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India’s Rupee Restrictions Take Effect

India is finding itself in a rupee crisis due to the government’s decision to take 500 and 1,000 notes (about $7.34 and $14.69, respectively, in U.S. dollars) out of circulation. The government provided four hours notice that the notes could no longer be used as legal tender and has stated holders of the notes must exchange them by Dec. 30 in order to receive credit for them. After that time, they will be worthless. The change comes in an effort to deter black market activities because these notes have been the preferred notes of criminals, but in the meantime, it has resulted in long lines at the banks and a cash shortage.

“Indian banks are running out of replacement money after the government scrapped 86% of the cash in circulation last week,” according to a Nov. 17 BBC News article. The news agency also reported that “some 90% of transactions in India are in cash.”

According to a Nov. 14 BBC News story, a former chief economist for the World Bank states the “collateral damage” from such a move will likely “outstrip” the benefits. “Low-income Indians, traders and ordinary savers who rely on the cash economy have been badly hit with hordes thronging banks to deposit expired money and withdraw lower denominations,” the article says. In response to the “widespread public anger,” the government increased the limit on cash withdrawals.

At least one credit professional on the FCIB discussion board shared that he heard from a customer in India that orders were delayed due to the change. Chad Sivertson, CBF, CICP, credit analyst for NatureWorks LLC, in Minnetonka, MN, questioned why the elimination of these notes would affect legitimate companies placing orders, “unless they keep lots of cash in a vault at their place of business and it might take time to get all of these notes to the bank.” Otherwise, he asked, “Can anyone think of another more plausible reason?”

One respondent to Sivertson’s question pointed out that “suppliers (creditors) to retail businesses could experience a slowdown in payments, which may be only temporary, unless this initiative actually slows economic growth—which some are concerned about.”

A Nov. 18 EconoTimes commentary says that the demonetization move will have a “detrimental” effect on India’s fiscal 2017 GDP “due to reduced consumption amid a cash crunch” and notes that the ANZ reported “over the long term, the move will have far-reaching positive implications.”

The commentary also estimates that currency notes that don’t get exchanged will cost “the economy a net loss of INR5 trillion; however, this will likely reduce the Reserve Bank of India’s liabilities, allowing for a special dividend payment to the government. ... Furthermore, over the medium term, the demonetization will also discourage cash hoarding, leading to higher tax compliance and a widening of the tax base.”

What Improved Relations with Russia Might Mean

Chris Kuehl, Ph.D.

Throughout the presidential election campaign, there was curiosity about the approach that Donald Trump would take with Russia and Vladimir Putin. Trump’s comments were interpreted as pro-Putin and in many respects they were, as Putin was admired for his strong leadership and his popularity with the Russian people. This is not exactly endorsing the oppressive regime and the aggressive attacks on other nations, but it was far from critical.

The initial conversation between Trump and Putin has been described as “cordial.” The exchange was full of the diplomatic speak that one would expect at this juncture, but there were some important and loaded phrases that reveal what the Russians expect. One comment from Putin expressed a “willingness to build a dialogue between partners with the new administration based on the principles of equality, mutual respect and non-interference in each other’s internal affairs.” This one statement is loaded with content and clearly set out parameters.

Russia is demanding that it be treated as an equal to the U.S.—as in the days of the Cold War. On the face of it, this is a ludicrous demand, as Russia is weak in almost every objective measure. The commodity-dependent economy of Russia is in serious recession and will sink further next year. Budget cuts of up to 25% are planned, and the country has no ability to influence the world with its cash largesse. It is a weak regional power and no player on the world stage. Its ambitions are related to its border. It can barely afford to project anything beyond.

The demand for non-interference is especially rich given that it has been Russia that has overtly and covertly tried to interfere in the domestic politics of the U.S. The Russian demand is for the U.S. to remove the sanctions imposed on it due to the invasion of Ukraine and to effectively countenance the takeover of that nation. The U.S. is to abandon its efforts to unseat Bashar al-Assad in Syria and to look the other way as Russia installs leaders it approves of in Central Asia. The comments that have been made by Trump in regard to NATO membership have been most welcome in Moscow, as it means the U.S. might hesitate to defend the Baltic States or other countries once tied to the old USSR.

It is wholly unclear what the U.S. gains from this rapprochement. There is no market to speak of in Russia—it is a poor country suffering a severe recession. This is a commodity-based economy and that means feast or famine, as far as economics is concerned. Is Russia offering the U.S. deals on these commodities (oil, gas, minerals)? If so, there has been no mention of them. Is Russia offering better access to its economy? The answer has been an emphatic no. Is there Russian support for other U.S. diplomatic initiatives? None whatsoever!

It would be helpful if there was a spirit of cooperation with Russia—the tension with the U.S. is palpable and destructive. For this to happen, Russia is going to have to make concessions as well, and right now there seems to be no desire whatsoever to do so.

Egypt Gets IMF Loan, Implements Structural Reforms

The International Monetary Fund (IMF) has approved a $12 billion loan to Egypt in support of its government’s economic reform plan. “Policies supported by the program aim to correct external imbalances and restore competitiveness, place the budget deficit and public debt on a declining path, boost growth and create jobs while protecting vulnerable groups,” the IMF said.

Egypt will receive a $2.75 billion initial installment with the rest paid out over a three-year period, pending five reviews.

The key elements of the program include:

  • Maintaining a flexible exchange rate regime to improve Egypt’s external competitiveness, supporting exports and tourism, and attracting foreign investment. “This will also allow the Central Bank of Egypt to rebuild its international reserves,” the IMF noted. “Monetary policy will focus on containing inflation and bringing it down to mid-single digits over the medium term.”
  • Strengthening government revenues via a value-added tax (VAT), which it adopted in August.
  • Reforming energy subsidy reforms to free up resources that can be spent on priority areas such as health, education, research and development, and social protection.
  • Strengthening social protection programs.
  • Wide-ranging structural reforms to improve the business climate, including streamlining industrial licensing, and facilitating access to finance for small- and medium-sized enterprises.

According to the 2017 Ease of Doing Business report from the World Bank, Egypt, which ranked 122 out of 190 economies overall, placed 168—a drop of 11 points year-on-year—when it came to trading across borders. The report “measures the time and cost (excluding tariffs) associated with three sets of procedures—documentary compliance, border compliance and domestic transport—within the overall process of exporting or importing a shipment of goods” and lists the documents needed to trade internationally, according to the World Bank website. When it comes to resolving insolvencies, the country fell to 109 from 105 year-on-year.

Global Roundup

Mexico’s economy: More difficult times ahead. Mexico’s economy has grown above Latin America’s average since 2012. While the region contracted by 0.5% in 2015, Mexico, its second largest economy, grew by 2.5%. Looking ahead, however, the outlook is less optimistic. Coface forecasts that the country’s GDP will grow by 1.6% in 2016 and 1.5% in 2017. It has downgraded the risk assessment for the country’s retail and automotive sectors, while commodity-dependent sectors remain at risk. (Coface)

Trump win pushes EU to protectionist stance. Donald Trump’s electoral win in the U.S. has boosted populist stances in Europe and created much uncertainty for the banking sector, both of which could have serious implications for trade agreements with the region. While the president-elect started his campaign with strong rhetoric about threatening to “tear up” existing trade agreements, this has shifted somewhat to a more consultative approach calling for renegotiations. Nonetheless, he has given strong signals that he will lead the U.S. away from being a global trade liberalization advocate, to one that is geared heavily toward national interest. (Global Trade Review)

What’s next for the Iran deal? Even before news sites were able to call the election in favor of Donald Trump, many were beginning to think about what he might do concerning the Iran nuclear deal if returns continued going in his favor. At a minimum, sanctions relief granted by President Obama under the deal must be renewed every 120 or 180 days, depending on the statutes involved. President Obama ordered that this be done in keeping with the deal. Would President Trump? (Global Trade Magazine)

The Moldovan election: A quiet country at an important crossroads. Europe is full of loud stories, and yet beneath the noise, there are first-time democratic elections shifting the tide of East-West relations, such as in Moldova. Moldova, between Ukraine and Romania, held its first democratic presidential elections on Oct. 30. Many believe the election, aside from the obvious democratic symbolism, could be a key tipping point in Euro-Russian relations. It may cause significant challenges for expansion of EU trade networks such as the EU Association Agreements. (Global Risk Insights)

Obama and EU leaders agree to keep sanctions on Russia. President Obama and several European leaders “unanimously agreed” on Friday to keep sanctions in place against Russia for its intervention in Ukraine, amid concern that President-elect Donald Trump would soften the United States’ stance against Moscow. The show of solidarity came as American allies—and Ukrainians themselves—have been unsettled by uncertainty regarding what kind of foreign policy Trump will pursue. (NY Times)

China picks up the U.S. trade fumble. It’s been less than a week since the White House confirmed the collapse of the Trans-Pacific Partnership trade deal, and already Asian states are racing to make new trade arrangements without the U.S. This time the focus is on the 16-nation Regional Comprehensive Economic Partnership, or RCEP, a deal that excludes the U.S., goes easy on statist economies and boosts China’s ambition to be the economic and strategic hub of the Asia-Pacific. (Wall Street Journal)

Blockchain technology is set to improve trust in international trade transactions. The age-old problem of low levels of trust between importer and exporter when it comes to payment looks set to be alleviated by the adopting of “blockchain” technology in the banking system. Blockchain is the revolutionary concept behind the global sensation of the cryptocurrency and Bitcoin, and is the current darling of fintech. A growing number of start-up companies from around the world are vying for attention in the race to develop practical applications across a variety of industries ripe for disruption. (Hellenic Shipping News)


Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations