The Unintended Consequences of Sanctions

The weaponisation of trade, the imposition of sanctions on sovereign foreign reserves and exclusion from SWIFT by the US could trigger a faster de-dollarisation among countries having the financial clout to do so

By Mrinal Roy

The war in Ukraine and the type of sanctions imposed may have far-reaching global economic and financial consequences. Data from the International Monetary Fund giving the Currency Composition of Official Foreign Exchange Reserves, published in December, shows that the US dollar, euro, Japanese yen, British pound and the Chinese yuan are the five major reserve currencies held by central banks around the world. The US dollar is the dominant currency holding 59.1% of the world allocated reserves. Only 2.7% of reserves are held in yuan. The dollar has been the world’s reserve currency.

However, past economic and financial sanctions have caused countries to adopt countervailing measures. In a bid to limit its exposure to US dollars, the Central Bank of Russia has spent years diversifying its reserve holdings, with a particular emphasis on building up exposure in euros, gold and the yuan. According to records, in mid-2021, 21.7% of Russian reserves were held in gold, 16.4% were in US dollars – down from more than 40% just four years ago – and 13.1% in yuan. Since 2014 China and Russia have severely reduced their dependence on the dollar for bilateral trade. Russia’s multi-year push to remove the dollar’s hold over its economy and financial markets has so far helped ease the impact of sanctions imposed by the US and its allies.

Undermining trust

Western sanctions cutting off Russia’s access to its foreign reserves give China a greater incentive to move away from the US dollar and euro and may push other countries to follow suit. A huge chunk of Russia’s $ 630 billion in foreign reserves is frozen. China might feel that further diversification of its US$3.2 trillion of foreign reserves would be appropriate. In other countries, policymakers might feel that the composition of their own reserves should be further diversified. They may favour increasing their yuan holdings.

‘Central banks are therefore starting to question whether reliance on the US dollar and basically putting ‘all eggs in one basket is a good idea’ said Gal Luft of the US based Institute for the Analysis of Global Security. Last month the US froze $7billon of Afghan reserves before releasing it to be split between humanitarian efforts for the Afghan people and American victims of terrorism, including relatives of 9/11.

Such actions undermine the sacrosanct principle that central banks’ foreign reserves are a store of wealth that is safe and accessible and which can be deployed as and when required. Freezing the dollar assets of central banks held in US financial institutions could therefore backfire on the world’s economic and financial order and erode trust in the US dollar.

Weaponisation

Analysts have cautioned that the weaponisation of trade, the imposition of sanctions on sovereign foreign reserves and exclusion from SWIFT by the US could trigger a faster de-dollarisation among countries having the financial clout and the political independence to do so.

It is noteworthy that Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, a move that would dent the US dollar’s dominance of the global petroleum market and mark another shift by the world’s leading crude exporter towards Asia. China buys more than 25% of Saudi Arabia oil exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Aramco (Saudi Arabian Oil Co).

In a bid to stabilize rising oil prices following the ban on energy imports from Russia, US President Joe Biden and British Prime Minister Boris Johnson who visited Saudi Arabia and the United Arab Emirates last week asked Saudi Arabia to increase its oil production. Saudi Arabia refused to do so.

Reports suggest that Saudi Crown Prince Mohammed bin Salman has already invited Chinese President Xi Jinping to his country. The two are expected to possibly discuss purchasing Saudi crude in yuan, instead of dollars. Experts warn that Saudi Arabia, which has been an American ally for decades, is drifting away from Washington as relations have soured owing to various reasons including the US renewed efforts to sign a nuclear agreement with Iran and its lack of support in the Kingdom’s long-drawn conflict with Yemen’s Houthi rebels.

Endless geopolitical shenanigans and games can boomerang. Sanctions are already having detrimental unintended consequences.

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Questionable Government Policies

In the UK and France, governments are envisaging a reduction of taxes on fuel over higher cost of living fears. In Mauritius, government is instead using its propaganda machine to build the narrative that fuel prices are comparatively cheaper than in a selected number of countries

 The war in Ukraine and the adverse effects of sanctions have triggered a rise of oil and gas prices, higher freight costs and food prices, etc. They are further eroding purchasing power and adding to the tremendous hardships and distress of people caused by the Covid-19 pandemic.

Against such a backdrop, the people expect governments to take cogent measures to cushion the adverse impact of rising prices on the purchasing power of citizens and in particular the more vulnerable. In the UK and France, the governments are envisaging a reduction of taxes on fuel over higher cost of living fears. In Mauritius, government is instead using its propaganda machine to build the narrative that fuel prices are comparatively cheaper than in a selected number of countries to justify the latest fuel price increases and mask the iniquity of oil pricing in the country.

For years now, the government has been using out of budget measures to raise funds by imposing a series of levies, contributions and taxes on the price of every litre of Mogas and gasoil bought by vehicle owners including some 225,000 owners of motorcycles and autocycles comprising field and factory workers or self-employed service providers who use them to commute to work. These motorcycle owners do not receive state-financed travel allocations. Why on earth is the tax burden of vehicles owners further worsened by the double whammy of imposing VAT on these taxes, levies and contributions?

These contributions and taxes, which inter alia also include contributions to the subsidy on LPG, flour and rice, the Covid-19 Solidarity Fund and to finance the cost of Covid vaccines, amount together with VAT to some Rs 25 or more than 41% of the current price of Mogas. Is this disproportionate tax burden fair on vehicle and motorcycle owners? Shouldn’t there be full public accountability and transparency in the use of these diverse funds? Is it not equally high time to overhaul this grossly iniquitous and questionable mode of financing and taxation on vehicle and motorcycle owners and ensure that these are part of normal budgetary financing?

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Payment of basic pension

Following the outcry from mainstream citizens, government decided to back-pedal on its flabbergasting decision taken last September to delay the payment of pensions till the fourth working day of the month in order to address the problem of overpayments flagged by the National Audit Office. Owing to weekends, the February and March pensions were paid on the 7th of the month. Did it not dawn on Ministers that such a delayed payment affects the meagre cash flow of pensioners and the timely payment of their monthly bills to avoid penalties and interests?

We also learn with dismay from the Minister’s press conference that a patient who is admitted in hospital for treatment for more than three months is not entitled to a pension. Do Ministers not realise that an elderly person under treatment for such a long period would require the totality of the pension due to take care of her/his health and obtain proper treatment and cure? Is it humane to deny senior citizens enduring long illnesses of such vital lifesaving funds when they need it most? Is that what a caring government does? How many patients are in this situation? What savings does such a deplorable approach generate against the backdrop of billions of Rupees wasted through botched decisions?

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Congested roads

Every new highway, flyover, bypass or road built to render the traffic more fluid spawns new bottlenecks upstream or downstream. The flyovers and bypasses built at Phoenix costing billions of rupees have created crippling bottlenecks at the Wooton roundabout. Government is already envisaging to invest billions of rupees to build flyovers at Wooton. Such a knee-jerk approach to costly infrastructural investments is unsustainable, the more so as heavy infrastructural constructions can trap water flow and be a source of flooding.

There were 610,658 vehicles registered as at June 2021. In the last ten years, the number of cars has doubled. This is the root cause of chronic congestion on our roads. For years now, the number of imported second-hand cars represent about half the number of new cars bought every year. Is this tenable? Is it not instead high time to cut down the number of second-hand car imports?

It is extremely short-sighted for Government policy to be only VAT driven, especially as the metro is meant to wean car owners away from using their cars to commute to work, thereby significantly reducing pollution and road congestion to cut down our carbon footprint.

These questionable government policies are yet again a jolting reminder that all is far from being well in the country.

* Published in print edition on 25 March 2022