumptions about modern finance. …
Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. …
In the near future – and sooner than most anticipate – there will be a significant reallocation of capital. …
As a fiduciary, our responsibility is to help clients navigate this transition. …
Over the next few years, one of the most important questions we will face is the scale and scope of government action on climate change, which will generally define the speed with which we move to a low-carbon economy. …
We don’t yet know which predictions about the climate will be most accurate, nor what effects we have failed to consider. But there is no denying the direction we are heading. Every government, company, and shareholder must confront climate change. …
Since BlackRock’s founding in 1988, we have worked to anticipate our clients’ needs to help you manage risk and achieve your investment goals. As those needs have evolved, so too has our approach, but it has always been grounded in our fiduciary commitment to you. …
The most significant of these factors today relates to climate change, not only in terms of the physical risk associated with rising global temperatures, but also transition risk – namely, how the global transition to a low-carbon economy could affect a company’s long-term profitability. …
As your fiduciary, BlackRock is committed to helping you navigate this transition and build more resilient portfolios. …
These models will use environmental, social, and governance (ESG)-optimized index exposures in place of traditional market cap-weighted index exposures. …
• Reducing ESG Risk in Active Strategies – In heightening our scrutiny on ESG issues. …
• Putting ESG Analysis at the Heart of Aladdin – We have developed proprietary measurement tools to deepen our understanding of material ESG risks. For example, our Carbon Beta tool allows us to stress-test issuers and portfolios for different carbon pricing scenarios. …
• Doubling Our Offerings of ESG ETFs. …
• Working with Index Providers to Expand and Improve the Universe of Sustainable Indexes. …
• Expanding Sustainable Active Investment Strategies. …
Our role as a fiduciary is the foundation of BlackRock’s culture. …
We invest on your behalf, not our own. …
While the low-carbon transition is well underway, the technological and economic realities mean that the transition will take decades. Global economic development, particularly in emerging markets, will continue to rely on hydrocarbons for a number of years. As a result, the portfolios we manage will continue to hold exposures to the hydrocarbon economy as the transition advances.
A successful low-carbon transition will require a coordinated, international response from governments aligned with the goals of the Paris Agreement, including the adoption of carbon pricing globally, which we continue to endorse. …
The steps we are taking today will help strengthen our ability to serve you as a fiduciary. Sustainability is becoming increasingly material to investment outcomes. …
Basically, the world’s largest investor, BlackRock (manager of about $7 trillion in funds), is predicting that as the 90%+ consensus of climate scientists increasingly impacts the relative prices of renewable as compared to non-renewable energy-sources, the “ESG” premium on the renewable (such as solar, wind, etc.) will inevitably cause the non-renewable (coal, oil, and gas) energy-sources to need to become ever-cheaper in order to remain competitive — and this will drive down the values of stocks in the non-renewable category, and drive up the values of stocks in the renewable category.
These two letters are saying that this will be evident “In the near future – and sooner than most anticipate,” but “the technological and economic realities mean that the transition will take decades.” There is an obvious tension between those two assertions. The “In the near future – and sooner than most anticipate,” is addressed to “CEOs,” but the “the technological and economic realities mean that the transition will take decades” is addressed to “Clients” — BlackRock’s customers, mainly the world’s billionaires and centi-millionaires, but also the investment-managers for large organizations. The “Clients” naturally have a preference for low perceived risk in their investments; and BlackRock is, in that letter, providing its clients the sense that there will be no earthquake to their investments. If one happens, BlackRock will be able to say to its clients, “We told you that this is coming, but it came faster than we and our competitors expected,” and they’ll be right about that. As regards the letter to “CEOs,” it’s telling them to transition as fast as is reasonably possible out of fossil-fuel investments and into renewable-fuel ones, in order to become less vulnerable to the shock, when it does hit. This makes good sense: keeping the clients comfortable, while telling the CEOs: “Make major moves on this ASAP!”
Mongolia has Come a Long Way: What is Needed to Consolidate These Gains?
When I last visited Mongolia in 2016, the country was on the brink of a deep economic crisis, with a large fiscal deficit and unsustainably high debt. The changes since then have been remarkable. Thanks to the government’s efforts under the Economic Recovery Program, supported by international partners, Mongolia’s economy has recovered strongly. Since 2017, economic growth has averaged 6.5 percent, the government turned a fiscal deficit of 15.3 percent of GDP in 2016 to a surplus of 2.6 percent last year and debt levels have come down, although they remain too high.
The World Bank has supported this progress with two budget support operations, aiming to close budget loopholes, improve the targeting of social spending and strengthen the investment climate to stimulate private sector job creation. Our colleagues at the International Finance Corporation and the Multilateral Investment Guarantee Agency have also contributed through engagements in the financial and mining sectors. Mongolia’s upcoming graduation from the International Development Association—the arm of the World Bank Group that provides concessional finance to low-income countries—is a sign of confidence in Mongolia’s development trajectory and reaffirms its middle-income country status.
As impressive as these gains are, there is still work to be done. In the face of an increasingly volatile and uncertain international outlook, Mongolia needs to remain vigilant to avoid policy reversals and ensure broad public support for necessary reforms. Three key risks stand out.
First, poverty remains stubbornly high. Preliminary calculations by the statistical agency suggest that urban poverty rates in particular have stagnated. While herders and rural workers have benefited from high meat prices, the robust economic performance of mining and manufacturing has not translated into sufficient income opportunities for the majority of the urban population. Creating more and better jobs remains an urgent priority.
Second, to create lasting improvements in people’s livelihoods ultimately will require improving governance and building stronger institutions. This is key to further improve confidence among private investors and to deliver better quality public services.
Lastly, weaknesses in the financial sector and the country’s external balances remain the Achilles’ heel of Mongolia’s economic stability.
What can policy makers do to address these risks and break the boom-and-bust cycle?
The government needs to maintain its course on reforms. It needs to focus on actions to create more private sector jobs and higher income opportunities while resisting pressures to go back to the practice of fiscal hand-outs. A transparent and predictable investment climate is key.
Poor and vulnerable households will need to be protected and supported. Social protection systems could be further strengthened, and social transfers better targeted. Looming fiscal liabilities in the country’s pension system need to be addressed. Bolder reforms are required.
Financial sector risks need to be urgently addressed. A successful recapitalization of the banking sector as agreed with the International Monetary Fund would provide critical financial resilience in case of negative external shocks. In the face of global uncertainty, Mongolia can ill-afford to let this issue linger. Addressing anti-money laundering issues to get Mongolia off the Grey List of the Financial Action Task Force (FATF) will ensure continued access to international bank lending.
Finally, the Bank of Mongolia can allow greater flexibility of the exchange rate and limit the volume of its interventions. It is now, when the economy is still performing relatively strongly, that it is the easiest to get savers and investors used to greater exchange rate volatility.
The international community is ready to support Mongolia in addressing these challenges, building on the gains achieved over the past three years. Since 1991, the World Bank has been a steadfast partner for Mongolia, providing over US$1billion in development financing to the country. We have invested in building infrastructure, strengthening education and health systems, and improving governance. We are proud of the progress made to date and look forward to further strengthening our partnership with Mongolia as a middle-income country with aspirations to improve living standards for all its citizens.
Mongolia has come a long way. Let’s consolidate these gains together.
Let’s Bet: Will the Phase One deal prove effective?
With oil prices soaring high with a geopolitical risk premium back in markets, the U.S.-China trade talks have taken a step back. However, as soon as this temporary spike settles down (as it seems to be), the question for crude markets and global economy will be how effective the Phase One agreement will prove. A study of past trade talks indicates that the prospects of getting an answer for this question might not be that easy. But meanwhile have “things changed”?
Consider the buildup to the current status: There have been more or less 13 meetings between the world economic juggernauts – China and the U.S. share a total of 40 percent of global GDP –to resolve their economic scrum. Trump has manifested his characteristic whimsical spells shifting from Panglossian optimism to Cynic pessimism. Chinese negotiators have reciprocated the fickleness but nevertheless have played along well. Recently, after the half-cooked “Phase One” (or mini deal), many observers and analysts are betting on a more comprehensive trade deal.
The 15th December tariffs of $160 bn have been delayed. Tariff rate on $120 bn of goods (imposed on September 01, 2019) have been reduced from 15 percent to 7 percent. Other tariffs of $250 bn with a rate of 25 percent still remain. China has promised, according to U.S. officials to purchase goods and services of about $200 bn over two years. However, this might not be that simple.
There are different variables here to consider. Clyde Russell in a trenchant piece for Reutersexplains in detail about these assumptions. An assumption that China would buy about $200 bn more goods from US is quite optimistic. Not to mention that the Phase One agreement has a snapback clause which means that upon quarterly reviews if the Chinese side isn’t holding true to their promises the agreement can become null and void.
Even if China fulfills its promise it won’t reduce U.S. deficit with China by any significant amount. U.S.’ trade deficit with China for the first 10 months of 2019 was $294 bn or 40 percent of the country’s total trade gap. However, for the same period, Chinese sold goods more than four times (of about $382 bn). China needs to half its current exports to the U.S. for a “meaningful” drop in the deficit- something that seems highly unlikely.
Also, the only room China has to ramp up its purchases is agricultural products. However, the recent outbreak of swine flu has led China to herd down its pig population therefore, low demand for soybeans. Also, Brazil, that has been a beneficiary of trade war, will not easily lose their market share and might reduce down prices, giving U.S. farmers a tough time.
Many observers are also pointing towards the language of the official statements. For one not much detail has been shared on the agreement; that consists of 86 pages according to U.S. officials. The U.S. administration is emphasizing Chinese promises of buying more from them while China isn’t that categorical. Chinese media said that the agreement was based on “principle of equality and mutual respect” and that as Chinese markets expands it will lead to “increasing imports of goods and services from abroad”.
Crude oil is another commodity where China can buy more volumes. However, much will then depend upon the price of oil which due to various factors, chief amongst a relatively slow demand, is expected to remain under pressure. China has already been importing record amounts of crude this year, 11.13mbpd in November 2019, with an average of 10.09 mbpd; 10 percentmore than the same time last year.Rex Preston Stoner, a security and geopolitical consultant based in Francenotes, “The Chinese and the U.S. are approaching this issue from diametrically opposed viewpoints. Without getting lost in the details, the Chinese negotiators systematically adhere to principles of strategic patience while grappling with foreign affairs while the current U.S. administration has no apparent systematic or strategic approach whatsoever.”
Most importantly, the Phase One agreement doesn’t address two very important changes in Chinese cyber laws. The first one is Multi-Level Protection 2.0 (implemented on December 1) and second is the Cryptography Law (that will go into effect by 1st January). Both of these rules will prohibit foreign companies from encrypting their data hence giving access to sensitive information to the Chinese. This can become a deal breaker!
As the element of human agency dominates the negotiation table and that the two people who will finally decide the fate of the trade talks cannot afford to look weak, the prospects of a final deal remain elusive. We may have aPhase One deal but it wouldn’t serve the purpose —we have been there before (Last November G20 meeting, both leaders ended the year on a very positive note). Read between the lines and we might have to reconsider our optimism regarding the end of trade war.
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