In Geopolitics This Week
IMF Hands Out Financial Support to Chile, Sri Lanka and Zambia, G-7 Formalizes a Price Cap Plan on Russian Oil, Technological Innovation is Key in US-China Competition, and other stories.
IMF Hands Out Financial Support to Chile, Sri Lanka and Zambia
The International Monetary Fund (IMF) has authorized financial assistance loans to Chile, Sri Lanka and Zambia this week. The IMF approved a two-year $18.5 billion credit line for Chile. Chile's economy is heavily dependent on copper exports, and this means the country is exposed to risks posed to export demand by a global economic downturn. Chile is also expected to undergo a period of political instability due to an upcoming vote on a new constitution.
As Chile faces a period of both economic uncertainty and increased social welfare demands, the government may be more willing to increase the country's debt to fund new state-owned enterprises. While Chile's debt was just 37% of the country's GDP in the first half of 2022, this figure is expected to rise with increased debt issuance. The IMF said that Chile qualified for the flexible credit line due to its “strong economic fundamentals” and “institutional policy frameworks," which combined with the country’s commitments to maintaining policies favourable to debt repayments, inspire confidence in the IMF.
The same week, the IMF agreed to grant Sri Lanka a $2.9 billion loan under its Extended Fund Facility to help the country manage its economic crisis. The loan will be contingent on upcoming debt restructuring negotiations with major creditors. The provisional agreement highlights the IMF's satisfaction with Sri Lanka's economic reform commitments. Sri Lanka defaulted on its foreign debt due to a balance of payment crisis, and this has led to economic and political turmoil.
Elsewhere, the executive board of the IMF approved a $1.3 billion arrangement to boost Zambia's debt sustainability through fiscal adjustments and debt restructuring. The decision will prompt an immediate release of $185 million, with the disbursement possible after China agreed to adhere to the Group of 20 Common Framework for coordinating Zambia's debt relief. Until now, the IMF had been withholding an estimated $1.3 billion in loan support for Zambia almost a year while demanding Zambia's creditors make concrete commitments.
The IMF's Extended Credit Facility will boost Zambia's economy and the strength of its currency. However, the government will have to remove some social support programs, — such as fuel and farm subsidies — which will likely be met with domestic discontent. Going forward, negotiations between Zambia and its creditors will be a crucial indicator for other African countries looking to renegotiate Chinese debt.
G-7 Formalizes a Price Cap Plan on Russian Oil
The G7 group of the most industrialized nations have agreed to finalize and implement a price cap on Russian oil. The move marks a critical step toward putting downward pressure on global energy prices and denying Russia revenues. The G7 invited countries to provide input on the design of the price cap, seeking a broad coalition to maximise effectiveness.
The G7 finance ministers confirmed they will seek to facilitate maritime transportation of Russian crude oil and petroleum products globally on the provision that such services would only be allowed if the oil and petroleum products are purchased at or below the price cap. This cap is set to be determined by the broad coalition of countries adhering to and implementing the price cap.
However, the plan has problems. Without the threat of secondary sanctions, countries are likely to continue buying Russian oil using tankers and insurance services outside the G7 coalition countries. This would allow Russia to continue selling its oil above the cap and render the whole plan ineffective. The cap's enforcement mechanism appears limited to a ban on transportation and insurance services for Russian oil shipped by sea if purchased at prices above the cap.
Russia, meanwhile, is attempting to dissuade the largest purchasers of its oil, India and China, from joining the coalition by threatening to end deliveries to them and send oil prices higher. Kremlin spokesperson Dmitry Peskov recently reiterated Russia’s position, stating that Moscow would stop selling all oil to any country that participates in the G7-led price cap.
Technological Innovation is Key in US-China Competition
In the race for dominance of the global technological and security commons between the United States and China, the recent passage of the CHIPS and Science Act in the US is an escalation that will boost the US arsenal against China, and revitalize its technological security in the context of US-China competition.
The US techno-security system in the opening years of the 2020s remains stronger and more innovative than its Chinese counterpart. Yet this dominance has been steadily eroding as technological changes and the intensive pace of China’s techno-security development shift the relative power between the two largest economies. For China, the revamping of the techno-security state under Xi has seen the gap steadily close with the US. Greater military-civil fusion is expected in both economies in the years ahead as even Washington centralizes top-down coordination for emerging core technologies.
One such directive has been a new US regulation that requires all sales of certain high-end chips to China to be approved by Washington. These restrictions came as a surprise to some industry experts, and Chinese officials heavily protested the sudden change in policy. The US multinational technology company Nvidia Corp. is heavily impacted by the move, and Washington gave Nvidia until the end of 2023 to finish its work on the next-generation of chips in China before moving operations out of the country.
This move by Washington will further strain relations with Beijing as both countries struggle to work out differences over long-standing issues. The United States will likely implement more such chip restrictions on China in the coming months, especially since the CHIPS and Science Act prioritizes nearshoring and “friend-shoring” operations to avoid technology transfers to China. In response, Beijing will likely respond with export restrictions of its own targeting specific US industries to maximize impact.