Argentina’s New Currency Crisis: What Happened This Time?

The peso crisis in Argentina: A risk analysis. What happened this time? Is any comparison with the previous crisis (1998 – 2002) possible? What impact could we expect in the close-term for President Mauricio Macri and the country’s political stability? The article tries to give some clues on what might be going to happen in the South-American State.

A history of debt crises

Argentina is no stranger to currency and debt crises. In the 20th century, periods of economic growth often led to trade deficits, pressure on the currency and the hasty adoption of fiscal austerity to tamp down the economy, creating an impoverishing and tiresome cycle of boom and bust. After a bout of hyperinflation in the 1980s, Argentina attempted to stabilize the Argentine peso by tying it 1:1 to the dollar in 1991 (the Convertibility Plan). Though successful in the short term, convertibility went disastrously awry at the century’s turn.

Argentina’s contemporary problems are a typical currency crisis. Those who hold Argentine pesos or peso-denominated assets are selling, partly to buy US dollars and dollar-denominated assets because the US Federal Reserve is raising interest rates. Argentina also runs a fiscal deficit, which it has to finance in dollars or another hard currency. As the peso falls, that debt becomes harder to service, increasing fears of default and creating a cycle of ever-increasing pressure on the peso. As the peso falls, prices rise – inflation currently runs at about 30 percent per annum.

The Argentine central bank attempted to stem the pressure on the peso by raising interest rates to extraordinarily high levels – they reached 27.25 percent at the end of April, and 40 percent in the first week of May. However, the peso continued its decline. The International Monetary Fund (IMF) was created just for situations like this. The Argentine government in May appealed to the fund for credit to reassure investors, obtaining a credit line of $50 billion, which the state can use to ensure its debts are paid and to support the peso. In return, the Fund has mandated Argentina take steps to reduce its budget deficit through fiscal austerity, including cuts and the reintroduction of taxes on exports. Argentina announced it would speed up this fiscal tightening on September 3.

Argentinian politics: A turn to the right

During the first decade of the 21st century, Latin America was seen as undergoing a left-wing transformation, with governments of varying left-wing ideologies, identities and programs coming to power in the majority of the region’s states. Since 2015, by contrast, there has been a turn to the right.

Argentina’s initial drift to the left began after the convertibility crisis of 1998-2002, which saw extreme austerity, an explosion in poverty and unemployment and the total discrediting of the IMF and economic orthodoxy more generally. The left turn in Argentina was represented by Néstor Kirchner (1950-2010), president between 2003 and 2007, and Cristina Fernández de Kirchner, his wife and successor as president between December 2007 and December 2015. The Kirchners introduced subsidies for utilities and public services, wage increases and, under Fernández de Kirchner, the nationalization of private pension funds to support public spending. Fernández de Kirchner also introduced capital controls, limiting the ability of peso-holders to exchange or sell their pesos on the open market, and thus the peso’s depreciation.

The Kirchners kept the peso reasonably stable, but prosperity during their tenure depended in large part on high prices for Argentine commodities (most notably soybeans). They also presided over a prolonged period of high inflation and considerable levels of corruption. In the 2015 elections, when Fernández de Kirchner could not run again, her left-Peronist faction ran Daniel Scioli, who in turn lost narrowly to Mauricio Macri, the mayor of Buenos Aires and representative of a center-right coalition, Cambiemos.

Macri succeeded in reducing subsidies and returning Argentine bonds to global markets – the country had been unable to borrow openly after the 2001 default. He also deregulated the finance sector. However, his attempts to cut inflation failed, while Macri failed to attract foreign investment. The currency crisis makes it harder for him to argue that his orthodox, conservative economic policies will succeed in restoring Argentine prosperity.

Economic risks

The immediate worry would be that Argentina would again default on its obligations. How likely is that? Well, the fact that the IMF credit line hasn’t prevented increasingly extreme attempts to reassure markets is certainly a bad sign. The Argentine central bank raised interest rates to a dizzying 60 percent at the end of August. There are significant doubts that Argentina will be able to meet the inflation and budgetary targets the IMF demands in return for its help.

The IMF learned during the 2001 crisis that it does not pay to continue supporting a country that is obviously going to become insolvent, so it is certainly possible that the IMF will cut off support – perhaps up to a 50 percent chance over the next year. This means that the danger of an Argentine default in the next year is probably almost as high, as it’s unclear who else might fund Argentina’s deficits.

Political risks

The immediate concern would be the sort of political chaos that attended the 2001 default. This led to a popular uprising and the flight of President Fernando de la Rúa from the Casa Rosada. The chances of this happening over the remainder of Macri’s current term (i.e. between now and December 2019) are probably very low – under 10 percent. The main reason is that the trigger for de la Rua’s downfall was neither inflation nor a default, but his order to freeze bank accounts (which prevented people from withdrawing their pesos and buying dollars). Macri is unlikely to issue a similar order simply to avoid recalling that precedent; rather, like Fernández de Kirchner, he would probably try to limit access to dollars in other ways.

The second political risk, especially from the purview of foreign investors, is Macri’s losing the next presidential elections, due at the end of 2019. This depends on a number of factors. Will Macri continue to pursue austerity and risk a recession, or limit cuts in a bid to save voters some pain?  Will Cristina Fernández de Kirchner be able to run, or will she be barred, legally or practically, by corruption investigations?

Because many Latin American countries do not allow presidents to run for immediate consecutive terms, there are relatively few precedents to apply. Macri is not accused of epic-scale corruption; indeed, his government has been rather vigorous in pursuing graft cases. His economic record is poor, but Fernández de Kirchner’s was not emphatically better. Given that Macri won his first term by a margin of three percent and his poor economic record, the chance of a left-wing victory would probably fall between 40 and 55 percent.

How Will Dollar Appreciation Against the Real Impact Brazil’s Economic Recovery?

Internal political uncertainty and US rising interest rates have caused a two and a half year high of the dollar to real exchange rate. The dollar’s appreciation, in turn, has caused concern regarding Brazil’s economic recovery – which has been driven by its internal market – given its pressure on inflation and the possible decrease in consumption as products become more expensive.

On September 5, the dollar hit a two and a half year high against the real closing at R$ 4,14 – the highest level since January 2016. Throughout the past few months, the dollar continued to rise and exchange offices were selling the tourism dollar – dollars sold directly to consumers – at R$ 4,32. Since January 2018 the dollar has appreciated 25% against the real.

International and domestic factors

On the international front, the dollar’s appreciation was caused by higher yields on U.S. Treasury securities which rose to 2% and continuous fear of a trade war between the US and its trade partners. Additionally, the Federal Reserve may continue its interest rate increase to contain inflationary pressures due to economic growth – especially in US retail sales. The concern is that an increase in retail sales may increase inflation, and in order to contain this increase, the Federal Reserve would likely increase interest rates even further.

High interest rates in the US – deemed the safest market in the world – have the potential to attract resources from other emerging market countries, such as Brazil.

In Brazil, the appreciation of the dollar can also be explained by the continuous volatility in the presidential polls. Last week, the Superior Electoral Court (TSE) voted to deny Lula da Silva from running under the Clean Slate Law – as of the latest August poll Lula was polling first with 39%. After the TSE decision, a new poll was published on September 5 without Lula; Jair Bolsonaro is now first with 22%, followed by Marina Silva 12%, Ciro Gomes 12%, Alckmin 9%, and Haddad 6%. Doubt remains as to whether the next government will make the necessary economic reforms to reach fiscal balance.

Alongside the dollar pressure, the Brazilian economy continues to underperform with 1.1% growth so far in 2018. This indicator is far worse than what was expected, causing economists at financial institutions to revise the GDP growth to 1.44% for 2018 – earlier in the year the expectation was 2.70%.

Brazilian Central Bank

So far in order to intervene, the Central Bank has held a number of foreign exchange swaps, equivalent to the future sale of dollars. In its latest round, on August 30, the total offer was $1,5 billion.

On August 1, the Central Bank’s Monetary Policy Committee (Copom) decided to keep interest rates at 6.5%, signalling caution due to the volatility of the external scenario.

The Selic rate is used to keep inflation within its target to control prices of goods and services – when inflation is low the Central Bank lowers the Selic rate to boost economic activity, and when inflation is high they increase the Selic to encourage people to consume less to remove reais from the market (sometimes increasing unemployment). Financial analysts project inflation at 4.16% for 2018.

Despite this volatile scenario, Minister of Finance, Eduardo Guardia, and Central Bank President, Ilan Goldfajn believe that Brazil will not face the same difficulties as its neighbour, Argentina, since Brazil has low levels of foreign debt, high international reserves, opportunities to sell future dollar contracts, and stable foreign investment inflows.


The dollar’s appreciation has a direct impact on the pockets of Brazilians. Uncertainty in the presidential elections polls and a need for security has caused investors and Brazilian tourists to buy more dollars, which in turn increases the price of the dollar even more.

In addition, it causes an increase in prices of goods and service and puts pressure on inflation, as many parts of the final goods are imported using U.S. currency – especially true for the electronics industry as well as food such as bread and pasta since wheat tracks the price of the dollar. In addition, the price of oil is likely to continue to increase due to tensions between Iran and the United States. If the dollar rises too much too quickly, it creates concern of boosting inflation in Brazil – something that if relatively moderate would not be considered too negative given its low 2017 and 2018 rates.

Inflation may also be passed along to products that do not use imported parts as some goods are traded in dollars for export and Brazilian exporters will have to adjust their prices in order to make a profit.

In regards to tourism, the appreciation of the dollar comes with positive and negative effects. On the negative side, vacations for Brazilians looking to go abroad became extremely expensive. On the positive side, international travellers may be attracted to come to Brazil due to its weak real which in turn can boost the tourism industry activity and improve some parts of the economy.

Overall, an increase in the price of the dollar is set to delay economic recovery in Brazil, especially as safe countries like the United States become more attractive to investors.


Lorena Valente is an Associate at Promontory Financial Group, an IBM company.

Why Peru’s Democracy is at Stake in Vizcarra’s Anti-Corruption Crusade

As yet another corruption scandal reverberates through Peru, polling shows that citizens are disappointed with their government and doubting democracy itself. If new president Martín Vizcarra fails to lead Peru past the wrongdoing that has plagued its government for decades, Peru could fall into a democratic crisis.

On Saturday, Peruvian president Martín Vizcarra called for a national referendum on judicial and political reforms aimed at tackling the country’s widespread corruption. The week previous, he asked congress to debate the ouster of the country’s magistrates “in light of the evident acts of corruption and crimes”. These extraordinary moves come after recordings were released that chronicle widespread influence peddling between dozens of senior judicial officials and organized crime gangs. The judicial branch is only the latest Peruvian democratic institution to face a corruption crisis, after President Vizcarra himself assumed the presidency after the resignation of his predecessor due to corruption allegations. In fact, all six living Peruvian presidents have either been imprisoned, implicated, or investigated for corruption.

Governmental wrongdoing has undermined Peruvian belief in democracy

Polling shows that Peruvians are weary of these scandals, and that they have negatively affected their opinion of democracy itself. Surveys conducted in May, before the most recent round of corruption scandals, indicate that 62% of Peruvians are worried about financial and political corruption in their country, compared to 35% worldwide. This is enough to make Peruvians the most concerned among the 28 major countries surveyed. Confidence in democracy has followed a similarly troubling trend, with only 45% of Peruvians indicating that they support it, the lowest approval level in a decade. Upcoming polls will likely find that the situation has worsened, as anti-corruption protest marches have begun and there are movements to fly the Peruvian flag at half-mast during its Independence Day celebrations.

Vizcarra’s anti-corruption crusade

When he assumed office in March, president Vizcarra pledged to curb corruption “at all costs”. While this commitment may cause déjà vu among corruption-weary Peruvians, Vizcarra is one of very few Peruvian leaders that has any chance of bringing it to fruition. Most political decision makers that have the ability to reform the system have themselves been embroiled in corruption scandals. Key stakeholders in the public and private sectors have benefitted greatly from the status quo, and thus have little incentive to right the ship. Though Vizcarra faces substantial headwinds in his quest to clean Peru’s political system, there are three key indicators to watch that would suggest his attempts will be successful:

Firstly, if he pays close attention to the governmental structures that will enable his success. A clean, independent judiciary is a vital pillar of any successful anti-corruption campaign, so he should continue to enact drastic actions to clean out any wrongdoers.Firing wrongdoers and leading thorough reviews is a good start, but he should also be sure to identify and place an untainted crop of new magistrates lest a new judiciary display the same problems as the old.

Secondly, if he heavily leverages the Peruvian people’s dissatisfaction with corruption. It is clear that many politicians have an incentive to inhibit the success of his initiative, so Vizcarra must mobilize the citizens that they supposedly represent and pressure the politicians to either clean up their act or resign. Though Vizcarra’s approval rating has fallen precipitously to 37 percent from his initial figure of 57 percent, he still is far more popular than any other Peruvian politician. By calling a referendum, he has taken am first step toward uniting the Peruvian people behind him.

Thirdly, if he creates a functional relationship with the powerful politician Keiko Fujimori. While Vizcarra’s lack of political history and party affiliation makes him feasible as an anti-corruption crusader, it puts him in a weak position compared to Fujimori, who helms Fuerza Popular and controls a healthy congressional majority. Since the Peruvian constitution grants disproportionate power to the unicameral legislature, any major proposition by the Vizcarra government will require the de facto sanction of Fujimori. Fujimori herself is under investigation for corruption and money laundering and wasmentioned as a potential co-conspirator in the same recordings that revealed wrongdoing in the judiciary, so conflict between her and Vizcarra’s anti-corruption crusade may be inevitable. Nonetheless, if he is to expect any major success in his administration’s objectives he must find a way to at least maintain a temporary alliance.

Outlook: what if he fails?

Vizcarra is faced with the unenviable task of confronting corruption and reinvigorating the legitimacy of his government in the eyes of the Peruvian people. He will likely find that much of the Peruvian government is hostile to his cause. Since he is one of a very small group of Peruvian politicians that has a realistic chance of reforming the system, his failure could prove the final straw for citizens. Peru’s democracy is already lacking strong institutions and leadership, and the further exasperation and disenfranchisement of its citizenry would make it susceptible to power grabs. The end result of Vizcarra’s failure could be a state where establishment and anti-establishment strongmen compete for power.


Arthur Williams is a Consultant in the Kuala Lumpur office of Kaiser Associates, a management consulting firm.

How Costa Rica Could Become the Regional Leader in Latin America for Electric Vehicles

There is a huge untapped market for electric vehicles in Latin America. Costa Rica is a regional leader in Latin America, as far as driving much of the innovation behind the electric automotive industry.  It has introduced tax incentives for the industry, which is likely to experience exponential growth in the next two decades. Risks to investors nonetheless remain.

Carlos Alvarado became Costa Rica’s 48th president on 8 May. In his inaugural speech, Alvarado pledged to eliminate fossil fuels from all vehicles by 2021. This pledge will likely inspire automotive investor confidence, due to the country’s growing spectrum of green industries. However, those advocating for an electric vehicle (EV) revolution must appreciate that the rhetoric of an incumbent president does not always match up with the realities of a much more complicated economic and political landscape.

In the country’s “Pura Vida” tradition, Costa Rican officials are proclaiming their intent to make their country a leader in the widespread adoption of EVs over the next few years. While tax exemptions have led to some immediate EV cost reductions, government actors must introduce policies to significantly change the country’s existing infrastructure, or the EV market will struggle to attract widespread support.

In December 2017, Costa Rica’s congress passed the Electric Transportation Bill which established several tax exemptions for electric vehicles. Defined as the Law on Incentives and Promotion for Electric Transportation, the new law came into effect on 25 May 2018. For EV advocates, this spark will unlikely provide the catalyst for insurmountable change.

As there are no local EV manufacturing plants in Costa Rica, the legislation hints at increasing imports of EVs, with tax exemptions helping to offset the higher costs of shipping. One important – yet still unanswered – question is whether this reduction will make EVs more attractive to consumers. As suggested in a report by La Nacionit is estimated that final EV prices will fall only marginally, from an average of $36,720 USD to $31,750 USD.

Another essential component to encouraging greater numbers of EVs is the need for more charging stations and an electricity grid that can support the extra electricity demand. Without these, it will remain difficult to incentivize most consumers to switch from the convenience of the petrol pump. According to a report in El Pais, Costa Rica currently has only 30 charging stations throughout the country. Officials plan to install only a handful more charging stations in 2018.

Market potential

Costa Rican National Registry data reveals that twice as many cars were registered than babies born in 2016, suggestive of a rapidly growing automotive industry. Car ownership is increasing by 5 percent per year, although EVs currently account for only a tiny fraction of the 1.4 million cars on Costa Rica’s roads.  Government officials hope to see 37,000 EVs being driven by Costa Ricans by the year 2022.

While this is a substantial increase from the current number of EVs, it falls dramatically short of inspiring a complete eradication of fossil fuels. To assume greater numbers of Costa Ricans will take up EVs in the time frame proposed by the Alvarado administration, ignores current domestic consumer demand trends.

According to a study by the Estadio de la Region, the country’s public transportation system has so far proved insufficient to satisfy exponential population growth. This has partly encouraged an increase in personal vehicle purchases. While this provides an opportunity for EV ownership, it could also prove to be an Achilles heel to advocates of EV. The EV market has proved uncompetitive to consumers demanding efficient and affordable modes of transportation.

As suggested by Oscar Echeverria, president of the Association of Importers of Vehicles and Machinery (AIVEMA), the transition away from fossil fuels will likely extend beyond 2021 because the Costa Rican market is slow to attract consumers.

Nonetheless, EV growth globally is promising. This bodes well for Costa Rica’s long-term plans of EV integration into its domestic transport system. According to a May 2018 Bloomberg New Energy Finance report, EVs will account for 33 percent of the world’s vehicles and 55 percent of all new cars purchased by 2040.

Remarkably, levels of forecasted EV growth have increased substantially in each year’s report. In the 2018 outlook, analysts predicted there would be 559 million EVs on the road by 2040. This is up from the 2017 analysis which suggested a total of 530 million EVs. Analysts in the 2016 report suggested lower numbers, with 406 million operational EVs expected globally by 2040. This forecasting further adds to the sustainability of long-term investments into EV usage worldwide, and in Costa Rica.


The World Economic Forum’s Global Energy Architecture Performance Index (EAPI) monitors key trends in the energy transition of all countries towards “sustainable, affordable and secure energy systems”. Costa Rica is ranked 14th out of 127 nations in the EAPI’s 2017 report. Alvarado’s shunning of fossil fuels in transportation is a bold step towards ensuring that Costa Rica continues to rank highly.

Monica Araya, the head of the organization Costa Rica Limpia, noted the immense opportunity granted through the country’s recent legislation. She suggested that the Electric Transportation Law would be “an exercise in inspiring the people to feel part of this great agenda which will allow our country to overcome the fossil fuel transportation model.” However, this tax exemption law does too little to encourage significant changes in the transportation landscape. Introducing new charging stations and a more efficient electricity grid would greatly help to boost Costa Rica’s  EV industry.

Additionally, 22 percent of total government tax revenue in Costa Rica stems from taxes imposed on fossil fuels. Eradicating this source of revenue by eliminating fossil fuel based vehicles, without significant changes in economic policy, could inspire considerable opposition from legislators.

Costa Rica has been at the forefront of energy innovation and bold environmental pledges for several years. With impassioned rhetoric, Alvarado has planted the seed for further changes in the country’s energy infrastructure. However, an electric vehicle revolution is likely to be less explosive than Carlos Alvarado would have us believe.

Euroscepticism in the Czech Republic: A Central European Disaster Or Hot Air?

The rise of euroscepticism in Central Europe has been well documented, particularly in the Czech Republic. Among the nations of the Visegrad Four, anti-EU sentiments have long provided easy fuel for political actors willing to appeal to populist instincts to secure political power, but rarely do such sentiments crystallize into concrete anti-European movements. In the Czech Republic, however, political instability and populist rhetoric employed at the highest level is frequently warned against as a harbinger for a potential earthquake in Czech – and potentially Central European – relations with the EU. But how likely is such an event in real terms?

It is no secret that the Czech Republic harbours one of the highest levels of eurosceptic sentiment in the European Union, a fact which has drawn plenty of analytical attention from outsiders and – particularly in light of the tectonic consequences of the Brexit referendum in 2016 – no end of warnings and extrapolations by parties concerned that a similar ‘Czexit’ referendum could very well take place. In the immediate term, it is certainly justifiable for external investors and third parties to be concerned by Czech euroscepticism as an economic and political risk; Eurobarometer has historically recorded significant levels of discontent with the EU both pre- and post-accession, which has never appreciably declined, and in late 2017 36% of Czechs recorded were unhappy with their status as an EU member, the highest percentage of any EU Member State.

The roots of Euroscepticism

Euroscepticism in Czech is an ongoing study; whilst the country benefits enormously from EU funding, the EU is nevertheless often held as the cause of economic woes by a salient portion of the Czech populace. Grassroots resentment over inequalities in salary between the Czech Republic and neighbour countries (for example, in Germany, where an occupation as sales assistant can yield a salary five times greater than its Czech counterpart) is widespread.

Socially, the story is similar: the advent of Brussels-imposed migration quotas in 2015 was almost universally poorly received in the Czech Republic, where anti-migrant and Islamophobic sentiment is extremely widespread, and to this day the migrant quota debacle has dramatically deteriorated Czech perceptions of EU membership, regardless of the fact that the migration quotas were rejected by the Czech government, and that Czech economy and society continues to benefit from and grow with the aid of EU funding programmes.

Potential outcomes

The EU continues to be scapegoated by Czech politicians seeking support from the eurosceptic vote. In real terms, the consequences of this may be dramatic: persistent whispers at the highest levels of Czech politics calling for a Czexit referendum suggests that Czech euroscepticism could, if unchecked, become the groundswell behind an anti-EU movement that eventually leads to a referendum on Union membership with dramatic consequences.

However, whilst the victory of Czech President Miloš Zeman in the January elections of this year, and the reappointment of Andrei Babiš to the post of Prime Minister were received by European analysts as indicators that euroscepticism is gaining ground steadily, the reality may be quite different. Both Mr. Zeman and Mr. Babiš stand to gain very little from a Czech departure from the European Union; Mr. Babiš in particular is unlikely to follow through with any threatened referendum on Czech membership given his economic interests in remaining within the EU. In particular, however, it is noticeable that both Mr. Zeman and Mr. Babiš have distanced themselves publically from the extreme anti-EU voices within the Czech government, refusing to enter into cooperation with hardline or single-policy parties advocating for EU departure. Following the 2018 presidential election results, only one extreme eurosceptic party entered the Lower House of the Czech Parliament, the SPD (Freedom and Direct Democracy) party under Tonio Okamura.

Ahead of the October 2018 Czech parliamentary elections, the outlook on the future of Czech euroscepticism may not be as negative as has been posited by some analyses. As long as political movers rely upon the European Union’s status as scapegoat – whether in the form of President Zeman’s reprimands over perceived bureaucratic incompetence in Brussels, or Prime Minister Babiš’ invocation of the sensitive subject of migration quotas – to build their support base, Czech euroscepticism will be considered a potential risk to EU-Czech relations and the interests of external actors in the Czech Republic. However, those with the greatest power in Czech politics – although perfectly content to utilise euroscepticism and populism as tools in their political arsenal – are very well aware of the damage a Czech departure from the European Union would cause to the Czech Republic.


Louis is a political analyst and researcher currently based in Prague, Czech Republic. He has worked previously as political advisor in one of the major political groups in the European Parliament, assigned to the Foreign Affairs, Security and Defense and Human Rights committees.

Why India May Get ‘Limited Waiver’ From Trump to Keep Buying Iranian Crude

India will very likely get a ‘limited waiver’ from the US to keep buying Iranian crude – albeit at decreasing levels into 2019. A 6-7 September “2+2” strategic dialogue between US Secretary of State Mike Pompeo and Secretary of Defense Jim Mattis with their Indian counterparts will likely result in India receiving a limited waiver in recognition of the immense geostrategic considerations at stake in the bilateral relations between the US and India. India will likely commit to gradually reducing its purchases of Iranian crude oil into 2019. While Brent briefly flirting with $70 per barrel on demand concerns this summer increasing focus on both supply reductions from Iran and the potential for ever greater military tensions in the Gulf will provide support for Brent prices as we head toward the 4 November US-imposed deadline for implementing the US sanctions. China will probably stand alone as the market of last resort to take increased volumes of distressed Iranian oil.

The complex context of the US-India relationship at present makes the decisions of both Indian and US policymakers on implementing US secondary sanctions very difficult. On the surface, there seems to be an impasse as the 2+2 ministerial meeting approaches. The US has made clear that there will be little flexibility shown in terms of granting waivers of US sanctions for countries which continue to buy Iranian crude after 4 November, and certainly no “blanket waivers” which would allow countries to continue doing business as usual with Iran in the physical oil market. For their part, Indian officials’ public statements have hewn closely to their tradition of foreign policy independence, making clear that they feel bound to comply only with sanctions endorsed by the UN Security Council.

However, despite the stated Indian policy, there seems to be accumulating evidence of an unstated policy. Shortly after the initial response, there were anonymous comments in the early summer from Indian refinery managers in the press suggesting that government officials had discussed with them the possible need to reduce Iranian crude oil supplies. More concrete support for this has emerged recently in the preliminary data from Bloomberg, with a steep drop in Indian imports from Iran in August, from 787,000 bpd in July to 376,000 bpd in August. To be sure, there are significant monthly fluctuations in normal times, but with the approach of the deadline this seems to be too large a drop to be coincidence. It also is clearly not driven by other bilateral issues, which has happened before, such as over a dispute between Iranian and Indian parastatal firms over development of a gas field. One Indian refiner, part of the huge Reliance Industries conglomerate, already has halted purchases from Iran due to the exposure of other Reliance Industries’ business lines to the US market. The big question is around the parastatal refiners IOC, HPCL, and BPCL, which own the bulk of India’s refining capacity.

Given India’s very independent foreign policy orientation, the US demand to cut off oil purchases from Iran is a significant irritant in bilateral relations. Even when similar sanctions were implemented in 2012 by President Obama prior to the 2015 nuclear deal, India never formally said it was complying with US wishes – but somehow Indian purchases declined by 20%, which Asian importers had been told would get them a waiver.

In this case, the Trump administration is taking a harder stance – trying to cut Iranian exports to zero. There also have been other irritants in the relationship besides sanctions, including social media chatter in the Indian press alleging that President Trump has mocked Prime Minister Modi’s Indian-accented English in private, and lectured him in their summit meeting about the need to ‘buy American,’ and restricted access to US visas for Indian technology workers.

Countering that, however, is that Indian-US relations have continued to grow closer under the Trump administration, propelled by the perceived need for India to balance a rising China along with the US and Japan. Recent Chinese moves to invest and strengthen relationships with Sri Lanka, the Maldives, and Nepal have added to longstanding Indian concerns about Chinese ties to Pakistan. The geopolitical pull of rising Chinese military power is a very strong force on both sides of the US-India relationship. It has led to a surge in US-India defense contracts – with India currently having $18 billion in defense sector trade with the US, and Russia falling well behind into second place. That geopolitical pull also will influence the US side. Japan and South Korea will halt purchases of Iranian crude entirely, but if there is a country with the geopolitical weight to get a waiver from the US for some level of reduced imports, it is India.

We will not know the outcome of the talks on this issue immediately after the meeting ends this week, as there is no way India will take a formal policy decision to comply, and there also is no way the Trump administration will telegraph a decision on the issuance of a waiver so far in advance of the deadline. What will be telling is the reaction next week from Indian refiners, which should come out in the press in due time, as well as the tanker loading schedule into the fall.

As outlined in previous notes, the US could tap its Strategic Petroleum Reserve (SPR) to temporarily offset the bullish price trend, but they will probably hold off and use that only as a last resort. If the market is knocking against $80 per barrel in early October, or above, that is the most likely time for President Trump to pull the trigger, for maximum effect on the 6 November midterm elections in the US.

China-Russia-Iran Axis Emerges As Asian Oil Refiners Anticipate Escalating US Trade War

Although China has backpedalled on proposed tariffs on U.S. crude imports, the move is indicative of its need to diversify sources and steps may now be taken to enable China to play the oil card in the future – including imports from Iran despite sanctions, and drawing closer to Russia. 

A reshuffle of crude oil exports to Asia

Asian oil refiners have been rushing to secure crude supplies in anticipation of an escalating trade war between the United States and China. Last week, Dongming Petrochemical, an independent Chinese refiner, said it has halted crude purchases from the U.S. and turned to Iranian imports amid escalating trade tensions between Beijing and Washington. U.S. crude oil exports to China reached 400,000 barrels per day (bpd) at the beginning of this July, but Beijing has recently threatened a 25 percent duty on imports of U.S. crude as part of its retaliation for Trump’s latest round of tariffs on US$34 billion worth of Chinese goods. In addition, Iran’s foreign minister said on 3 August that China was “pivotal” to salvaging a multilateral nuclear agreement for the Middle Eastern country after the United States pulled out. A reshuffle of crude oil exports to Asia is possible, with China vacuuming up much of the Iranian oil that other nations won’t buy because of the threat of U.S. sanctions.

China, India, Japan and South Korea together account for almost 65 percent of the 2.7 million barrels a day that Iran exported in May. The U.S. has been lobbying these countries and other multinational oil giants to cut crude purchases from Iran to zero by November, the deadline for re-imposition of the secondary sanctions. In view of the current trade disputes with the U.S., China has reacted defiantly to U.S. sanctions banning business ties with the Islamic republic. This could be the determining factor in helping Tehran withstand the sanctions on its vital energy industry.

With China turning to Iran, U.S. oil would start flowing in greater amounts to other leading importers in the region, such as Japan and South Korea. In Japan, the oil industry has yet to respond to this issue publicly. The Petroleum Association of Japan previously warned refiners that they will have to stop loading Iranian crude oil from October onward if Tokyo doesn’t win an exemption on U.S.-Iran sanctions. However, this past weekend,South Korea’s embassy in Iran rejected media reports that the country had suspended oil purchases from Iran under pressure from the U.S. Whether Japan and South Korea would seek more crude imports from the U.S. remains to be seen.

China may have Russia on its side

The sanctions imposed on Russia from the West as well as the trade tensions between China and the U.S. may provide even more room for energy cooperation between China and Russia. Russia’s sour relationship with the West forces it to look for new trade and investment partners, which definitely include China and Middle East countries. Russia has already become China’s single largest crude oil supplier, exporting crude oil worthUS$23.7 billion to China in 2017. Now with China possibly cutting imports from the U.S., Russia may seek to export even more crude oil to China.

On 19 July, China received the first ever liquefied LNG cargo from Russian natural gas producer Novatek via the Northern Sea Route (NSR) alongside the Arctic coast. The $27 billion Yamal project is the world’s largest Arctic LNG project and the first large-scale energy cooperation project to be implemented in Russia after the “Belt and Road” initiative. China’s National Energy Administration said China National Petroleum Corp (CNPC) will start lifting at least 3 million tonnes of LNG from Yamal starting in 2019. Therefore, it’s highly possible that China and Russia will deepen their cooperation in liquefied natural gas (LNG) trade despite U.S. sanctions.

In addition, according to an anonymous Russian government official, Russia is ready to invest US$50 billion in Iran’s oil and gas sector amid mounting pressure from the U.S. to economically and diplomatically isolate Tehran. Russia’s energy minister Alexander Novak said that Moscow was interested in developing an oil-for-goods program that would allow Iranian companies to buy Russian products in exchange for oil contracts to be sold to third world countries. This was evidence of Russia’s consistent strategy of using its strong oil and gas industry to meddle in Middle East issues. Under the current situation, even though China may somehow reach an agreement with the U.S. promising that it will cut oil imports if the U.S. is willing to reduce the trade tariffs, in the short-term China is still likely to get Russia on its side in defiance of the U.S. oil campaign.

Yueyi Chen is a graduate student at the Center for Eurasian, Russian and East European Studies, School of Foreign Service, Georgetown University.

North Korea Is Facing A New Food Famine — Worst Since Kim Jong-un Became Leader

North Korea faces a new food famine this winter. The expected fall in crop production will be the worst since Kim Jong-un became leader. A sustained famine could test the stability of his regime. Squeezed by new import restrictions induced by international enforcement of a tough UN sanctions regime, against the backdrop of a stalled nuclear negotiation with the US, a crippling heatwave, a shortage of fertilizers and the lack of farm equipment, North Korean fall crop harvests could fall by up to 20%. A new food famine in late 2018/ early 2019 is very likely unless UN sanctions are lifted, or China, Russia or others provide massive food aid to the beleaguered regime. North Korea’s precarious food balance may mollify its hard foreign policy stance at the US denuclearization talks and possibly produce a major foreign policy win for the Trump administration before the November mid-term elections.

Agriculture accounts for 22% of North Korea’s GDP, employs between 37% and 40% of the population. With a mere 22% of the total land area of North Korea arable, an imminent crop failure will have serious consequences for regime stability if no headway is made on US sanctions talks.

The likely crop failure this fall will hit the country’s west coast which shares a border with China much more significant than the rest of the country, and may see an upsurge of refugee inflows into China. The west coast of the country is the country’s ‘bread basket,’ accounting for 17% of available land. The country’s main food crops: rice, maize, potatoes, wheat and barley are all likely to be badly affected by the ongoing heatwave as they are harvested each year between August and October.

Further complicating the North Korean food situation is the poor quality seeds and proper fertilizers (made even harder by the strict oil import quota under the UN-sanctions enacted in November 2017). Frequent droughts and flooding do not help either. Additionally, environmental degradation, deforestation and economic mismanagement have conspired to stagnate crop yields over the past decade. With little economic incentives, most North Korean farms are run as socialist farm cooperatives where each household rely on a small plot of land – about 100 sq. m – to grow vegetables for their own consumption but also rear rabbits, pigs, goats and poultry to supplement household nutrition and income. The lack of economic incentives leads to massive inefficiencies and waste. The waste is staggering. A 2014 UN FAO study found that post-harvest loss of rice, maize, and wheat & barley, was 15.6%, 16.7%, and 16.4% of total production respectively.

North Korea’s food insecurity situation is so grave that the World Food Program (WFP) and its Global Hunger Index classifies the country as ‘serious’ with a rating of 28.2% of the population going hungry contrasted with India 31.4%, Sudan 35.5%, Chad 43.5% and Central African Republic 50.8% (the latter three labeled ‘alarming’/’extremely alarming’). Since 1995 WFP has regularly provided food aid and other assistance to North Korea.

The shortcoming of the agriculture sector is also visible in the trade sector. FAO’s Food Security Indicators shows that North Korea ‘average dietary requirement supply adequacy’ is just 88% – on the same level as Somalia. (Eastern Africa average 92% and world average 120%). Such shortfall ought to be met by ample food imports. That is not the case. The value of food imports as a percentage of merchandise exports is 11% (in 2013, latest available data) vs. 25% for Eastern Africa 11% – which is way below the 31% for low-income economies/frontier markets. Another way to illustrate the shortcoming is to compare with South Korea, which shares the same geographical and meteorological conditions, its southern neighbour imports 70% of its food needs.

In 2017 most of North Korea’s grain import came from China and increased three times according to Chinese customs data. Wheat (81,653 tons) was the biggest import, followed corn (57,887 tons) and rice (35,408 tons). Corn imports jumped 16 times to 31, 235 tons, and flour imports which stood at 7,000 tons increased 12 times from the previous year.

Furthermore, unregistered barter trade with China helps to mask the true size of imported agriculture products. However, the heavy trading sanction regimes levied on North Korea and stricter border controls are making increased agriculture imports challenging at the moment.

Strong Military Link

The North Korean military is called upon during labor-intensive planting and harvest periods to assist farmers. The North Korean military, the fourth largest in the world in manpower size, possesses the limited gasoline supplies and heavy machinery available. Thus military capabilities are significantly constrained during March-April and August-September months each year.

South Korea/Japan land reform model

Without a doubt the North Korean agriculture sector stands at a crucial juncture where major reforms are needed if the country is to maintain social stability. There has been some economic policy tinkering but a thorough reform package is yet to be unveiled. A Post US nuclear deal will give impetus to new economic reforms within the country.

The most likely pathway is to follow in the footsteps of South Korea and Japan on land reform. Following the end of WW2, South Korea introduced the first land reform, which involved putting a cap on rent charged to farm tenants to 1/3 of annual yield. In 1948 the government transferred farmland expropriated from the Japanese government and Japanese private owners to tenants where a cap was put on the land per tenant. The acquired land was sold to the farm tenants on generous terms. In 1950 a new Land Reform Act meant that government and government-vested lands (such as owned by absent landlords) were redistributed at similar generous terms.

The land reform led to former owners transformed into entrepreneurs who would start businesses in the manufacturing sectors the government had earmarked as having the best potential. The government also offered low-interest loans for them getting into business.

The land was distributed to recipients under strict conditions, such as they would actively farm the land. And recipients of land could only sell or donate the land after they paid it off, and the government could take the land back if the owners failed to meet regular payments. A similar reform scheme was enacted in Japan during the same period. Farmers used their land as collateral for bad loans, selected the crops cultivated, mechanized and applied fertilizers, which pushed up the yields/profitability that helped them free up family members/children to join other industries/study which oiled the fast-paced economic growth of North Asia through 1950-80s.

September 24 Harvest Festival will signal whether a famine is afoot or not

To better gauge internal North Korean sentiment around food security ahead of the winter, two major upcoming events will signal whether the food insecurity situation within the country is nearing a critical point or not. The National Day on September 9, (which also marks 70-years anniversary of the nation), and the Harvest Festival on September 24, (one of the country’s most cherished festivals) will see the regime signal the level of concern within North Korea over social stability. The regime may well push to sign a final denuclearization deal with the US by then. A sustained famine could severely challenge the stability of the Kim Jong-un led regime.

DaMina Advisors is an Africa-Asia focused independent frontier markets political risk research, due diligence, M&A transactions consulting and strategic geopolitical risks advisory firm. DaMina Advisors is legally registered and has offices in the US, Canada, The UK and Ghana. DaMina is headquartered in Toronto.

New Regulations For Shipping In Russia Arctic: The Case of Novatek

In early August Novatek, Russia’s largest independent natural gas producer, launched the second train of Yamal LNG even earlier than planned. Although gas production is ahead of schedule, Novatek’s shipping capacities are lagging behind – and there are regulatory factors to contend with as well.

New rules in the Arctic

Since last year, new regulations have been developed for Russia’s Arctic. The Northern Sea Route Directorate, a new overarching authority, was created to take care of the development of regional infrastructure, and manage a nuclear icebreaker fleet. In June 2018, Rosatom won a power battle between different governmental agencies as to who will be in charge of the Northern Sea Route. Vyacheslav Ruksha, a former Director General of Atomflot, Rosatom’s entity, was appointed the new head of the Directorate. The Ministry of Transport upheld the right to grant Russian and foreign vessels permission to sail via the Northern Sea Route. Had the right remained with Rosatom, it could have threatened Novatek’s shipping independence.

Earlier, in December 2017, the federal shipping code was amended stating that the shipping of oil, natural gas, gas condensate and coal which is extracted on the Russian territory along the Northern Sea Route must be loaded to vessels registered under the Russian flag. In light of the ongoing import substitution policy, the amendment aimed to bolster the position of the Russian shipping industry and to limit the involvement of foreign shipping companies.

The new bill would be a major headache for Novatek as it heavily relies on foreign-registered vessels to transport its LNG from the Arctic. Even Sovcomflot’s Christophe de Margerie is registered in Limassol, Cyprus. However, after Novatek’s lobbying, an exception was made to the bill stating that agreements for foreign-registered vessels signed before 1 February 2018 will be allowed to proceed. In addition, the new law defined the Northern Sea Route as the stretch of the Russian Arctic coast between the Novaya Zemlya and the Bering Strait but excluded Murmansk and Arkhangelsk, two major Arctic ports.

These loopholes are of key importance for Russia’s largest independent natural gas producer, Novatek. While the first exception will allow the company to use its fleet of 15 LNG carriers for Yamal LNG, the second exception will help the company to come up with a new strategy for its Arctic LNG-2.

Need for more ice tankers is growing

In early August Novatek launched the second train of Yamal LNG even earlier than planned. By January 2019, Novatek is planning to commence the last third train. The three train LNG terminal is expected to produce 16,5 million tonnes per year (mtpa). In 2022-2025, Novatek plans to start its second LNG terminal – Arctic LNG-2, adding another 20 mtpa. Together, both Arctic terminals will produce more than 55 mtpa of LNG by 2030.

Although gas production is ahead of schedule, Novatek’s shipping capacities are lagging behind. For Yamal LNG, Novatek ordered 15 icebreaking LNG carriers ice-class Arc7 from South Korea’s Daewoo Shipbuilding Marine Engineering. For Arctic LNG-2, approximately the same number of LNG carriers will be needed. Currently, only 3 LNG carriers are in operation, while the rest are set to be delivered by 2020. However, the company will not own any of the 15 carriers.

Novatek’s fleet ownership is divided between Russian Sovcomflot, Canadian Teekay, Japanese Mitsui O.S.K. Lines, Greek Dynagas and Chinese COSCO and LNG Shipping. Sovcomflot, a Russian maritime shipping company, owns only one LNG carrier –Christophe de Margerie. Hit by Western sanctions, Novatek struggled to fund construction of the terminal, let alone its transportation expenses. The costs of Arc7 class carriers are high – $320 million per carrier, resulting in a shipbuilding deal worth $5 billion.

Novatek’s short- and long-term strategies

As the fleet for Arctic LNG-2 should be domestically built, Novatek developed different strategies. In the short term, Novatek is planning to use 5 nuclear-powered icebreakers (60 MW capacity) owned by Rosatomflot. To cope with the production output, two reloading terminals will be built in Murmansk and in Kamchatka where LNG will be reloaded onto conventional tankers. Alternatively, Norway can be used as another reloading terminal. This will allow the optimisation of the logistics: by cutting the distance of expensive-in-usage icebreakers, the transportation costs will be reduced. The first ship-to-ship operation could already start mid-November 2018.

In June 2018, Novatek signed a strategic cooperation agreement with Sovcomflot to develop an effective logistics model on the Northern Sea Route. “Combining our efforts with Sovcomflot, one of the global leaders in navigation in harsh ice conditions, will allow us to achieve maximum efficiency in managing our transportation costs,” said Leonid Mikhelson, Novatek’s chairman.

In the long term, Novatek considers to order LNG carriers with Zvezda, a Rosneft-led shipyard in the Far East. However, experts say that at Zvezda the costs will be 60-80% higher than those made in South Korea and there is no guarantee of the quality or the delivery date. Zvezda still lacks expertise and experience in building ice-class tankers. A cooperation agreement signed with South Korea’s Hyundai Heavy Industries might compensate it though.

In May 2018, Novatek announced that the company decided to build its own shipping company “Maritime Arctic Transport”. In doing so, Novatek’s long-term strategy is to “optimize transport cost and ensure a well-balanced, centralized management structure to improve the competitiveness of NOVATEK’s Arctic projects,” said Mikhelson.

Both Yamal LNG and Arctic LNG-2 are planned to be in operation all year around, but the non-stop shipping via the Northern Sea Route is complicated by climate factors. As the eastern route is free of ice for only 2-4 months in summer, special ice tankers are needed. To face this challenge, a special icebreaking LNG carrier is to be designed. The contract to build a super-powerful nuclear-powered ice tanker “Lider” was obtained by Rosneft’s Zvezda. Designed to break 4-meter-thick ice, its completion is planned for 2027. The contract was assigned for political reasons rather than based on technical expertise.

Unfair competition between shipbuilding companies, together with the lack of expertise in building ice-class tankers, could jeopardize Novatek’s long-term strategy. It is unclear whether the company will resolve its mismatch between production capacity and export capacity in the near future.

Dr. Maria Shagina holds a double PhD degree from the University of Lucerne and University of Zurich and a M.A. from the University of Dusseldorf.

Nigeria: Violence in the Middle Belt Becomes Major Concern For President Buhari

Intercommunal violence and conflict in the Middle Belt, an area known for crop production, poses a threat to Nigeria’s economy and ultimately the livelihood of its people.

Nigeria is a multi-ethnic and culturally diverse country. While diversity is to be coveted and celebrated, it is the cause of insecurity and a stalling economy for Nigeria. The Middle Belt region, Nigeria’s most diverse region, acts as a divide between a largely Muslim north and a majority Christian south. This region, also known as the “food basket”, remains the cause of great concern for President Buhari and all interested in Nigeria’s growth and stability.

Violence in the Middle Belt

The Middle Belt area is ridden with conflict between Muslim and Christian Nigerians and has been for the last several decades, accounting for more casualties than Boko Haram. However, what makes the intercommunal conflict a pressing threat to Nigeria’s stability is not the mere fact that it is between Muslims and Christians, or because it is the cause of mass casualties, but because it is between Christian farming communities and Muslim cattle herders. While there are other similar farmer-herder conflicts across Nigeria, this distinction, and its representation as an ethno-religious conflict rather than a farmer-herder conflict, is what has exacerbated the situation and created a threat to Nigeria’s agricultural economy and subsequently its stability.

The Middle Belt area has been an area of intercommunal conflict for quite some time due to competition for resources and political influence. Climate change has intensified this competition as drought and desertification in Nigeria have made less and less resources available for use. Struggles for water and land ensue between groups such as the nomadic Fulani ethnic group, cattle herders, and sedentary, non-Fulani groups. Nigeria’s growing population and increasing migration due to northern climate change contributes to the situation.

Farmer-herder conflicts are the most geographically extensive in Nigeria, affecting states in all six geo-political zones of the country. 2,500 people were killed in 2016 and thousands more were displaced by farmer-herder conflicts. In one state alone, roughly 10,000 to 20,000 people are estimated to have died in intercommunal conflicts since 1980. At the heart of the conflict, farmers say herders are damaging their crops while herders say farmers are violently stealing livestock.

The distinction

The distinctions that make Nigeria’s Middle Belt intercommunal conflict a serious threat to stability in the country are the intersectional identities of the groups engaging in the conflict, the Middle Belt’s economic significance, and Nigeria’s current economic situation. While other regions in Nigeria also face farmer-herder conflict, the Middle Belt situation persists and continues to grow because of Nigeria’s prevailing ethno-religious tensions. Rather than it being perceived as what it truly is, a struggle and competition for natural resources, fuel is added to the fire by the existing religious tensions, creating further distrust between the farmers and herders.

Furthermore, prior to the discovery of oil, the Middle Belt was Nigeria’s breadwinner and it still has the potential to be so going forward. With Nigeria’s significant decline in oil revenue, non-oil sectors such as agriculture are increasingly important to Nigeria’s economy. Peace is needed in the Middle Belt now more than ever as Nigeria looks to other sectors for revenue. The Middle Belt can compensate for the decline of oil revenue, but only if the Nigerian government can put an end to the conflict.


If the conflict continues, starvation and hunger are possible, as the Middle Belt is known for crop production. The intercommunal conflict will greatly impact production in the area, creating food shortages. This in turn will increase the price of what does get produced, making food unaffordable to the masses. Putting an end to the conflict is in Nigeria’s best interest if it wants to feed its people and grow economically.

The conflicts also detract from Nigeria’s potential for an agriculturally powered economy, driving agribusiness investors away. According to a study by Mercy Corps, an estimated $13.7 billion in annual revenue would be gained from putting an end to the farmer-herder conflict. The conflict prevents economic growth by deterring investment, preventing market development and trade, and has an immense toll on the economic situation of families. The administration must act soon in order to prevent further damage to its economy and spur economic growth. If Nigeria wants prosperity and most importantly stability, it must first seek stability in the Middle Belt.

Chinas Belt and Road Heightens Sovereign Debt Risks in Tajikistan

At the People’s Bank of China-IMF joint conference in Beijing back in April, IMF head Christine Lagarde warned about potential debt risks for countries involved in China’s Belt and Road Initiative (BRI). This grand development initiative aimed at dismantling foreign investment barriers and improving international logistics has provided much-needed infrastructure support to its recipient countries. However, the BRI-related project loans may cause a problematic increase in sovereign debt in certain host countries.   

Debt risks posed by BRI-related financing  

As one of the poorest countries in Eurasia, Tajikistan is assessed by the IMF and World Bank to have a “high risk” of debt distress. However, as the “first leg” of overland infrastructure projects of BRI, Tajikistan is still planning to increase its external debt to pay for infrastructure investments in the energy and transportation sectors.

The Tajik government recently issued $500 million in Eurobonds to finance part of the costs of construction of Roghun hydroelectric power plant, an embankment dam in the preliminary stages of construction on the Vakhsh River in south Tajikistan.

The Vahdat-Yovon railway, which will link Tajikistan’s central part with the southern provinces of Khatlon and enhance the overall transportation capacity of the country, was financed by concessional loans provided by the Chinese government.

The construction of Vahdat-Yovon railway was contracted to China Railway Group and the railway went into full operation in 2016. The $72 million project loan was attracted from the Export-Import Bank of China (China Exim Bank) at concessional rates. In addition, a $3 billion portion of the Central Asia-China gas pipeline (Line D) was also reportedly financed through Chinese foreign direct investment (FDI), although there could be pressure for the Tajik government to cover some of the financing costs.

Tajikistan’s debt-to-GDP ratio is rapidly increasing, rising from 33.4% of GDP in 2015 to an expected 56.8% in 2018. Tajikistan’s debt to China, Tajikistan’s single largest creditor, accounts for almost 80 percent of the total increase in its external debt over the 2007-2016 period. If Tajikistan fails to pay back these infrastructure loans, which often entail the use of sovereign guarantees, tensions may arise on the bilateral relationship between two governments.

Why is sovereign debt even riskier?

For rich developed countries, properly managed sovereign debt is actually beneficial to financial development and can also stabilize macroeconomy because it enables the government to increase its budget deficit as the financial system comes under pressure. However, it is not the case in many emerging economies, where lending mechanism and accounting practices are poorly developed. It is hard to know how much debt any government can safely issue before risk premiums start rising in a dangerous manner, and regulators are always unable or unwilling to measure risks appropriately.

In addition, private debts can always be powerful leverages because private lenders can negotiate with the borrowers to acquire their physical assets in order to compensate for the failed repayment. However, it is not easy to make such a deal when it comes to sovereign debt, which entails sovereign guarantee and government reputation. For example, to reduce the debt burdens, Sri Lanka announced in last December that it would hand over control of the Hambantota port, which was financed by loans, to a state-owned Chinese enterprise China Merchants Port Holdings. However, this 99-year lease deal with China enraged Sri Lankan government critics, who are complaining that the deal has seriously threatened the nation’s sovereignty and the price being paid for reducing the China debt is even more costly than the debt burden Sri Lanka seeks to reduce.

Problems with the lending mechanism of BRI

One of the major problems with the current lending mechanism of BRI is that China does not report cross-border project financing in a standardized or transparent manner. Chinese Development Bank and China Exim Bank do not disclose the terms of their loans, making it difficult, if not impossible, to accurately assess the present value of the debt owed by a host country to China.

In addition, most of the private financial actors, namely investment banks and commercial banks, shy away from BRI projects due to high political risks. In the case of Tajikistan, security threats on the Tajikistan-Afghanistan border and conflicts among different domestic interest groups all created investment barriers for private the sector.

Multilateral loans: a saving grace?

In order to mitigate the concerns about potential debt risks caused by BRI, China has demonstrated a willingness to provide additional credit to protect borrowers from default risks, but a clear policy framework aligned with global standards is still absent.

The participation of multilateral financial institutions, such as AIIB and the World Bank, can contribute to a more sustainable lending mechanism for the BRI projects in that they play a vital role in promoting transparency as well as making financing terms for loans to sovereign governments publicly available.

Default risks are a huge obstacle for smaller commercial banks to finance BRI projects. However, extending credits for large-scale infrastructure projects in the form of syndicated loans allows commercial banks to jointly raise capital for large sovereign borrowers at reduced costs. This would also bring emerging economies like Tajikistan greater visibility and flexibility in their project financing.


Yueyi Chen is a graduate student at the Center for Eurasian, Russian and East European Studies, School of Foreign Service, Georgetown University.

Cambodia’s Pivot to China Heralds a New Era of Authoritarianism

Increasing Chinese influence is casting a shadow over Cambodia’s political freedoms. On the backdrop of the elections, Nathan Paul explores how the result is a great deal of leeway for Prime Minister Hun Sen to suffocate dissent and criticism, and to strengthen his own power.

The month of May saw the last remaining bastion of press freedom in Cambodia wither and all but die. The Phnom Penh Post, the only fully independent newspaper left in Cambodia, saw a mass exodus of its editorial staff following a controversial takeover. Resignations included the managing editor, the web editor and a number of senior journalists following the dismissal of editor-in-chief Kay Kimsong.

This is just the latest in a series of attempts to undermine free press in Cambodia, part of a wider effort by Prime Minister Hun Sen to dismantle democratic processes in the country. There are, in fact, three overlapping targets in this campaign: the press, political opposition, and any NGOs that champion human rights in ways that are critical of, or run counter to, government policy and ambitions.

Historically, Hun Sen reluctantly tolerated these factions as a condition of Western donations and investment. However, as Phnom Penh increasingly aligns itself with China – it accounts for 70% of total industrial investment in the country – and moves away from the EU and US, the Prime Minister has become increasingly brazen in his attacks, stating openly that Chinese money does not come with the same demands and obligations.

Radio Silence

Attacks on press freedom and on media companies with Western ownership, affiliations or funding in particular, have intensified over the past twelve months, as Cambodia began preparations for its general election in July.

English-language publication The Cambodia Daily, which frequently wrote stories critical of the Cambodian government, was shut down in September 2017 over a controversial tax bill. The previous month, the Cambodian government closed 15 independent radio stations, including the Phnom Penh-based Moha Nokor. This station hosted shows produced by Voice of America, Radio Free Asia and the (now non-existent) Cambodian National Rescue Party (CNRP), Hun Sen’s only genuine opposition at the time.

In May 2018, Bill Clough, the Australian owner of the Phnom Penh Post, sold the paper to Malaysian businessman Sivakumar S. Ganapathy for an undisclosed fee, in a move that some former staff members believe was coerced by the government in return for settling a similarly exorbitant tax bill. Both Clough and Ganapathy emphasised that the Post would retain editorial independence, but days later, editor Kimsong was fired for refusing to take down an article detailing the new owner’s ties to both the Malaysian government and Cambodian Prime Minister, Hun Sen.

Ganapathy is the managing director of the Malaysia-based Asia PR, which lists “Cambodia and Hun Sen’s entry into the Government seat” as a former “project”. Ganapathy’s personal biography also states that he currently “leads the Asia PR team in managing ‘covert operations’ for our clients.”

Deputy Asia Director of Human Rights Watch, Phil Robertson, referred to the deal as a “staggering blow to press freedom”.

The end of opposition

Hun Sen not only shut down his opposition’s mouthpieces; he effectively shut down opposition itself.

Former leader of the CNRP, Sam Rainsy, who claimed that China enables human rights abuses in Cambodia by providing no-strings attached loans to the Kingdom, has been in political exile since 2015 – and is now barred from re-entering the country at all. The same month as the the Cambodia Daily shut down, Rainsy’s successor Kem Sokha was arrested on allegations of treason.

Tellingly, Hun Sen framed this crackdown on opposition not only as a domestic political issue, but also as a necessary step to protect Cambodia against an existential threat. It resembles an attempt to resuscitate Khmer Rouge-era paranoia about Western infiltrators seeking to undermine the country’s identity and prosperity from within. Leading media outlet Fresh News, which he owns, accused Sokha of conspiring with the United States via a combination of Western freelance journalists (labelled as foreign spies) and NGOs with Western affiliations (such as the Cambodian Center for Human Rights) in order to bring down his regime. Sokha is still under arrest.

Then, in November 2017, the Supreme Court of Cambodia dissolved the CNRP altogether,. accusing it of trying to topple the government. This has, in effect, left Cambodia with no serious political opposition in the upcoming July elections. Hun Sen is now all but guaranteed to continue his 33 year rule unchallenged.

Biting the hand that (used to) feed you

Hun Sen also directs attacks against NGOs that oppose his actions. Last year, for the first time since 2001, the Cambodian government expelled an NGO and its foreign staff from the country. The National Democratic Institute, which receives funds by the National Endowment for Democracy, USAid and the US State Department, and works to strengthen democratic institutions around the world was targeted. Hun Sen also threatened the closure of the Cambodian Center For Human Rights (CCHR), but held back after a public outcry.

The Cambodian PM has responded to international condemnation of his actions by challenging the United States and other western countries to withdraw their aid from Cambodia. He has done this while citing confidence in continued support from China. The US responded, as did the EU, by cutting their funding for the upcoming 2018 elections. It has since imposed sanctions and visa bans on Cambodian government officials while also reducing its foreign aid assistance.

This represents a stark shift in loyalties and perspective by the Prime Minister, who in the 1980s decried China as “the root of all evil”, but by 2016 was confident enough in his new, powerful ally to warn Western donors who threatened to reduce aid that “China has never made a threat to Cambodia, and has never ordered Cambodia to do something.” His tone has become no more conciliatory since, even despite US Senator Lindsey Graham pushing for further sanctions on the grounds that “democracy is dead in Cambodia,” and that China is trying to “colonize” the nation.

Hun Sen’s arrogance was well-founded. following the withdrawal of financial support for the upcoming elections by the EU and US, China stepped up, with Beijing pledging to donate more than 30 kinds of equipment for the July election, including 60,000 polling booths and 15,000 ballot boxes. Historically, Chinese assistance has focused on developing infrastructure in Cambodia, while the US has funded support for the democratic process – respective foci that make sense given the two nations’ stated international priorities. China’s assumption of responsibility for electoral aid represents a troubling development.

A notch on the belt

“Basically what you are now seeing is the end of a western-dominated era in Cambodian nation building and politics,” says political analyst Ou Virak, who maintains that the US’s “diminishing voice on human rights and democratic freedoms” combined with “China’s largesse and influence” is precisely what ultimately emboldened the CPP to clamp down on political and press freedom and destroy their opposition.

While there’s no doubt that Western influence in Cambodia has been supplanted by China’s, it’s less clear what China will ultimately demand in return. Cambodia is key to China’s ambitious belt and road initiative and already acts as a mouthpiece within ASEAN for Chinese interests, such as those related to the highly contentious South China Sea. For now, these strings have proved far more acceptable than the West’s to a leader primarily concerned with consolidating power and silencing dissent. It seems likely that this trend will only strengthen into the future.


Nathan Paul Southern holds a BA in Criminology from Caledonian University, a law degree from the University of Strathclyde and and MSc in Global Security from the University of Glasgow. Article as originally appears