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What will cause the downfall of Russia’s economy

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The brutal logic behind measures targeting the central bank.

Ever since Russia seized Crimea in 2014 Western sanctions have failed to bite or act as a credible deterrent against Russian aggression.

The new measures targeting Russia’s financial system announced by America, the EU and other allies on February 26th change that.

Invasion of Ukraine

They have come too late to prevent an invasion of Ukraine but they are capable of triggering financial mayhem in Russia.

This is because they target its central bank and may lead to the freezing of its $630bn of foreign-exchange reserves.

This could trigger a run on Russia’s banks and currency, and will cause shudders in global markets and a further spike in energy prices.

It may also trigger Russian retaliation. On February 27th Russia said the sanctions were “illegitimate” and indicated that Russia’s nuclear forces had been put on a heightened level of alertness in response.

$3.4trn of reserves

The West’s deployment of this economic weapon will also be watched with slack-jawed shock in China, which has $3.4trn of reserves and which will now be rethinking how to resist Western pressure in the event of a war over Taiwan.

Up until now Western sanctions have been long on macho rhetoric about crushing Russia but short on clout.

For example, the penalties on oligarchs and their offshore wealth have led some tycoons to call for an end to the bloodshed, but not changed decision-making in the Kremlin.

Meanwhile limits on Western technology and industrial exports to Russia will take months or years to have an effect.

American sanctions

Even American sanctions announced on February 24th against Sberbank and VTB Bank, which together hold 75% of the Russian banking industry’s assets, were a serious but not killer blow, particularly since energy transactions were exempted. Russia’s “fortress” financial system looked capable of withstanding the economic weapons that the West dared to use.

The salvo on February 26th goes much further. Many of the headlines in America and Europe have dwelled on the decision to cut off some Russian banks, probably Sberbank and vtb, from swift, the global cross-border payments messaging system.

In fact the swift decision is incremental rather than a game-changer. It will make all counterparties, not just Western ones, wary of dealing with these firms.

If they choose to do so, they will have to resort to using email and phone to communicate, adding a layer of hassle.

$630bn of foreign reserves

Instead, the really big step is to target the institution at the heart of Russia’s fortress economy, the central bank. It holds $630bn of foreign reserves, equivalent to 38% of Russia’s gdp in 2021 (the sanctions may also cover other government-run funds).

Officials in the Biden administration say that they, acting with Europe, will prevent the central bank from using these reserves to undermine the impact of sanctions.

As part of the fortress strategy Russia has shifted the composition of its reserves away from dollars: as of June 2021, it held only 16% in greenbacks, versus 32% in euros, 22% in gold and 13% in Chinese yuan.

Holdings of securities

However, it is likely that the majority of its holdings of securities, bank deposits and other instruments, regardless of the currency they are denominated in, are held in accounts with financial institutions or in jurisdictions that will enforce Western sanctions.

That means some, or even much, of Russia’s national war chest can be frozen.

Responding to the new measures the central bank said on February 27th that it had all necessary resources and instruments to maintain financial stability.

But the implications are daunting. If the central bank does not have instant access to the reserves it will be hard for it to intervene in the currency market by using foreign cash to support the sagging ruble, as it has done in the past few days.

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Foreign currency liquidity

The central bank may be unable to offer foreign-currency liquidity to banks that are under sanctions, in turn increasing the probability that they may default on their foreign-currency obligations to counterparties.

And it will be unable to act as a middle-man for such banks, making or receiving foreign payments with foreign counterparties on their behalf, which is one theoretical way of evading sanctions.

That all points to an intensifying panic in Russia’s financial system. So far the damage from the war has been severe but tolerable.

The currency has fallen by 10% year-to-date, the stockmarket by 35% and the share prices of the biggest banks by over 50%.

Russian government

As of February 25th the cost of insuring against a Russian government default was on a par with Turkey.

Now the pressure is likely to intensify. Ordinary Russians may lose confidence in the banking system, although providing their withdrawals are denominated in rubles the central bank can offset this by offering ruble loans to the banks.

Thanks to its oil earnings, Russia runs a current-account surplus, earning more from abroad than it buys from abroad.

But if there is panic and capital flight, without access to its reserves, it could be forced to introduce tight capital controls to prevent a currency collapse.

It may also choose to temporarily close the financial markets (short-selling of shares has already been banned).

Chinese banks

So far, while there have been some signs of Chinese banks steering clear of dollar-denominated transactions with Russian firms, there has been little sign that China or many other Asian countries intend to enforce Western sanctions.

But now, with a higher risk of default on foreign-currency obligations by Russian banks, firms and the government, all of their counterparties, not just Western ones, will be more wary of them.

The new measures are sufficiently severe that they may be treated by Russia as something close to an act of war, and lead to it retaliating.

On February 27th it said that it had put its nuclear forces on a “special regime of duty”, which means a heightened level of alertness.

Kremlin

This is designed to signal that the Kremlin does not believe that there is a neat boundary between economic and conventional warfare.

The West may now have to alter its nuclear posture in response. There are other ways for Russia to retaliate. One path is intensifying cyber-attacks on Western institutions.

Another is for it to limit gas supplies to Europe. Up until February 25th the supply of gas from Gazprom through Ukraine had been boosted back to normal levels, according to Bloomberg.

But Russia could now taper down supply. This would have only a moderate financial impact on Russia (oil exports are far more important to its economy) but would lead to higher energy prices and consumer bills in Europe.

Economic weapons

In this scenario the West would still have other economic weapons with which to escalate, including blocks on consumer internet services or sanctions on Russian oil.

Whether the West’s newfound resolve succeeds in inflicting a devastating blow on Russia’s economy before Russia inflicts a devastating military blow on Ukraine remains to be seen.

But the new measures will inflict heavy damage on Russia. And they also represent a Rubicon that will fundamentally alter how sanctions and the global economy work.

That is because plenty of other countries that pursue foreign policies that America does not agree with hold large sums of reserves.

The largest of all is China, much of whose vast savings are held in Western financial instruments or through Western firms.

It will be watching and learning from Russia’s financial squeeze, and how Russia retaliates, and trying to assess how it can avoid becoming crushed by the West’s financial vice.

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Three Global Firms Signed By Nairobi Financial Hub On Its Launch

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Three companies were signed by Nairobi’s international financial centre on the day of its launch. The three include Prudential plc, ARC Ride Kenya and AirCarbon Exchange (ACX).

The Nairobi International Financial Centre (NIFC) is a special economic zone for financial firms.

Prudential, one of the world’s biggest insurers and asset managers, became the first firm to formally join the NIFC.

Singapore-based global carbon exchange ACX came along with Prudential. It seeks to set up a carbon exchange in Kenya.

Check out: Why Buyers Are Now Running Away From Popular Used Toyota Cars

NIFC has also admitted ARC Ride Kenya. It is a new start-up that is going to establish an electric vehicle assembly plant in Nairobi. The plant will produce two and three-wheeled electric bikes and scooters.

Also, the Financial Centre is determined to bolster the manufacturing sector in the country. It has signed an MoU with the Kenya Association of Manufacturers (KAM), to help increase financing and investment in the sector.

NIFC authority has hinted at being in discussion with other participants seeking to join it and will give official news soon.

“Last year Prudential Plc, one of the world’s biggest insurers and asset managers, made a commitment to relocating their Africa headquarters from London to Nairobi and join the Centre. Today we are proud to announce that Prudential becomes the first firm to formally join the Nairobi International Financial Centre,” Vincent Rague, Chairman NIFC Authority.

After many years of waiting, the hub will eye large foreign firms, boosting capital flows to Kenya and the region.

The authority has singled-out four sectors that it will prioritise for growth: financial technology, green finance, investment funds, and becoming a hub for regional multinationals.

The NIFC general regulations have been enacted, as the initial set of tax incentive proposals have been passed.

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Certification from the NIFC Authority must be applied by Firms considering conducting business through the NIFC.

A 15% corporate tax will benefit firms operating a carbon market exchange or emission trading system under the NIFC. The 15% advantage will happen for the first 10 years of operation.

Companies certified by the NIFC Authority and have invested a minimum of Sh5 billion will benefit from the certainty that, the Capital Gains Tax applicable at the time they make their investments will remain unchanged during the lifetime of the investments.

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Hackers Make Tactical Change, Now Targeting Small Businesses

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Traditionally, cybercriminals have been targeting big companies with aim of demanding ransoms running into millions. Nonetheless, the trend no longer holds, as new studies have shown the shift in hackers’ interest from big companies to small and medium ones.

Studies have shown that hackers are shifting their focus to small online businesses which they believe are more vulnerable.

Experts have warned that these SMEs and payment portals, especially those relying on mobile payment solutions, are now facing high risks of cyber attacks coordinated by these hackers.

Speaking during the inaugural Africa Cybersecurity Congress held in Nairobi, Hadi Maeleb, Agora Group co-founder and CEO said the threats to online businesses were growing at a high rate.

Further, he stated that more than 90% of business owners are unaware that their enterprises are at risk, despite the high growth rate of the attacks.

“Cybercriminals are now targeting small businesses more as they have realized that these enterprises do believe they would be exposed due to their comparatively low turnovers until they lose their data and payments are compromised,” said Mr Maeleb.

With the adoption of e-commerce platforms, State agencies, financial institutions, healthcare, energy and utilities have persistently faced cyber-attacks in the recent past.

According to CAK- Communications Authority of Kenya’s first-quarter data (between January to March 2022), a total of 79.2 million cyber-attacks were reported. This has prompted the government to issue 28,848 advisories in an attempt to fight the rising attacks.

Invest in Cybersecurity

Mr Maeleb noted that business owners should invest in cybersecurity tools as there is no magical solution to cybercrime.

“This ‘democratization’ of cyberattacks is expected to push losses due to business interruption, financial theft, personal data breaches and even ransom payments over the Sh4 trillion mark by end of 2022,” he said.

At the peak of the pandemic, several states adopted tough lockdown measures such as social distancing, working from home, and online learning.

Also read: Why Buyers Are Now Running Away From Popular Used Toyota Cars

Hackers shifting focus to small businesses.

This adoption of digital solutions such as e-commerce, remote working and banking went up as Kenyans turned to online platforms to curb the spread of the coronavirus.

“Unfortunately for them, the business of cybercrime has evolved to a point where attacks like ransomware are now sold as a service,” he added.

Even though these measures triggered the adoption of digital platforms, they also increased vulnerability such as ransom, data breaches, harassment, cyberbullying, and data breaches.

Kenya’s ICT Policy which came into effect in 2006, is credited for creating an enabling environment for the growth and usage of technology.

Kenya’s ICT Policy which came into effect in 2006, is credited for creating an enabling environment for the growth and usage of technology.

To achieve Kenya’s Vision 2030 goal of a regional ICT hub, the tech sector was expected to contribute directly and indirectly to an additional 1.5% of Kenya’s GDP by 2017/2018.

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Why Buyers Are Now Running Away From Popular Used Toyota Cars

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As it has been noted that Kenyans are now running away from the popular used Toyota car models, contrary to what has been a tradition in the country. The rise in their costs has seen even dealers cut down on imports of these vehicles due to decreased demand.

Traditionally, popular models such as Toyota Premio and RAV4 have been synonymous with middle-income earners over the years. However, this is no longer the trend.

Car dealers say more Kenyans are now going for vehicles such as Nissan Sylphy and Mazda, which cost less compared with popular Toyota models.

Toyota Vs Nisaan and Mazda models

According to Charles Munyori, the secretary-general of Kenya Auto Bazaar Association, Nissan Sylphy and Mazda’s CX5 and Axela, are quickly gaining popularity among Kenyans.

Mr Munyori said the price of a Toyota RAV4 has short up to Sh3 million currently from Sh2.8 million in February while a Premio is going for Sh2.2 million from Sh2 million four months ago.

On the contrary, Mazda Axela is now selling for Sh1.6 million with Nissan Sylphy (Blue Bird) going for at least Sh1.5 million.

Currently, consumers find these brands to be the best alternatives to their preferred models, as they are relatively cheaper and good.

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With the rising household costs, these car prices are making them affordable to most Kenyans as they struggle to balance the high cost of living.

“We are seeing a shift where Kenyans are now moving from the popular brands such as Toyota Premio and RAV4 to other models. This shift has been occasioned by the high cost that these cars are now fetching at the market,” said Mr Munyori.

“In fact, most of the car dealers are hardly bringing in Premio and RAV4 models because they are not moving and they will tie up money that they would need for importation of more vehicles,” he said.

Ex-Japanese vehicles

Ex-Japan vehicles dominate the Kenyan second-hand sector with a more than 80% market share.

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The buyers in the sector prefer these cars as their spare parts are easier to obtain locally compared to other brands. Additionally, buyers believe that the resale value of Toyota vehicles are higher than that of other brands like mazda or Nissan.

Reasons for risisng vehicle cost

The rising cost of vehicles in the country has been linked to the unavailability of dollars locally, a shortage of electronic chips in Japan, and a weakening shilling against the dollar.

The country is currently experiencing extreme dollar shortage, that one has to wait for at least three days to get $20,000 or $25,000 from the banks.

“We have to wait for like nine days in order to accumulate $80,000, and this has seen car dealers delay in making their orders. We are really feeling the impact of the dollar shortage in the market,” Mr Munyori said.

banks have imposed regulations on dollar purchase. This has forced traders to face difficulty in meeting their obligations.

Industrialists are forced to start seeking dollars in advance. The shortage puts a strain on supplier relations and the ability to negotiate favourable prices in gap markets.

On the other hand, Semiconductors are used in making electronic devices. Their shortage has forced the vehicle manufacturers to scale down the production. The quantity and quality cannot be maintained with decrease in one of the crucial raw material.

Finally, the shilling has persistently remained weak against the dollar. this has made it costly for importers shipping in goods.

The shilling has hit a record low trading at of Sh 117.06 against the dollar. This predicts a continued rise in imported goods, and signifies a further dollar shortage crisis.

The continuous depreciation in shilling stability is attributed to increased demand for dollars from importers. This highly arises on importaion of crude oil and merchandised goods.

It should be noted that most external debt is repaid in the dollar. Therefore, a weakened shilling increases prices of imported goods, and puts pressure on the country’s debt repayment.

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