Sri Lanka crisis: A warning to Pakistan and Bangladesh

Sri Lanka is in the midst of a deep and unprecedented economic crisis that has sparked huge protests and seen its president quit after fleeing the country - but other countries could be at risk of similar troubles, according to Kristalina Georgieva, Managing Director, International Monetary Fund (IMF).

"Countries with high debt levels and limited policy space will face additional strains. Look no further than Sri Lanka as a warning sign," said Kristalina.

She said developing nations had also been experiencing sustained capital outflows for four months in a row, putting their dreams of catching up with advanced economies at risk.

Sri Lanka is struggling to pay for crucial imports like food, fuel and medicine for its 22 million people as it battles a foreign exchange crisis. Inflation has soared about 50%, with food prices 80% higher than a year ago. The Sri Lankan rupee has slumped in value against the US dollar and other major global currencies this year.

Many blame ex-President Gotabaya Rajapaksa for mishandling the economy with disastrous policies whose impact was only exacerbated by the pandemic.

Over the years, Sri Lanka had built up a huge amount of debt - last month, it became the first country in the Asia Pacific region in 20 years to default on foreign debt.

Officials had been negotiating with the IMF for a US$3 billion bailout package. But those talks are currently stalled amid the political chaos.

The same global headwinds - rising inflation and interest rate hikes, depreciating currencies, high levels of debt and dwindling foreign currency reserves - also affect other economies in the region.

China has been a dominant lender to several of these developing nations and therefore could control their destinies in crucial ways. Buy it's largely unclear what Beijing's lending conditions have been, or how it may restructure the debt.

Where China is at fault, according to Alan Keenan from International Crisis Group, is in encouraging and supporting expensive infrastructure projects that have not produced major economic returns.

"Equally important has been their active political support for the ruling Rajapaksa family and its policies... These political failures are at the heart of Sri Lanka's economic collapse, and until they are remedied through constitutional change and a more democratic political culture, Sri Lanka is unlikely to escape its current nightmare."

Worryingly, other countries appear to be on a similar trajectory.

Pakistan

Fuel prices in Pakistan are up by around 90% since the end of May, after the government ended fuel subsidies. It's trying to rein in spending as it negotiates with the IMF to resume a bailout program.

The economy is struggling with the rising cost of goods. In June, the annual inflation rate hit 21.3%, the highest it has been in 13 years.

Like Sri Lanka, Pakistan also faces low foreign currency reserves, which have almost halved since August last year.

It has imposed a 10% tax on large-scale industry for one year to raise US$1.93 billion as it tries to reduce the gap between government revenue and spending - one of the IMF's key demands.

"If they are able to unlock these funds, other financial lenders like Saudi Arabia and the United Arab Emirates may be willing to extend credit," Andrew Wood, sovereign analyst at S&P Global Ratings said.

Former Prime Minister Imran Khan who vowed to fix some of these problems, was ousted from power although the faltering economy is not the only reason for that.

Again China plays a role here, with Pakistan reportedly owing more than a quarter of its debt to Beijing. "Pakistan appears to have renewed a commercial loan facility vis-a-vis China and this has added to its foreign exchange reserves and there are indications they will reach out to China for the second half of this year," Mr Wood added.

Bangladesh

With reserves dwindling, the government has acted fast to curb non-essential imports, relaxing rules to attract remittances from millions of migrants living overseas and reducing foreign trips for officials.

"For economies running current account deficits - such as Bangladesh, Pakistan and Sri Lanka - governments face serious headwinds in increasing subsidies. Pakistan and Sri Lanka have turned to the IMF and other governments for financial assistance," said Kim Eng Tan, a sovereign analyst at S&P Global Ratings.

"Bangladesh has had to re-prioritize government spending and impose restrictions on consumer activities," he said.

Rising food and energy prices are threatening the pandemic-battered world economy. Now developing nations that have borrowed heavily for years are finding that their weak foundations make them particularly vulnerable to global shock waves.

Are Russia and Iran friends or foes?

A budding courtship between Russia and Iran is an unwelcome development for the West in general and the United States in particular.

Russian President Vladimir Putin used a rare foreign trip on Tuesday to hold talks in Tehran with Supreme Leader Ayatollah Ali Khamenei and President Ebrahim Raisi, as well as Turkish President Tayyip Erdogan.

The fact that Russia and Iran are competing energy producers is likely to place limits on any deeper partnership.

Here's a look at some of the key questions that their developing relationship poses.

CAN IRAN HELP RUSSIA IN THE UKRAINE WAR?

US officials have said Iran is preparing to help supply Russia with several hundred unmanned aerial vehicles (UAVs), or drones, including some that are capable of firing weapons, but neither country has confirmed it. Russian presidential aide Yuri Ushakov was quoted by RIA news agency as saying Putin had not discussed the issue with Iran's leaders.

"Russia deepening an alliance with Iran to kill Ukrainians is something that the whole world should look at and see as a profound threat," US National Security adviser Jake Sullivan said last week.

Ukraine has used Turkish-supplied Bayraktar drones to lethal effect in targeting Russian units and destroying huge quantities of tanks and other armored vehicles. Jack Watling, a war expert at the RUSI think-tank in London, said Iranian drones would be useful to Russia for both reconnaissance and as loitering munitions that can bide their time in locating and engaging suitable targets.

"Beyond supplying UAVs Iran can also help Russia evade sanctions and potentially collaborate on the manufacture of weapons systems that are less dependent upon supply chains through Western countries," he said.

WHAT CAN RUSSIA LEARN FROM IRAN ON SANCTIONS?

Iran has many years of experience of defending itself against Western sanctions over its disputed nuclear program. "The Russians see Iran as being highly experienced at, and a potentially valuable partner, in evading Western sanctions," said Watling.

Russia, meanwhile, has been hit with waves of sanctions against banks, businesses and individuals over the war in Ukraine. Both countries therefore lack access to Western technology and capital, said Janis Kluge of the SWP think-tank in Berlin.

"There might be some lessons that Russia can learn from Iran... In exchange, Russia could offer military goods and possibly raw materials or grain," he said. Russia is already a major supplier of wheat to Tehran.

With some Russian banks cut off from the SWIFT international payments system, Moscow is developing an alternative in which Iranian banks could be included, Kluge said.

More broadly, Iran is part of a wider group of countries - also including China, India, Latin America and Arab and African nations - with which Russia is forging stronger ties in a bid to prove its claim that it can thrive under sanctions and that these will only rebound on the West.

HOW CAN RUSSIA AND IRAN COOPERATE ON ENERGY?

This is potentially a sensitive question, both countries are oil and gas producers, and competition between them has intensified since the start of the Ukraine war as Russia has switched more of its oil exports to China and India at knock-down prices.

"On the economic dimension, the war has significantly worsened their relationship. Moscow is eating Tehran’s lunch in commodity markets and has even fewer resources to throw at projects in Iran," said Henry Rome, deputy head of research at Eurasia Group.

Coinciding with Putin's visit, however, the National Iranian Oil Company and Russia's Gazprom signed a memorandum of understanding worth around US$40 billion under which Gazprom will help NIOC develop two gas fields and six oil fields, as well as taking part in liquefied natural gas (LNG) projects and construction of gas export pipelines.

WILL ANYTHING CHANGE IN THE IRAN NUCLEAR TALKS?

The Ukraine war has changed Moscow’s approach towards talks on reviving the 2015 Iranian nuclear deal, known as the JCPOA.

Eleven months of talks to restore the deal, which lifted sanctions on Iran in return for curbs on its nuclear program, had reached their final stages in March. But they were thrown into disarray over a last-minute Russian demand for written guarantees from Washington that Western sanctions targeting Moscow over its invasion of Ukraine would not affect its trade with Iran.

Although Russia quickly retreated under Iranian pressure, diplomatic momentum for an agreement was lost. The talks have stalled since then over various remaining issues.

Whether the deal can get back on track will be one measure of the impact of the rapprochement between Putin and Iran's leaders.

"Russia’s interference in the JCPOA talks was a significant reversal of the traditional Russian approach and probably further fanned suspicions in Tehran about Moscow’s reliability and trustworthiness," said Rome of Eurasia Group.

Europe inching towards worst energy crisis

The International Energy Agency (IEA) has warned Europe is facing a red alert over its gas consumption and significant additional reductions are needed to prepare the continent for a tough winter ahead.

The warning comes as Russian gas exports to the continent have decreased in capacity and amid maintenance work on the main pipeline to Germany (Nord Stream 1). The IEA fears that further gas cuts cannot be ruled out. 

Experts argue the European Union is struggling to secure alternatives to Russian supplies but has approved another 500 million euros in arms to Ukraine, whereby a push towards a peace settlement may save the bloc a lot of breathing space on its gas stocks, instead of the panic it finds itself in. 

The IEA itself which serves as the west’s energy watchdog says efforts to boost supplies are still falling short and the 27-member bloc needs stricter measures, such as restricting air conditioning demand (during the current heat wave in Europe) and auctioning gas supplies to industry.

Dr. Fatih Birol, the Executive Director of the IEA has said there is a global energy crisis but warned the situation is especially perilous in Europe, which is at the epicenter of the energy market turmoil. He has expressed concern about the months ahead for the continent. 

The IEA has acknowledged there has not been enough progress by the EU to ween itself of Russian gas especially on the demand side, to prevent Europe from finding itself in an incredibly precarious situation.

It says any further cuts of Russian natural gas flows to Europe, combined with other recent supply disruptions, are a red alert for the European Union, adding that as we get closer to next winter, we are getting a clearer sense of what Russia may do next. The next few months will be critical, the organization warned. 

Moscow has strongly rejected any allegations that it has been using its gas supplies for political purposes. Experts have also argued that it is not in the Kremlin’s interest to cut gas supplies as Russia would lose out financially. 

Nevertheless, Brussels the headquarters of the EU is reportedly preparing to tell the bloc members to cut gas consumption immediately, warning that without increased preservation the continent risks running short of the vital commodity this winter. 

Reports have surfaced that the European Commission will provide members with voluntary gas reduction targets by next week, which cautions that targets will be made mandatory in the event of severe disruption to supplies.

Acting jointly now will be less disruptive and costly, facilitating solidarity and avoiding the need for unplanned and uncoordinated actions later in a possible crisis situation with gas reserves running low.

The IEA warns that efforts to diversify away from Russian gas are no longer enough on their own and that Europe faces the real prospect of rationing its energy unless demand is restricted in order for storage facilities to be filled ahead of the long winter season. 

Birol says he has spoken to EU officials urging them to do all they can right now to prepare for a long, hard winter. He said, “Europe is now forced to operate in a constant state of uncertainty over Russian gas supplies, warning that we can’t rule out a complete cut-off.

The irony is that the EU initiated gas crisis by imposing unprecedented economic sanctions on Russia including hundreds of individuals, businesses, companies, entities, flights, and oil by the end of 2022. In March the bloc said it would reduce gas imports by two-thirds within a year, but there have been disagreements among EU members about this. 

The EU is evidently heavily reliant on Russian gas, yet it has threatened Moscow and at the same time, appears to have shot itself in the foot with its sanctions policy.

An EU last week recommended limiting central heating and cooling in buildings as well as the exemption of coal power stations from its target of emissions reductions.

One EU official has said talks are ongoing over what punitive measures can be enforced if mandatory targets set by the EU to cut gas are not met among member states. 

Europe had relied on Russia for about 40% of its gas but since Russia’s military intervention in Ukraine, Western sanctions have disrupted supplies. The continent imported a total of 155 billion cubic meters of gas from Russia in 2021 and consumes close to 400 billion cubic meters of gas in total during a normal year.

A new EU gas plan issues a warning that continued cuts to Russian gas supplies could lead to a drop in the bloc’s GDP by up to 1.5%, depending on the level of disruption.

Birol said, “Flows have been halted through Nord Stream [1], the biggest single gas pipeline between Russia and Europe, for what Russia says is planned maintenance that is due to end on July 21, 2022. Russia had already significantly reduced the flows coming through Nord Stream in June, and it remains unclear whether they will resume and if so, at what level, after the stipulated deadline.”

The maintenance work is routine procedure that is carried out every year and it’s not uncommon that the work would take longer than ten days. Kremlin spokesperson, Dmitry Peskov, has rejected accusations that Russia would use its gas exports to put pressure on European governments.

Nevertheless, the IEA has offered thorough guidelines and steps to the EU on how to fill European gas storage to adequate levels before winter; starting with the reduction of Europe’s current gas consumption, and putting the saved gas into storage. 

Among the advice is to bring down household electricity demand by setting cooling standards and controls. Government and public buildings should take the lead on this to set an example while campaigns should encourage behavioral changes among consumers.

If the measures proposed by the IEA are not implemented now, Europe will be in an extremely vulnerable position and could well face much more drastic cuts and curtailments later on,” the agency warned. 

It goes on to say that in addition to the measures proposed, “European governments also need to prepare the people of Europe for what may be coming. Public awareness campaigns in the context of an energy crisis have been successful previously in reducing short-term energy demand by several percent.”

According to the IEA, since Russia’s military operation in Ukraine, the amount of revenue that Moscow has collected from exporting oil and gas to Europe has doubled compared with the average of recent years – to US$95 billion. 

“The increase in Russia’s oil and gas export revenues in just the last five months is almost three times what it typically makes from exporting gas to Europe over an entire winter.” the IEA says. 

The agency warns that should Russia decide to completely cut off gas supplies before Europe can get its storage levels up to 90%, the situation will be even more grave and challenging.

The warnings and plans for Europe to cope with enough heat in the winter offers an idea on how reliant the EU is on Russian gas and how fragile the situation may become in wintertime. 

Cool heads are required at such a delicate time. Perhaps a peace deal, which the US-led NATO alliance doesn’t appear to care about, is just what’s needed.

 

Khamenei advises Erdogan not to launch military operation in Syria

Leader of the Islamic Revolution Ayatollah Khamenei received Turkish President Recep Tayyip Erdogan and his delegation on Tuesday. During the meeting, the Leader of the Islamic Revolution emphasized the need to increase cooperation between the two countries, especially commercial cooperation.

Discussing the Syrian conflict, the Leader reiterated the need to honor the territorial integrity of Syria. Responding to some statements about a possible Turkish military operation in northern Syria, he said, “Maintaining the territorial integrity of Syria is very important and any military attack in northern Syria will definitely harm Turkey, Syria and the entire region, and it will benefit the terrorists.”

Leader warned, if there is a policy to block the border between Iran and Armenia, the Islamic Republic will oppose it, as this border is a connection route that has been thousands of years old. The Leader added, “This is definitely to the detriment of Syria, Turkey, and the region. It will not achieve the expected political results from the Syrian government.”

Khamenei said the honor and greatness of the Islamic Ummah will be dependent on overcoming differences of opinion, as well as vigilance against divisive policies, mentioning the occupation regime of Israel as one of the causes of discord and enmity in the region.

The Leader considered Palestine as the first issue of the Islamic world and emphasized, “Despite the favor of some governments towards the Zionist regime, the nations are deeply opposed to this usurping regime.”

Emphasizing that the US and the Israeli regime should not be relied upon, he underlined, “Today, neither the Zionist regime, nor the United States, nor others will be able to stop the deep-rooted movement of the Palestinians, and the end result will be in the interest of the Palestinian people.”

Referring to the Turkish president's hatred of terrorist groups, Khamenei said terrorism must be countered, but a military attack in Syria will benefit terrorists, although terrorists are not limited to a specific group.

In response to the Turkish president's request for Iran's cooperation in fighting terrorist groups, the Leader said, “We will certainly cooperate with you in the fight against terrorism.”

Emphasizing that Tehran considers the security of Turkey and its borders as its own, Khamenei told Erdogan, “You also consider the security of Syria to be your security. The Syrian issues should be resolved through negotiations, and Iran, Turkey, Syria and Russia should resolve this issue through dialogue.”

Erdogan said, “In Syria, terrorist groups are supported by heavy weaponry from Western countries such as Germany, England, France, and especially the United States.”The Leader of the Islamic Revolution also called the rising cooperation between Iran and Turkey on all regional issues useful and necessary and said Iran has always defended Erdogan’s government in internal conflicts and against interference.

“As you said, we are friends of each other in difficult times and we pray for the Muslim nation of Turkey,” the Leader highlighted. 

Khamenei called the volume and quality of economic exchanges and cooperation between the two countries much less than the existing capacities, stressing that this issue should be resolved in the negotiations between the presidents.

In the meeting, which was also attended by President Ebrahim Raisi, Erdogan said it is necessary to unite the Islamic Ummah and increase the solidarity between Iran and Turkey. 

“Turkey has never been silent in the face of injustices against Iran, and the brotherhood of Iran and Turkey should expand in all areas,” Erdogan said in reference to illegal sanctions against Iran. 

Emphasizing that he has always been and will be against unilateral sanctions against Iran, Erdogan pointed out that Ankara supports Iran's legitimate demands based on the JCPOA talks and encourages Turkish companies to invest in Iran.

Referring to Iran and Turkey’s campaigns against terrorists for many years, the Turkish president said, “In Syria, terrorist groups are supported by heavy weaponry from Western countries such as Germany, England, France, and especially the United States.”

Erdogan concluded his remarks by stating that Turkey's position regarding the territorial integrity of Syria is clear, saying, “We expect the Syrian government to start political processes. At the Astana process, the Syrian issue is on top of the agenda, and we hope to achieve good results.”

Putin arrives in Iran

On Tuesday, in his first trip since the invasion of Ukraine, Russian President Vladimir Putin arrived in Iran for a summit with his Iranian and Turkish counterparts.

The three countries are working together to try to reduce the violence in Syria despite supporting opposing sides in the war. Russia and Iran are Syrian President Bashar al-Assad’s strongest backers, while Turkey supports anti-Assad insurgents.

Turkish President, Tayyip Erdogan has threatened to launch another operation in Northern Syria, which Tehran and Moscow oppose. In Tehran, Putin and Erdogan will meet to discuss a deal aimed at resuming Ukraine’s Black Sea grain exports.

The emergence of an US-backed Arab-Israeli bloc that could tilt the Middle East balance of power further away from Iran has accelerated its clerical rulers’ efforts to strengthen strategic ties with the Kremlin.

“Considering the evolving geopolitical ties after the Ukraine war, the establishment tries to secure Moscow’s support in Tehran’s confrontation with Washington and its regional allies,” said a senior Iranian official, who asked not to be named.

Sending a clear message to the West that Russia will seek to boost ties with anti-West Iran, Putin will meet the Islamic Republic’s most powerful authority, Supreme Leader Ayatollah Ali Khamenei, just a few days after US President Joe Biden visited Israel and Saudi Arabia.

Putin’s visit to Tehran is watched closely as Russia’s invasion of Ukraine has reconfigured the global oil market and because of Washington’s warning about Tehran’s plan to provide Russia with up to several hundred drones. Tehran has denied selling drones to Moscow to use in Ukraine.

Emboldened by high oil prices after the Ukraine war, Tehran is betting that with Russia’s support it could pressure Washington to offer concessions for revival of a 2015 nuclear deal.

Under the deal, Tehran curbed its sensitive nuclear work in exchange for lifting international sanctions.

But former US President Donald Trump exited the pact in 2018 and reimposed crippling sanctions on Iran. A year later, Tehran started violating nuclear limits of the pact.

Almost a year of indirect talks between Tehran and Washington in Vienna stalled in March, with Iran questioning the United States’ resolve and Washington calling on Tehran to drop extra demands.

But Moscow and Tehran, both subject to US sanctions, have overlapped interests. Iran, whose oil industry has struggled for years under US sanctions, has long relied on Chinese oil purchases to keep the economy afloat. Since the start of Ukraine war, Moscow has taken away Iran’s oil market in Asia.

In May, Reuters reported that Iran’s crude exports to China have fallen sharply as Beijing favoured heavily discounted Russian barrels, leaving almost 40 million barrels of Iranian oil stored on tankers at sea in Asia and seeking buyers.

 

Russia seeking oil payments from India in UAE dirhams

Russia is seeking payment in United Arab Emirates dirhams for oil exports to some Indian customers, three sources said and a document showed, as Moscow moves away from the US dollar to insulate itself from the effects of Western sanctions.

Russia has been hit by a slew of sanctions from the United States and its allies over its invasion of Ukraine in late February, which it terms a "special military operation".

Russian oil major Rosneft is pushing crude through trading firms including Everest Energy and Coral Energy into India, now its second biggest oil buyer after China.

Western sanctions have prompted many oil importers to shun Moscow, pushing spot prices for Russian crude to record discounts against other grades.

That provided Indian refiners, which rarely bought Russian oil due to high freight costs, an opportunity to snap up exports at hefty discounts to Brent and Middle East staples.

Moscow replaced Saudi Arabia as the second biggest oil supplier to India after Iraq for the second month in a row in June.

At least two Indian refiners have already settled some payments in dirhams, the sources said, adding more would make such payments in coming days.

The United Arab Emirates, seeking to maintain what it says is a neutral position, has not imposed sanctions on Moscow, and the payments could add to the frustration of some in the West, who privately say the UAE's position is untenable and siding with Russia.

The trading firms used by Rosneft have started asking for the dollar equivalent payment in dirhams from this month, the sources said.

Russia wants to increase its use of non-Western currencies for trade with countries such as India, its foreign minister Sergi Lavrov said in April.

The country's finance minister last month also said Moscow may start buying currencies of "friendly" countries, using such holdings to influence the exchange rate of the dollar and euro as a means of countering sharp gains in the rouble.

The Moscow currency exchange is preparing to launch trading in the Uzbek sum and the dirham.

Dubai, the Gulf's financial and business centre, has emerged as a refuge for Russian wealth.

India, also maintaining a neutral position, recognizes insurance cover by Russian companies and has offered classification to ships managed by a Dubai-based subsidiary of Moscow's top shipping group to enable trade.

India's central bank last week introduced a new mechanism for international trade settlements in rupees, which many experts see as a way to promote trade with countries that are under Western sanctions, such as Russia and Iran.

 

Can Iraqi mediation bring Saudi Arabia and Iran closer?

According to a report by Saudi Gazette, Iraqi Prime Minister Mustafa Al-Kadhimi paid a visit to the Kingdom of Saudi Arabia, during which he met Crown Prince Mohammed Bin Salman. The visit was followed by another visit to the Iranian capital Tehran, during which he met senior Iranian officials of that country.

What emerged from these two visits was an attempt of mediation to ease the atmosphere and reduce tension in the region, through dialogue between Saudi Arabia and Iran.

There has been no halt for the Iraqi attempts of mediation over the past few years, especially after the assumption of office by Al-Kadhimi as prime minister of the country. Al-Kadhimi is a respectable leader for Saudi Arabia, as the Kingdom sees him as a patriotic figure who works sincerely to resolve the huge crises that are afflicting Iraq.

The Iraqi viewpoint is that crises in inter-regional relations produce negative impact on Iraq internally. The more the region moves towards resolving crises and easing tension, the more this gives a comfortable ground for rulers in Mesopotamia.

It is true that the crises in Iraq are structural and it is very difficult to overcome most of these without understanding all the crises in their entirety. There is a possibility to mitigate the impact of these dilemmas, and perhaps the most important of them is the security dilemma.

It is ironic that Saudi Arabia, in its understanding and approach, is betting on Iran, which is striving to be a national state, and this is a major point of contention with Iran. The latter is betting on pre-state groups, and even supports them through illegal channels far from what is supposed to be from a national state, whether the militias in Iraq, the Houthis in Yemen, Hezbollah in Lebanon and others.

Restoring the national state will not be an easy matter after years of tampering with the social fabric in the countries of the region, which negatively affected the security and stability of the entire region.

It goes without saying that restoration of the state’s presence and roles through internal dialogue and negotiations and by stopping states from interfering in the internal affairs of other states, all of this would contribute to averting these states and the entire region from bloodshed.

Saudi Arabia spares no effort in extending the hand of dialogue to all who want to reach to this end, despite the pile up of discouraging experiences in terms of dialogue.

A point of concern is the arms race that Tehran wants to launch. It will not serve anyone, and it will cause serious consequences for Iran itself. Here we are talking about two aspects: The first is the nuclear program and the anxiety it causes to countries in the region and the lack of confidence in Iranian promises, especially with the increase in the enrichment rate and the secret aspects that Iran seeks to hide.

The second aspect is the program of drones and ballistic missiles that pose a serious threat to the entire region, and in this also there is a threat to the arms race that has already begun.

Serious dialogue to reach a security system can be a window not to resolve crises, as we all wish, but at least to manage them. As for the idea of dialogue for the sake of image, it will not work as the region had tried it during the past decades, a dialogue that results in smiles in front of cameras but fears remain.

What is worst is that Tehran is using this dialogue to continue its troubling policies, all of which will not be useful.

Saudi Arabia, under the leadership of King Salman and Crown Prince Mohammed Bin Salman, continues its efforts in the region to restore stability, avoid tension, and defuse crises whenever it is possible.