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Barriers to de-Dollarization Within BRICS

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This article explores systemic and market barriers preventing the wider use of BRICS national currencies in trade, including currency swaps mechanisms and reasons for BRICS exporters’ preference not to use national currencies. Design flaws are outlined in the New Development Banks’ Contingency Reserve Arrangement (CRA) in the context of de-dollarizing BRICS trade, namely its IMF linkage requirements and limited scope, symptomatic of a lack of trust between BRICS member states. The current levels of de-dollarization in Russia’s intra-BRICS settlements (as a representative sample) are used to find gaps between Russia’s stated de-dollarization goals and current initiatives, and market barriers are identified to explain this gap. Finally, the components of market mechanisms needed to de-risk Intra-BRICS trade and overcome the identified barriers are outlined.

Background to Challenge

The 2017 BRICS New Development Bank’s strategy report The Role Of BRICS In The World Economy & International Development detailed a long-term vision of the direction BRICS countries’ economic cooperation was headed in. The strategy report made the case that reforms in the existing western institutions would not be in BRICS countries’ favour in the near future, and hence emphasized the importance of a new Multilateral Clearing Union (MCU) which would serve as an intra-BRICS currency swap pool and tackle balance of payment shortcomings, trade finance, financial crisis aversion, and an overall restoration of sovereignty by de-dollarizing BRICS trade (NDB, 2017). This intention was also echoed in the 2017 BRICS Xiamen Summit declaration, which stated:

We agree to …enhance currency cooperation, consistent with each central bank’s legal mandate, including through currency swap, local currency settlement, and local currency direct investment….We commend the progress in concluding the Memoranda of Understanding among national development banks of BRICS countries on interbank local currency credit line and on interbank cooperation in relation to credit rating.

In parallel to the Xiamen summit, the R5+ (Real, Ruble, Rupee, Renminbi, Rand, in addition to the currencies of BRICS+ countries) currency initiative was launched, which sought to stimulate the use of national currencies for “investments, long-term projects, creation of common payment card systems and common settlement/payment systems, cooperation in promoting BRICS+ currencies towards reserve currency status.”

The New Development Bank’s proposed Multilateral Clearing Union was manifested in the form of a $100 billion Contingency Reserve Arrangement (CRA) that BRICS countries devised as a pool to swap currencies in times of need, increasing national currency settlement. The CRA included two currency swap instruments to support short-term balance of payment (BoP) pressures between a country’s current and capital accounts: 1) a liquidity instrument to provide support in response to current BoP gaps, and 2) a precautionary instrument to buffer against future BoP gaps. A country’s access to the shared capital funds was limited by conditionality, as only 30% of accessible funds (“de-linked portion”) were available on demand, whereas the majority, 70% of accessible funds require on-track arrangements with the IMF, as the CRA’s rationale document explains:

Where financing in excess of this 30% limit is required, an ‘IMF-linked portion’ will be made available. This will allow the country access to the remaining 70%, provided that a conditionality-based agreement with the IMF is concluded” (Biziwick, M., Cattaneo, N. and Fryer, D., 2015 (p. 316)).

CRA Defects

Of importance, it is worth noting that rather than having a mechanism for direct currency swaps, a swap transaction was defined as “the Requesting Party’s central bank purchases US dollars (USD) from the Providing Party’s central bank in exchange for the Requesting Party Currency, and repurchases on a later date the Requesting Party Currency in exchange for USD” (Biziwick et al., 2015 (p. 316)).

As a result, the CRA’s IMF linked component and USD reserve currency status raise questions about whether there is a potential mismatch between the stated goals of the MCU and the CRA’s implementation mechanism. In the RISS Joint Research Paper Use of national currencies in international settlements: Experience of the BRICS countries, Karataev et al state:

Though the BRICS countries have established a Contingent Reserve Arrangement… the currency swap under this arrangement is one between US dollar and local currencies of BRICS, not one among the BRICS currencies. Currently, there are few local currency swap agreements in force (between Russia and China, China and South Africa)” (Karataev et al., 2017 (p.110).

The key barriers hindering the CRA’s success towards its stated goals, including the CRA’s promissory model, limited size (mirroring the limited paid-in capital allocated to BRICS’ New Development Bank), and IMF linking, stem from the CRA modelling itself after the ASEAN+3 Chiang Mai currency swap initiative, which had a limited scope, operated on a promissory model rather than an actual capital pool, and carried a significant IMF-linked portion due to the lack of financial surveillance capacity and moral hazard borrowing risk (Biziwick et al., 2015 (p. 318)). On a macro level, “the CMI/CMIM arrangement has been criticized as utterly ineffective (it did not play any role in the 2008 crisis, for example), and the concern is that, by adopting its form, the CRA is condemning itself to a similar fate. Size and IMF linking (along with the lack of a rapid response facility) seem to have been major problems with the CMI/CMIM arrangement…the IMF linking seems hard to reconcile with the intention to provide a counterweight to the IMF ” (Biziwick et al., 2015 (p. 318)). Thus, as was the case with the Chiang Mai currency swap initiative, the BRICS NDB’s CRA’s promissory model, limited size (mirroring the limited paid-in capital allocated to BRICS’ New Development Bank), and IMF linking all stem from a fundamental lack of trust between BRICS member countries on their self-reliance for monitoring and governance of each others’ and common funds.

Despite their stated desire to break away from IMF’s conditionalities and dollar-denominated trade, at least in the CRA, a greater trust has been placed in the IMF for monitoring conditions for credit swaps. BRICS countries have thus inadvertently followed precedents set by hegemons.

This status quo is not inevitable, and can easily be overcome by coordinated CRA reform to introduce an internal trust-ensuring credit mechanism amidst financial instruments in national currencies to build the foundation for true independence from IMF and dollar-denominated transactions.

Market barriers to BRICS Trade De-Dollarization:

In addition to the CRA design flaws, BRICS Trade De-Dollarization is also held back by market barriers. As a representative sample to measure progress in de-dollarization, the currency composition of Russia’s publicly available intra-BRICS trade settlement since the launching of prominent de-dollarization initiatives in 2017 can be examined, as shown in figure 1 below. The percentage of Russian exports to BRICS countries settled in dollars has fallen from its peak of above 80% in Q1 2018 to 33.2% as of first quarter of 2020 (CBR, 2020). While Russian exports to BRICS have de-dollarized recently, it is apparent that rather than BRICS currencies, the Euro has replaced the dollar as the dominant export settlement currency (Russia is receiving only 13% of its exports in Rubles as of Q1 2020).

Figure 1: Settlement Currency Percentage for Russian Exports to BRICS (CBR, 2020)

This is due to Russian energy exporters preferring to denominate contracts in Euros rather than Rubles recently, for the same reason they previously preferred to denominate contracts in Dollars: greater volume of Rubles received in case of depreciation. By contrast, Russian imports from BRICS countries are still largely settled in Dollars as of Q1 2020, though there is a gradual de-dollarization trend present. The “other” currency slowly rising in imports settlements most likely being largely comprised of the Renminbi Yuan, as China and Russia have been accelerating ruble and yuan use in trade since 2019. Despite this, as demonstrated in Figure 1, it is worthy to note that Russia’s inter-BRICS trade is by far settled mostly in Dollars and Euros rather than Rubles or any other BRICS currency, indicating a gap of between Russian traders’ settlement currency choice and BRICS de-dollarization priorities.

To explain this phenomenon in greater detail, Karataev et al. outlined two key fundamental market barriers preventing the use of national currencies for BRICS trade finance specifically which need to be overcome as a supplement intra-BRICS currency swaps:

1. Currency Volatility:

Exchange rate fluctuations create uncertainty in optimizing settlement pricing and profitability at time of contract fulfilment from both exporters’ and importers’ perspective- “Exporters will seek to denominate their contracts in foreign exchange when their national currency is devaluing. It will allow them to receive additional profits in the national currency…(whereas) importers shall be encouraged to invoice a contract price in their national currency in order to reduce costs and prevent a decline in demand as a result of rising prices.” (Karataev et al., 2017 (p.20)).

2. Global Commodity Benchmarks:

 “Exporters of similar goods [i.e. commodities]… will seek to establish the contract price in the same currency as their competitors. That allows them to neutralize more successfully the adverse exchange rate fluctuations resulting in considerable price changes and therefore prevent the risk of reducing demand. As a result, the market price of such goods is denominated mostly in the US dollar….the global commodities exchange trade in these goods plays a significant role…if the global commodities market’s impact on the pricing model will decrease, the use of the USD as invoicing currency will decline too.” (Karataev et al., 2017 (p.19)).

Thus, the dominant factors preventing BRICS currency usage in trade were exchange rate fluctuations causing exporters to optimize profit margins by using foreign exchange (typically denominated in dollars), and industry benchmarks for export goods pricing, especially the influence of global commodities exchanges denominated in dollars. Amongst BRICS countries, this holds true for the largest Russian energy exporters, who often prefer to be paid in dollars or euros in order to maintain standardized price points and obtain additional rubles in case of depreciation.

However, empirical research demonstrated by Nakajima et al. with the vine copula method and value-at-risk model has found that using BRICS currencies in energy trade resulted in more stable prices and avoided translation risks compared to using dollars due to counter-balancing movements with oil prices (Nakajima et al, 2020). Thus, though dollar-denominated oil contracts may provide short-term gains for exporters, the overall commodity trade between BRICS countries would benefit from the use of national currencies. In addition, though the Euro is replacing the Dollar as Russia’s preferred export settlement currency within BRICS, the Euro poses lesser but similar risks to being weaponized by sanctions, given that it is still a third party non-BRICS currency and European Union sanctions against Russia could be expanded in the near future in light of political events unfolding in 2020 (i.e. EU-Russia differences over Belarus protests, Navalny incident, etc.).

Current Steps:

To overcome the remaining barriers to using national currencies, current steps being taken in BRICS include developing an in-house settlement system for trade finance based on Russia’s SPFS alternative to SWIFT, linking domestic payment systems to create the New International Payment System (NIPS), and researching feasibility requirements towards a common BRICS cryptocurrency. In addition, while progress has been made in diversifying the NDB’s loan denominations to include more local currencies, with a goal of 50% project financing in the near future according to NDB’s president, the more widespread internationalization of BRICS currencies would require mature bond markets to be created in all BRICS countries to compete with western bond markets. This was initiated by the creation of BRICS Local Currency Bond Fund during the 2017 BRICS Xiamen Summit declaration:

We agree to promote the development of BRICS Local Currency Bond Markets and jointly establish a BRICS Local Currency Bond Fund, as a means of contributing to the capital sustainability of financing in BRICS countries, boosting the development of BRICS domestic and regional bond markets, including by increasing foreign private sector participation, and enhancing financial resilience of BRICS countries.

Though these steps are cumulatively designed to increase autonomy over intra-BRICS fund flows, they do not, however, address the fundamental gap in de-risking the barriers to using national currencies in BRICS settlements which are holding back their more widespread use. Central Bank of Russia Governor Dr Elvira Nabiullina echoed this sentiment in 2019 when she claimed that while gold-pegged cryptocurrencies are being researched, it was more important to develop international settlements using national currencies. Thus, while BRICS payment and settlement systems are being integrated, BRICS local bonds are being developed, direct currency swap lines are being expanded, and an intra-BRICS cryptocurrency architecture conceptualized and brought to market, a crucial intermediate supplementary step in de-dollarizing inter-BRICS trade finance is establishing de-risked and mutually trustable intra-BRICS trade contracts to expand national currency settlement, overcoming the market barriers mentioned previously.

Gap Identification: Steps Needed for De-Risking Trade

Karataev et al. proposed a multi-tiered circular system whereby national and intra-BRICS financial institutions complement and coordinate with BRICS trade settlement transactions to create a robust system for using local currencies. The components steps were outlined as follows: 1) direct currency trading expansion and lowering transactions costs 2) creation and use of hedging instruments in BRICS currency pairs which would reduce risk management costs 3) widening of Swap Agreements and limiting liquidity risk, 4) local currency bond market development in conjunction with trade and development goals 5) trade surplus re-investment into local bond markets 6) diversification of bond markets and BRICS policy coordination for using these instruments to achieve currency internationalization goals (Karataev et al., 2017 (p. 111)).

Out of these measures, the CRA was designed to meet the needs of step 3, whereas progress has been started on steps 4-6 by the New Development Bank based on initiatives launched during the Xiamen summit. However, concrete initiatives are needed to fulfil steps 1 and 2. Karataev et al. specified three key exchange mechanisms in particular which need to be established to lower transaction costs and de-risk the use of national currencies in intra-BRICS trade contracts to overcome the aforementioned barriers for steps the first two steps mentioned above:

  1. BRICS Interbank foreign exchange market, whereby “companies should be able to purchase/sell a currency quickly and without additional costs to make settlements in such currency. This presumes the existence of a highly developed and liquid interbank and forex markets with large numbers of participants and convertible financial instruments” (Karataev et al., 2017 (p.18)).
  2. Currency Hedging instruments — “It will be necessary to encourage trading directly in BRICS currencies that will significantly contribute to lowering costs. This step [BRICS Trading pairs] has to be augmented with the creation and use of hedging instruments in BRICS currency pairs which might allow to reduce risk management costs. During the first stage leading public banks of BRICS countries may function as market makers on currency pairs to provide necessary liquidity.” (Karataev et al., 2017 (p.110)).
  3. BRICS Commodify Exchange — “Launching of a Commodity Exchange or some type of an e-trading platform for trade in goods and derivatives of various kinds can be one more instrument contributing to enhancing LCY [local currency] use in settlements in the BRICS countries…raw material trade could be mediated by setting market prices denominated in local currencies. With appreciable quantity of foreign investors trading on the exchange, this will lead to the internationalization of contracts denominated in local currencies” (Karataev et al., 2017 (p.112)).

In addition to the above three suggested exchanges, intra-BRICS trade de-dollarization requires the IMF-linked portion of the CRA to be removed to enable direct currency swaps to take place, granted the existence of bilateral swap agreements between all BRICS countries. A necessary replacement for the IMF on-track arrangement must be established between BRICS countries: a counter-party de-risking mechanism which serves as an independent source of trust to validate the fulfilment criterion of trade-necessitated direct currency swaps, thus eliminating the need for IMF on-track arrangements and consequent USD conversion.

Currently, all BRICS countries are largely reliant on western facilities for the above four types of exchanges. SWIFT largely dominates international interbank transfer settlement, with the Russian and Chinese SWIFT alternatives operating mostly domestically, though there are plans for integration of BRICS settlement systems as mentioned previously. BRICS countries have yet to develop a comprehensive intra-BRICS hedging mechanism for mitigating currency volatility risk directly independent of dollar and euro-denominated western capital markets.

Conclusions and Recommendations:

BRICS countries have maintained a longstanding goal of de-IMFing and de-dollarizing their trade settlements and reserves in order to increase their sovereignty over transactions and avoid currency crisis, and proposed the creation of a Multilateral Clearing Union towards that goal. However, design flaws in the Multilateral Clearing Union, a lack of an independent credit monitoring mechanism, and lack of currently de-risking mechanisms in intra-BRICS trade finance prevented the wider use of national currencies.

To overcome the reluctance of BRICS traders to take trade finance loans and settle in BRICS national currencies, there is a need to introduce forward hedging options with minimal cost of carry so traders can avail direct hedging options simultaneously with trade contracts to de-risk their trade contract in national currencies. As Karatev et al. concluded, in the long term goal, boosting demand for direct BRICS currency settlement would itself partially smooth out some of the volatility experienced by cyclical western capital flight, thus lowering the risk premium and cost of carry for forward contracts, making BRICS currencies the natural preferred choice in trade finance (Karataev et al., 2017 (p.110).

After a currency options market, a BRICS commodity exchange specifically needs to be created in which commodity prices are denoted in national currencies, and are accompanied by derivatives and other risk hedging options that minimize the combined effects of currency and commodity price fluctuations, essentially serving as a favoured market for BRICS commodity importers and exports to set contracts in national currencies and have instruments to de-risk any expected volatility. The most significant example of a local currency commodity exchange within BRICS was the Petro-Yuan futures market launched in China in 2016, which served as a viable alternative to the dominant dollar-denominated WTI and Brent oil exchanges. Though Russia has set up a similar exchange in the form of the Ural Oil Futures market, work remains to be done to achieve maturity and usage to the level of established commodities exchanges.

Combined with direct currency swap lines and an intra-BRICS free trade zone, the implementation of the above mechanisms would lower the transaction cost of BRICS national currency trade settlement, by lowering the risk premium for importers and exporters to set contracts in national currencies amidst exchange rate uncertainty. Thus, these exchanges would fulfil the BRICS goals of “focus[ing] joint efforts on providing companies engaged in foreign trade from BRICS countries with the same, or lower transaction (compliance) costs, guarantees of settlement and risk management that they currently have in utilizing the dollar, euro or yen” (Karataev et al., 2017 (p.110-111)).

In 2018, export-oriented development banks from all BRICS countries signed a MoU to enhance understanding of distributed ledger or blockchain technology for solving challenges in trade finance, with the aim of identifying areas to improve operational efficiencies and tackle common financial challenges. In 2019, the BRICS Business Council formed a working group exploring how a special trade-facilitating BRICS crypto-currency could be created to ensure the smooth flow of paperless document flow for trade obligations.

In fact, creating a specialized crypto-currency for document flow is not necessary to meet the BRICS goal of de-risking national currency trade settlement. The simplest yet most advanced and low-cost blockchain feature to enable the above four exchanges to take place directly between BRICS traders and banks (and allow a seamless disintermediation of transactions between separate parties without the need for outside third parties such as IMF) are Smart Contracts, an original feature of Ethereum networks but later adapted by other blockchain networks. Smart Contracts allow for multiple parties to program and pre-set conditional criterion for contracts based on fulfilment of services or market conditions, and automate the verification of fulfilment criterion via decentralized external verification engines known as Oracles, which are blockchain middleware that create a secure connection between Smart Contracts and various off-chain resources required for fulfilment. Funds needed to execute the contract can be temporarily pre-stored in a linked virtual escrow-like account associated with the contract to guarantee fund availability at the time of execution. Once the contract execution date arrives and conditional fulfilment checks have been completed, Smart Contracts self-execute and disburse associated payments to the contracting parties, automating execution and settlement and eliminating contract disputes and counter-party non-fulfilment risks.

Due to their automated fulfilment capabilities and dis-intermediation of third party legal and settlement entities, Smart Contracts are starting to be gain traction in western consortiums for trade finance, currency trading, and commodity trading in the mainstream dollarized economy. Trade Finance systems based on Smart Contract are currently enabling on average a 35% reduction in costs and the elimination of the 1–2 weeks of processing time for settlements, in addition to removing room for manual errors.

The author has proposed a solution implementing the above exchanges using Smart Contracts to De-Risk and De-Dollarize Intra-BRICS Trade—further details on this solution beyond those mentioned in this article can be seen in the December 2020 issue of the BRICS Journal of Economics.

Printed Sources Cited:

  • Biziwick, M., Cattaneo, N. and Fryer, D. (2015) “The rationale for and potential role of the BRICS Contingent Reserve Arrangement.” South African Journal of International Affairs. 22:3, 307-324.
  • Central Bank of Russia Trade Finance Settlement Data. “Credit Statistics” http://www.cbr.ru/vfs/statistics/credit_statistics/cur_str.xlsx translated into English, plotted in Excel.
  • Nakajima, Tadahiro, Yijin, He and Hamori, Shigeyuki. (2020). Can BRICS’ currency be a hedge or a safe haven for energy portfolio? An evidence from vine copula approach. The Singapore Economic Review. 65(4) 805-836. https://doi.org/10.1142/S0217590820500174.
  • NDB – New Development Bank. (2017) “The Role Of BRICS In The World Economy & International Development” BRICS New Development Bank Strategy Report. https://reddytoread.files.wordpress.com/2017/09/brics-2017.pdf.

From our partner RIAC

Director of US-Russia Relations, Russian American Youth Alliance. FinTech and Sanctions Specialist

Economy

Iran has an integral role to play in Russian-South Asian connectivity

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Iran is geostrategically positioned to play an integral role in Russian-South Asian connectivity. President Putin told the Valdai Club during its annual meeting in October 2019 that “there is one more prospective route, the Arctic – Siberia – Asia.

The idea is to connect ports along the Northern Sea Route with ports of the Pacific and Indian oceans via roads in East Siberia and central Eurasia.” This vision, which forms a crucial part of his country’s “Greater Eurasian Partnership”, can be achieved through the official North-South Transport Corridor (NSTC) and tentative W-CPEC+ projects that transit through the Islamic Republic of Iran.

The first one refers to the creation of a new trade route from Russia to India through Azerbaijan and Iran, while the second concerns the likely expansion of the China-Pakistan Economic Corridor (CPEC, the flagship project of China’s Belt & Road Initiative [BRI]) westward through Iran and largely parallel to the NSTC. W-CPEC+ can also continue towards Turkey and onward to the EU, but that branch is beyond the scope of the present analysis. The NSTC’s terminal port is the Indian-backed Chabahar, but delays in fully developing its infrastructure might lead to Bandar Abbas being used as a backup in the interim.

CPEC’s Chinese-backed terminal port of Gwadar is in close proximity to Chabahar, thus presenting the opportunity of eventually pairing the two as sister cities, especially in the event that rumored negotiations between China and Iran result in upwards of several hundred billion dollars worth of investments like some have previously reported. The combination of Russian, Indian, and Chinese infrastructure investments in Iran would greatly improve the country’s regional economic competitiveness and enable it to fulfill its geostrategic destiny of facilitating connectivity between Russia and South Asia.

What’s most intriguing about this ambitious vision is that Iran is proving to the rest of the world that it isn’t “isolated” like the U.S. and its closest allies thought that it would be as a result of their policy of so-called “maximum pressure” against it in recent years. While it’s true that India has somewhat stepped away from its previously strategic cooperation with Iran out of fear that it’ll be punished by “secondary sanctions” if it continued its pragmatic partnership with the Islamic Republic, it’s worthwhile mentioning that Chabahar curiously secured a U.S. sanctions waiver.

While the American intent behind that decision is unclear, it might have been predicated on the belief that the Iranian-facilitated expansion of Indian influence into Central Asia via Chabahar might help to “balance” Chinese influence in the region. It could also have simply been a small but symbolic “concession” to India in order not to scare it away from supporting the U.S. anti-Chinese containment strategy. It’s difficult to tell what the real motive was since American-Indian relations are currently complicated by Washington’s latest sanctions threats against New Delhi in response to its decision to purchase Russia’s S-400 air defense systems.

Nevertheless, even in the worst-case scenario that Indian investment and infrastructural support for Iran can’t be taken for granted in the coming future, that still doesn’t offset the country’s geostrategic plans. Russia could still use the NSTC to connect with W-CPEC and ultimately the over 200+ million Pakistani marketplaces. In theory, Russian companies in Pakistan could also re-export their home country’s NSTC-imported goods to neighboring India, thereby representing a pragmatic workaround to New Delhi’s potential self-interested distancing from that project which could also provide additional much-needed tax revenue for Islamabad.

Iran must therefore do its utmost to ensure Russia’s continued interest in the NSTC regardless of India’s approach to the project. Reconceptualizing the NSTC from its original Russian-Indian connectivity purpose to the much broader one of Russian-South Asian connectivity could help guarantee Moscow’s support. In parallel with that, Tehran would do well to court Beijing’s investments along W-CPEC+’s two branch corridors to Azerbaijan/Russia and Turkey/EU. Any success on any of these fronts, let alone three of them, would advance Iran’s regional interests by solidifying its integral geo-economic role in 21st-century Eurasia.

From our partner Tehran Times

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The phenomenon of land grabbing by multinationals

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Since 2012 the United Nations has adopted voluntary guidelines for land and forest management to combat land grabbing. But only a few people know about the guidelines, which aim to protect small farmers particularly in Third World countries.

When multinational investors buy up fields for their huge plantations, the residents lose their livelihood and means of support and will soon only be sleeping in their villages. If they are lucky, they might find work with relatives in another village. Many also try their luck in the city, but poverty and unemployment are high. What remains are depopulated villages and the huge palm oil plantations that have devoured farmland. People can no longer go there to hunt and grow plants or get firewood. The land no longer belongs to them!

Land grabbingis the process whereby mostly foreign investors deprive local farmers or fishermen of their fields, lakes and rivers. Although it has been widely used throughout history, land grabbing – as used in the 21st century – mainly refers to large-scale land acquisitions following the global food price crisis of 2007-2008.

From 2000 until 2019 one hundred million hectares of land have been sold or leased to foreign investors and the list of the most affected countries can be found here below:

Such investment may also make sense for the development of a country, but it must not deprive people of their rights: local people are starving while food is being produced and turned into biofuels for export right before their eyes.

In 2012, after three years of discussion, the UN created an instrument to prevent such land grabbing: the VGGTs (Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security:

Detailed minimum standards for investment are established, e.g. the participation of affected people or how to safeguard the rights of indigenous peoples and prevent corruption. Formally, the document provides a significant contribution to all people fighting for their rights.

The document, however, is quite cryptic. The guidelines should be simplified and explained. Only in this way can activists, but also farmers and fishermen, become aware of their rights.

Others doubt that much can be achieved through these guidelines because they are voluntary. After all, the UN has little or no say in the matter and can do no more than that. If governments implemented them, they would apply them as they will.

In Bolivia, for example, there are already laws that are supposed to prevent land grabbing. In the Amazon, however, Brazilian and Argentinian companies are buying up forests to grow soya and sugar cane, often with the approval and agreement of corrupt government officials. Further guidelines would probably be of little use.

At most, activists already use the guidelines to lobby their governments. Together with other environmental and human rights activists, they set up networks: through local radio stations and village meetings, they inform people of the fact that they right to their land.

Nevertheless, in many countries in Africa and elsewhere, there is a lack of documentation proving land ownership. Originally, tribal leaders vocally distributed rights of use. But today’s leaders are manipulated to pressure villagers to sell their land.

The biggest investors are Indians and Europeans: they are buying up the land to grow sugar cane and palm oil plantations. This phenomenon has been going on since 2008: at that time – as noted above – the world food crisis drove up food prices and foreign investors, but also governments, started to invest in food and biofuels.

Investment inland, which has been regarded as safe since the well-known financial crisis, must also be taken into account. Recently Chinese companies have also been buying up thousands of hectares of land.

In some parts of Africa, only about 6% of land is cultivated for food purposes, while on the remaining areas there are palm oil plantations. Once the plantations grow two or three metres high, they have a devastating effect on monocultures that rely on biodiversity, because of the huge areas they occupy. There is also environmental pollution due to fertilisers: in a village, near a plantation run by a Luxembourg company, many people have suffered from diarrhoea and some elderly villagers even died.

Consequently, the implementation of the VGGTs must be made binding as soon as possible. But with an organisation like the United Nations, how could this happen?

It is not only the indigenous peoples or the local groups of small farmers that are being deprived of everything. The common land used is also being lost, as well as many ecosystems that are still intact: wetlands are being drained, forests cleared and savannas turned into agricultural deserts. New landowners fence off their areas and deny access to the original owners. In practice, this is the 21st century equivalent of the containment of monastery land in Europe that began in the Middle Ages.

The vast majority of contracts are concentrated in poorer countries with weak institutions and land rights, where many people are starving. There, investors compete with local farmers. The argument to which the advocates of land grabbing hold -i.e. that it is mainly uncultivated land that needs to be reclaimed – is refuted. On the contrary, investors prefer well-developed and cultivated areas that promise high returns. However, they do not improve the supply of local population.

Foreign agricultural enterprises prefer to develop the so-called flexible crops, i.e. plants such as the aforementioned oil palm, soya and sugar cane, which, depending on the market situation, can be sold as biofuel or food.

But there is more! If company X of State Y buys food/fuel producing areas, it is the company that sells to its State Y and not the host State Z that, instead, assigns its future profits derived from international State-to-State trade to the aforementioned multinational or state-owned company of State Y.

Furthermore, there is almost no evidence of land investment creating jobs, as most projects were export-oriented. The British aid organisation Oxfam confirms that many land acquisitions took place in areas where food was being grown for the local population. Since local smallholders are generally weak and poorly educated, they can hardly defend themselves against the grabbing of the land they use. Government officials sell or lease it, often without even paying compensation.

Land grabbing is also present in ‘passive’ Europe. Russia, Ukraine, Romania, Lithuania and Bulgaria are affected, but also the territories of Eastern Germany. Funds and agricultural enterprises from “active” and democratic Europe, i.e. the West, and the Arab Gulf States are the main investors.

We might think that the governments of the affected countries would have the duty to protect their own people from such expropriations. Quite the reverse. They often support land grabbing. Obviously, corruption is often involved. In many countries, however, the agricultural sector has been criminally neglected in the past and multinationals are taking advantage of this under the pretext of remedying this situation.

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No let-up in Indian farmers’ protest due to subconscious fear of “crony capitalism”

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The writer has analysed why the farmers `now or never’ protest has persisted despite heavy odds. He is of the view that the farmers have the subconscious fear that the “crony capitalism” would eliminate traditional markets, abolish market support price and grab their landholdings. Already the farmers have been committing suicides owing to debt burden, poor monthly income (Rs. 1666 a month) and so on.”Crony capitalism” implies nexus between government and businesses that thrives on sweetheart deals, licences and permits eked through tweaking rules and regulations.

Stalemate between the government and the farmers’ unions is unchanged despite 11 rounds of talks. The farmers view the new farm laws as a ploy to dispossess them of their land holdings and give a free hand to tycoons to grab farmers’ holdings, though small.

Protesters allege the new laws were framed in secret understanding with tycoons. The farmers have a reason to abhor the rich businesses. According to an  a  January 2020 Oxfam India’s richest one  per cent hold over four times the wealth of 953 million people who make up the poorest 70 per cent  of the country’s population. India’s top nine billionaires’ Inc one is equivalent to wealth of the bottom 50 per cent of the population. The opposition has accused the government of “crony capitalism’.

Government has tried every tactic in its tool- kit to becloud the movement (sponsored y separatist Sikhs, desecrated Republic Day by hoisting religious flags at the Red ford, and so on). The government even shrugged off the protest by calling it miniscule and unrepresentative of 16.6 million farmers and 131,000 traders registered until May 2020. The government claims that it has planned to build 22,000 additional mandis (markets) 2021-22 in addition to already-available over 1,000 mandis.

Unruffled by government’s arguments, the opposition continues to accuse the government of being “suit-boot ki sarkar” and an ardent supporter of “crony capitalism” (Ambani and Adani). Modi did many favours to the duo. For instance they were facilitated to join hands with foreign companies to set up defence-equipment projects in India. BJP-ruled state governments facilitated the operation of mines in collaboration with the Ambani group  just years after the Supreme Court had cancelled the allotment of 214 coal blocks for captive mining (MS Nileema, `Coalgate 2.0’, The Caravan March 1, 2018). Modi used Adani’s aircraft in March, April and May 2014 for election campaigning across the country.

“Crony capitalism” is well defined in the English oxford Living Dictionaries, Cambridge and Merriam –Webster. Merriam-Webster defines “crony capitalism” as “an economic system in which individuals and businesses with political connections and influence are favored (as through tax breaks, grants, and other forms of government assistance) in ways seen as suppressing open competition in a free market

If there’s one”.

Cambridge dictionary defines the term as “ an economic system in which family members and friends of government officials and business leaders are given unfair advantages in the form of jobs, loans, etc.:government-owned firms engaged in crony capitalism”.

A common point in all the definitions is undue favours (sweetheart contracts, licences, etc) to select businesses. It is worse than nepotism as the nepotism has a limited scope and life cycle. But, “crony capitalism” becomes institutionalized.

Modi earned the title “suit-boot ki sarkar” when a non-resident Indian, Rameshkumar Bhikabhai virani gifted him a Rs. 10 lac suit. To save his face, Modi later auctioned the suit on February 20, 2015. The suit fetched price of Rs, 4, 31, 31311 or nearly four hundred times the original price. Modi donated the proceeds of auction to a fund meant for cleaning the River Ganges. `It was subsequently alleged that the Surat-based trader Laljibhai Patel who bought the suit had been favoured by being allotted government land for building  a private sports club (BJP returns ‘favour’, Modi suit buyer to get back land, Tribune June21, 2015).

Miffed by opposition’s vitriolic opposition, Ambani’s $174 billion conglomerate Reliance Industries Ltd. Categorically denied collusion with Modi’s government earlier this month. Reliance clarified that it had never done any contract farming or acquired farm land, and harboured no plans to do so in future. It also vowed to ensure its suppliers will pay government-mandated minimum prices to farmers. The Adani Group also had clarified last month that it did not buy food grains from farmers or influence their prices.

Modi-Ambani-Adani nexus

Like Modi, both Adani and Ambani hail from the western Indian state of Gujarat, just, who served as the state’s chief for over a decade. Both the tycoons are reputed to be Modi’s henchmen. Their industry quickly aligns its business strategies to Modi’s nation-building initiatives. For instance, Adani created a rival regional industry lobby and helped kick off a biannual global investment summit in Gujarat in 2003 that boosted Modi’s pro-business credentials. During 2020, Ambani raised record US$27 billion in equity investments for his technology and retail businesses from investors including Google and Face book Inc. He wants to convert these units into a powerful local e-commerce rival to Amazon.com Inc. and Wal-Mart Inc. The Adani group, which humbly started off as a commodities trader in 1988, has grown rapidly to become India’s top private-sector port operator and power generator.

Parallel with the USA

Ambani and Adani are like America’s Rockefellers and Vanderbilt’s in the USA’s Gilded Age in the second half of the 19th century (James Crabtree, The Billionaire Raj: a Journey through India’s New Gilded Age).

Modi government’s tutelage of Ambanis and Adanis is an open secret. Kerala challenged Adani’s bid for an airport lease is. A state minister said last year that Adani winning the bid was “an act of brazen cronyism.”

Threat of elimination of traditional markets

Farmers who could earlier sell grains and other products only at neighbouring government-regulated wholesale markets can now sell them across the country, including the big food processing companies and retailers such as WalMart.

The farmers fear the government will eventually abolish the wholesale markets, where growers were assured of a minimum support price for staples like wheat and rice, leaving small farmers at the mercy of corporate agri-businesses.

Is farmers’ fear genuine?

The farmers have a logical point. Agriculture yield less profit than industry. As such, even the USA heavily subsidies its agriculture. US farmers got more than $22 billion in government payments in 2019, the highest level of farm subsidies in the last 14 years, and the corporate sector paid for it. The Indian government is reluctant to give a permanent legal guarantee for the MSP. In contrast, the US and Western Europe buy directly from the farmers and build their butter and cheese mountains. Even the prices of farm products at the retail and wholesale levels are controlled by the capitalist government. In short, not the principles of capitalization but well-worked-out welfare measures are adopted to sustain the farm sector in the advanced West.

Threat of monopsonic exploitation

The farmers would suffer double exploitation under a monopsony (more sellers less buyers) at the hands of corporate sharks.  They would pay less than the minimum support price to the producers. Likewise, consumers will have to pay more because the public distribution system is likely to be undermined as mandi (regulated wholesale market) procurement is would eventually cease to exist.

Plight of the Indian farmer

The heavily indebted Indian farmer has average income of only about Rs. 20000 a year (about Rs. 1666 a month). Thousands of farmers commit suicide by eating pesticides to get rid of their financial difficulties.

A study by India’s National Bank for Agriculture and Rural Development found that more than half of farmers in India are in debt. More than 20,000 people involved in the farming sector died by suicide from 2018-2019, with several studies suggesting that being in debt was a key factor.

More than 86 per cent of India’s cultivated farmland is owned by small farmers who own less than two hectares of land each (about two sports fields). These farmers lack acumen to bargain with bigger companies. Farmers fear the Market Support Price will disappear as corporations start buying their produce.

Concluding remarks

Modi sarkar is unwilling to yield to the farmers’ demand for fear of losing his strongman image and Domino Effect’. If he yields on say, the matter of the farm laws, he may have to give in on the Citizenship Amendment Act also. Fund collection in some foreign countries has started to sustain the movement. As such, the movement may not end anytime soon. Unless Modi yields early, he would suffer voter backlash in coming elections. The farm sector contributes only about 15 per cent of India’s $2.9 trillion economy. But, it employs around half its 1.3 billion people. 

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