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But many questions remain about whether creditors truly are prepared to meaningfully reduce debt burdens. These issues likely will be on the table in India this week (July 14 to 18) when the Group of Twenty (G20) finance ministers and central bank governors gather to discuss debt restructuring and other global economic issues.

In Zambia, which defaulted on its debts in 2021, government creditors led by China have resolved months of jostling and agreed to a restructuring of $6.3 billion of the country’s more than $8 billion of debt. The agreement extends for 20 years the country’s debt-repayment schedule and lowers its annual interest bill to one percent until economic growth recovers. Now, the country’s private-sector lenders, who hold billions of dollars of government IOUs, are talking about writing down some of their Zambia loans, and in Ghana are writing off loans and restructuring dollar-denominated bonds. Meanwhile, both classes of creditors are deep in restructuring discussions with Sri Lanka, which has requested a 30 percent haircut on some bonds.

These settlements would pave the way for assistance from the International Monetary Fund (IMF) and provide a way forward—albeit a difficult one—for dozens of low-income countries that are in or nearing debt distress. This represents progress compared with a year ago, when China and the private sector were balking at a transparent negotiating process. But there are still many issues to address—especially how far China really is prepared to go in reducing the burden of its vast lending. Unlike previous global debt episodes, notably the Latin America debt crisis of the 1980s and debt relief to low-income countries early this century, there is unlikely to be a grand bargain this time around.

While the preliminary agreement with Zambia has been heralded as “an epochal shift in global finance,” the reality is that negotiations there and elsewhere are following a well-trodden path: first the seal of approval of an IMF rescue program (which in Zambia’s case was reached in 2022), with promises of IMF money once a debt restructuring is agreed to. Then the hard bargaining with government lenders, followed by talks with private creditors. This slow progress is a far cry from late 2020 when the G20 agreed on a restructuring process for the poorest countries called the Common Framework that briefly raised hopes of a rapid succession of debt reductions—hopes that were dashed largely because of foot-dragging by China and foreign lenders.

Before the emergence of China as a major creditor to middle and low-income countries during the lending spree that accompanied its Belt and Road Initiative, debt negotiations went through the IMF and the Paris Club of advanced-economy lenders. It was arguably a simpler world, not least because private-sector lenders’ debt exposure in developing countries was marginal. That changed after 2010, when institutional investors joined China in shoveling money out the door to what became known as “frontier economy” borrowers. Between 2007 and 2020, an unprecedented 21 African countries accessed international debt markets. Today, debtors must proceed on multiple tracks—the Paris Club, the Chinese government, China’s state banks and state-controlled commercial banks, and Western fund managers and money-center banks.

Some creditors question the true nature of the debt restructuring now on offer. For example, private sector lenders and analysts say privately it is not clear whether, in Zambia’s case, China has negotiated bilateral conditions that have been concealed from other lenders. They say that this could cast doubt on assurances that government creditors have provided to the IMF about restructuring arrangements. In addition, China’s insistence on extending debt repayments for decades conflicts with the Paris Club’s track record of providing relief in the form of reductions in principal owed. That could become an issue if China pursues its approach in countries where other governments are major creditors—for example, India and Japan in Sri Lanka. In that case, the model of the Zambia agreement could quickly become a muddle.

The private sector has arguably made significant strides in recognizing their loan losses, as the situation in Ghana illustrates. Lenders such as the big four South African banks are writing off as much as $270 million of their loan exposures, which equates to a haircut of almost 60 percent. And Standard Chartered Bank has set aside some $160 million for Ghanaian write-downs. This loan-loss recognition serves two purposes. First, it is an effort to inform shareholders about the banks’ overall sovereign exposure and the steps they are taking to reduce it. Second, by setting a floor on the losses they are prepared to absorb, they have a better negotiating hand in the restructuring conversations.

Meanwhile, bondholders are likely to face increasing pressure to restructure Eurobond issues—and accept haircuts—as the repayment schedule accelerates in the next two years.

A looming issue may be the response of Western banks and bondholders to China’s success in having some of its loans by state-controlled banks exempted from the Zambia agreement and classified as commercial lending. How those Chinese loans are treated—in Zambia and elsewhere—while the real private-sector creditors negotiate settlements will be a test of China’s willingness to accept the principle of “comparability of treatment” for all creditors, a key principle that Beijing publicly insisted upon as recently as April.

There are real-world ramifications to these nuts-and-bolts issues that extend beyond the politics of the restructuring process. The human cost of the debt crisis for poor countries has been severe. The UN estimated last year that fifty-four countries with severe debt problems represented about three percent of global gross domestic product, but accounted for more than one-half of the 600 million people worldwide living in extreme poverty. That number has risen sharply since the pandemic hit in 2020.

Debt payments by these countries siphon off resources that are desperately needed for health, education, and other social programs. Defaults and restructuring only make this scarcity worse. That points to the need for new sources of funding. The World Bank is under pressure to free up more money for grants and lending. Meanwhile, the IMF has increased funding for two trusts designed to meet the needs of low-income countries, including one created to help developing countries meet the immediate and long-term challenge of climate change and pandemics. About $100 billion of new resources come, in part, from the 2021 allocation of $650 billion of Special Drawing Rights to IMF member countries.

But demand for help is rising faster than the available resources, especially for the Poverty Reduction and Growth Trust, a perpetually underfunded IMF vehicle that subsidizes zero-interest loans to the poorest countries. As new lending to these nations from China and private creditors dries up, the World Bank and IMF will be hard-pressed to pick up the slack. Debt restructuring that merely extends repayment for decades without any forgiveness will only entrench the imbalance between needy borrowers and lenders whose priority is to recoup their capital.

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

Vasuki Shastry, formerly with the IMF, Monetary Authority of Singapore, and Standard Chartered Bank, is the author of Has Asia Lost It? Dynamic Past, Turbulent Future. Follow him on Twitter: @vshastry.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Since Moscow’s invasion began in February 2022, cities across Ukraine have experienced significant destruction from Russia’s frequent artillery bombardments, drone attacks, and missile strikes. Ongoing fighting around Bakhmut in eastern Ukraine is a reminder of how cities remain central battlefields in the war.

Local officials and mayors have courageously stepped up to the challenge of wartime governance, with citizens increasingly turning to them to address emergency humanitarian and security challenges. Ukrainian mayors often serve as primary lines of defense responsible for processing medical aid, engaging directly with international organizations, and repairing damaged infrastructure.

According to a recent survey conducted across twenty-one cities, between 87% and 96% of Ukrainian residents wish to remain in their cities after the war, with 39% to 62% of respondents agreeing that local officials should decide reconstruction priorities. Clearly, leaders who have managed local response systems are well equipped to identify local needs and mobilize available resources for future targeted reconstruction projects.

For this reason, it is crucial that Ukraine’s nascent reconstruction strategies incorporate local leaders and mayors as primary actors charged with directing and managing redevelopment initiatives. Although any Ukrainian “Marshall Plan” will certainly prioritize financing redevelopment projects and infrastructure repair, Ukrainian officials and the country’s international partners should also work to establish new relationships that empower leaders at the local level.

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Numerous plans to address Ukraine’s future economic and political engagement with transatlantic and other recovery institutions are already underway. During the recent Ukraine Recovery Conference in London, public and private leaders from over 60 countries pledged significant financial resources to address humanitarian needs and outline investments in Ukraine’s battered economy.

Kyiv had earlier presented a draft Recovery and Development Plan at the 2022 Ukraine Recovery Conference in Lugano, Switzerland. This plan outlined the need for approximately 850 reconstruction projects set over ten years with total costs estimated at $750 billion dollars.

In January 2023, the European Commission also unveiled its Multi-Agency Donor Coordination Platform, which is designed to streamline future Ukrainian international recovery assistance and establish clear, transparent, and accountable financial standards. While such initiatives help secure much-needed funds, Ukraine and its allies must also seek to utilize these global opportunities and engage Ukraine’s local leaders as vital partners in their country’s recovery.

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Expanding on Ukraine’s decentralization experience is not only a pragmatic wartime imperative necessary for distributing equipment and supplies; it will also build upon established reforms necessary for Ukraine’s democratic consolidation. Beginning in 2014 as part of the many sweeping reforms enacted after the Euromaidan Revolution, political decentralization has been an important way of reducing Soviet-style centralization in Kyiv while combating corruption.

Over the past nine years, Ukraine’s mayors have started to gain experience developing and managing public policies and directly responding to constituent needs. Over this period, more than 10,000 informal local councils were merged into officially recognized municipalities and granted formal administrative oversight and financial regulatory powers. Up until Russia’s 2022 invasion, decentralized economic and political reforms introduced unprecedented positive changes in quality of life for millions of Ukrainians; the share of citizens living below subsistence levels fell from 52% to 23% between 2015 to 2019.

Ukraine’s continued success in creating resilient local governance systems will require cooperation with national political leaders with clear expectations outlined in legal commitments. Meanwhile, examples of renewed political centralization in response to wartime demands have highlighted possible fault lines between local and national figures. This trend threatens to exacerbate tensions if left unchecked.

In the city of Chernihiv, located approximately 90 miles north of Kyiv, Mayor Vladyslav Atroshenko was removed by courts following an investigation by Ukraine’s National Agency for the Prevention of Corruption (NAPC) into the alleged use of a municipally-owned car by the mayor’s wife to evacuate from the city during the opening days of the war. Mayor Atroshenko himself stayed in Chernihiv to oversee the defense of the city which withstood a siege and partial occupation in spring 2022.

In the city of Rivne in western Ukraine, rumblings grow of Mayor Oleksandr Tretyak potentially being removed in relation to an NAPC investigation into the payment of bonuses to city officials in 2020. At the same time, Mayor Tretyak claims he has come under increasing pressure to move limited city budget money to the region’s civil military administration, something he has so far refused to do, claiming that the city has already fulfilled all budgetary support requirements. These examples have fueled speculation over the direction of wartime centralization and should give pause to local authorities and regional civic leaders.

Any future national reconstruction policy will be best served by building upon Ukraine’s localized leadership assets and incorporating local councils, mayors, and officials in decision-making processes. By directing incoming aid at the local level, global partners can help expand technical, strategic, and administrative capacities and ensure resources are used effectively across targeted issues. Ukraine’s dedication to continued decentralization reforms is not only necessary to achieve reconstruction goals but is also a critical component of the country’s mission to develop transparent democratic systems from the ground up moving forward.

Zachary Popovich is a senior program associate at the International Republican Institute. Michael Druckman is the resident program director for Ukraine at the International Republican Institute.

Further reading

UkraineAlert Jun 29, 2023

Putin’s Wagner weakness is a signal to support Ukraine’s counteroffensive

By Taras Kuzio

With the short-lived Wagner mutiny exposing Vladimir Putin’s weakness for all to see, the time has come for Ukraine’s Western partners to provide the country with everything it needs to secure victory, writes Taras Kuzio.

Conflict Freedom and Prosperity

UkraineAlert Jun 19, 2023

Beyond the battlefield: Why we should invest in Ukraine’s democratic future

By Peter Erben, Gio Kobakhidze

Western military aid has helped Ukraine defend itself against Russia’s full-scale invasion, but the West must also support Ukraine’s efforts to consolidate the country’s democracy, argue Peter Erben and Gio Kobakhidze.

Civil Society Conflict

UkraineAlert Jun 26, 2023

How Ukraine can pin down Russia in Crimea without a land campaign

By John B. Barranco

Many analysts believe Ukraine must liberate Crimea in order to win the war, but it could be possible to render the peninsula strategically irrelevant for Russia without launching a major land campaign, writes John B. Barranco.

Conflict Defense Policy

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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On June 13, the Atlantic Council’s Iran Strategy Project hosted a virtual event, “The Mechanisms of Corruption in Iran” to discuss the nature of corruption and sanctions in Iran as well as the social, economic, and political implications of these issues.

The Atlantic Council’s Scowcroft Middle East Security Initiative Director, Jonathan Panikoff conducted opening remarks, stating that discussions of Iran’s current economic situation must also address the corruption that exists within the country given its rampant nature. This was emphasized by Atlantic Council nonresident senior fellow Nadereh Chamlou who served as the moderator for the session.

In order to discuss the complexities of corruption within Iran, it is first important to define corruption. Associate Professor of Finance at the University of Dallas, Ali Dadpay, explained that corruption is the use of a public position for personal gain. Dadpay shared how this phenomenon manifests in situations such as the importation of luxury vehicles into the Islamic Republic. He recalled how foreign made vehicles were banned from Iran, however, members of Parliament were able to import foreign made luxury vehicles due to their positions of power.

Causes of Sanctions and Corruption

The beginning of the conversation included a review of the causes of corruption in Iran and specifically analyzed the role that sanctions play in its prevalence. To initiate the discussion, Chamlou mentioned a study by one of Iran’s top economists that found only 20% of corruption can be traced back to sanctions, whereas 80% is attributed to other factors. This begs the question, what could that something else be?

Entrepreneur Majid Zamani claimed that while sanctions are not the only cause of this corruption, they have created a plethora of opportunities for rent-seeking, which only those who are ideologically connected to the regime have access to.

Within Iran specifically, Zamani discussed the existence of a theocratic system, stating that because people are selected for leadership based on their loyalty to ideology, rather than merit, the political system is poorly organized and thus more susceptible to corruption. Furthermore, Dadpay argued that because Iran has a nationalized economy with extensive regulations, as opposed to a globalized economy, the government benefits from corruption and monopolization. Zamani added that the banking system epitomizes this vulnerability to corruption due to the interest rates, corrupting all loans.

Impact of Corruption & Sanctions

The panel then moved to the discussion of how corruption and sanctions have manifested in Iranian society. Given the US Government’s prioritization of US interests, as opposed to those of the Iranian community, Atlantic Council’s nonresident senior fellow Brian O’Toole and Dadpay both recognized that even though these sanctions are targeted, they will ultimately influence all Iranians, by creating a demand for sanctions evasion and a market that avoids financial responsibility. When asked whether Iranians could avoid corruption in the private sector and still succeed, Zamani claimed that the entire private sector in Iran is impacted by its relationship to the government. However, there is a spectrum of involvement, with one end including those who are loyal to the government and comfortable with the corruption and the other end comprising of individuals trying to avoid engaging in corrupt behaviors but ultimately having to comply at times in order to survive. He also clarified that although they do not make up the majority of the GPD, the Iranian private sector includes small market owners and medical professionals, occupations that comprise the bulk of society.

How to address it

After discussing the causes and effects of corruption in Iranian society, the panelists moved to their recommendations as to how to address it. O’Toole said that it takes time, so patience and persistence are crucial, and tackling corruption begins by addressing root problems. While pursuing flashy cases of corruption may be more alluring, it often only targets a single perpetrator rather than the source. To tackle the wider system would require transparency at every stage, even the more mundane. Dadpay agreed with O’Toole, advocating for a clear and transparent legal framework and stating that accountability in corruption cannot be achieved without an explicit and independent judiciary branch. In order to achieve transparency and accountability, according to Zamani, civil society must demand it from the government, through civil disobedience and outward refusal to engage in a corrupt system of governance. Lastly, moderator Chamlou included her own belief that tackling corruption in Iran would require dismantling networks of patronage and government insiders.

Masoud Mostajabi is a Deputy Director at the Atlantic Council’s Middle East Programs.

Britt Gronemeyer is a Young Global Professional with the Middle East Programs at the Atlantic Council. 

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On July 1, 2023, Global China Hub Nonresident Senior Fellow Wawa Wang’s newest piece for The Diplomat explored the effects of the Asia Infrastructure Investment Bank’s emphasis on “rapid and flexible infrastructure financing, making it easier for clients to dodge higher rule-based standards.”

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The completion or near completion of those measures is indeed helpful to DLICs, even if the measures fall short of what is needed—the sustainable development gap of those countries has been estimated to be $2.5 trillion per year. What the DLICs really need are concrete initiatives and the less said about grand strategy the better. Dressing those initiatives up as parts of a “new global financial architecture” risks conflating them with the geopolitical conflict centered around changing or preserving the current world order. That conflation will only make it more difficult to develop the international consensus required to adopt those measures. 

The Paris Summit showcases the potential and limits of the plurilateral approach  

The Paris Summit brought together senior representatives of about thirty-two countries, international organizations such as the World Bank (WB) and the International Monetary Fund (IMF), civil society organizations advocating debt relief and climate financing for DLICs, as well as private-sector businesses. Besides Macron, presidents and prime ministers from South Africa, Brazil, Germany, China, and a dozen or so African countries attended. The United States was represented by Treasury Secretary Janet Yellen and Special Climate Envoy John Kerry. The Summit represents an example of a plurilateral approach where a relatively small group of countries get together around a common agenda instead of the multilateral approach involving all members of the international community. Other examples include the World Trade Organization (WTO), which has been able to push through a few plurilateral trade agreements on specific issues, having failed to facilitate any round of multilateral trade liberalization since its inception in 1995; and the IMF which has recognized that working with smaller groups of like-minded countries can be a practical way forward. 

The Paris Summit exhibited the potential and limitations of the plurilateral approach. The results of the Summit were contained in the Chair’s summary of discussion, essentially reflecting participants’ appeals and statements of wishes rather than new commitments by countries. In fact the United States—a key country in any international undertaking—has been lukewarm at best about several proposals to raise funding, including worldwide taxation of CO2 emission in shipping and aviation, of financial transactions, and of fossil fuels in general. Yellen reiterated that multilateral development banks (MDBs) should try to optimize the use of their balance sheets to provide more finance to climate-related projects before asking members for more capital. 

Concrete results from the Paris Summit 

Nevertheless, the Paris Summit managed to produce two sets of results. One is a Road Map highlighting important events and meetings such as the G20 Summit in September in New Delhi and the IMF/WB annual meetings in October in Marrakech. Also noteworthy is the meeting of the 175-member International Maritime Organization in July to discuss the idea of taxing emissions from shipping, and the United Nations Summit on the Future in September 2024. The road map is useful in focusing international attention on important gatherings to push for further progress on the various commitments and initiatives already on the table. 

More useful to DLICs are announcements of the completion or near completion of previous pledges. Specifically, President Macron expressed confidence that the 2009 pledge by developed countries to spend $100 billion a year to help DLICs deal with the impacts of climate change will be fulfilled later this year. The OECD has reported that in 2020 the total amount reached $83 billion—the failure to meet this promise on time has been a disappointment for DLICs. More positively, the IMF reported that it has met its goal of asking countries with excess SDR reserves to re-channel $100 billion of the SDRs allocated in 2021 to help DLICs—with $60 billion pledged for its Resilience and Sustainability Trust (RST) and Poverty Reduction and Growth Trust (PRGT). In particular, the RST is aiming to help DLICs deal with climate change through an exception to the short-term nature of IMF lending, offering loans with a 20-year maturity and a 10-year grace period. 

The WB also outlined a toolkit that had been in the works for some time and includes offering a pause in debt repayments during extreme climate events (but only for new loans, not existing ones), providing new types of insurance for development projects (to help make those more attractive to private sector investors), and funding advance-warning emergency systems. In particular, it has announced the launching of a Private Sector Investment Lab to develop and scale up solutions to barriers to private investment in emerging markets. Progress has been reported in efforts by MDBs, especially the WB, to optimize their balance sheets according to the G20-endorsed Capital Adequacy Framework in order to be able lend $200 billion more over 10 years—with the hope of catalyzing a similar amount of investment from the private sector (which is easier said than done). 

Most concretely, after years of procrastination, the official bilateral creditor committee agreed to restructure $6.3 billion of Zambia’s bilateral debt, a portion of its total public external liabilities of more than $18 billion. The deal extends maturities of bilateral debt to 2043, with a 3-year grace period; an interest rate of 1 percent until 2037 then rising to a maximum of 2.5 percent in a baseline scenario; but up to 4 percent if Zambia’s debt/GDP ratio improves sufficiently. In the baseline scenario, the present value (PV) of the debt will be reduced by 40 percent, assuming a 5 percent discount rate. This is lower than the 50 percent PV haircut accorded to some other countries in debt crises and is insufficient to meaningfully reduce Zambia’s debt load. Nevertheless it is helpful, especially in allowing Zambia to receive a $188 million disbursement from its $1.3 billion IMF program. The deal was reached contingent on Zambia negotiating comparable agreements with its private creditors and after the multilateral development banks (MDBs) pledged to provide concessional loans and grants to DLICs in crises. 

Key takeaways  

First and foremost, the results of the Paris Summit show that it is useful to maintain pressure on governments and international organizations to deliver on their pledges and commitments to various initiatives, as well as to agree to new ones to help DLICs. Even though each of the measures is insignificant compared to the overall needs, cumulatively many of them can provide tangible support to DLICs.  

Secondly, progress on any of these initiatives requires agreement by all key countries, including China. For example, the Zambia debt restructuring deal was achieved only when China’s preferences have been honored—including no cut in the principal amount of debt, relying instead on maturity extension and low interest rates; classifying several loans including from China Development Bank as commercial, not official; and requiring other creditors including MDBs and private sector investors to participate on a comparable basis in the debt relief. Hopefully, the Zambia deal can represent a template to speed up the restructuring process for DLICs, as flagged in an earlier Atlantic Council post.  

And that leads to the last takeaway from the Paris Summit, mentioned earlier. Countries should not let debt alleviation and climate change mitigation initiatives be used as political scoring points in the geopolitical conflict between the West and China. This will make it difficult to build the consensus required to move forward in these efforts.  

Hung Tran is a nonresident senior fellow at the GeoEconomics Center, Atlantic Council, and former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Thanks to Ukrainian bravery and determination, almost nobody now doubts our ability to survive the war and defeat Russia’s invasion. However, many international observers are now starting to ask a new question: What will Ukraine do next?

I was recently in my hometown of Chernihiv. Russia tried to seize it in the first weeks of the full-scale war. For a period, the city was surrounded. One year later, Chernihiv is humming with activity. Ruins are gradually being rebuilt and businesses are working. During my trip, I talked to a local entrepreneur, Andrii, who owns a small store. He donates half of his profits to the Ukrainian military. Andrii asked me: “Of course, we will win, but what happens next? How will the country develop?”

I answered him and I can answer the whole world. We have a clear vision of what Ukraine must become and how to achieve it. Our plan for Ukraine has three pillars: security, freedom, and drive.

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Security comes first. All other efforts will be futile without this key ingredient. Ukraine needs a strong army to ensure the safety of our people and our economy. This is also the only way to make sure NATO’s eastern border remains secure.

Freedom is the second pillar. This is a central aspect of Ukraine’s European identity. As a nation, we stand for human rights and against international aggression. The new Ukraine will be a place where citizens and businesses have the freedom to innovate and succeed. We aim to remove unnecessary barriers to business development while ensuring inclusion and equality through social policies.

The third pillar is drive, shaping our goal for dynamic growth. We want Ukraine to become a global competitor and contributor, not a state dependent on others. By attracting investment and promoting innovation, Ukraine will become a new engine of European economic growth.

Ultimately, Ukraine’s goal is to join the Trillion Dollar Club. We need to finance a strong army of 500,000 personnel and a highly developed defense sector, as well as social services, education, and healthcare. A GDP of $1 trillion will enable ample funding for these sectors without imposing a critical burden on the budget.

At present, we see an investment potential in the region of $500–900 billion toward the rebuilding of Ukraine over the next 20 years. Additionally, replacing Russian and Chinese exports to EU and G7 countries could generate very large volumes annually.

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The construction industry and infrastructure development are top priorities. Currently, the damage inflicted by Russia on Ukraine’s residential sector alone amounts to over $54 billion. Reconstruction will require a significantly larger investment, creating unprecedented challenges and opportunities for the entire sector. We envisage a generational infrastructure upgrade that moves Ukraine away from the post-Soviet model and toward a modern European approach.

In the longer term perspective, we intend to rely on sectors where Ukraine already has proven potential and can offer globally competitive solutions. This includes food security, green transition, high-end technology, and industry.

We are committed to participating in the green transition, which is essential for Europe. This will make it possible to replace Russian energy resources. Our understanding of the green transition goes beyond energy to include the development of green metallurgy and a shift toward green logistics. Furthermore, Ukraine’s large reserves of strategic minerals position us as a major player in the production of lithium-ion batteries and nuclear fuel. The availability of resources provides an opportunity for high-tech production, opening the way for the EU to replace supplies from China.

Industrial development will generate demand for technological solutions and innovation. We expect to see a new boom in the Ukrainian IT sector, as well as the emergence of sectoral R&D centers capable of meeting the needs of other industries and the digital economy.

We are focused on technological development, but we are also very much aware that 350 million people are currently facing starvation worldwide. We aim to boost food security and become a food provider for 600 million people globally.

None of the above would be possible without the people who will make it happen and for whom all of this is intended. We aim to create conditions for millions of Ukrainians to return home and to persuade others to relocate to Ukraine by implementing attractive social policies and citizenship rules.

Simultaneously, we need to do the same for investors. The task we face is enormous. Ukraine’s record annual foreign direct investment (FDI) total remains the $11 billion received in 2007. We must attract at least that amount every single year for the next two decades.

We understand that investors need to see tangible results not just ambitious plans. Key steps include reform of Ukraine’s law enforcement agencies and courts, along with the establishment of strong and independent regulators. If successfully implemented, this will provide an institutional framework to ensure fair play and anti-corruption policies.

Setting up a business in Ukraine will become easy. We will simplify and digitize all processes involved in the creation of a new business, from construction permits and environmental regulations to turnkey utilities connections. We will reform monetary, tax, and labor policies by revising rates and tariffs and liberalizing the labor market. Ukraine will become one of the most convenient places on the planet to do business. 

Ukraine’s future goes beyond sectoral growth. We envision ourselves as an integral part of the European community and a driving force for global development. We will contribute to international security, propose solutions for shared challenges, and establish good governance practices.

Over the last 10 years, Ukraine has already made significant progress toward countering corruption. Further advances are crucial as we seek to become a NATO member to protect our nation, and as we pursue EU membership to open up new business opportunities and consolidate reforms.  

There is no alternative for us. Ukrainians must turn these ambitions into reality to ensure the country’s future safety and preserve freedom. Otherwise, Russia will remain a threat and will inevitably make another attempt to destroy Ukraine.

We call on all Ukrainians to return home and invite the global community to join us on this transformative journey. We invite them to invest in our resilient nation and to become shareholders in the prosperity that Ukraine’s success will surely bring. This is more than a national task; it is a global call to action. It will show how ordinary people in extraordinary times can turn adversity into strength.

Yulia Svyrydenko is Ukraine’s First Vice Prime Minister and Minister of Economic Development and Trade.

Further reading

UkraineAlert Jun 6, 2023

Ukraine’s summer counteroffensive is a key moment but long-term resolve remains crucial

By Tennyson Dearing

Ukraine’s summer counteroffensive is an important moment in the war with Russia but it is critical to maintain a sense of perspective and underline the need for long-term Western backing, writes Tennyson Dearing.

Conflict Freedom and Prosperity

UkraineAlert Jun 7, 2023

Ukraine’s summer counteroffensive will aim to keep the Russians guessing

By Peter Dickinson

Speculation is mounting that Ukraine’s hotly anticipated summer counteroffensive may be underway but initial stages are likely to feature probes and diversionary attacks rather than a big push, writes Peter Dickinson.

Conflict Drones

UkraineAlert Jun 12, 2023

Beyond the counteroffensive: 84% of Ukrainians are ready for a long war

By Peter Dickinson

84% of Ukrainians reject any compromise with Russia and are ready for a long war if necessary in order to fully de-occupy their country. Most simply see no middle ground between genocide and national survival, writes Peter Dickinson.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The rise of sustainable investing in the private sector

Mobilizing private sector capital to boost sustainable development and ESG priorities makes sense given the numbers. With the top 500 asset managers holding $131.7 trillion in Assets Under Management (AUM) and the combined market capitalization of the top ten global companies reaching over $10 trillion in 2022, the private sector is well-positioned to contribute. Moreover, sustainable investing, mostly in renewable energy, was the fastest growing Foreign Direct Investment (FDI) theme in 2021—with 70% directed to developing countries. Up until 2021, financial markets have also experienced large shifts toward sustainable investing, with ESG fund issuance increasing by 53% to $2.7 trillion in 2021, while the green, social, sustainable and sustainability-linked bond market rose $1 trillion, grabbing 10% of the global debt market share. Sustainable companies also issued $48 billion in new equity, while sustainable lending reached close to $717 billion in borrowing. For example, in Indonesia, companies like Pertamina Geothermal Energy are looking to issue green bonds to help grow its business but also facilitate the transition to clean energy.  

Meanwhile, multinational corporations (MNCs) are integrating sustainability metrics into their supply chains, based on the Science Based Targets Initiative (SBTI). Financial and reputational risks from poor ESG practices can negatively impact a company’s future profits and resilience, which filter down to its local value chain. Many MNCs, including, Nestle, PepsiCo, and Unilever, are working towards preventing this by establishing and adhering to SBTI targets to increase sustainable practices within their global supply chains. Others, including Starbucks, are diverting funds to support climate and water projects in developing countries in an effort to conserve or replenish 50% of the water they deplete through their operations, including the agricultural supply chain. 

Together, ESG investing and SBTI targets should contribute significantly to sustainable development and lower the cost of hitting the SDGs. However, last year revealed several barriers that threaten that potential.

Roadblocks to investing in sustainable development

Sustainable finance faced challenges in 2022 as increased global regulatory scrutiny and divergent ESG standards led to a dip in ESG investing. Reuters reported that in 2022, sustainable investments reversed course for the first time in a decade, with sustainable bond sales decreasing by 30% and green bonds down 23%. Overall, ESG performance declined by nearly 9%, as international investment in ESG, especially climate change, declined.

Varying ESG rating standards, methodology, and data sources, that are often reclassifying sustainably labelled products, contributed to lower levels of ESG investing in 2022. Several ESG labelled securities were downgraded due to criteria conflicting with both major ratings agencies, while conflicting or overly prescriptive requirements led to a decline in support for ESG related shareholder proposals and the withdrawal of several financial industry members from regional ESG alliances. With over 600 ESG data providers, globally, it is not surprising a lack of consistency and standardization leave investors confused about the true risks and rewards from sustainable finance. Recent research reported that 20 of the 50 largest global asset managers assess their sustainable finance products using four or more ESG rating providers, while the other 30 use internal models for the same purpose. Underlying biases in ratings can often exclude developing countries struggling to attract sustainable finance due to inherent country-specific risks, like fossil fuel dependence, budget constraints, and high sovereign debt from external shocks, market access, and lack of technological innovation. However, some asset managers, like Abrdn, have developed in-house ESG ratings system based on data and metrics from external sources, like the World Bank and IMF, to consider unique factors when evaluating alignment with the SDGs for companies listed in their Emerging Markets Sustainable Development Corporate Bond Fund. 

Global regulations for ESG have also complicated cross-border sustainable investing, potentially leading to an increase in compliance costs and reduction in the number of eligible sustainable funds for firms.  Although evolving European, UK, and US frameworks regulating ESG have similar objectives, the approaches towards sustainable investing vary among the jurisdictional regulations and oversight bodies, especially around labelling and reporting. This disparity has also encroached on the Asia-Pacific financial industry, where many banks are starting to require local asset managers to comply with European ESG standards despite the existence of similar local regulations.  An analysis of ESG and sustainable-labelled funds identified that less than 4% meet the standards of all three jurisdictions, while 85% do not comply with any of them.  Additionally, different jurisdictional requirements and contradicting assessments of how to measure sustainable supply chains brought an additional level of uncertainty to MNC’s ESG initiatives in FDI. Companies are starting to realize they may not have fully assessed the impact of carbon emissions on its operations in other countries, specifically in the developing market.  Streamlining allowing for flexibility in the global ESG regulatory framework will be critical to ensuring sustainable investments increase and assist with countries in meeting their ESG goals. 

A way forward

To help meet the SDGs, the World Bank recently announced the creation of a roadmap that focused on three main objectives, including increasing private sector funding, improving country-level engagement and analysis, and establishing a global taxonomy for sustainable investment tools. UN Deputy Secretary-General Amina Mohammed recently warned that “the SDGs will fail without the private sector,” because private sector actors can “invest in the transitions necessary to accelerate development progress and get the SDGs back on track.” The private sector has not only the financial capacity, but also the commitment, to fuel sustainable investing, but faces barriers to keep up the momentum. The IMF and World Bank have an incredible opportunity to address the current ESG investing challenges. The World Bank roadmap is an important first step, but more will be needed to ensure globally consistent standards and data for ESG. The potential for greenwashing or indiscriminate exclusion of countries can be avoided by working with governments and ratings providers, and by improving country-level engagement to both align metrics and to integrate unique country risks in sustainable investing and supply chains. With many firms already leveraging IMF and World Bank data, creating a formal framework will encourage the expansion and scaling up of private sector ESG financing for regions in urgent need of funding.

Nisha Narayanan is a Non-Resident Senior Fellow with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Policymakers who recently gathered in Washington, DC for the Spring Meetings of the IMF and World Bank highlighted the need for global progress on crypto-asset regulations. G20 finance ministers and central bank governors included global regulatory development on their list of priorities, as did the International Monetary and Financial Committee. Crypto regulations were discussed throughout the meetings, including in a session focused on the future of crypto-assets. 

The meetings made two things clear. First, the need for robust, globally coordinated crypto regulations is evident. And, second, policymakers face substantial challenges achieving that goal. Following on discussions held at the Spring Meetings, we used our Cryptocurrency Regulation Tracker to identify several of the major policy dilemmas facing policymakers and regulators.

Consumer protection rules are lagging behind other forms of regulation

Consumers participating in crypto-markets are exposed to considerable risk. Theft is increasingly common. Volatility, often fueled by speculation, is a defining feature of crypto markets. And misinformation and deceptive advertising make informed investing difficult. Despite the risks that consumers face, we found that only one-third of the countries studied had rules in place to protect consumers. Other countries may have legal protections that extend to crypto market participants, though the law is often untested or ambiguous. 

Fortunately, countries that do provide consumer protections are demonstrating a diversity of approaches. India, France, and others have helped consumers make better informed decisions by requiring that advertisers disclose risks associated with crypto-investing. In South Korea, crypto-asset service providers, such as exchanges and wallets, are required to obtain an information security certificate from the Korea Internet and Security Agency, decreasing the likelihood of theft. And many countries, including Australia and Japan, have rules in place to prevent and penalize deceptive conduct and fraud. While these examples demonstrate steps some countries are taking, the safety of crypto markets requires that policymakers redouble efforts to enact consumer protection regulations. 

Regulations to prevent another FTX-style collapse are a long way off

Centralized exchanges like FTX and Binance play a critical role in the crypto ecosystem. By allowing individuals to participate in “off-chain” transactions involving crypto-assets, they dramatically reduce the barriers to entry posed by more technically complex “on-chain” transactions. The substantial gains made in market capitalization and adoption would be unlikely absent centralized exchanges.

But centralized exchanges that perform multiple functions pose risks that regulators must address. Many exchanges are not sufficiently transparent about their operations, finances, or governance, leaving investors in the dark on key matters. Some companies are taking steps to address this problem by disclosing “proof of reserves”, a transparent accounting of a company’s assets and liabilities. While more than half of the countries in the tracker have licensing or registration rules, these do not typically include disclosure requirements. 

Centralized exchanges may misuse customer funds. Unlike in traditional finance, where customer funds are subject to certain protections, centralized exchanges typically face either nonexistent or less stringent regulations. The Cryptocurrency Regulation Tracker includes only two examples of a specific requirement that crypto companies segregate customer funds, placing a firewall between customer money and proprietary trading. The European Union’s Markets in Crypto-assets framework, which became law last month, has specific rules that wall off customer funds from proprietary trading. The US Securities and Exchange Commission is considering a similar move.

In some cases, global exchanges may fall outside national or regulatory borders. This leaves policymakers incapable of performing basic oversight, as was the case with FTX in the United States. Policymakers have yet to achieve coordinated global action and are continually confounded by crypto companies that evade—intentionally or otherwise—traditional regulatory definitions. Bringing crypto activity within the regulatory perimeter remains a key challenge. 

Our research shows that more needs to be done to prevent the next FTX. Fortunately, that debacle has propelled policymakers and regulators to fill this perilous gap. 

Low- and middle-income countries lag advanced economies in regulatory development, but not in rates of crypto adoption 

The Cryptocurrency Regulation Tracker considers four categories of regulation: taxation, anti-money laundering, consumer protection, and licensing. Of the advanced economies we reviewed, 64% have regulations in each of these categories. Only 11% of the middle income countries have rules in all four categories, and none of the low-income countries do. These findings identify a clear trend: low- and middle-income countries are adopting crypto-regulations more slowly. 

Limited regulatory development, however, has not slowed adoption. In fact, our research found virtually no relationship between crypto-regulation and adoption rates. Six of the ten countries with the highest rates of adoption (according to Chainalysis) have in place either a partial or general ban on crypto-assets. It is worrying that some low- and middle-income countries, who may be vulnerable to crypto-induced shocks, have active crypto-markets with few regulations. 

The widening regulatory gap between countries is a critical challenge for international financial institutions and standard-setting bodies. Patchwork, uncoordinated global regulations present opportunities for regulatory arbitrage. Companies may consider issuing new crypto-assets from jurisdictions with few or no guidelines and selling those assets to investors around the world—even in countries where such sales are technically illegal. In the short-term, such activity could hurt consumers and facilitate illicit activity. In the longer-term, it could present a meaningful financial stability risk. 

In recent remarks at the Atlantic Council, World Bank President David Malpass urged regulators to make global standards “accessible” to countries with lower state capacity. Indeed, the International Monetary Fund, Financial Stability Board, and others must do the tough work of both establishing global standards and providing technical assistance where needed. 

Regulators around the world face multiple challenges. They must protect customers and put in place safeguards to prevent the next FTX-style collapse, all while coordinating across diverse jurisdictions. And they have a long way still to go.

To keep up with this rapidly evolving topic, follow the GeoEconomics Center’s Cryptocurrency Regulation Tracker.

Cryptocurrency Regulation Tracker

Cryptocurrencies may significantly alter financial structures and transform the next generation of money and payments. Governments around the world are looking to create regulations to prevent the harms caused by cryptocurrencies while encouraging the innovative capabilities of cryptocurrencies. We analyze how 45 countries have regulated cryptocurrency in their jurisdictions.

Greg Brownstein is a Bretton Woods 2.0 Fellow and research consultant with the GeoEconomics Center.

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While some of the most powerful economic institutions in the world are led by women at the moment, Calviño is unfortunately right. With Kristiana Georgieva at the International Monetary Fund, Ngozi Okonjo-Iweala at the World Trade Organization, Christine Lagarde at the European Central Bank, and Janet Yellen at the US Treasury, we’re given the impression that women are at the helm of economic policymaking. However, this success has not translated into broad representation. Structural barriers continue to prevent many women from reaching top roles in finance and economics—and the problem is more pronounced than in other areas of policymaking.

A leaky pipeline

Of the 190 member countries of the IMF, 26 have women as finance ministers and only 17 have women as central bank governors. That means just 11.3% of policymakers in those two roles are women. The average proportion of women serving as cabinet ministers globally is meaningfully higher, at 22.8%. What is it about the economic portfolio that results in such a drop off?

The reasons for this disparity can be attributed to a variety of factors, such as male-dominance in the study of economics, barriers that prevent women from being promoted, and social perceptions of women’s abilities. These structural and social barriers create a “leaky pipeline,” where small gender gaps in participation at early stages can accumulate over time to result in large disparities at the top of institutions.

Economics requires mathematics and quantitative skills. However, girls often receive the message that they are not as competent in these areas from a young age. The lower participation of women and girls in STEM-related activities is well-documented, and similar patterns are present in economics. Across major US and European academic institutions, women represent around 35% of PhD candidates in economics. Women also tend towards more social research areas such as health, education, and labor while men dominate areas like economic theory, macroeconomics, and finance—the subfields from which top policy leaders are often drawn from. There is nothing preordained about these trends in specialization. They are driven by social expectations, gender biases, and a lack of role models.

However, educational differentials don’t fully explain the disparity. After all, while the role of finance minister or central bank governor requires experience with economics, that doesn’t have to include a PhD. We can look to US Federal Reserve Chair Jerome Powell and ECB President Christine Largarde (both lawyers) as examples of such exceptions.

Women are also held back by an array of barriers to promotion in big economic and financial institutions. Men are more likely to be promoted than their female counterparts with comparable qualifications. For example, the US financial sector employs around 9 million workers, with women comprising the majority of the entry-level workforce but holding less than a fourth of the top leadership positions. Women are impacted by the “motherhood penalty” caused by gendered expectations around parenting and work. This penalty can be exacerbated by a lack of parental leave, but even when leave is available, women use it more than men and are stigmatized for it. The promotional gap makes it more difficult for women in economics and finance to achieve the caliber of resume that candidates for finance minister or central bank governors usually have.

Finally, there is an unconscious bias against women’s ability to effectively conduct economic research and policy. As a whole, both men and women rate male applicants higher for positions that require quantitative skills, and female financial advisors are punished more severely for misconduct. Surveys in the US found that when central bankers were introduced without their credentials in a media announcement, people were more likely to doubt the commitment and ability of the Federal Reserve to balance inflation and employment if a woman was the spokesperson. Another study found a correlation between countries with high inflation and a lack of female central bank governors, and suggested that women are hindered by a bias that men are more “hawkish” and therefore more committed to fighting inflation.

Not a quick fix

In 2013, after over two years without a woman sitting on its six-member Executive Board, the ECB committed to a gender diversity action plan. At the time, only 14% of senior managers were women. The ECB’s action plan includes up to 20 weeks of paid parental/adoption leave for either parent and a target of a minimum 50% women in new hires across all levels of staff. As of the end of 2022, 38% at the senior managerial level are women. While 38% is not parity, it does represent a real increase as a result of the ECB’s diversity policies.

As President Lagarde said, “Being surrounded by men is not something new, but it is something that is always disappointing.” The barriers that women face aren’t new and neither are the suggested solutions. There is no magic pill for improving gender representation. Instead, there are a myriad of policies that tackle the different aspects of the “leaky pipeline.” From improving opportunities in education, to committing to equitable hiring practices, the approach to gender equality in economics must be holistic.

Jessie Yin is a Young Global Professional with the GeoEconomics Center.

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Historically, US consumers used checks to make payments directly from their bank accounts, but check payments do not translate to online payments. Today, US consumers are left with a gap in their payment options: they cannot pay directly from their bank accounts (as allowed by a check), and real-time payments can only be made through expensive third-party credit cards. The lack of a real-time digital payments network holds the US back: It creates delays and risks for consumers and businesses and ties up capital needlessly.

The US has some catching up to do. Many countries in Europe stopped issuing paper checks more than two decades ago, transitioning instead to an electronic payments network. The United Kingdom introduced instant payments in 2008. The Single Euro Payments Area (SEPA) was launched in 2017, allowing instant payments among 36 countries using a unified framework for direct bank payments, including cross-border transfers. Globally, 79 countries have already implemented at least one instant payment network.

This year, the US will take a major step toward faster payments when the Federal Reserve launches its planned FedNow payment network. But even after FedNow launches, the US will still have a ways to go before consumers can access instantaneous digital payments.

Faster payments in the US

The US was originally at the forefront of electronic payments. In the 1970s, it introduced the Automated Clearing House (ACH) for processing electronic payments. This initiative happened because a group of California bankers became concerned about the growing volume of paper checks overwhelming the processing equipment and the technology to clear the checks.  ACH became—and still is—the method for issuing payroll, vendor payments, and other direct deposits.

While the ACH network made electronic payments possible within the US, it is far from instantaneous. ACH settlements typically take several business days from the time they’re initiated. ACH transactions are processed in batches, either at the beginning or end of the day, or as several batches throughout the day, necessitated by the extremely robust but 60-year old COBOL mainframe systems on which ACH runs. The ACH network moved $77 trillion in 2022.

In 2016, the ACH Network introduced Same-Day ACH which settled transactions within the same business day. Still, same-day ACH falls short of instant payment processing. Wire transfers are another payment option, with real-time transfer capabilities through the FedWire system. However, wire transfers need to be submitted during FedWire operating hours. Wire transfers typically support critical business transactions involving large sums rather than everyday payments between consumers and companies, and often incur significant fees.

A few consumer-friendly options have emerged, such as the RTP network. Governed by some of the largest banks in the US, the RTP network offers real-time payment processing for financial institutions. Unlike ACH, however, RTP only has the ability to credit payments to an account (“push payments”), whereas ACH also has the ability to debit payments from an account (“pull payments”).Meanwhile, checks are still a regularly used form of payment for consumer and business transactions in the US. In 2003, Congress passed The Check Clearing for the 21st Century Act (Check 21), as a way for banks to accept an electronic substitution (image) of a check instead of the original. The purpose was to “foster innovation in the payments system” according to the Federal Reserve, but is still no more than a patch on an antiquated technology.

FedNow: One step closer to real-time payments

In 2019, the Federal Reserve announced its plans for the FedNow Service, the U.S. attempt to create a European-style network of real-time payments. As a complement to the ACH Network, FedNow (with an initial launch planned for July 2023) will offer instant payments between bank accounts. Transfers will take mere seconds instead of hours or days that ACH and Same-Day ACH offer. And, unlike FedWire, FedNow will be available 24/7. FedNow will be governed by the Federal Reserve instead of a private banking association. Like the RTP network, FedNow will have transaction fees of only a few cents per transaction, which makes it cost-effective. Initially, FedNow will have a cap of $500,000 while the RTP network has a limit of $1 million per transaction. For now, FedNow also only supports domestic “push payments”  but not “pull payments,” so it is still missing half of the equation that ACH enables.

The key variable for these real-time payment solutions is “participating financial institutions.” The RTP network has close to 280 participating financial institutions, including some of the largest banks in the country, but with nearly 10,000 banks and credit unions in the US, this offers far from universal coverage. FedNow is only just beginning its rollout and, again, financial institutions have to opt to implement FedNow. Consumers will not be able to access FedNow directly, and can only access it if their bank opts in. Eventually, FedNow is expected to have interoperability with ACH, which could broaden its reach and perhaps get the US closer to instant payments.

Financial institutions, even if they opt in to FedNow, will still have to figure out how to make it available to their customers. FedNow only operates as a payment rails system; access for consumers needs to be provided by the financial institution through their online banking or a third-party app. Adoption among the general population may be slow and limited as a result. Also, the lack of support for “pull payments” means that instant payments directly from a consumer’s bank account—as well as other solutions requiring “pull” capability—are still not possible.  For these reasons, FedNow will also not work as payment rails for the P2P space. Finally, there are legitimate concerns that FedNow does not adequately protect against fraud, as it does not provide a solid method for recalling erroneous or fraudulent payments that is available when making payments by wire.

FedNow will likely change the face of bank to bank payments in the US, particularly with respect to business-initiated payments. But the FedNow system as currently imagined falls short of being a fully-integrated real-time payments network supporting a broad range of instant consumer, business and international payments use cases (both “push” and “pull”) that Europe has proven is possible. 

The US may still be waiting for its true solution to real-time payments.

Piret Loone is a contributor to the GeoEconomics Center and the General Counsel and Interim Chief Compliance Officer at Link Financial Technologies.

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SWIFT was founded in 1973 with 239 original members and over the years has grown to incorporate 11,696 banks sending more than 44 million messages around the world every day. But the core idea has stayed the same: Banks need a uniform and standard way to communicate with each other about transactions, and SWIFT is the answer. Every member gets a unique code—with details about country, location, and even bank branch. When a bank wants to transfer money to another bank, it simply enters the code through the SWIFT network, tells the other bank the amount, and then the actual money changes hands.

But here’s the rub—SWIFT is only a messaging service. It does not provide bank accounts or hold funds for banks in any capacity. The banks actually transfer the funds through a different entity. In order to send money across borders, individuals usually need to use a trusted network of banks, which settle transactions through a series of mutually held accounts. Think of SWIFT like a very elite Gmail, but once you tell your friend you want money, they have to switch over to Venmo to actually pay you. That’s why ‘banning’ a bank from SWIFT does not mean that the institution cannot get money from other banks. It just makes it more complicated and costly to do so.

In 2020, global businesses transferred approximately $23.5 trillion across borders—and it cost them over $120 billion to process the transactions. That’s like paying a tax the size of Morocco’s entire gross domestic product. Plus, these payments often take days to settle. It’s a lot of money for slow service, and that cost gets passed on to consumers.

How banks move money around the world

Interactive graphic by Sophia Busch, Alisha Chhangani, and Nancy Messieh.

What if SWIFT helped build something faster and cheaper? What if you could create a network that could combine both messaging and settlement and become a one-stop shop for international payments? That’s what China has been working on since 2016 with its Cross-Border Interbank Payments System, or CIPS, and most recently with its wholesale central bank digital currency (CBDC) experiment, the mBridge Project.

Both the CIPS and mBridge projects can be utilized for cross-border wholesale (meaning bank-to-bank) purposes. Importantly, the mBridge project is a cross-border CBDC initiative. The idea for both is that large sums of money could be sent between banks internationally, without using SWIFT for messaging or the dollar-based payments clearance hub, the Clearing House Interbank Payments System (CHIPS), for settlement. Already Hong Kong, the United Arab Emirates, and Thailand have partnered with the People’s Bank of China on the mBridge project, and in October 2022, they settled twenty-two million dollars across borders. This was the first successful test of cross-border bank-to-bank digital currency involving real money. As Atlantic Council research on CBDCs has shown, mBridge is just one of more than a dozen wholesale CBDC projects globally, many of which accelerated after Russia’s invasion of Ukraine and the Group of Seven (G7) sanctions response. Over time, if these systems are successful, they could create alternative financial transfer networks and provide a useful conduit for countries aiming to avoid the bite of Western sanctions.

SWIFT is not sitting idly by. The technology teams at its headquarters outside of Brussels are piloting their own cross-border CBDC system, partnering with major private banks and central banks including the Banque de France and the German Bundesbank. They are also experimenting with new, faster types of global transfers between banks. But transforming SWIFT from a messaging system to a new cross-border settlement system that can handle all types of assets (both traditional and digital) is going to take years and millions of dollars. Where to start?

The first step is for the board that governs SWIFT to give it the green light to innovate. As SWIFT members are eager to point out, they are a “private cooperative” and answer to their shareholders. But it’s not so simple. SWIFT is overseen by the National Bank of Belgium and the European Central Bank alongside the central banks of Italy, the Netherlands, Switzerland, Sweden, Canada, Japan, the United Kingdom, and the United States.

These countries have responsibility for providing SWIFT with strategic guidance and helping direct its technology planning. But so far no central bank has publicly come out in support of a major modernization effort. That’s a mistake.

It is understandable for Western central banks to feel sanguine about SWIFT’s current dominance. After all, the vast majority of global transactions currently touch SWIFT at some point. But look closer and you can see the ground shifting. Last month, Bangladesh agreed to pay a Russian company that is helping the country build a nuclear power plant in Rooppur. What’s interesting is how it is paid. Since Russian banks are largely banned from SWIFT, Bangladesh used a bank account at a Chinese bank that transferred yuan to Russia through CIPS. 

Bangladesh is not alone. Transaction volume on CIPS has more than doubled since 2020, and the number of direct and indirect participants in its network has also increased. More and more of these transactions will develop outside of SWIFT, and governments will understand less and less of what’s happening. Part of the motivation is geopolitical, given the way the dollar and euro are being weaponized against Russia. But a large part of it is simply technological: There are faster and cheaper ways to exchange money between countries, and if SWIFT does not figure out how to do it, someone else will.

Even if it is somewhat late to the game, SWIFT has a massive incumbent advantage. With its network of more than eleven thousand banks, SWIFT can build on a system that the world already relies upon instead of creating something new from scratch. China and Russia have to build a rival from the ground up and that takes time. SWIFT’s network is familiar and trusted: Think of it like an individual customer—why switch to a whole new bank if my current one is going to offer all the same features? If there are disputes, or mistakes, they can be settled in European courts.

Plus, SWIFT has something no one else can offer. It is the gateway to interacting with banks in New York, London, Tokyo, Paris, and Frankfurt. The argument for the new SWIFT is simple: If you want to be interoperable with the dollar, the euro, the pound, and the yen—which together are used in more than 85 percent of global transactions—this is the place to do it. If the G7 works in tandem to set technical and regulatory rules of the road for this new network it will, over time, become the de facto global standard, just like the original SWIFT of the 1970s.

The new SWIFT will have to do multiple things at once: communicate and settle between thousands of banks all over the world, find a way to transfer traditional commercial bank money as well as money on a blockchain, and do it all before a network of regional systems springs up to challenge its effectiveness and increase the fragmentation of money and finance.

Doing this right requires a massive investment in innovation from the Western banks that guide SWIFT. The United States is going to have to spend money and bring its own technological solutions to the table. There are major risks involved with faster settlements, including the need for adequate liquidity to complete the transaction, and it will require new regulations to ensure the system is trusted and secure. The recent Silicon Valley Bank crisis, accelerated by a social media–fueled bank run, should provide a lesson on the perils of moving money quickly in the digital age. And while SWIFT rebuilds, it will need to maintain its current operations. Remodeling a house while living in it is a tricky proposition.

But the bigger risk is doing nothing. This year SWIFT will turn fifty. For decades, SWIFT was the pace setter in the race for the future of money. Its technology connected the world’s financial institutions and helped ensure a system with Western protections on rule of law, privacy, and anti-money laundering provisions became the global standard. But all that is changing. If the United States and its allies want to create and promote the technological standard for the decade ahead while ensuring the effectiveness of sanctions, it’s time to start moving, well, more swiftly.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former IMF advisor.

Ananya Kumar is the associate director of digital currencies at the Atlantic Council’s GeoEconomics Center.

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Over the past year, bank deposits fell by almost $1 trillion while assets under management (AUM) of the MMFs increased by $700 billion. MMFs were growing before the banking turmoil, too: AUM has increased by $1.7 trillion since the beginning of 2020, to $5.7 trillion at present. Since MMFs largely invest in US Treasury bills, their status as a safe and attractive alternative to bank deposits would be threatened if the national debt ceiling stalemate cannot be resolved in time. A debt ceiling breach would put in doubt the government’s ability to meet its obligations, as soon as June 1. This is known as the X-date when the Treasury Department will have exhausted all extraordinary measures to avoid breaching the $31.4 trillion debt ceiling. Even if the stalemate is resolved at the last moment, as market participants currently expect, the increase in the probability of government default would elevate uncertainty and further unsettle financial markets which have already been under stress. The tail-end risk of a messy and prolonged debt ceiling stalemate is higher this time around than previously—and money markets will be the first to react if a deal isn’t reached in time.

Why money market funds are at risk

MMFs are vulnerable to disruptions in the Treasury market since they hold a lot of Treasury bills. In particular, government MMFs—with $4.4 trillion in AUM—split their portfolios almost evenly between Treasury bills and lending to the Fed via the Overnight Reverse Repo facility. Under this facility, MMFs can lend money to the Fed on an overnight basis, taking US Treasury securities as collateral and agreeing to sell them back at predetermined rates. The Fed reserve repo facility has grown substantially in recent years, reaching $2.2 trillion in volume at present.

As the X-date approaches, one-year US sovereign Credit Default Swap (CDS) spreads (equivalent to the insurance premiums investors pay for protection against default) have jumped to more than 160 basis points—a record high compared to less than 20 basis points during normal times. That exceeds the CDS spreads for Mexico, Brazil and Greece. Investors have also avoided T-bills maturing right after the X-date, pushing up their yields. For example, at the latest auction on May 4, yields on one-month T-bills maturing on June 6 jumped to 5.76 percent, or 240 basis points higher than two weeks ago. Such a sharp and abrupt increase in yields has reduced the prices of fixed income instruments like T-bills, leading to mark-to-market losses at MMFs. Depending on their portfolio composition and risk management practices, some MMFs could suffer losses noticeable enough to discomfort their clients who expect stable values of these funds.

Furthermore, if the debt ceiling is not raised in time to avoid default, the US credit rating would be downgraded to Restricted Default (RD) and affected Treasury securities would carry a D rating until the default is cured. Even if the government prioritizes the servicing of its debt ahead of other obligations to avoid default—a politically controversial move—that would not be consistent with an AAA rating. One major agency, S&P, already downgraded the US in 2011.

In short, possible mark-to-market losses and credit downgrades of Treasury securities, the main assets held by MMFs, would generate anxiety among MMF clients, probably prompting some to move their money elsewhere. (Much of it might flow to the top banks, further accelerating the consolidation of the US banking system.) While any outflow could be dampened to some extent by the gating arrangements and liquidity fees employed by MMFs to manage the outflow in an orderly way, this would nevertheless heighten uncertainty and a sense of nervousness in financial markets already struggling to cope with the regional banking crisis, high interest rates, and a credit crunch. Adding a run on MMFs to heighten market turmoil might trigger a more severe recession than hitherto expected. For that reason, the negative financial and economic impacts of the current debt ceiling stalemate could be more substantial than those of the previous episodes in 2011 and 2013.

Uncertainty at just the wrong time

MMFs can respond to the uncertainty surrounding the status of Treasury bills after the X-date by lending more to the Fed through the reverse repo facility, whose daily volume could rise substantially in the weeks ahead. However, the more MMFs lend to the Fed, the more liquidity is being withdrawn from the financial system, compounding the effects of Quantitative Tightening (QT) which the Fed has been implementing since June 2022 to reduce its holding of government securities by $95 billion per month. This would make it more difficult to assess the overall effects of the Fed’s tightening policy stance—both for the Fed itself and for market participants, elevating uncertainty about future economic prospects.

The political wrangling over the national debt ceiling has heightened uncertainty at the wrong time and is helping to raise the odds of a severe recession. Beyond the near-term outlook, the recurrence of the debt ceiling “mini crises” would erode the reliability, predictability, and trustworthiness of the US government—possibly causing it to eventually lose its AAA rating and raising its funding costs. More fundamentally, the practice of using the debt ceiling as a political tool to change or terminate federal programs approved by previous Congresses reflects bad governance in the US—notwithstanding the fact that the US public debt/GDP ratio is too high and needs to be reduced over time. The inability of the US to adopt a sustainable fiscal policy in an orderly manner will exact an increasingly noticeable cost by diminishing the efficiency and credibility of the US government, with negative implications for the whole economy.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post The US debt ceiling stalemate threatens money market funds—and financial stability appeared first on Atlantic Council.

Commentators have urged major countries to clearly identify the high-tech areas which require heightened government control to safeguard national security, and to ensure that, as Wolf writes, “security-oriented interventionism should be as precise and non-protectionist as possible, with a view to continuing to gain from the economies of scale granted by cross-border trade.”

Those concerns and proposals are well intended but will likely remain aspirational until policymakers can come up with economically credible and politically acceptable policies to deal with the root causes of fragmentation. The two most important are the resentment and resistance of the people left behind by globalization and the crisis of trust between major countries.

Globalization won’t work until we assist those left behind

Globalization has significantly lifted overall economic growth and helped many emerging market countries develop, bringing hundreds of millions of people out of poverty, but it has had a mixed impact in developed countries.

In developed economies, globalization has greatly benefitted consumers, owners of capital, and technologically skilled workers while depressing wage growth, exacerbating income inequality, and displacing low-skilled workers. It has hollowed out manufacturing sectors and communities which used to be the bedrock of the middle class and social stability. The numerous so-called losers have become the springboard for populist political movements that are pushing back against globalization. Some of the ire against globalization mistakes the true cause of job loss—technology has played a bigger role than trade—but that doesn’t change what needs to be done.

It is wrong-headed to blame the dismal outcome in developed countries on globalization. Instead, the blame should be put on the failure of national efforts to educate, train, and generally prepare workers to be able to compete internationally in a technologically driven world. In particular, many developed countries have implemented trade adjustment assistance (TAA) programs when they concluded free trade agreements to mitigate labor displacement impacts. In the US, the TAA program was launched in 1962. However, TAA programs, especially in the US, have been grossly inadequate, not well conceived and poorly executed, difficult for intended beneficiaries to access, and generally ineffective.

The US TAA program focused in its earlier years on workers able to document their displacement by trade with countries that had a free trade agreement with the US. It was later expanded to cover the impact of outsourcing—but it was always inadequate relative to the scale of the problem. In the US, 8 million manufacturing jobs were lost from a peak of 19.5 million in 1979 to a trough in 2010.

Only about a third of manufacturing workers who were displaced between 2001 and 2008 were eligible to apply for TAA benefits (including income assistance to extend unemployment benefits for up to 130 weeks and training for up to one year). Of those who applied, about one third actually received benefits.

Inadequate as it was, the US TAA program was better than nothing. Sadly, it was terminated in July 2022. By contrast, the European equivalent program has been expanded into the European Globalization Adjustment Fund to deal with all displacement effects of globalization. Active labor market adjustment programs in Europe have been much better funded than in the US—for example Germany spends 0.66% of GDP and France spends 0.99 percent, while the US spends only 0.11 percent. While Europe has done better than the US, it has not done nearly enough either. And its programs have been criticized as “narrow, piecemeal… hard to access at scale” and “reactive”.

Until there are credible efforts in developed countries to enable the people left behind by globalization and technological changes to participate in the benefits of inclusive growth, popular resentment and resistance to open and free trade will persist, especially in the US—leading to more protectionism, not less.

How to deal with the crisis of trust

The world is also suffering from a crisis of trust. As ably demonstrated by the NYT’s Thomas Friedman, that is especially true between the US and China and it is pushing them further apart. This collapse of trust has several dimensions. As China and several other emerging market countries have developed their economies, they want to reshape the rules facilitating international relations, including trade, which were established decades ago by developed countries. Today, those developed countries account for less than half of the global economy. The US as an incumbent leading power has viewed these developments with an increasing sense of national insecurity and has tried to protect its position.

Furthermore, international trade in goods has progressed from benign “shallow goods” like textile and garments, footwear, and similar consumer items to high-tech “deep goods” like electronics/IT and telecom enabled by semiconductors which have dual uses—civilian and military. Naturally cross-border trade and investment in such high-tech dual use goods have become areas of competition and conflict between the two superpowers.

Fundamentally, the problem is the absence of a mutually agreed framework allowing for the peaceful coexistence between two different and largely incompatible political and economic systems—represented by the US and China. Clearly the postwar institutions, especially the World Trade Organization, have shown signs of fractures and dysfunction, and need to be changed. Until the issues causing the crisis of trust are addressed, it is futile to simply call for international cooperation to restore the practices of global open free trade.

As the world becomes more fragmented politically and economically, the costs will mount and the risk of military conflict will rise. There will be calls to reverse such a dangerous trend. The way to do that is to address domestic challenges and build more inclusive economies in order to create the necessary internal political support for international cooperation. This will allow countries to figure out how to reconcile their different political and economic systems. The fact that these two challenges are interrelated makes their solutions much more difficult to conceive and implement. But there is no alternative but to try.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post The root causes of geopolitical fragmentation appeared first on Atlantic Council.

ISSUE BRIEF

Commercial opportunities in space-based technologies are expanding rapidly. From satellite communications and Earth observation to space tourism and asteroid mining, the potential for businesses to capitalize on these emerging technologies is vast and known as “NewSpace.”¹

The NewSpace model is important for governments to understand because the dual-use nature of space, specifically its growing commercialization, will influence the types of space-based technologies that nations may leverage, and consequently, impact their national security paradigms. By capitalizing on the private sector’s agility and combining it with the essential research efforts and customer role played by the public sector, the NewSpace industry can play a critical function in addressing current and future national security challenges through public-private codevelopment.

As the NewSpace industry expands, the role of government is evolving from being the primary developer and operator of space assets to facilitating their commercialization, while still prioritizing key advancements. US and allied governments can capitalize on this competitive landscape by strategically investing in areas that align with their national security objectives. However, it is crucial for them to first understand and adapt to their changing roles within this dynamic environment.

Indeed, the benefits of the burgeoning NewSpace industry extend beyond the United States. International collaboration and competition in this area can lead to faster technological advancements and economic gains. The global NewSpace landscape is driving down costs, increasing access to space, and fostering innovation that can improve not only economic well-being, but also impact national security models.

To that end, this memo will examine the broad state of the space market, discuss the industry drivers, and propose recommendations for US and allied policymakers as they consider future government investments in those enabling space-based activities that support wider national security ambitions.

The commercial context

In recent years, the space industry has undergone significant commercialization (NewSpace) in which governments have partnered with private companies and invested more into the commercial space sector. NewSpace companies often carry many of the following characteristics.²

Figure 1: Characteristics of NewSpace Companies

NewSpace contrasts with the historical approach to space-based technologies, which typically involved a focus on standardization to ensure the reliability and quality of space components. This standardization was (and still is) essential for the safety of manned space flight, the longevity of systems, and the overall success of missions. Despite the increased collaboration between the public and private sectors, the failed January 2023 Virgin Galactic launch in the United Kingdom, the failed March 2023 Mitsubishi H3 launch in Japan, and the failed June 2022 Astra launch in the United States serve as clear reminders of the challenges associated with NewSpace technology.³

Today, when considering who is spending what on space-based technology research, US and allied governments can be viewed more as customers than as creators. This is in stark contrast to former US President John F. Kennedy’s famous 1962 speech launching the Apollo program, which put NASA at the forefront of driving the necessary technology and engineering needs.⁴ Indeed, the capital flows of research and development (R&D) from the US government relative to the private sector have shifted significantly since the era of Sputnik (1957), a pattern that also is evident across many allied nations (see Figure 2).⁵

Figure 2: Ratio of US R&D to gross domestic product, by source of funds for R&D (1953-2021)

For US space technology, this financial shift from public sector to private sector is arguably no surprise given the findings of a 2004 presidential commission on US space exploration, which recommended that:

As a result of the commission’s findings, Congress created the Commercial Orbital Transportation Services Program, which sought to create new incentives to support the privatization of both upstream and downstream space activities.⁷ In short, the aim of this legislation was to create market forces that would enhance innovation while driving down costs through competition.

To do this, a new approach was developed to shape the relationship between NASA and its private contractors. Instead of being a supervisor, NASA became a partner and customer of these companies. This shift was reflected in the change of contract type, replacing cost-plus procurement with fixed-price payments for generic capabilities such as cargo delivery, disposal, or return, and crew transportation to low-Earth orbit (LEO).⁸ As a result, the risk was transferred from NASA to private firms, leading to less intensive government monitoring of cost-plus contracts and more encouragement of innovation.

Ripple effects

In recent years, the European Space Agency (ESA) has also prioritized commercialization activities. This, too, was an outcome of political and economic pressure to rethink European space policy to provide products and services for consumers, with a specific focus on downstream space activities. This policy shift toward greater commercialization was driven, in part, by those structural changes (i.e., competition) emerging from the United States (NASA).⁹

Likewise, in India—following a 2020 change in Indian space policy—private firms are no longer only suppliers to the government, but the government is now supporting and investing in them, similar to the NASA model.¹⁰ These and other shifts in public policy have shaped much of the market we have today.¹¹

However, this market arguably represents a challenge to government control over NewSpace firms and their technologies. NewSpace companies operate with more agility and flexibility than traditional government-led programs.¹² This rapid pace of innovation and commercial competition can make it difficult for governments to keep up with regulatory frameworks and oversight. Additionally, the increasing role of the private sector in space activities is arguably leading to a diffusion of state control, making it more challenging for governments to ensure the responsible use of space and manage potential security risks associated with dual-use technologies. Therefore, governments should look to partner, co-develop, and invest in NewSpace firms as alternative ways to influence the sector. Such an approach carries impacts not only on public-sector capital flows but also on national security paradigms.

The global space market

The space industry is a rapidly growing market that can bring about both commercial and national security benefits: the total sector was valued at $464 billion in 2022 and is expected to reach around $1.1 trillion by 2040, with a projected compound annual growth rate (CAGR) of around 7 percent.¹³ Of today’s total market, the commercial sector accounts for around 75 percent.¹⁴ To put this in perspective, the 2021 global aerospace industry saw the top ten earning companies generate a combined revenue of $417.15 billion.¹⁵ Breaking this down further, the United States is currently the largest market for both public and private space activity, holding a 32 percent market share, while Europe and the United Kingdom hold a combined 23 percent.¹⁶

However, Asia has experienced the most significant growth in this market over the last five years and now holds 25 percent of the market share.¹⁷ In terms of satellite launches, China has been the most active country in the region, with a total of sixty-four launches in 2022, placing it behind only the United States, which launched 87 times that year.¹⁸ Trailing China is India, which deployed over fifty satellites across four separate launches in 2022.¹⁹

In China and India alike, commercial firms are supported by both government R&D and public programs designed for national needs (including requisite contracts), as well as mature commercial markets that demand advanced satellite systems. What this translates to is an upstream market that relies on government funding to thrive, while the downstream market is more evenly distributed and does not require significant upfront investment or government contracts to sustain itself. This downstream market is currently driven by NewSpace demand for connectivity and location-based services, and its growth is influenced by demographic and regional economic trends, as well as government efforts to close the digital divide as governments finance satellite connectivity.²⁰

Challenges to and opportunities for NewSpace industry growth

The key challenges to NewSpace industry growth are the regulatory landscape and access to financing. This is evidenced by the European NewSpace ecosystem where, at a structural level, regulatory frameworks do not facilitate the scaling of the financial resources (public and/or private) necessary to match the political and commercial intent (demand) espoused by European political and business leaders. This mismatch between demand and financial firepower results in slower development and uptake of NewSpace opportunities despite significant engineering and entrepreneurial talent residing within Europe.²¹ Figure 3 shows the breakdown of global government investment in space technologies between 2020 and 2022 in real terms, and figure 4 shows how such expenditure relates to GDP, while figure 5 shows the global private sector space investment breakdown, which highlights a significant role for venture capital (VC) firms.²²

Noting that the United States accounts for almost half of the world’s available VC funds, while Europe only accounts for around 13 percent, it is evident that the sheer scale of investment from the United States enables NewSpace to flourish within the US market, while many allies and partners struggle to access private funding.²³ For Europe to embrace the NewSpace model, conditions must foster timely connections between both public and private finance and NewSpace opportunities.²⁴ That said, given the deep technology nature of NewSpace, and the long time horizons for venture capitalists to see a return, financing this sector writ large remains a challenge.

Figure 3: Government expenditure on space programs in 2020 and 2022, by major country (in billions of dollars)

Figure 4: Government space budget allocations for selected countries and economies (measured as a share of GDP in 2020)

Figure 5: Value of investments in space ventures worldwide from 2000 to 2021, by type (in billion U.S. dollars)

In addition to attracting financing, the business models of NewSpace companies rely on foundational technologies—often resourced by governments—to be in place. Such technologies include: access to low-cost launch capabilities; conditions for in-space manufacturing and resource extraction for space-based production; foundational research to support space-based energy collection, combined with reliable radiation shielding; and debris mitigation efforts in an increasingly busy orbital environment. This indicates that there is a persistent role for governments to actively invest in deep technologies to help foster the commercial markets that NewSpace can bring about. Only governments have the financial risk tolerance (a tolerance that takes one beyond risk and into uncertainty) to undertake such endeavors.

While each of these foundational technologies has limited profitability, together they form a self-sustaining system with enormous potential for profit when subsequently exploited through relatively cheap NewSpace technologies. Indeed, the economics of human space activities often mean that the whole is greater than the sum of its parts. To that end, one might envisage how a potential self-reinforcing development cycle would support the space economy, with cheaper and more frequent rocket launches enabling short-term tourism and industrial and scientific experimentation, leading to demand for commercial space habitats, which would then create demand for resources in space. However, it is doubtful that this path will be easily achieved without government support.²⁵

In addition to traditional space-based areas of monitoring, observation, and communications, the sectors listed below offer further commercial opportunities NewSpace is likely to exploit.²⁶

Figure 6: Commercial opportunities for NewSpace companies

Allied advancements in NewSpace

While the above table represents a broad perspective, many US allies and partners are already at the leading edge of aggregating NewSpace technologies to take advantage of growing markets.

In Denmark, the government and private commercial actors are working on project BIFROST, with plans to launch in early 2024. BIFROST is a satellite-based system for advanced on-orbit image and signal analysis that aims to demonstrate artificial intelligence-based surveillance from space. The satellite will have versatile payloads on board to provide information on applied AI in space for Earth-observation missions—detecting ships, oil spills, and more. The main purpose of the mission is to establish: “a platform in space for gaining further experience in AI-based surveillance and sensor fusion using multiple on-board sensors. The satellite will also test means of communication between different satellites to achieve real-time access to intelligence data and demonstrate the feasibility of tactical Earth observation.”²⁷ Additionally, the mission will evaluate the capability of changing AI models during its lifespan to improve the surveillance system.²⁸

In Sweden and Germany, OHB (a German-based European technology company) is working with Swiss start-up ClearSpace SA for its space debris removal mission, ClearSpace-1. OHB will provide the propulsion subsystem and be responsible for the complete satellite assembly, integration, and testing. The mission is aimed at demonstrating the ability to remove space debris and establishing a new market for future in-orbit servicing. The mission will target a small satellite-sized object in space and be launched in 2025. Carrying a capture system payload—“Space Robot,” developed by the ESA and European industry—it will use AI to autonomously assess the target and match its motion, with capture taking place through robotic arms under ESA supervision. After capture, the combined object will be safely deorbited, reentering the atmosphere at the optimum angle to burn up.²⁹

In Belgium, entities such as Interuniversity Microelectronics Centre, aka imec, are at the leading edge of developing nanotechnology that is being commercialized for space. Imec’s Lens Free Imaging system is a new type of microscopic system that is not dependent on traditional optical technologies and fragile mechanical parts. Instead, it operates through the principle of digital holography, which allows images to be reconstructed afterward in software at any focal depth. This eliminates the need for mechanical focusing and the stage drift that occurs during time-lapse image acquisition, making it a more robust and compact system suitable for use in space.³⁰ Imec is also perfecting manufacturing in space leveraging microgravity, which minimizes “gravitational forces and enables the production of goods that either could not be produced on Earth or that can be made with superior quality. This is particularly relevant for applications such as drug compound production; target receptor discovery; the growth of larger, higher-quality crystals in solution; and the fabrication of silicon wafers or retinal implants using a layer-by-layer deposition processes,”³¹ all of which are enhanced in microgravity.

In the United Kingdom, collaboration between the agricultural and space sectors seeks to enhance societal resilience through more efficient and self-sustaining crop production. Research entities such as the Lincoln Institute for Agri-Food Technology is commercializing technologies on LEO satellites to improve the spatial positioning of robots in agriculture to enhance their precision weeding, nutrient deployment, and high-resolution soil sampling capabilities.³² Furthermore, UK start-ups such as Horizon Technologies have developed novel ways of creating signals intelligence focusing on specific parts of the electromagnetic spectrum, allowing the company to leverage meta data for both commercial and government clients. An important component to Horizon’s success is the reduction in productions costs combined with accessibility to space launches.

Across Europe, the ESA is conducting R&D to harness the sun’s solar power in space and distribute that energy to Earth. Under Project Solaris, space-based solar power is harvested sunlight from solar-power satellites in geostationary orbit, which is then converted into microwaves, and beamed down to Earth to generate electricity. For this to be successful, the satellites would need to be large (around several kilometers), and Earth-surface rectennas³³ would also need to be on a similar scale. Achieving such a feat would enhance Earth’s energy resilience, but would first require advancements in in-space manufacturing, photovoltaics, electronics, and beam forming.³⁴

The United States also partners with allied firms on foundational research to support upstream and downstream NewSpace technologies. The Defense Advanced Research Projects Agency (DARPA) Space-Based Adaptive Communications Node (BACN) is a laser-enabled military internet that will orbit Earth. The Space-BACN will create a network that piggybacks on multiple private and public satellites that would have been launched regardless, using laser transceivers that are able to communicate with counterparts within 5,000 km. The satellite network will be able to offer high data rates and automatic rerouting of a message if a node is disabled, and it will be almost impossible to intercept transmissions. DARPA is working with Mynaric, a German firm, which designs heads for Space-BACN, and MBryonics, an Irish contractor, which uses electronic signals to alter light’s phase, with the aim of having a working prototype in space in 2025.³⁵

While US allies and partners offer a plethora of specific space-based commercial opportunities, the criteria for successful development remains constant: the combination of multiple technologies, reduction in production and maintenance costs, and safe access to operate in space. With that in mind, the US government can play two roles to help further expand this market:

• Act as a reliable, adroit customer who can issue contracts quickly (noting that many NewSpace firms do not carry large amounts of working capital and therefore cannot wait months for contractual confirmation).
• Continue to invest in deep technologies and develop those foundational upstream building blocks that NewSpace will seek to leverage.

Notably, however, some US executives are deliberately registering firms in allied jurisdictions and conducting all research and patenting there, too, to avoid the bureaucratic challenges of dealing with US International Traffic in Arms Regulations (ITAR) and, specifically, the tight controls associated with exporting NewSpace dual-use products for commercial use. This suggests two things: The first is that, while allies may lack financial firepower, they have jurisdictional strengths that can attract NewSpace firms to their shores; and the second is that US ITAR controls impacting dual-use technologies need to be updated to enable NewSpace firms to thrive. If such companies are blocked from selling to allied and partner markets, then the very model of dual-use becomes diminished and governments will be unable to benefit from the competition and iterative technology development that spill over from such commercial settings into the public sector. As Figure 2 shows, the US government does not currently invest enough in technologies relative to the private sector to enable such a stringent export controls program in the context of NewSpace. The two policies are incongruous: limited government R&D spending and excessive export controls.

Recommendations for US and allied policymakers

Taking all the above into account, US and allied policymakers should focus on enhancing regulations and financial resources. Governments need to continue to create the conditions for the NewSpace market to prosper by playing the roles of a nimble customer and deep technology investor, enabling NewSpace companies to quickly access government contracts, while also helping mature next-generation space-based technologies. This helps such companies grow, become competitive, and enhance the sector. Specifically, US and allied governments should consider the following.

Recommendation #1: US and allied governments must continue to provide a stable and progressive regulatory environment for the NewSpace industry. This includes providing a clear and predictable legal framework for commercial space activities, as well as ensuring that regulations are flexible and adaptable to the rapidly changing technology and business models of the industry. ITAR is one area that needs urgent reform, given the dual-use nature of many new space technologies. This problem is exemplified by US talent establishing next-generation space companies in Europe to avoid overly controlling and outdated ITAR constraints, according to interviews with industry participants.³⁶ Given the cross-cutting nature of ITAR, the US National Security Council should examine ITAR rules and their utility for dual-use technologies impacting NewSpace, assessing such rules from a holistic perspective covering defense, trade, and economics.

Recommendation #2: US and allied governments should maximize coinvestment with industry in R&D to support the codevelopment of new technologies and capabilities for both the public and private sectors. This includes funding for research into new propulsion systems, as well as materials and nanotechnologies that will enable more cost-effective and reliable access to space. To support such funding—and noting the challenge of private investment finding its way to allied entrepreneurs and engineers—the US government should consider establishing with allies and partners a new multilateral lending institution (MLI) focused on space technology to provide funding and other forms of support to companies in the commercial space industry. The MLI or “space bank” could provide loans, grants, loan guarantees, insurance, and other forms of financial assistance to companies engaged in commercial space activities, helping to mitigate the high costs and risks associated with space ventures. This could be modeled after any of the MLIs of which the United States is already a member.³⁷

Recommendation #3: Furthermore, the US government could provide tax credits and grants to NewSpace firms (US and allied) based on certain provisions that support wider government objectives—such as manufacturing locations, supply network participants, and expected labor market impacts.

Any such credits and grants should be complemented by leveraging a suitable financial vehicle to conduct direct investment to take equity in NewSpace firms both at home and abroad. Crucially, this should be conducted without the government owning any of the intellectual property, as this impacts export opportunities and thus undermines the dual-use model. Such an effort would go some way in minimizing the socialization of risk and the privatization of rewards, and could be a role for either In-Q-Tel and/or the Department of Defense’s new Office of Strategic Capital.³⁸

Recommendation #4: To further support such an approach, the US government might create a national space co-R&D center of excellence for government and industry to work hand in glove to drive the codevelopment of breakthrough technologies, taking inspiration from a conceptually similar UK model of designing government contracts to address specific problems and awarding them to capable small companies.³⁹

Conclusion

NewSpace is making significant strides in developing cost-effective and innovative technologies for both public- and private-sector customers. This is important because it drives economic growth and can enhance national security through the delivery of new, cost-effective, and resilient technologies. Indeed, the NewSpace market is unquestionably growing, and governments, including the United States and its allies, have a critical role to play in shaping this market by acting as both customers and codevelopers with NewSpace firms. Such an approach allows governments to exert a degree of influence in the sector without constraining its creativity. However, this way of working may carry wider implications for national security paradigms in terms of dual-use technologies and public/private partnerships.

While use cases for NewSpace are almost limitless, multiple US allies and partners are already forging niche NewSpace areas of excellence that can bring about a degree of comparative advantage. To make best use of such opportunities, the United States should:

• Keep its market as open as possible to encourage competition and thus drive innovation.
• Provide specific programs and locations for codevelopment between allied academia, government, and industry without taking any intellectual property.
• Act as a nimble customer.
• Ensure there is a pragmatic balance between regulations that protect US space interests (i.e., ITAR) and those that unleash innovative dual-use endeavors.
• Create new financial instruments with allies through an MLI bank to support the financial investment needed to help the private sector commercialize the next generation of breakthrough space-based technologies.

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About the author

Robert Murray
Senior Lecturer and Director, Master of Science in Global Innovation and Leadership Program, Johns Hopkins University

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The United States’ vast network of alliances and partnerships offers a competitive advantage—this is especially evident in outer space. Often characterized as a global commons, space holds value for all humankind across commercial, exploration, and security vectors. As technological advancements trigger a proliferation in spacefaring nations, the United States and its allies and partners are confronted with new challenges to and opportunities for collective action.

This series examines how US space strategy can recognize the comparative advantages of allies and partners in space and best harness allied capabilities:

Robert Murray examines the state of the commercial space market and key drivers, considering how government investments in enabling activities can support broader national imperatives.

Tiffany Vora analyzes current US space exploration goals and the capabilities that will be critical to achieving them, highlighting arenas where US allies and partners are strongly positioned for integration.

Nicholas Eftimiades assesses the potential benefits to US national security offered by allied integration, identifying pathways for cooperating with allies and partners on their space capabilities.

The way forward for US and allied coordination in space

Several common themes emerge across this series. First, outer space is characterized by a transforming landscape and market. Commercial tech advancements—including the introduction of small satellites, advancements in Earth observation and asteroid mining, and the rise of space tourism—drive the development of what Murray terms the “NewSpace” market. The way in which the United States and its allies do business in space is changing, with the private sector leading in capability development and the government becoming the consumer. The burgeoning space sector, totaling $464 billion in 2022, is attracting allies and adversaries alike to invest in and expand their space operations. Strategic competitors recognize they can now target US and allied commercial and national security imperatives from space.

Second, this increasingly competitive environment further accentuates the value of alliances and partnerships in space. As Vora highlights, US and allied cooperation in space today rests on the Artemis Accords, which advances shared principles for space activity, and is a key mechanism for the international transfer of expertise, technology, and funding. The US Department of Defense also houses the Combined Space Operations Vision 2031, which offers a framework to guide collective efforts with several allies, and a host of collaborative exercises and wargames. Eftimiades describes the cross-cutting benefits of this collaboration: it alters the decision calculus for hostile actors, threatening a response from a coalition of nations; offers the ability to share capabilities, responsibilities, and geostrategic locations; and creates consensus in setting the norms for responsible space behavior. Current collective efforts in the space domain are limited, albeit expanding, considering the benefit allies and partners bring to the table.

Third, in order to promote stronger collaboration among the United States and its key allies and partners, it is necessary to address and overcome the barriers that stand in the way. Vora identifies protectionist policies and regulations that act as hurdles to the transfer of key technologies and information. Murray explains that lengthy government contract timelines, coupled with insufficient investment in technologies critical to NewSpace, hinder US and allied commercial advancement. Eftimiades argues that the United States has yet to articulate a strategy for space coordination, highlighting a lack in transparency with allies and partners on capability and data gaps.

The authors put forth ideas to pave the way forward for US and allied space development. Recommendations for the United States and its allies and partners include conducting gap analysis on where allied investments can complement existing US capabilities, establishing a “space bank” to support NewSpace actors, and formulating a US and allied strategy for space development, building upon the Artemis Accords. To maintain its competitive advantage in space, the United States cannot go at it alone.

Read the full papers:

The NewSpace market: Capital, control, and commercialization

By Robert Murray

Beyond launch: Harnessing allied space capabilities for exploration purposes

By Tiffany Vora

Integrating US and allied capabilities to ensure security in space

By Nicholas Eftimiades

Acknowledgements

To produce this report, the authors conducted a number of interviews and consultations. Listed below are some of the individuals consulted and whose insights informed this report. The analysis and recommendations presented in this report are those of the authors alone and do not necessarily represent the views of the individuals consulted. Moreover, the named individuals participated in a personal, not institutional, capacity.

• Allen Antrobus, strategy director, air and space, Serco
• John Beckner, chief executive officer, Horizon Technologies
• Dr. Mariel Borowitz, associate professor, Sam Nunn School of International Affairs, Georgia Institute of Technology
• Steven J. Butow, director, space portfolio, Defense Innovation Unit
• Chris Carberry, chief executive officer and co-founder, Explore Mars
• Darren Chua, EY space tech consulting partner and Oceania innovation leader, Ernst & Young Australia
• Kenneth Fischer, director for business development North America, Thales Alenia Space
• David Fogel, nonresident senior fellow, Forward Defense, Scowcroft Center for Strategy and Security, Atlantic Council
• Dr. Yasuhito Fukushima, senior research fellow, National Institute for Defense Studies, Japan
• Peter Garretson, senior fellow in defense studies, American Foreign Policy Council
• Sqn Ldr Neal Henley, chief of staff, Joint Force Space Component, UK Space Command
• John Hill, deputy assistant secretary of defense for space and missile defense, US Department of Defense
• Komei Isozaki, Japan Chair fellow, Hudson Institute
• Mat Kaplan, senior communications adviser, The Planetary Society
• Cody Knipfer, director of government engagement, GXO, Inc.
• Dr. Jerry Krasner, independent consultant, US Department of Defense
• Massimiliano La Rosa, director, marketing, sales, and business, Thales Alenia Space
• Ron Lopez, president and managing director, Astroscale U.S. Inc.
• Douglas Loverro, president, Loverro Consulting, LLC; former deputy assistant secretary of defense for space policy, US Department of Defense
• Russ Matijevich, chief innovation officer, Airbus U.S. Space & Defense, Inc.
• Jacob Markish, vice president, strategy and corporate development, Thales North America
• Brig Gen Bruce McClintock, USAF (ret.), lead, RAND Space Enterprise Initiative, RAND Corporation
• Col Christopher Mulder, USAF, active-duty officer, US Air Force; 2020-2021 senior US Air Force fellow, Scowcroft Center for Strategy and Security, Atlantic Council
• Dr. Eliahu Niewood, vice president, Air and Space Forces Center, MITRE Corporation
• Dr. Jana Robinson, managing director, Prague Security Studies Institute
• Audrey Schaffer, director for space policy, National Security Council
• Paul Szymanski, director, Space Strategies Center
• Dr. Christian Willmes, doctor of philosophy, University of Oxford

Generously Sponsored By

About the authors

Robert Murray
Senior Lecturer and Director, Master of Science in Global Innovation and Leadership Program, Johns Hopkins University

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Tiffany Vora

Nonresident Fellow

GeoTech Center

Space Space Security

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Nicholas Eftimiades

Nonresident Senior Fellow

Forward Defense Scowcroft Center for Strategy and Security

China Intelligence

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Accra is hardly alone in its enthusiasm for gold. Since 2008, emerging-market and developing countries have more than doubled their central bank gold reserves, led by Russia, China, Turkey, and India.

The end of gold demonetization?

Developing and emerging-market countries’ growing gold purchases have reversed a selloff in gold reserves—led by advanced economies—since the 1990s.

Starting in the mid-1940s, the Bretton Woods system linked most advanced economies’ currencies to gold, so treasuries and central banks accumulated large reserves to back them. But the system’s collapse in 1971 eliminated gold’s direct monetary purpose as a guarantor of currency value. Meanwhile, central banks’ success in controlling inflation in the late 1980s suggested that gold was no longer needed to rapidly raise capital for currency market interventions. And as interventions became less frequent, it became harder for central banks to justify large reserves in the 1990s.

Consequently, advanced-economy governments (which held 85% of all government-held gold in 1990) offloaded nearly one-fifth of their gold reserves from 1990 to 2007. Some, like the United Kingdom, swapped gold for foreign currencies. Others tried to get more creative: the Swiss government proposed establishing a foundation for Nazi-era victims with sale proceeds, although they eventually filled state coffers after voters rejected the idea. Apart from additional revenue, the sales offered practical benefits like reduced holding costs and lower exposure to gold’s notoriously high price volatility.

Emerging-market and developing economies largely followed advanced economies in demonetizing gold, though they had less of it to sell. Their gold reserves grew less than 10% during this period, even as their non-gold reserves expanded 25-fold.

Emerging markets’ new gold rush

What explains emerging-market and developing countries’ increased enthusiasm for gold since then?

First, the Global Financial Crisis weakened their confidence in the dollar-backed financial system’s stability—catalyzing a trajectory shift in gold purchases. In 2009, for example, China’s State Council announced that it had quietly expanded its gold stockpile by over 70% in previous years. Although China times its disclosures strategically—sometimes years apart—the announcement signaled an accelerated purchase program that persists today.

Second, the logic of returns may explain some diversification into gold. Years of rock-bottom interest rates on advanced-economy bonds increased the attractiveness of assets like gold, which can generate meaningful long-term returns. More recently, some central banks have reasoned that gold’s scarcity preserves its value as elevated inflation erodes Dollar- and Euro-denominated assets—although past returns suggest that gold is not an effective inflation hedge over shorter horizons.

Third, some countries have sought to reduce sanctions risk with gold reserves. Transacting with gold offers key advantages for sanctions evasion: anonymity, low traceability (especially if gold is mixed into alloys), and alternatives to Western financial centers where the US and its allies can more easily restrict trade flows. For example, Russia embarked on a major gold purchase program after US and EU sanctions for its annexation of Crimea in 2014. Since then, Russian entities have conducted gold-denominated transactions through hubs like Dubai to evade sanctions. Although gold’s bulkiness makes it an imperfect medium of exchange, several heavily-sanctioned countries have followed Russia’s lead in increasing gold’s share of foreign reserves.

Greater ambitions for gold

More broadly, countries with fractious US relations trust the dollar-backed financial system less, so it is unsurprising that gold purchases increase with geopolitical distance. Grouping countries by their degree of alignment with the US (represented by votes at the UN General Assembly, where “most aligned” states are in the top quarter of countries by voting alignment, “more aligned” are the next quarter, and so forth) shows that all but the “most aligned” countries have grown their gold reserves since 2008.

An important question is whether China and Russia will employ gold in their efforts to foster alternatives to the dollar—for example, by aiding the internationalization of the Chinese yuan. Outside of China, use of the yuan is hampered by Beijing’s capital account controls; foreign investors are reluctant to hold or trade yuan-denominated contracts without firmer guarantees of its convertibility. However, gold-backed yuan contracts could promise greater convertibility without requiring China to loosen capital controls. The Chinese government has already moved to promote the gold trade, establishing a yuan-denominated gold benchmark index in 2016 that makes it easier for Chinese market participants to exchange gold and influence prices, although further steps have been limited.

For now, emerging markets’ growing interest in gold is more a feature of the existing monetary system than a seismic shift away from it. Gold reserves still make up only 7% of emerging and developing countries’ reserves, and central banks may eventually decide that its clunkiness and price volatility are not worth the trouble. Diversifiers into gold believe that they can reduce their risks, improve their returns, or both. Whether these countries keep buying after inflation subsides will offer a clue into the staying power of gold’s appeal.

Phillip Meng is a Young Global Professional with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Central bankers, finance ministers, executives, and civil-society leaders are meeting at the International Monetary Fund (IMF) and World Bank Spring Meetings this week with an ambitious economic-reform and fiscal agenda. The talks come six months after IMF Managing Director Kristalina Georgieva told the world’s economic leaders to “buckle up and keep going” in the face of multiple financial crises stemming from the pandemic, Russia’s invasion of Ukraine, global debt distress, high inflation, and more.

Amid all the uncertainty, a parade of central bank governors and finance ministers are visiting the Atlantic Council on the sidelines of the meetings and getting together with our experts to decode what is—and is not—happening behind the meeting’s closed doors. Below are our experts’ takeaways from our convenings, which feature leaders such as World Bank Group President David Malpass, and insights as the meetings unfold.

The latest from Washington

• Three new ways to support Ukraine, from Poland’s finance minister
• Sovereign debt restructuring: The kitchen lights are on, but where’s the beef? 
• The UAE’s trade minister on the new multilateralism
• How Ukraine’s digital innovations will shape reconstruction
• Economic policymakers shouldn’t fall into the trap of complacency
• The IMF missed an opportunity to take on the US debt ceiling debate
• What the World Economic Outlook didn’t say
• Who’s first and what’s second is this week’s central debate
• Central banks shouldn’t use IMF projections as an excuse to get too loose again
• Inside the World Bank’s digital governance agenda
• Spain’s economy minister aims to fight ‘fragmentation’
• ‘Sustainability, resiliency, and inclusion’ must top the reform agenda, says Cameroon’s minister of economy
• Senegal’s economy minister: ‘the US private sector is missing’
• David Malpass: Today’s economic double whammy may slam development into reverse

Three new ways to support Ukraine, from Poland’s finance minister

As Russia’s war on Ukraine puts major stress on the Polish economy, Poland’s Minister of Finance Magdalena Rzeczkowska visited the Atlantic Council on Friday to outline three ways how Western partners and multilateral institutions can support Poland’s goal of increasing military and financial assistance to Ukraine:

1. The European Union (EU) should provide funds to Poland for covering Ukraine-related expenses. Rzeczkowska drew attention to the fact that Poland’s total Ukraine-related spending, including military equipment and refugee accommodation, amounts to 2 percent of Poland’s gross domestic product. But Poland has not received funding from the EU to cover those expenses. Poland plans to increase spending both on Ukraine’s military equipment and its own defense. “It’s something that needs to be done because Ukraine is fighting for our future and freedom”, she said.
2. Multilateral organizations should allocate more funding for Ukraine. Rzeczkowska said that Poland is “very engaged with the IMF and the World Bank” and praised the institutions for the “proper answer” to the war, a program that has helped maintain Ukraine’s macro financial stability. Poland pushed the IMF to allocate its funding package for Ukraine, which will close Kyiv’s immediate budgetary needs and “give financial stability to Ukraine for four years.” Moreover, the European Bank for Reconstruction and Development has provided humanitarian aid to Ukrainian refugees in Poland. Rzeczkowska said that “Poland also wants to contribute to the fund which was created for Ukraine” by the European Investment Bank.
3. The Three Seas Initiative portfolio should include Ukraine’s reconstruction. Rzeczkowska believes that the Three Seas Initiative—a forum supported by the Atlantic Council—“is an important instrument for leveraging Central and Eastern European countries and building the North-South axis of infrastructure.” She argued that apart from its regular infrastructure-building and digitization agenda, the Three Seas portfolio should also include Ukraine’s reconstruction. While the Initiative struggles with the financing of projects and often requires compromises from member states, Rzeczkowska said it can be a strong and resilient instrument for Ukraine’s reconstruction and future growth of Europe.

—Maia Nikoladze is an assistant director with the Economic Statecraft Initiative in the Atlantic Council’s GeoEconomics Center.

Sovereign debt restructuring: The kitchen lights are on, but where’s the beef? 

As the Spring Meetings of the IMF and World Bank are winding down, more details are beginning to emerge from the closed-door meetings that were held on the touchy question of sovereign debt restructuring. The atmosphere around the new Global Sovereign Debt Roundtable appears to have been friendly and constructive, no doubt helped by the fact that Chinese officials were able to participate again in person. After all, despite extensive Zoom contacts over the past months, face-to-face meetings remain indispensable for finding a path through controversial, and possibly expensive, policy disagreements. 

The upshot is that the roundtable came to an agreement around several technical steps that could eventually facilitate the operation of the Group of Twenty (G20) Common Framework, but expectations for any concrete decisions or debt deals were (again) disappointed. Nevertheless, the areas of future work are concrete enough to suggest that progress on specific country cases may not be too far off. They include steps toward improving transparency around restructuring needs (where the IMF and World Bank would provide earlier insights into their debt sustainability assessments), a clarification of the role of multilateral development banks (MDBs), and further work on defining what constitutes comparable treatment of different credit classes. 

While China has not yet abandoned its demand that the World Bank and other MDBs share in any haircuts to official and private creditors, the latest signal from Beijing opens room for compromise, depending on the amounts of fresh concessional financing (and grants) that may be provided by multilateral lenders. One should of course not underestimate the capacity of international finance officials to make process look like progress, and it will be primarily up to China to demonstrate its willingness to help some of its poorest creditor countries back on its feet. 

China may still be hesitant to move fast, given that the long-overdue restructuring of Zambia’s debt could provide a hard-to-reverse model for the Common Framework. But there are now clear signs that the chefs are back in the kitchen, and one might hope that, with a few more ingredients, a palatable compromise may yet emerge.

—Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former IMF chief of staff.

The UAE’s trade minister on the new multilateralism

Economic fragmentation may be the hot topic at this year’s World Bank-IMF Spring Meetings, but that does not mean that all countries have lost faith in multilateralism. Just ask Thani Al Zeyoudi, the United Arab Emirates’ (UAE) trade minister. “While others talk about de-globalization,” he said at the Atlantic Council on Thursday, “we’re focused on economic expansion.” 

For Al Zeyoudi, that means establishing a wide network of trade partnerships from Israel to Indonesia, while liberalizing trade and foreign ownership regulations at home. The UAE’s aspirations to become a “global market” are vital to its economic health: With a post-hydrocarbon future on the horizon, the country is banking on finance, transport, and logistics as the foundation for future growth. But as we have heard throughout this week, the UAE is only one of a growing number of countries unconvinced by rising protectionism.

Countries in the Global South and their major hubs, like the UAE, have been some of the most vocal supporters of multilateralism. But this does not mean that these new champions are content with the trading order as it is. Al Zeyoudi argued that “there is a consensus that we need urgent reform for the multilateral trading system,” and his country has sought modernized trade mechanisms and new free trade agreements even as many of its partners pursue stricter trade controls. At this week’s meetings, we may see whether more countries heed his call.

—Phillip Meng is a young global professional at the Atlantic Council’s GeoEconomics Center.

How Ukraine’s digital innovations will shape reconstruction

Ukraine has emerged as an example of resilience against all odds, and on Thursday morning, Deputy Minister of Digital Transformation Alex Bornyakov discussed the digital infrastructure that will enable better outcomes for Ukrainians a year into the war. He was joined at the Atlantic Council by Mark Simakovsky, deputy assistant administrator at the US Agency for International Development’s bureau for Europe and Eurasia; Denelle Dixon, the CEO of Stellar Development Foundation; and Anatoly Motkin, president and founder of StrategEast. 

The panelists discussed the Diia app, which has become a hub for services such as education and skill improvement, health care, digital identification, and other government services. “We have shown through example how the interaction between the government and the citizen can be done in the twenty-first century, ” Bornyakov said.

The panelists emphasized the resilience of technology during the war, the role of the private sector (both domestic and international) in reconstruction and development, and the challenges of corruption and accountability. “The private sector will have to be induced to go to Ukraine,” Simakovsky said. “Ukrainians will have to accelerate the reform and have to ensure that the decentralization that happened before the war is going to continue.”

Both Dixon and Bornyakov spoke about the role of women in building resilient infrastructure for the future and how technology can bridge the existing gap. The panelists also discussed innovation in payments architecture, such as central bank digital currencies, as well as the role of cryptocurrency in Ukraine’s economy. 

—Ananya Kumar is the associate director of digital currencies at the Atlantic Council’s GeoEconomics Center.

Economic policymakers shouldn’t fall into the trap of complacency

During the IMF/World Bank Spring Meetings, some officials—in particular US Treasury Secretary Janet Yellen—have downplayed the risks and negative impacts of last month’s bank failures, repeating the mantra that major banking systems are healthy. While banking turmoil has indeed subsided, it is important to guard against being complacent about the threat of “further bouts of financial instability… [due to] stresses triggered by the tighter stance of monetary policy”—as the IMF pointed out in its Global Financial Stability Report.

Tellingly, the report estimated that almost 9 percent of US banks with assets between ten billion and three hundred billion dollars would become undercapitalized (with their Common Equity Tier 1 capital ratios falling below the regulatory minimum of 7 percent) if forced to fully account for the unrealized losses on their holdings of US Treasuries and agency mortgage-backed securities (due to rising interest rates). Going forward, if the coming recession turns out to be more severe than expected, credit risk losses on bank lending, especially in the commercial real estate sector, would be significant.

On top of banks’ interest rate and credit losses, there have been tremendous deposit outflows from banks to money market funds. JPMorgan Chase has estimated that “vulnerable banks” have lost about one trillion dollars of deposits in the past year. Specifically, the top three US banks (JPMorgan, Wells Fargo, and Bank of America) have revealed a huge $521 billion deposit drop over the past year. The combination of losses on assets and deposits proved fatal to the failed banks last month and could yet strike vulnerable banks again.

More broadly, banking stresses have significantly tightened financing conditions, leading to a record contraction in US bank lending of nearly $105 billion in the two weeks ending on March 29. If this continues, declines in bank lending will tip the US economy into a recession sooner than expected, causing credit losses in a negative feedback loop. Policymakers need to be aware of this trend and try their best to mitigate it.

—Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance, and former deputy director at the IMF.

The IMF missed an opportunity to take on the US debt ceiling debate

Rarely have the IMF’s World Economic Outlook and associated documents been written under as much uncertainty as now, with two significant bank failures happening in the middle of the drafting process. Yet, the IMF has managed to get together a set of sensible reports, with the uncertainty reflected not so much in this year’s growth projections than in the fairly sober medium-term outlook and the extensive discussion of risks.

The reports highlight the tight constraints on growth and policy faced by policymakers around the globe, and the IMF is right that, barring major financial shocks, monetary policy will need to focus on bringing down inflation expectations and fiscal policy will need to be supportive in this regard.

Given that they are vetted by the IMF membership in what is usually a very long board discussion, it is normal that the reports end up a little on the bland side, with carefully worded country-specific references, if any. Still, it is surprising that there is no discussion of the debt ceiling talks that currently appear stalled in the US Congress. The risk of a breach of the United States’ fiscal obligations, even if temporary, would have major repercussions both for the United States and the world economy—and possibly for the broader global financial system. 

The IMF missed a major opportunity this time around to remind the United States of the severe consequences for itself—and the rest of the world—of not living up to its responsibilities as the issuer of the world’s major reserve currency. One would hope that IMF delegates still use these Spring Meetings to drive home this point to their US counterparts. 

—Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former IMF chief of staff.

What the World Economic Outlook didn’t say

On Wednesday, Atlantic Council senior fellows gathered to discuss the World Economic Outlook (WEO) report that was released by the IMF this week. The WEO is published twice a year and presents the IMF’s analysis of global economic developments over the near and medium term. This year, the report comes in the midst of tightening financial conditions in most regions and the aftermath of a banking crisis. The IMF forecasted that global growth will slow from 6 percent in 2021 to 2.7 percent in 2023.

The former IMF officials led a discussion to decode the WEO and address which elements they felt were missing. While participants cannot be quoted directly as the conversation was conducted under Chatham House rules, the experts generally agreed that the report was missing important discussions in several areas: the US debt ceiling, artificial intelligence, structural reforms to address aging populations and declining productivity, and the normal analysis of specific countries or regions. The group talked about the report’s increased attention toward economic fragmentation despite the political sensitivity of this issue. In addition, they discussed the potential for stagnation versus stagflation and the complexity of debt relief with China and private creditors. The experts also gave a defense of the WEO and why it matters in an economically divided world.

—Jessie Yin is a young global professional at the Atlantic Council’s GeoEconomics Center.

See more expert reactions from our WEO roundtable:

Who’s first and what’s second is this week’s central debate

Whether the topic at hand is COVID-19 debt fallout, the Ukraine conflict, climate finance, food security, or supporting small states, a common theme in deliberations thus far during the IMF-Word Bank Spring Meetings has been how to balance clear but competing needs in the short term versus the medium and long term. The threat of a “lost decade” of global growth adds urgency to figuring a path forward quickly.

There does seem to be consensus that multilateral financial institutions—and indeed, the entire global financial and development system—need to walk and chew gum at the same time. That is, they need to respond to urgent and basic needs, such as widespread food insecurity, while simultaneously investing in what is needed for economic recovery and inclusive growth; for example, investing in infrastructure and health systems. Some argue education is a medium-to-long term economic development need, but the 70 percent of the world’s ten-year-olds in low- and medium-income countries who cannot understand simple text and the hundreds of millions of unemployed youth might disagree. Climate change is seen as both an immediate and an existential threat—and, increasingly, a market opportunity. 

The debate this week in Washington, then, is less about which crises or challenges to address, and more about who should do what, when, and how. There are arguments for the IMF returning to a focus on liquidity and macro-fiscal and short-term stabilization, while the World Bank should focus on medium- to longer-term recovery and economic growth and development. It is too soon, however, to know if the arguments for this way forward will win out. Importantly, there is agreement that to tackle these problems both sides of 19th Street, along which the institutions sit (with the International Finance Corporation just up the road), need to incentivize and mobilize more private-sector capital and engagement, and better coordinate with other multilateral and bilateral agencies. Watch this space.

—Nicole Goldin is a nonresident senior fellow at the GeoEconomics Center and global head of inclusive economic growth at Abt Associates, a consulting and research firm.

Central banks shouldn’t use IMF projections as an excuse to get too loose again

The IMF’s World Economic Outlook expects global growth to remain around 3 percent in the next few years—lower than the 3.9 percent annual average from 2000-2009 and 3.7 percent from 2010-2019. This low growth estimate is based on expectations of a return to secular stagnation driven by long-term trends such as aging populations and slowing productivity growth, pushing the natural real interest rate (known as r*) to ultra-low levels comfortably below 1 percent.

This may or may not be the case. But the World Economic Outlook does not clearly mention the chance that secular stagflation is equally likely as secular stagnation to happen—especially since geopolitically driven fragmentation will likely reduce output and increase costs and prices. This comes on top of the fact that deglobalization has reversed the disinflationary benefits of the globalization period when hundreds of millions of low-wage workers in China and other emerging markets joined the global economy.

Consequently, the possibility of ultra-low r* should be viewed cautiously, as both inflation and nominal interest rates may be higher than in previous decades. Central banks should not use that as an excuse to implement extraordinary loose monetary policies like they did in the decade or so after the Global Financial Crisis—policies that boosted financial asset prices, causing recurring financial instability and now persistently high inflation requiring central banks to sharply raise interest rates. This is a hard-earned lesson that should not be quickly forgotten.

—Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance, and former deputy director at the IMF.

Inside the World Bank’s digital governance agenda

As global conversations accelerate around digital-first governance, the emerging agenda must be based on “inclusion, competition, and trust,” said Priya Vora, managing director at Digital Impact Alliance (DIAL). 

Vora spoke Tuesday at an Atlantic Council event along with Arturo Herrera Gutiérrez, global director for governance at the World Bank, and Tim Murphy, chief administrative officer at MasterCard, to discuss how the World Bank should address digitalization. 

Participants in the roundtable, conducted in partnership with the Mastercard Policy Center for the Digital Economy, had one clear message: “The public sector cannot sit back anymore.” The real role of the US government, as Vora underscored, is to create the tools for an equitable and safe digital economy, then lead by setting global standards. 

This process starts with people-centric innovation coupled with comprehensive regulation. Gutiérrez stressed that countries cannot simply provide a technical solution, rather they need to create an “engagement strategy” to best inform consumers about the benefits and risks of that technology. 

The United States, as Murphy noted, is falling behind. As countries trend towards digitalization, Murphy warned about the threat of fragmentation, in which different countries have their own siloed digital priorities and issues of privacy, data protection, and consumer transparency are often ignored because of a focus on geopolitical competition. Therefore, the panelists agreed, global leadership and cooperation are crucial, especially to understand both the negative and positive opportunities of technology development.

The World Bank’s governance agenda will need to adapt to reflect the dynamics of the digital economy, including issues of privacy, cybersecurity, consumer protection, and sustainability. The next wave of innovation should be about “giving more tools of transparency and control to people,” said Vora. 

—Alisha Chhangani is a program assistant at the Atlantic Council’s GeoEconomics Center.

Spain’s economy minister aims to fight ‘fragmentation’

Nadia Calviño, Spain’s vice president and minister of economic affairs and digital transformation, declared on Tuesday that economic fragmentation would be a “lose-lose” situation for major economies. At an event at the Atlantic Council, Calviño noted that a “massive tectonic plates shift” is taking place within the post-World War II geopolitical order that has benefited the global economy. Economic ties are increasingly linked to geopolitical allies, and new research from the IMF shows that if geoeconomic fragmentation were to deepen, the global economy would contract by about 2 percent. This contraction would be far worse for developing economies.

Calviño believes that the World Bank and IMF will play key roles in avoiding such fragmentation and ensuring prosperity for all. Difficult discussions around debt relief, climate change, and economic slowdowns should not weaken the role of the institutions as financial stabilizers and promoters of development, she said. If the Bretton Woods Institutions didn’t already exist, “we’d have to invent them now.”

As the chair of the IMF’s International Monetary and Financial Committee, Calviño has three goals for the meetings this week. First, she aims to generate a consensus on reinforcing the global safety net and supporting the most vulnerable economies. Second, she plans to deliver a message of confidence that will also bring confidence to global economic markets. And third, which would be a bonus, she hopes to build a framework to coordinate economic policies that would encourage financial stability and prevent geoeconomic fragmentation.

This will not be an easy task. But Calviño is “neither optimistic nor pessimistic but determined” to make progress on these issues in a period of global economic uncertainty and volatility.

—Mrugank Bhusari is an assistant director at the Atlantic Council’s GeoEconomics Center.

‘Sustainability, resiliency, and inclusion’ must top the reform agenda, says Cameroon’s minister of economy

At the Atlantic Council, Cameroon’s minister of economy laid out the country’s economic trajectory in conversation with Julian Pecquet, the Washington/UN correspondent for Jeune Afrique and the Africa Report. Despite modest growth in the face of significant global pressures, it is “not enough for [Cameroon] to get to [its] goals of becoming an emerging country by 2035,” Ousmane Mey said.

A “paradigm shift” is underway in Cameroon’s economic planning, the minister of economy explained, as the country continues to learn from the disruptions of the COVID-19 pandemic and the pressures of the war in Ukraine. He said that in particular, the Cameroonian government wants to “take advantage of the situation to reengineer [its] production capacity to be able to produce more locally, cover the national demand, and export more in this environment.” At a broader level, the African Union is also working to “integrate and trade more between the countries” to promote resiliency and insulation from global crises at a continental level, Ousame Mey explained.

At the same time, he said, the stressors climate change is imposing on Africa, even though the continent contributes the least to global pollution, are closely tied to Cameroon’s economic goals. The minister noted that “sustainability, resiliency, and inclusion” must be at the forefront of the agenda for international monetary institutions. These issues are informing Cameroon’s position going into the Spring Meetings, explained the minister, who expects the talks to focus on “the future of the [Bretton Woods] institutions,” “reforms,” and “global challenges.” Particularly on the topic of reforms, he praised the “debt service suspension initiatives” that were introduced in 2020 under the Group of Twenty common framework to alleviate Cameroon’s burden in a time of crisis. “This is certainly something we should include in the reform of the financial architecture in the future,” he said.

—Alexandra Gorman is a young global professional at the Atlantic Council’s Africa Center.

Senegal’s economy minister: ‘the US private sector is missing’

Senegal’s newly appointed Minister for Economy, Planning, and Cooperation Oulimata Sarr has one clear message for international partners going into the IMF/World Bank Spring Meetings: “Senegal is open for business.”

In a conversation at the Atlantic Council with Julian Pecquet, the Washington/UN correspondent for Jeune Afrique and the Africa Report, Sarr acknowledged that she wants “the private sector to a play a much bigger role” in the country’s economy, which has grown rapidly in the past few years. In particular, “the US private sector is missing” in Senegal, she acknowledged, because it tends to view “Africa as a whole as a risky investment place.”

A major factor that shapes these views is sovereign debt credit ratings, which have historically been administered by foreign-based entities that rely on faulty metrics, Sarr said. The rise of credit rating agencies on the continent (currently there are two) will more accurately reflect the reliability and investment potential of African economies, Sarr noted.

Ultimately, “development cannot wait,” she told US viewers, noting the urgency of the issue. “Fast-tracking” solutions is the country’s top priority in all economic considerations, from “the reform of the Bretton Woods Institutions” to the choice of partners between the US and China. The current Biden administration clearly sees “Africa as a very, very important player” and “as a land of opportunity,” but she believes that the “US can do much more.”

—Alexandra Gorman is a young global professional at the Atlantic Council’s Africa Center.

David Malpass: Today’s economic double whammy may slam development into reverse

As World Bank President David Malpass prepares to hand over the reins to his successor, he has one big worry about the global economy: a “reversal in development.” 

“That means poverty is higher… than five years ago, that education and literacy problems are worse than they were five years ago,” he said at an Atlantic Council Front Page event on Tuesday hosted by the GeoEconomics Center. That reversal is unfolding, he explained, because of the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine, which together hit the global economy with a “double whammy.” 

But even if these crises come to an end, development won’t necessarily get right back on track, warned Malpass, who will be succeeded in the coming weeks by former Mastercard Chief Executive Officer Ajay Banga. Next week, the boards of governors of the World Bank and International Monetary Fund (IMF) will meet in Washington to discuss reshaping development for a new era as central banks around the world raise interest rates to fight inflation.  

“The dislocation is huge,” Malpass said, explaining that countries looking to continue their growth strategies from the past decade will now see higher interest rates reflected on their contracts. Thus, instead of looking to return to pre-COVID development economics, Malpass explained, countries should be looking at this moment as “an inflection point into some new [economic] growth model”—and adjusting their strategies accordingly. 

“We don’t want it to be a lost decade for growth,” Malpass said. Preventing one, he added, will require sorting out global debt restructuring and increasing the resources available to the World Bank. 

—Katherine Walla is an associate director of editorial at the Atlantic Council.

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Apr 5, 2023

David Malpass on China’s role in the World Bank and how to prevent a ‘lost decade for growth’

By Katherine Walla

The president of the World Bank, speaking at the Atlantic Council as he prepares to hand over the reins to his successor, has one big worry about the global economy: a “reversal in development.” 

Digital Currencies Economy & Business

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IMF-World Bank Week at the Atlantic Council

APRIL 10–APRIL 14, 2023

Highlights from the Atlantic Council’s IMF-World Bank Spring Meetings. Watch the special events with finance ministers and central bank governors from around the world.

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Watch the full event

Online Event Tue, April 4, 2023 • 10:00 am ET

Special event with President of the World Bank Group David Malpass

AN #ACFRONTPAGE EVENT – Malpass shared his vision for how the World Bank Group can respond to global challenges and help foster inclusive growth around the world.

Economy & Business Fiscal and Structural Reform Inclusive Growth International Financial Institutions

As World Bank President David Malpass prepares to hand over the reins to his successor, he has one big worry about the global economy: a “reversal in development.” 

“That means poverty is higher… than five years ago, that education and literacy problems are worse than they were five years ago,” he said at an Atlantic Council Front Page event on Tuesday hosted by the GeoEconomics Center. That reversal is unfolding, he explained, because of the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine, which together hit the global economy with a “double whammy.” 

But even if these crises come to an end, development won’t necessarily get right back on track, warned Malpass, who will be succeeded in the coming weeks by former Mastercard Chief Executive Officer Ajay Banga. Next week, the boards of governors of the World Bank and International Monetary Fund (IMF) will meet in Washington to discuss reshaping development for a new era as central banks around the world raise interest rates to fight inflation.  

“The dislocation is huge,” Malpass said, explaining that countries looking to continue their growth strategies from the past decade will now see higher interest rates reflected on their contracts. Thus, instead of looking to return to pre-COVID development economics, Malpass explained, countries should be looking at this moment as “an inflection point into some new [economic] growth model”—and adjusting their strategies accordingly. 

“We don’t want it to be a lost decade for growth,” Malpass said. Preventing one, he added, will require sorting out global debt restructuring and increasing the resources available to the World Bank. 

Below are more highlights from the event, moderated by Bloomberg Surveillance co-host Lisa Abramowicz, as Malpass dove into the World Bank’s role in the world, its relationship with its contributors, and global financial and monetary challenges. 

World Bank, global problems 

• Malpass pointed out how over the past few decades, as countries face increasing costs, the bank’s contributions from shareholders and donors have “been relatively flat.” Given that “there were no more donations from the advanced economies,” the World Bank instead leveraged its balance sheet to expand funding for programs such as its International Development Association, which works to combat extreme poverty. 
• The flat donations are, in part, due to countries allocating spending to their own international development programs, Malpass admitted, but he noted that all bilateral aid hasn’t grown very much.  
• There’s one big exception to this trend. “China has substantially increased its contribution to the World Bank,” he explained. In response to critiques about China’s lending practices, Malpass argued that the country is the “world’s second-biggest economy, so… there needs to be some component of China’s involvement and engagement.” 
• At the same time, Malpass explained, the World Bank is working with Beijing on improving its development practices and avoiding such practices as requiring nondisclosure clauses and asking countries for collateral. “Billions and billions of dollars… are flowing with insufficient transparency,” Malpass warned. “That’s a high priority as the world interacts with China in a global context.” 
• “What we want China to see is that it is strongly in its interest to see the world growing,” Malpass added. “That can be done through a difference in lending practices—also a faster restructuring of debt.” Why hasn’t that debt restructuring happened yet? Beijing is “looking for a way to have a constructive restructuring dialogue with the world,” Malpass explained. 
• In discussing which countries the World Bank prioritizes for its lending programs, Malpass said the question often involves whether to focus on long-term projects or fast disbursements of money. “There’s a lot of pressure on the World Bank to just lend the money to the country, even if they’re not doing well” on governance and corruption. “We still operate in those countries, but we tend to do it more with social safety nets” and “direct assistance to the people of the country” so that they can survive food shortages and economic hardship. 

Currency: Dollar and digital

• Despite today’s high inflation, the dollar is still strong, Malpass said, adding that he isn’t worried about preserving the dollar’s status as the world’s reserve currency. “You earn that by dependability and by how fast you can trade the currency,” he said. “The US still has dominance in that.”  
• In the meantime, China’s renminbi, which is one of a handful of currencies that make up the IMF’s Special Drawing Rights reserves, has the potential to grow as a reserve currency, Malpass argued. But “competition is good for a currency,” he said, adding that it will push the United States to “really have strong financials… so that the dollar can remain the world’s most important currency.” 
• Malpass briefly discussed the risks that cryptocurrencies pose: He noted that, for example, they grant a measure of anonymity, making it easier to lose track of terrorism financing. Central banks will have to “speed up their settlement process,” he said, to offer a digital currency option that competes with cryptocurrencies while avoiding those risks.  

Crises underway—and on the horizon

• Malpass said that the recent string of bank failures starting with Silicon Valley Bank has increased the risk of a recession. As small and regional banks are under increasing stress, he added that the financial system needs to maintain access to the kind of small loans and local community service these banks provide. 
• With members of the OPEC+ oil cartel, which includes the Persian Gulf countries and Russia, announcing a voluntary cut to oil production on Sunday, Malpass had a grim outlook for global growth. He explained that as oil prices go up, the costs of agricultural inputs and healthy food will rise as well, with devastating impacts on food systems and health. 
• The World Bank responded to Russia’s full-scale invasion of Ukraine by offering direct grants to Kyiv and setting up trust funds that the United States has used to send non-military support to Ukraine. The bank has also conducted damage assessments to help international partners understand the amount of money needed to rebuild the country—and it will continue working on reconstruction with the United States and the European Union, Malpass said. 

Katherine Walla is an associate director of editorial at the Atlantic Council.

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The compounding crises of COVID-19, the war in Ukraine, persistent inflation, and climate change have battered the global economy. Meanwhile, debt, digital, and demographic disruptions are reorganizing the needs for and nature of development investments. To deliver on its mission to “end extreme poverty and promote shared prosperity in a sustainable way,” the World Bank should seize this moment and redefine its role in the global economy. It can start by focusing on these five policy priorities to help address the challenges to inclusive growth in the global economy today.

1. Address the uptick in extreme poverty due to COVID, conflict, and climate

COVID-19 ended the decline in global poverty dating back to 1998. More than seventy million people were pushed into extreme poverty in 2020. By its own admission, the World Bank will no longer be able to achieve its goal of reducing extreme poverty (currently around 9 percent of the world’s population) to 3 percent by 2030. Slow vaccine rollout in poorer economies has prolonged COVID’s impact. Since the start of the pandemic, inequality within and between countries has grown; young people and women disproportionately have carried the costs of these crises.

Russia’s full-scale invasion of Ukraine in 2022 sent global prices of food, fuel, and fertilizer skyrocketing. The World Food Programme estimated that 345 million people will face acute food insecurity in 2023, double the amount of 2020. Meanwhile the climate crisis and weather-related events continue to undercut infrastructure, impact agriculture production, and intensify humanitarian disasters that displace millions globally. The World Bank should devote as much as possible of its lending and advisory might to social protection and tackling the immediate shortfalls in food, energy, and raw materials that are driving higher inflation and exacerbating poverty. At the same time, it should work to support longer-term recovery and resilience, including through data, infrastructure, governance, and economic reform.

2. Deal with debt distress 

Throughout the 2010s, countries increased external borrowing in a long period of low interest rates and high liquidity and then accumulated even more debt in response to the pandemic. Now as financial conditions tighten, questions over the sustainability of this debt are rising. Fifty-four countries are already in debt crises. The private sector has fared no better; looming corporate debt distress poses systemic risks. A growing problem of non-performing loans and the recent banking sector crisis will likely lead to a credit crunch, disproportionately hampering lending to small- and medium-sized enterprises that dominate emerging market and developing economies.

While the International Monetary Fund is on the front line of financial crises, it is up to the World Bank to keep developing countries focused on projects and reforms that support long-term economic growth prospects. When key projects are at risk of being canceled or deferred, the World Bank should engage with all stakeholders, from creditors and ratings agencies to domestic policymakers, to isolate these from cuts. The World Bank has the resources to do this, for example, through its Development Policy Financing tools. But it should redouble efforts and consider raising more money on markets to lend into debt-distressed countries and companies (especially small businesses) and to restructure existing debts.

3. Embrace the digital revolution

Commerce, public administration, and education are all evolving with rapid digitization. As technology becomes part of most jobs or business processes and creates entirely new ones, the World Bank should prioritize projects providing new and accessible ways to upskill youth and reskill older workers who are not digital natives, as well as technologies that make physical activities easier to perform. The World Bank has already taken encouraging steps in this direction, such as Skilling Up Mashreq and other programs. The World Bank should also provide support for innovation and entrepreneurship across government, education, health care, finance, green energy, and agriculture to increase digital and technology integration at the sector level. It should further develop infrastructures, policy frameworks, and regulatory reform that improves the availability, access, and affordability of new technologies. That should include incentivizing public-private partnerships and directly engaging with the private sector.

4. Change incentive structures for private capital

Interest rates have been hiked in response to high inflation, raising borrowing costs for governments and the private sector. At the same time, higher interest rates in developed markets mean higher rates of return, which, combined with increased risk in lower- and middle-income countries, could lure emerging-market investors to the United States and Europe. In order to maintain the flow of investment into projects in emerging economies, it is crucial for investment contracts to be well thought through, with protections against inflation. The World Bank’s lending for a project, even when small, will continue to play a key role in reassuring investors and “crowding in” funding and financing—including climate finance for adaptation and mitigation.

5. Reestablish that inclusive growth begins with inclusive governance

The Group of Seven (G7) and European Union member states together control more than 50 percent of all votes at the World Bank, even as they represent under 13 percent of the global population. As part of its overall reforms, the World Bank should seriously consider voting reforms to address criticism from its members of unequal voice and representation. The organization should increase coordination with regional development banks, which are more sensitive to the dynamics of their operating regions and have demonstrated their capacities in helping respond to the pandemic and to climate change. It should deepen engagement with sovereign wealth funds, multinational corporations, and pension funds, which play a far greater role in the global economy than they did in 1944, when the Bretton Woods Institutions were created. At the same time, operationally, the World Bank should re-double its consultation with and support to young people, women, and small- and medium-sized enterprises—each has seen substantial pre-COVID gains erased. This support can include helping them tap into recovery initiatives and opportunities in the expanding green, social, and industrial sectors.

The challenges facing the World Bank are daunting. But the appointment of a new president and an appetite for reform in the United States and elsewhere mean that the World Bank has a unique opportunity to anticipate changes to its mandate and prepare for a stronger future.

Nicole Goldin is a nonresident senior fellow at the GeoEconomics Center and global head of inclusive economic growth at Abt Associates, a consulting and research firm.

Mrugank Bhusari is an assistant director at the Atlantic Council GeoEconomics Center.

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The ECB was the first major central bank to make a move during the crisis when it decided to raise key policy rates by fifty basis points (or half a percentage point) on March 16—consistent with its pre-crisis plan. President Christine Lagarde explained that the ECB will continue to focus on bringing down inflation to its medium-term target of 2 percent, making use of the interest-rate instrument to do so. The ECB, she added, will also closely monitor market tensions and be ready to use its policy toolkit to supply liquidity to the financial system if needed.

Several commentators, in particular former US Treasury Secretary Larry Summers, praised the ECB not only for raising rates as planned in the face of financial market turmoil but also for delineating monetary policy from financial stability concerns. “Lagarde gets an A+ today,” Summers said. Basically, in this delineation, monetary policy mainly uses interest rates to keep inflation under control, while financial stability problems can be addressed by another set of instruments including financial regulation and supervision, liquidity support, deposit insurance, and closing or staging buyouts of banks. This separation of policy goals and instruments is conceptually appealing, avoiding the problem of trying to use one instrument to serve multiple policy objectives.

Unfortunately, reality is too complicated and interconnected to allow such a clear-cut separation. Essentially, interest rates influence behaviors throughout the economy and financial markets. Or as then Fed Governor Jeremy Stein said ten years ago: monetary policy “gets in all of the cracks.” As a result, central bank interest-rate policy strongly influences financial behaviors, especially the appetite for risk. Low rates for long periods of time, as has been the case from the 2008 global financial crisis to the COVID-19 years, prompt a frantic search for yield, leading to an overvaluation of financial assets and elevating financial stability risks.

Subsequently, when inflation rises and central banks raise interest rates, this will create losses in fixed-income instruments and other assets, tightening financial conditions and slowing economic activity. If the volume of bonds accumulated by banks and other financial institutions is significant, the losses—both realized and unrealized—will also be uncomfortably large. These losses, coupled with slowing business activity, will be destabilizing to institutions with unstable funding bases.

Indeed, this is what has recently transpired in the United States. A combination of unrealized bond losses and generally unprofitable businesses, together with unstable funding, have brought down Silicon Valley Bank and Signature Bank and put severe pressure on First Republic Bank and several others in similar circumstances. US authorities have guaranteed large deposits at the two failed banks, launched the Bank Term Funding Program to lend against banks’ high-quality bond portfolios at face value (to avoid mark-to-market losses) for up to one year, and strengthened currency swap lines with five other major central banks to provide adequate supply of US dollar funding to foreign banks. In Europe, the Swiss authorities have moved quickly to broker a buyout by UBS of the inherently weak and unprofitable Credit Suisse, offering substantial liquidity support and guarantees of losses.

These actions have addressed the problems identified at specific institutions, but banking systems worldwide remain under market pressure: They still face the same underlying challenge of high interest rates. Moreover, pouring liquidity into the banking system would contradict to a large extent central banks’ effort to keep raising rates, while causing uncertainty in financial markets. Moreover, this crisis episode has shown that regulatory and supervisory tools are imperfect and unable to address financial stability concerns on a timely basis—in part due to the backward-looking nature of regulatory ratios. For example, Credit Suisse maintained its capital adequacy and liquidity coverage ratios above the levels required by Basel III launched in the wake of the 2008 crisis to the day it was acquired by UBS.

More importantly, by not doing enough to prevent crises, allowing them to materialize, and then trying to pacify markets with crisis management tools, central banks have inflicted substantial costs on society as a whole. Central banks’ reputation and legitimacy have also suffered—and will even more if their crisis management is not executed perfectly.

At present, market participants expect central banks, in particular the Fed in its March 22 Federal Open Market Committee meeting, to adjust their tightening strategy. After all, the banking crisis has caused a significant tightening of financial conditions, which is what central banks try to do by raising rates. Specifically, markets expect the Fed to either raise rates by twenty-five instead of its planned fifty basis points or pause tightening, with a rate cut likely to come later this year. Under the currently unsettled circumstances, the stakes are high: Disappointing market expectations could usher in additional selloffs in financial markets, especially of bank shares and bonds, possibly requiring more bailouts. On the other hand, the Fed needs also to communicate its intention to bring inflation back to its target in the medium term—a difficult but not impossible thing to do.

Going forward, central banks should be more transparent in explaining how they take into consideration the impacts of excessive risk taking as well as banking and financial crises when formulating monetary policies—both during the easing and tightening phases. It is difficult for central banks to balance controlling inflation with preserving financial stability, but that is no excuse not to try to the best of their judgement. Given what has happened, simply repeating the mantra that monetary policy is for dealing with inflation while regulatory and supervisory tools are for financial stability is doing a disservice to all stakeholders of the financial system.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance, and former deputy director at the International Monetary Fund.

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Navigate our coverage

• How the Iraq war changed…
• What Iraq needs now
• What the United States can do now

Twenty years on from the US invasion of the country, Iraq has fallen off the policymaking agenda in Washington, DC—cast aside in part as a result of the bitter experience of the war, the enormous human toll it exacted, and the passage of time. But looking forward twenty years and beyond, Iraqis need a great deal from their own leaders and those of their erstwhile liberators. A national reconciliation commission, a new constitution, and an economy less dependent on oil revenue are just some of the areas the experts at the Atlantic Council’s Iraq Initiative highlight in this collection of reflections marking two decades since the US invasion.

What else will it take to transform Iraq into a prosperous, productive regional player? What can the United States do now, with twenty years’ worth of hindsight? And just how far-reaching were the effects of the war? Twenty-one experts from across the Atlantic Council take on these questions in a series of short essays and video interviews below.

Oula Kadhum on what March 20, 2003 was like for a young Iraqi

How the Iraq war changed…

The cause of democracy in the region

When the United States invaded Iraq two decades ago, one of the public justifications for the war was that it would help spread democracy throughout the Middle East. The invasion, of course, had the opposite effect: it unleashed a bloody sectarian conflict in Iraq, badly undermining the reputation of democracy in the region and America’s credibility in promoting it.

Yet the frictions between rulers and ruled that helped precipitate the US invasion of Iraq persist. The citizens of the region, increasingly educated and connected to the rest of the world, have twenty-first-century political aspirations, but continue to be ruled by unaccountable nineteenth-century-style autocrats. Absent a change, these frictions will continue to shape political developments in the region, often in cataclysmic fashion, over the next two decades.

The George W. Bush administration’s failures in Iraq severely set back the cause of democracy in the region. In the perceptions of Arab publics, democratization became synonymous with the exercise of American military power. Meanwhile, Iraq’s chaos strengthened the hand of the region’s autocrats: as inept or heavy-handed as their own rule might be, it paled in comparison to the breakdown of order and human slaughter in Iraq. 

Citizens’ frustrations with their political leaders finally erupted in the Arab Spring of 2010 and 2011, but their protests failed to end autocracy in the region. Gulf monarchs were able to throw money at the problem, first to shore up their own rule and then other autocracies in the region. The Egyptian experiment with democracy proved short-lived; Tunisia’s endured far longer but also appears over. More broadly, the region has seen democratic backsliding in Lebanon and Israel as well.

The yawning gap between what citizens want and what they get from their governments remains. The World Bank’s Worldwide Governance Indicators show that, on aggregate, states in the region are no more politically stable, effectively governed, accountable, or participatory than two decades ago. Unless political leaders address that gap, further Arab Spring-like protests—or even social revolution—are probable. 

Having apparently gotten out of the business of invasion and occupation following the wars in Iraq and Afghanistan, the United States could play a new and constructive role here. It could both cajole and assist the region’s political leaders to improve governance for their citizens. 

The United States exacerbated political tensions in the region two decades ago; now it has an opportunity to help ameliorate them.

—Stephen R. Grand is the author of Understanding Tahrir Square: What Transitions Elsewhere Can Teach Us About the Prospects for Arab Democracy. He is a nonresident senior fellow with the Council’s Middle East programs.

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State sovereignty

Since the seventeenth century, more or less, world order has been based on the concept of state sovereignty: states are deemed to hold the monopoly of force within mutually recognized territories, and they are generally prohibited from intervening in one another’s domestic affairs. The invasion of Iraq challenged this standard in three important ways. 

First, the fact of the war represented a direct attack on the sovereignty of the Iraqi state, which undermined the ban on aggressive war. While the Bush administration cast the invasion as a case of preemptive self-defense, it was widely seen as a preventive war of choice against a state that did not pose a clear and present danger. Moreover, the main exceptions to sovereignty that have developed over time, such as ongoing mass atrocities or United Nations authority, were not applicable in Iraq. Thus, the United States dealt a major blow to the rules-based international system of which it was one of the chief architects. This may have made more imaginable later crimes of aggression by other states. 

Second, the means of the war, and especially the occupation, powered the reemergence of the private military industry. Driven by the need to sustain two long wars in Iraq and Afghanistan, the US armed forces became dependent on military contractors, which sometimes involved authorizing paid civilians to kill. The US effort to (re)privatize warfare brought back into fashion the use of private military force, generating a multibillion-dollar industry that is here to stay. Over time the spread of private military companies could unspool the state’s exclusive claim to violence and hammer the foundations of the current international system.

Third, the consequences of the war led to the spectacular empowerment of armed nonstate actors in the region and beyond, who launched a full-frontal assault on the sovereignty of many states. The Islamic State of Iraq and al-Sham, of course, emerged amid the brutal contestation of power in post-invasion Iraq and pursued its “caliphate” as an alternative (Sunni) political institution to rival the nation-state. While the threat has been contained, for now, in the Middle East, it is only beginning to gather force on the African continent. In addition, because Iran effectively won the war in Iraq, it was able to sponsor a deep bench of Shia nonstate groups which have eroded state sovereignty in Lebanon, Syria, Yemen, and Iraq itself. 

The US invasion of Iraq left us a world with less respect for state sovereignty, more guns for hire, and a dizzying array of well-armed and determined nonstate groups. 

—Alia Brahimi is a nonresident senior fellow of the Atlantic Council’s Middle East programs and host of the Guns for Hire podcast. 

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Abbas Kadhim on the opportunities missed

US-Turkish ties

By launching a war on Turkey’s border, against Turkish advice, in a manner that prejudiced Turkish interests, the United States in 2003 upended a strategic understanding that had dominated bilateral relations for five decades. 

During and immediately after the Cold War, Turkey and the United States shared a strategic vision centered on containing the Soviet Union and its proxies. In exchange for strategic cooperation, Washington provided aid, modulated criticisms of Turkish politics, and deferred to Ankara’s sensitivities regarding its geopolitical neighborhood. With notable exceptions (e.g., Turkish opposition to the Vietnam War and US opposition to Turkey’s 1974 Cyprus operation), consensus was the norm and aspiration of both sides. After close collaboration in the Balkans, Somalia, Iraq, and Afghanistan from 1991 to 2001, though, Ankara became increasingly alarmed about the prospect of a new war in Iraq.

Bilateral relations deteriorated sharply after the Turkish parliament voted against allowing the United States to launch combat operations from Turkish soil. The war was longer, bloodier, and costlier than its planners had anticipated. The Kurdistan Workers’ Party (known as the PKK and designated by the United States as a terrorist organization in 1997) ended a cease-fire in place since the 1999 capture of its founder, Abdullah Öcalan, and gained broad new freedom of movement and action in northern Iraq. US military aid to Turkey ended, while defense industrial cooperation and military-to-military contacts dropped. In July 2003 US soldiers detained and hooded a Turkish special forces team in Sulaymaniyah, Iraq, on suspicions that they were colluding with insurgents. This event, coupled with Turkish anger over the bitter conduct and conclusion of the prewar negotiations, helped fuel a sustained rise in negative views about the United States among the Turkish public.

Sanctions and the war in Iraq damaged Turkish economic interests, though these would rebound from 2005 onward. The relationship of the US military to the PKK—first as tacit tolerance of PKK attacks into Turkey from northern Iraq despite the US presence, and later with employment of the PKK affiliate in Syria as a proxy force against the Islamic State in Iraq and al-Sham (ISIS)—rendered the frictions of 2003 permanent. That US forces train, equip, and operate with a PKK-linked militia along Turkey’s border today is fruit of the Iraq war, because US-PKK contacts were brokered in northern Iraq, and US indifference to Turkish security redlines traces back to 2003.

The story of US-Turkish estrangement can be told from other perspectives: that Ankara sought strategic independence for reasons broader than Iraq, that President Erdoğan’s anti-Westernism drove divergence, that the countries have fewer shared interests now. There may be truth in these arguments, though they are based largely on speculation and imputed motives. Yet they, too, cannot be viewed except through the lens of the 2003 Iraq War, which came as Erdoğan’s Justice and Development Party was assuming power and greatly influenced his subsequent decision-making.

Many effects of the Iraq War have faded, but the strategic alienation of Turkey and the United States has not.

—Rich Outzen, a retired colonel, is a nonresident senior fellow at the Atlantic Council IN TURKEY and a geopolitical analyst and consultant currently serving private-sector clients as Dragoman LLC.

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China’s rise

As George W. Bush took office in 2001, managing the US-China relationship was regarded as a top foreign policy concern. The administration’s focus shifted with 9/11 and a wartime footing—which in turn altered Beijing’s foreign policy and engagement in the Middle East. 

A high point in US-China tension came in April with the Hainan Island Incident. The collision of a US signals intelligence aircraft and a Chinese interceptor jet resulted in one dead Chinese pilot and the detention of twenty-four US crew members, whose release followed US Ambassador Joseph Prueher’s delivery of the “letter of the two sorries.” 

But after the September 11 attacks, the United States launched the global war on terrorism, and the ensuing wars in Afghanistan and Iraq became the all-encompassing focal points. While that relieved pressure on China, the US decision to invade Iraq raised serious concerns in Beijing and elsewhere about the direction of global order under US leadership. 

American willingness to attack a sovereign government with the stated goal of changing its regime set a worrisome precedent for authoritarian governments. Worries transformed into something else following the global financial crisis in 2008. Chinese leaders became even more wary of US leadership, with former Vice Premier Wang Qishan telling then-Treasury Secretary Hank Paulson after the financial crisis, “Look at your system, Hank. We aren’t sure we should be learning from you anymore.”

The war in Iraq was especially troubling for Chinese leaders. Few believed that the United States would engage in such a disastrous war over something as idealistic as democracy promotion in the Middle East. The dominant assumption was that the war was about maintaining control of global oil—and using that dominance to prevent China from rising to a peer competitor status. The so-called “Malacca Dilemma” became a feature of analysis in China’s strategic landscape: the idea that any power that could control the Strait of Malacca could control oil shipping to China, and therefore its economy. Since then, China has developed the world’s largest navy and invested in ports across the Indian Ocean region through its Maritime Silk Road Initiative. Its defense spending has increased fivefold this century, from $50 billion in 2001 to $270 billion in 2021, making it the second-largest defense spender in the Indo-Pacific region after Japan, and higher than the next thirteen Indo-Pacific countries combined. 

Since the Iraq war, the Middle East has become a much greater focus in Chinese foreign policy. In addition to building up its own military, China began discussing security and strategic affairs with Middle East energy suppliers, conducting joint exercises, selling more varied weapons systems, and pursuing a regional presence that increasingly diverges or competes with US preferences. 

Would China’s growing presence in the Middle East have followed the same trajectory had the United States not invaded Iraq? Possibly, although one could argue that the same sense of urgency would not have animated decision makers in the People’s Republic of China.

—Jonathan Fulton is a nonresident senior fellow with the Atlantic Council and host of the China-MENA podcast. He is also an assistant professor of political science at Zayed University in Abu Dhabi. Follow him on Twitter: @jonathandfulton.

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The country’s readiness to meet climate challenges

Over the course of the last two decades, Iraq has become one of the five most vulnerable countries in the world to climate change. It has been affected by rising temperatures, insufficient and diminishing rainfall, intensified droughts that reduce access to water, sand and dust storms, and flooding. Iraq’s environmental ministry warns that the country may face dust storms for more than 270 days per year in the next twenty years. 

While not the sole cause of environmental mismanagement in Iraq, the muhasasa system of power sharing has exacerbated and contributed to a culture of corruption and political patronage that has undermined efforts to protect the environment and to sustainably manage Iraq’s natural resources. Muhasasa is an official system that allocates Iraqi government positions and resources based on ethnic and sectarian identity. It may have been a good temporary compromise to promote stability in the early 2000s, but today it is widely viewed as a harmful legacy of the post-invasion occupation period.

In the context of protecting the environment, the muhasasa system has led to a situation where some government officials are appointed to their respective positions without the necessary skills or qualifications to manage resources efficiently or effectively. Forced ethnosectarian balancing has encouraged natural resource misuse for political or personal gain to the immediate detriment of average Iraqis. While muhasasa was intended to promote political stability and prevent marginalization of minority groups, in practice it has contributed to a culture of corruption and nepotism, and undermined efforts to promote good governance and sustainable development. 

To address its acute climate challenges, Iraq needs to move away from the sectarian-based power sharing and toward a more inclusive, merit-based system of governance. It must strengthen its environmental regulations, commit itself to sustainable development, and better manage its natural resources for the country and as part of the global effort to mitigate climate change. The international community has a role to play here through supporting technical assistance, capacity building, and providing financial resources to help address these concerns along the way. 

—Masoud Mostajabi is an associate director of the Middle East programs at the Atlantic Council. 

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Iran’s regional footprint

From the outset of the invasion of Iraq, the United States’ decision was built on several dubious premises that the administration masterfully overhyped to build support for its aspirations of removing Saddam Hussein by force. The last two decades have tragically shown the consequences of this decision—with high costs of blood and treasure and a serious blow to American credibility. But from a strategic standpoint, one particular miscalculation continues to create blowbacks to US regional security interests: top US policymakers willfully ignored the need for an adequate nation-rebuilding strategy, leaving a power vacuum that an expansionist Iran could fill.

With the removal of the Baathist regime, Iran finally saw the defeat of a rival it could not best after eight years of one of the region’s bloodiest wars. This cleared the path to influence Iraqi Shia leaders who had long relied on the Islamic theocracy next door for support. Even as some Shia learning centers in Najaf and Karbala challenged (once again) Qom, new opportunities of influence that never existed before opened up for Iran. 

By infiltrating Iraq’s political institutions through appointed officials submissive to its regime’s wishes, Iran succeeded in two goals: deterring future threats of Iraqi hostilities and preventing the United States from using Iraqi territories as a platform to invade Iran. Through its Islamic Revolution Guards Corps Qods Force, Iran trained and supplied several militia groups that later officially penetrated Iraq’s security architecture through forces called Popular Mobilization Units, which have repeatedly carried out anti-American attacks. Nevertheless, those groups would eventually prove valuable to the United States in the fight against the Islamic State in Iraq and al-Sham (ISIS)—yet even then Iran succeeded in appearing as the protector of Iraq’s sovereignty by immediately equipping the Popular Mobilization Units, unlike the delayed US response that arrived months later. 

Regionally, Iran’s military leverage and political allies inside Iraq provided it with a strategic ground link to its network in Syria and Lebanon, where the Qods Force ultimately shifted the political power dynamics to Iran’s advantage, especially as they crucially strengthened engagement in recruiting volunteers to support Bashar al-Assad’s fighters in Syria. Through the land bridge that connects Iran to the Bekaa Valley, Iran has helped spread its weapons-trafficking and money-laundering capabilities while reinforcing an abusive dictatorship in Syria and a crippled state in Lebanon.

Twenty years ago, the United States went to liberate Iraq from its oppressive dictatorship. What it left behind is a void in governance and an alternative system that fell far short of what the United States wanted for Iraq. Meanwhile, the Iranian regime continues to base its identity on anti-Americanism while it gets closer to its political and ideological ambitions. With US sanctions having so far failed to halt Iran’s network of militia training and smuggling—and the attempt to revive the nuclear deal stalled, despite being the main focus of US Iran policy—the question remains: How long will the United States tolerate Iran’s regional ascendancy before it intensifies its efforts toward restraining it? 

—Nour Dabboussi is a program assistant to the Atlantic Council’s Rafik Hariri Center and Middle East programs.

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How governments counter terrorist financing 

Without the experience of the war in Iraq, US and transatlantic economic statecraft would be less agile and less able to prevent terrorist financing. However, more work and continued international commitment is needed to ensure Iraq and its neighbors are able to strengthen and enforce their anti-money-laundering regimes to protect their economies from corruption and deny terrorists and other illicit actors from abusing the global financial system to raise, use, and move funds for their operations.

The tools of economic statecraft, including but not limited to sanctions, export controls, and controlling access to currency, became critical to US national security in the wake of 9/11 and the US invasion of Iraq in 2003. Sanctions and other forms of economic pressure had been applied against the government of Iraq and illicit actors prior to 2003. However, economic pressure and the use of financial intelligence to combat terrorist financing became increasingly sophisticated as the war progressed. Since 2001, the State Department and Treasury have designated more than 500 individuals and entities for financially supporting terrorism in Iraq. Following the money and figuring out how terrorist networks raised, used, and moved funds was a critical aspect in understanding how they operated in Iraq and across the region. Information on terrorist financial networks and facilitators helped identify vulnerabilities for disruption, limiting their ability to fund and carry out terrorist attacks, procure weapons, pay salaries for fighters, and recruit. 

Sanctioning the terrorist groups and financial facilitators operating in Iraq and across the region disrupted the groups’ financial flows and operational capabilities while protecting the US and global financial systems from abuse. Targets included al-Qaeda and the Islamic State group, among others. For example, the US Treasury recently sanctioned an Iraqi bank moving millions of dollars from the Revolutionary Guard Corps to Hezbollah, preventing terrorists from abusing the international financial system. 

Notably, the fight against terrorist financing set in motion the expansion of the Department of the Treasury’s sanctions programs and helped the US government refine its sanctions framework and enforcement authorities and their broad application. 

Equally important, the US government’s efforts and experience in countering the financing of terrorism increased engagement and coordination with foreign partners to protect the global financial system from abuse by illicit actors. The Financial Action Task Force (FATF), the inter-governmental body responsible for setting international anti-money-laundering and counter-terrorist financing standards, strengthened and revised its standards, recommendations, and red flags to account for what the international community learned from the experience of combatting terrorist financing in Iraq. The United States and partner nations provided, and continue to provide, training and resources to build Iraq’s and its neighbors’ capabilities to meet FATF standards and address terrorist financing and money laundering issues domestically. 

—Kim Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. 

—Maia Nikoladze is an assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. 

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The United States

Perhaps no event since the end of the Cold War shaped American politics more than the invasion of Iraq. It is fair to say that without the Iraq war neither Donald Trump nor Barack Obama would likely have been president.      

Weirdly, the invasion of Iraq in 2003 is still almost a forbidden topic in GOP foreign policy circles. After the Bush years, a kind of collective-guilt omerta about the Iraq war took hold among Republicans. It was as if US-Iraqi history had started in 2005, or 2006, with Democrats and a few Republicans baying for a needed defeat. It never came. The 2007 surge, as David Petraeus’s counterinsurgency strategy came to be known, was the gutsiest political call by an American leader in my lifetime.      

It happened also to be right when very little else about the war was: There were, of course, no weapons of mass destruction found. Iran did expand its power, massively. Iraq did not offer an example of democracy to the region: rather, it horrified the region. It became linked to al-Qaeda only after the invasion. The White House refused to take the insurgency seriously until it was very serious. Iraq pulled attention away from Afghanistan. And of course there were 4,431 Americans killed.

By 2016, the narrative favored by Republicans had become that the execution of the war was flawed. Paul Bremer, head of the Coalition Provisional Authority in Baghdad, was the villain in this story: But for Bremer’s incomprehensible decision to disband the Iraqi army and institute de-Baathification in early 2003, so the story went, the Iraq war could have succeeded. But in retrospect these decisions were defendable. Bremer was erring on the side of satiating the Shia majority, not the Sunni minority, and trying to reassure them that a decade after they were abandoned in 1991 the United States would deliver them political power. And the one real success of the Iraq war, beginning to end, is that the United States never faced a generalized Shia insurgency.

The other villain was Barack Obama, who played in the sequel. (Obama largely owed his electoral victory to the Iraq war, brilliantly using Hillary Clinton’s vote for the invasion to invalidate her experience and judgment and thus the main argument for her candidacy.) In this version of events, Obama’s precipitous decision to withdraw troops from Iraq in 2011 contributed to the country’s near-collapse three years later under the rise of the Islamic State of Iraq and al-Sham (ISIS). This was basically accurate. The withdrawal of US forces eliminated a key political counterweight from Iraq, and the main incentive for then-Prime Minister Nouri al-Maliki to hedge his sectarianism and friendliness with Iran. This accelerated political support for Sunni rejectionist movements like ISIS.

Both the Bremer narrative and the Obama narrative allowed George Bush’s Republican party to avoid revisiting the core questions of American power: intervention, exceptionalism, and its limits—precisely the same questions that had featured prominently in the 2006 and 2008 elections.

This was the broken market that Donald Trump exploited: that Republican voters’ views on Iraq after 2008 looked much like Democratic voters’, but the Republican establishment’s views did not. And it was no accident, in the 2016 presidential primaries, that the two candidates most willing to criticize the interventionism of the 2000s, Trump and Ted Cruz, were the ones who did best.      

This debate remains critical. More than any other decision, Bush’s war created the contemporary Middle East. Above all that includes the unprecedented regional dominance of Iran, the power of the Arab Shia, and the constraints on American power in buttressing its traditional allies. That imbalance, combined with a decade-long sense that America is leaving the region and wants no more conflict, has led Sunni Arab states to look for their security in other places.

Especially in the wake of Russia’s war against Ukraine, which if anything has sharpened foreign policy divisions, the Republican party and the United States need a dialectic, not a purge; a discussion, not a proscription; and a reasonable synthesis of the lessons of Iraq. People want to vote for restraint and realism, as much as or more than they want to vote and pay for interventionism and idealism. Was the Iraq War a mistake? Let us start this debate there, and produce something better.

—Andrew L. Peek is a nonresident senior fellow at the Atlantic Council’s Middle East Programs. He was previously the senior director for European and Russian affairs at the National Security Council and the deputy assistant secretary for Iran and Iraq at the US Department of State’s Bureau of Near Eastern Affairs.

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Andrew Peek on the historical context of the 2003 invasion

US foreign policy

The US decision to invade Iraq twenty years ago was, to use the words of Charles-Maurice de Talleyrand, a wily French statesman and diplomat of the Napoleonic era, “worse than a crime; it’s a mistake.” 

While Saddam Hussein was a monster, and had ignored numerous United Nation-mandated commitments, the US-led effort in 2003 to topple him as president of Iraq was strategically unnecessary. It became the center of a failed mission in nation-building—one that has proved disastrous for US interests in the greater Middle East and beyond. 

Iraq was at the center, but it was only one of four failed American interventions in the region.  The others were Afghanistan, Libya, and, to a lesser extent, Syria.  The operation to take down the Taliban was fast and efficient, but consolidation of a post-Taliban Afghanistan never occurred. Part of the reason for that was the United States’ war of choice in Iraq, which began less than eighteen months after Afghanistan. That sucked up most of the resources and attention for the rest of that decade. But the other reason for US failure in Afghanistan was that we were beguiled by the same siren song that misled us in Iraq: that we could overcome centuries of history and culture and create a stable society at least somewhat closer to US values. Failure on such a scale is not good for the prestige and influence of a superpower.

But that is not the end of it. There is also the domestic side. The misadventures in the greater Middle East were a failure not just of the US government but of the US foreign policy elite. It was a bipartisan affair. Neoconservative thinking dominated the Republican Party throughout the aughts, while liberal interventionism prevailed in the Democratic Party. They were all in for the utopian policies in Afghanistan, Iraq, Libya, and Syria. 

While the failures in the greater Middle East were widely understood even before the unnecessarily embarrassing 2021 departure from Afghanistan, there has never been a public reckoning. There was nothing like the Church Committee, which in the mid-1970s shined a very harsh light on US failures in Southeast Asia. Few prominent thinkers or officials have publicly acknowledged their failed policy choices. And the same figures who led us into those debacles are still widely quoted on all major foreign policy matters.   

This has had the consequence in the United States of providing ground for the growth of neoisolationist thinking. In running for the presidency in 2016, Donald Trump was not wrong in pointing out the failures of elites in both parties in conducting foreign policy in the greater Middle East. Since then, populists on the right have used this insight to undermine the credibility of foreign policy experts. And like generals fighting the last war, they have applied their “insight” from the Middle East to the latest challenges to US interests, such as Moscow’s war on Ukraine.  

In this reading, US support for Ukraine is comparable to US interventions in Iraq and Afghanistan and will result in failure. There is no analysis—simply dismissal—of the dangers that Vladimir Putin’s war in Ukraine poses to US security and economic prosperity. No recognition that, as Putin has stated numerous times, he wants to restore Kremlin political control over all the states that used to make up the Soviet Union—which includes NATO and European Union (EU) member states. In other words, he seeks to undermine NATO and the EU. 

Furthermore, there’s no understanding that despite the presence of American troops, the United States’ local allies in Iraq and Afghanistan could not win—but without one NATO soldier on the battlefield, Ukraine is fighting Russia to a standstill. Indeed, Ukraine has destroyed between 30 percent and 50 percent of Moscow’s conventional military capability. These analogies with the Iraq war ignore the reality that if Putin takes control of Ukraine, the United States will likely spend far more in financial resources and perhaps American lives in defending its NATO allies.

These failures of understanding are not simply or mainly a consequence of US errors in the Middle East. Utopian thinking in the United States and especially Europe was a natural consequence of the absence of great-power war since 1945. Especially since the fall of the Soviet Union, people on both sides of the Atlantic got comfortable with the notion that Russia was no longer an adversary. And isolationism also has a long pedigree in US society. So it would be vastly oversimplifying to blame the confusion of today’s neoisolationists exclusively on US failures in the Middle East. But the strong US response to the challenge of a hostile Soviet Union was possible because a bipartisan approach on containment was endorsed by leaders of both parties. After the United States’ misadventures in Iraq, such endorsements carry less weight today. In US foreign policy as elsewhere, we still do not know what the ultimate impact of the decision to invade Iraq will be. 

—John Herbst’s 31-year career in the US Foreign Service included time as US ambassador to Uzbekistan, other service in and with post-Soviet states, and his appointment as US ambassador to Ukraine from 2003 to 2006.

What Iraq needs now

William F. Wechsler on the future of Iraq

A reconciliation commission to rebuild national unity

One of the most devastating shortcomings of the 2003 Iraq invasion was the dismantlement of state institutions and the weakening of the Baghdad central government. That structural vacuum of power and services forced Iraqis back into tribal, religious, and ethnic allegiances, contributing to the nation-state’s fragmentation and exacerbating divisive sectarian discourses and intercommunity tensions. A quota-based constitutional system only served to institutionalize and legitimize the ethnosectarian distribution of power.   

Conflicting groups grew further apart over the past two decades and became more motivated by accumulating political positions, hefty oil incomes, and territorial and symbolic gains rather than collectively seeking to rebuild their balkanized nation. Iraqi youth, on the other hand—who campaigned in the name of “We Want a Homeland” [نريد_وطن#] during the 2019 Tishreen (October) protests—seem to have understood what political elites might be missing: the necessity for national reconciliation and memorialization. 

The bombing of the al-Askari shrine in Samarra in 2006 unleashed the chaos trapped inside Pandora’s box and resulted in violent Sunni-Shia confrontations, which pushed the country to the brink of civil war. Today, political elites, aware of the fragility and precariousness of the political consensus, pretend the time of friction is over. My firsthand work in Iraqi prisons and camps, and the research projects I led in the country’s conflict zones off the beaten path, such as west of the Euphrates, in Zubair, and in rural areas in the Makhoul Basin, prove the absolute contrary. 

A flagrant example of the sectarian ticking bomb that persists in Iraq is the mismanagement of the Sunni populations in the aftermath of the war against the Islamic State of Iraq and al-Sham (ISIS). Many pretended that ISIS fighters came from some fictional foreign entity and refused to face the fact that most of them, including their leader, were Iraqi-born and raised, which I observed as an eyewitness working with the International Committee of the Red Cross during the ISIS war in Nineveh and Salahuddin. Many people who were accomplices of the atrocities even engaged in rewriting the narrative altogether after 2017 in the name of national unity. 

A number of Sunni populations in Iraq were mystified by their sudden loss of power with the toppling of Saddam Hussein and were in disbelief that the Shia they stigmatized as shrouguis—literally, “easterners,” a derogatory reference used by Sunni elites to refer to Shia Iraqis from the southeast—became the new lords of the land. Instead of engaging in meaningful mediation and reconciliation to work through these social changes, the majority parties preferred to bury their heads in the sand. This tendency led them to allow militia groups to displace and isolate the Sunni inhabitants of a key city like Samarra, to submerge under water the citizens of northern Kirkuk and Salaheddin, or to conceal the evidence incriminating Tikrit Sunnis during the Speicher massacre, in which ISIS fighters killed more than a thousand Iraqi military cadets, most of them Shia. 

These are not isolated examples in a chaotic political and constitutional system in which many communities feel persistently misunderstood, including Kurds, Assyrians, Mandaeans, Baha’is, Afro-Iraqis, Turkmen—and even the Shia themselves. The only possible and plausible pathway for the country to be one again in the next twenty years is to engage in an excruciating but indispensable reconciliation process, through which responsibilities are determined, dignity is restored, and justice is served. 

—Sarah Zaaimi is the deputy director for communications at the Atlantic Council’s Rafik Hariri Center & Middle East programs.

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A new constitution

Iraq needs a new constitution. A good constitution spells out the framework and structure of government. It provides essential checks and balances to prevent dictators from coming to power. It helps protect the people’s rights. It has measures to prevent gridlock or the collapse of a functioning government.

Judged by these standards, the 2005 Iraqi constitution is only a partial success.

However, complaints have built up since 2005: over the muhasasa system under which the established political parties divide up ministerial appointments; over the failure of Iraq’s government or other institutions to deliver basic services like electricity and water; over perceptions of excessive Iranian meddling in Iraq’s politics; and over the inability of the government to provide meaningful employment for millions of young Iraqis—or to foster a private sector capable of doing so. These grievances came to a head in the 2019 Tishreen protests in which more than 600 Iraqis died.

The United States invaded Iraq in 2003 in part to bring democracy to Iraq, so it is ironic that Iraq’s 2005 constitution was the product of mostly Iraqi political forces unleashed by the failure of the United States to ensure a democratic transition. It was expected that the Kurdish political parties, which had worked closely with the United States for years, would insist upon a federal republic to ensure their autonomy from a central government whose long-term character and leanings in 2005 were far from settled. Beyond this, however, the small number of Americans actually involved in advising the key Iraqi players in the constitutional process—in the room where it happened—actually had relatively little experience in constitutional mechanics or modern comparative constitutional practice. The American sins of commission during the first two years after Iraq’s liberation were replaced by sins of omission during the crucial months of negotiation of the 2005 constitution.

Genuine constitutional reform in Iraq is not likely to be accomplished directly through the parliament, given the interests of Iraq’s political parties and the parliament’s need to focus on legislative responsibilities. Instead, Iraqi civil society—including scholars, lawyers, religious and business leaders, and retired government officials and jurists—should initiate serious discussions about constitutional reform. Many of these voices were not heard when the 2005 constitution was adopted. Their effort can be far more open and transparent than the process was in 2005.

Foreign governments should have a minimal role, limited to supporting and encouraging Iraqi-led efforts, without trying to broker a particular outcome. International foundations, institutes, universities, and think tanks can offer outside expertise, particularly in comparative constitutional law and other kinds of technical assistance. But the overall effort needs to be Iraqi-led, with input from a broad spectrum of Iraqi voices.

While civil society discussions in Iraq could begin with considering amendments to the 2005 constitution, US experience may be relevant. The US Constitutional Convention convened in May 1787 to consider amendments to the Articles of Confederation decided to completely redesign the government, resulting in a Constitution that, with amendments, has been in force in the United States for more than 230 years. Sometimes it’s better to start over.

Iraq’s path to constitutional reform is not clear today, but there is a path nevertheless. Incremental reform is possible, but reform on a larger scale may achieve a more lasting result. The more promising outcome could be for a slate of candidates to run for office with the elements of the new constitution as their platform. A reform slate is not likely to gain an absolute majority, but if its base of support is broad enough, it may be able to gain support in a new parliament needed to send a revised constitution to the Iraqi people for their approval. A new constitution, done right, could propel Iraq towards a better future.

—Thomas S. Warrick led the State Department’s “Future of Iraq” project from 2002 to 2003, served in both Baghdad and Washington, and was director (acting) for Iraq political affairs from July 2006 to July 2007. He is a nonresident senior fellow at the Atlantic Council’s Scowcroft Center for Strategy and Security.

Thomas S. Warrick on the need for Iraqi-led constitutional reform

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An economy diversified away from oil

The post-2003 political order, based on the muhasasa system of sectarian apportionment, came with the promise of a complete break with the past. The 2005 constitution, drafted by the new order, promised: “The State shall guarantee the reform of the Iraqi economy in accordance with modern economic principles to insure the full investment of its resources, diversification of its sources, and the encouragement and development of the private sector.” 

As with other bold promises made, the economic promise was broken as soon as the constitution came into effect, as the political order pursued a decentralized and multiheaded evolution of the prior economic model, and persistently expanded the patrimonial role of the state as a redistributor of the country’s oil wealth in exchange for social acquiescence to its rule. 

Over the last twenty years the economy developed significant structural imbalances, and was increasingly bedeviled by fundamental contradictions. Essentially, it was dependent on government spending directly through its provisioning of goods and services as well as public services, and indirectly on the spending of public-sector employees. However, this spending was almost entirely dependent on volatile oil revenues that the government had no control over; yet the spending was premised on ever-increasing oil prices.

The political order had the opportunity to correct course and honor the original promise during three major economic and financial crises, each more severe than the last and all a consequence of an oil-price crash: in 2007 to 2009, due to the global financial crisis; in 2014 to 2017, due to the conflict with the Islamic State of Iraq and al-Sham; and in 2020, due to the emergence of COVID-19. Yet, paradoxically, the political order doubled down on the policies that led to these crises as soon as oil prices recovered.

On the eve of the twentieth anniversary of the invasion of Iraq, the political order—buoyed by the bounty of high, yet unsustainable, oil prices—is planning a budget that is expected to be the largest ever since 2003, to seek legitimacy from an increasingly alienated public. These plans will only deepen the economy’s structural imbalance and its fundamental contradictions, and as such could likely lead to even greater public alienation if an oil-price crash triggers yet another economic and financial crisis. Even if oil prices were to stay high, however, the country’s demographic pressures will in time create the conditions for a deeper rolling crisis. 

—Ahmed Tabaqchali is a nonresident senior fellow with the Atlantic Council’s Middle East programs. An experienced capital markets professional, he is chief strategist of the AFC Iraq Fund.

Andrew Peek on the current state of Iraq and the US-Iraq relationship

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An inclusive vision, representative of all its people

One of the enduring legacies of the 2003 invasion has been its deleterious effect on the many diverse ethnic and religious minority communities that make up the social fabric of Iraq. Yet it is that diversity and rich heritage that could now unlock a brighter future for the nation, if the political system can recognize and represent it. 

Marginalized by an institutionally inscribed political system and few representative seats in parliament, Iraq’s minority communities have found themselves peripheralized by the state—and in the imaginations of the country’s future. Many have emigrated and now reside in diaspora, changing the ethnic and religious heterogeneity of Iraq. 

Calculating the cultural toll of war goes beyond the destruction of shrines and artifacts, and the looting of museums and buildings: One of the biggest social and cultural losses for Iraq has been the exclusion of minority communities from the nation-building processes. This is a tragic state of affairs for Iraq, whose uniqueness, strength, and richness stems from its ancient histories and cultures, its religious, artistic, and musical traditions, and the languages that have contributed to its heritage and development. That heritage deserves to be protected and celebrated. 

Until the day the muhasasa system is dismantled, and a new Iraq built on meritocracy can thrive, minority communities must be safeguarded and included in Iraq’s future. Yet, this can only be achieved through the protection of minorities’ rights in Iraq’s political life, and genuine and concerted effort to increase parliamentary seats and legal representation of minorities. Investment in areas destroyed by terrorism and conflict, more reparations for communities whose livelihoods and homes have been ruined, and more boots on the ground to protect communities and religious shrines should be a priority. 

Twenty years of destruction, corruption, violence, and the subsequent emigration of many communities cannot be erased. Yet the twentieth anniversary of Iraq’s occupation ought to serve as a point of reflection for the kind of Iraq that Iraqis want now. There is certainly much hope in a new generation of Iraqis calling for new national visions, an end to muhasasa, more civil rights, and expanding economic opportunities. 

Yet all of Iraq’s communities must be part of this conversation. A more inclusive Iraq that applauds its diversity and takes pride in difference could be the driving force needed to unify the nation. 

—Oula Kadhum, a former nonresident senior fellow at the Atlantic Council, is a postdoctoral research fellow at Lunds University in Sweden and a fellow of international migration at the London School of Economics and Political Science in the United Kingdom. 

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Oula Kadhum on the reforms needed to reposition Iraq in the next twenty years

A new US Iraq policy focused on youth and education

As the global community reflects on the twentieth anniversary of the US-led invasion of Iraq and looks to the future, it is time for foreign policy toward Iraq to move beyond its traditional, security-heavy approach. 

While security threats persist, including a potential resurgence of the Islamic State of Iraq and al-Sham (ISIS), and should be a priority, US aid to Iraq has historically been ineffective and financially irresponsible. Humanitarian assistance, meanwhile, tends to focus on short-term issues like the response to COVID-19 and assisting displaced individuals. And while such aid can be beneficial, continuing with the traditional avenues of support is not a sustainable solution to rebuild Iraq. The United States and the international community must begin to focus on long-term solutions that address human security, development, infrastructure, education, and the economy. At the center of all these issues are two key variables that must be the focal point of policy: education and the youth population.

A 2019 UNICEF report estimates that a staggering 60 percent of Iraq’s population is under the age of twenty-five. Learning levels and access to education in Iraq remain among the lowest in the region. The great challenges these two facts pose can also be seen as a unique opportunity: to place its large youth population at the epicenter of Iraq’s future through policy that increases the number of educators and trains them, ensures sanitary and competent learning conditions, and increases access to education.

The benefits of a long-term investment in Iraq’s education system and youth population go beyond simply educating its citizens: It would be the first step in unlocking the human potential of Iraq. More education means more qualified professionals; more doctors would increase the quality and access to healthcare, an increase in engineers will ensure that the country’s infrastructure continues to develop, and additional business leaders and entrepreneurs will assist in growing the economy. 

To truly rebuild Iraq, the United States and the international community can no longer view the country as only a security issue. Rather, this moment must be seen as an opportunity to empower bright Iraqi youths, who hope to lead in rebuilding their own country—providing them with a fair shot of again being a cradle of civilization. 

—Hezha Barzani is a program assistant with the Atlantic Council’s empowerME initiative. Follow him on Twitter @HezhaFB.

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Iraq’s Deputy Prime Minister Fuad Hussein reflects on the twentieth anniversary of the invasion

What the United States can do now

Recommit to the cause of Iraqi freedom

It’s hard to believe that it has been twenty years since the US invasion of Iraq. As I sat waiting to launch my first mission on March 20, the war’s historical significance was not my primary thought. How I found myself flying on the first night of the war in Afghanistan and Iraq was. That thought was accompanied by the tightness in the pit of my stomach that I always got before launching into the unknown. 

We didn’t debate the case for the war among ourselves. It has been discussed thoroughly since, and I don’t claim to have any new insight to offer on that topic. We were focused on not letting down our fellow Marines and accomplishing our mission: to remove Saddam Hussein’s dictatorship and replace it with a democracy that would give the people of Iraq the freedom that people everywhere deserve as their birthright. 

Did we succeed? We certainly succeeded in rapidly destroying the Baathist regime and its military, the third largest in the world. The answer to the second question is less clear. On my second and third tours in Iraq, I saw the chaos from the al-Qaeda-fueled insurgency in 2005 and 2006 and the dramatic turnaround following the al-Anbar “Sunni Awakening” in 2006-2007. From afar, I watched the horrors that the Islamic State in Iraq and al-Sham inflicted on its people after US troops withdrew without a status-of-forces agreement. 

Today, Iraq is rated “not free,” scoring twenty-nine out of one hundred in Freedom House’s Freedom in the World 2022 report. Although not up to Western liberal democracy standards, this is an improvement over 2002, when it received the lowest score possible and was listed as one of the eleven most repressive countries in the world. Moreover, Iraq’s 2022 score is vastly better than most of its neighbors: Iran scored fourteen, Syria scored one, and Afghanistan scored ten. 

Despite Afghanistan being widely seen as “the good war” of the two post-9/11 conflicts, where the casus belli was clear, today it is Iraq, and not Afghanistan, that gives me hope that twenty years from now, on the fortieth anniversary, we will see our efforts to promote democracy in Iraq come entirely to fruition. We owe it to the 36,425 Americans killed and wounded there, the thousands of veterans who took their own lives, and the many more still struggling with post-traumatic stress disorder to stay engaged in Iraq and the region to try and make sure that they do.

—Col. John B. Barranco was the 2021-22 Senior US Marine Corps Fellow at the Atlantic Council’s Scowcroft Center for Strategy and Security. These views are his own and do not represent those of the Department of Defense or Department of the Navy. 

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Balance confidence and humility

I officially swore into the military at Fort Hamilton, Brooklyn, on April 4, 2003, during the early stages of the US “shock and awe” campaign in Iraq. Having decided to join the Air Force following 9/11, the lengthy administrative process I’d endured to get to this point had been agonizing. I recall going through the in-processing line at Officer Training School on April 9, when an instructor whispered to us: “Coalition forces have taken Baghdad, stay motivated.” The thought that immediately went through my mind was: “I’m going to miss the wars.”

I had made the choice to pursue special operations and still had two years of training ahead of me. At the time, the war in Afghanistan seemed like it was nearing completion, and the swift overthrow of Saddam Hussein in Iraq had me convinced that, by the time I was ready to deploy, there would be no fighting left. Little did I know that the wars in Afghanistan and Iraq, along with their expansions across the Middle East and Africa, would end up consuming a large majority of my twenty years of service, take the lives of many of my special operations teammates, and impact the health and well-being of a generation of US service members and their families.

It’s impossible to know how the war in Iraq shaped other US endeavors in the region. Did it take our focus from Afghanistan and put us on a path of increased escalation and investment there? Did it set conditions for the Islamic State in Iraq and al-Sham to take root many years later, setting off another expansive counterterrorism campaign? 

More broadly, did it allow adversaries the time and space to study US capabilities and ultimately inform their strategies for malign influence? I often think of this today when I’m asked about what’s going to happen with the Russian war in Ukraine, or how prepared the United States is to defend Taiwan. 

The United States needs the confidence to confront global challenges to peace and prosperity, but also the humility to know we get things wrong, and mistakes involving direct military intervention can be catastrophic. Given the escalatory risks associated with the security challenges in the world today, our pursuit of a balance of confidence and humility has never been more important.

—Lt. Col. Justin M. Conelli is the 2022-23 Senior US Air Force fellow at the Atlantic Council’s Scowcroft Center for Strategy and Security.

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William F. Wechsler on the current political discourse around Iraq

Recognize the successes as well as the failures

“Was the invasion of Iraq worth it?”

I’ve spent a great deal of my military and postmilitary career answering questions about Iraq, but this one—from a brigadier general in the audience—caught me off guard. It was 2018, seven years after the formal withdrawal of US forces from Iraq, and I found myself in front of a roomful of Army officers giving a talk on the future of US-Iraq security cooperation. By that time, such talks had become a little frustrating. The fight against the Islamic State in Iraq and al-Sham (aka the Islamic State group) demonstrated that Iraqi forces could rise to the immediate challenge; however, the conditions that led to their unceremonious collapse in 2014 had not much changed. As a result, there remained many questions about the best way to continue the security partnership to prevent future catastrophe. 

The question I got that day, however, had little to do with how to partner with Iraqi forces. A co-presenter from Kurdistan jumped in immediately to answer the brigadier general’s question: the US invasion had removed Iraqi Kurdistan’s most significant threat—Saddam Hussein—and had provided opportunities for economic and political development it would not have had otherwise. Sensing a trap, I nonetheless walked right into it. While Iraqi Kurdistan was certainly in a better position, I pointed out that was not consistently so for the rest of Iraq. The US invasion had unleashed a sectarian free-for-all that allowed Sunni extremists, Shia militias, and their Iranian sponsors to fill the vacuum of oppression Saddam’s departure had left. Moreover, this vacuum had empowered Iran to challenge the United States and its partners regionally. So my answer was no, toppling Saddam likely did not outweigh the costs.

In previous years, the questions had been more policy-focused. For example, when I arrived at the Pentagon’s Iraq Intelligence Working Group in August 2002, the first question asked was how Iraq’s diverse ethnic and confessional demographics would affect military operations and enable—or impede—victory. By early 2003, the questions were about the larger effort to construct a new political order. Before long, we were asking how the confluence of Islamist terrorism, sectarian rivalries, and external intervention drove resistance to efforts to reconstruct Iraq. 

In 2012, I became the US defense attaché in Baghdad, just after the last US service members withdrew. At first, the question I heard in this capacity was how to continue the reconstruction project with a limited military and civilian presence whose movement was often severely restricted in a sovereign, sometimes uncooperative, Iraq with frequent interference from Iran. Before I left, al-Qaeda had metastasized into the Islamic State group and the question became how to cooperate to prevent the group’s further expansion and liberate the territory it had seized. Meanwhile, Iran’s influence with the Iraqi government continued to grow. 

In retrospect, the conditions I described in 2018 were accurate (and still largely hold today), but I wish I had given a more considered response. What I wish I had said was that a better question than “was it worth it” is: what have we learned about past failures to assess future opportunities? A prosperous Iraq that contributes to regional stability was not possible under Saddam. Now Iraq is an effective partner against Islamist extremists, and the Iraqi people, if not always their government, are in a position to push back on Iran in their own way, exposing Tehran for the despotic government it is. Moreover, Iraq’s hosting of discussions between Saudi Arabia and Iran was a catalyst to their recent normalization of relations. 

The point is not to rationalize failure. Rather, the question now is: what have we learned from those failures to effectively capitalize on the success we have had, and how can we take advantage of the opportunities the current situation presents?

—C. Anthony Pfaff, PhD, is a nonresident senior fellow with the Atlantic Council’s Iraq Initiative and a research professor for strategy, the military profession, and ethic at the Strategic Studies Institute of the US Army War College in Carlisle, Pennsylvania.

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Tony Pfaff on the future of US-Iraq relations

Remember the price of hubris

For me, the memories of those first days and weeks in Iraq remain quite clear. I remember calling my family from a satellite phone on the tarmac of Baghdad International Airport to let them know I was alive, late night meetings with Iraqi agents in safe houses, wrapping up Iraqi high-value targets, the fear amid firefights and the carnage on streets strewn with dead and mutilated bodies, and a confused Iraqi population that at the time did not know what to make of US forces who claimed to be liberating them from the regime of Saddam Hussein. 

Upon arrival in Baghdad in early April, there were few signs of the resistance that would haunt the United States for decades to come. Yes, there were still combat operations underway, but that was against Iraqi military and paramilitary units. So, as we tracked down Iraqi regime targets one by one—members of the famed “deck of fifty-five cards” that US Central Command had dreamed up and distributed like we were trading baseball cards—we saw this as part of a new beginning.

Yet soon after, the wheels began to fall off. Orders came from Washington policy officials with absolutely zero substantive Middle East experience both to disband the Iraqi military and purge the future government of Baath party officials, which immediately put tens of thousands of hardened military officers, conscripts, and officials out of work and on the street. The CIA presence on the ground protested, but to no avail. I had never seen Charlie, my station chief, so angry, including face-to-face confrontations with senior figures in the Coalition Provisional Authority. Charlie—the most accomplished Arabist in the CIA’s history—sadly predicted the insurgency that was about to come. If only Washington had listened.

I rarely think of Iraq in terms of big-picture strategy. As a CIA operations officer, I was a surgical instrument of the US government, and I gladly answered the bell when called upon to do so. I am proud to have served with other CIA officers and special operations personnel who performed valiantly. I suppose I can defend the invasion on human rights grounds. It seems we forget that Saddam was one of the great war criminals in history, and Iraq has been freed from his depravity. Yet two numbers are haunting: 4,431, and 31,994. Those are the number of Americans killed and wounded in action, per official Department of Defense statistics. 

War is a nasty business, and many times a terrible price is paid for hubris. The casualty figures noted above paint a stark picture of the historic intelligence failure that the analytic assessment that Iraq possessed weapons of mass destruction was. The CIA in particular suffered a credibility hit that has taken decades to recover from.

—Marc Polymeropoulos, a nonresident senior fellow at the Atlantic Council, served for twenty-six years at the CIA before retiring in 2019. 

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Thomas S. Warrick on the lessons to learn from the Iraq War

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Fifty-three economies—including Argentina, Egypt, Pakistan, and Nigeria—are in an especially fragile condition because they have either defaulted on some of their debts, or have debt levels that the IMF considers unsustainable. Given their 5 percent share in the global economy, this may not sound alarming. However, considering the contagion phenomenon in financial markets—and the fact that these fifty-three economies are home to about 20 percent of the world’s population—debt distress, and its social, political, and economic ramifications could pose serious threats to the global economy. Acknowledging these dire conditions, the IMF has redoubled its efforts to help its member countries avoid the worst of debt crises.  

How does IMF financial assistance work? 

The IMF’s financial assistance is intended to provide financial support for countries that are experiencing or at risk of financial crises, including balance of payment (BoP) crises, banking crises, currency crises, or external/internal debt crises. The IMF’s financial assistance provides breathing space for governments to devise and gradually implement corrective policies. Hence, the IMF’s financial assistance is always associated with a set of reform policies tailored for the country in crisis. These may include monetary policy and exchange rate policy reforms, and other sets of economic-wide reforms broadly referred to as Structural Adjustments or Reforms. By implementing these reforms, the country is expected to restore long-run financial stability and growth in its economy and rebuild domestic and foreign investors’ faith in the country’s economy.  

Table 1 provides a breakdown of the IMF’s financial assistance accounts and types. Broadly speaking, IMF financial assistance can take three forms. First is lending at an interest rate determined by the average of interest rates in world major currencies. Loans extended under the General Resources Account (GRA) are of this type. Second is lending at concessional terms which are extended at very low or no interest rates to low-income economies. Financial assistance through the Poverty Reduction and Growth Trust (PRGT) falls under this category. The third form of IMF financial assistance is through the Catastrophe Containment and Relief Trust (CCRT). This is a debt relief grant for heavily indebted, low-income economies facing debt distress and financial turmoil. Figure 2 shows the value of all IMF financial assistance between 2020 and 2022 for each type and recipient country. More than three-quarters of all IMF financing during the 2020-22 period was through the Flexible Credit Line (58 percent of the total) and the Extended Fund Facility (19 percent of the total). 

Latin America and the Caribbean have been the IMF’s largest clients. 

In fiscal year (FY) 2022, the IMF provided $113 billion of financial assistance to twenty three of its member countries, 90 percent of which is dedicated to Latin American and Caribbean economies. Two economies in Latin America accounted for $91 billion (or 80 percent of the IMF’s financial assistance in 2022): Argentina with $43 billion and Mexico with $48 billion. FY2022 was not an anomaly in the IMF’s financial assistance pattern. As seen in Figure 3, 71 percent of all IMF financial assistance between 2020-22 (including FCL) was allocated for the Latin America and Caribbean region.

However, it is important to note that the type of financial assistance IMF has provided in the form of FCL —for example to Mexico and Columbia— is drastically different in nature from the assistance provided to Argentina in the form of EFF. In particular, FCL is designed as a crisis-prevention and crisis-mitigation credit line for countries that have strong policy frameworks and solid track records in their economic performance. Hence, the country may or may not decide to use all or even a portion of this line of credit that is allocated to them. For example, Mexico has drawn nothing from the total amount of 80.214 billion SDR made available to them through FCL facility between 2020 and 2022. In contrast, Argentina has drawn 17.5 billion SDR from the 31.914 billion SDR EFF assistance provided to them. It must be noted here that IMF extends EFF to a country facing major medium-term BoP challenges because of various structural issues that will necessitate some time to address. IMF’s lending commitments site provides updated detailed information on the type and amount of assistances IMF has allocated for each member country from its first day of inception, the amount drawn from the allocated funds, and the outstanding balances.    

After Latin America, the Sub-Saharan Africa region is the IMF’s main client. It is followed by a few countries in other regions such as Egypt in the Middle East and North Africa, and Pakistan in South Asia, which are highlighted in Figure 4.

The IMF should reexamine the uneven distribution of its financial resources.

The case in hand is the IMF’s uneven response to economies in Latin America versus those in Sub-Saharan Africa. While both regions suffer frequently from debt and BoP crises, Latin American economies tend to get larger IMF packages than African economies, even when their IMF quotas are considered. For example, Argentina’s most recent IMF package (arranged March 25 2022) was about $43 billion, which is about 1,000 percent of its quota and $950 million per capita. Moreover, program aimed to help Argentina repay its outstanding IMF debt from an unsuccessful 2018 $57-billion IMF program.  

In contrast, Zambia’s most recent IMF package (approved August 31 2022) was about $1.3 billion, or 100 percent of its quota and about $73 million per capita. A careful look at the IMF’s financial assistance history will surface many more such examples of potentially uneven treatment. Pakistan and Egypt are two other countries that have received substantial and frequent financial assistance from the IMF over the past decades while other countries in their respective regions have had less luck in that front.  While citizens and policymakers in Latin America, Pakistan, and Egypt may reject the notion that the IMF has treated them favorably over the years, a close look at other countries such Sri Lanka and Lebanon provides a glimpse of what could happen to economies in crises when IMF assistance is not immediately there to support them.  

Conclusion 

The global economy is facing multifaceted challenges that are increasingly interconnected and transnational in nature. Bretton Woods Institutions, such as the IMF and the World Bank, are tasked with addressing many of these challenges—including the debt distress faced by many low income and emerging economies. However, as shown above, their responses to crises have not been equitable across different regions and countries. As firefighters of the global economy, these institutions should respond to crises on equitable terms across all their members. Otherwise, they risk being viewed as politically motivated, undermining their effectiveness and relevance in the governance structure of the global economy and financial relations.  

Recent debt relief grants allocated to many low-income economies in Sub-Saharan Africa through the CCRT and the last month’s visit of IMF’s managing director, Kristalina Georgieva, to Africa and engaging with African leaders are steps in the right direction. However, they must be followed by more favorable and creative financing schemes for debt-distressed low-income African economies, where debt vulnerabilities were exacerbated by the global pandemic and skyrocketing global food and energy prices. 

Amin Mohseni-Cheraghlou  is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also an assistant professor of economics at American University in Washington DC. @AMohseniC

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From what is known so far, the cause for SVB’s demise was a classic asset-liability duration mismatch. The bank held a large portfolio of long-term bonds that had lost in market value as interest rates increased over the past year. As word began to spread about its weak financial situation, it did not have enough short-term liquidity to meet customers’ demands for deposit withdrawals. The bank was then forced to sell its assets and realize its losses, which eventually led regulators to step in.

With the Fed’s tightening cycle still in full swing, it stands to reason that SVB—the sixteenth largest US bank with $209 billion in assets at the end of 2022—is not the only bank or financial institution to experience maturity mismatches of this kind. FDIC Chair Martin Gruenberg cautioned last week that the US financial system carries a $620 billion risk from value losses in bond portfolios. Much of this may be spread across smaller financial institutions, but it remains to be seen how other banks are able to cope with valuation losses on their balance sheets.

While SVB’s failure did not portend a systemic financial risk, given the specialized nature of its business, its troubles posed an existential threat to many start-up companies. These companies have held most of their deposits with the bank, and significant losses or an inability to access liquid funds could have jeopardized their ability to pay for ongoing operations. The concern was that widespread failures in the start-up sector could have had detrimental consequences for the pace of technological innovation and economic growth in future years. While Silicon Valley appeared to be hit hardest, SVB also owned branches or subsidiaries in countries around the world. Pressures duly emerged in Canada, the United Kingdom—where HSBC took over Silicon Valley Bank UK on Monday—and South Korea, for example.

Where does this leave policymakers at the current juncture?

• Immediate steps. US regulators, the Federal Reserve, and the US Treasury moved quickly over the weekend to protect depositors, restore access to SVB customers’ funds, and ensure that the SVB failure would not lead to a wider crisis of confidence in the financial sector. Unlike 2008, the bank’s failure stemmed from bond valuation losses, not failed loans. This leaves a considerable amounts of assets to cover losses while the balance sheet is being unwound, keeping overall rescue costs low. The FDIC had also invited bids from other banks to take over SVB’s business, but no buyer emerged over the weekend.
• Addressing systemic risk. The Federal Reserve also announced the creation of a new Bank Term Funding Program as a source of liquidity that could help financial institutions to avoid fire sales in times of stress, backed up by twenty-five billion dollars from the US Treasury’s Exchange Stabilization Fund. Financial markets recovered after the announcement but, in an echo of the 2008 global financial crisis, these actions could be politically contested. By extending deposit protection to banks’ commercial customers, regulators could be accused of encouraging additional risk-taking at public expense. Given the concentration of losses in the US technology sector, however, the intervention seemed justified. Regulators now need to hold managers accountable and ensure swift intervention and resolution of failed banks going forward.
• Bank regulation. Experts and former officials are asking why bank supervisors did not detect SVB’s problems at an earlier stage, allowing it to operate until a deposit run forced an intervention mid-week (similar to the recent case of Silvergate Capital, a smaller bank tied to the bankruptcy of crypto firm FTX). Best practice would have been to intervene over a weekend to avoid deposit runs, minimizing bank losses and effects on market confidence. While supervisors were quick to shut down Signature Bank, a smaller bank with ties to the crypto industry, over the weekend, they have been hampered by the fact that smaller banks became subject to less intense supervision with the 2018 revision of the Dodd-Frank Act. Whether legislative efforts are needed to tighten regulations will surely become a point of contention going forward.
• Crypto companies. In a twist highlighting the close relationship between the traditional financial and crypto universes, stablecoin issuer Circle* has also been affected by the closure of SVB, which held about three billion of its forty-two-billion-dollar asset base. Circle’s US dollar coin was trading as much as 15 percent below parity on Friday but recovered over the weekend after the company pledged to cover any shortfall in assets. The episode highlights the fragility of the business model behind stablecoins, even for a company that has a reputation of working closely with regulators. Circle’s quick response appears to have averted further damage even before it regained access to its deposits, but the onus is on the US Securities and Exchange Commission and other regulators to ensure that stablecoins are fully backed by liquid and high-quality assets.

The SVB episode is likely a harbinger of greater market volatility as the Federal Reserve continues to tighten monetary policy, even in the absence of a full-blown recession. While interest rate increases could slow down in the case of financial fragilities, the Fed is in a bind as long as inflation remains at current levels. The 2008 crisis has provided regulators with important lessons, but the end of a decade-long period of ultra-low interest rates clearly carries the potential for significant disruptions, including in the large nonbank financial sector. Economic agents have always been caught out by shifting monetary policy paradigms, and this time will be no different.

Risks are not limited to the United States, of course. Europe is undergoing its own tightening cycle, with the European Central Bank caught between stubborn inflation and some highly indebted euro area member countries. China is grappling with slow growth and a real estate crisis, emerging markets are under strain from a strong dollar, global trade restrictions are on the rise, and so are geopolitical tensions with China and Russia. Cryptocurrencies and cyber risks have introduced another element of uncertainty and possible contagion, as the SVB event has demonstrated. In this volatile environment, it may take less than a Lehman Brothers-sized shock to cause severe financial and economic disruption. Governments and central banks around the world better be prepared.

Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former International Monetary Fund chief of staff.

Note: Circle is a donor to the Atlantic Council.

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In part, the shock came because Banga hails from the private sector. He is the vice chairman of the private equity firm General Atlantic and a former chief executive officer of Mastercard. Names floated as potential nominees in recent weeks favored current and former government officials. 

Banga’s nomination comes after the current World Bank president, David Malpass, announced that he will step down in June, ahead of the end of this five-year term. It also comes as the nearly eighty-year-old organization faces an array of global crises, from the COVID-19 pandemic and food insecurity to climate change. In fiscal year 2022 alone, the World Bank provided more than $104 billion in loans, equity investments, grants, and guarantees to partner countries and private businesses. 

Below, experts from our GeoEconomics Center answer the burning questions around this announcement. 

Do you expect any pushback on Banga’s nomination?

Other countries can put forward their nominees, and then the World Bank’s executive board will consider the nominees. The board has signaled they will decide by the end of May. However, per an informal agreement at the creation of the Bretton Woods Institutions in 1944, the United States has always chosen the World Bank president and has always selected an American. The Europeans are informally granted the privilege of selecting the head of the IMF (currently Kristalina Georgieva, a Bulgarian economist who was actually a former acting president of the World Bank herself). It is possible that other countries from emerging markets may try to oppose this arrangement this time around, but it seems unlikely that they could prevent Banga from ultimately being selected.

—Josh Lipsky is the senior director of the GeoEconomics Center.

There has been explicit signaling from the World Bank’s executive board, as well as a push from the nongovernmental-organization community, including ONE, that it’s time for a woman to (finally) helm the World Bank. There has also been an increasing sense that emerging markets and developing economies should have a stronger role in governance. With this nomination of Banga, we could very well see an alternative candidate emerge. 

—Nicole Goldin is a nonresident senior fellow with the GeoEconomics Center and the global head of inclusive economic growth at Abt Associates.

What does Banga’s nomination reveal about how the Biden administration views the World Bank?

The US nomination of Banga as the next president of the World Bank seems to convey the priorities the Biden administration expects from the institution going forward. Besides sharing the administration’s concerns about mobilizing resources to combat the effects of climate change, Banga brings to the table his track record as a successful chief executive officer of Mastercard, skill in mobilizing public and private capital, and experience doing business in developing countries. These skills and knowledge are important in leading the World Bank in the period ahead. 

—Hung Tran is a nonresident senior fellow with the GeoEconomics Center and a former IMF official.

Selecting a former leader of a major international company (which is not the typical mold for a president) suggests that the United States is focused as much on internal reform of the bank as it is on changing World Bank lending policy on climate and China. Reforming the inner workings of the World Bank has been a perennial mission for the institution’s presidents, and it’s unclear if Banga will have more success than others. 

We have done work on this issue at the Atlantic Council through our Bretton Woods 2.0 project, and what we show is that the World Bank’s ability to lend effectively to countries around the world ties directly to how it is structured internally.

—Josh Lipsky

What is the most pressing issue the next World Bank president will face?

The next World Bank president will have to contend with compounding crises: COVID-19, climate change, and conflict. The fallout from them includes learning loss, the reversal of gains against poverty, inflation and food insecurity, widening inequality between and within countries, and debt.

—Nicole Goldin

While the White House announcement of Banga’s nomination highlighted climate change among “the most urgent challenges of our time” facing the World Bank, there are several other issues that will require his immediate attention, notably the debt crisis that has enveloped dozens of countries since the COVID-19 pandemic hit. An estimated 60 percent of low-income countries are in, or at high risk of, debt distress, and a solution to their plight has been elusive because of an impasse in getting private-sector lenders and China (the World Bank’s third-largest shareholder) to agree to debt-restructuring deals.

The US government and Malpass have repeatedly criticized China over the issue, and the White House likely will expect Banga to keep up the pressure. But as China cuts its lending to developing countries, the World Bank will face calls to increase its commitment of funds not just to climate change programs, but in traditional areas such as infrastructure and poverty reduction.

—Jeremy Mark is a nonresident senior fellow with the GeoEconomics Center. He previously worked for the IMF and the Asian Wall Street Journal.

The post The big questions (and answers) about Ajay Banga’s nomination to lead the World Bank appeared first on Atlantic Council.

The international community must apply pressure so that China and private-sector lenders join in facilitating a collective haircut that includes all lenders.

As this year’s G20 chair, India clearly wants to position itself as the voice of the Global South, and resolving developing-country debt distress will serve as validation of its approach. The International Monetary Fund (IMF) estimates that 60 percent of low-income countries are in, or at high risk of, debt distress—double the 2015 level. However, the international community has struggled to offer a cohesive solution to resolve the most urgent cases, as the damage from COVID-19 continues to deepen, global growth remains slow, and high inflation continues.

The debt issue will be front and center when G20 finance ministers meet in India this week, with the Indian chair clearly prepared to turn up the heat on recalcitrant creditors. But representatives of the bondholders and some bankers who are major lenders to developing countries were expected to be absent from the discussions as the governments seek to resolve their differences. The meeting, however, can be a hopeful, fresh start.

India’s tongue-lashing of China, coupled with pressure on Beijing from the United States, World Bank, and IMF, brings unprecedented pressure to bear on a single sovereign lender. It is the inevitable result of Beijing’s decision to move at a snail’s pace to resolve the debt crisis that is resulting from its extensive lending—more than eight hundred billion dollars to developing countries between 2000 and 2017. But Chinese flexibility alone will not be enough to resolve the crisis. Comprehensive debt solutions will only become possible when the arm-twisting turns to private-sector creditors (such as powerful asset managers BlackRock and Aberdeen Asset Management and Swiss commodities giant Glencore) whose lending represents a large proportion of several countries’ debt.

Baby steps  

To be sure, there have been small steps in that direction. Creditor committees have been established for some of the worst-off debtors—Zambia, Chad, and Ethiopia—with varied results. Committees for Ghana and Sri Lanka are likely to follow suit. But those talks have dragged, offering little hope to nations on the brink of default. The scale and depth of debt issues faced in particular by many African countries require a magnanimous, multilateral approach from all classes of creditors

By some estimates, China’s collection of official and quasi-official lenders accounts for around 13 percent of Africa’s stock of private- and public-sector external debt, much of it made at commercial rates. The private sector, by contrast, accounts for about 40 percent. Multilateral lenders such as the IMF and World Bank, which lend at zero or extremely low interest rates, account for an additional 32 percent. That has led Beijing to call for those institutions to take a haircut as well—a position that lacks support from the rest of the international community, including some borrowers. That’s because multilateral institutions need to retain their preferential status as creditors since they are often the only agencies willing to provide financial assistance during a crisis—when other lenders are unwilling to help. This impasse underlines that there can be no meaningful resolution to developing-country debt distress without the active participation of all lenders.

Of all the failures in global cooperation in recent years, the debt crisis stands out as a sad example of government lenders and private creditors working at cross purposes. At the outset of the pandemic, the G20 appeared to have found a response to the rising cases of debt distress by agreeing to a Common Framework for Debt Treatment (which governs the negotiations in Chad, Ethiopia, and Zambia). Multilateral agencies stepped in to provide emergency loans and some debt relief, and G20 lenders agreed to suspend interest payments until the end of 2021. These actions provided some breathing room for countries at the front line of debt distress and gave creditors the opportunity to organize and resolve the most urgent cases.

But debt resolution in the post-pandemic era has turned into a four-legged stool comprised of national governments, the Paris Club coalition of long-time government lenders and multilateral agencies, China, and private creditors—and if two legs break, the whole stool collapses. That appears to be the case in a world with shifting power dynamics as the Paris Club, led by the Organisation for Economic Co-operation and Development, has found itself out-flanked by more powerful creditors such as China and the private sector. To be sure, the latter two have sharply varying objectives when it comes to debt resolution, and there is no suggestion that they are colluding. While the private sector hopes to extract favorable terms by way of debt repayments or an outright haircut, China’s position is more ambivalent: Geopolitics plays a role, and Beijing prefers having leverage over countries in debt distress. The end result is an international community that cannot deliver.

A study in contrasts

This is starkly evident in the cases of Zambia and Sri Lanka. US Treasury Secretary Janet Yellen met with Chinese Vice Premier Liu He (who is expected to retire soon) in Zurich before she visited Lusaka, Zambia’s capital city, last month to, as she said, “press for all official bilateral and private-sector creditors to meaningfully participate in debt relief for Zambia, especially China.” IMF Managing Director Kristalina Georgieva followed with her own trip to Lusaka, urging a “swift resolution.” Yet there are few overt signs of Chinese flexibility on the six billion dollars it is owed by Zambia. Meanwhile, private holders of Zambian Eurobonds, who account for about 20 percent of Zambia’s external obligations, have largely sat on their hands while the governments try to work out their differences—a stance that hasn’t helped the restructuring process across Africa.

In the case of Sri Lanka, while some major official creditors (India and the Paris Club) have provided financing assurances that are critical to unlocking an IMF loan, China has merely agreed to a two-year moratorium on debt payments, with no indication of any future forbearance. Private-sector creditors—who represent about 40 percent of the country’s outstanding debt—have pursued a more constructive approach, with one group writing to the IMF earlier this month committing to “design and implement restructuring terms.”

Why is the private sector apparently being more cooperative with Sri Lanka than Zambia? In private conversations, bankers say that Sri Lanka has better credit credentials and should be judged as a middle-income country on its capacity and ability to repay in the future. The implied conclusion here is that low-income African countries in debt distress have neither the capacity nor the means to recover from the pandemic-induced shock. If these perceptions are widely held, it is a scathing indictment of the global financial architecture, which incentivized poor countries to reduce aid dependence and encouraged them to access international capital markets to finance their development needs.

What’s next in this never-ending saga of debt and distress? The G20 will try to work out some solutions this week. Two things need to happen to signal to the international community that this year’s G20 will not be business as usual.

First, the G20 has to decide if a new sovereign debt roundtable convened last week by the World Bank and the IMF, which includes China, is a more effective way of addressing debt restructuring cases compared with the Common Framework, which appears to be mired in bureaucratic reporting requirements that have little bite. The private sector’s enthusiasm to participate in the Sri Lanka debt negotiations offers a helpful model for addressing existing and future cases of debt distress, with a focus on a few large individual institutions driving the agenda rather than cumbersome industry associations.

Second, the G20 will have to delicately make a choice regarding China’s role. If the private sector and Paris Club creditors speak with one voice, Beijing may feel isolated enough to come to terms with aligning with the international community.

A new approach is needed, but the G20’s track record of stalemate on difficult issues over the past decade hardly offers confidence. In the absence of a breakthrough, it will be up to the individual governments, led by India, to maintain public pressure. That would likely prove less effective, but Beijing has already shown it will respond to pressure on some debt-related issues—for example, when it agreed to the Common Framework.

The international community needs to build momentum in 2023 for a comprehensive debt resolution. After initially facing the risk of a lost decade of development due to the pandemic, many low-income countries in Africa now face the prospect of several lost decades. To prevent this, the private sector and China need to be shamed into joining forces with the rest of the G20 and do what India has wisely suggested—get a haircut.

Vasuki Shastry, formerly with the IMF, Monetary Authority of Singapore, and Standard Chartered Bank, is the author of Has Asia Lost It? Dynamic Past, Turbulent Future. Follow him on Twitter: @vshastry.

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

The post China and private lenders are blocking a solution to the global debt crisis. The G20 must step in. appeared first on Atlantic Council.

My company, Nibulon, is one of Ukraine’s largest grain producers and exporters. We were enjoying some of the best years in our 30-year history before the start of Russia’s full-scale invasion in February 2022. In a matter of weeks, we went from being a healthy business with a bright future to one battling for survival.

Around 20% of Nibulon’s assets are currently inaccessible in temporarily occupied regions of Ukraine. Other assets including grain elevators, barges, silos, and terminals have been destroyed. In 2022, our exports collapsed because we could no longer access our main export route through the port of Mykolaiv. Thousands of other Ukrainian companies have had similarly grim wartime experiences.

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The liberation of Kherson and the surrounding region in late 2022 revealed the scale of the effort that will be necessary to restore agricultural production in regions of Ukraine subjected to Russian occupation. These regions are now believed to be among the most heavily mined areas in the world. De-mining will add significant costs and delays before farming activities can resume. Experts say that one day of war means one month of de-mining. We are already investing in de-mining equipment and personnel. At present, we calculate that with 20-25 people working ten hours a day, it will take three years to clear our fields in the worst affected areas.

To a greater or lesser degree, these problems are affecting the entire agricultural industry in Ukraine. The UN estimates that this strategically crucial sector of the Ukrainian economy has already suffered damages and losses of over $30 billion. Prior to the full-scale Russian invasion of February 2022, Ukraine had been steadily expanding its global reach as a food exporter and was widely seen as an emerging agricultural superpower. There is now a very real danger that Putin will succeed in bankrupting the Ukrainian breadbasket.

Like so many other Ukrainian companies, we have been adapting our business model to wartime conditions. We have successfully re-routed exports via land and rail and have built a new grain terminal on the Danube close to the Romanian border. However, we need to invest more in order to increase our exports and reduce the much higher transportation costs that farmers are now having to pay.

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One of the key problems facing the entire private sector in wartime Ukraine is the lack of access to financing because of prohibitively high borrowing rates domestically and internationally. Not surprisingly, war creates a significant risk premium. As a result, international capital markets are effectively closed for Ukrainian companies. Alternative forms of financing are urgently needed.

The United Nations and Turkey have succeeded in establishing a grain corridor to allow limited exports of Ukrainian grain through the Black Sea. Now is the time to establish a “financing corridor.” Just as the grain corridor has been a lifeline for Ukraine’s agricultural sector, the Ukrainian economy needs a mechanism to help private businesses secure immediate survival and safeguard their futures by investing to become more resilient and competitive.

A financing corridor would help ensure private businesses are not forced to close and can instead go on to underpin Ukraine’s reconstruction and recovery. The requirements are simple. First, lenders should offer Ukrainian businesses a standstill on their existing liabilities. A standstill will provide much-needed flexibility to address some of the immediate challenges to their operations. Second, international institutions should provide fresh financing for urgent working capital needs or strategic investments. Third, G7 countries and international financial institutions should offer partial guarantees to enable Ukraine’s major exporters to issue new debt at acceptable cost levels.

In the agricultural sector, enhanced financial support is essential as businesses look to repair or replace damaged equipment and facilities. The World Bank estimates the sector will require $18.7 billion in new investment over the coming decade. The next agricultural planting season is just around the corner. Without increased access to capital, farmers will not be able to obtain the equipment and fertiliser they need to sow their crops as planned.

If this happens, the consequences will be felt not only in Ukraine but far beyond the country’s borders as well. Reduced yields in Ukraine will impact global food security. The UN World Food Program estimates that the ongoing Russian invasion of Ukraine could increase the number of people at risk of acute hunger by 47 million, with the greatest impact on Sub-Saharan Africa.

Agriculture is a slow-motion business. If producers cannot invest today, the negative effects will be felt for years to come. The survival of the country’s major agricultural exporters is essential for Ukraine’s long-term economic reconstruction and recovery. It is also important for global stability. Good business strategy requires looking to the risks and opportunities that lie ahead. Western governments need to think beyond the immediate challenges of the war today and also consider what will be needed to secure Ukraine’s future.

Andriy Vadaturskyy is the owner and CEO of Ukrainian agribusiness Nibulon.

Further reading

UkraineAlert Jan 28, 2023

Poland is leading Europe’s response to the Russian invasion of Ukraine

By Diane Francis

Poland was the unsung hero of the recent landmark decision by Berlin and Washington to provide Ukraine with tanks as Polish leadership continues to shape the European response to Russia’s genocidal invasion.

Conflict Economic Sanctions

UkraineAlert Feb 6, 2023

Hero Ukrainian medic: “Russia will not stop until it is stopped”

By Peter Dickinson

Ukrainian military medic Yulia Paievska has a simple message for anyone who still believes in the possibility of a compromise peace with Putin’s Russia. “They will not stop until they are stopped,” she says.

Civil Society Conflict

UkraineAlert Feb 1, 2023

Europe’s last empire: Putin’s Ukraine war exposes Russia’s imperial identity

By Botakoz Kassymbekova

Vladimir Putin’s genocidal invasion of Ukraine has exposed modern Russia’s unapologetically imperial identity but could yet lead to the collapse of the Kremlin’s broader imperial ambitions, writes Botakoz Kassymbekova.

Belarus Central Asia

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

Read more from UkraineAlert

UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Vladimir Putin must not be allowed to bankrupt the Ukrainian breadbasket appeared first on Atlantic Council.

The Atlantic Council’s Eurasia Center is exploring the issue of Russian threats to global financial security, beginning with a virtual event on February 8 moderated by Ambassador John Herbst and featuring Ukrainian Minister of Finance Serhiy Marchenko along with a panel of international experts.

Minister Marchenko began the event by reminding viewers that “for too long, Russia has been allowed to undermine the system from inside.” Ignoring the challenges that Russia’s misuse of the rules-based international order pose will only make this problem worse, he warned.

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Since 2014, the West has sanctioned an expanding list of Russian industries and entities in response to violations of international law. Unprecedented additional sanctions were imposed following Russia’s full-scale invasion of Ukraine in 2022. However, the available sanctions options are not yet exhausted. “Sanctions are having an impact on the Russian economy,” said panelist Brian O’Toole, nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, “but there is still plenty more to be done.”

Russia has created an international network to avoid sanctions and flout the rules governing the global financial sector. This network includes not only Russia’s Wagner Group, which was recently sanctioned as an international criminal organization by the US State Department, but also “the Taliban, Hezbollah, [Syria’s] Assad regime, North Korea, and Iran,” said Marchenko.

“Countless investigations have uncovered Russia’s complicity in money laundering,” reported Marchenko. He noted that Russia’s dependence on illicit financial activity through its network of allies has only increased since the imposition of sanctions.

For Timothy Ash, senior sovereign strategist at Bluebay Asset Management, sanctions are just the beginning of the process of extricating Russian malign influence from global institutions. Moscow is “corrupting [global] systems from within,” while Moscow’s international partners help “regime money exit and then be deployed in Russian state interests,” said Ash.

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John Cusack, founder of the Global Coalition to Fight Financial Crime, noted that “Russia has been gaming the system for more than two decades.” In the case of one global institution, the Financial Action Task Force (FATF), which was set up to police international money laundering, he claimed Russia’s role has run directly counter to the goals of the institution. Cusack accused the Kremlin of weaponizing its standing in the FATF to “[go] after people they don’t like.”

To respond to Russia’s flagrant violations, FATF has the power to place Russia on a “blacklist” that calls on FATF member countries to apply greater due diligence on financial transactions involving Russia. Russia’s placement on the FATF blacklist would, according to Minister Marchenko, “dramatically increase the cost of doing business with Russia.”

O’Toole noted that sanctions are only one aspect of the overall strategy to counter Kremlin aggression in Ukraine and beyond. “Ukraine’s victory relies on the bravery of the Ukrainian people and military supplies from the West,” he commented. At the same time, O’Toole stressed that sanctions “are a complementary policy” limiting the ability of Russia to fund its aggression.

Olena Halushka, co-founder of the International Center for Ukrainian Victory, compared Russian atrocities in Ukraine to the actions of “ISIS, Al Qaeda, or Hezbollah” and called on Western countries to label Russia a terrorist state. Halushka observed that Russia’s blacklisting by the FATF can also help “to close the loophole through which Western-made main components [including] microchips are ending up in Russian or Iranian weapons.” There will be no end to Russian aggression if there is no accountability, warned Halushka.

The global financial system is based on rules, commented Minister Marchenko. “We have powerful mechanisms to enforce these rules,” he noted. “The time has come to use them.”

Benton Coblentz is a program assistant at the Atlantic Council’s Eurasia Center.

Further reading

UkraineAlert Jan 28, 2023

Poland is leading Europe’s response to the Russian invasion of Ukraine

By Diane Francis

Poland was the unsung hero of the recent landmark decision by Berlin and Washington to provide Ukraine with tanks as Polish leadership continues to shape the European response to Russia’s genocidal invasion.

Conflict Economic Sanctions

UkraineAlert Feb 6, 2023

Hero Ukrainian medic: “Russia will not stop until it is stopped”

By Peter Dickinson

Ukrainian military medic Yulia Paievska has a simple message for anyone who still believes in the possibility of a compromise peace with Putin’s Russia. “They will not stop until they are stopped,” she says.

Civil Society Conflict

UkraineAlert Feb 1, 2023

Europe’s last empire: Putin’s Ukraine war exposes Russia’s imperial identity

By Botakoz Kassymbekova

Vladimir Putin’s genocidal invasion of Ukraine has exposed modern Russia’s unapologetically imperial identity but could yet lead to the collapse of the Kremlin’s broader imperial ambitions, writes Botakoz Kassymbekova.

Belarus Central Asia

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

Read more from UkraineAlert

UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

Learn more

The post Countering Russian threats to global financial security appeared first on Atlantic Council.

Even as they confronted the war’s near-term challenges, such as Russian attacks on Ukrainian energy and civilian infrastructure, G7 leaders recognized the urgent need to establish a body to coordinate the planning and execution of the enormous rehabilitation and reconstruction effort Ukraine will require. The leaders directed the creation of a “Donor Coordination Platform” and a supporting secretariat. Senior officials from each G7 nation and Ukraine met on January 26 to begin organizing the platform. 

When the Donor Coordination Platform next convenes in March, the agenda must include identifying ways to mobilize Ukrainian and international companies to support the reconstruction effort—for example, by establishing a private-sector advisory board for the Donor Coordination Platform. Humanitarian aid and direct government budgetary support are rightly the short-term priorities of today’s civil assistance to Ukraine. Along with military equipment and training for Ukraine’s armed forces, this aid must continue for Ukraine to survive the winter. But it will take more than government aid alone to rebuild Ukraine’s economy.

The private sector can make a substantial contribution to this rebuilding campaign. There are international infrastructure firms ready to invest in Ukraine’s future. Private companies could offer donors and international institutions valuable project-management expertise learned from their work in other post-disaster and post-conflict zones. Companies can streamline logistics and provide oversight of the operationalization of funds in challenging environments. They can leverage private-sector financing to complement financial and insurance guarantees that we trust governments and international financial institutions will make available. The recent announcement that Kyiv and the US-based investment firm BlackRock will coordinate “potential investors and participants” in reconstruction is a useful first step, if it then connects to the G7 platform and encourages wider private-sector involvement. 

There is not yet any engagement mechanism for the private sector that parallels the “Ramstein” effort established in 2022 to produce, procure, and deliver military equipment to Ukraine. Getting the private sector involved now will pay future benefits. It will enable Ukrainian firms to establish partnerships with international companies that can create employment and economic growth, which can then attract more investment. These partnerships can help create a productive, competition-based, and law-abiding economy, which, given Ukraine’s history of corruption, Ukrainians will want and international donors will require.

Mobilizing the private sector is also one antidote to donor fatigue, which has grown as governments have committed more taxpayer money to support Ukraine. A recent poll by the Chicago Council on Global Affairs found that 40 percent of Americans favor continuing the current level of assistance to Ukraine indefinitely, down from 58 percent in July. 

Getting the private sector involved, however, will not be easy. Ukraine remains under fierce Russian attack. No one knows how much rebuilding will really cost or when it can begin at large scale. 

These challenges can be met in partnership with the Ukrainian government. Kyiv is focused on securing the seventeen billion dollars that the World Bank has identified as Ukraine’s “first stage, rapid recovery” needs in 2023. While meeting these needs, private-sector donors can put anti-corruption benchmarks into aid contracts, which in turn could serve as a template for future investment agreements through the Donor Coordination Platform and a catalyst for political reform. Zelenskyy’s recent moves against corruption in the government are also a strong signal to Ukrainians and to international investors that Ukraine is a full partner in fighting corruption.

On the donor side, the World Bank Group’s Multilateral Investment Guarantee Agency should finish its work on a preliminary risk insurance framework for firms seeking to operate in Ukraine. This will provide a template for the export credit agencies of individual nations, which should also be authorized to provide full risk insurance (including acts of war) to national firms willing to invest in Ukraine’s recovery.

In Washington, Zelenskyy reminded Americans and the world that today’s fight against aggression is about what life should be like tomorrow. G7 leaders have identified an important coordinating mechanism to help create a brighter future for Ukraine. The sooner systematic planning for the country’s rebuilding begins, and the earlier and more fully those conversations include the private sector, the better placed nations will be to further support Ukrainians in their quest to become a free and prosperous nation.

Marc Grossman is a former US undersecretary of state for political affairs and US ambassador to Turkey. He is a vice chairman of The Cohen Group, which has clients in the architecture and engineering sectors operating globally, including in Ukraine.

Kurt Volker served as US special representative for Ukraine negotiations from 2017 to 2019 and as US ambassador to NATO from 2008 to 2009. He is a distinguished fellow at the Center for European Policy Analysis. 

Earl Anthony Wayne is a former US ambassador to Argentina and Mexico, and assistant secretary of state for economic and business affairs. He is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a public policy fellow at the Woodrow Wilson International Center for Scholars, and a distinguished diplomat in residence and professorial lecturer at American University’s School of International Service. 

The post How to get the private sector involved in reconstructing Ukraine appeared first on Atlantic Council.

On the eve of the invasion, the Ukrainian economy was in relatively good shape. While Ukraine suffered a slight decline in 2020 due to the Covid pandemic, this had been preceded by four consecutive years of strong GDP growth. Small and medium-sized enterprises (SMEs) had played an important role in this progress, especially in the wholesale, retail, and IT sectors.

Over the past twelve months, Ukraine’s positive economic outlook has been shattered by the brutality and destruction of Russia’s invasion. The SME sector has been particularly hard hit. Wartime disruption and Russian attacks on critical infrastructure have caused a dramatic deterioration in the business environment. This is making it more and more difficult for Ukraine’s entrepreneurs to survive.

Kateryna Markevych, the lead expert on economic and social programs at the Razumkov Center think tank in Kyiv, told Reuters in late 2022 that SME activity in Ukraine had worsened considerably as a result of the Russian airstrike campaign against civilian infrastructure. In general, the war has led to higher costs throughout value chains while the volume of bank loans has decreased. This means SMEs are often not able to secure alternative financial resources. As a result, many have been forced to shut down. Other consequences of the conflict such as the closure of ports, disruption of trade routes, power shortages, and widespread material damage have added to the challenges facing Ukrainian business owners.

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It comes as no surprise that Ukraine’s GDP declined by around 35% during 2022, the largest annual drop since the country regained independence in 1991. The International Labor Organization (ILO) has estimated that 4.8 million people lost their jobs in the same time period, while UNDP officials have predicted that if the conflict continues, up to 90% of the Ukrainian population could face poverty.

For SME owners, getting through this crisis period requires resolve and creativity. “The war has dealt a heavy blow to the Ukrainian economy and businesses,” says Dr. Bohdan Ferens, founder of SD Platform, a social-democratic NGO in Ukraine, and SPARK’s liaison in Ukraine. “The losses of entrepreneurs as a result of the war, unfortunately, are growing every day. However, businesses are trying to adapt to new realities, or are looking for new directions and opportunities to work.”

Many Ukrainian SMEs are successfully navigating the new practicalities of doing business during wartime. For some, this means reacting directly to emerging military or humanitarian needs and incorporating them into their business model. A stark illustration of this trend is Yuriy Zakharchuk, who transitioned from manufacturing theatrical costumes to military apparel. Similarly, after closing their shop for a few months, employees of a ceramic studio in Mykolaiv decided to arrange workshops for children in exchange for donations.

For other SME owners, surviving has meant relocating to safer regions in western Ukraine or across the border in the European Union. For instance, dentists Oleksiy Vlasov and Olena Shestakova moved from Kramatorsk in eastern Ukraine to Chernivtsi close to the Romanian border, where they offer free treatment to internally displaced people. This was made possible thanks to a state-guaranteed loan which allowed them to move and helped cover initial rental payments. There are thousands of similar cases across Ukraine. More help is urgently needed in order to support the SME sector. This in turn will allow SMEs to make a meaningful contribution to the revival of the Ukrainian economy.

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Local authorities and the existing Ukrainian entrepreneurial ecosystem have long been essential to the development of the country’s SME sector. Support has included initiatives to help entrepreneurs and business owners access production premises, support services, and new technologies. One such example is the CSR Development Center, which promotes the principles of sustainable business and social responsibility in Ukraine. Realizing the need to adapt to the new wartime environment, the center has launched several initiatives to support entrepreneurs, such as the Mentoring Program for Ukrainians Abroad. These initiatives are a direct response to the challenges created by the Russian invasion.

One initiative features a program for women looking to set up an SME or expand their existing business. The program offers a combination of training, networking, and financing opportunities. “During the war, the role of women has changed. As there are currently a lot more men than women serving in the military, women now have more influence on the stability of the Ukrainian economy,” notes Oleksandra Hondiul, Project Manager at CSR Development Center. “At the same time, the demands on these women have increased, such as providing for the family, taking care of children, managing businesses, and so forth.”

At the international level, governments, philanthropists, and institutional donors have joined forces over the past twelve months to help meet Ukraine’s growing humanitarian needs. But while the world’s attention is understandably focused on relief efforts during the ongoing conflict, economic recovery and support for Ukraine’s businesses is also urgently needed.

In July 2022, the Ukrainian government launched its comprehensive National Recovery Plan detailing a pathway to rebuilding the economy once the war is over. Shortly after, Liesje Schreinemacher, Minister for Foreign Trade and Development Cooperation of the Netherlands, pledged significant funds to enable Ukrainian SMEs to invest in their businesses and to rebuild a number of Ukrainian cities.

It is vital that these efforts now continue with an emphasis on support for the SME sector. “It is worth thinking about restoration today, and the support of our Western partners, in particular the Dutch ones, is very important,” concludes Ferens.

Seba Salim is a Communications Associate at SPARK, an international NGO specializing in support for entrepreneurs and SMEs in fragile and conflict-affected regions throughout Eastern Europe, the Middle East, and Africa. Sarah Page is a Communications Manager at SPARK.

Further reading

UkraineAlert Feb 1, 2023

Europe’s last empire: Putin’s Ukraine war exposes Russia’s imperial identity

By Botakoz Kassymbekova

Vladimir Putin’s genocidal invasion of Ukraine has exposed modern Russia’s unapologetically imperial identity but could yet lead to the collapse of the Kremlin’s broader imperial ambitions, writes Botakoz Kassymbekova.

Belarus Central Asia

UkraineAlert Jan 24, 2023

Putin is facing defeat in the information war

By Peter Dickinson

Russia’s entire invasion of Ukraine has been built on a web of deceit but Putin is now facing defeat in the information war as the gap between the Kremlin’s alternative reality and the real world becomes too big to bridge.

Conflict Disinformation

UkraineAlert Jan 28, 2023

Poland is leading Europe’s response to the Russian invasion of Ukraine

By Diane Francis

Poland was the unsung hero of the recent landmark decision by Berlin and Washington to provide Ukraine with tanks as Polish leadership continues to shape the European response to Russia’s genocidal invasion.

Conflict Economic Sanctions

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

Read more from UkraineAlert

UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

Learn more

The post Ukrainian SMEs hold the key to the country’s economic revival appeared first on Atlantic Council.

One of the simplest and quickest ways of increasing support for Ukraine is through the utilization of already operational treaties, programs, and formats that make it possible to enhance the country’s resilience. These include the EU-Ukraine Association Agreement, which goes beyond any of the agreements signed with Central and Eastern European countries in the 1990s.

Intensification of cooperation within the framework of the Association Agreement will further Ukraine’s EU integration in line with the summer 2022 decision to award the country official EU candidate status. It also presents a number of comparatively uncomplicated opportunities to help Ukraine deal with the immediate issues created by ongoing Russian aggression.

Deepening cooperation with NATO within existing partnership frameworks such as the Enhanced Opportunity Program (EOP) and the NATO-Ukraine Commission is also possible. Meanwhile, the Ukraine Defense Consultative Group, which is informally known as the Ramstein Format, makes it relatively easy to increase weapons supplies to Ukraine and speed up the defeat of Vladimir Putin’s invasion. The most urgent objective in this regard is the delivery of Leopard tanks.

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Some existing programs and policies require significant modification in order to account for the dramatically deteriorating circumstances in Ukraine as the full-scale Russian invasion of the country approaches the one-year mark. One obvious step would be the extension and hardening of current Western sanctions against Russia. This intensification of the sanctions regime could seek to widen the circle of targeted state actors and private individuals within Russia while also aiming to impose sanctions measures on a wider range of non-Russian companies that provide Moscow with services and technologies critical to the war effort.

The European Union could look to adopt and introduce a staged EU accession procedure for Ukraine in the coming months that would build on last summer’s confirmation of candidate status. This would involve Ukraine’s gradual inclusion into various sub-unions, governing organs, regulatory frameworks, branch agreements, and special EU programs ahead of full membership.

A resolute intensification and modification of the West’s existing Ukraine-related programs and policies would go a long way to meeting some of Kyiv’s most immediate needs. However, Ukraine’s extraordinary current circumstances and their consequences for the whole European project, as well as the institutional and doctrinal inertia of existing programs, mean that mere acceleration and adaptation will be insufficient. Entirely new tools will be required to bring about a rapid and qualitative change in Kyiv’s ability to win the current war and the subsequent peace.

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After Vilnius: What’s next on Ukraine’s path to NATO?

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Innovation will be essential in 2023 in order to provide the support necessary to defeat Putin and prepare the ground for the massive national reconstruction project that lies ahead. A number of novel approaches have already become hot topics on the international agenda. Top of the list is the need for a multilateral reconstruction initiative for Ukraine, which most observers are framing as a successor to the Marshall Plan in post-World War II Europe.

There is currently no consensus of the exact makeup of a possible future Marshall Plan for Ukraine. However, there is a general sense that the EU would play a leading role together with the UN, the world’s leading international financial institutions, national development agencies, individual partner governments, and private investors.

Some policymakers and observers favor the establishment of a reconstruction or coordination center which would function under the joint auspices of the G7 nations and Kyiv. This could serve as an attuning, auditing, and clearing mechanism for multilateral, national, and non-governmental actors in order to harmonize their support for Ukraine under a common roof.

The international community should also look to establish a political risk insurance scheme to help Ukraine attract the foreign direct investment the country will desperately need in the coming years. The EU and international financial institutions could create a framework that will protect investors from war-related risk in order create the right conditions for an economic revival.

Talk of rebuilding Ukraine is still premature, of course. First, Russia’s attempt to take over or destroy the country must be decisively defeated. To achieve this goal, Ukraine needs significantly enhanced weapons supplies from the country’s international partners.

Once active hostilities come to an end, Europe should take the lead in the establishment of a new type of collective security guarantee for Ukraine involving a coalition of willing states. Unless Ukrainian security is guaranteed by a powerful coalition, there will be no sustainable peace in Europe. 

Providing Ukraine with the support necessary to defeat Russia and win the peace will require both political will and political skill. This will be neither cheap nor easy. Indeed, European leaders must be prepared to invest considerable political capital if they wish to stop Putin and prevent a far larger war in the coming years. Some will inevitably be reluctant to accept such costs, but failure to do so would have disastrous consequences for Europe and the wider world.

Dr. Andreas Umland is an analyst at the Stockholm Centre for Eastern European Studies (SCEEUS) of the Swedish Institute of International Relations (UI). He recently authored the SCEEUS report: ”How the West Can Help Ukraine: Three Strategies for Achieving a Ukrainian Victory and Rebirth.”

Further reading

UkraineAlert Dec 26, 2022

Eight reasons for Ukrainian optimism in 2023

By Brian Mefford

Ukrainians have experienced an incredibly traumatic year but the country enters 2023 with reason for cautious optimism that Vladimir Putin’s criminal invasion can be decisively defeated, writes Brian Mefford.

European Union NATO

UkraineAlert Dec 25, 2022

Bakhmut: Fortress of freedom

By Andriy Yermak

Western support for Ukraine must remain strong in 2023 to prevent a Russian victory that would fuel a global authoritarian revival, warns the head of Ukraine’s Office of the President, Andriy Yermak.

Conflict European Union

UkraineAlert Dec 22, 2022

Russia’s defeat is the top global priority for 2023

By Oleksii Reznikov

Ensuring that the Russian invasion of Ukraine ends in defeat is vital for the international security system and must be the strategic priority for 2023, writes Ukrainian Defense Minister Oleksii Reznikov.

Conflict European Union

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post How Europe can help Ukraine defeat Russia and win the peace in 2023 appeared first on Atlantic Council.

The existential nature of the current war and the anticipated long-term scope of the post-war rebuilding challenge mean that the Ukrainian state is likely to enjoy wide-ranging regulatory powers for an extended period. Indeed, Kyiv has already reportedly invoked wartime laws to nationalize a number of strategically important companies including engine maker Motor Sich, energy companies Ukrnafta and Ukrtatnafta, vehicle maker AvtoKrAZ, and transformer producer Zaporizhtransformator. This is fueling speculation that we may soon witness further steps toward the wholesale nationalization of at the least the commanding heights of the Ukrainian economy.  

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Admittedly, Ukraine’s recent nationalizations may be justified due to the exceptional circumstances created by Russia’s ongoing invasion. At the same time, it is also true that anti-oligarch policies adopted by the Ukrainian authorities before the war were inconsistent, despite President Zelenskyy’s claims that de-oligarchization is a major national priority.

There is no doubt that wartime nationalizations undermine the political power of the oligarchs while augmenting that of the state. One could thus argue that such takeovers serve a democratic as well as a military purpose. But if Ukraine is to strengthen its democracy and become fit for EU membership, it might be better to ultimately eschew ownership of energy providers and key companies in the defense, telecommunications, and media sectors. 

In this context, it is important that wartime nationalizations take place as a last resort when all other legal means prove to be ineffective. Any nationalization that does take place must be transparent. Failure to meet such conditions could cost Ukraine dearly, not least when it comes to the distribution of recovery funding, which is likely to be released only on condition that Kyiv meets tough rule of law commitments. 

There are also practical issues to consider. It is vital that any nationalizations do not exceed the state’s capacity to manage targeted companies effectively in both war and peacetime. It is true that many if not most European energy companies are state owned or managed. However, if the Ukrainian state is not able to govern effectively and manage these firms fully and impartially because the economy is in ruins due to the wanton destruction inflicted by Russia, then Ukraine runs the risk of falling back into oligarchic domination.

Since secure property rights are an essential pillar of both democracy and a genuine market economy, Ukraine must prioritize safeguarding these foundational rights. Furthermore, it may take a long time to restore state capacity to the point where it can effectively manage these kinds of large firms. 

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Looking ahead, it might be wiser to encourage private and mixed public-private forms of ownership within the boundaries of a strong regulatory state and legislature. This approach could help consolidate democratic governance and the rule of law in post-war Ukraine. Coupled with Ukraine’s gradual compliance with EU membership requirements, such an approach would likely attract significantly more foreign investment and help generate faster economic growth.

At present, the temptation to nationalize key sectors of the economy is understandably great. But the authorities in Kyiv should also remember that once the war ends and the huge task of reconstruction gains pace, meeting the EU’s membership conditions will become equally urgent. In this light, the nationalization of key sectors of Ukraine’s economy could lead the country backwards to a lesser but still damagingly excessive role of the state in the economy. It could also provide opportunities for oligarchic penetration of the state and a revival of crony capitalism. 

With the country’s continued existence still very much under threat, Ukraine’s leaders are currently focused on securing national survival and winning the war. Nevertheless, it is also vital to lay the foundations for a post-war recovery period that is likely to involve international investments amounting to trillions of dollars. This requires a deliberate approach to questions of nationalization and the right balance between public and private ownership in critical sectors.   

It is crucial that decisions shaping Ukraine’s post-war revival are not based on purely partisan political grounds. Instead, they must take into account the necessity of consolidating democratic governance and creating the right conditions for a flourishing market economy based on the rule of law and secure property rights. This will invigorate Ukraine’s economy and strengthen the country’s security while also boosting the post-war process of European integration.

Stephen Blank is a senior fellow at the Foreign Policy Research Institute.

Further reading

UkraineAlert Dec 26, 2022

Eight reasons for Ukrainian optimism in 2023

By Brian Mefford

Ukrainians have experienced an incredibly traumatic year but the country enters 2023 with reason for cautious optimism that Vladimir Putin’s criminal invasion can be decisively defeated, writes Brian Mefford.

European Union NATO

UkraineAlert Dec 25, 2022

Bakhmut: Fortress of freedom

By Andriy Yermak

Western support for Ukraine must remain strong in 2023 to prevent a Russian victory that would fuel a global authoritarian revival, warns the head of Ukraine’s Office of the President, Andriy Yermak.

Conflict European Union

UkraineAlert Dec 22, 2022

Russia’s defeat is the top global priority for 2023

By Oleksii Reznikov

Ensuring that the Russian invasion of Ukraine ends in defeat is vital for the international security system and must be the strategic priority for 2023, writes Ukrainian Defense Minister Oleksii Reznikov.

Conflict European Union

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

Read more from UkraineAlert

UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

Learn more

The post Rebuilding Ukraine the right way appeared first on Atlantic Council.

As this year began, many experts predicted inflation would be transitory, Europe’s recovery would be stronger than the United States’, and China would return to strong growth. Then inflation soared and Russian President Vladimir Putin invaded Ukraine—fueling an energy crisis in Europe and food price shocks around the world. Meanwhile, China’s zero-COVID policy chained its economy. To make sense of a shocking year for the global economy, our GeoEconomics Center experts take you inside the numbers that mattered—including many you may have missed—in 2022.

Over the past year, the market value of cryptocurrency assets has collapsed from $3 trillion to about $850 billion as Bitcoin—the original and best-known cryptocurrency—plunged from $68,000 to $17,700, stablecoins such as TerraUSD broke the advertised one-to-one peg to the US dollar, and the crypto-exchange FTX sank from a $32 billion valuation to bankruptcy within a week. Those losses and market turmoil have laid bare the volatility of crypto-assets and the pressing need for consumer protections. 

Going forward, crypto-assets may not recover their full value, and it’s clear that regulation needs to be tightened to deal with the financial instability and lack of consumer protections exhibited by this year’s market upheaval. In our latest tracker, the GeoEconomics Center explored regulatory developments in twenty-five jurisdictions, which include Group of Twenty (G20) member countries and six countries with the highest crypto adoption rates. Among the countries we studied, cryptocurrency is legal in thirteen, partially banned in nine, and generally banned in three. We found that in 88 percent of the countries we studied, crypto regulations were under consideration, and the next frontier of regulatory developments will be on stablecoins. The United States has a number of legislative proposals under consideration currently, with a larger debate on which regulatory authority must have jurisdiction over crypto-assets. Watch for 2023 to be a marquee year on crypto regulation, especially as Europe and the United Kingdom clarify their regulatory structures.

—Ananya Kumar is the associate director for digital currency at the GeoEconomics Center. 

A striking ten of the G20 countries (including Russia of course) do not participate at all in the financial sanctions triggered by the invasion of Ukraine.

Admittedly this division did not prevent the issuance of a G20 Bali Leaders’ Declaration on November 16 stating: “Most members strongly condemned the war in Ukraine and stressed it is causing immense human suffering and exacerbating existing fragilities in the global economy—constraining growth, increasing inflation, disrupting supply chains, heightening energy and food insecurity, and elevating financial stability risks.”

Yet only advanced economies have joined the sanctioning process, even if to a varying extent, whereas emerging economies (except for South Korea) are not involved. This illustrates how fragmented the world has become and contrasts with the G20 momentum created by the global financial crisis—during which the entire group was largely on the same page in crafting a robust response.

—Marc-Olivier Strauss-Kahn is a nonresident senior fellow at the GeoEconomics Center and a former director general and chief economist for the Banque de France.

In October, a US government report found that the Russian military lost six thousand pieces of equipment since invading Ukraine in February. The imposition of Western sanctions has made it difficult for Russia to acquire the supplies and foreign parts it needs to repair or maintain this lost equipment, which includes items such as tanks, armored personnel carriers, and infantry fighting vehicles. This six thousand figure is important because it offers a tangible example of how sanctions can undermine a country’s war machine and make it difficult to pursue its aggression. Now, because of sanctions, the Russian regime must find other costly and more complicated means of acquiring hard-to-find parts, which was a deliberate goal of the sanctions, as reported by the New York Times. Often, when analysts, the press, or even governments discuss the impact of Russia sanctions, they first look at the state of the Russian economy or currency. But those figures are not entirely affected by sanctions and can change for numerous reasons; whereas, this six thousand figure is proof that sanctions are working to achieve their stated goal—to undermine Russia’s aggression against Ukraine.

—Hagar Chemali is a nonresident senior fellow at the GeoEconomics Center and a former spokesperson for terrorism and financial intelligence at the US Treasury Department.

This is the amount of Central Bank of Russia (CBR) reserves that Group of Seven (G7) nations and the European Union (EU) have immobilized since Russia’s invasion of Ukraine. In response, CBR Governor Elvira Nabiullina pledged to file legal claims in order to recover the reserves, but she has yet to set a timeframe to do so. Meanwhile, experts and policymakers on both sides of the Atlantic have discussed seizing frozen Russian reserves and using them for Ukraine’s reconstruction. However, this effort is hindered by laws in the EU and other sanctions-wielding countries. Confiscating frozen assets is allowed only in case of criminal conviction, and even then, getting each case through the court could take years.

But even before it could seize the frozen assets, the West still has to identify where the blocked assets are. Sanctioning jurisdictions are publishing reports at their own pace on how much Russian reserves they have immobilized, but a multilateral effort is essential to identify the rest. We are hearing that the US government is certain about the location of only a third of the three hundred billion dollars, and it is working to find the rest.

Sanctioning the CBR and blocking its assets held in Western central banks took Moscow by surprise. However, the policy hasn’t delivered the punch to the gut that it might have. At least not yet. The West has options now to make it truly hurt.

—Maia Nikoladze is a program assistant at the Economic Statecraft Initiative within the GeoEconomics Center.

On December 5, the G7-led price cap on Russian oil exports came into force. The decision to place the initial cap at sixty US dollars per barrel was reached only a few short days beforehand. EU member states that had pushed for a much lower cap managed to secure a last-minute drop from sixty-five.

Wary of adding more complexity to an already tense market, the policy’s original backers in the US Treasury are reasonably happy with a cap that is close to the average price Russia has been selling at over the past six months. In their view, this locks in a discounted price, which has already cost Moscow billions in lost revenue and which new buyers of Russian oil such as India will unashamedly use as they negotiate contracts.

Implementation relies on Western providers of insurance and shipping services, which must ask buyers of Russian oil for attestations that they have paid at or below the cap. So far, energy markets seem to understand the guidance that has been issued and we haven’t seen any major price swings. This doesn’t rule out snags that could fuel fears over supply, such as the recent situation where Turkish authorities started demanding proof of insurance from all tankers flowing through the Bosphorus.

—Charles Lichfield is the deputy director of the GeoEconomics Center.

This year produced one of the most significant sanctions programs ever devised, both in terms of the scale of the economy where sanctions were imposed, as well as the speed and comprehensiveness of the tactics used. Despite the fact that Western sanctions programs expanded by 42 percent in 2022, there are still substantial sectors where Russia trade continues and has grown in some instances. The one absent element of an effective sanctions program has been enforcement—which has been severely lacking in the United States, United Kingdom, and EU against violators of the Russia sanctions. There has yet to ever be an EU sanctions enforcement action, and some nations don’t even have the legal authority to levy sanctions. Enforcement in the United States, which historically has led the world in monetary fines, has dropped substantially in each of the past three years. While cases typically take time to build, early moves to highlight and penalize sanctions violators could serve the objective of continuing to put on notice those that would try to still carry out certain business with Russia.

—Daniel Tannebaum is a nonresident senior fellow in the GeoEconomic Center’s Economic Statecraft Initiative and a partner in Oliver Wyman’s Risk and Public Policy Practice, where he leads the firm’s Global Anti-Financial Crime Practice.

Sixty countries globally have reached an advanced stage of central bank digital currency (CBDC) development. As of November, the United States is one of them. 

Eighteen of the G20 countries have CBDCs under development, piloted, or fully launched, as reported in our Central Bank Digital Currency tracker. Motivations differ globally for CBDC exploration, from concerns about international standards setting to efforts at improving financial inclusion. The logistical difficulties of sending physical COVID-19 stimulus checks called attention to inefficiencies in US payment systems. By harnessing technology, including the blockchain, central banks may be able to develop payment systems that are quicker, cheaper, and safer. In November, the New York Federal Reserve released a white paper explaining that it was starting to test a wholesale (bank-to-bank) CBDC in cooperation with the Monetary Authority of Singapore. In doing so, it joined the European Central Bank, which is already in the development stages for a retail digital euro. A pilot program for China’s digital currency, the e-CNY, began in 2020 and has now expanded to over two hundred million users.

With the risks of cryptocurrencies and stablecoins front and center in the news, attention may turn more and more to central banks. CBDC development, and what the United States does next, will play a major role in the future of payments in 2023.

—Sophia Busch is a program assistant at the GeoEconomics Center.

The Biden administration has declared US dependence on advanced semiconductors produced in Taiwan as “untenable and unsafe” (in the words of Commerce Secretary Gina Raimondo) because of the threat to the country from neighboring China. As a result, the administration in 2022 prioritized the passage of the CHIPS and Science Act, which was signed into law in August. The law provides fifty-two billion dollars of subsidies and tax incentives to promote the development of cutting-edge semiconductor factories on US soil. One of the projects taking advantage of that funding is being undertaken by Taiwan Semiconductor Manufacturing Corporation (TSMC), which currently produces over 90 percent of the most sophisticated chips in the world in Taiwan. When TSMC’s Phoenix plant reaches full capacity in the next two years, it will produce about twenty thousand wafers of semiconductors each month. That will only represent less than 1.6 percent of the company’s current monthly output of 1.3 million wafers. Reducing dependence on Taiwan will remain a long way off.

—Jeremy Mark is a nonresident senior fellow at the GeoEconomics Center and former official at the International Monetary Fund (IMF) and reporter for the Wall Street Journal.

Investment screening regulations continued to proliferate, strengthen, and expand in 2022. Seven EU member states drafted, introduced, or started consultation processes for new investment screening authorities this year (Belgium, Croatia, Estonia, Greece, Ireland, Luxembourg, and Sweden). In the United States, the Biden administration issued the first executive order designed to provide clarity over the process by which the Committee on Foreign Investment in the United States (CFIUS) evaluates the national-security implications of foreign acquisitions of US businesses. And this fall saw two congressional hearings on the prospects of creating a CFIUS-like process for outbound investment. Look out for increased regulation over both inbound and outbound investment among major economies in 2023.

—Sarah Bauerle-Danzman is a nonresident senior fellow with the GeoEconomic Center’s Economic Statecraft Initiative and associate professor of international studies at Indiana University.

North America is still the commercial dynamo for the United States, with over three million dollars per minute in goods traded between the United States and its two neighbors through September of this year.

Canada and Mexico are the top two US trade partners, together accounting for more than twice what the United States trades with China. North American trade is growing at double digits within the framework of the US-Mexico-Canada agreement (USMCA), which came into effect in 2020.

In the most recent study available, North American trade was estimated to support more than twelve million US jobs in 2019 and millions more in Mexico and Canada.

North America is demonstrating the clear potential to emerge more competitive globally vis-a-vis China and other commercial powerhouses, as the world transforms following the pandemic, the war in Ukraine, and other disruptions. The question will be how well the United States, Canada, and Mexico can work through differences and seize the opportunities to maintain the impressive commercial growth that can boost the continent’s prosperity and well-being.

—Earl Anthony Wayne is a nonresident senior fellow at the GeoEconomics Center and a former US ambassador to Mexico.

A staggering and concerning 60 percent of low-income countries are currently at risk of debt distress or debt default, according to the IMF. If a series of low-income countries were set to default, it is possible the IMF would not have enough resources to to disburse the loans these countries would need to keep afloat. The G20 had a plan to deal with the problem called “the common framework.” It was supposed to be a way to help countries restructure their debt and involve the world’s largest bilateral creditor, China. But only a handful of countries have used the system—largely because it’s slow and private creditors haven’t fully signed on. This number is a flashing red light for the global economy headed into 2023. 

—Josh Lipsky is the senior director of the GeoEconomics Center.

Forty-five million people are expected to face starvation by the end of 2022. A series of economic shocks sent global food prices to an all-time high in 2022 and curbed households’ ability to pay for sustenance. Extreme global uncertainty and the prospect of sudden unemployment resulted in food hoarding in 2020 during the pandemic. The supply-chain constraints of 2021 then dramatically increased transport costs for those items. And Russia’s invasion of Ukraine at the beginning of 2022 unexpectedly eliminated large volumes of food items from the global market overnight. In the past year, food insecurity was exacerbated by export bans by other major grain producers, weakening currencies, and accelerating inflation around the world. The threat of a global recession next year now looms large over hundreds of millions of people who are struggling to fulfill basic human needs.

—Mrugank Bhusari is a program assistant at the GeoEconomics Center.

In November, the world’s population surpassed eight billion and is expected to continue to rise as life expectancy increases around the world and fertility rates remain high in several regions, primarily sub-Saharan Africa and South Asia. The geoeconomic and development implications are stark and are compounded by the lingering effects of COVID-19 as well as climate change and conflict. The world’s people and resources are not distributed equally, and inequality within and among countries is rising. Ever-expanding cities seek to capitalize on the benefits of agglomeration while managing the resulting stress on infrastructure and services. At the same time, in lower- and middle-income countries—which tend to be the most populous—food, health, and education systems struggle to meet expanding and evolving needs. 

Younger and older people tend to bear the brunt of the challenges associated with population growth, especially in terms of economic opportunity as job creation fails to keep pace with the number of labor market entrants, and digitization, automation, and the changing nature of work put worker longevity and job security at risk. However, history and emerging evidence show that strategic economic and environmental policies combined with investments in human capital, lifelong learning and wellbeing, and technologies that increase innovation and productivity are what enable the accumulation of earnings and intergenerational wealth. That catalyzes consumption and can harness larger populations toward demographic dividends and sustainable, inclusive growth.

—Nicole Goldin is a nonresident senior fellow at the GeoEconomics Center and global head of inclusive economic growth at Abt Associates.

To combat inflation, central banks representing nearly three-quarters of the global economy, measured by gross domestic product (GDP) weight, increased their benchmark interest rates in 2022. Most noticeably, this was done by the US Federal Reserve (the Fed), European Central Bank (ECB), and Bank of England, together accounting for 42 percent of global GDP. The Bank of Japan, People’s Bank of China, and Central Bank of the Republic of Turkey were among the few central banks cutting their benchmark interest rates in 2022. When it comes to central bank rate hikes, it is important to note that forty-one countries have their currencies pegged to the US dollar and/or euro. To protect the peg while also allowing for the free flow of capital, these economies have no choice but to increase their domestic interest rates on par with the Fed and ECB—even if domestic inflation is not a concern for their economies—therefore reducing their growth potentials. Oil and gas exporting countries of the Persian Gulf are among these economies.

—Amin Mohseni-Cheraghlou is the macroeconomist at the GeoEconomics Center and an economics professor at American University.

On September 28, 2022, the US dollar, euro, and British pound were closer to a triple parity than ever before. The dollar had appreciated against most currencies throughout the year, reflecting the relative strength of the US economy, the Federal Reserve’s determination to bring inflation down by sharply raising overnight interest rates, and a flight to safety after the start of the Ukraine war. European inflation has been more strongly tied to energy, and the ECB was therefore slower to embark on a tightening cycle, helping the dollar breach parity to the euro in August for the first time in twenty years. And in late September, the pound fell to the lowest ever value against the dollar after the short-lived government of Prime Minister Liz Truss presented its inflationary tax-cut proposals and the Bank of England had to prevent a collapse in the UK government bond market. Both the euro and pound have rebounded since, but for a short moment the three currencies were only a few basis points away from being valued equally.

—Martin Mühleisen is a nonresident senior fellow and former chief of staff and strategy director of the IMF.

The share of global environmental, social, and governance (ESG) investments as a proportion of total assets under management is projected to increase from 14.4 percent in 2021 to 21.5 percent in 2026.

ESG funds, which evaluate how well companies are managing risks and opportunities related to environmental, social, and governance issues, are growing rapidly to become the new default choice for investors. As investors refocus their long-term investment strategies, the demand for ESG funds is out-stripping the existing supply. Asset managers looking to deliver investor success and survive turbulent investment markets are embracing ESG funds as the best way to differentiate their products in the future. These emerging global trends in the asset and wealth management industry—led by the United States—provide a critical reality check on swiftly evolving investor priorities and an important counterweight to concerns that recent anti-ESG rhetoric and legislation were taking some of the steam out of enthusiasm for impact investing. ESG funds are the next big thing.

—John Forrer is a contributor to the GeoEconomics Center and director of the Institute of Corporate Responsibility at George Washington University

For most of the world, 2022 was the year the pandemic became endemic. While COVID-19 case numbers continue to soar, with year-over-year cases increasing by nearly 75 percent in 2022, deaths have sharply declined by some 67 percent when compared to 2021. At the same time, the pandemic remains one of the foundational trends shaping the global policy landscape—complicating a range of issues from Russia’s invasion of Ukraine to a potential global recession. In the United States, COVID continues to moderate economic productivity with a recent National Burea of Economic Research working paper estimating that people’s unwillingness to be in close proximity with others reduced labor force participation by 2.5 percent in the first half of 2022. This translates to roughly a $250 billion drop in potential output—or around 1 percent of GDP. COVID’s sweeping impact is most prominently playing out in China, which in recent weeks has been rocked by the most widespread protests in decades following nearly three years of periodic lockdowns and dampening economic prospects. 

—Niels Graham is an assistant director at the GeoEconomics Center.

The US Federal Reserve has reduced the size of its balance sheet in 2022 by $381 billion, draining liquidity from the financial system. This quantitative tightening (QT) policy aims to support the contractionary impact of the Fed’s interest-rate hikes to rein in inflation. At the current pace, the Fed will shed $1.6 trillion in assets by the end of 2023, reducing its overall balance sheet by roughly 18 percent. While it remains difficult to measure QT’s impact, a reduction of that size could tighten financial conditions significantly. This matters because it might allow the Fed to forego a rate hike in 2023 and/or start decreasing interest rates earlier. QT targets long-dated assets that have an outsized influence on equity and bond markets. A severe recession or the Fed’s desire to ease financial conditions could all spell an early end to QT. This is a space to watch in 2023.

—Ole Moehr is a senior fellow and consultant with the GeoEconomics Center.

That’s how many manufacturing jobs have been created in the United States since April 2020 (when manufacturing employment was at a record low) to reach a total of 12.9 million manufacturing jobs as of November 2022. US manufacturing employment started out at nine million in 1940 and rose steadily to a peak of 19.5 million in July 1979. The US then lost 8.1 million manufacturing jobs in the following four decades, a result of the hollowing out of the US manufacturing base due to the offshoring of manufacturing to other countries, in particular China. Since early 2020, pro-manufacturing policies in the US seem to have reversed the declining trend. It remains to be seen if this nascent recovery will be strengthened in the future as a result of efforts to attract high-tech manufacturing activity back to the United States with incentives provided to companies in the US CHIPS and Science Act and the Inflation Reduction Act.

—Hung Tran is a nonresident senior fellow at the GeoEconomics Center and a former IMF official.

Year to date, the US Commerce Department has designated 390 parties to the Entity List, a 260 percent increase over the designations made in 2021. Along with various other export-control mechanisms, Entity List designations are increasingly used to promote US national security and foreign-policy interests by restricting the target parties from receiving certain, or in some cases all, items subject to US regulation. Because US export controls are primarily property-based, these restrictions can be effective in covering gaps left by trade and economic sanctions, which may not apply to certain foreign parties whose dealings in US-regulated products, technologies, or software could benefit US adversaries. 

Unsurprisingly, the vast majority of Commerce’s Entity List designations in 2022 involved parties in Russia. Notably, parties elsewhere, including in certain US ally countries such as the United Kingdom and Spain, were listed for having acquired or attempted to acquire US-regulated products in support of Russia’s military, defense industrial base, or strategic ambitions. China was also heavily targeted by designations that took aim at parties involved in certain semiconductor manufacturing activities. Whether the swell in designations continues over time remains to be seen, but it seems likely that Commerce will continue to use the Entity List in furtherance of efforts to limit Russia’s and China’s military and advanced manufacturing capabilities. In addition, Commerce has the authority to designate parties whose host governments fail to facilitate US security-driven end-use verifications, as well as those involved in human rights, cybersecurity, and spyware-related threats. Regardless of the final numbers, the Entity List is a score worth tracking in 2023.

—Annie Froehlich is a nonresident senior fellow at the GeoEconomics Center’s Economic Statecraft Initiative and special counsel at Cooley LLP.

The post By the numbers: The global economy in 2022 appeared first on Atlantic Council.

For those who thought the United States was behind in the digital-currency “space race,” the news was welcome. In a subsequent white paper on the project—named Project Cedar—the New York Fed explained that it has already completed stage one of testing and proved that international currency transactions could be done both quickly and safely through the blockchain. But buried in the technical details was a revealing line on the ambitions of the project: The goal of the new network is “to reduce settlement risk in cross-border, cross-currency transactions.” The message? We see what the world is doing on CBDCs, and the United States is not going to be left behind.

According to new Atlantic Council research, the United States, thanks to Project Cedar, has moved into development of a central bank digital currency and joined its colleagues at the European Central Bank, the Bank of Japan, and the Bank of England in making the leap forward. All of these jurisdictions have different projects (some, such as the United States, are focused on wholesale, while others, such as the eurozone, are hard at work on a “retail” digital currency that could be used to buy an espresso). Many of these central banks, including the Fed, have not actually decided to issue a CBDC—for that, most of the central banks will need legislative approval. And there are major privacy and cybersecurity challenges to address before most Americans open up their phones and use the digital dollar. 

Check out the CBDC Tracker

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now features 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

But over a span of two years, the world’s leading central banks have gone from skeptical to serious about a government form of digital currency. When the Atlantic Council’s GeoEconomics Center began this project in 2020, thirty-five central banks were exploring a CBDC; as of today, that number is 114. The motivations vary in each economy, but there are some common themes. The first is the pandemic, or more specifically, the lessons learned from it. At the height of COVID-19, many countries—including the United States—discovered how antiquated their financial plumbing was. The distribution of stimulus checks that could have taken hours sometimes took weeks. As the global economy likely heads into a recession in 2023, the need to improve delivery of money to citizens is paramount for policymakers. 

The second is crypto. The FTX debacle is just the latest and largest in a string of prominent crypto failures. Finance ministries and legislatures around the world are trying to figure out rules that can help rein in the worst actors in the field. But while the regulators get to work, central bankers don’t want to sit on the sidelines. Cryptocurrencies and stablecoins are being used all over the world. In India, for example, nearly 10 percent of the population now owns or is planning to invest in cryptocurrency. In the United States, it’s closer to 13 percent. Central bankers are concerned about losing monetary sovereignty and becoming blind to what is happening inside their own economies. They see a central bank digital currency as a way to evolve and compete in this changing landscape.

The final motivation is geopolitical: Russia’s invasion of Ukraine. In the ten months since Russia’s invasion, the GeoEconomics Center’s research has shown that interest in wholesale central bank digital currency has nearly doubled. A range of countries including China, India, Indonesia, South Korea, and Brazil are pursuing this new technology. So what does a land war in Europe have to do with the future of finance?

When the United States and Group of Seven (G7) responded to Russian President Vladimir Putin’s invasion, they did so not with direct military engagement but with the most sweeping set of financial sanctions ever levied against a major economy. The West froze Russian reserves, cut Russian banks off the SWIFT payment messaging system, and slapped over 6,500 individuals with sanctions—and the rest of the world took notice. In conversations we have had with central bankers, it was clear that financial sanctions made several countries think differently about the dollar. Suddenly, the possibility that any country on the G7’s bad side could be cut off from the ability to transfer funds between banks became very real. The logical move, for many countries, was to develop a back-up plan. That’s where central bank digital currencies come in. 

The dollar is involved in approximately 88 percent of all foreign exchange transactions. That dominance comes in part from the fact that the dollar is a stable liquid asset in demand by nearly every central bank and financial institution. But only 60 percent of official cross-border contracts are actually denominated in dollars. That’s because even when countries aren’t settling in dollars, they still use it as a trusted intermediary between other currencies. Sometimes international transactions can take days to finalize, so having the dollar as the agreed-upon conversion helps both parties manage risks and reduce costs. Technologies such as CBDCs that allow countries and their commercial banks to settle currency across borders almost instantly are changing the nature of cross-border flows of money. Last month, Hong Kong, China, Thailand, and the United Arab Emirates showed what settlements may look like in the future when they completed twenty-two million dollars in cross-border transactions on the blockchain in the first successful test of its kind.

Suddenly the United States could see the future arriving faster than it previously anticipated. If countries could settle currencies between themselves without touching the dollar, they could significantly soften the bite of sanctions. While debates about crypto legislation and central bank digital currencies have been playing out on Capitol Hill for years, up until now little concrete action has been taken. The speed of finance is faster than the legislative imagination of Congress. With Project Cedar, the New York Fed is showing what is possible when the world’s largest financial market uses state-of-the-art technology to try to improve financial flows across the world.

The announcement, of course, was just the first step. More testing will be done over the next six months, and it will likely be a year before any real money is settled on a US central bank digital currency network. But the signal from the New York Fed was clear: If you are a country considering developing a CBDC, you have a new model to pay attention to. The United States has entered the chat. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center.

Ananya Kumar is the associate director for digital currency at the Atlantic Council GeoEconomics Center.

The post It’s official: The United States is developing a bank-to-bank digital currency appeared first on Atlantic Council.

Latin America and the Caribbean is in the midst of a delicate economic transition, with five of the LAC6 countries attempting a tax reform before their GDPs recovered to pre-pandemic levels.¹ As the region confronts rising inflation, the economic spillovers of the war in Ukraine, and budgetary pressures left behind by the pandemic, governments should improve their taxation systems to rebuild fiscal stability, stimulate growth, and enhance equity – a delicate balancing act among overlapping policy priorities.

Regional taxes are a heavy administrative burden, requiring nearly twice the time to complete in LAC as in the OECD.² At the same time, the region struggles with average tax evasion of 5.6 percent of GDP³ and a continued overreliance on corporate income taxes.⁴ With still-high public debts and fiscal deficits, governments must respond by implementing policies to streamline and modernize revenue collection and management.

What are the pros and cons and trade-offs involved in increasing or decreasing the region’s three main taxes (VAT, PIT, and CIT)? How can governments optimize enforcement and collection without resorting to rate changes? What policies outside the tax authority are needed to support tax reforms? How can policymakers better navigate the thorny politics of tax reforms?

The following pages provide new analysis and concrete recommendations to address these questions. Drawing on the powerful expertise of its authors in addition to valuable commentary and insight from private, nonpartisan strategy sessions, legal experts, and regional governments, this report is a strong addition to the Adrienne Arsht Latin America Center’s #ProactiveLAC Series, which aims to provide insight and foresight to LAC countries on how to advance economic reactivation and long-term prosperity.

Read the full report below

The Adrienne Arsht Latin America Center broadens understanding of regional transformations and delivers constructive, results-oriented solutions to inform how the public and private sectors can advance hemispheric prosperity.

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The post Improving tax policy in Latin America and the Caribbean: A balancing act appeared first on Atlantic Council.

Russia’s war has caused the contraction of Ukraine’s economy by 35 percent (or seventy billion dollars) this year. In addition, it has caused massive material destruction that the non-governmental Kyiv School of Economics assesses at more than $120 billion. The World Bank has already assessed the total Ukrainian losses at $252 billion.

In the spring, the IMF reckoned that Ukraine’s state budget would need five billion dollars a month or about fifty billion for the whole of 2022. Alas, the total external financing pledged to Ukraine for 2022 has been only $36 billion, and only $26.5 billion has been actually dispersed—that is, about half of what is needed. (These amounts do not include military funding.)

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Nov 30, 2022

A badly designed Ukraine bailout could backfire on the IMF. Here’s how to get it right.

By Martin Mühleisen

The IMF should stick to what it does best in aiding Ukraine: Using its macroeconomic expertise to corral broader support while sticking to its guidelines for its own loan.

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Lacking tax revenues and sufficient foreign aid, Ukraine has little choice but to print money to finance its bare-knuckles budget, as public expenditures have been slashed to the bare minimum. As a result, inflation is rising persistently. In October, it reached 26.6 percent through no fault of the Ukrainian government.

The Ukrainian government has specified its needs for 2023, presuming that the war continues with the current intensity. In October, President Volodymyr Zelenskyy stated that Ukraine would need fifty-five billion dollars of foreign support next year, including thirty-eight billion to patch a hole in the budget and seventeen billion for the rebuilding of critical infrastructure. He expected an IMF program of some twenty billion dollars.

So far, the two dominant donors to the Ukrainian budget have been the United States and the European Union (EU). Since June, the United States has done its share, steadily giving grants of $1.5 billion a month to Ukraine, and the Biden administration intends to continue this support with $14.5 billion in 2023. This support is included in the administration’s thirty-seven billion dollar Ukraine aid request for next year, which hopefully Congress will pass during its current lame-duck session. If the administration fails to have this adopted before the end of this year, it risks substantial delay and obstruction from Donald Trump-aligned Republicans, who oppose assistance to Ukraine altogether or want to delay it by raising bureaucratic obstacles.

The European Commission is also strongly in favor of Ukraine, and it attempts to match the US financial support, though with highly subsidized loans rather than grants. The European Parliament concurs, but the European Council of twenty-seven ministers of finance has to approve any financial support, and each of them has veto powers. The German government has repeatedly caused delays in the EU disbursements to Ukraine, complaining that the EU must not increase its indebtedness.

As a result of this obstruction, the EU has only disbursed six billion euros of the nine billion it promised Ukraine last May. The European Commission is pressing hard for a decision on disbursement of eighteen billion euros to match the US contribution next year, and it harbors high hopes to be able to do so. If so, Ukraine would receive about three billion dollars a month from the United States and the EU, but on either side something can go wrong or be delayed, raising the financial risks for Ukraine.

The missing piece in the Ukrainian financial drama is the IMF. After Russia’s aggression against Ukraine in March 2014 when it annexed Crimea, the IMF announced within days that it would issue fourteen to eighteen billion dollars for a two-year rescue package for Ukraine. As the impact of the war became known, the IMF adopted a four-year program in March 2015. But at that time, the IMF had different leadership.

Current IMF Managing Director Kristalina Georgieva, by contrast, has not done what’s necessary to secure a program for Ukraine. After nine months of Russian aggression against Ukraine, the IMF has only provided $2.7 billion of emergency financing. In order to avoid offering any financing, it developed a new monitoring instrument, a Program Monitoring with Board Involvement (PMB), in October. It aims to establish a macroeconomic framework, which is indeed important. On November 23, nine months after the start of this war, the IMF finally announced that it had concluded such a staff-level program after virtual discussions, but without any financing.

In phone calls, Zelenskyy has appealed to Georgieva for an IMF program. Speaking at the International Conference on the Recovery, Reconstruction, and Modernization of Ukraine in Berlin on October 25, Georgieva stated that the “PMB would help catalyze urgently needed support from donors and pave the way for eventually moving to a full-fledged IMF program.” But neither there nor elsewhere has Georgieva explained this neglect of the primary IMF duty, to help a member country in a macroeconomic crisis by providing emergency financing.

This IMF passivity is all the more remarkable since US Treasury Secretary Janet Yellen on October 12 urged “the IMF to use the envisioned monitoring program to lay the groundwork to establish a full-fledged program for Ukraine early next year.” By contrast, she expressed her appreciation of the World Bank and European Bank for Reconstruction and Development (EBRD) for their support to Ukraine.

There are always political considerations and complications among IMF members, but its Executive Board has repeatedly voted on previous IMF programs for and disbursements to Ukraine. Russia has been the single dissenting vote, while China and India have happily supported Ukraine.

Neither Georgieva nor any other senior IMF official has visited Ukraine since Russia started this war, while Anna Bjerde, vice president of the World Bank, visited Kyiv on November 16, and leaders from most EU countries have visited the capital. The World Bank, the EBRD, and the European Investment Bank all perform important roles in helping Ukraine.

Arms are of foremost importance in a war, but Ukraine needs substantial financial support from its friends. The United States and the European Commission do what they can, but the IMF needs to provide a normal macroeconomic stabilization program with proper financing to keep Ukraine’s government functioning so its military can stay in the fight.

Anders Åslund is a senior fellow at the Stockholm World Forum. His most recent book is Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.

The post The IMF needs to step up to keep Ukraine afloat in 2023 appeared first on Atlantic Council.

Nevertheless, IMF staff will be hard-pressed to design a viable program as Ukraine is running low on foreign exchange reserves, has negotiated debt standstills with private and official creditors, and requires significant grants to meet continued budget deficits. Under threat of suffering further damage to its economy, Kyiv might run into difficulties repaying the IMF in the future, violating a fundamental requirement for IMF programs and creating financial risks for the institution itself.

Ukraine, of course, deserves all the support it can get to prevail in its struggle against Russia’s invasion. The Bretton Woods Institutions also have an important role in supporting democratic values across the world. However, their ability to do so in the future may be in question if a large, troubled Ukraine program deepens the political fragmentation of their membership, threatening gridlock on strategic decisions down the road.

Therefore, the IMF should stick to first principles and do what it does best—use its macroeconomic expertise to catalyze and coordinate a broader support effort by multilateral lenders and bilateral contributors, and stick closely to its lending guidelines when it comes to the size of its own contribution. Given the extraordinary geopolitical risks, the main financial burden will need to be provided by Ukraine’s allies and partners, including the United States.

Political and financial turbulence ahead

To be clear, Ukraine’s allies will have no difficulty getting an IMF loan approved, as their voting shares well exceed the simple majority needed for such decisions. Indeed, the October UN resolution condemning Russia’s annexation of Ukrainian territory was carried by almost 80 percent of UN member countries, which also happen to hold more than 80 percent of the IMF’s capital and contribute the vast majority of its financial resources.

However, there’s more to the geopolitical reality. Countries voting against or abstaining from the recent UN resolution account for almost a third of the world’s gross domestic product and more than half of the global population, led by India and China. Some of these countries may be concerned about a large multilateral loan to Ukraine, either on political grounds or because they refuse to accept large risks from indirectly financing a war effort that they did not support in the first place.

The Bretton Woods Institutions will need to step carefully in this new reality. It’s true that the IMF and the World Bank were no strangers to geopolitically motivated programs during the Cold War, such as the series of failed loans to Mobutu Sese Seko’s Zaïre in the 1970s. Even more recently, the amount and conditions associated with IMF loans seem to have been more generous for countries aligned with the United States and other major shareholders.

Unlike during the Cold War, preferential loans for political allies could now provoke political backlash. The COVID-19 pandemic again showed that large emerging-market countries have become less dependent on multilateral financing, and there is building frustration about the delays in governance reform that would grant those countries greater voting power in multilateral institutions. Moreover, low-income countries are dissatisfied with the IMF and World Bank for not doing enough to help in the climate transition, a demand that was voiced clearly at the recent UN Climate Change Conference of the Parties (COP27).

In this environment, it would be problematic for the IMF to approve a large loan to Ukraine with relatively light conditions and high risks—especially so soon after a controversial Argentina program. This would make it harder for the IMF to resist other countries’ demands for easier lending conditions, with detrimental effects on its balance sheet. Continued geopolitical discrimination would also risk undermining the long-established consensus model that has allowed the IMF and World Bank to operate smoothly in times of crisis.

The October UN vote may be an omen of things to come. The group of emerging-market and developing countries not explicitly supporting the resolution holds a combined voting share of 18 percent in the Bretton Woods Institutions. This share is more than the 15 percent needed to block strategic decisions on issues such as IMF capital increases, allocations of Special Drawing Rights, or certain lending policies.

There is of course no indication that this particular voting pattern will apply to a Ukraine lending decision. However, the numbers could foreshadow tough political disputes in the future. If a large enough group of emerging and developing countries were to form a coalition around common grievances, the United States’ ability to shape decisions as the only veto power in the IMF and World Bank could be diminished.

A new approach

The question then is how best to help Ukraine while maintaining the broad support of the Bretton Woods membership. First principles would require an IMF program to be fully financed, with adequate buffers against downside risks, and a path to paying off debt that remains sustainable beyond the end of the program.

This means that, once ongoing discussions have concluded, bilateral support from Ukraine’s allies would be fully integrated into the IMF program design, and Kyiv would receive concrete financing assurances from its lenders and donors, subject to satisfactory program implementation. Moreover, the IMF should receive guarantees from Ukraine’s allies that the country will be able to repay its multilateral loans; the IMF’s macroeconomic loan conditions cannot account for the possibility of military or other geopolitical setbacks that could further damage Ukraine’s economy in the months ahead.

If done properly, this approach could become a model for future loans to countries where strategic Western interests are at stake. While keeping to the IMF’s strict lending standards, the West should seek ways to help geopolitical allies with bilateral funding, capital investment, market access, or other support that can boost the chances of a program’s success. The World Bank and other multilateral development banks would have a large role in project coordination, and where debt burden is a concern, the IMF’s lending into official arrears policy could be used against lenders not acting in good faith, freeing up resources otherwise used for debt service.

Such action would allow the West to leverage resources for the benefit of allied countries while still protecting the balance sheets of multilateral lenders—which are owned by all member countries, rich and poor alike. This would strengthen incentives for other countries to adopt sound financial policies and become less dependent on financing from geopolitical competitors.

This strategy cannot emanate from the Bretton Woods Institutions themselves: It requires the United States and its allies to engage in a deep and well-structured coordination effort to marshal the tangible and intangible resources needed to counter China’s and Russia’s global influence.

Without such coordination, there is a risk that the IMF and World Bank would be on their own to deal with financial and political hurdles that might undermine their still broad-based global support. This could deny the West the ability to use a major geopolitical asset at a time when the resources and expertise of the Bretton Woods Institutions are needed more than ever.

Martin Mühleisen is a nonresident senior fellow at the Atlantic Council and a former IMF chief of staff.

The post A badly designed Ukraine bailout could backfire on the IMF. Here’s how to get it right. appeared first on Atlantic Council.

Russia’s airstrike campaign against civilian infrastructure began in early October following a series of Russian military defeats in Ukraine. The change in strategy appears designed in part to address mounting domestic unease within the Russian Federation over Vladimir Putin’s rapidly unraveling invasion.

Kremlin officials and regime propagandists openly praise the bombings and depict them as a means of provoking additional refugee flows to Europe. Moscow hopes that a new wave of Ukrainian refugees will persuade EU leaders to reduce support for Kyiv. The Kremlin also appears to believe that blackout conditions inside Ukraine will pressure the country’s leaders into negotiating a compromise peace settlement on Russian terms.

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On November 17, Russia expanded its targeted missile strikes on civilian energy infrastructure to include ten gas production facilities across Poltava and Kharkiv in eastern Ukraine. These critically important facilities provide about one-third of Ukraine’s domestic hydrocarbon production. Some facilities were destroyed, while others were damaged and require immediate repair.

Naftogaz Ukraine, the state-owned gas and oil company that I was appointed to lead as CEO earlier this month, is the country’s largest producer, storer, and supplier of domestic natural gas. We are currently working to prepare an appropriate level of gas in underground storage facilities. We are therefore in need of both stable production and predictable import volumes.

Relentless Russian missile strikes on our power infrastructure are forcing us to reinforce our energy stocks for the coming winter season. Electricity blackouts are putting pressure on our hydrocarbon reserves and may require us to purchase additional natural gas on the external market. Generous assistance from our partners in the US, Canada, France, Norway, and the EBRD in the form of loans and grants has already allowed us to procure some much needed additional gas internationally. More will certainly be required. With Russia’s aerial assault set to continue, we face the toughest winter season in our three decades as an independent nation.

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The resilience that my company has shown throughout the war has been remarkable, but resolve alone is not enough. In the spirit of solidarity, we need to galvanize more support from our Euro-Atlantic and Pacific partners and from the international business community. Prior to Russia’s aggression against my country, Ukraine was a net exporter of electricity to Europe. Naftogaz is positioned to become a net exporter of natural gas to Europe. To achieve this goal, we need to leverage new technologies, international expertise, and investment like never before. This can only be done with support from our partners and allies.

Despite the existential challenges of today’s wartime conditions, we have already taken a number of key steps to restore trust and reaffirm our commitment to our international lenders and bondholders. These steps include the recent appointment of an internationally respected special advisor, who has been tasked with providing both oversight and guidance on ongoing negotiations with our partners. We have already resumed constructive dialogue with holders of our 2022 and 2026 Eurobonds, as we recognize that they are key to successfully financing the exploration and production activities that are our growth drivers.

Another important priority is prolonging corporate governance reforms at Naftogaz in line with OECD principles. During my first day on the job, I sent a note to Ukraine’s Cabinet of Ministers requesting a conclusion of the international selection process to identify qualified, independent directors for our Supervisory Board. The company’s continued transformation depends on a predictable development track founded on trust, transparency, and good governance, which can only be guaranteed by a stable and professional international board.

As an essential service provider to the people of Ukraine, we are committed to providing the civilian population with the gas and heating required to withstand harsh winter conditions. Despite ongoing Russian attacks on civilian infrastructure, we will continue to demonstrate the kind of courage and resilience that the world has come to expect from Ukrainians over the past nine months of Putin’s brutal invasion.

Russia’s attack on Ukraine is an attack on international rule of law and the entire global security system. As we confront this shared threat, the continued support of our international partners, creditors, investors, and allies will be fundamental to our coming victory.

Oleksiy Chernyshov is CEO of Ukrainian state energy company Naftogaz.

Further reading

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The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Fueling Ukraine’s fight back against Russia’s blackout blitz appeared first on Atlantic Council.

Most of this spending must happen in low-income economies. Nearly eight hundred million people in the world do not have access to electricity and basic drinking water services. Around 1.8 billion people in the world are not using basic sanitation services. The vast majority of these people reside in low-income economies, including the Sub-Saharan African and South Asian regions. Moreover, around 3.2 billion people around the world do not use the internet and only sixteen out of one hundred people have broadband subscriptions. As shown in figure 1, in low-income countries, only 21 percent of people have access to the internet, and only one in two hundred have broadband. Figure 1 can be explored for more detailed statistics on various forms of basic infrastructure gaps, such as in access to electricity, drinking water, sanitation, internet, and broadband.

From 2015 to 2020 assets under management (AUM) for sovereign wealth funds (SWFs) and private pension funds grew from $11 trillion to $15 trillion. As of the end of 2020, total global pension assets (public and private) exceeded $56 trillion, almost double the amount in 2010. Having more than $65 trillion in assets (see figure 2 and figure 3), institutional investors (such as SWFs and pension funds) are uniquely positioned to bridge low-income economies’ infrastructure financing gap in the coming decades. This is mainly because the investment horizons of institutional investors are often long-term with low but secure return expectations, which are characteristic of large-scale infrastructure projects. As shown in figure 2, Asia and the Middle East are home to some of the largest SWFs in the world, accounting for 40 percent and 34 percent of world’s total SWF assets, respectively. Available data suggests that cross-border investments of SWFs from these regions mainly target the financial and real estate sectors of advanced economies, accounting for around 40 percent of all their cross-border transactions.

As seen in figure 3, advanced economies are home to the world’s largest pension funds and retirement saving accounts. The United States accounts for around two-thirds of AUM in this industry. While highly liquid and low-risk assets such as bonds and equities have traditionally been the two main asset classes invested by pension funds and retirement saving accounts, they are slowly starting to invest in less liquid asset classes with longer return time-horizons, such as infrastructure and real estate. This could be a game-changer in filling the global infrastructure financing gap. However, despite their growing importance in the global economy and financial markets, institutional investors such as SWFs and pension funds account for less than 1 percent of private participation in infrastructure in developing economies, largely due to risks of long-terms investments in these countries.

It has long been clear that traditional mechanisms of public financing of infrastructure projects are not sufficient to meet the growing demand for infrastructure. This calls for new and innovative mechanisms to bring in investments from institutional investors and the private sector. To make this possible, infrastructure needs to be defined as an asset class that can readily be invested in by private and public entities alike. The establishment of Global Infrastructure Facility (GIF) by the World Bank is an effort in this regard. Such efforts have also been complemented by increasing activity in public-private partnerships. For example, in 2012, the World Pension Council and Organization for Economic Co-operation and Development first convened a meeting focusing on promoting pension funds’ exposure to long-term assets such as infrastructure investment.

The Bretton Woods Institutions (BWI) are uniquely positioned to encourage investment in developing countries’ infrastructure through providing various guarantee and insurance mechanisms, thereby reducing risk for private investors. In other words, BWI’s involvement in developing economies’ infrastructure projects can crowd-in institutional and private investors by reducing risks and increasing trust and transparency in such projects. While the establishment of the GIF by the World Bank is an important step forward, the following two reports identify other areas where the World Bank and International Monetary Fund could engage with private capital, non-state, and quasi-state actors (such as SWFs and pension funds) to bridge the infrastructure financing gap over the next few decades: Modernizing the Bretton Woods Institutions for the twenty-first century and Changing Bretton Woods Institutions: How non-state and quasi-state actors can help drive the global development agenda.

Amin Mohseni-Cheraghlou  is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also an assistant professor of economics at American University in Washington DC. @AMohseniC

Naomi Aladekoba is a consultant with the GeoEconomics Center focusing on Sub-Saharan Africa, Chinese foreign policy, and international development. @NAladekoba

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The post The global infrastructure financing gap: Where sovereign wealth funds and pension funds can play a role appeared first on Atlantic Council.

This paper outlines reforms for Bretton Woods Institutions – such as the World Bank Group (WGB), the International Monetary Fund (IMF), and the World Trade Organization (WTO). The world needs a Bretton Woods 2.0 for the twenty-first century. The challenges that led to World War II — inequality, protectionism, and rising nationalism — have resurfaced and created the dire need for reform of these institutions.

New, even bigger challenges — such as climate change, pandemics, global inflation, and supply chain disruptions — now threaten the global economy and trade. The current institutions are too small and ill-equipped to adequately address the threats of widening wars and surging food and fuel prices. This paper argues that a new international financial and economic architecture is needed. Bretton Woods Institutions must be modernized and revamped to help address these problems for the remainder of the twenty-first century.

The new system requires three core “Rs” – a revised global remit, an enhanced resource base to help individual countries confront collective global problems, and the mandate to monitor agreed-upon global rules. The IMF must refocus itself on addressing global financial instability and macroeconomic policy. The World Bank must become a financial institution focused on planetary sustainability and shared prosperity. A strengthened WTO must become the forum for freer and fairer trade in goods, services, and cross-border transactions.

These institutions must work with regional and other United Nations (UN) specialized bodies. They should coordinate with bilateral aid agencies, sovereign wealth funds, pension funds, and private philanthropic organizations. The IMF, WTO, and WBG need to leverage their power and resources to draw in private capital at much higher levels. This would provide the Bretton Woods institutions with the needed resources and expertise to address rising global challenges and development needs. These reforms would create a stronger international economic and financial architecture suitable for the twenty-first century.

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At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Modernizing the Bretton Woods Institutions for the twenty-first century appeared first on Atlantic Council.

The Bretton Woods institutions continue to serve as the champions of international development and financial stability, but several factors create a challenge for their continued effectiveness and relevance. The growing finance gap from rising poverty, income and gender inequality and poor infrastructure are threatening global sustainable development. Emerging and developing countries, still recovering from pandemic, are also dealing with challenges related to climate change, food and energy security issues and access to technological innovation. Both the International Monetary Fund (IMF) and the World Bank, on their own, will not be able to effectively tackle these issues in the long-run. An increasingly connected world had led to the emergence of new and increasingly relevant, actors in the global development field.

The emergence of these actors, both non-state and quasi-state actors, which include Multi-National Corporations, Sovereign Wealth Funds, Pension Funds, and Non-Governmental Organizations (NGOs) has demonstrated how critical their inclusion in development-finance is for the BWIs. MNCs are continuing to expand their footprints globally, shifting supply chains and additional economic benefits to both emerging and developing markets, while SWFs and Pension Funds are accessing their growing pool of assets to boost disadvantaged markets and promote sustainability. Despite the recognition of their valuable contribution, the IMF and the World Bank, have been limited in the scope of the inclusion of these actors. The opportunity to create more effective and impactful Bretton Woods institutions will depend on both the willingness and capacity of the institutions to effectively integrate these non-state and quasi-state actors into a constructive operational framework.

This new report examines the increasingly influential role of non-state and quasi-public actors in global development and sustainable finance, specifically through the rising level of sustainable investments in emerging and development markets. Implementing near-term solutions that include these actors in future capital mobilization and development financing will be critical to ensuring the gap between the North and South does not continue to expand. Moreover, integrating the data and expertise these actors into streamlined thematic initiatives and consultations and country-level analysis between the Bretton Woods institutions can strengthen efforts in meeting the Sustainable Development Goals in an increasingly high risk environment.

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Bretton Woods Institutions will face enormous challenges going forward. While ambitious reforms are needed, its unlikely they will be seriously considered due to high geopolitical tension and mistrust among major countries. Nevertheless, the need for reform is pressing. Therefore, it is important to look at more feasible reform, narrower in scope and technocratic in nature, to improve the these institutions.

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Report Oct 17, 2022

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Economy & Business Fiscal and Structural Reform

Report Oct 17, 2022

How China would like to reshape international economic institutions

By Victor Shih

Despite its size, China has an inadequate voice in traditional Bretton Woods Institutions. This paper examines aspects of the dissatisfaction China has with existing global governance institutions such as the World Trade Organization (WTO) and the International Monetary Fund (IMF). It also discusses the proposed changes to these institutions according to discussions with Chinese experts.

China Economy & Business

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post Changing Bretton Woods Institutions: How non-state and quasi-state actors can help drive the global development agenda appeared first on Atlantic Council.

Despite being the second largest economy in the world and the largest trading partner for a majority of the world’s economies, China has an inadequate voice in traditional international economic institutions, leaving many of its experts and policymakers dissatisfied. For example, on a per capita basis, 170 out of 189 member countries in the World Bank Group’s International Bank for Reconstruction and Development (IBRD), have more voting power than China. This paper examines different aspects of the dissatisfaction that Chinese scholars and officials’ have with existing global governance institutions (GGIs), with a special focus on the World Trade Organization (WTO) and the International Monetary Fund (IMF). It also discusses the underlying aspirations that drive proposed changes to various GGIs according to discussions with Chinese experts.

In the IMF, China is pursuing greater representation in the decision-making process while in the WTO China seeks to revise rules so that the United States can no longer dominate the organization’s case flows. China is also prepared to navigate an increasingly fragmented and complex set of GGIs, including new ones it has established –New Development Bank or BRICS Bank and Asian Infrastructure Investment Bank (AIIB) or the BRI Bank, across different regions and issue areas.

For Bretton Woods Institutions to remain relevant and effective in the twenty-first century and address ongoing global challenges in a timely manner, China’s active engagement in these institutions is crucial. However, the lack or slow pace of substantial reforms in these institutions increases the risk of China becoming disillusioned and disengaging with them. Therefore, the United States alongside its G7 allies and Organization for Economic Cooperation and Development (OECD) countries should take meaningful steps to make existing GGIs more inclusive of all developing and emerging economies, with an emphasis on China, and also actively engage with regional multilateral development banks and financial institutions around the world.

Related content

Report Oct 17, 2022

The evolution of the IMF: A case for IMF 1.5 before Bretton Woods 2.0

By Hung Tran

Bretton Woods Institutions will face enormous challenges going forward. While ambitious reforms are needed, its unlikely they will be seriously considered due to high geopolitical tension and mistrust among major countries. Nevertheless, the need for reform is pressing. Therefore, it is important to look at more feasible reform, narrower in scope and technocratic in nature, to improve the these institutions.

China Economy & Business

Report Oct 17, 2022

Changing Bretton Woods Institutions: How non-state and quasi-state actors can help drive the global development agenda

By Nisha Narayanan

This new report examines the increasingly influential role of non-state and quasi-public actors in global development and sustainable finance, specifically through the rising level of sustainable investments in emerging and development markets.

Economy & Business Fiscal and Structural Reform

Report Oct 17, 2022

How China would like to reshape international economic institutions

By Victor Shih

Despite its size, China has an inadequate voice in traditional Bretton Woods Institutions. This paper examines aspects of the dissatisfaction China has with existing global governance institutions such as the World Trade Organization (WTO) and the International Monetary Fund (IMF). It also discusses the proposed changes to these institutions according to discussions with Chinese experts.

China Economy & Business

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post How China would like to reshape international economic institutions appeared first on Atlantic Council.

Since their creation in 1944, the International Monetary Fund (IMF) and other Bretton Woods Institutions (BWI) have made significant contributions to the growth and stability of the world economy. However, they are now faced with enormous challenges going forward in the remainder of the twenty-first century. A century likely marked by increasing frequency of climate-related acute events, global inflation, rising public debt beyond sustainable levels, and growing geoeconomic rivalry among the world’s largest economies.

Many ideas have been put forward to reform these institutions to make them fit for the new era.

Unfortunately, ambitious and comprehensive reform proposals are not likely to be seriously considered due to high geopolitical tension and mistrust among major countries. An example of these ambitious ideas includes changing the quota and voting shares among members to better reflect the increasing weight of emerging and developing economies, most importantly China. Other ideas consider raising the capital of the IMF and the World Bank Group (WBG) and promoting the SDRs as the main international reserve currency. Clearly, these proposals will not attract much attention in today’s strained geopolitical environment.

Nevertheless, the need for reform is pressing. Therefore, it is important to look at more practical and feasible reform, narrower in scope and technocratic in nature, to improve the working of those institutions in the current difficult environment. This paper argues for IMF 1.5 in the short and medium run as a path to IMF 2.0 in the long run. These practical reforms include equitably allocating lending resources among member countries, more specifically, a relative shift from Latin America to Sub-Saharan Africa. Also, the IMF should scale back structural reform as conditionality and offer coordination to different providers of emergency liquidity to make them more effective. Moreover, the IMF should avoid mission creep by focusing on and leveraging its institutional expertise in economic analysis and assessment of risks. The success or failure of these smaller-scale feasible reforms today will determine the path forward to more substantive reforms of Bretton Woods Institutions in the long run.

Related content

Report Oct 17, 2022

How China would like to reshape international economic institutions

By Victor Shih

Despite its size, China has an inadequate voice in traditional Bretton Woods Institutions. This paper examines aspects of the dissatisfaction China has with existing global governance institutions such as the World Trade Organization (WTO) and the International Monetary Fund (IMF). It also discusses the proposed changes to these institutions according to discussions with Chinese experts.

China Economy & Business

Report Oct 17, 2022

Modernizing the Bretton Woods Institutions for the twenty-first century

By Ajay Chhibber

The challenges that led to World War II have resurfaced and created the dire need for reform of the Bretton Woods Institutions. A new system to address these challenges requires the three core “Rs”—a revised global remit, an enhanced resource base, and a mandate to monitor agreed-upon global rules.

Economy & Business Financial Regulation

Report Oct 17, 2022

Changing Bretton Woods Institutions: How non-state and quasi-state actors can help drive the global development agenda

By Nisha Narayanan

This new report examines the increasingly influential role of non-state and quasi-public actors in global development and sustainable finance, specifically through the rising level of sustainable investments in emerging and development markets.

Economy & Business Fiscal and Structural Reform

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post The evolution of the IMF: A case for IMF 1.5 before Bretton Woods 2.0 appeared first on Atlantic Council.

What’s encouraging is that there is growing consensus among global leaders regarding the gathering dangers and their historic stakes, comparable to those of the 1930s ahead of World War II. What’s most disappointing is that common action is falling far short of this generational challenge.

For example, the International Monetary Fund-World Bank meetings in Washington underscored a rising consensus that escalating global inflation and a likely oncoming recession will grow worse if untreated, including rising dangers of asset price collapses, loan defaults, and Lehman Brothers-like creditor failures.

The US Federal Reserve and other central banks are taking dramatic steps to fight inflation, and policymakers were working behind the scenes this week to prevent fiscal crises like the United Kingdom’s from spreading. But they left Washington without a clear plan to tackle the worst-case scenario.

“We’ve got the most complex, disparate, and cross-cutting set of challenges that I think I can remember in the forty years I’ve been following this stuff,” former US Treasury Secretary Larry Summers told the Institute of International Finance this week. “And in all honesty, I think the fire department is still in the station.”

The Biden administration’s National Security Strategy (NSS), also released this week, intelligently underscored the escalating dangers of the global geopolitical contest with Russia and China at a time of domestic political divisions. However, it also fell short on the remedies and resources required to address that contest.

As if on cue, Russian President Vladimir Putin this week escalated his attacks on Ukrainian civilian targets, empowered by Kyiv’s continued lack of sufficient air-defense systems and inability to counterstrike the source of the attacks within Russia. And today marks the opening of Chinese leader Xi Jinping’s Communist Party Congress, which is expected to hand him a third five-year term of increasingly authoritarian rule.

Taken together, Putin and Xi are underscoring the ideological contest that defines our times. Both countries are driven by autocratic nationalism, but China’s is of an increasingly Marxist-Leninist nature.

“Under Xi, ideology drives policy more often than the other way around,” writes Kevin Rudd, the former Australian prime minister and one of the keenest observers of modern China. Writing in Foreign Affairs, Rudd says Xi has “stoked nationalism by pursing an increasingly assertive foreign policy, turbocharged by a Marxist-inspired belief that history is irreversibly on China’s side and that a world anchored in Chinese power would produce a more just international order.”

The West’s own wounds

Also in this remarkable week, there were new reminders of Western democracies’ self-inflicted wounds.

The US House of Representatives committee investigating the January 6 assault on the Capitol voted to subpoena former President Donald Trump following a sweeping summation of its case that Trump was at the center of an effort to overturn the 2020 elections that began before election day.

With midterm elections only three weeks off, US allies worry that the United States’ stubborn internal divisions make its current and future behavior on the world stage unpredictable at a time when greater consistency is so urgently required.

And in the United Kingdom, Prime Minister Liz Truss, hoping to halt the collapse of her political authority after only a month in office, fired Chancellor of the Exchequer Kwasi Kwarteng and scrubbed her tax-cutting package. Whether that settles financial markets or the rebellion within her own party remains to be seen.  

It’s weeks like this one, when so many plot strands of the global future wind together, that have prompted writers and historians to quote Vladimir Lenin, who is reported to have said: “In some decades, nothing happens; in some weeks decades happen.”

Richard Haass of the Council on Foreign Relations adds an addendum: “there are also decades when centuries happen.” Haass believes we are in such a moment, which he calls “The Dangerous Decade.” He writes: “The frightening gap between global challenges and the world’s responses, the increased prospects for major-power wars in Europe and the Indo-Pacific, and the growing potential for Iran to cause instability in the Middle East have come together to produce the most dangerous moment since World War II.”

A question of leadership

The question is which leaders will define the years ahead? Will they be Putin, Xi, and their ilk, who lack both democratic constraints and legitimacy, or the likes of US President Joe Biden and Truss, who are so hamstrung by messy politics? Or could the example of Ukraine’s Volodymyr Zelenskyy inspire similar courage in others?

It’s fair to observe that we lack leaders of the caliber of US President Franklin Delano Roosevelt or UK Prime Minister Winston Churchill, who shaped the 1930s through World War II. However, what’s too often forgotten is that they also managed to galvanize their people against autocratic challenges while working through democratic means.

In releasing his NSS, Biden put it plainly: “Autocrats are working overtime to undermine democracy and export a model of governance marked by repression at home and coercion abroad.”

Mercifully, however, the NSS departed from the administration’s earlier predilection to group all non-democracies together. Though it doesn’t say it this way, there’s a greater recognition that Singapore isn’t North Korea, that the United Arab Emirates isn’t Iran, and that Saudi Arabia isn’t Putin’s Russia.

The NSS put it this way: “Our goal is clear—we want a free, open, prosperous, and secure international order.” To achieve that, according to the NSS, requires “three lines of effort. We will: 1) invest in the underlying sources and tools of American power and influence; 2) build the strongest possible coalition of nations to enhance our collective influence… and 3) modernize and strengthen our military so it is equipped for the era of strategic competition with major powers…” 

What it fails to say is that all bets are off if the civilized world doesn’t first defeat the bear at the door. Ukraine must succeed in pushing back Putin, and Putin must fail in his delusional and imperial ambitions.

All else that is imagined in the NSS could fail if the civilized world doesn’t provide sufficient arms, sanctions, and political will to succeed at this. One place to start: Western nations can change their laws so that the three hundred billion dollars in Russian assets currently frozen in the international financial system could be repurposed to help Ukraine rebuild. What’s been achieved thus far is impressive, but it remains insufficient when measured against the historic stakes.

If the civilized world falls short, this could be its final act.

Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on Twitter @FredKempe.

THE WEEK’S TOP READS

#1 United States National Security Strategy
THE WHITE HOUSE

This is big.

The US National Security Strategy released this week, while not without its flaws, brilliantly and tersely captures our global challenges and what to do about them.

Atlantic Council experts weigh in and grade the NSS here. Writes Matt Kroenig, acting director of our Scowcroft Center for Strategy and Security: “Overall, this is a fine strategy. Several of the key themes are similar to those that have appeared in Atlantic Council Strategy Papers over the past several years. The NSS recognizes the preeminence of the China challenge, the superiority of democracies in great-power rivalry, and the need to stitch together US alliances in Europe and Asia and to create new frameworks to address twenty-first century challenges.

“On the negative side, there is a potential gap between ambition and resources. The strategy prioritizes amorphous global challenges over concrete security threats; it is too optimistic about cooperation with China; and the section on strengthening the United States for strategic competition includes too many divisive domestic political issues.” Read more →

#2 World Economic Outlook, Report October 2022: Countering the Cost-of-Living Crisis
INTERNATIONAL MONETARY FUND

The language in the IMF’s twice annual outlook is blunt: “Risks to the outlook remain unusually large and to the downside. Monetary policy could miscalculate the right stands to reduce inflation. Policy paths in the largest economies could continue to diverge, leading to further US dollar appreciation and cross-border tensions. More energy and food price shocks might cause inflation to persist for longer…”

That language reflects the mood in Washington this week among global economic and financial leaders. Their off-record comments to me reflect a growing consensus on the rising global financial and economic dangers and a lack of common cause regarding their solutions.

Hold onto your seats. Read more →

#3 How Ukrainians define their enemy: ‘It’s not Putin, it’s Russia’
David Ignatius | THE WASHINGTON POST

Readers of this column already know David Ignatius is both a friend and, in my view, the finest foreign affairs columnist of our times. He’s at his best when he’s traveling on the front lines of historic challenges, as he did when delivering this week’s column from Kyiv.

“I kept asking Ukrainians a question that vexes me: Is your war against President Vladimir Putin—or against Russia itself? Nearly every time, I got the same unyielding answer. The enemy is a Russia that must be defeated and transformed.” Read every word of this one to learn why Ukrainians believe Russia needs to go through the same process of change that Germany did after World War II. They may know best. Read more →

#4 The World According to Xi Jinping
Kevin Rudd | FOREIGN AFFAIRS

It’s hard for Americans to believe that their major global competitor and adversary might be motivated by an ideology as arcane and outdated to them as Marxism-Leninism.

However, if we are to prevail in this competition, every US official and legislator ought to read this piece reflecting on the ideological drivers behind Chinese President Xi Jinping as he opens his party congress today, which is likely to anoint him for a third five-year term.

“Within the Chinese system,” writes Rudd, “Marxism-Leninism still serves as the ideological headwaters of a world view that places China on the right side of history and portrays the United States as struggling in the throes of inevitable capitalist decline, consumed by its own internal political contradictions and destined to fall by the wayside. That, in Xi’s view, will be the real end of history” Read more →

#5 The world divided: The world China wants
THE ECONOMIST

The Economist is at its best when it takes on a giant issue defining our times and then throws the weight and intellectual heft of its team to tackle it. That’s the case with this special report focusing on what it is China wants, how it intends to get it, and why China may succeed. It makes for unsettling reading.

What China wants “is more subtle than Russia’s brazen defiance, yet more disruptive,” writes the magazine. “Under Xi Jinping… China is working to reshape the world order from within. When its efforts meet resistance, it pushes for vaguer rules whose enforcement becomes a question of political bargaining. All too often, it seeks to revive old, discredited ways of running the world that put states first, at the expense of individual freedoms.”

The Economist reminds us that seventy years ago, at the United Nations’ founding meetings, Soviet-bloc delegates “sought an order that deferred to states and promoted collective rather than individual rights, opposing everything from free speech to the concept of seeking political asylum…”

In the late 1940s, the free world outvoted communist countries. China now “seeks to reopen these old arguments about how to balance sovereignty with individual freedoms. This time, the liberal order is on the defensive.” Read more →

Atlantic Council top reads

New Atlanticist Oct 11, 2022

Your expert guide to China’s 20th Party Congress

By Atlantic Council experts

The once-in-five-years event is slated not only to further cement Xi Jinping’s rule but also to have impact on a number of policy areas, from China’s economy to its relationship with the Global South.

China Climate Change & Climate Action

UkraineAlert Oct 11, 2022

Six things you (yes, you!) can do now to help Ukraine

By Melinda Haring

With the winter season fast approaching and Vladimir Putin launching a campaign against Ukrainian civilian infrastructure, it is more important than ever to maintain support for Ukraine. Melinda Haring has some ideas.

Civil Society Conflict

New Atlanticist Oct 12, 2022

Experts react: The hits and misses in Biden’s new National Security Strategy

By Atlantic Council experts

We put the call out to our experts from across the Atlantic Council: Does this document deliver? What does it get right and what’s missing?

Middle East National Security

The post Wanted: Global leadership to meet this historic moment appeared first on Atlantic Council.

The post Tran quoted by the South China Morning Post on risks of stagflation and a global recession appeared first on Atlantic Council.

Flagship Event Wed, September 28, 2022 • 2:00 am ET

Highlights from the 2022 Frankfurt Forum on US-European GeoEconomics

Explore key moments from the inaugural forum, presented in partnership with Atlantik-Brücke, including keynote remarks from European Central Bank President Christine Lagarde.

On September 28, 2022, at the Frankfurt Forum for US-European GeoEconomics, EU Commissioner for Economy Paolo Gentiloni spoke about responding to Russia’s invasion of Ukraine with transatlantic partners. Below are his remarks as prepared for delivery; the full transcript of his appearance with his speech as given can be found here.

The EU and the United States have deep economic and political ties, rooted in our shared history, culture, and values. Like in every relationship, we have our ups and downs. But we can be sure of one thing: In times of crisis, we always come together. At every historic turning point since [World War II], we have stood side by side: with the Marshall Plan; during the Cold War and the fall of the Iron Curtain; and now in the face of Russia’s war of aggression in Ukraine.

War in Ukraine—a new impetus for EU-US relations

Since February, we have come together to impose unprecedented sanctions against Russia’s brazen breach of international law. We have come together to provide crucial military and financial assistance to Ukraine. And we have come together to weaken Russia’s grip on our energy markets.

Let me be clear: Our common response is working.

Our support is helping Ukraine keep the state running while its inspiring armed forces turn the tide of the war.

The sanctions are steadily eating away at Russia’s economy, which is set to shrink markedly both this year and next. Russia’s own federal labor service has stated that three thousand brands have put business on hold since the invasion, with five hundred foreign companies having been liquidated by the end of July at a cost of 125,000 jobs.

Russia’s imports from the [European Union (EU)] fell by around 50 percent in the period March to June, compared with the same period last year.

Russia’s imports of [information technology] equipment have tumbled, despite its legalization of parallel imports. Blocked access to updates of Western software, essential spare parts, and semiconductors are having a grinding effect on industry. Many of the few cars now produced in Russia—data over the summer indicated that sales were down by more than 70 percent compared to the same period last year due to the collapse in production—are without airbags, [Anti-lock Breaking Systems (ABS)], and catalytic converters.

Russia’s share in EU gas imports has fallen by two-thirds, from 45 percent before the war to 14 percent now. And its share of our pipeline gas imports has fallen by three quarters, from 40 percent to 9 percent. The deals we have struck with the United States and other partners to boost energy imports have made up for the cuts in Russian fossil fuels.

And the cap on the price of Russian oil exports agreed in principle at the [Group of Seven (G7)] level will put downward pressure on global energy prices and reduce the Kremlin’s ability to fund its war. Today we are setting out the legal basis to implement this key measure in the EU.

So our common response is working, and Russia’s recent moves—from halting gas deliveries via the Nord Stream 1 pipeline until sanctions are lifted, to the mobilization of reservists and sham referendums in occupied territories—are clear signs of that. Signs of weakness and of growing desperation. But also signs of escalation, to which we are responding with the adoption of an eighth sanctions package, as [EU President Ursula] von der Leyen has just announced.

Economic outlook

Clearly, the war and its consequences are weighing on economic prospects on both sides of the Atlantic.

The combination of high energy prices, high inflation (even if for different reasons), monetary tightening and extraordinary uncertainty are putting a damper on growth. Both the EU and the US will see positive growth for the year 2022 as a whole. But all the signs are pointing to a significant slowdown underway, such that a recession can no longer be ruled out.

To ensure our economies successfully navigate these troubled waters, we need to maintain agile and responsive fiscal policies, just as we did during the pandemic.

In the EU, we are pushing forward with the implementation of recovery and resilience plans as part of our NextGenerationEU response to the pandemic. And as part of our REPowerEU plan, we are now leveraging the extraordinary funds made available by NextGenerationEU to drastically reduce our reliance on Russian fossil fuels.

NextGenerationEU remains the strongest common tool we have at our disposal. And this is why I have made clear that while we are open to discussing limited and specific points, there should be no wholesale reopening of plans or postponing of key commitments.

Priorities for the future of transatlantic relations

In this context, I see three lessons or priorities for the future of our transatlantic relations.

First: Our strength lies in our unity, both within the EU and with our like-minded partners across the Atlantic and beyond. In the challenging months ahead, this unity will be tested again and again by those who seek to divide us. We must stay the course.

Second: In an increasingly multipolar world, the EU and the US must continue to work together every day, and not just in times of crisis, to show that liberal democracies can deliver sustainable and inclusive growth.

This has already started to happen. The arrival of the Biden administration marked a qualitative improvement in our relations.

Our economic agendas are very much aligned. In Europe, we are pursuing an ambitious path of investments and reforms to deliver on the triple transition: green, digital, and social. The Inflation Reduction Act in the US goes in a similar direction.

We are also looking more broadly at how our fiscal rules can better support investments in crucial areas while making sure debt levels remain sustainable. We will present our ideas on this next month.

Going forward, there is also scope to strengthen our trade cooperation. The disruptions to global supply chains brought about by the pandemic and the war must galvanize us to build safer, more resilient supply chains in strategic sectors. But we must resist the sirens of protectionism.

Third lesson: Transatlantic cooperation is a necessary but not sufficient condition to tackle the challenges the world is facing. For that, we need to muster much wider coalitions. And this is a challenge, as we have seen with the war in Ukraine.

Russia has openly challenged the rules-based international order. This is not a Western order. It’s an order that allows all countries to cooperate, prosper, and live peacefully side by side. An order where no country must fear being attacked by a more powerful neighbor. An order, in short, that it is in everyone’s interest to uphold.

Yet thirty-five countries, including three members of the [Group of Twenty (G20)] (China, India, and South Africa), decided to abstain in the UN Resolution condemning Russia’s invasion of Ukraine.

To increase our influence in other parts of the world, we need to invest in them. This is the key objective of our Global Gateway strategy to mobilize 300 billion euros in investments across the world, in line with the G7’s Partnership for Global Infrastructure.

We also need to work for a more effective multilateralism. A great example is last year’s global agreement to reform corporate taxation: an agreement for which the EU and the US worked hand in hand and which brought together more than 130 countries and jurisdictions.

This was made possible because everyone worked in a spirit of compromise to find a common solution. Here, too, implementation is not without its challenges. But I am confident that the spirit that led to that agreement remains alive and can guide us in meeting the common challenges we face.

Watch the Frankfurt Forum

The post The EU and US must continue to work together, as a recession ‘can no longer be ruled out,’ says Paolo Gentiloni appeared first on Atlantic Council.

Trade in times of new geopolitical realities

Ladies and gentlemen, it is a pleasure to talk to you this evening in this beautiful, historical house on the outskirts of Frankfurt.

Tonight, we are in the Bonames district. Its name is derived from the Latin “bona mansio,” which translates to “good inn.” Excavations have shown that during Roman times there was an inn located right here. The Romans chose this location carefully because it marked an important intersection of two vital Roman roads. These well-developed and well-protected roads were one of the pillars of the Roman Empire’s success. They allowed trade to flow over long distances which, in turn, contributed to the relatively high living standards of Roman citizens. While a lot has changed since then, trade remains crucial to enhance living standards.

In recent years, economies across the globe have been hit by an unprecedented series of shocks. Although the level of impact was different across each of the countries, it was severe for almost all.

As such, economic policymakers are currently being called upon to reduce the impact of these global events on inflation, growth, and welfare. This also includes central banks, which have been entrusted with an essential objective—to safeguard price stability. This is a task that—under the current circumstances—requires resolute action. In its recent meeting, the ECB Governing Council has taken a bold decision and… we expect that further steps will follow. I am confident that, by continuing to act resolutely, we will achieve our objective and bring inflation back down to 2 percent in the medium term.

At the same time, governments are putting together one economic relief package after [another] to ease pressure on their citizens. In times like these, when short-term efforts require so much focus, it is easy to lose sight of the medium and long-term challenges.

That being said, these challenges exist, and they need to be addressed. The pandemic has already, painfully, illustrated one of them: the fragility of international supply chains.

In principle, well-functioning market forces should provide enough incentives for firms to make their supply chains more resilient. Effective risk management should identify cluster risks and one-sided dependencies.

However, recent low-probability but high-impact events like the war against Ukraine have illustrated the limitations of these market forces. Especially events of a global reach often seem inconceivable before they happen. And at some point in the future, there will be another shock [that] firms and governments won’t see coming.

As a result, economic policymakers are rethinking elements of their strategic approach to take into account the unexpected. The European Union has formulated the concept of open strategic autonomy, which [ECB President Christine Lagarde] recently referred to in an evocative speech. One of its main goals is to strengthen the resilience of supply chains. The question is how do we do that?

In my opinion, deglobalization and renationalization can’t be the answer. Reshoring production and clustering it domestically carries high risks as well. Just imagine an earthquake like the one that hit Japan in 2011, or a flood. We simply can’t rule out that something could interrupt production there as well, and diversified supply lines act as an insurance against such events.

What is more, deglobalization would sacrifice efficiency, which trade offers through comparative advantages. Openness and resilience are not a trade-off in general, but [are] often complementary. As we have seen with my introductory example of the Roman Empire, trade is a deciding factor for higher living standards.

Therefore, rather than turning away from world markets, it is essential to re-evaluate trading partners and production networks and the terms on which trade takes place.

In my view, companies have to make these decisions themselves. It’s in their own interest to diversify supply chains and avoid clustering production in countries where geopolitical tensions could lead to operational disruptions or closed borders. And indeed, surveys have shown that many firms are already planning to relocate parts of their production.

However, redirecting flows of goods may increase costs. Security comes at a price, which has to be paid.

Economic policy can help to minimize these costs, by providing a reliable framework for firms. Clear and enforceable rules of trade as well as harmonized product standards reduce the uncertainty firms face when planning their supply networks.

A common set of rules will help companies to readjust their supply chains without losing too much efficiency. Having a group of countries that share the same values, and commit to such rules, will therefore be beneficial to all of them.

Watch the Frankfurt Forum

The post Here’s how to prepare for the world’s next economic shock, according to the Deutsche Bundesbank president appeared first on Atlantic Council.

The hotly debated move showed once again how the economic relationship between the United States and the European Union (EU) has evolved this year, from one focused on overcoming differences on trade and regulations to one centered on security and geopolitics. “In an increasingly multipolar world, the EU and US must continue to work together every day—and not just in times of crisis—to show that liberal democracies can deliver sustainable and inclusive growth,” said European Commissioner for Economy Paolo Gentiloni. “And this is happening.”

Gentiloni’s keynote address capped the first Atlantic Council and Atlantik-Brücke Frankfurt Forum on US-European GeoEconomics. The daylong forum showed that while the United States and EU approach some challenges differently, Russian aggression has provided a renewed sense of purpose and urgency to resolve those differences. Here are more highlights from the event:

Are Russia sanctions working?

• Daleep Singh, a former deputy national security adviser in the White House who helped devise the sanctions response to Russia’s invasion this year, said the success of those sanctions should be judged by the answer to the question: “What is going to be Russia’s ability to project influence and power in the world?” Singh argued that economically, technologically, and militarily, “Russia will emerge from this invasion considerably weaker and less relevant.”
• Still, the war continues, with Russian President Vladimir Putin escalating in response to a recent Ukrainian counteroffensive. But Julia Friedlander—CEO of Atlantik-Brücke, nonresident senior fellow at the Atlantic Council, and a former sanctions policy official at the US Treasury Department—pointed to the “time lag” for sanctions to bite. The rush to the “top of the escalation ladder” by blocking Russia’s access to foreign exchange reserves didn’t immediately shut down Moscow’s war machine. But seven months in, sanctions have helped create “an outcome which might lead to negotiation, could even lead to something that Ukraine could consider to be a victory.”
• Carla Norrlöf, senior fellow at the Atlantic Council and professor of political science at the University of Toronto, presented her research on whether sanctions use could dilute the power of Western reserve currencies. She warned against “coming down too hard” on countries like Brazil, India, South Africa, and Argentina for not joining Russia sanctions. “They just don’t sanction a lot,” she said. “So to ask them to participate in this mega-sanctioning enterprise is a lot.”
  
• The economic response to Russia’s invasion has raised questions about what would happen if China moved aggressively against Taiwan. “China is so plugged into the global economy that… to try to sanction China in the same way as Russia I think is a no-go,” Norrlöf said. But Singh countered: “There’s no country that’s too big to sanction.”

Testing the trade winds

• In a break from past US approaches, the Biden administration has avoided tackling tariff barriers and seeking new market access for US businesses as part of its trade policy, said Clete Willems, an Atlantic Council senior fellow who served as deputy director of the National Economic Council in the Trump White House. During a panel on trade, Willems presented new research arguing that the Biden administration should “raise [its] ambition” on bringing down tariffs from the EU to Asia.
• Elizabeth Baltzan, senior advisor to the United States Trade Representative, countered that “market access” doesn’t just refer to tariffs. The EU Trade and Technology Council and Indo-Pacific Economic tackle market access, she said, because “in agriculture, non-tariff barriers are more of an issue for small agricultural companies than the tariff barriers because it’s binary: You either access that market or you don’t.”
• Rupert Schlegelmilch, the European Commission’s acting deputy director-general for trade, agreed with Baltzan, saying: “The fragmentation of regulations is the new tariff.”
• The Biden administration has also lately pushed for “friend-shoring,” or moving supply chains away from geopolitical adversaries. But Kenneth Kang, deputy director for strategy, policy, and review at the International Monetary Fund (IMF), said such moves will not pay off. “The tendency to re-shore or friend-shore will only worsen diversification,” he said. “It will make countries more susceptible to such supply shocks and raise the overall cost of production.”

Inflated expectations

• After European Central Bank President Christine Lagarde opened the forum with a vow to continue raising interest rates to tame inflation, a panel of monetary-policy experts analyzed her policy promise, with Philippa Sigl-Glöckner—founder of the German think tank Dezernat Zukunft—saying she disagreed with rate hikes even though they probably won’t be catastrophic. 
• Europe’s inflation, she pointed out, is driven by energy costs. Her answer for getting the energy-price shock? “We need to invest,” Sigl-Glöckner said. “We need to get rid of fossil [fuels]. And what we’re doing right now [with rate hikes] is making capital costs more expensive.”
• Lagarde also cited the research of former IMF senior official Martin Mühleisen, now an Atlantic Council senior fellow, who argues that the dollar and euro will be difficult to replace as world reserve currencies—so long as the United States and EU are closely aligned and maintain a strong global security presence.
• But what about the Chinese renmibi? Andreas Dombret, former member of the Deutsche Bundesbank executive board, said the currency “is likely to gain in stature” for several reasons, including the new importance of China’s globally systemic big banks and Beijing’s status as the world’s biggest cross-border lender in US dollars. If China were to start lending in renminbi, Dombret said, that could shift the reserve currency balance quickly.
• To keep the dollar and euro on top, said Geoffrey Okamoto, the former first deputy managing director of the IMF, “fiscal discipline” is in order. He also recommended the disciplined use of sanctions: “You can take antibiotics the first time and it’s quite potent, but the more you take them, the less effective they can be over time.”

The race for a digital currency

• As the Atlantic Council’s central bank digital currency (CBDC) tracker shows, the United States is in the research phase for a digital dollar, while a digital euro is in development. Still, said Evelien Witlox, program director for the digital euro project at the European Central Bank, a digital euro remains years away—if it happens at all.
• Brent Neiman, counselor to the US Treasury secretary, said CBDCs could “dramatically improve” remittances and other cross-border payments by reducing fees and friction. But those benefits must be balanced against risks such as consumer privacy and money laundering concerns, which will require policymakers to “build up a regulatory perimeter and framework and structure.”
• Neiman said that will require the United States and EU to be trendsetters, as new Atlantic Council research argues that both must work together to ensure privacy and transparency standards are met in this burgeoning field.
• Witlox added that a CBDC will help ensure consumers still have access to central bank money in a cashless age: “We believe that this availability gives trust to the full system.”

Daniel Malloy is the deputy managing editor at the Atlantic Council.

Charles Lichfield is the deputy director of the GeoEconomics Center. 

The post Dispatch from the Frankfurt Forum: How the US and Europe can turn crisis cooperation into sustained partnership appeared first on Atlantic Council.

The transatlantic economic response to Russian aggression will be front and center on Wednesday as the Atlantic Council’s GeoEconomics Center and German think tank Atlantik-Brücke join forces to hold the first annual forum on US-EU GeoEconomics in Frankfurt, a crucial hub for transatlantic and global trade. Featuring appearances by European Central Bank President Christine Lagarde and European Union (EU) Commissioner for Economy Paolo Gentiloni, the day-long forum is bringing together leaders from government, business, and academia to inspire cooperation on the hottest economic debates from trade and sanctions to data and digital currencies.

The importance of closer partnership in these critical areas is a theme across four in-depth reports prepared by GeoEconomics Center experts ahead of the forum. Here’s a breakdown of the top takeaways from this research, and how it plays into the defense of shared economic principles. 

Preserving economic statecraft tools

The measures taken in response to Russia’s aggression were decided quickly and out of necessity to swiftly respond to the invasion. Now is the time to ensure that competitors’ fledgling efforts to diversify away from Western currency reserves do not blunt US and European economic statecraft tools. 

In her paper, Carla Norloff shows that non-aligned international economies are clearly attempting to diversify their portfolio of reserves away from dollars and into Chinese yuan and other currencies in the wake of the Group of Seven (G7) sanctions regime against Russia.

While the chart shows a net increase in yuan-denominated reserves since February, the crucial point is that there is a long way to go before the dollar and the euro’s global dominance is affected. 

Meanwhile, Martin Mühleisen argues that the dollar-based monetary system has withstood the major tests of the past two years remarkably well. As global economic activity has been shifting east, it remains unlikely for the yuan to replace the dollar and the euro, in part because a larger global role for the Chinese currency would be inconsistent with Beijing’s current policy priorities: a closed current account placing restrictions on capital flows (especially outward) and carefully managed exchange rates.

However, there is no room for complacency. The United States and Europe can use economic statecraft tools without forgoing influence in the long term—on the condition that they keep their economic houses in order and allies close. 

Rising to the challenge on trade

The United States and the EU have come a long way since the trade spats that characterized the Donald Trump presidency. Having resolved longstanding disputes over aircraft subsidies, steel, and aluminum (albeit in some cases temporarily), both sides are now enthusiastically engaging in promising discussions on supply-chain resilience and regulatory coordination in new sectors of the economy within the EU-US Trade and Technology Council (TTC). 

The United States is trying the same “beyond-the-border,” regulation-focused approach with the Indo-Pacific Economic Framework (IPEF). The Biden administration’s approach assiduously avoids elements contained in traditional free trade agreements (FTAs), such as the pursuit of new market access in the form of tariff reduction. The EU has maintained the more traditional approach of pushing bilateral FTAs with economies throughout the region, and with some success.

New research by Clete Willems and Niels Graham argues that the Biden administration will struggle to link supply chains with partners and allies unless the United States re-opens negotiations on market access. And even if the administration is not willing to do so now, it should include design features in IPEF and the TTC that enable them to serve as stepping stones to true FTAs with market access in the future.

New digital-currency frontiers

As a growing number of countries explore domestic Central Bank Digital Currencies (CBDCs), multi-country cross-border CBDC pilots are also proliferating. These CBDCs could make cross-border payments faster, cheaper, and simpler. However, for any cross-border CBDC to unlock these benefits and be widely adopted, it must address concerns around privacy and data transparency. 

Research by Giulia Fanti illustrates how various technical design choices can affect the privacy and transparency of cross-border CBDCs. The designs of these currencies are the result of policy choices taking into account tradeoffs regarding privacy, efficiency, and security. This requires coordination between different regulators and central banks.  

Here, too, the United States and the EU should work together to create a regulatory environment to enable privacy-preserving cross-border CBDCs. Washington and Brussels should seize this opportunity to finally establish a transatlantic privacy framework and clarify how it can allow for the prevention of money laundering and terrorism financing.

Transatlantic work on CBDCs, just like on sanctions and trade, should harness the momentum behind immediate policy responses to major shocks in order to build a strategy for the medium to long term. This strategy must not ignore the very real challenges of inflation and low growth prospects; it must also build bridges with non-aligned economies, rather than forcing them to choose between China and the West.

This will be the great challenge for policymakers long after the Frankfurt Forum adjourns, at least for this year.

Charles Lichfield is the deputy director of the GeoEconomics Center. 

The post From sanctions to digital currencies, here’s a new transatlantic agenda for economic coordination appeared first on Atlantic Council.

The international monetary system has been surprisingly resilient over the past two years, considering the size of pandemic and geopolitical shocks that hit markets during this period. Liquidity injections by the major central banks helped stabilize economic activity and avoid disruptions to capital flows or foreign exchange markets. Major exchange rates remained range-bound throughout most of the crisis, even if the dollar has appreciated sharply in recent months. Volatility is likely to pick up as monetary policy responds to high inflation, but there should be no doubt that the dollar-based monetary order has withstood a major test during the past two years.

This feat has been even more remarkable as the global security landscape has deteriorated in dramatic fashion, and Russia’s invasion of Ukraine has brought international tensions to a level not seen since the 1961 Cuban missile crisis. Moreover, while the dollar’s safe haven status remains firmly established, the center of global economic activity has been shifting east. Asia has become an economic powerhouse, and China is on course to become the world’s largest economy over the next few years. It is a natural question whether China will challenge the United States and Europe for global economic leadership, and whether the renminbi will appear as a leading, if not dominant, currency.

This paper argues that this is unlikely for the foreseeable future, in part because a larger global role for the renminbi would be inconsistent with the Chinese leadership’s current policy priorities. However, there is no room for complacency. With the post-World War II international order in gradual decline, the world could again reach a moment where unforeseen geopolitical events might lead to changes in long-held political and economic paradigms. The United States and Europe can reduce this risk by making their growth models more robust and sustainable. Moreover, keeping their global alliances intact could prevent a loss of influence that has heralded changes in the international monetary system in the past.

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But everything has a price. By imposing sanctions and freezing assets in response to Russia’s invasion of Ukraine, the G7 has reawakened a long-simmering debate about dollar alternatives. The idea of “de-dollarization,” or reducing a country’s reliance on the dollar, has gained momentum: From Russia to China—and to many non-aligned countries in between—there is a fear that overreliance on the dollar gives the United States too much leverage.

But what are the realistic alternatives to the dollar that US and allied policymakers should be paying attention to?

How money moves

Let’s start with SWIFT: The Society for Worldwide Interbank Financial Telecommunications is a messaging system that banks use to conduct international transactions. Despite some misconceptions, no actual financial transactions occur on SWIFT: Its value lies in the role it plays in safe, secure, and efficient communication between banks. When it was founded in the 1970s, it connected 239 banks across fifteen countries. Today, it connects over eleven thousand financial institutions in more than two hundred countries and territories, making it the primary mode of communication about international transactions. SWIFT is a private cooperative, owned by two thousand entities; it is headquartered in Brussels and overseen by a group of banks including the US Federal Reserve (Fed), the European Central Bank, and several individual banks in the European Union, in addition to the banks of Japan, England, and Canada. The United States and the European Union, therefore, play a key role in its governance. 

Since SWIFT does not hold any bank accounts, the actual fund clearance and settlement occurs using the Fed-owned Clearing House Interbank Payments System (CHIPS). On average, CHIPS cleared close to $1.8 trillion in transactions daily. The system has forty-three direct participants, which are all US banks or foreign banks with US branches, and eleven thousand indirect participants, which are banks without US branches who are engaged in the system through their accounts with direct participants. Through its participants, CHIPS covers over 96 percent of dollar-denominated cross-border transactions. CHIPS works in parallel with the Fed-owned Fedwire Funds Service to actually clear and settle transactions.

Together, SWIFT, CHIPS, and Fedwire broadly cover almost all dollar-denominated international transactions. They create a network effect that is nearly impossible to rival. How do their alternatives stack up in comparison? 

Today’s challengers: Russia and China

Russia began developing its System for Transfer of Financial Messages (SPFS) after being hit by a round of sanctions following the 2014 annexation of Crimea. It functions as an alternative to SWIFT for transmitting information across four hundred domestic Russian banks and around fifty international entities primarily from Central Asia. Although reports have recently emerged about central banks in India, Iran, and China connecting to SPFS, the system is still primarily a mode for domestic interbank communication in Russia. 

On the other hand, China’s Cross-Border Interbank Payments System (CIPS) is an alternative to the CHIPS system. It was created in 2015 to function as a settlement and clearance mechanism for yuan transactions. Like CHIPS, it is supervised by a central bank (in this case, the People’s Bank of China) and requires direct participants to be within its jurisdiction. Interestingly, participants can message each other through the CIPS messaging system, but 80 percent of transactions on CIPS rely on the SWIFT infrastructure. This is partly a result of the need to translate messages, which is more efficiently done through the SWIFT network. CHIPS has ten times as many participants as CIPS and processes forty times as many transactions as CIPS.

Yuan transactions only amount to 3.2 percent of all transactions using SWIFT. China’s political goals to internationalize its currency, which led to the creation of CIPS, conflict with the capital controls on the yuan, making the yuan less attractive as a currency than the dollar. That doesn’t mean there isn’t interest in expanding the role of CIPS: unverified reports suggest that the volume of transactions through CIPS has grown by 50 percent per year. 

Both CIPS and SPFS offer incomplete alternatives to the powerhouse combination of SWIFT, CHIPS, and Fedwire. These challengers have a smaller network and smaller scope, but most importantly, they do not impact the prevalence of dollar-denominated international transactions. 

Still, it is important to note that they were both created following the imposition of stricter financial sanctions on the countries that designed these systems. As US officials tighten sanctions measures, there will be more incentive for countries to participate and grow the network of these alternative payment rails. This is an important balancing act for sanctions policymakers. 

The idea of getting around the dollar isn’t limited to US adversaries like Russia or competitors like China. Countries like India, Indonesia, Brazil, and South Africa are all exploring changes in the way they process cross-border payments and the possibility of reducing their reliance on the SWIFT system.

Playing a new card

Looped into these payment networks are credit- and debit-card schemes connecting consumers to merchants across the world. Visa, Mastercard, and American Express are the three largest companies that allow cross-border and domestic payments. Visa and Mastercard each reach close to 53 million global merchants in over two hundred countries. Chinese banks in 2002 launched an alternative payment network: UnionPay, which enjoyed a monopoly over China’s domestic markets until 2020, when China began to allow international card schemes. Today, UnionPay connects 55 million merchants in 180 countries, including 37 million merchants located outside of China. 

Since Visa and Mastercard suspended their services in Russia, UnionPay has emerged as one of the only options for cross-border transactions for Russians. Another one of those options is Mir, Russia’s homegrown card scheme. Mir, which was developed during the 2014 round of sanctions on Russia, has become popular because it is used for pension and public-sector payments domestically and can be used by Russians living abroad. Over one hundred million Mir cards have been issued, and several countries, including Turkey and Iran, have expressed interest in joining Mir’s network. Additionally, Russian banks have been doing business with UnionPay for several years, and given UnionPay’s large network, Mir could partner with UnionPay to expand its reach with marketing or even co-branded cards.

A focus on fintech

Increasingly, fintech alternatives to traditional payments are cropping up in the form of wallets and platforms that enable primarily retail payments. AliPay and WeChat Pay, run by Chinese fintech companies, are the two most popular digital wallets globally. AliPay and WeChat Pay each have more than a billion users, while their closest competitors (ApplePay and GooglePay) have around four hundred million to five hundred million users each. While reports differ, some sources say AliPay is in use in up to 110 countries and WeChat Pay is in use in up to fifty countries. The digital wallets are primarily used in domestic payments, and transactions are designated in the local currency of the country. 

Central bank digital currencies (CBDC) have become popular among countries looking for an alternative to the dollar-based financial system because they can be faster, cheaper, and more efficient than the existing cross-border payments rails. According to Atlantic Council research, there are now twelve cross-border CBDC experiments underway. One of the projects, Multiple CBDC Bridge (mBridge), connects Thailand, Hong Kong, China, and the United Arab Emirates in a multi-currency exchange bridge, which offers a cheaper, more efficient, less risky, and faster transaction pipeline than existing systems. Wholesale CBDCs, which are intended for institutional transfers between banks, are a new way in which countries are both solving problems in the payments architecture while creating new networks of payments transfers. These systems, though not yet ready for full launch, could help countries bypass SWIFT and develop an alternative financial architecture. 

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now features 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

Over time, these innovations could erode the way the dollar’s global dominance is used to make sanctions effective. That’s certainly the hope in Beijing: According to the International Monetary Fund (IMF), the People’s Bank of China has three hundred staff members solely dedicated to its CBDC—that’s larger that the entire staff of most other countries’ central banks. 

How to keep the dollar on top

De-dollarization is not a new idea—but both fintech innovation and the weaponization of the dollar via sanctions have breathed new life into an old debate. Given China’s capital control over yuan transactions and its lack of liquidity, the dollar still reigns as the preferred stable and easily convertible currency for international payments. Transactions done with credit cards or fintech solutions still form a small portion of global foreign exchange flows and are not the main target of sanctions. And given the Fed’s interest rate hikes, the dollar’s value is surging.

But threats to the dollar are looming in the distance: The yuan’s share in global payments has seen an uptick this year, and given the energy crisis, countries could be convinced to offer ruble or yuan swap lines and increase the share of these currencies in their balance sheets. Over time, if the United States does not lead with allies in their own technological innovation, many countries will seek alternatives. There have been some early steps in this direction: Last week, the Biden administration released a slew of reports on digital asset regulations. Some of these reports detailed the possible design for a dollar-based CBDC. But since that may be years away, the Fed is set to test the Fednow Service in 2023, creating a much faster payments system within the United States. 

While the dollar isn’t going anywhere any time soon, it may find it has some unexpected company in the international financial system sooner than it would like. 

What is there to do? US leadership must work to curb the growing fragmentation in the global payments landscape. This can be achieved by clarifying domestic regulations, especially when it comes to the Fed’s authority in issuing digital dollars and the role of dollar-backed stablecoins. The United States cannot lead without a model; and for this, it will have to encourage innovation on CBDCs but also in the form of more efficient private-sector payments options. Finally, the United States has a crucial role in setting global standards and needs to be more active at the Group of Twenty (G20) and IMF on these issues. This would serve two purposes: It would ensure that innovation in the payments landscape does not lead to more fragmentation and also would make clear which countries are interested in collaborating—and which ones truly want to carve out a different path. 

Ananya Kumar is the assistant director for digital currencies at the Atlantic Council’s GeoEconomics Center.

Josh Lipsky is the senior director of the GeoEconomics Center.

The post The dollar has some would-be rivals. Meet the challengers. appeared first on Atlantic Council.

The massive economic gains and relative peace of the second half of the twentieth century owe much to this post-war global architecture, which includes the UN, the World Bank, the International Monetary Fund (IMF), NATO, the World Health Organization, and the World Trade Organization (WTO). But the upheaval in recent years from the 2008 global financial crisis and the US-China trade war to the COVID-19 pandemic has produced a rising tide of nationalism and protectionism—a kind of global pushback against multilateralism. 

Russia’s invasion of Ukraine this year represented a failure of these multilateral institutions to stop a major war. But as organizations such as NATO have found renewed purpose in coming to Ukraine’s aid and punishing Russia, the conflict has underscored the importance of these institutions. On its own, a single nation cannot contain Russian aggression any more than it can take on the other pressing problems of our age, such as climate change, socioeconomic inequality, food insecurity, supply-chain disruptions, or inflation. Solving these problems will require an inclusive global compact that transcends governments, the UN, and specialized organizations.

Here are three places to start:

First, the multilateral system needs to be restructured from closed to more collaborative, with more trust-building cooperation between regional and global organizations. While the UN’s work with the Association of Southeast Asian Nations (ASEAN) is a good illustration of regular and active cooperation, today’s networked world calls for increased efforts. They must be framed within a broader multilateralist discussion that fosters inclusivity and provides a mechanism for regional concerns to be fed into policy decisions. Partnerships like this need to be guided by pragmatism, with each organization building on its strengths. Regional organizations, for instance, have historical ties and can be more capable of implementing global policies due to their knowledge of regional challenges. More interactions between the UN and regional organizations will build trust, maximize efficiency across all UN domains, and establish knowledge-transfer mechanisms. To put this vision into practice, an independent expert body should map out the regional organizations’ capabilities in different areas such as security and conflict resolution. Then, the UN should establish an official partnership with selected regional organizations, which could include regular meetings between the leaders of members of the UN Security Council and heads of the regional organization, or an annual meeting for top UN officials from the Security Council, General Assembly, UN agencies, and all regional organizations.

Second, the Bretton Woods Institutions must utilize their capabilities to enhance investments in global public goods. These are broadly shared, non-exclusive benefits such as the environment, health, peace, security, and technology. In today’s interconnected global economy, climate change, pandemics, financial crises, and regional conflicts create cascading challenges across borders, with the most acute effects often felt among the poorest countries and marginalized communities. Investing in global public goods will compete with traditional financial assistance. However, today’s agenda has shifted from country-specific issues to global ones. This requires multilateral banks to pivot away from their traditional country-focused models and prioritize global public goods investments. This is crucial for promoting the sustainable advancement of poor and rich countries, enabling inclusive economic growth, and reducing poverty and inequality. One way to accomplish this is through enhanced partnerships with regional development banks to facilitate public goods investments in low-income countries.

Third, the new multilateralism must embrace its global role in driving data governance and the digital economy. While data presents incredible opportunities, it also poses risks in terms of misuse and cybersecurity. There are many governments attempting to leverage the global digital economy for domestic economic growth, but dozens of governments have enacted measures that prevent data from flowing across borders. Multilateral organizations such as the WTO should establish data-governance frameworks and common standards to combat the trend of data localization and foster cross-border data sharing and public-private data collaboration. They should also play a role in helping governments maintain a strong national statistical system, develop talent, and foster cybersecurity solutions and data-governance policies. Also, more actions are needed to enable governments to utilize data ecosystems. For instance, the UN Development Program and the Office of the UN Secretary-General’s Envoy on Technology are promoting the concept of open technology, This concept aims to enable the development of solutions that are made available for anyone to adapt. Examples are digital public goods (DPGs), such as open source software, and digital public infrastructure (DPIs), such as payment systems. Moving forward, it is key to further develop country capacity, which requires multilateral actors to come together so that no one is left behind in the deployment of DPGs-DPIs. 

The world leaders gathering in New York this week face a world growing more volatile by the day—and they are acting within a system ill-equipped to handle the moment. To meet today’s challenges and take advantage of tomorrow’s opportunities, they must change how they work and rethink multilateralism. 

Yomna Gaafar is an assistant director at the Atlantic Council’s Freedom and Prosperity Center.

The post Multilateralism needs an overhaul. Here’s where to start. appeared first on Atlantic Council.

“WHEN BANKS LEAVE: THE IMPACTS OF DE-RISKING ON THE CARIBBEAN AND STRATEGIES FOR ENSURING FINANCIAL ACCESS”

September 14, 2022

Chairwoman Waters, Ranking Member McHenry, and distinguished members of the Committee, it is my privilege to address you this morning on the impacts of de-risking in the Caribbean and strategies for ensuring financial access. Today, my testimony will focus on (1) why correspondent banking relations matters and how de-risking is an impediment to Caribbean economic development; (2) how de-risking affects U.S. national security and why it matters for U.S.-Caribbean relations; and (3) recommendations that can help address de-risking in the short- and long-term. Today’s testimony draws on the recommendations of the Financial Inclusion Task Force, which was convened by the Caribbean Initiative at the Atlantic Council’s Adrienne Arsht Latin America Center.

First, I congratulate the Committee for prioritizing the withdrawal of correspondent banking relations in the Caribbean. It was an honor to accompany Chairwoman Maxine Waters to Barbados in April 2022 to participate in the Financial Access Roundtable that was co-chaired by the Honourable Mia Mottley, Prime Minister of Barbados in which the issue of de-risking was raised. Given the impacts and challenges facing Caribbean economies, governments, and citizens, urgent action is needed to safeguard the future survival and prosperity of the region. In this vein, addressing de-risking is critical. At the same time, ensuring that the Caribbean remains connected to the global financial system via correspondent banking relations has direct and indirect benefits for U.S. interests and its national security.

Financial development and access are cornerstones of economic growth and development. Critically, correspondent banking and cross-border financial flows are essential for countries, financial institutions, individuals, and businesses to transact and effect payments. These payments are necessary for all countries, particularly for international and domestic trade, foreign investment, portfolio management, and other key cross-border transactions, such as remittances. Simply, correspondent banking is the medium used to access international currencies, including the U.S. dollar. Without access to the global financial system, U.S. interests are adversely affected, as it provides an opening for increased financial crimes, illicit flows, the usage of Chinese currencies, and limits U.S. economic influence abroad.

The need to address de-risking in the Caribbean has never been more urgent. The region’s small and open economies are under threat. Over the past decade, natural disasters and extreme weather events have limited the economic potential in the Caribbean. Over the past two years, the COVID-19 pandemic has taken on this role. Russia’s invasion of Ukraine and the resulting consequences, in the form of rising food and energy prices, has the potential to cripple Caribbean economies and disrupt the livelihoods of the region’s citizens. Correspondent banking is at the core of helping Caribbean countries rebuild after each economic shock. It allows for countries to access development finance from multilateral banks to invest in new, resilient infrastructure and is a medium that allows organizations deliver needed aid to citizens in need.

De-risking and its effect on Caribbean economies

While de-risking occurs globally, the Caribbean is disproportionately affected. A 2015 survey by the World Bank found that the Caribbean, due to its small size and limited financial markets appears to be the world’s most severely affected region. In 2017, a survey from the Caribbean Association of Banks noted that up to twenty-one Caribbean countries lost at least one correspondent banking relationship. And in 2019, a Caribbean Financial Action Task Force survey showed that at least sixteen banks from The Bahamas, Belize, Jamaica, and members of the Organization of Eastern Caribbean States lost access as well.

De-risking in the Caribbean varies from country to country. Of the Caribbean Community (CARICOM) countries, Belize (-51%), Saint Vincent and the Grenadines (-45%), Dominica (-42%), and The Bahamas (-41%) fared the worst by sheer numbers of lost correspondent banking relation counterparties. Specifically, in Belize, over the course of one year, three domestic banks lost 90 percent of their correspondent banking relations. For these countries, the cost of doing business increased across the broader economy, especially for sectors – such as the tourism industry – that are reliant on executing U.S. dollar transactions. Further, since U.S. and European banks were primarily responsible for de-risking banks in Belize, domestic banks had to look elsewhere for correspondent banking relations, specifically turning to services in Turkey and Puerto Rico. One consequence is that this incurred longer processing times for transactions with some operators in key economic sectors unable to receive payments for almost four months.

Importantly, de-risking affects three main drivers of economic growth and recovery in the Caribbean – remittances, travel and tourism, and access to the global financial system. Remittance flows to the Caribbean are critical for supplementing incomes of working-class populations and accessing the U.S. dollar. For Jamaica, remittances contribute a fifth of the country’s overall GDP and for other countries, they account for upwards of at least 5 percent. Correspondent banking relations allow remittance companies, such as money transfer operators, to move currency from one financial institution to another. In the case of the Caribbean, it helps convert the U.S. dollar to localized currencies. De-risking affects this sector by increasing the operational costs of sending and receiving remittances. This becomes a deterrent to send remittances to the region and can provide incentives for relatives to use other, informal means of transferring money abroad.

The tourism industry in the Caribbean is also affected by de-risking. According to the Inter-American Development Bank, ten of the top twenty tourism-dependent economies in the world are CARICOM members. The value of the tourism industry cannot be understated, nor can correspondent banking be for the functioning of the sector. Correspondent banking is essential for credit card settlements. The inability to process transactions via credit or debit cards due to lost banking relations or high costs in accessing to the U.S. dollar can deter tourists. It also means that local hoteliers and restaurants that service tourists are less likely to afford to import products purchased abroad, such as food, pillowcases, bedsheets, among others.

Most importantly, de-risking limits the ability of Caribbean governments, financial institutions, and businesses to access the global financial systems in terms of trade, investment, credit, and financial flows. Most of these economies also run large physical-trade deficits because of their dependence on imported goods, fuel, and food. The result is that these companies are net importers of capital, usually in the form of investment, credit, and remittances. Without correspondent banking, many of the transactions needed to secure these goods and services would not be possible. De-risking leads to high costs to sustain these transactions and can have adverse effects on market functioning. Simply, it would limit banking customers from sending and receiving payments or maintaining relations with foreign suppliers. This can lead to decreases in revenue for businesses, ultimately contributing to defaults on baking loans, which, in turn, weakens the domestic banking system.

Addressing de-risking is critical for U.S. national security and interests

While de-risking has severe impacts in the Caribbean, the United States, its national security, and interests are not spared. Because of the region’s proximity to the U.S. shores and as a logistics hub for the movement of people and goods, what affects Caribbean countries often impacts the United States. There are four main areas where de-risking affects U.S. interests: (1) the U.S. government’s ability to regulate monetary transactions; (2) the effectiveness of U.S. economic influence; (3) the role of the Chinese currency; and (4) the long-term potential rise of political instability and crime.

The U.S. dollar as the world’s most used currency is critical to U.S. influence abroad. For Caribbean countries, it is central to the health and functioning of their economies. And the main mechanism for accessing the U.S. dollar, beyond receiving hard cash during tourist arrivals, are through correspondent banking. De-risking curtails this possibility, and with it, U.S. monetary and regulatory agencies’ ability to monitor transaction activity. Therefore, de-risking is counterproductive to addressing concerns of money laundering in the region if organizations, enterprises, and individuals are forced to use alternative currencies or avenues – a process commonly referred to as shadow banking. These networks can hide criminal and terrorist activities, making it more difficult for U.S. investigative agencies to bring them down. This presents a clear national security risk for the United States due to the Caribbean’s proximity to countries that house illicit actors, such as Venezuela and Cuba. Increased shadow banking via de-risking coupled with limited U.S. regulatory capability due to lost access to the U.S. dollar exposes the Caribbean to becoming a future hub for criminal financing.

Over a 20-year period (1999-2019), the U.S. dollar accounted for an estimated 96 percent of all trade in the Americas, making the currency critical to the U.S.-Caribbean economic relationship. Companies that are seeking to shorten supply chains and nearshore to the Caribbean are likely to face barriers if they cannot pay service and product suppliers in the region. For companies looking to invest in emerging industries, such as the oil and gas markets of Guyana, Trinidad and Tobago, and Suriname, correspondent banking will be vital to ensuring that the U.S. private sector is able to compete for and maintain existing contracts. There are also implications for trade relations. Most owners of micro, small, and medium-sized enterprises purchase goods and services from the United States, specifically Florida. As of 2020, the Caribbean accounts for nearly 40 percent of all of Florida’s trade with Latin America and the Caribbean. An inability to export to the Caribbean can decrease the overall trade balance of the U.S.-Caribbean relationship, forcing countries in the region to source products elsewhere.  

Continued de-risking and loss of access to the U.S. dollar presents an opportunity for Caribbean governments and financial institutions to seek new or strengthen existing relationships abroad, notably with China. While Caribbean governments and people rely on the U.S. dollar, it is not the only internationalized currency. The euro is an alternative, but Caribbean governments face similar de-risking challenges with banks in the European Union. The result is an opportunity for Chinese RMB and its banks to strengthen ties with the Caribbean. Currently, Chinese RMB is not internationally traded to the extent of the U.S. dollar or the euro, nor are Chinese banks as present as U.S. correspondent banks. Chinese RMB also accounts for just 2 percent of global reserves. However, RMB use is increasing globally. From 2009 to 2016, Chinese CBRs globally grew from sixty-five to 2,246. Despite its limited global influence, the RMB still has the potential to be used in smaller markets t, such as the Caribbean. De-risking from U.S. and European banks can push them in this direction. More banking relations offer China new avenues to engage with partners in developing regions that are currently struggling to attract or maintain CBRs, such as Caribbean countries.

The draw of new banks and RMB usage from China is likely to be attractive for most Caribbean countries and can influence Taiwan’s allies in the region. At present, five of Taiwan’s remaining fourteen allies are CARICOM members (Belize, Haiti, Saint Vincent and the Grenadines, Saint Lucia, and St Kitts and Nevis). Except for Haiti, these countries have each lost more than 30 percent of their correspondent banking counterparties since 2011, meaning lost access to the U.S. dollar and potential economic benefits from the United States. China provides an alternative to its allies in the region and if the severity and frequency of de-risking rises in the region, Taiwan’s allies might look to switch diplomatic recognition. These countries, because of their small size, are pragmatic actors, who make decisions in the best interests of the needs of their citizens and their own objectives. Thus, if de-risking continues to threaten Caribbean economic development in Taiwan’s allies, Chinese assistance can be a plug for the holes left by U.S. banks that have de-risked the region.

Since the availability of correspondent banking relations underpins economic growth, the loss of them can drive people into poverty and unemployment as well as limit governments’ ability to respond to the needs of their citizens. This leads to security risks for the Caribbean and broadly for the United States. First, increased poverty and unemployment incentivizes citizens to engage in criminal activity to replace lost household incomes and sustain their livelihoods. Further, it can be a driver for people to join criminal organizations for similar reasons, thus increasing the power of organized crime relative to the state and its own police forces. Second, since de-risking adds another layer of constraint of the fiscal flexibility of Caribbean governments, social unrest and riots might ensue when leaders cannot immediately respond to citizen needs. The likelihood of this increases with frequent disasters and economic shocks – something that is a regular occurrence in the Caribbean. 

Strategies to address de-risking that can strengthen U.S.-Caribbean relations

Never has there been more appetite between the United States and the Caribbean to expand cooperation and strengthen their partnership. This was seen at the Ninth Summit of the Americas, where the United States announced the U.S.-Caribbean Partnership to Address the Climate Crisis 2030, otherwise known as PACC 2030. Further, Vice President Harris, on several occasions, and President Joe Biden at the Summit, has carved out time to meet with Caribbean leaders and listen to their perspectives and viewpoints on matters of shared interests, such as food and energy security and access to development finance. In fact, the Congressional Delegation led by Chairwoman Waters to Barbados in April of this year and this hearing to address de-risking in the Caribbean are added indications that U.S.-Caribbean relations are headed in the right direction.

It is important now to take these words and turn them into legislative action. Addressing de-risking can be a first, tangible step as correspondent banking is the lifeblood of economic activity in the Caribbean. In many ways, it is one of the most important avenues of U.S.-Caribbean relations, enabling U.S. government agencies to provide disaster assistance after natural disasters, allowing the U.S. private sector to invest in the region, and ensuring the trade relations with Caribbean countries remain strong.

Earlier this year, the Caribbean Initiative at the Atlantic Council’s Adrienne Arsht Latin America Center released a report, “Financial De-risking in the Caribbean: U.S. Implications and What Needs to be Done,” of which the foreword was written by Chairwoman Waters. The report was a result of an almost year-long process, where the Initiative’s Financial Inclusion Task Force – a group made up of bankers, regulators, and multilateral representatives from across the United States and the Caribbean – met to provide recommendations on how U.S. policymakers can best curb de-risking.

Based on the findings of the report, there are several actions U.S. legislators can take to support Caribbean economic development and protect U.S. interests by addressing de-risking. Since correspondent banking is integral to a functional and healthy global economy, this Committee should consider putting forward legislation that categorizes it as critical market infrastructure or a public good. Through the U.S. Congress, this determination would provide justification for the U.S. Government and international financial institutions to incorporate access to correspondent banking as part of aid and development packages.

Key to the process of addressing de-risking in the Caribbean is ensuring that the affected actors are part of the overall discussion. Caribbean financial institutions and governments have first-hand accounts of the unique challenges they face to address the causes of de-risking and are therefore in the best position to provide feedback on which strategies are most effective. This Committee should consider, through legislation, working with the U.S. Treasury to consult with affected Caribbean actors when developing solutions that lead to greater financial access for the region.

Working hand-in-hand with the Caribbean financial institutions and governments also means providing them with a platform that shows progress these actors have made to fulfill compliance and regulatory requirements. As such, the Committee should consider adopting and passing “The INCSR Improvement Act,” which will help Caribbean financial actors and government leaders annually underscore actions taken to address money laundering, drug trafficking, and financial crimes. The passage of the Act will help promote healthy dialogue between U.S. and Caribbean actors.

Dialogue is critical to addressing de-risking. Therefore, the Atlantic Council is working alongside and in coordination with several key partners to create an annual U.S.-Caribbean Banking Forum. The intent for the Forum’s creation stems from the Atlantic Council’s report on financial de-risking and was supported by Caribbean government leaders and U.S. legislators during the April 2022 Financial Access Roundtable in Barbados. Since then, an organizing committee that comprises bankers, multilateral representatives from across the Americas, and the Atlantic Council has been formed to carry out the inaugural Forum and will look to include the recommendations and feedback from this hearing into its eventual agenda.

In sum, the health and future of U.S.-Caribbean relations may well depend on correspondent banking relations remaining present in the region. Caribbean countries face an uphill battle to address de-risking. Even some of their solutions to note such as launching a Central Bank Digital Currency (CBDC) to address de-risking comes with its challenges. An Atlantic Council tracker on CBDCs notes that cybersecurity is an increasing concern as well as the ability of countries to house these currencies where there is instability in the financial system – two areas where Caribbean countries are still in need of support.

Decisive action is needed for U.S. interests and national security, yes, but also for the prosperity and livelihoods of the average U.S. and Caribbean citizen. Thank you, once again, for the honor and the opportunity to appear before the Committee today. I look forward to answering your questions.

Staff

Wazim Mowla

Associate Director, Caribbean Initiative

Adrienne Arsht Latin America Center

Caribbean China

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