World-Watching: The Problem with the Current Russia Sanctions Regime

[from Project Syndicate, by Mohamed A. El-Erian]

There is much debate about the effectiveness of Western sanctions, the Ukraine war’s implications for markets and the global economy, and what the West’s next steps should be. While there are few good options, some are clearly worse than others.

Cambridge — It has been five months since Europe and the United States imposed tough economic and financial sanctions on Russia, a G20 country that was the world’s eleventh-largest economy on the eve of its invasion of Ukraine. While the sanctions have been gradually strengthened in the intervening months, debate rages about their effectiveness, the war’s broader implications for markets and the global economy, and what the West’s next steps should be.

On the first question, although the sanctions have been less effective than Europe and the U.S. had hoped, they also are proving more onerous than the Kremlin claims. Russia’s central bank expects GDP to contract by 8-10% this year, while other forecasters expect a larger fall, together with longer-lasting damage to growth potential. Imports and exports have been severely disrupted, and inflows of foreign investment have essentially stopped. Shortages are multiplying, pushing inflation higher. At this point, the country no longer has a properly functioning foreign-exchange market.

The sanctions would have bitten much harder had the West not opted for a carve-out of Russia’s energy sector, and had many more countries joined the U.S. and Europe in the effort. Because that didn’t happen, Russia has not felt nearly as much pressure as it would have. Moreover, it has been able to continue trading through various side and back doors that will likely become increasingly important as long as the sanctions regime, as currently designed, continues.

Nonetheless, it is only a matter of time before the Russian economy experiences a harder hit. Inventories of imported goods – including many critical technological and industrial inputs – are dwindling fast, and many sectors are becoming less resilient. The cumulative damage to Russia’s economy over time will be significant and long-lasting – a fact that has not yet been fully captured by consensus medium-term forecasts.

The second question concerns global spillovers from the war and the sanctions regime. Most observers agree that Russia’s invasion has increased not just energy insecurity but also food insecurity, highlighting the fallout from the war’s disruption to Ukrainian agricultural exports. But there is still much debate about the West’s use of the economic nuclear sanctions option: the curbs placed on Russia’s central bank and on Russia’s use of the international payments system.

These curbs are far more intrusive than the usual mix of restrictions on sanctioned government and private sector trade and on individuals’ financial dealings. Yet, because they are not subject to any internationally agreed standards, guidelines, or checks and balances, they fall outside the purview of relevant global-governance bodies such as the Bank for International Settlements, the International Monetary Fund, and the World Trade Organization.

In a time of war, such oversight might seem like a nicety. But some worry that the sanctions could significantly reduce the dollar’s role as the world’s reserve currency and the U.S. financial system’s role as the primary global intermediary for other countries’ savings and investments. After all, a growing number of countries undoubtedly now feel more vulnerable to the reach of U.S. sanctions.

But it is impossible to replace something with nothing, which means that no significant loss of dollar or U.S. financial primacy will occur in the immediate future. Rather, the sanctions will lend further momentum to the gradual process of global economic fragmentation, which was also fueled a few years ago by the tariffs imposed by the Trump administration. More countries now have even more of a reason to pursue greater financial resilience and inherently inefficient forms of self-insurance.

That brings us to the third debate. With no end in sight for the war, what should the West do next? Fearing the implications for energy prices and the supply of gas to Europe, many in the West are tempted to call for a moratorium on any new sanctions – or even for additional carve-outs. Others, however, favor additional measures to hold Russia accountable for its indiscriminate attacks on Ukrainian civilians.

In any case, maintaining the current sanctions regime is not problem-free, owing to the twin objectives of pressuring Russia and limiting the economic disruption to Europe. Moreover, as European Commission President Ursula von der Leyen recently said, it feels as if Russia is “blackmailing” Europe by threatening to disrupt gas supplies at any moment. No wonder the Commission is urging member countries to cut consumption by 15%.

Under the current sanctions regime, the West risks falling between two horses. While easing sanctions could help alleviate concerns about Europe’s economic outlook, this option is a non-starter, given the atrocities that Russian forces are committing in Ukraine. But if the West is serious about pressuring Russia through truly crippling economic and financial sanctions, it needs to bite the bullet and eliminate the carve-outs for energy.

Doing so would undoubtedly have a severe short-term economic impact on European economies and the rest of the world, amplifying the “little fires everywhere” syndrome that I warned about in May. It is therefore critical that governments use their available fiscal space to provide targeted support to vulnerable segments of the population, as well as to fragile countries; and multilateral agencies must support developing countries through aid and a more operational debt relief framework. If done properly, this option would yield better outcomes in the medium and long term than the current strategy.

Muddling through risks bringing about the worst of all possible worlds. It is insufficient to dissuade Russia from continuing its illegal war; it is fueling deeper fragmentation of the international monetary system; and it is not even protecting Europe from a winter gas disruption.

Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse (Random House, 2016).

Shipping and the World

[from Seatrade Maritime News]

Asyad Dry Dock Expanding Capacity As Demand Grows

Oman shipyard Asyad Dry Dock is expanding its capacity by 20% with a new floating dock as its current facilities are fully utilized.

by Marcus Hand

The shipyard, formerly Oman Drydock Company, is now part of the Asyad Group, the logistics arm of the Oman government. Management of the yard has been combined with shipowner Oman Shipping Company, and overseen by Dr. Irbahim Al Nadhairi, Chief Executive Officer, Shipping & Drydock.

“We have integrated the shipping and drydocking as the shipping service. The companies are still two legal separate entities but then we share the same executive team to be more efficient,” Dr. Ibrahim told Seatrade Maritime News in an interview at Posidonia 2022.

On the shipping side of the business the group owns a fleet of 65 ships with plans to increase the fleet to over 100 vessels over the next five years. He explains that with such a size of fleet the shipowner needed a quality shipyard so it made sense to work together.

Asyad maintains most, if not all its fleet at the shipyard in Oman, accounting for around 15% of its business. While part of the same group Dr. Ibrahim says it does not send its ships to the yard “by default,” and they have to make sure it is competitive as it needs to be for their third-party customers.

Business has been growing for the shipyard and it experienced a spike in the first half of this year as Chinese capacity has been taken out of the market by COVID restrictions pushing work to yards in other parts of the world. “So, we could see there was a big hike in the number of ships, not only for Asyad Dry Dock, but the entire region as well,” Dr. Ibrahim said.

“The next 12 months I believe the ship repair industry will still continue to flourish on our side.”

The shipyard’s two 600,000 DWT drydocks are already operating at full capacity and this year sees it adding a floating dock with the capacity to handle vessels up to Panamax size.

“We’ve recently acquired a floating dock which is of Panamax size and we reckon that about 40% of the business in ship repair is within that Panamax size. The floating dock gives us around 20% extra capacity,” he said. It will increase the number of ships the yard can repair from 200 to around 240.

The floating dock is expected to arrive in Oman in the next six weeks, and following some dredging works be operational by the start of Q4 this year.

Greek owners are major clients of the shipyard and account for around 40% of business, and Dr. Ibrahim said they added two more Greek clients last week. “It seems we have a good reputation in the Greek market and between now and end of Q3 we have 27 ships in orderbook from the Greek market.”

Globally its customer base includes MSC, AP Møller-Mærsk, CMA CGM S.A., Hapag-Lloyd, and Mitsui OSK Lines (株式会社商船三井). Maersk currently has currently two vessels in the yard.

Being able to deliver services efficiently and on time is of critical importance in the financially booming container sector.

“Today when you talk about bringing a container ship into a shipyard time really is money,” Dr. Ibrahim said. If a container ship owner says a ship will be in the yard for 15 days the owner will expect work to be completed in 12 days.

‘Further Action Is Needed’ As MEPC 78 Gets Underway

IMO Secretary General Kitack Lim hailed the 78th session of the Marine Environment Protection Committee as an opportunity to be brave and lead by example on decarbonization.

by Gary Howard

MEPC 78 has a packed agenda with the opportunity to consider and progress IMO’s work on cutting greenhouse gas emissions from ships.

At the last MEPC meeting, a revision process was agreed to strengthen the IMO’s initial GHG strategy which was adopted in 2018. A strengthened version of that initial strategy is due in mid-2023 at MEPC 80.

Speaking to Seatrade Maritime News in May, Stamatis Fradelos, Vice President, Regulatory Affairs at ABS said that important influencers in the IMO like the United States, EU, Canada, Japan, Australia and New Zealand are calling for net zero emissions from shipping by 2050 and introducing a level of ambition for 2040.

“Whilst progress has been made on many of the measures set out in the Initial Strategy, I am sure that we can all agree that further action is needed. Your discussions this week will chart the way forward for the decarbonization of international shipping,” said Lim.

“It is therefore of utmost importance that IMO continues to deliver concrete progress in transitioning international shipping from fossil fuels to low and zero-carbon alternatives.”

Member states at MEPC 78 will also consider adoption of guidelines to support short-term measures on GHG emissions, including correction factors for carbon intensity, EEXI calculation methodology and revised SEEMP.

Calculations on the GHG impact of fuels will be discussed, as ISWG-GHG 11 reports progress on developing lifecycle GHG assessment guidelines. Well-to-wake and tank-to-wake calculations are in scope, with the aim of giving fuel users a full picture of the impact of the production and use of the fuels they choose.

“Your constructive discussions on these topics will enhance the Committee’s evidence-based decision making when further considering proposals for mid-term GHG reduction measures,” Lim told Member States.

“I would like to take this opportunity to express my deepest appreciation to all Member States, and observer delegations, and especially the Chair of the Working Group on reduction of GHG emissions from ships, Mr. Oftedal of Norway, for the extraordinary effort and dedication in ensuring the successful outcome of both intersessional meetings.”

Houston Begins $1.1Bn Ship Channel Widening

The Port of Houston kicked off its the long-awaited billion dollar dredging scheme, the Houston Ship Channel Widening and Improvement Project 11 last week.

by Michele Labrut

The $1.1bn expansion of the Houston Ship Channel, which has been in planning for more than a decade is finally underway.

After more than a decade of planning, Project 11 will allow the ship channel to accommodate an additional 1,400 vessels per year and could generate up to $134bn more annually in economic impact once completed. The channel currently accommodates about 8,200 vessels and 215,000 barges each year, hauling more than 247m tons of cargo.

“This project will enable Port of Houston to continue to grow and respond effectively to whatever the future demand in the supply chain has to offer,” Port of Houston Executive Director Roger Guenther said in a statement.

Port of Houston is a 40-2 km-long complex of nearly 200 private and public industrial terminals along the 583.6 km-long manmade Houston Ship Channel, which connects the port to the Gulf of Mexico.

Project 11 will widen the Houston Ship Channel by 51.8 m along its 41.8 km Galveston Bay reach, to 213.3 m wide. It will also deepen upstream segments from a current depth of 13.7 m to a depth of 14.7 m. Dredging began last week. The Houston Ship Channel winds from the Gulf of Mexico through shallow Galveston Bay and up through the port.

“This project is important on many levels, including improving the efficiency of our nation’s supply chains, promoting navigational safety, and creating environmental benefits through the innovative use of dredged material,” Michael Conner, Assistant Secretary of the Army (Civil Works), said in a statement.

Port of Houston and the Army Corps of Engineers signed an agreement in August giving the port permits to start dredging the federal waterway. Great Lakes Dredge and Dock Co. was awarded a $95m contract in October, which also includes oyster mitigation and construction of a bird island. The channel widening and deepening project is scheduled to be completed in 2025.

EU Transport Commissioner Focuses on ‘Solidarity Lanes’ and Sanctions

As the global food crisis deepens and millions of tons of Ukraine’s grain remain blocked in the Black Sea, EU Transport Commissioner Adina-Ioana Vălean has declared that all transport modes will be considered in setting up new Solidarity Lanes that bypass the Black Sea.

by Paul Bartlett

Her comments come as disrupted grain movements risk a global food crisis.

Speaking to journalists immediately prior to yesterday’s opening ceremony at Posidonia, she said that trucks, tracks, trains, transshipment and storage facilities will all contribute to new supply chains to ensure that exports from one of the world’s largest grain exporters can resume, at least in part, as soon as possible.

She said that the setting up of Solidarity Lanes would have important commercial implications for shipping and could even lead to changes in the sector’s business models

Vălean also rejected criticism from prominent Greek shipowners who had claimed earlier in the day that sanctions imposed on Russia in the wake of its invasion on Ukraine won’t work. At a Maritime Leaders Summit staged by Capital Link on Monday, George Prokopiou and Evangelos Marinakis had both said that sanctions against Iran and Venezuela had been shown not to work and similar moves against Russia would not be effective either.

However, other sources pointed to the scale of the sanctions package that has severely impacted the Russian economy by disrupting key revenue generating sectors. Energy exports are the most obvious example and although Russian oil is still easily sold in India and China, for example, it is at deep discounts to global prices.

Meanwhile, LNG exports have also been hit and development of Arctic LNG supply chains have also been severely affected. Within the next few months, Vălean said that Russian oil exports would be further disrupted by the withdrawal of insurance cover on shipping and transport arrangements.

Climatology-Watching: Tyndall Centre for Climate Change Research

[from Tyndall Centre for Climate Change Research]

UK’s climate change readiness has made ‘significant progress’

by Renee Karunungan on May 4, 2022

There is significant progress in the UK for reporting and implementing climate change adaptation, according to a new study led by Tyndall UEA’s Katie Jenkins. Katie has created an Adaptation Inventory of adaptation actions happening based on official records of adaptation projects being implemented by both public and private sector, accompanied by  a systematic review of the peer-reviewed literature of adaptation case studies.

Adapting to climate change means taking action to prepare for and adjust to current and predicted effects of climate change. Adaptation plays an important role in managing past, present and future climate risk and impacts. However, there is an “adaptation gap” where the distance between existing adaptation efforts versus adaptation needs is widening, according to the United Nations Environment Programme’s Adaptation Gap Report. Tracking national adaptation plans is deemed critical to support future decision-making and drive future actions.

Studies of adaptation consider the UK at the forefront of adaptation planning, setting an early example with the Climate Change Act 2008 which contains a five-year cycle of adaptation planning, published as the UK Climate Change Risk Assessment. Evidence from the UK Climate Change Committee shows that adaptation action has failed to keep pace with increasing climate risks. 

According to the Committee’s assessment, adaptation planning for 2C and 4C global warming is not happening, and that the gap between future risks and planned adaptation has widened, delivering the minimum level of resilience.

Katie’s new Adaptation Inventory provides insight on what is currently being implemented, which helps policymakers and practitioners learn from existing knowledge and practical case studies.

“The Adaptation Inventory provides a consistent and easily searchable database which will continue to evolve. It can provide evidence on the specific types of adaptation implemented on the ground as well as provide more detailed insight into the specific examples of action being implemented. This has the potential to help and inform UK-based decision-making,” Katie said.

The Adaptation Inventory identifies and documents current and planned adaptation in the UK, and how it is being implemented through adaptation actions, the sectors where adaptation is occurring, and where the gaps remain. There were 360 adaptation actions identified in the Inventory, comprising 134 adaptation types. Out of these 360 adaptation actions, 80% have already been implemented.

The private sector accounts for 74% of the actions with water companies dominating. Regulatory frameworks, standards, and reporting requirements are key drivers required by water companies by the Regulator. For example, water companies are already required to plan their resilience to drought.

The most common types of adaptation actions are flood protection (12%), leakage reduction (4%), water metering (3%), property level flood protection (3%), operational improvements (3%), and back-up generators (3%). Most actions were categorized as structural and physical interventions. Other interventions were categorized as technological and ecosystem based. 

An example of a structural adaptation action is raising boat landings to address higher tides because of rising sea levels. For an example of technology, London Transport has installed air cooling units and mechanical chillers at two key busy tube stations to address heat stress. An ecosystem-based example  introduces barley straw to reservoirs to control blue green algae, more common with warmer summers.

The Adaptation Inventory also looks at the types of climate hazards being addressed. It found that 76% of the actions were in response to drought, 26% for extreme rainfall, 13% for flooding, and 11% for higher temperatures. One example of adaptation for drought is rainwater recovery using storage facilities available on the site, reducing the demand for fresh water during drought. For alleviating flooding, a water company is using afforestation. The London Underground has doubled the capacity of ventilation shafts on the Victoria line, which provide more air flow on hot days.

European Central Bank’s Macroprudential Bulletin

The European Central Bank’s Macroprudential Bulletin provides insight into the work they are currently doing in the field of macroprudential policy. Their goal is to raise awareness of macroprudential policy issues in the euro area by making their ongoing work and thinking in this field more transparent, and to encourage broader discussion on these key issues.

January 2022, Issue 16

Reforming money market funds

Money market funds perform a key function for the financial system by linking the short-term funding and cash-management needs of various market participants. Proposals to reform the regulation of these funds and enhance the sector’s resilience are assessed in this issue of the Macroprudential Bulletin.

Assessing possible reform proposals

At the onset of the coronavirus pandemic, money market funds proved particularly vulnerable when faced with severe market disruption. This article looks at specific policies to address the liquidity risk of these funds and ensure they can deal with large and unexpected outflows under similar periods of stress.

[Archived PDF of full article]

The impact of a public debt quota on money market funds

Public debt assets tend to be easier to draw down and sell during market stress than private sector debt. Having a minimum public debt quota for private debt money market funds could increase their shock-absorbing capacity. What are the costs and benefits of such a proposal?

[Archived PDF of full article]

Essay 86: World-Watching: India

(from ICRIER Newsletter | November 2019 | Vol. III, Issue 11)

The November 2019 issue of the Newsletter provides a quick recap of ICRIER’s research and policy engagements during the month of October 2019.

Three research reports were released by ICRIER last month in the areas of competition, trade and investment and climate change (See below).

ICRIER also organized consultation workshops, dissemination and outreach events during the month. ICRIER researchers published several articles in leading newspapers and other media platforms on a variety of current issues such as growth, agriculture, trade, FTAs, RCEP, single use plastics and the Economics Nobel. We sincerely hope that you will take a few moments to glance through these updates and engage further with anything that interests you. We hope you enjoy the newsletter’s new format. As always, we welcome your valuable feedback.

Competition Issues in India’s Mobile Handset Industry

(Rajat Kathuria, Mansi Kedia and Kaushambi Bagchi)

Mobile phones have been the key to India’s technology revolution. India is the second largest mobile phone market globally, next only to China. At the end of 2018, the estimated number of smart phone users in India was 337 million, compared to 2.53 billion users worldwide. One would imagine that the exponential increase in cheaper smart phone models would displace the market for feature phones; to the contrary, feature phones continue to dominate the Indian market. While smart phone and feature phone shipments in 2018 Q3 were about the same, a comparison of growth rates shows that both phablets (large screen smartphones) and regular smartphones eclipse feature phones.

Read more (archived PDF).

Exploring Trade and Investment Opportunities between India and Select African and Asian Economies

(Anirudh Shingal, Neha Gupta, Minakshee Das, Akshaya Aggarwal and Varsha Jain)

Using descriptive statistical analysis, this study examines trade and investment opportunities between India and 41 African and Asian economies (mostly LDCs) by focusing on the latter’s export opportunities in the Indian market and on India’s investment opportunities in the selected countries. It also discusses barriers to realizing the identified trade and investment opportunities between India and the selected economies, based on a review of the existing literature.

Read more (archived PDF).

Financing Resilience against Natural Disasters

(Saon Ray, Samridhi Jain and Vasundhara Thakur)

Disaster Risk Resilience can be interpreted as global policies working for improving disaster risk reduction. The Sendai Framework for Disaster Risk Reduction is the guiding principle for efforts to improve resilience worldwide. This report links the global efforts for disaster risk reduction with resilient infrastructure. The report analyses the applicability of popular instruments for emerging economies, the role of the private sector, and challenges to implementation of resilience framework. It maps the evolution and status of disaster risk financing in India.

Read more (archived PDF).

ICANN 66 Pre-Meeting Briefing

ICRIER hosted the ICANN 66 Pre-Meeting Briefing on 18th October 2019 for its Indian stakeholders. This edition of the Pre-Meeting Briefing looked closely at the developments between ICANN 65 and ICANN 66 and highlighted some of the key policy discussions currently underway at ICANN. The event witnessed participation from various stakeholders from India, including representatives from the Ministry of Electronics & Information Technology (MeitY), National Internet Exchange of India (‘.in’ registry) along with Indian representatives active in various policy development processes at ICANN. ICANN 65 was held in Montreal, Canada, between 2-7 November 2019. ICRIER will also be hosting the ICANN 66 Readout during the first week of December 2019 to highlight some of the key takeaways from ICANN 66.

Read more [archived PDF].

Dissemination of the India-LDCs Trade and Investment Study

ICRIER organised Dissemination of the Report Exploring Trade and Investment Opportunities between India and Select African and Asian Economies on October 14, 2019 at Magnolia Hall, India Habitat Centre, Lodhi Road, New Delhi.

Welcome remarks were delivered by Dr. Rajat Kathuria, Director & CE, ICRIER and the Introductory Session was Chaired by Dr. Jayant Dasgupta, IAS (Retd.) Former Ambassador of India to the WTO. Dr. Anirudh Shingal, Sr. Fellow, ICRIER presented the key findings of the report, which was followed by a Panel discussion Chaired by Dr. Arpita Mukherjee, Professor, ICRIER.

Read more [archived PDF] [Presentation PDF] [Report PDF]

Market Incentives, Direct Income Support for Farmers are far more Effective in Increasing Agricultural Productivity

(Ashok Gulati, Sakshi Gupta)

Read article [archived PDF]

Cities at Crossroads: Single-use Plastic only Part of the Challenge

(Isher Judge Ahluwalia, Almitra Patel)

Read article [archived PDF]

From Plate to Plough: Agri-Policy Lessons from China

(Ashok Gulati & Sakshi Gupta)

Read article [archived PDF]

Growth, Income, Poverty and the Nobel

(Alok Sheel)

Read article [archived PDF]

Understanding the RCEP with Rajat Kathuria

(Rajat Kathuria)

Listen to podcast [archived MP3 audio] [PDF transcript]

The Five-trillion Math

(Alok Sheel)

Read article [archived PDF]

Has PM-Kisan Belied Expectations?

(Siraj Hussain)

Read article [archived PDF]

How Government Can Control Sudden Spike in Prices of Onion and Tomato

(Ashok Gulati & Harsh Wardhan)

Read article [archived PDF]

Best of Business Standard Opinion: Corporate Tax Cuts, Pollution Challenge…

(Durgesh K. Rai)

Read article [archived PDF]

India’s Trade with its FTA Partners: Experiences, Challenges…

(Durgesh K. Rai)

Read article [archived PDF]

India’s Trade Policy Should Lend an Ear to a Wider Range of Voices

(Ujjwal Krishna & Amrita Saha)

Read article [archived PDF]

Monsoon’s Late Surge Helps, But Floods Hurt Crop Prospects

(Siraj Hussain)

Read article [archived PDF]