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Russian oil price cap accelerates global economic decoupling

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Pipelines of Hungarian oil and gas group MOL's main Duna (Danube) refinery are seen in Szazhalombatta, 9 January 2007. Russia recently stopped oil shipments to Belarus via the Druzhba pipeline, also shutting off exports to five European nations including Poland, Germany and Hungary. (Photo: REUTERS/Laszlo Balogh)

Author: Suryaputra Wijaksana, Bank Central Asia

The oil ‘price cap’ of US$60 per barrel for Russian oil is a controversial move by the European Union and G7. The price cap prohibits Western insurers and shipping companies, which account for more than 90 per cent of the marine insurance industry, from servicing vessels that carry Russian oil above US$60 per barrel.

The intention is lofty — prevent Russia from profiting from high global oil prices, but provide enough incentive for Russia to continue supplying oil, especially to vulnerable countries in Africa and Asia. Yet the price cap can be destabilising and have unforeseen consequences.

Current buyers of Russian oil, namely India and China, can demand even steeper discounts on shipments because they know Russia has limited options. In addition to weakening global demand, this may push global oil prices down in the short run, putting Russia in a tight spot. If its oil prices fall below production costs, estimated at US$35–40 per barrel, Russia may temporarily suspend oil exports or stop production completely. It does not have enough oil storage units left to store excess supply.

Another important player is OPEC, the global oil cartel, which is the main competitor to Russian crude oil. The alliance would push for higher oil prices to maximise profits, cutting supply and increasing global oil prices rapidly.

Restarting Russia’s oil operations after a temporary halt is also difficult and time-consuming, delaying supply of Russian oil into the market. Even if Russian oil reaches global markets, additional sanctions will reduce its effectiveness in lowering prices. Other countries may also seek to further disrupt the oil market, such as Turkey or Azerbaijan — both of which could block Russian oil routes. It is likely that global oil prices will escalate in the mid to long run.

A destabilised oil market could be disastrous for the global economy. It would permanently reduce global oil supplies, pushing energy prices higher and driving up inflation. This would undermine the global fight against inflation and prompt the US Federal Reserve and other global central banks to continue their aggressive monetary stances.

Higher interest rates also increase financing costs for new technologies that decrease reliance on fossil fuels. It is predicted to cost US$3.5 trillion in investment every year for the world to have any chance of reaching net zero carbon emissions by 2050. Yet weaning Europe off Russian gas will cost an estimated US$314 billion by 2030. Worse, higher financing costs also increase the cost of servicing government debt, which is already reaching all-time highs due to the COVID-19 pandemic.

But the most important and worrying impact of the price cap is an accelerated global economic decoupling that could lead to worsening living standards. Other oil-producing countries will be drawn into the US–China rivalry, each weighing in on the advantages of joining the respective blocs and further disrupting global oil supplies.

Meanwhile, Chinese access to Russian crude oil and other energy sources, such as natural gas and uranium, will reduce costs for Chinese manufacturing. The Western drive for more green investment will further increase Chinese dominance in green technologies, as it increases economies of scale. More trade barriers between the West, China and Russia force manufacturers to relocate to multiple or geographically closer countries, increasing production costs.

The price cap may also accelerate decoupling in the financial sphere. The complete embargo on Western insurers and shipping companies in shipments of Russian crude oil will create momentum for an alternative non-US dollar financial ecosystem. This would be in line with Chinese President Xi Jinping’s push for renminbi-denominated settlement of oil and gas trade with Middle Eastern gulf countries in his last visit to Saudi Arabia. Widespread internationalisation of the renminbi would increase its liquidity overseas and produce a more efficient financial system, enabling the growth of expensive maritime insurance and renminbi-denominated cross-border lending.

This accelerated decoupling could push the global economy closer to a ‘tipping point’ of transition from a US dollar-based financial system to a non-US dollar one, likely a multi-currency financial system. If history were to repeat, the transition will not be smooth and will involve higher inflation and a financial crisis. For emerging economies, an accelerated decoupling in the financial sphere can be significantly…

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WTO ministerial trading in low expectations and high stakes

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The WTO’s 13th Ministerial Conference is set to focus on e-commerce transparency, investment facilitation, and admitting new members. However, progress may be hindered by disputes, especially regarding fisheries subsidies.

The World Trade Organisation’s 13th Ministerial Conference

The World Trade Organisation’s (WTO) 13th Ministerial Conference is set to take place in Abu Dhabi on 26–29 February, with expectations of deals on electronic commerce transparency, investment facilitation for development, and the admission of Timor Leste and the Comoros as WTO members. Despite these positive developments, the expectations are relatively modest compared to promises made at the 12th Ministerial Conference, which included addressing fisheries subsidies and restoring a fully functioning dispute settlement mechanism by 2024.

Challenges in Dispute Settlement and Agricultural Trade Reform

However, challenges remain, especially in the deadlock of dispute settlement since December 2019 due to a US veto on the appointment of Appellate Body judges. Progress in restoring the dispute settlement mechanism has stalled, and discord continues regarding India’s grain stockholding policy as a potential illegal subsidy. Restoring a fully functioning dispute settlement mechanism hinges on addressing US concerns about perceived bias against trade remedies in relation to China’s state subsidies.

Geopolitical Tensions and the Future of Trade Relations

The likelihood of reaching agreements amid geopolitical tensions between Western democracies and China appears slim, with issues surrounding subsidies and global supply chains causing rifts in trade relations. As nations focus on self-reliance within the global value chain, opportunities for trading face obstacles. Advocacy for open markets and addressing protectionist sentiments remains crucial for fostering resilience to external shocks and promoting economic growth.

Source : WTO ministerial trading in low expectations and high stakes

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Getting Vietnam’s economic growth back on track

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Vietnam’s economy grew 8% in 2022 but slowed in 2023 due to falling exports and delays in public investments. The economy’s future depends on structural reforms and reducing dependency on foreign investment.

Vietnam’s Economic Roller Coaster

After emerging from COVID-19 with an 8 per cent annual growth rate, Vietnam’s economy took a downturn in the first half of 2023. The drop was attributed to falling exports due to monetary tightening in developed countries and a slow post-pandemic recovery in China.

Trade Performance and Monetary Policy

Exports were down 12 per cent on-year, with the industrial production index showing negative growth early in 2023 but ended with an increase of approximately 1 per cent for the year. Monetary policy was loosened throughout the year, with bank credit growing by 13.5 per cent overall and 1.7 per cent in the last 20 days of 2023.

Challenges and Prospects

Vietnam’s economy suffered from delayed public investments, electricity shortages, and a declining domestic private sector in the last two years. Looking ahead to 2024, economic growth is expected to be in the range of 5.5–6 per cent, but the country faces uncertainties due to geopolitical tensions and global economic conditions.

Source : Getting Vietnam’s economic growth back on track

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Thailand’s post-pandemic economic recovery still trailing behind

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Thailand’s economy is struggling to recover from the impact of the COVID-19 pandemic, with slow growth in GDP and GDP per capita. The government has implemented short and long-term policies to address economic challenges.

## Thailand’s Economic Slowdown

Thailand’s real GDP and GDP per capita have yet to outpace pre-pandemic figures, unlike other ASEAN countries. The Thai economy was severely affected by the pandemic, causing a slow economic recovery. The country’s large informal economy and dependence on tourism made it particularly susceptible to the impacts of the pandemic. While economic growth in 2023 was driven by activities in the travel sector, the manufacturing sector continued to contract, and merchandise exports continued to decline.

## Government’s Economic Policies

The new government’s short-term economic policies include providing a one-time digital cash payment to approximately 50 million residents, debt relief measures, and efforts to cut energy and electric train costs. Long-term economic measures consist of new free trade agreements, green industry projects, and a land bridge project. However, these measures have faced criticism from Thai economists due to significant fiscal implications and rising public debt-to-GDP ratio.

## Challenges in International Trade and Industrial Policies

Thailand’s new government is looking to boost international trade through free trade agreements. However, concerns are raised regarding the effectiveness of FTAs in driving global value chains and boosting trade. Additionally, industrial policies that emphasize domestic value added are being reconsidered in light of evidence that it runs counter to development from engaging in global value chains. The success of Thailand’s economic growth goals will depend on how supply-side constraints are addressed and resolved.

Source : Thailand’s post-pandemic economic recovery still trailing behind

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