Capitolis believes financial markets can aAnd should work better for everyone

BANKING & INVESTMENT PAN Finance Magazine Q2 2022

Capitolis believes financial markets can and should work better for everyone

As the leading capital marketplace driving financial resource optimization for market participants, Capitolis has an expansive vision of the financial services industry, its challenges, and its potential.

Capital markets – as currently designed, with the necessary measures implemented by regulators – face capital limits. Large institutions that deliver critical financial services are required to hold large amounts of capital, and they must continuously assess the total cost of the services they provide. This can constrain them from doing more of what they do best, delivering critical solutions to their customers. The knock-on effect of increasing costs of doing business impedes and diminishes overall market efficiency and economic growth. Without a solution to manage capital requirements the capital needs of the global economy can become increasingly constrained. Capitolis solves fundamental market inefficiencies by connecting banks, which have unique ability to originate, service and deliver critical financial services to their clients, with institutional capital providers that have investment capacity and are happy to partner with the banks.

Capitolis tailors and scales solutions to democratise access to capital—unlocking opportunities and reimagining what’s possible in the global economy. As unrivalled experts in finance and technology, Capitolis leverages its breadth of experience to build solutions that both meet clients’ needs and create access in the market, with innovation at the intersection of finance and technology. Founded in 2017, Capitolis’ technology enables financial institutions to optimise their resources, execute seamlessly with new market participants, and achieve greater access to more diversified capital, all of which enable fairer, safer, and healthier capital markets.

CAPITOLIS COMPRESSION AND OPTIMIZATION SOLUTIONS

Capitolis’ Compression and Optimization solutions provide clients the opportunity to free up capacity and manage capital requirements stemming from their derivatives portfolios. Reductions can be achieved by overlaying trades to rebalance risk, collapsing trades to remove risk, or through Novations, whereby risk is transferred between counterparties.

Clients access Capitolis services on a centralised system which provides insights into portfolio inefficiencies. Through the optimization platform, clients gain insights into their portfolio and are able to participate in bilateral and multilateral optimizations and compression opportunities to achieve significant increases in efficiency in their derivatives portfolios. Capitolis is revolutionising a process that has traditionally been highly manual and operationally intensive. Capitolis’ Compression service combines world-class mathematics and algorithms, a flexible product process, a respected sales team and a dedicated adoption team that work end-to-end to solve clients’ most pressing resource problems.

COMMITMENT TO PROVIDING SOLUTIONS

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Gil Mandelzis Founder & CEO

In August 2021, Capitolis announced the acquisition of LMRKTs, an industry-leading multilateral optimization and compression provider. The LMRKTs acquisition allowed Capitolis to provide banks, asset managers, and hedge funds with the broadest and most complete trade compression solutions available in the market. The introduction of their existing network of clients to one another served to further expand their optimization options. They have doubled their engineering team over the last 12 months to further enhance and improve technology and innovation.

SOLVING FOR REGULATORY COMPLEXITIES

Beginning in 2020 Capitolis has been focused on developing a leading solution for clients to manage derivatives exposures and capital requirements under the Basel Committee’s Standardized Approach to Counterparty Credit Risk (SA-CCR). plementation of SA-CCR at the start of 2022, Capitolis successfully completed four multilateral SA-CCR proof of concept optimization runs, working closely with clients to prepare for the upcoming calculation changes and associated data complexities, with over 25 of the world’s largest financial institutions participating. Through their monthly working groups with over 40 participants (existing clients and non-clients alike) they were able to make a significant impact on the industry’s preparedness for the critical SA-CRR transition this year.

Building upon the work done to prepare clients for SACCR optimization, Capitolis has completed seven successful multilateral runs through mid-May 2022, with growing participation and regular benefit for the industry. This success sets the stage for an expanding footprint in the SA-CCR landscape in 2022. To date, Capitolis has delivered reductions in SACCR notional amounts in excess of $1 trillion. tion is a complement to Capitolis’ extended success in its Novation platform and bilateral compression and optimization services. For the last five years, Capitolis has been the market leader in bilateral compressions and novations, where they have pioneered automation-driven solutions to optimise over $14 trillion in notional amounts.

AGILE AND TRUSTED PARTNER

In times of market volatility and uncertainty, customers come to Capitolis for trusted, agile, and rapid responses and the established network of the world’s largest dealers and other financial institutions.

An example of this— following Russia’s aggression in Ukraine, Capitolis was approached by the world’s leading financial institutions, many of which have large historical exposures denominated in Russian ruble, seeking a targeted solution to manage and reduce derivatives exposure. Capitolis worked quickly to bring together a large network of global banks and, through Capitolis’ trade optimisation platform, supported a dozen banking entities to successfully reduce their exposure to Russian ruble and mitigate the impact of settlement failures due to sanctions or other market happenings. These banks needed the right technology, and a trusted third party that had established its capabilities and credibility with them to execute this. Through its trade compression platform, Capitolis was able to reduce these large exposures and promote financial soundness and stability for the benefit of the whole capital markets system. Through Mid-May, Capitolis has helped clients remove in excess of $20 billion in settlement exposures.

INNOVATIVE THOUGHT LEADER

Capitolis also understands that innovation must be coupled with industry education. To have the evolving market understand how regulatory changes impact them, the company distributes thought leadership, offering insights to the broader FX community, to clients and to other key stakeholders in the industry. Sharing information is crucial in the evolution of the capital marketplace. Capitolis believes in driving growth with purpose to make a positive impact on the world. Their offerings revolutionise the market and propel the industry forward — while actively enabling a safer, more stable market that protects every participant.

WORLD CLASS BACKING

Capitolis is backed by leading venture capital and financial firms that both back them, and serve as clients. To date the company has raised $280 million in funding and is backed by top fintech investors including Canapi Ventures, 9Yards Capital, and SVB Capital– most notably with our recent Series D funding raise of $110 million, bringing us to a $1.6 billion valuation. Other investors include top VC’s, Andreesen Horowitz, Sequoia Capital, and Index Ventures, as well as our clients, including JP Morgan, Citi, and State Street. Capitolis currently employs 150+ global professionals in its companies and offices in New York, London, and Tel Aviv.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

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Affordable housing – in pandemic times, what works and what doesn’t?

Emily Hamilton

Senior Research Fellow, George Mason University

HOW HAVE PANDEMIC-LINKED ECONOMIC SHIFTS AFFECTED HOUSING MARKETS?

Emily Hamilton: During the early stages of the pandemic, there was a big slowdown in localities issuing building permits and homebuilders starting housing construction, due to early efforts to mitigate the spread of COVID-19. It’s taken a long time to work out of that, as well as ongoing supply constraints.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

As a result of this big reduction in new houses, house prices in many parts of the country have increased drastically since the start of the pandemic.

There have also been increasing challenges of people not being able to afford housing that they were already in prior to the pandemic, due to job losses and income insecurity.

COMMUNITIES ARE USING A VARIETY OF STRATEGIES TO MAKE RENTING OR OWNING A HOME MORE AFFORDABLE. WHEN IT COMES TO WHAT THE RESEARCH SHOWS, WHAT ACTUALLY WORKS?

Emily Hamilton: Successful strategies for improving housing affordability are policy reforms that make it feasible for homebuilders and developers to provide more housing, especially at the low-cost end of the market.

For example, Houston is known for expanding outward. It should also be known for some of the reforms that it’s done to make more housing within neighborhoods that are closest to some of its job centers possible.

Houston reformed its minimum lot size requirements, which has made a lot of townhouse construction feasible. As a result, the median home price there is below the national median, even though Houston has been growing rapidly in terms of its economy and its population for several decades.

ARE THERE AFFORDABLE HOUSING STRATEGIES THAT DON’T WORK AS WELL?

Emily Hamilton: One policy I’ve studied that doesn’t work very well in promoting housing affordability is inclusionary zoning. This is a policy that many localities across the country have adopted in recent years. Under inclusionary zoning, local policymakers require homebuilders to provide a certain percentage of below-market-rate units as a condition of being able to build a new development.

I’ve found that under inclusionary zoning, localities have seen higher market-rate prices than what they could have expected without the program. Inclusionary zoning programs in general produce very few units as a percentage of a locality’s total housing stock. They’re not doing a good job of serving the populations who they’re intended to help, while they also make housing potentially more expensive for everyone else.

HOW DOES RACIAL DISCRIMINATION PERSIST IN TODAY’S HOUSING MARKET?

Emily Hamilton: Today’s land use regulations started developing in the early 20th century, and they were an outgrowth of efforts to segregate neighborhoods and localities by race, which the Supreme Court declared unconstitutional in Buchanan v. Warley. When they were no longer permitted to segregate real estate markets with tools that explicitly separated regions by race, local policymakers turned to zoning rules that separated households by income directly and oftentimes by race indirectly. It continues today.

In part as a result of these racial segregation policies, minority households tend to have

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lower incomes than white households in the U.S. And because lower-income households tend to spend a larger portion of their income on rent or mortgage payments, rules that make housing more expensive disproportionately affect lower-income households and minority households.

WHEN IT COMES TO FACTORS THAT AFFECT HOUSING AFFORDABILITY, WHAT TRENDS ARE YOU SEEING?

Emily Hamilton: We’ve seen a decades-long trend of less housing permitted and built, relative to the country’s population. There was a big drop in housing permitting during the 2008 financial crisis, and more than a decade later, housing starts still haven’t recovered.

And this issue that in the past was really a big problem for a few coastal markets – like the Bay Area and New York City and Boston – is increasingly becoming a problem across the country as a whole. Cities in the Mountain West and places like Austin are increasingly becoming expensive and not offering opportunities for people who want to live there.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

Thomas Marois

Reader in Development Studies, SOAS, University of London

David McDonald

Professor, Global Development Studies, Queen’s University, Ontario

Susan Spronk

Associate Professor of International Development and Global Studies, L’Université d’Ottawa/University of Ottawa

It’s time for the Canada Infrastructure Bank to reclaim its public purpose

The Canada Infrastructure Bank (CIB), a federal government financial institution, opened its doors five years ago with great promise, vowing to deploy $35 billion of investments towards “the next generation of infrastructure Canadians need.”

But rather than investing public money in public services, the CIB has instead privatized our water, transportation and electricity. For every dollar invested by the CIB, the hope was that $4 to $5 would be invested by the private sector.

This extraordinary leap of faith in private capital and market forces was baked into the CIB Act:

“The purpose of the Bank is to invest and seek to attract investment from private sector investors and institutional investors, in infrastructure projects in Canada or partly in Canada that will generate revenue.” Five years later, the CIB has not been able to deliver on its promise. Of the $19.4 billion invested to date, only about one-third has come from private and institutional investors ($7.2 billion).

The public-private partnership model (PPP) promoted by the CIB has failed. Typically, PPPs involve long term contracts where public money supports private, for-profit delivery of public services and infrastructure.

In Mapleton, Ont., for example, the CIB aimed to funnel private investment into public water provisioning in a form of PPP. Local authorities pulled out when the contractual terms worked against the public good, underscoring the problems of PPPs that have been well documented around the world.

SAFEGUARDING A PUBLIC PURPOSE LEGACY

Not all public banks operate in this way. The Council of Europe Development Bank, for example, recognizes PPPs as inherently problematic, noting that they can “require extensive use of consultancy and legal services at considerable additional costs”. Kommunalbanken, a Swedish public bank, focuses entirely on publicly owned and publicly operated infrastructure.

It’s not too late for the CIB to renew its vows and become a more pro-public institution. In fact, there are signs this is already happening. Some of the CIB’s investment partnerships include projects that promote public-public partnerships by funding public sector zero-emission buses and municipal building retrofits. The CIB also funds public interest projects, like decarbonizing production.

But more needs to be done to remake and safeguard the CIB as a public bank with a public purpose.

First, it needs a far more robust sustainability mandate. If a project cannot demonstrate how

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it will reduce carbon emissions or protect the environment, it should not get funded. The publicly owned Finnish Climate Fund and the Dutch Invest-NL incorporate such binding conditions.

Second, the CIB needs to improve its governance. Current provisions for the board of directors are vague and subject to political cycles. The CIB Act fails to specify who is appointed on the board and on what representational basis.

A more robust governance framework would see broad stakeholder representation written in to the bank’s legal framework, much like the German public development bank, Kreditanstalt für Wiederaufbau. Its highest governing forum, the Board of Supervisory Directors, includes designated representatives from government, trade unions, municipalities and other key areas.

TIME FOR CHANGE

The recent Private Member’s Bill C-245, intended to amend the CIB Act, is a step in the right direction. Put forward by Manitoba MP Niki Ashton, it is pitched as “an alternative to the Liberals’ privatization agenda that uses public ownership to support communities in the fight against climate change.”

It starts with jettisoning the CIB’s current emphasis on PPPs by having the CIB prioritize lending to all levels of public institutions, including northern and Indigenous communities. It is also a first step in improving governance by proposing the inclusion of First Nations, Inuit and Métis members on the board. Moreover, binding free, prior and informed consent (FPIC) of Indigenous Peoples needs to be one part of a broader strategy of public financial institutions in Canada contributing to reconciliation.

The CIB must also take leadership from the Costa Rican Banco Popular and commit to gender equity in all of its decision-making bodies.

The goal should be to foster inclusive, green and democratic networks that mutually reinforce the public purpose of the CIB. Recent scholarship suggests democratization and inclusion lead to public banks funding better and greener infrastructure with fewer social conflicts.

THE FIVE-YEAR ITCH

The notion of changing the CIB is within reach. This year, the CIB must conduct its first fiveyear review and deliver it to Parliament.

Canadians should be aware of this opportunity and communities across Canada should be engaged in it. Ask the CIB about its public consultation plans, reach out to MPs, see how unions are responding and encourage cities to demand more of the CIB.

The CIB has failed on its own terms, presenting an opportunity to reclaim its public purpose. Rather than underwriting private interests and the privatization of public services, the CIB can build a democratic institutional legacy of providing patient, low-cost and appropriate financing for green and just community transitions in the public interest.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

Laura Nkula-Wenz

Lecturer and Researcher at the African Centre for Cities, University of Cape Town

Africa’s urban planners face huge corruption pressures: some answers

CORRUPTION IS COMMONLY DEFINED AS THE ABUSE OF ENTRUSTED POWER FOR PERSONAL GAIN.

Understanding and tackling corruption at the city-scale is crucial because cities are increasingly becoming home to much of the global population. According to the United Nations, more than two-thirds of the world’s population will be living in cities by 2050. The fastest urban growth is happening in Africa and Asia.

In our Cities of Integrity project, we worked with urban planners and their respective professional bodies in South Africa and Zambia. The aim was to understand how they experience and deal with corruption in their daily practice. We also sought to imagine creative ways in which their professional community could play a role in strengthening transparency and collective accountability.

As we explain in this animated video, corruption in urban development can lead to dysfunctional infrastructure that does not meet public needs. It also hardwires injustice into city systems for decades.

Urban property is worth more than the combined value of stocks, bonds and shares globally and – especially in volatile economic times – is a hot asset class. The immense fortune that can be made from urban land and real estate also attracts unsavoury characters with a desire to bend the rules.

In this complex context, urban planners are trying to keep the balance between public needs and private interests. This makes them particularly prone to corrupt influences. This is because they allocate development rights – through zoning, for example. They also decide on the location of key public infrastructure such as roads or schools. Such decisions have a great impact on the value of land and the price of property. They can generate large windfall profits. UNDER PRESSURE

In our online survey, nearly half (46%) of the 113 South African planners said they had been asked at least once to ignore or violate a planning rule, policy or procedure to achieve a particular outcome.

A similar proportion – 43% – indicated that colleagues, superiors or senior officials had a personal interest in planning activities they oversaw, at least on occasion.

Among our 98 Zambian respondents, these numbers were even higher. 73% had been asked to favour a particular party in their decision-making.

In both countries planners flagged political interference as a major impediment to maintaining professional integrity. This was a more common complaint for Zambian planners.

For their South African peers, the greatest concern was the lack of capacity and efficiency in

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local government. As one respondent lamented:

Politicians don’t understand oversight. There is a very thin line between oversight and interference, and they cannot differentiate between the two.

FOSTERING PROFESSIONAL INTEGRITY

In both countries, the majority of planners also believed that land was frequently being captured by powerful interest groups with impunity. Thus, only 15% of South African planners believed that the general public or poorer groups of society benefited most from urban development. Here, our findings also correspond with recent figures from the independent pan-African research network Afrobarometer. It found that 67% of the general public in South Africa believed that rich people were very likely to get away with bribing officials to falsely register land that does not belong to them.

Finally, both South African and Zambian planners displayed low levels of faith in the effectiveness of current compliance-focused anti-corruption measures. A prevalent sentiment was that some planning codes were “divorced from reality”. They also believed that no procedure could compensate for a lack of ethical principle. As acclaimed public affairs author and former municipal official Crispian Olver aptly noted in one of our public roundtable discussions:

A transparent system, run by people without integrity, is equally corrupt.

Nonetheless, the majority of South African and Zambian planners still felt a strong sense of public purpose in their work. Here, our data corroborates the idea espoused by public affairs scholars Wendy Hayes and Beth Gazley that professional networks can help enforce positive value systems and thus help to proactively tackle corruption.

In both countries, respondents regarded professional training courses on ethics and integrity as priority measures to be taken by their respective professional associations. However, as our research shows, for such initiatives to not become “tick box exercises”, it is important to understand the local planning context and its specific corruption pressures first, before workshopping appropriate tactics and tools to bolster professional integrity.

COLLECTIVE ACCOUNTABILITY

While our research suggests that professional integrity has an important role to play in combating urban corruption, we also recognise that individual changes in behaviour alone are not enough to address urban corruption challenges on the continent. Legal reforms of outdated planning laws, public service reforms and greater transparency in procurement processes will be equally necessary.

Nonetheless, we argue that professional networks can play a key role in strengthening collective accountability among urban planners and support them in becoming champions of urban integrity.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

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Shanghai: world’s biggest port is returning to normal, but supply chains will get worse before they get better

Sarah Schiffling

Senior Lecturer in Supply Chain Management, Liverpool John Moores University

Nikolaos Valantasis Kanellos

Lecturer in Logistics, Technological University Dublin

Shanghai is slowly emerging from a gruelling COVID lockdown that has all but immobilised the city since March. Although Shanghai’s port, which handles one-fifth of China’s shipping volumes, has been operating throughout, it has been running at severely reduced capacity. Many shipments have either been cancelled, postponed or rerouted to other Chinese mega-ports such as Ningbo-Zhousan.

With the city due to fully reopen on June 1, the port is going to be in overdrive as manufacturers try to fulfil backlogs, with serious knock-on effects around the world. It is an example of how global supply chains in 2022 have been destabilised in ways that were not apparent at the beginning of the year. In January, we predicted ongoing disruption as the world economy continued to recover from the pandemic. In fact, things have got worse.

Besides Shanghai, other major Chinese ports such as Shenzhen have also been affected by lockdowns. And then there is Ukraine. The war has pushed up prices for goods and services even higher than predicted rises for 2022, as well as adding to logistical difficulties.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

According to the New York Federal Reserve’s global supply chain pressure index, which takes account of issues such as freight rates, delivery times and backlogs, supply chains are under unprecedented pressure – and have been getting worse recently.

UKRAINE AND FOOD

Ukraine might not have been on many people’s radar as a key economic partner, but it was already seen as a major bottleneck for food supply chains long before the war got underway. This was due to poor port infrastructure and the large concentration of world maize and wheat supplies moving through. The war was therefore always going to have a devastating impact on international supplies.

You can get a good sense of the ripple effect on prices by considering a bag of fish and chips. Sunflower oil for frying used to be imported from Russia and Ukraine. Flour for the batter came from Ukraine. Much of the fish used to be caught by Russian trawlers but is about to be affected by sanctions. In all cases, this translates into shortages and/or raised prices.

Then there is electricity and gas, whose prices have skyrocketed thanks to sanctions, affecting everything from deliveries to food production. And since Russia is a key player in the fertiliser market, even domestically grown potatoes will become more expensive soon enough.

With Ukraine’s ports blockaded now for months, Russia is also being accused of holding food hostage for millions around the world. Developing countries are being hit hardest, while in richer nations, the poorest are bearing the brunt. Even when the conflict ends, restarting food exports from Ukraine will not be easy. Capacity on land transport is limited and the sea, in addition to the Russian blockade, is heavily mined.

THE DOUBLE WHAMMY

Beyond food, the war’s impact on energy and fuel prices has made both production and transport more expensive across the board, exacerbating the effects from China’s COVID problems. This has hit major western players, including Apple, Tesla, Adidas, Amazon and General Electric. Easing restrictions in China are now allowing some, such as Volkswagen and Tesla, to restart production, but logistics delays linger, with everything from healthcare to entertainment gadgets affected.

Around the world, many major ports experienced congestion in 2021, with the US west coast ports of Los Angeles and Long Beach enduring long periods with dozens of ships waiting to dock. This eased noticeably in early 2022, but Shanghai port’s return to normal operations is likely to lead to a torrent of products heading west as manufacturers do their best to clear order backlogs.

This will probably mean bottlenecks and delays at the western end in the coming weeks. Meanwhile, the heightened demand for ships will potentially affect freight prices: these went up at least five-fold in 2021 as suppliers struggled to deal with pent-up COVID demand, and even after reducing in 2022 they are still about four times the pre-COVID rate. Any further increases will put more pressure on consumer prices.

THERE IS HOPE

Even if there are no more China lockdowns and the Ukraine crisis does not spread, the global supply chain is clearly going to be under heavy pressure for the rest of the year. According to one recent UK survey, three-quarters of companies think 2023 will be tough too.

For smaller businesses in particular, a failure to adapt to the changing environment could threaten their survival. At a time when fears of a recession are already in the wind, this could make longer-term economic recovery all the more difficult.

But for the medium term at least, there are reasons to be cautiously optimistic. For decades, most supply chains were focused on cutting

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costs. Manufacturing was outsourced to specialist suppliers, ideally in countries with lower labour costs. Firms kept minimal inventories and used short-term contracts to be as flexible as possible.

The weaknesses in this “just-in-time” system were exposed by COVID and the US/China trade war, and now many companies are putting more emphasis on being resilient and also having a clearer view of all the suppliers in the chain. In this “just-in-case” model, some inefficiencies are considered an advantage rather than a waste of money. Cost is still of course a key consideration, but product quality and availability are now seen as more important. Companies are also diversifying their supplier base so that they are not as dependent on China (with the additional benefit of reducing their carbon footprints). US players such as Walmart, Boeing and Ford are among those turning to locations nearer their home markets, while numerous UK and mainland European companies are following suit.

Shifts like these should at least make supply chains a bit more robust in future, even if this probably also leads to higher prices. At the same time, we see efforts to anticipate future crises. The EU and US plan to develop an early warning system to identify future global disruptions to semiconductor supply chains, which have affected everything from production to cars to video game consoles. More broadly, a recent UK report called on the government to establish a resilience task force and work with industry to increase visibility within supply chains.

That sort of approach would be well worth implementing. Supply chains are going through their most turbulent period in many years, but learning lessons and adapting will hopefully mean that the worst can be avoided in future.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

Yuriy Gorodnichenko

Quantedge Presidential Professor of Economics, University of California, Berkeley

Ukraine’s economy went from Soviet chaos to oligarch domination to vital global trader of wheat and neon – and now Russian devastation

Ukraine’s economy continues to operate despite the battering the country is getting from the Russian military. Many factories and businesses still function. Other industries like those in information technology have barely missed a beat, with workers continuing to work from areas out of the direct line of fire.

But Ukraine has been largely transformed into a war economy. For example, a women’s shoe maker is using Italian leather to craft military boots, a construction company’s dump trucks were converted into antiaircraft launchers, and a steel and mining group has been making anti-tank weapons and concrete shelters. And many IT workers have joined Ukraine’s hacker army aimed at defending infrastructure from cyberattacks or going on the offensive against Russia.

Yet the economic damage is dire. In the early days of the war, Ukraine’s central bank estimated total output dropped by half. The government estimates Russia has already destroyed well over US$500 billion in economic assets. Substantial damage to airports, seaports and bridges has crippled the country’s infrastructure and ability to trade with other countries.

Beyond its importance to feeding, fueling and supporting its own citizens, Ukraine is also a vital part of the global economy with its exports of wheat, corn and neon. As a native of Ukraine and economics professor, I’d like to provide a primer on the Ukrainian economy, how much it has changed since it was a Soviet republic and the consequences of Russia’s war.

UKRAINE’S COMMAND ECONOMY COLLAPSES

Ukraine inherited a “command economy” when it became an independent state after the dissolution of the Soviet Union in 1991. In a command economy, all decisions involving production, investment, prices and incomes are determined centrally by a government.

Moreover, much of it was tied to a Soviet obsession with heavy industry and a massive military industrial complex. In other words, Ukraine’s economy was great at mining ore and building intercontinental ballistic missiles but less so at making the kinds of consumer

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goods vital for a modern economy.

And so, the economy collapsed soon after independence. Gross domestic product plunged by over 60% in the early 1990s, and inflation skyrocketed to more than 10,000%. For ordinary Ukrainians, this collapse meant massive poverty and hardship: Approximately 50% of households lived on less than $5.50 per day, and life expectancy declined by five years.

This led to the mass privatization of stateowned enterprises as small as a grocery store to as large as giant steel mills – just like in Russia. This also created the class known as the oligarchs, made up of former Communist elites and others with connections in the government who got control over major factories and other key productive assets at little or no cost. Some estimates suggest that over 50% of GDP was controlled by oligarchs.

Although the oligarchs initially helped Ukraine’s biggest businesses restore their productive capacity, jump-starting the economy, they quickly began using their connections to stifle competition. Corruption was endemic and the economy struggled to grow or diversify beyond producing basic commodities and equipment like steel, iron ore and mining equipment. In 2006, for example, base metals made up 43% of exports, followed by mineral products at 10% and chemicals at 8.8%.

And Russia was Ukraine’s top trading partner, buying 56% of all its exports. The U.K. was a very distant second with just 3.4%.

Ukraine’s sources for imports were only a little more diverse. Goods from Russia made up 16% of Ukraine’s imports, second only to America’s 23% share. UKRAINE TURNS WEST

Ukraine’s economy began to shift radically around 2014, when Russia annexed Crimea and fomented insurrections in the eastern part of the country.

The events that led to the annexation were largely inspired by a desire on the part of Ukrainians to form closer economic and political ties to Europe and end corruption. An agreement forged in 2013 to more closely integrate Ukraine into the European Union was abruptly dropped a few days before it was to be signed, and the government signaled it planned to align more closely with Russia. Massive street protests ensued, which eventually drove the pro-Moscow president from power in what became known as the Maidan Revolution.

Russia responded by taking Crimea and backing separatists in the Donbas region.

Since then, trade with Russia has plunged as Ukraine strengthened ties with other countries, most notably those in Europe. The government almost immediately resumed negotiations with the EU over the trade agreement and signed it, which lowered or removed tariffs on most goods and resulted in the EU becoming its biggest trading partner.

In addition, the economic crisis brought on by the conflict in the east led the International Monetary Fund to offer a $17.5 billion bailout in exchange for economic reforms that included a crackdown on corruption, an independent central bank and improved democratic processes, many of which Ukraine subsequently implemented. As a result, Ukraine began to send a wider range of goods to the world, especially agricultural products such as wheat and sunflower oil, which was its biggest export ahead of base metals in 2019. Ukraine has some of the most fertile soil in the world.

Another key growth industry in Ukraine has been information technology, which made up 26% of export revenues in 2020. In fact, IT services was its top export to the U.S. in 2021.

ECONOMIC GAINS AT RISK

Ukraine’s increased integration with the global economy means many of its goods play critical roles in some markets.

Ukraine was expected to make up 12% of global wheat exports in 2022. Egypt, Tunisia and Algeria, for example, depend heavily on Ukraine for their wheat, and there are concerns of famine as a result of Russia’s blockade on ships leaving Ukraine. The picture will only get worse the longer the conflict goes on and if farmers are unable to plant their seeds while war is raging.

Ukraine also plays a critical role in the production of neon, an inert gas that is a key component for lasers used in making chips. Ukraine produces 90% of semiconductor-grade neon used in the U.S.

It’s still unknown how many civilians Russia’s war in Ukraine has killed, and there’s no knowing when the destruction will end. But it’s likely that another victim of the invasion may be Ukraine’s economy and the progress it has made transforming from an unbalanced Soviet economy into a diversified modern one.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

Michael E Odijie

Research associate, UCL

Poorva Karkare

Policy Officer, ECDPM

Why import restrictions aren’t enough to help Nigeria industrialise

Nigeria has a strong ambition to industrialise. It has relied heavily on the restriction of imports of certain goods targeted for domestic production. But for Nigeria’s industrialisation drive to succeed, it needs a broader array of industrial policy tools than simply import restrictions.

These tools should include addressing binding constraints in different sectors to raise productivity. And addressing the flaws in the design and implementation of industrial policies.

A further complicating factor is regional integration, specifically Nigeria’s approach to it, and a lack of capacity both in Nigeria and the Economic Community of West African States to manage illegal cross-border trade.

Nigeria’s neighbour, Benin, an entrepôt economy, is a major supplier of re-exported goods to Nigeria. With close ethno-cultural affinities there is thriving informal cross-border trade between these countries. At the same time, there is a fledgling smuggling economy in Benin with links to the highest echelons of government.

In Nigeria, the survivalist informal trade is seen as organised smuggling that jeopardises the country’s industrialisation ambitions. Curbing this trade therefore is a rather pressing political issue in a country trying to boost domestic production.

As a result, the interest on the Nigerian side is in heavily regulating, and not facilitating, trade. Nigeria perceives a greater threat from smuggling through neighbouring countries, than benefits by engaging in regional trade given limited markets.

We conducted research focusing on the context of Nigerian government’s decision in 2019 to close its borders with its neighbours.

We found that it wasn’t a sudden event. Rather, that it was a continuation of policy decisions to curb smuggling, which was perceived to undermine the country’s industrialisation drive. This affects how trade facilitation is viewed, with implications for support programmes.

We looked at rice and pharmaceuticals because of their relevance to the Nigerian economy and the region. Through these two sectors, we analysed the shortcomings in Nigeria’s industrialisation policies and provided pointers for improvements.

NIGERIA’S TRADE AND INDUSTRIAL POLICIES

Industrial policies have often been a response to economic crises following a fall in oil prices. Governments consequently tend to rely on import restrictions and foreign exchange controls to incentivise domestic production. Nigeria’s focus has been on the so-called backward integration policy . Under this approach imports of designated products are limited to a handful of companies through licences and quotas. Import licences are gradually phased out as these firms ramp up local production.

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This policy was instituted for several sectors. One of them was rice. The measures included:

• putting in place a differential import duty and levy system

• banning rice imports through land borders, and

• providing support to ramp up local production.

But successive governments have not paid enough attention to the whole value chain. Rice milling capacity, for example, is constrained by continued electricity disruptions as well as lack of local markets for spare parts of milling equipment. This elevates the operating cost of mills, and increased disruptions. The effect is a reduction in the competitiveness of locally produced rice.

In addition, farmers struggle with high input costs. Transport is expensive and fuel prices are high.

Nigeria’s industrial policies have focused on self-sufficiency. But other research shows that top-down policies often lack the necessary groundwork and consultation with implementing agencies to determine their feasibility.

A similar pattern can be seen in the pharmaceutical sector. Firms have received support, mainly through import restrictions. But here too not enough has been done to overcome other binding constraints. These include poor infrastructure, a lack of access to finance and a restrictive regulatory environment.

Another problem we identified in this sector was that objectives weren’t clearly defined. This made performance monitoring inefficient. In turn this resulted in policies failing to provide an environment for interactive learning through, for example, joint ventures with foreign firms. As a result, development in the sector remains limited.

Other dynamics also affect the sector. Firms generally support government policies towards self-sufficiency. But – being both producers and importers – they also continued importing finished goods to ensure an uninterrupted access to medicines from a healthcare perspective. This circular flow and arbitrage has held back the sector, although it’s been profitable for the firms involved.

In addition, informal imports remain a big concern.

We identified other major gaps in policy design.

DESIGN AND IMPLEMENTATION FLAWS

Industrial policy should be about acquiring technology or tacit knowledge. But it should also be about dynamic economies of scale. That is, it is necessary to generate the demand for domestically-produced products, preferably through a form of export-orientation, and not just focus on increasing their supply. This consideration seems largely missing in Nigeria’s industrial policies.

In addition, the heavily politicised nature of policy formulation and execution means that there have been numerous policy shifts, negatively affecting continuity. In some cases, firms run campaigns to make policy reversals difficult.

Another problem is the leakage of resources through corruption and other inefficiencies. For instance, the differential import duty and levy system in the rice sector, under Goodluck Jonathan, saw significant corruption and rent seeking. Large firms were the biggest beneficiaries.

There are also a number of other inefficiencies. For instance, the Anchor Borrower Scheme, under President Muhammadu Buhari, has relatively low repayment rates on loans. The scheme was designed so serve farmers in Northern Nigeria - an important electoral constituency.

The procurement system for pharmaceuticals is also riddled with inefficiencies.

WHAT WAY FORWARD?

As long as industrial policies in Nigeria are introduced as a crisis response, import restrictions will continue to be the focus. Curbing smuggling is likely to remain a more pressing concern for the government, rather than trade facilitation.

In the absence of effective performance management, industrial policies are likely to be captured by interest groups without significant development of productive capacities. As our research shows, shortcomings in sector performance, rice being an example, will be blamed on rampant smuggling, without sufficient regard to production constraints in the wider value chain. Uncoordinated action and untargeted policy support, as has been the case with pharmaceuticals, will mean that firms continue to depend on import restrictions to remain competitive.

To break this cycle there is need for a multi-pronged approach that ensures the country’s industrialisation ambitions are supported along with trade facilitation given the close link between the two.

Given the different sector dynamics, a onesize fits all approach may not bring the desired benefits. Thus Nigeria needs a broader array of industrial policy tools to address the binding constraints in different sectors to raise productivity. This includes introducing the right balance between incentives (essentially targeted and time-bound learning rents) and compulsions (threat of withdrawal of support in case of non-performance), or credible commitments.

Given their political nature, the power structure within which industrial policies are introduced needs to be carefully examined to ensure optimal results. In short, industrial policies should entail strategic coordination to resolve several organisational, structural and institutional challenges. This requires a whole-of-government approach.

Regional commitments, such as trade facilitation, are implemented at the national level. For policymakers and development partners interested in trade facilitation as a tool to promote regional integration this means making sure there’s alignment with national industrialisation ambitions. Otherwise, there is a risk that previous efforts towards trade facilitation will be undone.

Apart from this, as a sector develops and matures, there is greater demand for rules based engagements, including trade facilitation. And, given Nigeria’s reservations, it is essential that interventions effectively addresses the problem of smuggling. This requires a problem-driven approach that is bottom-up and with political buy-in.

Ensuring the success of trade facilitation by generating the demand for regional cooperation also requires a sector-specific approach. In the case of rice this could include exploring opportunities for a regional value chain, and not just regional trade, through negotiated cooperation. In the case of pharmaceuticals, it would require compatibility in regulatory procedures so that domestically-produced medicines are easily traded in the region and there is quality assurance.

TECHNOLOGY PAN Finance Magazine Q2 2022

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Plan to become a ‘cryptoassets hub’ may just be the UK government hedging its bets

Matthew Shillito

Lecturer in Law, University of Liverpool

In a busy start to April 2022 for the British chancellor, Rishi Sunak announced his intention to make the UK a “global hub for cryptoassets technology”. Put simply, this means he wants the country to be an attractive place for cryptocurrency companies to operate. For the government, this requires a delicate regulatory balance between preventing financial crime and protecting consumers, and allowing cryptocurrencies to flourish. If all goes to plan, greater engagement with the sector could result in a welcome boost to the UK economy.

TECHNOLOGY PAN Finance Magazine Q2 2022

It’s early days of course, and many central banks and economists remain unsure of the role cryptocurrencies should play in a nation’s financial makeup. But Sunak’s plans featured some eye-catching proposals, including removing tax barriers, and developing a non-fungible token (NFT) with the Royal Mint.

But the key element was a proposal to bring a particular element of cryptocurrencies, “stablecoins”, within the scope of existing UK banking regulation. Stablecoins are widely considered to be at the safer end of the sector, where the notorious volatility of other cryptocurrencies like Bitcoin is replaced with something more reliable. So where Bitcoin’s value is derived purely from levels of confidence and demand, stablecoins are backed by other assets. Usually this means traditional currencies (usually the US dollar), but some are attached to commodities like gold. Either way, the aim is the same – to keep their value as close to constant as possible, making stablecoins more useful as a reliable medium of exchange.

Stablecoins may also have attracted the UK government because they offer fast transactions, at low cost and without borders. This allows users to make speedy global transactions with individuals and businesses, without the need to exchange currencies into a local tender. Other appealing factors of stablecoins include their transparency, in that every single transaction is recorded and publicly visible. They are also (largely speaking) under centralised control, in the same way that traditional banks have control over customers’ accounts.

It makes sense then, that as the UK dips its toe into cryptocurrencies, it is stablecoins which have most appeal. An alternative approach would be to introduce a central bank digital currency, as China is doing, but this is time consuming and expensive. A well-regulated stablecoin space will at least get the UK involved in the sector while the Bank of England decides whether or not to commit to a digital currency of its own.

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CRYPTIC CRYPTO

But the lack of detail around the UK proposals – what regulation will look like and what it hopes to gain – remains a concern. So too is its recent lack of progress in dealing with a huge part of the modern financial world.

For example, there have been promises since 2015 about regulating of cryptoassets, with little beyond tax issues and preventing money laundering being forthcoming – and both have had a restrictive impact on the sector.

The UK’s financial services regulator meanwhile, has indicated recently that it is more focused on preventing risk than helping crypto technology to flourish. Perhaps then, the UK is not as welcoming to innovation and crypto technology as it makes out.

Nor has the treasury provided any clear detail about what stablecoin regulation would actually involve. Yet to encourage wider use of stablecoins it would at least need to bring in some kind of registration system and a mechanism for consumer compensation should the stablecoin ever fail. Without this, a stablecoin could indeed fail, causing major damage to the economy, the wider crypto sector and to individual investors.

It is also questionable to what extent the UK can become a global crypto leader, as the most successful stablecoins all peg, to some degree, to the US dollar. (Although this could change as the US and EU adopt tougher stances on cryptocurrencies.)

The UK may well hope to gain a greater foothold in the relatively safe (and controllable) world of stablecoins and enjoy the potential benefits for the pound as an underpinning currency. But in reality, it will take much more than the measures announced so far to make any meaningful progress. They sound instead like a vague attempt not to be left behind by other countries, without committing too much in the way of investment and resources.