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Daily current Affairs 15.03.2022 (Microfinance firms can set interest: RBI,The surge in oil and natural gas prices, Fragmenting world order, untied nations)

Daily current Affairs 15.03.2022 (Microfinance firms can set interest: RBI,The surge in oil and natural gas prices, Fragmenting world order, untied nations)

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1. Microfinance firms can set interest: RBI

The Reserve Bank of India (RBI) on Monday allowed microfinance institutions to fix interest rates on loans, with a caveat that the rates should not be usurious.

In revised guidelines that will take effect on April 1, the RBI tweaked the definition of a microfinance loan to indicate a collateral-free loan given to a household with annual income of up to ₹3 lakh.

Regulation of MFI’s  by RBI

  • RBI first allowed informal self-help groups to open savings accounts in banks and bank lending to these groups in 1991-92.
  • In 2000, RBI permitted all types of institutions to offer microcredit and bank loans extended to these institutions for on-lending were treated as part of the priority sector lending.
  • Beyond these, RBI was unwilling to bring in any regulations on the plea that as long as these are not deposit-taking institutions there is no need to regulate them. 
  • That was the stand of various RBI-appointed committees too, including the Vyas Committee of 2004.
  • Based on the Malegam Committee recommendations, RBI came out with detailed guidelines for microfinance institutions (not the microfinance sector) in 2011.
  • These guidelines introduced a new category of NBFCs, viz NBFC-MFIs (microfinance institutions).
  • It also set norms for income criteria for clients of MFIs, repayment period, borrower loan limits, interest rate norms and caps, limits on a number of lenders to a borrower and a host of other norms and criteria.

How these norms created the issue of a level playing field?

  • After 2015-16, the entry of small finance banks, eight of which were MFIs, into the microfinance space started to create issues.
  • MFIs discovered to their dismay that while they had to adhere to a set of regulations, it was a free-for-all for non-MFIs (banks, SFBs and NBFCs).
  • The main issue was that non-MFIs need not adhere to the norm of number of lenders (two in the case of NBFC-MFIs) and per-borrower loan limits.
  • It prompted non-MFIs to target borrowers identified and nurtured by MFIs with higher loan amounts, leading to high levels of borrower indebtedness.
  • In addition, the interest rate cap (2.75 times the base rate declared quarterly by RBI) was squeezing the margins of small and medium MFIs, as none of them get loans from the biggest banks.

2. Fragmenting world order, untied nations

The impact of the Ukraine war on global interconnectedness is a cause for worry in the post-World War order

Nearly three weeks into the Russian war on Ukraine, the cost to India is still to be counted. While some are focusing on how India’s refusal to criticise Russia’s actions, and the string of abstentions at the United Nations, would affect its relations with the West and its Quad partners (the United States, Australia and Japan), others are watching the economic costs that the unprecedented sanctions of the U.S. and the European Union will have on Indian trade, energy and defence purchases. However, the outcome that should worry New Delhi and other like-minded countries the most, apart from the devastating consequences for the Ukrainian nation, is the impact the Ukraine crisis is having on the global world order, which is fragmenting in every respect of global interconnectedness — in terms of international cooperation, security, military use, economic order, and even cultural ties.

The UN and Security Council

To begin with, the global order has broken down and events in Ukraine have exposed the United Nations and the Security Council for their complete ineffectiveness. Russia’s actions in Ukraine may, in terms of refusing to seek an international mandate, seem no different from the war by the United States in Iraq in 2003, Israel’s bombing of Lebanon in 2006 and the Saudi-coalition’s attacks of Yemen in 2015.

But Ukraine is in fact a bigger blow to the post-World War order than any other. The direct missile strikes and bombing of Ukrainian cities every day, exacting both military and civilian casualties, and the creation of millions of refugees, run counter to every line of the UN Charter preamble, i.e. “to save succeeding generations from the scourge of war…”, “to practice tolerance and live together in peace with one another as good neighbours”, as well as Articles 1 and 2 of the ‘Purposes and Principles’ of the United Nations (Chapter 1) (https://bit.ly/3w4BS5X).

The fact that Russian President Vladimir Putin broadcast his decision to “launch military operations” on Ukraine at the same time the Russian envoy to the United Nations was presiding over a UN Security Council discussion on the Ukraine crisis, speaks volumes for the respect the P-5 member felt for the proceedings. A vote of the international commons, or the UN General Assembly (UNGA), that decried Moscow’s actions, was brushed off in a way that was even easier than when the U.S. did when it lost the UNGA vote in 2017 over its decision to move the U.S. Embassy to Jerusalem.

Meanwhile, in their responses, other P-5 members such as the United States, the United Kingdom and France did not seek to strengthen the global order either, imposing sanctions unilaterally rather than attempting to bring them to the UN. Clearly, Russia would have vetoed any punitive measures, but that should not have stopped the attempt. Nor are the surge in weapons transfers to Ukraine a vote of confidence in the UN’s power to effect a truce.

Whither nuclear safeguards

The next point is Russian recklessness with regard to nuclear safety in a country that has suffered the worst impacts of poor safety and planning following the 1986 Chernobyl disaster (when Ukraine was part of the Soviet Union), which is a challenge to the global nuclear order. Russian military’s moves to target areas near Chernobyl and shell buildings near the Zaporizhzhia nuclear power plant ( also Europe’s largest), show an alarming nonchalance towards safeguards in place over several decades, after the U.S.’s detonation of atomic bombs over Hiroshima and Nagasaki in 1945 led to the establishment of the International Atomic Energy Agency (IAEA) in 1956. The world must also consider the cost to the nuclear non-proliferation regime’s credibility: Ukraine and Libya that willingly gave up nuclear programmes have been invaded, while regimes such as Iran and North Korea can defy the global order because they have held on to their nuclear deterrents.

There are also the covenants agreed upon during the global war on terrorism, which have been degraded, with the use of non-state actors in the Ukraine crisis. For years, pro-Russia armed militia operated in the Donbas regions, challenging the writ of the government in Kyiv. With the arrival of Russian troops, the Ukrainian President, Volodymyr Zelensky, has invited all foreign fighters who are volunteering to support his forces to the country. This seeks to mirror the “International Brigades” in the Spanish Civil War of the 1930s, comprising foreign volunteers from about 50 countries against forces of Spanish military ruler Francisco Franco.

However, the role of foreign fighters has taken on a more sinister meaning after 2001 and al Qaeda, when western recruits joined the Islamic State to fight Syrian President Assad’s forces. British Foreign Secretary Liz Truss’s recent statement that she would “absolutely support” British veterans and volunteers joining the Ukraine war against Russia has since been reversed by the British Foreign Office, and it is hoped that other countries around the world, including India, make firm efforts towards preventing such “non-state actors” from joining a foreign war.

Economic actions

Economic sanctions by the U.S., the U.K. and the European Union (EU) also point to a fragmentation of the global financial order. While analysts have pointed out that the sanctions announced so far do not include some of Russia’s biggest banks such as Sberbank and Gazprombank and energy agencies (in order to avoid the disruption of oil and gas from Russia), the intent to cut Russia out of all monetary and financial systems remains. From the eviction of Russia from SWIFT payments, to the cancellation of Mastercard, Visa, American Express and Paypal, to the sanctioning of specific Russian businesses and oligarchs and pressure on Western businesses (McDonalds, Coca-Cola, Pepsi, etc.) operating in Russia to shut down, the arbitrary and unilateral nature of western sanctions rub against the international financial order set up under the World Trade Organization (that replaced the General Agreement on Tariffs and Trade, or GATT).

The obvious fallout of this “economic cancel culture” will, without doubt, be a reaction — a pushback from Russia and an exploration of alternative trading arrangements with countries such as China, India and much of the Eastern Hemisphere which continue to trade with Moscow. For the S-400 missile defence deal, for example, New Delhi used a rupee-rouble mechanism and banks that were immunised from the U.S.’s CAATSA sanctions (or Countering America’s Adversaries Through Sanctions Act) for advance payments. Russian banks will now use the Chinese “UnionPay” for online transactions. Gradually, the world may see a “non-dollar” system emerge which would run banking, fintech and credit systems separately from the “dollar world”.

Isolation by culture

Finally, there is the western objective, to “isolate” Russia, socially and culturally, that rails against the global liberal order. While several governments including the U.S., the U.K. and Germany have persistently said that their quarrel is not with Russian citizens but with their leadership, it is clear that most of their actions will hurt the average Russian citizen. The EU’s ban of all Russian-owned, Russian-controlled or Russian-registered planes from EU airspace, and Aeroflot’s cancellation of international routes, will ensure that travel to and from Russia is severely curtailed. Some of this isolation of its citizens will work to the favour of an increasingly authoritarian Kremlin. Mr. Putin’s response to the banning of Russian channels in Europe and its allies has been to use the western media ban as a pretext to ban opposition-friendly Russian channels as well. The “isolation” extends to art and music: in the past two weeks the Munich Philharmonic fired its chief conductor and New York’s Metropolitan Opera let a Russian soprano, Anna Netrebko, go because they would not criticise the war. The Bolshoi Ballet’s performances in London and Madrid were similarly cancelled.

The perils of this comprehensive boycott of Russia are not without historical precedent. Speaking to his Parliament this week, Mr. Zelensky invoked British Prime Minister Winston Churchill’s “Fight to the End” speech, delivered at the House of Commons in June 1940, to speak about Ukraine’s commitment to fight Russia. European onlookers would do well to also remember Churchill’s other famous speech, “The Sinews of Peace”, delivered in the United States in 1946, when he first referred to the “Iron curtain coming down” between Soviet Russia and Western Europe. “The safety of the world requires a new unity in Europe, from which no nation should be permanently outcast,” Churchill had warned, although his words went in vain and the world suffered the consequences of the Cold War for the next four decades.

New Delhi needs to ponder

The events over the past two weeks, set in motion by Russia’s declaration of war on Ukraine, have no doubt reversed many of the ideas of 1945 and 1990, fragmenting the international order established with the UN, ushering in an era of deglobalisation and bringing down another Iron Curtain. India’s abstentionist responses and its desire not to be critical of any of the actions taken by the big powers might keep Indians safe in the short term. But in the long term, it is only those nations that move proactively to uphold, strengthen and reinvent the global order that will make the world a safer place, even as this war that promises few winners rages on.

The birth of the United Nations:

The UN was born out of the ashes of yet another international organisation created with the intention of keeping war away.

The League of Nations was created in June 1919, after World War I, as part of the Treaty of Versailles.

However, when the Second World War broke out in 1939, the League closed down and its headquarters in Geneva remained empty throughout the war.

Consequently, in August 1941, American president Franklin D. Roosevelt and British prime minister Winston Churchill held a secret meeting aboard naval ships in Placenta Bay, located in the southeast coast of Newfoundland, Canada.

The heads of the two countries discussed the possibility of creating a body for international peace effort and a range of issues related to the war.

Together they issued a statement that came to be called the Atlantic Charter. It was not a treaty, but only an affirmation that paved the way for the creation of the UN.

It declared the realisation of “certain common principles in the national policies of their respective countries on which they based their hopes for a better future for the world.”

The United States joined the war in December 1941, and for the first time the term ‘United Nations’ was coined by president Roosevelt to identify those countries which were allied against the axis powers.

Main goals of the UN since its creation:

The United Nations finally came into existence on October 24, 1945 after being ratified by 51 nations, which included five permanent members (France, the Republic of China, the Soviet Union, the UK and the US) and 46 other signatories. The first meeting of the General Assembly took place on January 10, 1946.

The four main goals of the UN included

  1. Maintaining international peace and security,
  2. Developing friendly relations among nations,
  3. Achieving international cooperation in solving international problems and
  4. Being at the center for harmonising the actions of nations in the attainment of these common ends.

Achievements and failures of the UN in the last 75 years:

  1. While at the time of its formation, the UN consisted of only 51 member states, independence movements and de-colonisation in the subsequent years led to an expansion of its membership. At present, 193 countries are members of the UN.
  2. The UN boasts of several significant achievements in the last 75 years.
  3. It has also expanded its scope to resolve over a large number of global issues such as health, environment, women empowerment among others.
  4. Soon after its formation, it passed a resolution to commit to the elimination of nuclear weapons in 1946.
  5. In 1948, it created the World Health Organisation (WHO) to deal with communicable diseases like smallpox, malaria, HIV.
  6. At present the WHO is the apex organisation dealing with the coronavirus pandemic.
  7. In 1950, the UN created the High Commissioner for Refugees to take care of the millions who had been displaced due to World War II.
  8. It continues to be on the frontlines of crises faced by refugees from countries across the world. In 1972, the UN environment programme was created.
  9. More recently in 2002, the UN established the UN criminal court to try those who have committed war crimes, genocide, and other atrocities.

Share of criticisms in UN performance:

The UN has also met with its share of criticisms. In 1994, for instance, the organisation failed to stop the Rwandan genocide.

In 2005, UN peacekeeping missions were accused of sexual misconduct in the Republic of Congo, and similar allegations have also come from Cambodia and Haiti.

In 2011, the UN peacekeeping mission in South Sudan was unsuccessful in eliminating the bloodshed caused in the civil war that broke out in 2013.

Need for UN Security Council Reforms:

  1. UN represents a larger world and the irony is that it has only 5 permanent members in its such an important body.
  2. Current composition of the Security Council represents the post World War II realities and thus is not in pace with the changing balance of power in the world.
  3. The power of veto is frequently cited as a major problem as the P5 members often influence the resolutions making those countries to suffer, which rather need a platform to grow.
  4. Member states that have demonstrated credibility and capacity to shoulder the responsibilities of the principal UN organ should have a presence to ensure the legitimacy of the council.
  5. Thus, a new category of “semi-permanent” seats is intriguing as, if properly structured, could ensure legitimacy without preventing flexibility for a changing world.
  6. At the time of the formation of UNSC, big powers were given privileges to make them part of the council. This was necessary for its proper functioning as well as to avoid the failure like that of the organization ‘League of Nations’.
  7. The regions like far East Asia, South America, Africa have no representation in the permanent membership of the council.
  8. Rise of fora like G4 (India, Brazil, Germany, and Japan) as important economies and emerging world powers are pushing after quick UN Security Council reforms.

3. The surge in oil and natural gas prices

Why did international oil prices surge to a 14-year high last week? What will be the immediate effect of U.S. sanctions on Russia’s energy exports?

Russia is the world’s largest exporter of crude and oil products and the world’s third-largest oil producer. It is also a major exporter of natural gas and supplies almost a third of the gas consumed in Europe.

On March 8, U.S President Joe Biden announced that they were banning the import of Russian oil, liquefied natural gas, and coal to the country. The U.K. also announced that it would phase out the import of Russian oil products by the end of 2022. However, the rest of Europe and China are not joining this import ban.

Oil prices are about 40% higher since the start of 2022 after having climbed sharply since Russia’s February 24 invasion of Ukraine and are still well above $100 a barrel.

The story so far: On March 8, President Joe Biden announced that the U.S. was banning the import of Russian oil, liquefied natural gas, and coal to the country, a move aimed at depriving Russia of the economic resources needed to continue its war in Ukraine. In the run up to the U.S. announcement, international oil prices surged to a 14-year high on March 7, with Brent crude futures hitting $139.13 intraday. However, following the U.S. decision, oil prices yo-yoed and Brent ended last week at $112.67 a barrel, which was 4.8% lower than the preceding week’s close.

Why did the U.S. target Russia’s energy exports?

Russia is the world’s third-largest oil producer, trailing only Saudi Arabia and the United States. In January 2022, Russia’s total oil production was 11.3 million barrels per day (mb/d), of which 10 mb/d was crude oil, according to the Paris-based intergovernmental International Energy Agency (IEA). By comparison, total oil production by the U.S. in January was 17.6 mb/d, while Saudi Arabia produced 12 mb/d.

In terms of exports to the global markets, however, Russia is the world’s largest exporter of crude and oil products, having shipped 7.8 mb/d in December 2021, and the second largest supplier of crude to the world with only Saudi Arabia exporting more crude than it.

Russia is also a major exporter of natural gas and supplied almost a third, or 32%, of the gas consumed in Europe (and the U.K.) in 2021.

The revenue it made from the sales of oil and gas in 2021 accounted for 36% of Russia’s total revenue of 25.29 trillion rouble (about $330.7 billion as per the exchange rate prevailing in January, well before the invasion) last year. The energy exports, which at $240.7 billion were almost half of Russia’s total exports last year, helped Moscow achieve a record current account surplus of $120.3 billion, which represented 7% of gross domestic product in 2021.

These figures clearly show the significance of oil and gas exports to Moscow and the potential impact any move to completely stop global purchases of these commodities from the country could have on Russia’s economy.

What impact could Washington’s move have on Russia and on global crude prices?

In a fact sheet accompanying the announcement, President Biden’s administration stated that in 2021, the U.S. had imported almost 7,00,000 barrels per day of crude oil and refined petroleum products from Russia. Given that Russia exported substantially more than 7 million barrels per day of crude and oil products last year, the U.S. ban would impact about one-tenth of Russia’s oil exports. And even as it acknowledged that not all of its allies and partners around the world were currently in a position to join in its import ban, Washington, however, said the longer-term goal was “to reduce our collective dependence on Russian energy”.

Among its allies, the U.K. announced on March 8 that it would phase out the import of Russian oil and oil products by the end of 2022, a move that London said was aimed at giving the country’s businesses enough time to find alternatives to the supplies, which meet about 8% of demand.

Still, without the rest of Europe and China joining the import ban on Russian oil and gas, the impact would not be as severe on Russia’s economy.

China, which is the world’s largest importer of crude oil, is Russia’s single-biggest buyer and purchased 1.6 mb/d of crude, or about 20% of Russian oil exports, on average in 2021. And OECD Europe (or European members of the Organisation for Economic Co-operation and Development) collectively accounted for 60% of Russia’s oil exports, according to the IEA.

From the perspective of energy prices, Energy Intelligence reported on March 3 that an already tight oil market had been pushed over the edge with the loss of Russian supply of about 1.5 mb/d of its benchmark Urals crude and about 1 mb/d of refined products. It explained at the time that many international energy traders had been shunning Russian cargoes of oil to limit financial and reputational risks in the wake of the invasion and the sanctions.

Crude prices have, however, eased from the 14-year highs hit on the eve of the U.S. announcement as the market has realised that, at least for now, neither a majority of the European buyers nor China plan to stop imports of Russian oil.

What lies ahead?

Benchmark Brent crude prices fell as much as $4 a barrel on Monday, extending last week’s decline as traders bet that diplomatic efforts to end the war in Ukraine may help avert a supply shock.

Prices, however, are still about 40% higher since the start of 2022 after having climbed sharply since Russia’s February 24 invasion of Ukraine and are still well above $100 a barrel.

Currently, oil prices are treading water as investors worldwide await the outcome of this week’s meeting of the U.S. Federal Reserve, and energy traders keep an eye on demand in China, where a recent upsurge in COVID-19 cases has triggered targeted lockdowns in some parts of the country including the southern commercial and trade hub Shenzhen.

If the Fed raises interest rates, as is widely expected, the dollar is likely to strengthen, thereby making imports of oil costlier for net energy importers such as India.

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