Boomer Banker

Starting with a visit to Rwanda last week and continuing with time in Tanzania this week, I am honored to be part of the OneBRAC week as a member of the BRAC International Holding BV supervisory board. I plan to post a series of blogs over BRAC and their work as I consider it one of the best international development organizations that exist. As stated on the BRAC website, BRAC “partners with over 100 million people living with inequality and poverty to create opportunities to realise human potential.”

BRAC International operates as both an NGO and a microfinance institution in many countries outside of Bangladesh. They do not hesitate to work in some of the most challenging locations in the world including Afghanistan, Myanmar, and South Sudan among other locations. They are active in microfinance in Myanmar, Ghana, Sierra Leone, Liberia, Uganda, Tanzania and Rwanda.

I hope these posts over the next several days provide my readers and followers with insight into the great work that BRAC does to help realize the potential for those who are born without adequate resources. I encourage you to check out their websites. I hope you also enjoy hearing from me on my experiences over this time I am spending with BRAC in Africa.

Occasionally when reading an article, a new insight pops into my head. On 11 January Lex in The Financial Times provided commentary on the efforts of Lina Khan to eliminate the broad use of non-compete clauses in the US workplace. This effort by Khan is worth discussing with nuance and facts.

Lex notes that: “(i)n 2022, the labour market boasted its best-ever nominal gain in wage growth in two decades with wage growth above 5 per cent. Those gains — at the indirect expense of shareholders — would continue if employers could not simply lock employees in any more.”

What is most interesting about this comment is the implicit bias that gains in wages are not as important as the fact that shareholders will receive lower returns. In fact in much of the business press there is a consistent bias that only shareholder returns matter. For society in total, the split of revenue between providers of inputs, financial capital and human capital should be subject to fair negotiations.

The financial press should not be biased in favour of only one of those components. Perhaps a fairer share going to wages would reduce the political polarisation facing so much of the world today.

A recent article in The Economist provides insight into far reaching positive consequences from shifting to renewable energy. The article focuses on the development of wind driven energy based in the North Sea. The analysis in the article goes beyond the basic fact that the wind powered energy will reduce carbon emissions to look at the impact on the political and economic power shifts that may result from a wind-based power system.

At the same time the article does not ignore the challenge of wind-based renewable energy. Based on my walks along the beach in The Netherlands, I can testify to the strength of the winds of the North Sea. However, these winds are not always present and the article notes the need to address the variability. The need for investment in more efficient interconnections of power grids as well as the development of “green energy storage” through creating of hydrogen or ammonia is noted in the article.

Overall the article provides an optimistic view on the potential shift to renewable energy from wind. Emphasising and supporting the development of this future should be a key focus for any financial institution looking to the future rather than continuing to invest in the dying past of fossil fuels.

On 17 July 2014 Malaysian Airlines MH17 was shot down. As noted by the Dutch and Australian governments when announcing legal proceedings on 14 March 2022:

1. Flight MH17 was shot down by a Russian Buk-TELAR surface-to-air missile system;
2. the missile system was transported from Russia to an agricultural field in the east of Ukraine on the morning of 17 July 2014 – an area under the control of Russian-backed separatists;
3. the missile system belonged to the Russian Federation’s 53rd Anti-Aircraft Military Brigade, and was accompanied by a trained Russian military crew;
4. from the launch site, the Buk-TELAR fired the missile that shot down Flight MH17, killing all 298 people on board;
5. the missile could only have been fired by the trained Russian crew of the Buk-TELAR, or at least by someone acting under their instruction, direction or control; and
6. the Buk missile system was returned to the Russian Federation shortly after the downing of Flight MH17.

These facts were gathered in part by the efforts of Bellingcat. As noted on their website: “Bellingcat is an independent international collective of researchers, investigators and citizen journalists using open source and social media investigation to probe a variety of subjects.” This innovative use of a wide range of sources investigated by professionals and volunteer supporters provides an interesting idea for ways of approaching the hidden oligarch wealth that was stolen from the Ukrainian and Russian people and whose owners provide support to the vicious Putin war on Ukraine.

The Financial Times recently highlighted three books that provide in-depth analysis of how the financial industry and its legal, accounting and consulting supporters managed to make the US and the UK “safe havens for dirty money.” These safe havens are now being looked at as the US, UK and European Union look to apply sanctions against oligarchs and their wealth. Of note the US Department of Justice has established a Task Force KleptoCapture as reported in the New York Times and the Washington Post.

At the same time there are increasing stories about oligarchs and their assets outside Russia. These include Alexei Mordashov whose ownership of the travel agency TUI is covered in The Guardian. The Guardian also covers a real estate development in a private housing compound in Surrey where it is estimated that more than 25% of the homes are owned by “Russians and those from former Soviet states.” Direct action is being taken including the capture of a balcony of a mansion in London linked to Oleg Deripaska as noted by the BBC. Similarly many luxury yachts are also being taken into custody in France, Spain, Germany, and Italy.

Much of this wealth has been carefully concealed using legal structures that hide true ownership. Looking behind these structures will require significant effort and expertise and most likely changes in laws and regulations to create transparency for the ownership of partnerships, offshore shell companies, Dutch BVs, North Dakota trusts, Delaware corporations and so forth. Perhaps a Bellingcat is needed to enlist bankers, lawyers, accountants and consultants to help do the research necessary to find the stolen wealth. But who better to find the money than those who helped hide it in the first place. A small price to pay to atone for past sins.

The terrible war by Putin against Ukraine raises many issues of which fossil fuel dependency of Europe on Russian oil and gas resources is just one. The emergence of wealth from these resources and how that wealth is used is of interest. Norway and Russia are two countries blessed with an abundance of fossil fuels that have created economic wealth and climate change crises. But the paths of these two countries vis-à-vis the use of the wealth generated from exploitation of those resources are substantially different. The path chosen by Russia potentially provides a way forward once the war is over and both Ukraine and Russia need to rebuild their economies.

Norway established an “oil fund . . . to ensure responsible and long-term management of revenue from Norway’s oil and gas resources, so that this wealth benefits both current and future generations.” This fund reports transparently on its activities and has a value as of the end of 2021 of approximately USD 1.4 trillion. That amount is just under USD 260,000 for each of the 5.4 million residents of Norway.

The Russian model is quite different. The Carnegie Council for Ethics in International Affairs in an article: How Did Russia’s Oligarchs Rise to Power provides access to an excerpt from a 2001 book by David Hoffman: The Oligarchs: Wealth and Power in Russia. In essence the oligarchs were able to amass huge amounts of wealth essentially through purchase of companies, many of which were based on fossil fuels, owned by the Russian government at very favourable prices. This transfer of wealth from the government to individuals gave away the value which would have been for the benefit of the Russian people to a small number of individuals.

It is difficult to determine the actual amount of wealth of the oligarchs but there have been a series of attempts to do so. In 2018 the National Bureau of Economic Research published study of the history of wealth in Russia produced by Thomas Piketty among others. In 2020 the Atlantic Council in an article “Defending the United States against Russian Dark Money,” the authors estimated that the value of “dark money” from Russia held outside of the country was about USD 1 trillion. The amounts can also be estimated from the real time billionaires list provided by Forbes Magazine. Regardless of the source, the Russian oligarch wealth would appear to be more than 70% of the wealth accumulated in the Norwegian fund – but that oligarch wealth is solely for the benefit of a few individuals rather than the Russian people from whom it was stolen.

The significant wealth of the oligarchs is now under scrutiny from those fighting the invasion of Ukraine by Putin and his army. It appears highly likely that the wealth of the oligarchs invested in assets outside of Russia, will be subject to sanctions and perhaps even confiscation. Chris Truax in The Bulwark suggest that this wealth could be the basis of a fund noy only to provide for support of the millions of refugees from the terrible Putin war underway but also a source of funding for the rebuilding of the destroyed Ukrainian infrastructure. And perhaps even for the necessary rebuilding of a Russian economy that is focused on meeting the needs of all the Russian people and not just the oligarchs.

The last week has been one in which the various negative impacts of fossil fuels has been emphasised. Two reports have been issued noting the critical vulnerability of our earth to climate change arising from the use of carbon-based fuels. The Intergovernmental Panel on Climate Change issued its Sixth Assessment Report which highlights a series of challenges we will be facing. It is a long and detailed report that does not make for easy reading both in terms of content and message.

Almost simultaneously the UN Environmental Program issued “Spreading like Wildfire: The Rising Threat of Extraordinary Landscape Fires.” As noted with the release of the report: “Recent years have seen record-breaking wildfire seasons across the world from Australia to the Arctic to North and South America.” They go on to note that “(u)ncontrollable and extreme wildfires can be devastating to people, biodiversity and ecosystems.”

But we also see the impact of our reliance on fossil fuels in the Putin invasion of the Ukraine – also leading to flames as reported by the BBC among others. It appears that an element behind Putin’s attempt to extinguish the sovereignty and freedom of the Ukraine people was a belief that the dependence of Europe, and especially Germany, on Russian gas would deter any meaningful response to this violation of civilized norms as well as the 1994 agreement between the Russian Federation, Ukraine, Britain, and the US to “respect the independence and sovereignty and the existing borders of Ukraine.”

Whilst the invasion of Ukraine is an egregious example of how the use of fossil fuels creates geopolitical challenges, it is not the only time that these challenges have been seen. With solid reporting again by the BBC we learn of the murder and dismemberment of Jamal Khashoggi for his critical reporting on Saudi Arabia. Again there was very little effective response from a world that was and is dependent on the flow of fossil fuels from Saudi Arabia.

The poison of a dependency on carbon-based fuels leads not only to global warming that threatens our future but also to geopolitical actions that threaten a civilized society today.

The black swan is often used as a metaphor for the arrival of unexpected risks. And a group of swans is generally referred to as a wedge – reflecting their flying pattern. In looking at the world today, it seems to be that we are potentially facing a wedge of black swans creating significant social, political, and economic risks. Perhaps the realisation by many that the world is currently risky drives the current negative feelings that seem to be unjustified by relatively benign or even positive economic measures.

Inflation is one of the issues for which there does not appear to be a clear perspective of what will happen and what policies should be taken to address it. A recent article by Paul Krugman provides interesting insight using data. Krugman has been sceptical of the longevity of the current increase in inflation, but he digs deeper into potential driving factors and is consequently more concerned. He specifically focuses on the possibility that US economic potential has permanently decreased due to a decrease in the number of people who are part of the workforce.

An analysis by the Peterson Institute for International Economics digs deeper into the workforce issue noting that the Congressional Budget Office sees excess mortality and reduced immigration as being driving factors for reduced labour. Excess mortality is clearly a result of COVID-19. But immigration has been impacted by the policies of the former Trump administration to reduce immigration to the US. The impact of those policies is now being felt by the labour market at all levels of compensation.

Unexpected issues related to COVID-19 are also significant. As reported in Nature, The Economist magazine has developed a model to measure excess deaths since COVID-19 began. That model estimates excess deaths of between 12.5 million and 22.5 million people, significantly higher than the 5 million reported COVID-19 deaths. In any case the impact on the economy is meaningful as these excess deaths represent people who are neither working nor consuming – thereby reducing economic potential.

Moving beyond inflation and COVID-19 there has also been an increase in geopolitical risk. The current dispute between Russia and the Ukraine is one such risk. Whilst it is easy to focus on the overall risk of conflict, it may be the case that the conflict represents more serious issues within Russia. There is evidence that excess deaths in Russia are particularly high (see Nature article referenced above). Furthermore, the impact of the melting of the tundra as reported in The New Yorker will create economic stress. These stresses can be creating internal strains that may not be fully apparent. What better way to address internal stress than to focus people on external threats – real or imagined.

China is also a potential black box of risks. These range from the long-term sustainability of a zero-COVID policy to internal economic stresses arising from real estate speculative investments as summarised in a Financial Times commentary. Increased internationalisation of funding for China real estate introduces new risks for the ability of the Chinese government to manage the situation as shown by the actions of foreign investors with secured lending positions. Again, these internal stresses may lead to actions to focus a nation on external issues such as the need to reunite with Taiwan. The Olympics create yet another potential point of stress with increased likelihood of COVID-19 entering the country to potential political statements by Olympic athletes from countries not as well controlled as China.

And of the known black swans we continue to see erratic weather patterns. The impact of climate change seems to be increasingly manifested in weather patterns that create social and economic stress in a variety of locations.

In summary unease seems fully warranted as a wedge of known and unknown black swans approach.