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Economy in Libya

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Strange to say, but the Libyan economy which, as is well-known – depends much, if not almost exclusively, on oil extraction and sale, performed very well in 2017 even at a time of falling prices – currently made more complex by the Covid-19 pandemic which has led to crisis in consumer countries.

It should be recalled that the 2017 good performance of the Libyan economy came six years after the silly elimination of Colonel Gaddafi, with a +67% extraction peak compared to 2016.

 In 2018 it went much worse, with a 17.9% increase, but in 2019 GDP grew by 9.9% and currently, at the end of 2020, a 58.7% vertical drop in GDP is expected.

 Obviously there is an inextricable combination of severe internal political and military instability, pandemic-related crisis in consumer countries, as well as a different configuration of the struggle for world oil power, especially with the arrival of the U.S. shale oil.

 Basically, oil extraction and refining in Libya have almost stopped, except in the last few weeks, when some oil wells (such as El Sharara or El Feel, among the largest ones  Libya) are supposed to reopen “as soon as possible”, as the Minister said.

 The two oil wells, however, are still controlled, by Khalifa Haftar’s LNA forces. Here is the clear link between political-military destabilization and the Libyan economic crisis.

 Oil production fell by 0.1 million barrels per day as from April 2019, i.e. at the beginning of the clash between the GNA and the LNA, with a public deficit that reached 28.9% of GDP in 2019, but with inflation rate falling by 4.6% in 2019 alone, although expected to reach 22.3% by the end of 2020.

 The oil barrel global cost is supposed to keep on falling also in 2021, but production in Libya continued to grow, at least until March 2020, which was the expiry date of the moratorium granted to Libya by OPEC.

Nevertheless, the specifically political level of negotiations between Libya and OPEC – which is what matters – will be mediated mainly by Saudi Arabia, notoriously pro-Haftar, and the United States, often uncritical supporter of the Tripoli regime. A complex mediation.

However, both General Haftar’s LNA and, in many ways, the various katibe linked to Tripoli’s regime – often rather loosely – are business groups – mostly illegal – and, as always happens in these cases, constitute illegal monopolies guaranteed by the monocratic exercise of power and force.

Therefore the “mafiazation” of the economy is the obvious result of a central State which is absent, substantially unlawful or perceived as such.

General Haftar has imposed his monopoly mainly on the export of scrap metal and the sale of refined oil products.

 Many monopolies, ranging from food to the sale of technological materials, have been guaranteed more or less legally to Haftar’s LNA by the Tobruk House of Representatives.

 The activities for controlling and managing the routes of transit and sending of sub-Saharan migrants to Italy are mostly connected to the parallel networks of Haftar’s LNA, but also to Tripoli’s networks of Zawiya and the “Al Nasr Martyrs” group, always operating in that city. But there are entire sectors of the Defence Ministry, the Libyan Coast Guard, the Police and the Interior Ministry cooperating and contributing, directly or indirectly, to the big bipolar system of illegal migrant trafficking and smuggling.

This is the second source of illegal income, after the smuggling of oil products. This is what happens when you destabilize an African coastal State, without any other project than the chatter of some French pseudo-intellectual on “human rights”.

 It is the classic anti-Machiavellian paradox of modern politics. The heterogenesis of ends, as Giovanni Gentile put it.

 But Haftar’s LNA, in particular, also funds itself directly with banks: Libya’s Central Bank in the East has, in fact, backed the wages and material of Haftar’s troops for three years, with the local equivalent of at least 6.7 billion U.S. dollars.

Furthermore, with a view to funding the State and its armies, both Tripoli and Benghazi used the credits granted by merchant banks – often manu militari or through corruption or political-military connections.

In 2018 alone, the government of Cyrenaica raised 7.9 billion U.S. dollars in loans, while the Tripoli area reached a budget of over 8.1 billion U.S. dollars only with loans from credit banks.

As mentioned above, this share includes the role of corruption, which is huge and even affects the officials of the anti-corruption structure in Tripoli – to the tune of millions of dollars. Obviously this applies also to the East.

With about 70,000 soldiers, Haftar’s LNA currently controls a larger territory than France, but the core of its financial operations is still the creation, on June 5, 2017, of the “Committee for Military Investment and Public Works”, led by Air Force Colonel al-Madani al-Fakhri, whose leaders immediately began to extort money from Cyrenaica’s businessmen. In the West, the various military katibe of “martyrs” shared control over all trade and productive activities, sector by sector.

Based on what can be inferred from “open” local sources, the GNA has extorted at least 5-6 billion dollars from businessmen and traders in 2020 alone.

 Although Western propaganda always tends to see Haftar’s LNA as the den of all evils, the two forces are similar, as far as the illegal economy is concerned.

Furthermore, nobody knows how many counterfeit dinars were printed in Russia – possibly 4 billion, at least – with Gaddafi’s effigy, which passed through Malta, greasing many wheels.

In May 2017, during the Ramadan, the banknotes printed in Russia were distributed particularly to banks in the South and in the East.

The idea, after all, was not bad. Libyans do not trust banks, under any circumstances, even when they make withdrawals.

Hence, when it comes to paying wages and salaries, the rulers in both East and West hurry to print new money, which is easily exchanged with the banknotes probably printed in Russia.

 So much so that if everyone accepts it at a lower value than the normal dinars, it becomes only a devalued currency, no longer counterfeit money. 

This is fine, even better than the official dinar, for the “grey” and “black” economy.

 Moreover, the financial-oil system does not directly support Haftar’s LNA, nor can it do so.

 Only the state-owned National Oil Company (NOC) – which is largely answerable to the West – has the possibility to sell Libyan oil, and only the Central Bank of Tripoli can accept the related payments.

 The fact is that all the military groups operating in Libya, in the East and in the West, are linked to the war economy and inextricably tied to the parallel para- or totally illegal economy.

 The economic crisis, connected with the non-existence of a strong and credible central State, perpetuates the positive incentives for all those who take advantage of the State dysfunctions.

 Dysfunctional and para-criminal economies are always based on three pillars: smuggling, extortion, theft of public resources and external patronage.

 The latter can be of a Libyan potentate or, more often, of an “external player”: Turkey, Egypt, the Russian Federation, France, Saudi Arabia, Qatar. Obviously Italy has disappeared from the Libya, since currently its foreign policy is little less than a joke.

 The operations of all these countries’ Intelligence Services are largely rewarded by the business that becomes possible for the companies linked to all external Services, if they operate in Libya. The operations of the various intelligence agencies fund themselves on their own in Libya.

I have been told that, regardless of the external player, the operations of the various Intelligence Services generate 20-25% gains, which are guaranteed by the extortion ability of the various local katibe to which the external States refer.

 There is no return from a criminal economy which generates a failed state and, above all, eliminates any alternative legal option.

 In Cyrenaica, there is now a monopoly of the illegal use of force by Haftar and his LNA. It shows signs of overstretching and some old allies are showing signs of disillusionment. But soldiers from Darfur, Chad and even Mauritania could soon strengthen Haftar and allow a new offensive towards Tripoli, also considering the presence of Syrian jihadists in the GNA, sent by the Turkish Intelligence Service.

 In the West, there is Tripoli and hence Fajez al-Sarraj’s government, often comically praised and hailed by Westerners.

In this case, however, there is another factor of structural weakness other than the LNA: the factionalism of the various katibe and their often completely interested and always partial relationship with the government in Tripoli.

 Therefore, the analytical pair with which to study the connections between Tripoli and Benghazi is Factionalism/Ovestretch. Here is the fundamental dialectic.

Again using the very useful terms of the Mafia jargon, Tripoli’s militias are a “cartel”, while in the East there is a monopoly of unlawful and illegitimate force which, however, struggles to make itself credible.

Moreover, factionalism is inherent in the Arab and, above all, Bedouin soul: “my brother and I against our cousin, my cousin, my brother and I against the stranger”.

 Thinking about the Middle East with the typically Western and European idea of the Nation-State is a mistake that will lead us to far greater disasters than those caused by the Sykes-Picot agreement, narrated in an old book with the now famous title, A Peace to end all Peaces.

Distribution of local gangs and oil wells, updated to May 2020, source

Then there is the powerful “stone guest” of the Libyan economy that we must never neglect, namely China.

It should be recalled that China abstained in the UN Security Council voting authorising military intervention in Libya against Gaddafi and also criticized NATO’s decision to create a no-fly zone. It even underlined the illegality of air strikes on the legitimate forces of Gaddafi’s regime. China was right.

 Even when Gaddafi was in power, China was very active in Libyan infrastructure, as Libya paid very well.

 At the time of Gaddafi’s fall, China had as many as 75 companies operating in Libya, with a turnover of 18.8 billion U.S. dollars.

 The workers concerned were mainly the 36,000 Chinese, but also the about 28,000 Libyan ones or even many immigrants (Egyptians, Tunisians and Algerians).

Until 2011 there were 50 Chinese projects in Libya and it should be noted that Libya alone produced 3% of all Chinese oil imports, equivalent to 150,000 barrels a day.

  At the time of West’s maximum manipulation against Gaddafi, China always tried to maintain all its business connections, obviously rejecting the NATO military mission in its entirety.

 Moreover, like the Russian Federation, China also rejected the theory – typically Western-style in its naivety and arrogance- of Responsibility to Protect, i.e. the universal rule – stuff for boy scouts or elegant socialites-whereby States can intervene directly and militarily in other States when the protection of “human rights” is needed.

However, who establishes and ascertains the violation of human rights? A French pseudo-philosopher, a former follower of Pol Pot, two articles in the New York Times or possibly the statements of an NGO invented at the moment (in this respect, the story of NGOs working for migrants from Libya to Syria would be very interesting) or the lamentation of some “intellectuals” who do not even know where Tripoli is on the map?

Obviously, with a view not to being relegated to play the role of the only protector of the vilain Gaddafi, China finally abstained in voting on the UN Security Council Resolution on Libya, but immediately recognized the National Transitional Council (NTC), as the only semblance of unitary Libyan government left.

 ENI also recognized it, well before others, exactly two days after the start of the insurgency against the Colonel, staged only by the East and by French submarines.

As early as the beginning of June 2011, China held its first meeting with Mohammed Jibril, the Head of the NTC. A few days later, the Head of the Department for West-Asian and Middle East Affairs of the Chinese government, Chen Xiaodong, visited Benghazi very carefully.

 Obviously China pursues a policy of careful neutrality between the two factions, namely the GNA and Haftar’s LNA.

 Officially China supports the GNA, which – in a Memorandum of Understanding (MoU) signed in June 2018 -even accepted that Libya would be part of the Chinese Belt and Road Initiative, albeit with some obvious twists in the map.

China, however, has also excellent relations with Haftar and, above all, with the Tobruk House of Representatives.

 As to the Covid-19 pandemic, which – for those who know how to use it-is an opportunity for hegemonic penetration into the so-called “third” countries, China has rapidly included Libya in its humanitarian and health aid programmes, which are currently envisaged for as many as 82 countries.

However, what is the profound logic of Libya’s political and hence economic system? Unfortunately, we always see and interpret the non-Western world through the eyes of our often idiotic, fashionable ideologies. It is the biggest mistake we can currently make.

As seen above, the fact is that Libyan institutions have always been sectarian and biased in Libya, but not less powerful for this reason.

 The British Military Administration (1942-1951) built up a great deal of political-tribal mediations in Libya even equal, if not greater, than Gaddafi’s. They largely remained in place, even after the 1969 coup of the “Free Officers”, organised by the Italian intelligence services in a meeting at Abano Terme.

 Then there is the Senussi monarchy, originating from an Islamic esoteric sect, not from a specific family lineage of the monarch.

 The last King Idriss was ousted by the coup of the Nasserian and Third- World Socialist “Free Officers”, led at the time by Gaddafi, who had been selected for that purpose by the Italian intelligence Services, during a comfortable meeting – I still remember – at an excellent hotel in Abano Terme.

 The Senussi monarchy originated from a strange esoteric organization that started from a wide Islamic heterodoxy and finally shifted to a sort of quasi-Wahabi Koranic normativism, which is not at all contradictory, as it would appear in the poor minds of Westerners, who see only the servile adaptation to Western pluralism or simple “fanaticism”, old theme of the worst and naivest18thcentury Enlightenment.

As we all know, Gaddafi’s regime began in 1969, amidst counter-coup, attacks and adverse operations by the British intelligence services, which only thanks to Italy were wrecked. Revolutionary governments, however, choose only the faithful tribes, which are such because they are paid to be so.

In the case of the Senussi, the Cyrenaica Defence Forces operated – and King Idriss boasted he had never been to Tripoli – made up of agents and employees of the British Intelligence Services. Also the People’s Social Committee of Executives had military roles. Gaddafi had no mercy, of course.

 The Warfalla tribe made several unsuccessful attempts on Colonel’s life. Therefore, after the attempted coup against the Colonel in 1991 it accepted a negotiation with Gaddafi.

Nevertheless, it was precisely because of the Gaddafian Jamahiriya (1973-1979) that the Libyan economic networks became ever more informal and sometimes tribal, but paradoxically ever less controlled by the Colonel’s regime.

Exactly those networks killed him and hence ousted him from power, although the poor informal military economic networks believed in the Western promises of an economy integrated in the world market and in an opening of Libya to foreign investment.

 They wanted globalisation, without too many disasters, but the West gave them a useless failed state, even for Italy.

Hence within the Great Socialist Jamahiriya of the Libyan Arab People there still were popular committees that dealt with economy and business, often very seriously – but without any coordination and control by Gaddafi’s leadership, except for the NOC.

 There were GECOL (General Electricity Company of Libya), a separate committee, as well as LISCO (Libyan Iron and Steel Company), ESDEF (Economic and Social Development Fund) and ODAC (Office of Development of Administrative Complexes).

A great role was played by the free zone of the port of Misrata, and by an endless number of autonomous committees, even in the Security Services, which, however, were linked to the abstract and even scarcely “informative” structure of Jamahiriya.

 Generally speaking, the network of “people’s” Committees that managed the economy reported to the General People’s Congress, but everything was obviously in the hands of Gaddafi and his most trusted aides and collaborators – who, however, did not succeed in getting the news in time or let some operations slip away, given the level of informality of the Libyan economy, already pathological at the time.

 The only two organizations with some degree of autonomy were the Central Bank of Libya, established in 1956, well before Gaddafi’s coup – which, however, originated from a UN-established institution, namely the Libyan Currency Committee – and obviously the National Oil Corporation (NOC), created in 1970, immediately after Gaddafi’s coup.

 There is also the Libyan Investment Fund (LIA), the Libyan Sovereign Fund that supports 15 other apparently autonomous funds or financial initiatives.

 It was established in 2006. At the beginning, in the good years of oil revenues, LIA had an endowment of as many as 60 billion U.S. dollars.

 Gaddafi’s son, Saif-al Islam, was actually its leader. But, after the anti-Gaddafi “revolution”, between 2005 and 2010, also the experts who seemed capable of privatizing anything arrived. Called by France, the United States, the Libyan elite itself, but not by Italy, of course.

 At that juncture, given the solidity of the old informal Gaddafian economies and of those following the destruction of the Libyan State, the new Agencies of Libyan liberals arrived. Hence the Economic Development Board and the Privatization and Investment Board were established, in addition to the Public Projects Authority.

You privatize when there is capital available, otherwise to whom do you sell in a failed state where those who have money are already out of Libya?

 As early as the phase in which the war between Eastern and Western Libya was starting to emerge, the local governments had to “enlist” technicians, experts, economists and business jurists to understand the intricacies of post-Gaddafi economic structures which, in any case, had developed – in their baroque and elaborate complexity – since the last years of Gaddafi’s life.

We could define Libya between Gaddafi and the two current governments as an overlap between the oil rentier States, the Socialist autocracies typical of the Third International and the chaotic and incoherent liberalization attempts that the Americans made in the old Socialist economies of the East after 1989.

This adds to the unpreparedness and factionalism of the new economic and political ruling classes that came to power after Gaddafis’ elimination.

 The Colonel’s technocracy was often better than the current ones.

 No economic unifying criteria were visible among the various factions that fought and then managed the 2011 insurgency, but all this remained even in the years 2013-2015, when the high oil barrel prices gave hope that fresh capital would right the wrongs of an authoritarian planning that added to the factionalism of the economy and the Stock Exchange short-sighted naivety of post-Soviet liberalisations.

 Meanwhile, the mass of wages and salaries, in addition to subsidies, increases every year regardless of the amount of oil revenues.

 There are therefore no quick fixes or effective solutions for a mechanism that is now so structured.

The World Bank predicts that oil rents will be 47% of GDP by the end of 2021, but wages and salaries will increase by up to 49%.

 Public subsidies for oil or food will be equally high, to the tune of 10.6% of GDP, but then how will debt be refinanced?

 In Tripoli – but the situation in Benghazi seems similar – the solution will be the cash advance from the Central Bank of Libya, in addition to the sale of Treasury Bonds, especially in Cyrenaica.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

Economy

Rebalancing Act: China’s 2022 Outlook

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Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha

After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.

The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.

The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.

Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.

In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.

Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.

None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.

First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.

Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.

A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.

Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.

In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.

Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.

While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.

In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.

However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.

First published on China Daily, via World Bank

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The US Economic Uncertainty: Bitcoin Faces a Test of Resilience?

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Is inflation harmful? Is inflation here to stay? And are people really at a loss? These and countless other questions along the same lines dominated the first half of 2021. Many looked for alternative investments in the national bourse, while others adopted unorthodox streams. Yes, I’m talking about bitcoin. The crypto giant hit records after records since the pandemic made us question the fundamentals of our conventional economic policies. And while inflation was never far behind in registering its own mark in history, the volatility in the crypto stream was hard to deny: swiping billions of dollars in mere days in April 2021. The surge came again, however. And it will keep on coming; I have no doubt. But whether it is the end of the pandemic or the early hues of a new shade, the tumultuous relationship between traditional economic metrics and the championed cryptocurrency is about to get more interesting.

The job market is at the most confusing crossroads in recent times. The hiring rate in the US has slowed down in the past two months, with employers adding only 199,000 jobs in December. The numbers reveal that this is the second month of depressing job additions compared to an average of more than 500,000 jobs added each month throughout 2021. More concerning is that economists had predicted an estimated 400,000 jobs additions last month. Nonetheless, according to the US Bureau of Labour Statistics, the unemployment rate has ticked down to 3.9% – the first time since the pre-pandemic level of 3.5% reported in February 2020. Analytically speaking, US employment has returned to pre-pandemic levels, yet businesses are still looking for more employees. The leverage, therefore, lies with the labor: reportedly (on average) every two employees have three positions available.

The ‘Great Resignation,’ a coinage for the new phenomenon, underscores this unique leverage of job selection. Sectors with low-wage positions like retail and hospitality face a labor shortage as people are better-positioned to bargain for higher wages. Thus, while wages are rising, quitting rates are record high simultaneously. According to recent job reports, an estimated 4.5 million workers quit their jobs in November alone. Given that this data got collected before the surge of the Omicron variant, the picture is about to worsen.

While wages are rising, employment is no longer in the dumps. People are quitting but not to invest stimulus cheques. Instead, they are resigning to negotiate better-paying jobs: forcing the businesses to hike prices and fueling inflation. Thus, despite high earnings, the budget for consumption [represented by the Consumer Price Index (CPI)] is rising at a rate of 6.8% (reported in November 2021). Naturally, bitcoin investment is not likely to bloom at levels rivaling the last two years. However, a downfall is imminent if inflation persists.

The US Federal Reserve sweats caution about searing gains in prices and soaring wage figures. And it appears that the fed is weighing its options to wind up its asset purchase program and hike interest rates. In March 2020, the fed started buying $40 billion worth of Mortgage-backed securities and $80 billion worth of government bonds (T-bills). However, a 19% increase in average house prices and a four-decade-high level of inflation is more than they bargained. Thus, the fed officials have been rooting for an expedited normalization of the monetary policy: further bolstered by the job reports indicating falling unemployment and rising wages. In recent months, the fed purview has dramatically shifted from its dovish sentiments: expecting no rate hike till 2023 to taper talks alongside three rate hikes in 2022.

Bitcoin now faces a volatile passage in the forthcoming months. While the disappointing job data and Omicron concerns could nudge the ball in its favor, the chances are that a depressive phase is yet to ensue. According to crypto-analysts, the bitcoin is technically oversold i.e. mostly devoid of impulsive investors and dominated by long-term holders. Since November, the bitcoin has dropped from the record high of $69,000 by almost 40%: moving in the $40,000-$41,000 range. Analysts believe that since bitcoin acts as a proxy for liquidity, any liquidity shortage could push the market into a mass sellout. Mr. Alex Krüger, the founder of Aike Capital, a New York-based asset management firm, stated: “Crypto assets are at the furthest end of the risk curve.” He further added: “[Therefore] since they had benefited from the Fed’s “extraordinarily lax monetary policy,” it should suffice to say that they would [also] suffer as an “unexpectedly tighter” policy shifts money into safer asset classes.” In simpler terms, a loose monetary policy and a deluge of stimulus payments cushioned the meteoric rise in bitcoin valuation as a hedge against inflation. That mechanism would also plummet the market with a sudden hawkish shift.

The situation is dire for most industries. Job participation levels are still low as workers are on the sidelines either because of the Omicron concern or lack of child support. In case of a rate hike, businesses would be forced to push against the wages to accommodate affordability in consumer prices. For bitcoin, the investment would stay dormant. However, any inflationary surprises could bring about an early tightening of the policy: spelling doom for the crypto market. The market now expects the job data to worsen while inflation to rise at 7.1% through December in the US inflation data (to be reported on Wednesday). Any higher than the forecasted figure alongside uncertainty imbued by the new variant could spark a downward spiral in bitcoin – probably pushing the asset below the $25000 mark.

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Platform Modernisation: What the US Treasury Sanctions Review Is All About

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Image source: home.treasury.gov

The US Treasury has released an overview of its sanctions policy. It outlines key principles for making the restrictive US measures more effective. The revision of the sanctions policy was announced at the beginning of Joe Biden’s presidential term. The new review can be considered one of the results of this work. At the same time, it is difficult to find signs of qualitative changes in the US administration’s approach to sanctions in the document. Rather, it is about upgrading an existing platform.

Sanctions are understood as economic and financial restrictions that make it possible to harm the enemies of the United States, prevent or hinder their actions, and send them a clear political signal. The text reproduces the usual “behavioural” understanding of sanctions. They are viewed as a means of influencing the behaviour of foreign players whose actions threaten the security or contradict the national interests of the United States. The review also defines the institutional structure of the sanctions policy. According to the document, it includes the Treasury, the State Department, and the National Security Council. The Treasury plays the role of the leading executor of the sanctions policy, and the State Department and the NSS determine the political direction of their application, despite the fact that the State Department itself is also responsible for the implementation of a number of sanctions programmes. This line also includes the Department of Justice, which uses coercive measures against violators of the US sanctions regime.

Interestingly, the Department of Commerce is not mentioned among the institutions. The review focuses only on a specific segment of the sanctions policy that is implemented by the Treasury. However, it is the Treasury that is currently at the forefront of the application of restrictive measures. A significant part of the executive orders of the President of the United States and sanctions laws imply blocking financial sanctions in the form of an asset freeze and a ban on transactions with individuals and organisations. Decrees and laws assign the application of such measures to the Treasury in cooperation with the Department of State and the Attorney General. Therefore, the institutional link mentioned in the review reflects the spirit and letter of a significant array of US regulations concerning sanctions. The Department of Commerce and its Bureau of Industry and Security are responsible for a different segment of the sanctions policy, which does not diminish its importance. Export controls can cause a lot of trouble for individual countries and companies.

Another notable part of the review concerns possible obstacles to the effective implementation of US sanctions. These include, among other things, the efforts of the opponents of the United States to change the global financial architecture, reducing the share of the dollar in the national settlements of both opponents and some allies of the United States.

Indeed, such major powers as Russia and China have seriously considered the risks of being involved in a global American-centric financial system.

The course towards the sovereignty of national financial systems and settlements with foreign countries is largely justified by the risk of sanctions.

Russia, for example, is vigorously pursuing the development of a National Payment System, as well as a Financial Messaging System. There has been a cautious but consistent policy of reducing the share of the dollar in external settlements. China, which has much greater economic potential, is building systems of “internal and external circulation”. Even the European Union has embarked on an increase in the role of the euro, taking into account the risk of secondary sanctions from “third countries”, which are often understood between the lines as the United States.

Digital currencies and new payment technologies also pose a threat to the effectiveness of sanctions. Moreover, here the players can be both large powers and many other states and non-state structures. It is interesting that digital currencies at a certain stage may present a common challenge to the United States, Russia, China, the EU and a number of other countries. After all, they can be used not only to circumvent sanctions, but also, for example, to finance terrorism or in money laundering. However, the review does not mention such common interests.

The text does propose measures to modernise the sanctions policy. The first one is to build sanctions into the broader context of US foreign policy. Sanctions are not important in and of themselves, but as part of a broader palette of policy instruments. The second measure is to strengthen interdepartmental coordination in the application of sanctions in parallel with increased coordination of US sanctions with the actions of American allies. The third measure is a more accurate calibration of sanctions in order to avoid humanitarian damage, as well as damage to American business. The fourth measure is to improve the enforceability and clarity of the sanctions policy. Here we can talk about both the legal uncertainty of some decrees and laws, and about an adequate understanding of the sanctions programmes on the part of business. Finally, fifth is the improvement and development of the Treasury-based sanctions apparatus, including investments in technology, staff training and infrastructure.

All these measures can hardly be called new. Experts have long recommended the use of sanctions in combination with other instruments, as well as improved inter-agency coordination. The coordination of sanctions with allies has escalated due to a number of unilateral steps taken by the Trump Administration, including withdrawal from the Iranian nuclear deal or sanctions against Nord Stream 2. However, the very importance of such coordination has not been questioned in the past and has even been reflected in American legislation (Iran). The need for a clearer understanding of sanctions policy has also been long overdue. Its relevance is illustrated, among other things, by the large number of unintentional violations of the US sanctions regime by American and foreign businesses. The problem of overcompliance is also relevant, when companies refuse transactions even when they are allowed. The reason is the fear of possible coercive measures by the US authorities. Finally, improving the sanctioning apparatus is also a long-standing topic. In particular, expanding the resources of the Administration in the application of sanctions was recommended by the US Audit Office in a 2019 report.

The US Treasury review suggests that no signs of an easing are foreseen for the key targets of US sanctions. At the same time, American business and its many foreign counterparties can benefit from the modernisation of the US sanctions policy. Legal certainty can reduce excess compliance as well as help avoid associated losses.

From our partner RIAC

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