Tag Archives: geoeconomics

Shut-out, Cut-off and Suicidal: Aliens v. America

The United States leads the world in punishing corruption, money-laundering and sanctions violations. In the past decade it has increasingly punished foreign firms for misconduct that happens outside America. Scores of banks have paid tens of billions of dollars in fines. In the past 12 months several multinationals, including Glencore and ZTE, have been put through the legal wringer. The diplomatic row over Huawei, a Chinese telecoms-equipment firm, centres on the legitimacy of America’s extraterritorial reach.

America has taken it upon itself to become the business world’s policeman, judge and jury. It can do this because of its privileged role in the world economy. Companies that refuse to yield to its global jurisdiction can find themselves shut out of its giant domestic market, or cut off from using the dollar payments system and by extension from using mainstream banks. For most big companies that would be suicidal.

But as the full extent of extraterritorial legal activity has become clearer, so have three glaring problems.  First, the process is disturbingly improvised and opaque. Cases rarely go to court and, when they are settled instead, executives are hit with gagging orders. Facing little scrutiny, prosecutors have applied ever more expansive interpretations of what counts as the sort of link to America that makes an alleged crime punishable there; indirect contact with foreign banks with branches in America, or using Gmail, now seems to be enough. Imagine if China fined Amazon $5bn and jailed its executives for conducting business in Africa that did not break American law, but did offend Chinese rules and was discussed on WeChat.

Second, the punishments can be disproportionate. In 2014 bnp Paribas, a French bank, was hit with a sanctions-related fine of $8.9bn, enough to threaten its stability. In April ZTE, a Chinese tech firm with 80,000 employees, was banned by the Trump administration from dealing with American firms; it almost went out of business. The ban has since been reversed, underlining the impression that the rules are being applied on the hoof.

Third, America’s legal actions can often become intertwined with its commercial interests. As our investigation this week explains, a protracted bribery probe into Alstom, a French champion, helped push it into the arms of General Electric, an American industrial icon. American banks have picked up business from European rivals left punch-drunk by fines. Sometimes American firms are in the line of fire—Goldman Sachs is being investigated by the doj for its role in the 1mdb scandal in Malaysia. But many foreign executives suspect that American firms get special treatment and are wilier about navigating the rules.

America has much to be proud of as a corruption-fighter. But, for its own good as well as that of others, it needs to find an approach that is more transparent, more proportionate and more respectful of borders. If it does not, its escalating use of extraterritorial legal actions will ultimately backfire. It will discourage foreign firms from tapping American capital markets. It will encourage China and Europe to promote their currencies as rivals to the dollar and to develop global payments systems that bypass Uncle Sam…. Far from expressing geopolitical might, America’s legal overreach would then end up diminishing American power.

Excerpts from Tackling Corruption: Judge Dread, Economist, Jan. 19, 2019

Killing off Foreign Tech Firms – China

E-commerce companies and banks in China are scrapping hardware and uninstalling software for mainframe servers made by American suppliers in favor of homegrown brands said to be safe, advanced and a lot less expensive.  Domestic rivals of these companies such as Huawei Technology Co. and Inspur Co. are winning contracts from state company and bank IT departments at an accelerating rate.

Some companies, such as e-commerce giant Alibaba Group, have been building internal computer networks with open-source software and commonly available hardware.  The movement dates to 2008, when Alibaba’s computer-network department director Wang Jian proposed cutting back on foreign suppliers and replacing their wares with equipment and technology developed almost entirely in-house. What Wang wanted to get rid of most was the so-called IOE system, an acronym for an IT network based on the names of three suppliers: IBM, whose servers are packaged with the Unix operating system; Oracle, which supplies database-management systems; and EMC, the maker of data-storage hardware. Wang dubbed his campaign the “De-IOE Movement.”

Wang decided to revamp Alibaba’s network by replacing its Unix-based servers with less expensive, X86-based PC servers running on the open-source Linux operating system. In such a system, several PCs with X86 microprocessors inside can be linked in a chain to function as a server, replacing a mainframe server. The e-commerce company also built a database management-system of its own with an open-source structure, and started storing data on an internal cloud-storage system…

De-IOE Movement milestones were reached in May 2013 when Alibaba pulled the plug on its last IBM server, and two months later when Alibaba’s advertising department abandoned its Oracle database. The rest of the company’s databases are scheduled to switch to a homegrown system from Oracle’s by 2015.

IT departments at companies and banks across the country are now following Alibaba’s example — and hitting their longtime American suppliers in the pocketbook.  The switch to servers made at home has been a slow process for Chinese banks. Ultimately, the banks’ IT experts have been making these decisions, although they’re being encouraged by the government to choose Chinese suppliers, according to a source close to the China Banking Regulatory Commission.  [But]

“Getting rid of IOE means that all of the software must be moved and made compatible to domestic server systems, which seems to be a mission impossible,” said the consultant…And replacement costs can be astronomical. “The basic technology networks for an IOE system and a ‘De-IOE’ system are totally different,” said another source a state bank. “De-IOE will lead to transforming personnel and management. It’s hard to estimate how high the costs will be.”  Ultimately, said the IT consultant, Chinese banks will only manage to kill off IOE systems if products made by Chinese suppliers can provide comparable security and capacity levels, and if the new hardware and software are compatible.

China pulling the plug on IBM, Oracle, others, MarketWatch June 26, 2014

Loans-for-Oil: China and Latin America

China’s demand for commodities has entrenched Latin America’s position as a supplier of raw materials. The country guzzles oil from Venezuela and Ecuador, copper from Chile, soyabeans from Argentina, and iron ore from Brazil—with which it signed a corn-import deal on April 8th.   Chinese lending to the region also has a strong flavour of natural resources. Data are patchy, but according to new figures from the China-Latin America Finance Database, a joint effort between the Inter-American Dialogue, a think-tank, and Boston University, China committed almost $100 billion to Latin America between 2005 and 2013 (see chart). The biggest dollops by far have come from the China Development Bank (CDB). These sums are meaningful. Chinese lenders committed some $15 billion last year; the World Bank $5.2 billion in fiscal year 2013; foreign commercial banks lent an estimated $17 billion.

More than half of China’s lending to Latin America has been swallowed by Venezuela, which pays much of the loan back from the proceeds of long-term oil sales to China. Ecuador has struck similar deals, as has Petrobras, Brazil’s state-controlled oil firm, which negotiated a $10 billion credit line from CDB in 2009.

Such loan-for-oil arrangements suit the Chinese, and not simply because they help secure long-term energy supplies. They also reduce the risk of lending to less creditworthy countries like Venezuela and Argentina. Money from oil sales is deposited in the oil firm’s Chinese account, from where payments can be directly siphoned.  It is no surprise that Chinese money is welcome in places where financial markets are wary. Ecuador, which defaulted on its debts in 2008, has used Chinese loans both to fill in holes in its budget and to re-establish a record of repayment in advance of trying to tap bond markets again.

But Chinese credit has its attractions in other economies, too. It often makes sense for countries to diversify sources of lending. Loans can open the door to direct investment. And as Kevin Gallagher of Boston University points out, the Chinese banks operate in largely different sectors to the multilaterals. Of the money China has lent in the region since 2005, 85% has gone to infrastructure, energy and mining. Borrowers may have to spend a proportion of their loan on Chinese goods in return; some observers worry about the laxer environmental standards of Chinese banks. But the main thing is that money is available. Expect the loan figures to rise.

Chinese lending to Latin America: Flexible friends, Economist,  Apr. 12, 2014, at 27

Why Germany Loves Russia

Chancellor Angela Merkel’s deputy chided Siemens AG (SIE) Chief Executive Officer Joe Kaeser for traveling to Moscow, saying German companies shouldn’t sell out European values to protect business with Russia.   The conflict over Kaeser’s meeting with President Vladimir Putin last week underscores the rival forces tugging at Merkel during the crisis in Ukraine. While the European Union and the U.S. seek to punish Russia for annexing Crimea, many German corporate leaders view Putin as an economic partner.

Frankly, I found the scene a bit off-key,” Economy and Energy Minister Sigmar Gabriel, a Social Democrat who is also vice chancellor, said of Kaeser’s trip to Moscow in an interview with ARD television yesterday, according to an e-mailed transcript. “We don’t want economic sanctions, but we also have to show the Russian president that we can’t accept” his “imperial policy.”

Merkel, who learned Russian while growing up in communist East Germany, heads Russia’s biggest EU trading partner during the worst standoff since the end of the Cold War. Putin risks a “tough reaction” from EU governments if he escalates the crisis over Ukraine, she said on March 26.  While Merkel has said Germany could withstand the economic impact of European economic sanctions against Russia, the heads of Adidas , ThyssenKrupp  and Deutsche Post questioned the need for sanctions, according to the transcript of a round-table interview with the Die Welt newspaper published two days ago. It showed the CEOs saying EU policy makers mishandled their engagement with Ukraine while affronting Russia.

Asked if Putin must be stopped, Adidas CEO Herbert Hainer said, “I’d turn the question around,” according to Die Welt. “I wonder if one shouldn’t have included Putin in the process much earlier, rather than starting talks when it’s too late.” ThyssenKrupp CEO Heinrich Hiesinger said “Russia felt cornered.” Deutsche Post CEO Frank Appel said the U.S. and its allies had meddled “in the front yard of another big power” and questioned calls by EU leaders including Merkel to review Europe’s energy ties with Russia, saying Germany “will always be dependent on others” for fossil fuel, according to Die Welt.

Kaeser said meeting with Putin showed that Munich-based Siemens, Europe’s biggest engineering company, “won’t be overly influenced by short-term turbulences” involving Russia. “We’re counting on dialogue and mutual understanding,” he said in a ZDF television interview after returning from his trip, which he said Merkel’s chancellery knew about in advance.

By Tony Czuczka, Siemens CEO Rebuked as German Business Defends Putin Partnership Bloomberg, Mar 30, 2014

The Strategic Value of Helium

Helium  is used in a range of applications from welding and fibre-optic technology to deep-sea diving. Super-cold liquid helium is essential to making and running the superconducting magnets for MRI scanners and to manufacturing electronic devices from TVs to phones… A third of the world’s helium [ 2.1 billion cubic feet a year  out of a global market of 6.3 billion] comes from an underground reservoir in Texas built up under government auspices and run by the Bureau of Land Management. Such was the supposed strategic value of helium, a by-product of natural gas, that a reserve was created in 1925 to supply the gas to inflate airships. So jealously did America guard its helium that other countries had to fill dirigibles with flammable hydrogen—the Hindenburg was one of dozens that went up in flames as a result.

Once airships had drifted out of fashion, helium remained crucial to the space race and nuclear-weapons development. Nonetheless overall demand tapered. By the mid-1990s the cost of running the Federal Helium Reserve, which bought all the helium that gas firms could produce, was too steep to justify a buffer that was not needed. Lawmakers decided to close it and sell most of the accumulated helium to pay off debts of $1.4 billion….

Helium demand has grown by around 5% a year since 2000 with the advent of new applications, such as MRI scanners. Prices have doubled over the past five years. America’s conventional gasfields, the source of most helium, are depleting and ways to plug the gap left by the rundown of the reserve have proved difficult to develop. New plants in America and Australia are producing the gas but mishaps and technical difficulties at other new refineries in Qatar and Algeria have crimped supplies. This has encouraged firms such as Siemens and GE to look for substitutes for helium. As a result demand may expand by only 2.5% a year for the next decade or two, according to John Raquet of Spiritus Group, a consultancy.

Relief for the helium market seems destined to come from Russia, long a minor producer. The country has the wherewithal to create a reserve of its own. Gazprom appears to be gearing up to become a big supplier by 2018, just as America’s reserve is set to run dry (if it secures the cash to continue past October). Not everyone will be pleased that an arm of the Russian state may in future hold sway over their medical treatment and their children’s parties.

Helium: Inflation Warning, Economist, Sept. 28, 2013, at 68