Russia-Ukraine conflict reveals structural weaknesses in India
India was among the fastest-growing of all emerging economies in 2021. But the Russia-Ukraine conflict has resurfaced the country’s structural weaknesses.
India’s primary weakness is, of course, its reliance on oil, with rising oil prices weighing heavily on the country’s trade balance. Leveraging its neutral – not to say ambiguous – geopolitical positioning, India has substantially changed its oil supply sources to take advantage of the discount on Russian oil, which is trading at $30-40 a barrel below the official price.
Russian oil is set to account for almost 25% of India’s total oil imports in June, with the country receiving nearly a million barrels a day; contrast this with 2021, when Russian oil accounted for barely 2% of India’s total oil imports. A welcome source of help, no doubt, but not enough to quell soaring import values (up 72% year on year in May), which have quickly weakened India’s trade balance. The total one-year deficit has risen to a record $222 billion, equating to around 8% of GDP. The current account was more or less balanced in 2021. However, the deficit was already 2.7% of GDP at the end of 2021 and is likely to continue to deepen in 2022.
The second structural weakness, which goes hand in hand with the first, is the return of inflation. Although largely fuelled by energy prices (up 41% year on year in May), inflation is also affecting food products (up 12%), which in India make up more than 40% of the price index. Inflation reached 7.8% in April before slowing slightly to 7% in May.
Once again, the war in Ukraine is partly to blame, causing the price of cooking oils – of which India is a net importer – to soar, but so is bad weather (drought and a heat wave) affecting harvests of tomato, fruit and wheat, all staples of the Indian diet. The authorities have tried to respond by blocking exports of wheat to ensure India’s food security, but with cereal prices highly volatile, this decision has been partly cancelled out by speculation. Consumer spending was already slowing in the first quarter of 2022, making only a very modest contribution to growth (one percentage point, compared with 4.4 points the previous quarter).
The central bank (the Reserve Bank of India, RBI) resigned itself to having to hike interest rates by 40 and then 50 basis points, to 4.9%. With inflation mainly the result of supply constraints rather than of an overheating economy, this move was first and foremost a signal to markets, notably to head off attacks on the rupee, which has lost just over 5% against the dollar since January, in line with the average of other Asian emerging countries.
Amid a flight to quality and with the dollar strengthening, the RBI has every incentive not to stand out from other emerging countries: if the rupee were to depreciate too steeply, this would push up import prices even higher. In any event, the central bank still has plentiful reserves (over $500 million) with which to defend its currency.
Lastly, the war has highlighted India’s ambiguous position on the international stage. President Modi, once seen as a mediator in the conflict, has ultimately refrained from taking part in negotiations and is pursuing a rather opportunistic policy of buying up discounted Russian oil at the risk of heightening India’s reliance (already high when it comes to weapons) on Russia. Above all, though, it is the stance of his party, the BJP (Indian People’s Party), on Islam that has put India at odds with Muslim countries.
With President Modi pursuing a policy of repressing and marginalising the Muslim community (the world’s third largest after Indonesia and Pakistan) for the past few years, resulting in riots and deaths in February 2020, purported blasphemous comments about the Prophet Muhammed by a BJP spokesperson on a national TV channel have triggered a wave of indignation throughout the Muslim world.
The Gulf states, notably Kuwait and Qatar, have summoned the Indian ambassadors to their countries to demand explanations. The Organisation of Islamic Cooperation (OIC), which has 57 member countries, has also responded, stating that these comments “come in the context of the escalation of hatred and abuse of Islam in India and in the context of the systemic practices against Muslims and restrictions on them […]”.
The Gulf states are host to nearly 9 million Indian workers, who provide over half of India’s income from foreign workers – a welcome inflow of currency ($87 billion in 2021) that goes some way towards rebalancing the current account. Until 2021, the Gulf states also provided for just over 60% of India’s oil needs.
After initially minimising if not covering up the controversy, New Delhi has finally woken up to what is at stake and made repeated conciliatory statements aimed at Muslims while suspending those implicated. There is unlikely to be any change in the general attitude towards this community, the repression of which has never seemed to bother the OCI countries. However, the BJP is sure to be careful what it says on this topic from now on. This is a purely pragmatic position: India needs the Gulf states more than they need it.
Tensions mount between Spain and Algeria
On 8 June, Algeria announced that it was immediately suspending its treaty of “friendship, good neighbourliness and cooperation” with Spain due to the latter’s stance on Western Sahara and Morocco’s independence plan for the region. That same day, Algeria’s Professional Association of Banks and Financial Institutions (ABEF) announced that it would be ordering all banks to freeze bank operations relating to trade with Spain with effect from 9 June.
The question of Western Sahara, a former Spanish colony considered a “non-self-governing territory” by the UN, has for decades been a bone of contention between Morocco – which controls 80% of it – and the pro-independence Front Polisario (FP). On 18 March, Madrid radically changed its position on the matter by backing Morocco’s independence plan. In so doing, it aroused the ire of Algiers, the principal supporter of the Sahrawi independence movement. Experts say this U-turn has put an end to Spain’s neutrality. The Front Polisario has accused Madrid of giving in to Rabat’s “blackmail” and demanded that an independence referendum be held.
The circular issued by ABEF covers all trade transactions with Spain. This decision will affect all finished goods for resale and commodities for production. Algeria is Spain’s second-largest trading partner in Africa after Morocco. In 2021, 9.8% of Algerian exports went to Spain, while Spanish goods accounted for 6.2% of Algeria’s total imports. Algeria exports more to Italy and France; it mainly imports from China, followed by France, Italy and Germany, with Spain coming in fifth place. Spanish firms buy fertilisers, chemicals and fish and sell machinery and building materials. Spanish exports to Algeria totalled €2.9 billion in 2019, €1.9 billion in 2020 and €1.1 billion in 2021.
In the current environment, though, the most sensitive product is gas. According to CORES, Spain’s oil stockholding agency, 30% of gas imported by Spain this last March came from Algeria, while the average over the past twelve months was 37.5%. Purchases from the United States have increased over the past few months; in March they exceeded purchases from Algeria, accounting for 43% of gas imports. But this is liquefied natural gas (LNG), which is transported by sea and has to be regasified on arrival. LNG is generally more expensive due to the associated transport and transformation costs. There are various reasons for this change of supplier. Firstly, the war in Ukraine has prompted the United States and other countries to increase their exports to the European Union to help out Member States reliant on Russian gas. Some of this gas transits through Spain. Secondly, the Spanish Government has been trying to diversify its energy sources. But the main reason is that Algeria closed down the Maghreb–Europe gas pipeline last November over its disagreements with Morocco and is currently supplying gas through just one pipeline, Medgaz, reducing its export capacity and forcing Spain to look for other sources of supply. Medgaz, which links Béni Saf with Almería, is owned by an Algerian public corporation (with a 51% stake) and a Spanish firm (with the remaining 49%). The contract is sealed for ten years but prices are currently being renegotiated.
The risks are significant: Algeria could threaten to cut off gas supplies in a last-ditch effort to put pressure on Spain. With demand extremely high, Algeria could at present afford to go without its Spanish client (it need look no further than Italy, which is seeking a solution to its high reliance on Russian gas). But there is a signed contract that must be honoured, and Algeria runs the risk of exposing itself to sanctions. The fact remains, however, that the Spanish Government’s strategy and change of stance in this highly uncertain environment raise questions.
European Union: after oil, gas? How best to respond?
The European Council recently imposed an official embargo on Russian oil. The intention is to further dissuade importing companies, shipping lines, insurers and financiers from any involvement in buying Russian oil. In theory, these incentives should result in a steeper discount on the price of Russian oil. The extent of the discount and the impact on Russian production will depend on Russia’s ability to divert its output to Asia. For the time being, the shift in European demand to other suppliers is straining the global market and pushing up prices, with the expected increase in production announced by OPEC deemed insufficient by markets.
There are no plans for an embargo on Russian gas: with alternative sources hard to find, slowly reducing reliance on Russian imports is seen as being the only real way forward. There is, however, scope for action on prices. A number of countries, including Italy, Spain, Belgium, Portugal and Greece, have put forward proposals either to cap the price of gas (through a cap or fluctuation bands on prices traded on the virtual market in the Netherlands and a cap on liquefied natural gas shipping costs) or to decouple gas and electricity prices. However, their proposals have thus far met with scepticism from the Netherlands and Germany.
The Commission has hitherto tended to welcome this type of solution. It has already analysed the various options: financial compensation for fossil energy producers as the counterpart for lower prices, a direct cap on wholesale electricity prices or regulatory intervention to limit the amount of profit made by certain market participants. The Commission has already described the pros and cons of such mechanisms: they hinder competition, dissuade investment, notably in alternative energy, and disincentivise supply more generally. The ACER (Agency for the Cooperation of Energy Regulators) report, requested by the Commission and made public in May, did not come up with any solutions other than those already explored by the Commission. While conceding that the European electricity market was not designed to cope with emergencies like the one Europe currently faces, it set out the same options and highlighted the risks associated with ill-conceived emergency measures. However, ACER does classify these measures according to how “dangerous” they are – a classification from which the Commission could take inspiration. But the report has been judged fundamentally disappointing, with the Commission’s president describing it as a “very small step”.
A consensus seems to have been reached on the need for urgent action and the European Council has asked the Commission to quickly take forward work on optimising the operation of the European electricity market, including the impact of gas prices on that market. Tying renewable energy prices to the price of gas might perhaps have been warranted when gas was the predominant form of energy used to produce electricity. Today, though, with renewable energy accounting for a growing share of the energy mix, there appears to be no further justification for linking renewable energy to gas prices. There is even less justification at a time when gas prices are highly volatile, and when this link is resulting in extraordinary profits for renewable energy producers.
Any solution enabling the market to withstand excessive present and future price volatility, so as to be able to supply affordable electricity, will need to be assessed in light of certain constraints: the need for a market suited to a carbon-free energy system, the maintenance of incentives in support of ecological transition, the safeguarding of supply security, preservation of the single market and, lastly, the need to limit fiscal costs.
Ranking of options for counteracting rising energy prices: from most to least desirable (ACER report)
Pending a joint decision on gas, individual countries are each making their own way, trying to limit the fiscal impact of the measures they adopt.
From a macroeconomic perspective, the current situation calls for the debate over the right policy mix (fiscal vs. monetary) to shift to the field of regulatory policy. Given that what we have is a typical supply shock triggered by a market failure (due to the power of a monopolistic supplier), state intervention in prices is justified and looks to be better than any other solution.
Intervention to temporarily decouple electricity and gas prices is the only kind that could stamp out inflation. Neither fiscal policy in support of purchasing power nor action by the central bank would succeed.
The only way fiscal policy could translate into lower inflation would be by acting on tax rates on energy, but this would come at a high fiscal cost. Monetary policy cannot slow commodity-linked inflation by hiking interest rates; all it can do is interrupt the link between inflation and rising wages by causing economic activity and demand for labour to slow. This link is not yet visible in the eurozone. The central bank can, however, work to prevent economic agents anchoring their expectations on higher inflation by showing its determination to combat the latter. But the cost in terms of lost activity could prove high if the result were uncontrolled imported inflation, which would undermine its credibility. Lastly, the idea of using trade policy to impose import tariffs on imports of Russian gas has also been explored. The rationale for such an approach would be twofold: on the one hand, it would raise prices for consumers and thus limit demand; and on the other, it would lower pre-tariff prices and distribute the tariff income to consumers. But these twin benefits are wholly reliant on the assumption that Russia would lower its prices, which is by no means a foregone conclusion.
The next European Council meeting at the end of June could yield a decision on capping energy prices; however, the risk of Russia hitting back by withholding gas supplies will have increased in the meantime. The real challenge for the European Union will be to maintain a united front, take coordinated action and pursue solidarity policies – the foundations of a future single market for energy.
The battle of ideas: who will win the world war?
Behind the conflict in Ukraine are a number of different wars, areas of confrontation and time frames. Companies must now discern these areas and time frames as they seek to outline their foreign policy: each could one day materialise as a risk or an opportunity.
Ideologically speaking, it’s clear that the war is already global in scale. This has been true more or less from the outset, with all participants contributing to the war of ideas. But this battle will rumble on long after the guns have fallen silent: clashes of ideas play out over much longer timescales than military conflicts. Furthermore, winning the war on the ground doesn’t necessarily mean you’ve won the war of ideas. Lastly, we need to be aware that this war of ideas will also play a role in shaping our investment universe by influencing the emerging global geopolitical equilibrium, whatever the short- and long-term military situation and however weakened Russia might be economically and politically in the short and long term.
In a way, the ideological dimension of the conflict as the Kremlin sees it – a proxy war between the West and the rest of the world, with Moscow as the “pinnacle” – is slipping from Russia’s grip as it becomes more global in nature. In reality, while plenty of intellectuals and political leaders in non-Western countries have seized the opportunity to highlight NATO’s putative responsibility for provoking this war and, above all, to broaden the debate by calling for a new world order that is no longer the preserve of the West, they have nevertheless still overwhelmingly condemned Russia’s intervention.
The global ideological battle lines have, it seems, been drawn: responsibility for the conflict, and even the legitimacy to engage in it, constitute the primary front line, with the West’s role in the world acting as a secondary front line. It is in light of this ideological interpretation of the war that the effects of enlarging NATO to include Sweden and Finland must be understood. Note also that, in many Western European countries, it is on this issue of responsibility for the conflict that the connection is being made between domestic policy and geopolitics. Indeed, now that the psychological shock of the first few months and the violence they unleashed has abated, the debate over the causes of the war is becoming a powerful driver of growing conflict in public opinion, reflected and amplified by the polarising efforts of anti-establishment parties.
At this stage, however, no united bloc has emerged behind an anti-Western leader. This highlights the failure of both Russia and China to take on this role despite having coveted such leadership for the past thirty years. But the story is clearly not over yet…
From the outset of the conflict, Beijing has adopted a stance designed to avoid the threat of economic sanctions while aligning itself ideologically with Russia against the West. While this strategy has been described as ambiguous, by adopting this stance China has been able to secure a number of strategic advantages: it has avoided a clean economic break with the West – something it would certainly not be able to withstand at the present time – and cashed in on Russia’s ideological capital. It has chosen the path of patience: avoid war and let events work to its advantage. In so doing, it has taken a leaf right out of Sun Tzu’s book: the art of war is subduing the enemy without a fight. Beijing has theorised about global ideological warfare – but only after the United States and the USSR! – by drawing on the concept of the “Three Warfares”: public opinion warfare (rallying others to one’s cause and appealing to the emotions), psychological warfare (demoralising the enemy’s armed forces and undermining trust between enemy governments and their people) and legal warfare (using or making laws to dissuade, constrain or punish).
This hijacking and institutionalised use of international law to try to shift the geopolitical balance of power has also given rise to a concept that originally emerged in US neoconservative circles but has in recent years taken on huge strategic importance across the board: lawfare. As Amélie Férey spells out in an IFRI study, lawfare currently manifests itself in four main forms: “adapting legal constraints by reinterpreting existing standards; issuing new standards by means of legal lobbying in the service of a power strategy; mobilising the effects of law to force a party to act a certain way through strategic judicialisation; and using the law as a reputational weapon”.
Strengthened by the power of social media, which have made the global intellectual space both fragile and “liquid”, lawfare is also becoming one of the most powerful tools of ideological warfare and thus a de facto source of numerous operational risks for businesses. Lawfare, it must be said, has long kept compliance departments busy, with Russia and China clearly becoming an increasing threat in this space. Indeed, this is one of the clearest indicators of the operational nature of global geopolitics.
This war provides an extreme example both of the evolution of lawfare over the past twenty years and of its paradoxes. While the United States has long used lawfare as an instrument of hegemonic domination (via the extraterritorial application of US law and economic warfare), it has now also become a weapon of war for all enemies of the US. Russia’s alternative legal discourse on the right of intervention has become very influential both at home and abroad as Russia seeks to build a post-Soviet space by legally redefining its diaspora. This legal discourse has gradually given substance to the Russian obsession with rewriting history; as long ago as 2008, Russia’s leaders came up with the idea of the “Russky mir”, encompassing the thirty million people who live beyond Russia’s borders but maintain ethnic, legal and cultural ties with Russia. This discourse has taken over the heart of the state and Russian society.
The fact remains that, although the war has caused the debate to gather momentum, there is as yet no real anti-Western ideological bloc but rather an ill-assorted collection of various types of regimes, geopolitical strategies and political factions. But many of these have one thing in common, and it’s important to identify this one thing as a clue to the geopolitical scenario that will emerge from current events.
In many countries, we are seeing a convergence between challenges to the West’s right to reshape the world order and a new form of geopolitical non-alignment. Behind a stance of neutrality with respect to the conflict lies support for a multipolar world and the rejection of hegemonic power. In concrete terms, behind the refusal to impose sanctions on Russia lies a global refusal to pick sides – not with the United States, nor with China, nor with Russia. This stance speaks volumes about what is to come because it allows many countries to affirm their ideological independence while continuing to collaborate economically with both the West and its objective and putative enemies. This is the stance adopted by, for example, India and the United Arab Emirates. If this stance escapes sanction over the coming months, that will be a further signal not only of the weakening of Western hegemony but also of the declining power of Western lawfare – in short, the West’s inability to disseminate its values and enforce its legal standards.
There are a number of more or less intertwined reasons for this refusal to pick sides, which vary from country to country. At the extreme end of the spectrum, there is a rejection of the West’s two-faced position on human rights: the idea of double standards that runs through post-war history. Part of the critique of democracy is also based on this point. In a similar vein, there is also authoritarian regimes’ distrust of the geopolitics of human rights, which they see as a direct threat. Some countries – especially those with a desire to conquer or with latent territorial conflicts – take an ambiguous position on the idea of territorial sovereignty. Lastly, on top of all this there is the legacy of Third-Worldism and the non-alignment of the 1960s, in the context of which the rejection of the West echoes the rejection of financial capitalism. For example, the interview with Brazil’s Lula in Time magazine is very revealing of what is happening in many Latin American countries, which see the Russian and Ukrainian presidents as sharing responsibility for the war and, above all, blame the United Nations logjam and are calling for reform of global institutions.
So, where are we at? For the time being, the ideological war of which the conflict in Ukraine forms a part is having three effects:
While such a rethink is being called for by many moderate players (including Western legal specialists) and appears essential to ecological transition, we must be in no doubt about the nature of the current moment: it may be true that many countries are keen to see a more multipolar world, but there are also those revisionist powers that want to bring down the world order, assume leadership and even exploit this desire for non-alignment for their own ends.
In the introduction to his thesis on the Vienna Congress, former US Secretary of State Henry Kissinger invites the reader to think about both the nature of revisionist powers and what their emergence says about the current geopolitical moment. “Every time a power denounces the oppression it sees as being embodied by the existing order or the way that order is legitimised, its relations with other powers take a ‘revolutionary’ turn […]. When this happens, we can no longer speak of accidental events under the existing system. It is the fate of the existing system itself that is at stake. […]. What is unique about a revisionist power is that nothing can reassure its leaders […]. The absolute security to which a revisionist power aspires results in the absolute insecurity of everyone else […]. Revisionist powers always go to extremes”.
The great ideological battle that Russia has stirred up with this war is well and truly a battle to revise the world order from an extremist standpoint. This, more than a pivot to Asia, is the meaning of the great divorce between Russia and the West. But this battle is merely taking what was already there in the clash between the US and China and in the Chinese proposal of another world order embodied by its New Silk Road and prolonging it by radicalising it. In the world of ideas, then, this also highlights the current profound imbalance in the system of international relations.
Lastly, the clash of ideologies highlights twin trends in the global geopolitical scenario that can be seen in other areas, for example trade: on the one hand, a hard conflict between an ideologically aligned West and a few enemy countries, and on the other, in the rest of the world, fragmentation, the redistribution of power and the rejection of blocs. Ultimately, given this fragmentation, restoring a global order will undoubtedly involve reforming international institutions. In the meantime, though, the more the war escalates, the more difficult it will become to remain ideologically neutral and the more the battle to shape the narrative will intensify. And in this battle, each and every one of us is a target.
 “This war is a kind of proxy war between the West and the rest – Russia being, as it has been in history, the pinnacle of ‘the rest’ – for a future world order”,. S. Karaganov, interview in The New Statesman, April 2022.
 See the work of sociologist Zygmunt Bauman on the concept of the liquid society.
Italy – Scenario 2022-2023: facing the setback of the conflict in Ukraine
After record growth in 2021, the outbreak of the war in Ukraine is weakening the Italian economic recovery. Against the backdrop of a global slowdown, Italy is facing a double shock: confidence and prices. What is the outlook for 2022?
Geoeconomics and direct investment: the self-fulfilling power of expectations
OECD statistics on foreign direct investment flows are worth revisiting, in the long term, in light of geopolitical risk. In particular, geopolitical tension evidently did not discourage direct investment into China up until 2021, with flows trending upwards since 2005 and, more strikingly, increasing sharply from 2019. Yet political analysts had already diagnosed the existence of a major political risk several years ago – a reality made even more obvious by Trump’s rise to the presidency. It had thus long been clear that economic relations with China would have to take account of a growing hegemonic struggle between China and the US, which would inevitably lead to a more or less gradual decoupling of value chains for all strategic products – i.e. not only those products that underpin geopolitical power but also those that guarantee states’ autonomy and sovereignty. This risk had been in existence for several years – spelled out, for example, in American documents naming China as a strategic adversary – and was gradually spreading through the economic domain. However, until 2021, it was not a powerful enough factor to influence long-term western decisions about investing in China.
What’s behind this disconnect between political analysts’ diagnosis and investors’ decisions? The explanation undoubtedly has to do with the individual beliefs of decision-makers: ultimately these play a decisive role in long-term investment choices. Although the US-China clash had been noted and discussed, it was no doubt not completely credible to the whole of the business community because it was not yet (at least not sufficiently) reflected in the reality on the ground – apart from in the trade war and the ramp-up of economic sanctions (which you might think would be evidence enough…). So, while some industry segments in China were affected, the overall view of the country was not. Up until 2021, this slow increase in geopolitical risk was not enough to offset the appeal of the Chinese market for direct investors, with short-term gains helping drive long-term strategic priorities.
However, beliefs are now shifting fast: the war in Ukraine has starkly highlighted what is ultimately at stake when it comes to major geopolitical risks. Such risks have suddenly become a powerful tool for reshaping the investment universe, because what we are dealing with is no longer “just” a shock but a new long-term risk universe. In this way, the war is also shifting investment expectations worldwide, well beyond the bounds of Europe, simply by broadening the range of possibilities. The “what if” advocated by Max Weber in his practise of historical sociology is regaining its relevance as a risk assessment method. Ultimately, then, this war has (unfortunately) crystallised the geopolitical risk premium, which had previously been so difficult to clearly identify – except in the volatility of the sovereign spreads and exchange rates of certain countries regularly affected by geopolitics, Turkey being one example.
Behind the decision by most direct investors not to align their strategies with the signals emanating from the geopolitical sphere lie beliefs about how much stress geopolitical risk can really generate. However, undoubtedly also at play is the still widespread conviction that the US hegemonic cycle could be followed by a Chinese cycle. “China has already won”, wrote Singaporean political analyst Kishore Mahbubani in a 2020 headline. He explained how, in the competition between China and the US, while the latter retained its lead in many areas, China was scoring more long-term points because it was making fewer mistakes than its rival on the other side of the Pacific. The fact that a good number of western investors absorbed this underlying geopolitical scenario of a Chinese “win” into their collective beliefs was also underpinned by the world’s unquestionable demographic tilt towards an Asia that was seen as having China at its core – an argument which, at the time, won out over the weakness of Beijing’s growth model, however visible that may already have been.
Barely two years on, it’s worth cautiously questioning Kishore Mahbubani’s conviction, not only in light of the western strategic realignment that will henceforth influence companies’ choices (because, in the event of conflict, businesses will side with their own country) but also because of the obvious weaknesses of China’s economic and political model. To what extent could these factors eventually translate into a more lasting loss of power that would give the US the upper hand in the hegemonic struggle? While it’s still too early to answer that question, it’s clear that, in terms of the global balance of power, China is likely to emerge much weaker than expected from Covid. Furthermore, if investors adopt this idea and change their expectations in favour of the US, this could have a self-fulfilling effect on direct investment flows over the next few years.
Lastly, let us keep in mind a few lessons from history, in particular the idea that hegemonic transitions are always times of not only great uncertainty and growing global conflict but also strategic surprises. Consequently, the scenario in which one hegemonic power (in this case the US) is replaced by its designated competitor (namely China), for example on account of an increase in China’s share of global GDP, does not line up with either historical experience or the true complexity and slowness of a hegemonic transition… Shifts of power are about much more than something as simple as GDP because they involve both hard and soft power. So what we’re currently seeing could just as well be the birth of a new US cycle as that of a world divided into blocs or, above all, much more complex scenarios of fragmentation that will likely result in a multipolar global power structure.
Lastly, another lesson history teaches us is that there can be no lasting hegemonic transition unless the new dominant state is able to offer a new social contract based on choices, values and a collective imagination shared by a majority of citizens. After the war, it was as much the American dream as military power that served as the basis for the hegemonic cycle. Furthermore, it is in this area of dreams and individual projection that Russia – like the USSR before it – has always failed to offer an alternative. Building a hegemony involves positive momentum, not just a struggle for power. The dominant power needs a modicum of legitimacy to be able to impose its regulating standards and principles and thus restore a form of stability to the global system of international relations.
The war in Ukraine is aggravating the palm oil crisis in Indonesia
Soaring palm oil prices in Indonesia exemplify the kinds of indirect (or “second-round”) effects a crisis – in this case the war in Ukraine – can have on even a faraway economy whose trade structure has few links to the conflict zone. This phenomenon is highlighting consumer behaviours, value chains and the complementarity or substitutability of some products. The contagion is not confined to Indonesia: it is now affecting the country’s customers – chief among them India and China, both of which import huge amounts of Indonesian palm oil. Collateral damage from the conflict is as yet far from fully visible, let alone under control.
Markets got carried away last week after the Indonesian government announced a surprise embargo on exports of palm oil – of which the country is by far the world’s leading exporter – on 22 April. Palm oil was trading on the Koala Lumpur Stock Exchange at $1,700 a tonne (compared with $1,300 at the beginning of the year), while the Indonesian rupiah, although relatively unaffected by pressure on emerging currencies, was trading at over 14,400 to the dollar (up from 14,250 in January).
Palm oil prices had already begun to rise before the conflict but surged in March when exports of Ukrainian sunflower oil were blocked. Back in January, the government had already ordered producers to reserve 20% of their output for the domestic market and instituted a price freeze; this quota was raised to 30% in March before being replaced by an export tax. However, as the end of Ramadan and its celebrations – when demand for cooking oil increases sharply – approached, President Joko Widodo, known as Jokowi, decreed the embargo, not wanting to take any risks. He would like cooking oil to stabilise at around 14,000 rupiah a litre, 30% below its current price.
Compared with the rest of the world, inflationary pressures have been kept in check in Indonesia. Price inflation has quickened, rising from 2.1% year on year in February to 2.6% in March, very close to the level of core inflation (2.4% in March), which remains within the central bank’s target range (3% ± 1%), enabling the latter not to hike interest rates (4%) despite US monetary tightening.
In reality, this is the result of a policy of subsidies and price control for both energy (coal, oil) and food (cooking oil, sugar, soya, eggs). This policy, hitherto financed by the higher prices of exported commodities (coal, palm oil, metals), has enabled the country to consolidate its foreign currency reserves (enough to cover around eight months’ imports) and build up a record trade surplus ($39 billion).
The freeze on palm oil exports (which account for around 10% of Indonesia’s total exports) is thus depriving producers – and, above all, the state – of considerable inflows of foreign currency, while Indonesia is also dependent on the outside world for some commodities (notably oil, soya and wheat).
This is a difficult circle for President Jokowi – whose approval ratings have fallen sharply and who has a multitude of constraints to reckon with – to square. Supposing the export ban fails to bring down palm oil prices or inflation surges through other channels, the subsidy policy could also run afoul of fiscal principles enshrined in Indonesian law, which lay down a golden rule according to which the budget deficit may not exceed 3% of GDP.
While this rule was bent in 2020 to finance exceptional Covid-19-related measures, the Finance Act calls for the deficit to be brought back below 3% by 2023. In 2021, the deficit came in at 4.65% of GDP, well below the official estimate of 5.7%, thanks to a big increase in receipts linked precisely to the export sector.
Investors are keeping a very close eye on the country, long considered one of the “usual suspects” ever since the 1997 crisis and the rescheduling of both public and private debt. Another potential cause for concern is the overly lax use of monetary policy (monetary financing of the deficit), which raised questions among analysts during the Covid-19 crisis. The government is thus determined to do everything in its power to avoid setting up a vicious circle in which a reversal in the trade balance could put exchange rates under severe pressure, forcing the central bank to intervene.
Indonesia – which, relatively speaking, has less debt than its neighbours, with public and external debt of around 40% of GDP – is not the country most at risk of such a reversal. The fact remains, however, that such a nightmare scenario would further undermine the Indonesian economy, which still bears the scars of past crises.