Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilisation of Resources, Growth, Development and Employment;

Relevance: GS-2: Effect of Policies and Politics of Developed and Developing Countries on India’s interests, Indian Diaspora

Key Phrases: Economic Balkanisation; NATO; transatlantic alliance; stagflation; Globalisation; Dim-sum bonds; credible institutional limits on arbitrary action by the executive.

Why in News?

• Russia’s invasion of Ukraine
  • Is radically redrawing the economic, political and security landscape of the world.
  •  Politically, it is pushing Russia away from Europe.
    • It has redoubled the commitment of NATO members to their Transatlantic alliance
    • It has led Germany to abandon its aversion to defence spending.
  • Economically, it
    • Augurs an extended period of high energy prices as Europe weans itself off Russian oil and gas,
    • Will raise the spectre of stagflation. [Coexistence of Inflation and low to zero Growth)
• The closing of McDonald’s in Moscow is bad news for the global economy (and globalisation)

Key highlights of the article

• On the financial front, Russian banks have been
  • Barred from doing business in the West and
  • Cut off from Swift, the bank messaging system for international payments.
• The central bank’s securities and deposits have been frozen, which rendered it incapable of stemming the Russian rouble’s fall.
• The Central Bank of the Russian Federation is similarly unable to act as a lender of last resort to financial institutions, such as Sberbank, with obligations in foreign currencies. These measures would be financially and economically devastating for Russia

Effects of such move

• Would such sanctions reduce the importance of dollars and increase the importance of Chinese Renminbi as foreign currency asset?
  • Central banks across the world diversified holdings away from the US greenback
    • Over the last couple of decades, the share of dollars in identified foreign-exchange reserves worldwide has fallen by roughly 10 percentage points
    • But the resulting migration has been only one-quarter into the renminbi and fully three-quarters into ‘subsidiary’ reserve currencies such as the Australian dollar, Canadian dollar, Swedish krona and Swiss franc.
• Despite these currencies being easily tradable, and independent (because they do not move in lockstep with the dollar) almost all have supported the West’s anti-Russia sanctions.
  • which means that none of these currencies is likely to provide a haven for governments violating international norms.

Why hasn’t there been more migration toward the renminbi?

• Renminbi-denominated bonds and bank deposits are not easily accessed by foreign official investors, at least in the relevant quantities.
• Dim sum bonds (renminbi-denominated bonds traded offshore, in Hong Kong and elsewhere) and offshore renminbi bank deposits are accessible, but other instruments not so much.
• Although Hong Kong and Shanghai operate a ‘bond connect’ through which overseas investors can invest in Mainland China’s interbank bond market, few if any central banks are on the list of approved investors authorised to participate in the scheme.

A message for belligerent leaders

• Russian President Vladimir Putin’s actions are sure to remind central banks’ reserve managers of a fundamental fact: every leading international and reserve currency in history has been the currency of a political democracy or republic, where there are credible institutional limits on arbitrary action by the executive.

• Few reserve managers will be inclined to place their asset portfolios at Xi’s mercy

Effects on Globalisation and Geo-Economic framework of the world

Geo-economic consequences of this war are negative for just about every country on the planet.

• Even if major economies manage to absorb some of the immediate shocks created by disruptions and sanctions, the global response to the war will shift public policies around the world in a regressive direction.
  • There is a hope that McDonald’s exit from Russia does not mark the end of a period of global growth and prosperity which began with the arrival of the golden arches at Moscow’s Pushkin Square in January 1990.
• The partisan behaviour of multinational companies (MNCs) and tech platforms has undermined the argument that they are more-or-less geopolitically agnostic, and good corporate citizens of the countries they do business in.
  • This was also seen due to fear from Cancel Culture
  • While MNCs of the 1990s and 2000s were prepared to face domestic criticism for their political neutrality in foreign countries, the current generation has ditched that balanced approach.

A dangerous message

• Policymakers around the world will now perceive foreign companies as extensions of foreign governments and treat them accordingly.
  • TikTok or Huawei, are rightly seen as instruments of the Chinese state, and
  • YouTube and Cisco, which have acted in accordance with the US government’s foreign policy, might be seen in the same light.
  • Western firms have acted as the coercive front end of American and European policies against one country, Russia. This could be repeated in the future.
• If good relations with the West are a precondition for good behaviour from Western companies, nation-states are bound to limit foreign investment in their economies.
  • A simple risk management approach will suggest greater caution towards foreign investment.
• This will compound the challenges of global economic recovery in the wake of the US-China trade war and the pandemic disaster.
  • Starting with data localization and greater regulation of technology platforms, we can expect governments to privilege national champions in critical sectors like defence, banking, finance, telecommunications and media.

Conclusion

• A worldwide backlash against globalisation, open economies and free trade is on the cards. It is unclear if leaders of the world’s biggest economies have the conviction, capability or political leeway to make a G-20-like attempt to find a cooperative route to prosperity out of this.
• After all, they created this mess in the first place. Critics claim that we are in for a period of economic Balkanisation, restricting access to technology, energy and food and driving up costs.
• Global cooperation on tackling climate change, stewarding an energy transition and combating pandemics, will be much harder and hence more collaborative approach and sustained engagement based in rules based order is required.

Source Live Mint

Mains Question:

Q. How will the sanctions imposed on Russia affect the investment environment in developing countries? Discuss.