Sunday, March 27, 2022

BlackRock chief on globalisation

BlackRock CEO Larry Fink thinks the Ukraine conflict marks the end of globalisation. You may have seen my post on the subject earlier.

The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades,” Fink wrote in his annual letter to shareholders of BlackRock, which oversees $10tn as the world’s largest asset manager. While the immediate result had been Russia’s total isolation from capital markets, Fink predicted “companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries.

FT has another article   that cites other corporate chieftains as echoing these sentiments.

 The Ukraine war is part of a pattern of supply chain disruptions getting more frequent and more severe,” said Dan Swan, co-lead of McKinsey’s operations practice, pointing to the trade war between the US and China, the blockage of the Suez Canal last year, and the coronavirus pandemic.

Nations and companies will want greater control over their supply chains. They will want to minimise dependence on fossil fuels by focusing more on renewable energy sources. They will want to accelerate indigenisation of defence production because they would not want to be at the mercy of outsiders for the supply of spare parts and ammunition in a crunch.

It is back to the much-derided Nehruvian focus on self-reliance with a bang. The approach has been derided in recent years by those who contrast the faster growth of outward-looking economies with that of India post independence. They overlook the fact that India, unlike small nations, will have to have a voice in world affairs. It will have to make sure its foreign policy and policy towards neighbours is not vulnerable to external pressure. Self-reliance is needed to give ourselves what is now called 'strategic autonomy'. That necessarily entails a sacrifice of growth.  

Democracy may involve a sacrifice of growth in the medium term when compared to authoritarian regimes. But we in India value freedom of expression and are willing to sacrifice growth. Similarly, we value the freedom to conduct an independent foreign policy. That too may require us to sacrifice growth.

This realisation is dawning on others as well. The more you integrate with the global economy, the greater is your susceptible to outside pressures and the greater the compromise of national sovereignty. 

Monday, March 21, 2022

Ukraine conflict: impact on the world economy

 The FT has a long article on the economic impact of the war in Ukraine. The highlights (shown in italics):

  • Impact on world economic growth: Before the war, global growth was expected to be in the region of 5 per cent in 2022, but Sheets (Citibank Chief Economist) reckons “if the [Ukrainian] tensions are prolonged or escalate further, the markdowns to this year’s growth outlook may need to be denominated in percentage points”.

  • Impact on Europe: The organisation (OECD). simulated a 1.4 percentage point hit to Europe’s economy in 2022, based on the effects so far, but officials are worried this underestimates the true economic impact. .... The worst-case scenario modelled by economists and central banks is if Russian energy supplies to Europe are cut off. Jan Hatzius, chief economist of Goldman Sachs, estimates an EU ban on Russian energy imports would cause a 2.2 per cent hit to production and trigger a eurozone recession, defined as two consecutive quarters of economic contraction.

  • Impact on the US: The US is, perhaps, the best placed which, perhaps, explains why the US is keen on propping up the government in Ukraine.  In contrast to Europe, the US economy is running too hot, with unemployment at 3.8 per cent in February almost back to the pre-pandemic rate of 3.5 per cent, and inflation at a multi-decade high last month, with consumer prices 7.9 per cent higher than a year earlier.
What about China and the emerging markets? China, as observers have noted, will be careful not to violate sanctions against Russia even while it provides moral support to Russia. Unless there is covert Chinese support to Russia that invites the wrath of the US, China should be well placed to withstand the present turbulence. The West has to be careful in imposing sanctions against China given that China is far more closely integrated with the global economy than Russia.  

As for emerging markets, a flight of funds is inevitable as interest rates in the US rise. But most emerging markets, including India, are well placed to deal with the pressure on their currencies, thanks to strong foreign exchange reserves. But emerging markets cannot escape the impact on growth as the global economy slows. 

Sunday, March 20, 2022

Book review: Spy Stories: Inside the Secret World of ISI and RAW


26/11, the attack on Mumbai by terrorists who came by boat from Pakistan, was widely seen as state-sponsored terrorism. The world was horrified by the loss of lives in a leading city of the world. India went on the diplomatic offensive and had some success in painting Pakistan as a rogue nation.

According to Adrian Levy and Cathy Scott-Clark, authors of  superbly researched Spy Stories, 26/11 was the work of set of non-state actors who may not have had the sponsorship of the state of Pakistan. (The authors had earlier written an acclaimed book on 26/11, the attack on Mumbai).

The mastermind behind 26/11 was one Pasha, a former officer of the Pakistan military. Pasha had been sent to Afghanistan to fight the Al Qaeda. He refused to fight as he placed “his faith before his country”. He was demoted and he quit the Pakistan Army. He initially joined the Lashkar e Toiba (LeT) and then moved to 313 Brigade, a Kashmiri militant outfit that kept its distance from the ISI, Pakistan’s spy agency.

The authors believe it was Pasha who conceived of the daring idea of a raid across the sea to Mumbai instead of the usual trek across the mountains in Kashmir that militants were used to. The astonishing part of their narrative is this: the CIA had comprehensive details of the 26/11 plot, passed on by David Headley, an American of Pakistani descent. Headley had been a drugs trafficker who had defected to the CIA. The intelligence, the authors say, had been passed on to the Indian authorities. But the authorities failed to act on it.

The authors’ source is Monisha, an officer at RAW, India’s external intelligence agencies. Monisha wonders whether the lapse was intentional. She speculates whether the authorities in India allowed the raid to happen in the knowledge that it would help them paint Pakistan in the darkest of colours and break the cosy relationship between Pakistan and the US.

The authors say that 26/11 did break that relationship. It also forced on Pakistan the realisation that terrorism in Pakistan, if not reined in, would cause the collapse of the state. There followed a crackdown on a unit in ISI which was seek as creating trouble. Hafiz Saeed, the LeT chief, came to be placed under house arrest. Monisha, for her part, is disillusioned with the way India’s intelligence agencies are functioning and emigrates to the US.

26/11 is just one of many episodes in a riveting book. Parts of it seem like something out of a Robert Ludlum novel or even from Mission Impossible. The authors have talked to numerous individuals connected with the two agencies (in India, they had access to NSA Ajit Doval). One wonders about the risks the authors took in doing the book.

Apart from Monisha, another individual figures prominently, Major Iftikhar, an ex-operative of ISI who is on the run from his own country’s agencies and can be reached only in complicated ways.  The cast includes numerous militants and agents, some of whom are double agents.

In Kashmir, it is hard to tell who is working for whom. Militants turn law enforcers. Some law enforcers turn renegade. The ISI passes on information to Indian agencies about some of its former assets who have now become a headache for it. The Indian agencies make short of them. It is a crazy world, one in which accountability and the rule of law is notably absent.

After 9/11 and until 26/11 dynamited the relationship between Pakistan and the US, the two had been very intimate indeed. After 9/11, the US sought two important favours from Pakistan. One was the use of Pakistan’s air bases and air space for sending its drones across the border into Afghanistan to eliminate America’s enemies and for housing its Special Forces.  Another was information on various terrorists it was trying to hunt down and who were using Pakistan as a safe haven. The US paid generously for these services. By 2004, Pakistan was making $4.7 bn for its services. It used the money to improve its defence infrastructure and to beef up the operations of the ISI.

The authors have their own take on the attack on the Indian Parliament in December 2001. India, they say, was quick to seize the opportunity to portray Pakistan in the worst possible light. They suggest that the “evidence” gathered in the case was cooked up. They write, “A special cell of Delhi Police officers with a reputation for staging fake encounters worked in record time, recovering mobile phones, SIM cards, receipts, and scribbled-down phone numbers- apparently left lying on the ground, critical identification brought on to a clandestine raid and then left undamaged after it”. The investigation was led by an officer, Rajbir Singh, notorious for fake encounters and with a distinctly shady past in the police force.

Two individuals who were incriminated were cousins Shaukat and Afzal Guru. Police claimed that the two had been intercepted while driving back to Kashmir. In their vehicle, investigators said, were recovered laptops, templates for counterfeit passes to enter Parliament and fake identity cards. Afzal Guru was said to have brought the terrorists to Delhi. Shaukat and Afzal gave the court signed statements saying that Jaish e Mohammed, the Pakistani terrorists organisation, had ordered the attack.

The authors say that Afzal Guru brought the terrorists to Delhi at the bidding of a police officer in Kashmir, Davinder Singh. The courts did not think it necessary to probe Singh’s role or his murky background. Singh was arrested in 2020 when found escorting a Hijbul Mujahideen Deputy Commander in a car in Kashmir. Singh was accused of “waging war on India”. Afzal Guru was hanged. But Western analysts and intelligence agencies, the authors say, remained sceptical of the official version on the Parliament attack. Pakistan, for its part, decided to crackdown on Jaish, believing that it had been infiltrated by RAW and IB! Talk of wheels within twisted wheels.

There is more in this vein in the book. What you hear or are told by the law enforcement agencies or the media often bears little relation to the reality. It is hard to tell who is friend or foe and whether an incident has been engineered by the intelligence agencies or not. It is best that read the book yourself and get a flavour of the diabolical games that underlie the official version of events that make newspaper headlines.



Friday, March 18, 2022

India: inflation outlook

CPI inflation came in at 6.1 per cent in February  2022. This breached the upper limit of the tolerance band for inflation set for RBI. 

Some analysts are pressing the panic button and asking for a rise in the policy rate or forecasting one. The raging conflict in Ukraine has lent an edge to concerns about inflation worldwide and analysts in India are no exception.

The analysts need to calm down. Oil prices have fallen back to $100 a barrel after rising much higher. Please note that Russia has not restricted its supply of oil. European nations are continuing to buy oil from Russia as payments related to oil and gas are exempt from sanctions. The earlier rise in oil prices reflected fears about a supply crunch, it's not a supply crunch had happened. True, many commodity prices have risen but this is merely the continuation of a trend that began long before Ukraine.

The war in Ukraine will dampen growth. The IMF had projected growth of 4.4 per cent for the world economy in 2022 compared to growth of 5.9 per cent in 2021. A downgrade is expected with Europe being significantly impacted. India's own growth prospects will not remain unscathed. As growth slows down, inflationary tendencies should recede. In other words, the supply-shock induced inflation should be a transient phenomenon.

The RBI believes that the high levels of inflation in recent months are account of the low base of the previous year. As soon as the base effect peters out, the inflation rate should fall.  This is the basis for the RBI's forecast for inflation for FY 22-23 of 4.5 per cent. Even if we factor in the rise in prices as a result of geopolitical factors, there is no reason to suppose at the moment that the upper band of 6 per cent will be breached. CRISIL has raised its own forecast to 5.4 per cent after taking into account recent developments.

RBI Deputy Governor Michael Patra gives a clearer idea of the RBI's thinking in a recent talk. He makes the following points:

i.  headline inflation has stayed in single digits and has tended to revert back to the target as each supply side shock receded.

ii. India has also transformed its food economy from deficits in key food items to surpluses and exports.

· iiiii. the absence of second round effects on wages and rentals, and low pricing power among corporates and excise duty cuts on petroleum products have tempered these upside pressures.

iv.iv. the evolution of CPI inflation up to January 2022 shows that statistical base effects have been keeping it elevated; the momentum or month over month changes in prices have actually declined during December 2021 and January 2022.

dd  The bottomline? Expect the RBI to revise its inflation forecast upwards at the next MPC meeting but it does not follow that the RBI will move towards raising the policy rate or even signalling one in the future. Growth rather than inflation remains the overriding concern for India.


Friday, March 11, 2022

Ukraine conflict will further derail globalisation

Whatever the stories the Western media may put out about the heroic resistance put up by the people of Ukraine and the heavy weather the Russian army is making of the operation, the outcome of the conflict is not in doubt. Ukraine will be suitably subdue and de-militarised, it will not be allowed to become a NATO member.

Don't take seriously the talk of a several mile- long convoy of Russian vehicles being stalled on the route to Kyiv. Such a convoy should be a sitting duck for the Ukrainian air force. The very fact that it hasn't been hit bears out Russia's claim of having established supremacy over the Ukraine skies. 

President Putin has chosen to proceed cautiously in order to limit civilian casualties. He also thinks that it suffices to cut off the Ukraine army into isolated pockets in cities encircled by the Russian army and wait for supplies to the Ukraine forces to run out. No need, then, to storm cities and endanger Russian and Ukrainian lives.

NATO has been careful to stay away from getting involved. It's not clear how much truth is in claims of Western arms being reached to Ukraine. How will the supplies reach encircled forces? Will they not be taken out en route? 

Anyway, I do not wish to dwell on the military details of the campaign. In my BS article, I argue that the conflict between Russia and the West will not settle even after Ukraine is subdued. A new international order is struggling to be born and it won't happen overnight. '

The casualty in the conflict is greater economic interdependence or globalisation. It is not just Russia that is getting cut off from the world economy. All countries will think carefully about the costs of integrating with the world at large- such integration makes you more vulnerable to external pressures. The movement of goods, services and capital across borders will receive a serious setback consequent to the sanctions imposed by the West on Russia. That is the long-term impact. In the short-run, we must expect higher inflation and lower growth.

More in my BS article, A fresh blow to globalisation.

A fresh blow to globalisation

The conflict in  Ukraine will   deepen   concerns about globalisation and national security


The world has changed since Ukraine. It is too early to grasp the full dimensions of the change that is upon us. But two things are reasonably clear. The reordering of international relations that Russia’s military operation in Ukraine is intended to bring about is likely to be a protracted affair. Two, the trend towards globalisation, which had suffered reverses even before the Ukraine crisis, has received another severe jolt. 

To grasp these changes, we need to first discount the narrative on Ukraine put out by the West. The Western media would have us believe that the conflict in Ukraine has happened because President Vladimir Putin wants to recreate the Soviet empire. That the Russian military operation has gone horribly wrong and will spell a major reverse for Mr Putin. That Mr Putin has underestimated Western resolve to deal with Russian aggression. And that Western sanctions will bring Russia to its knees. A large section of the Indian media and the Indian intelligentsia has bought this narrative.  

There is an alternative narrative that needs to be taken seriously if only so that policymakers can plan realistically for the difficult months ahead. Mr Putin sees the inclusion of Ukraine in NATO as an existential threat and the intervention in Ukraine as necessary to prevent a nuclear conflagration in the near future. No cost for Russia is too high to be borne in order to prevent such a denouement.  

Mr Putin is not the only person to have warned the West about the eastward expansion of NATO. Several leading American thinkers, including George Kennan, Henry Kissinger and Stephen Cohen, had warned that conflict with Russia was inevitable if the expansion continued. Mr Putin may now see the Russian operation in Ukraine as a precursor to a roll-back of NATO presence in Russia’s periphery. The West, for its part, is determined to punish Mr Putin for his adventure. As a result, the conflict between Russia and the West will not end soon even while few doubt the outcome in Ukraine itself. The war in Ukraine is not likely to end the way the West wants it. Western analysts are crowing over Russia’s failure to achieve a quick victory. They see the Russian campaign ending up in a quagmire. This is   wishful thinking. As several independent analysts have pointed out, the Russian army has moved slowly because it is under orders not to impose large civilian casualties. The Russian army also reckons that its objectives can be met by encircling Ukrainian troops and cutting off supplies instead of seeking a head-on confrontation.   

The tactics seem to be working. Ukraine President Volodymyr  Zelensky said on March 9 that he is willing to give up his quest for NATO membership and also consider some of Moscow’s other demands. This is a clear indication that Ukraine does not believe it can hold out for much longer. 

  In a speech that Mr Putin made on February 24 before the commencement of the military operation, he used chilling words to warn the West against any interference with the military operation. He said, “To anyone who would consider interfering from the outside — if you do, you will face consequences greater than any you have faced in history."

The warning seems to have had the necessary effect. NATO countries have ruled out involvement of their troops in Ukraine. Talk of a “no fly” zone over Ukraine imposed by NATO was swiftly scotched. Poland’s offer to transfer Russian-made fighter planes to the US for onward transfer to Ukraine has been rejected as untenable by the Pentagon. NATO prefers economic war to military war against Russia. 

The West has imposed what are supposed to be the harshest sanctions ever faced by any country. The US has banned oil and gas imports from Russia. The UK is curtailing oil imports. Russia has been cut off from the SWIFT messaging system. Select Russian banks have been barred from the payments system. 

Russia has not retaliated with its own sanctions so far. But an announcement it has made on foreign currency payments owed by Russian entities to countries it has declared “hostile” gives an indication of its capacity to hurt the West. These payments can now be made only in roubles parked with designated Russian banks. 

Western banks and companies face huge losses in consequence. The ruble has depreciated steeply since the Ukranian conflict erupted, it is not clear how foreign entities can access ruble payments parked with Russian banks and repayment of dollar-denominated Russian bonds are now in doubt. Even without Russia curbing supplies, oil and gas prices have soared. The West and, indeed, the rest of the world will have to suffer the costs of higher inflation and lower growth. 

Rising protectionism and concerns about national security had slowed the momentum of world trade and investment flows even before the Ukraine crisis. The corona pandemic raised doubts about nations being overly dependent on supply chains scattered across the world. The Ukraine crisis will deliver another blow to globalisation. 

The problem is not just the trade and investment relationships between the West and Russia. It is also relationships between the West and others, such as China and India, who may choose to continue to deal with Russia. If the sanctions regime is applied to those who deal with Russia, the potential for disruption is mind-boggling.

Russia faces severe restrictions on its access to its central bank foreign currency reserves parked in the West. As many commentators have noted, this is a development that will get other countries, including India, thinking seriously about parking foreign exchange surpluses with central banks in the West. The broader lesson that will go home is that greater integration with the outside world makes an economy more vulnerable to external pressures and could compromise a nation’s sovereignty.

Against this background, Prime Minister Narendra Modi’s slogan of “Atmanirbhar Bharat” is likely to gain in appeal. It is a slogan that has been interpreted in different ways by different people. However, a basic theme is to promote self-reliance in identified sectors, including defence. 

The government’s stance is that we do not wish to sacrifice competitiveness, we will produce for the world but we will support domestic industry through tariffs and subsidies.  in order to make this possible. In the post-Ukraine world, self-reliance is not just about producing national champions, it is about ensuring national security by reducing vulnerability to external pressures.