7 March 2022
Welcome to the Economic Surplus, the newsletter brought to you by the Marshall Society! We are the University of Cambridge's flagship economics society. Every week, we bring you our bespoke commentary on economic trends, updates on our exclusive members' events as well as a summary of the headlines you can't ignore! You've probably received this email because you were previously subscribed to the Marshall Society's old email list, but if you have been forwarded this by a friend, feel free to subscribe here!
7PM, 9th March 2022: Globalisation after Covid: Business as Usual, or Not? - a talk by Professor Beata Javorcik
Location: Kennedy Room, Cambridge Union
We are proud to host Chief Economist at the European Bank for Reconstruction and Development (EBRD), Professor Beata Smarzynska-Javorcik, for the event entitled ‘Globalisation after Covid: Business as Usual, or Not?’. Beata Javorcik is a Professor in Economics at the University of Oxford and a former senior economist at the Development Economics Research Group of the World Bank. Her research explores how developing countries and transition economies are able to harness globalization to stimulate the country's economic growth. Her involvement in other affiliations include Royal Economic Society London, CESifo Munich, International Growth Centre London, and Centre for Research on Globalization and Economic Policy at the University of Nottingham.
The event will include a 45-minute personal address followed by a 15-minute Q&A session.
The Marshall Society is looking for writers for its annual magazine - The Dismal Scientist!
The Dismal Scientist hopes to discuss economic issues in a wide range of topics some of which are listed below:
- The Economic Rise of Asia
- Economic Development
- Public Policy
- Discipline of Economics
If any of these topics excite you or you have any other article ideas, we would love to hear from you!
If you’d be interested in writing, join the writers’ Facebook group here: https://www.facebook.com/groups/266451508701811, or send us a message on Instagram @dismal.scientist
At this point, we are trying to see who’s interested and what sort of articles people will want to write so we can plan ahead – so join up ASAP. This is not binding yet so please do join the group if you’re interested!
In case of any queries, please feel free to reach out to Anya Gupta (firstname.lastname@example.org) or Louis Young (email@example.com)
This week’s Marshall’s Thoughts are written by Jiong Han.
The economic noose continued to tighten around Russia in the past week, as Western countries unveiled a raft of new economic and financial sanctions on the country. This article seeks to consider the effects of the newly imposed sanctions on the Russian economy.
First, there was the news that seven Russian banks would be excluded from the SWIFT system, an interbank messaging system which facilitates cross-border financial transactions. This is however likely to be largely symbolic. Ejecting Russian banks from SWIFT increases the costs of financial transactions, but do not prevent payments from being executed. Less efficient communication alternatives over secure channels exist. Russia already has a domestic alternative, SFPS, although that is only presently connected to 23 foreign banks. Most importantly, costs are likely to be limited given that payments for oil and raw materials were exempted. This carve-out for energy is unsurprising, given that Russia accounts for 40% of the EU’s oil and gas imports.
A more notable measure was the announcement that Russia’s central bank would have their foreign reserves frozen. The EU has banned all transactions with the Russian central bank, and the US could also place it on the list of Specially Designated Nationals, which would prevent various financial intermediaries like brokers and central security depositories from dealing with it. This would neutralize a significant portion of its securities held overseas, with implications for the central banks’ ability to stabilize its exchange rates and even making the rouble more susceptible to speculative attacks by short sellers.
In fact, this move has begun to show some bite, with the rouble declining by 30% following these announcements, which forced the Bank of Russia to double its interest rates to 20%. Demand for foreign currency has reached the highest level since March 2020 with long queues forming at ATMs, foreshadowing potential bank runs in days ahead.
With more than a third of Russian imports are denominated in the US dollars, measures have been taken to stem capital outflow.Bans have been imposed on foreign investors from selling Russian assets and Russian citizens from transferring money abroad. Major exporting firms have also been recently required to sell most of their foreign exchange revenues as well. These interventions, coupled with the threat of possible sanctions, are likely to further reduce Russia’s attractiveness as a destination for foreign investment.
Nevertheless, a significant portion of foreign reserves is held in the form of the world’s fifth-largest gold holdings, conveniently stored in domestic vaults. With sufficient incentives, these might be easy to dispose of, with the value of gold surging recently due to inflationary risks and the crisis itself. The threat of Western sanctions and public opinion may not be a sufficient deterrent – even Shell, which just promised to divest from Russia entirely, recently purchased $20 million of discounted Russian gas.
In conclusion, the events of the recent week suggest that Western countries have finally shown some economic mettle in taking decisive action against Russia. This is likely due to the reduced exposure to the Russian market, following the sanctions imposed after the annexation of Crimea, which makes the imposition of ‘asymmetric’ costs. A recent study by the Bank of International Settlements showed that Western lenders had 120 billion pounds of outstanding claims in Russia in 2021, down from a peak of 275 billion pounds in 2013. How this will factor into Putin’s cost-benefit analysis on the war in Ukraine is anyone’s guess.
In Case You Missed It:
Existing economic analysis on the conflict in Ukraine have largely focused on the few major players directly involved in the war or sanctioning it. This article explores the knock-on effects that the conflict in Ukraine is likely to have on emerging markets through three mechanisms: increased commodity prices, capital flight and increased risk premium for geopolitical risk.
A central dogma in financial economics is the possibility of reducing risk through diversification while maintaining the same payoff. This thought-provoking article suggests that for US investors, international diversification may not necessarily achieve the same result – with the US stock-market significantly outperforming foreign markets, and markets in general becoming more correlated over time.
The IMF has recently begun to impose surcharges on countries which fail to pay back their loans quickly. In this paper, Joseph Stiglitz argues for a removal of these surcharges, given that pro-cyclical surcharges inflict harm on the productive capacity of these countries, and further increases the risk of their default. Interestingly, he also points out that there is significant moral hazard involved given their arbitrary structure of the surchargesand the IMF’s reliance on them as a source of revenue.
That's it from us for now!
The Marshall Society