Recently, China responded positively to a proposal by the Prime Minister of Malaysia, Anwar Ibrahim, to form an Asian Monetary Fund as an alternative to the International Monetary Fund (IMF) and to reduce reliance on the U.S. dollar. The idea is decades old, but it is now being seized upon those who claim that the role of the USD as a global reserve currency are numbered.
Because the dollar is so widely-accepted internationally, the American government can get away with much more profligate spending than any other government, given how its central bank, the Federal Reserve, is able to go much further in monetizing U.S. debt (really just printing money) than any other central bank. For 50 years, there have been claims that the United States may lose this so-called exorbitant privilege, but so far that has not happened. Arguments and explanations why this is the case range from the U.S. pledge to militarily protect the Saudi ruling class—the “Petrodollar” theory—over the American status as being energy independent to the fact that it remains a leading developer of cutting-edge technology, given that it for example counted three times as much newly funded AI companies in 2022 as China.
Still, even those with the rosiest perspective on the U.S. dollar, will need to admit that things are changing.
A number of recent agreements is illustrative. This year, Brazil and China agreed to conduct all future trade transactions using their own currencies, Indian customers have recently begun paying for most Russian oil in non-dollar currencies, and Saudi Arabia has intensified ties with China, becoming a “dialogue partner” in the China-controlled “Shanghai Cooperation Organization” and committing to a massive chemicals and raw materials investment project in China. On top of that, there is China’s key role in restoring diplomatic ties between Saudi Arabia and Iran.
This all goes beyond the ‘BRICS.’ At the end of March, French oil giant Total Energies announced it had completed its first purchase of liquefied natural gas (LNG) from Chinese oil company CNOOC, thereby using the Chinese Yuan as the currency.
In her new book, Backfire: How Sanctions Reshape the World Against US Interests, former French Treasury official and current global forecasting director of the Economist Intelligence Unit Agathe Demarais discusses how the policy instrument of sanctions comes with a whole range of unintended side effects that may ultimately diminish U.S. influence. This while regimes have been using all kinds of innovative techniques to evade such sanctions.
Global tensions and disputes
For the West, it is particularly troubling to see Malaysia as the driver behind the Asian Monetary Fund. In the age of ‘decoupling,’ with Western countries and their allies attempting to avoid excessive dependence China and Russia when it comes to “strategic” matters—something that is hard to define and prone to misuse—Southeast Asia, a region with enormous growth prospects, could make up for any reduced trade with China and Russia.
Then, tensions between Southeast Asia and the European Union in particular seem to be on the rise. At the heart of it is a dispute over palm oil, an important export for economies like Malaysia and Indonesia. Ever more stringent EU requirements, often linked to concerns about deforestation, are angering the Southeast Asian export powerhouses, leading to Indonesian President Jokowi openly warning the EU at last year’s EU-ASEAN Summit that it should not try to dictate its standards to ASEAN, the regional trade bloc. A particular frustration in Malaysia and Indonesia is that the EU is flatly ignoring the undeniable progress in reducing deforestation during palm oil production. Instead of commending this, the EU is imposing ever more bureaucracy on palm oil exports. According to rumours, this is really about protecting alternative oilseeds that tend to be produced in Europe, even if these alternatives are actually a greater burden for the environment than palm oil.
Yet, a high-profile $14.9 billion legal dispute is currently framing the outlook for Malaysia-Europe relations. The fact that it has received relatively little media attention in Europe is probably telling of how much European policy makers care about this.
In February 2022, a French court ordered Malaysia to pay $14.9 billion to the heirs of the last sultan of Sulu, which is part of the resource-rich Malaysian province of Sabah. The question here was whether Malaysia should continue to honour a colonial-era deal, whereby a British trading company paid compensation to the sultan of Sulu, then considered sovereign over the territory.
After Malaysian independence, the newly formed state always respected the promises made by the British, paying the heirs an annual stipend of $5,300, until in 2013, following an armed incursion from the Philippines by a group claiming to be the heirs.
The fact that politicians in the Philippines continue to make historical claims to Sabah makes it all even more sensitive. With a group claiming to represent the heirs now engaging in lawsuits to get their way, European courts have been forced to provide verdicts on the matter. Following the French arbitration decision, Malaysian politicians were shocked to see efforts to seize bank accounts in Luxembourg of two subsidiaries of Malaysian state oil company Petronas. A French court did suspend the enforcement of the award until the conclusion of the appeal, but the attempted seizure indicates how high the stakes are.
The whole dispute is surrounded by a lot of question marks. First of all, there is the question whether the claimants are the genuine heirs of the Sulu sultan. Furthermore, it isn’t very clear who’s financing the legal campaign. The Financial Times cites “multiple people close to the case” that London-based investor Therium would be bankrolling the supposed heirs, who live in the Philippines and are not wealthy.
Then there’s the fact that the Madrid high court annulled a proceeding presided over by the arbitrator in the case, Gonzalo Stampa, who then moved the case to Paris, where a verdict going against Malaysia was pronounced. Arbitration cases can be relocated, but only when they become “unduly difficult.” The Malaysian government has now initiated criminal proceedings against Stampa, which is indicative of the way this case has played out. To make it all even more complicated, there are historical records showing that the land never belonged to sultan of Sulu in the first place, but to the sultan of Brunei instead. In sum, it is probably not too exaggerated to speak of a hornets’ nest. Whatever one thinks of it, it is contributing to the challenges between Malaysia and Western Europe that could gravely undermine the EU’s relationships with ASEAN, just when the EU is attempting to deepen trade and diplomatic ties with the region. It is of course all very complex, but European governments must not overlook concerns in the region. In the age of decoupling, alienating friendly trading partners is just not a good idea.
Decoupling is Happening, So Europe Must Avoid Alienating Allies
Recently, China responded positively to a proposal by the Prime Minister of Malaysia, Anwar Ibrahim, to form an Asian Monetary Fund as an alternative to the International Monetary Fund (IMF) and to reduce reliance on the U.S. dollar. The idea is decades old, but it is now being seized upon those who claim that the role of the USD as a global reserve currency are numbered.
Because the dollar is so widely-accepted internationally, the American government can get away with much more profligate spending than any other government, given how its central bank, the Federal Reserve, is able to go much further in monetizing U.S. debt (really just printing money) than any other central bank. For 50 years, there have been claims that the United States may lose this so-called exorbitant privilege, but so far that has not happened. Arguments and explanations why this is the case range from the U.S. pledge to militarily protect the Saudi ruling class—the “Petrodollar” theory—over the American status as being energy independent to the fact that it remains a leading developer of cutting-edge technology, given that it for example counted three times as much newly funded AI companies in 2022 as China.
Still, even those with the rosiest perspective on the U.S. dollar, will need to admit that things are changing.
A number of recent agreements is illustrative. This year, Brazil and China agreed to conduct all future trade transactions using their own currencies, Indian customers have recently begun paying for most Russian oil in non-dollar currencies, and Saudi Arabia has intensified ties with China, becoming a “dialogue partner” in the China-controlled “Shanghai Cooperation Organization” and committing to a massive chemicals and raw materials investment project in China. On top of that, there is China’s key role in restoring diplomatic ties between Saudi Arabia and Iran.
This all goes beyond the ‘BRICS.’ At the end of March, French oil giant Total Energies announced it had completed its first purchase of liquefied natural gas (LNG) from Chinese oil company CNOOC, thereby using the Chinese Yuan as the currency.
In her new book, Backfire: How Sanctions Reshape the World Against US Interests, former French Treasury official and current global forecasting director of the Economist Intelligence Unit Agathe Demarais discusses how the policy instrument of sanctions comes with a whole range of unintended side effects that may ultimately diminish U.S. influence. This while regimes have been using all kinds of innovative techniques to evade such sanctions.
Global tensions and disputes
For the West, it is particularly troubling to see Malaysia as the driver behind the Asian Monetary Fund. In the age of ‘decoupling,’ with Western countries and their allies attempting to avoid excessive dependence China and Russia when it comes to “strategic” matters—something that is hard to define and prone to misuse—Southeast Asia, a region with enormous growth prospects, could make up for any reduced trade with China and Russia.
Then, tensions between Southeast Asia and the European Union in particular seem to be on the rise. At the heart of it is a dispute over palm oil, an important export for economies like Malaysia and Indonesia. Ever more stringent EU requirements, often linked to concerns about deforestation, are angering the Southeast Asian export powerhouses, leading to Indonesian President Jokowi openly warning the EU at last year’s EU-ASEAN Summit that it should not try to dictate its standards to ASEAN, the regional trade bloc. A particular frustration in Malaysia and Indonesia is that the EU is flatly ignoring the undeniable progress in reducing deforestation during palm oil production. Instead of commending this, the EU is imposing ever more bureaucracy on palm oil exports. According to rumours, this is really about protecting alternative oilseeds that tend to be produced in Europe, even if these alternatives are actually a greater burden for the environment than palm oil.
Yet, a high-profile $14.9 billion legal dispute is currently framing the outlook for Malaysia-Europe relations. The fact that it has received relatively little media attention in Europe is probably telling of how much European policy makers care about this.
In February 2022, a French court ordered Malaysia to pay $14.9 billion to the heirs of the last sultan of Sulu, which is part of the resource-rich Malaysian province of Sabah. The question here was whether Malaysia should continue to honour a colonial-era deal, whereby a British trading company paid compensation to the sultan of Sulu, then considered sovereign over the territory.
After Malaysian independence, the newly formed state always respected the promises made by the British, paying the heirs an annual stipend of $5,300, until in 2013, following an armed incursion from the Philippines by a group claiming to be the heirs.
The fact that politicians in the Philippines continue to make historical claims to Sabah makes it all even more sensitive. With a group claiming to represent the heirs now engaging in lawsuits to get their way, European courts have been forced to provide verdicts on the matter. Following the French arbitration decision, Malaysian politicians were shocked to see efforts to seize bank accounts in Luxembourg of two subsidiaries of Malaysian state oil company Petronas. A French court did suspend the enforcement of the award until the conclusion of the appeal, but the attempted seizure indicates how high the stakes are.
The whole dispute is surrounded by a lot of question marks. First of all, there is the question whether the claimants are the genuine heirs of the Sulu sultan. Furthermore, it isn’t very clear who’s financing the legal campaign. The Financial Times cites “multiple people close to the case” that London-based investor Therium would be bankrolling the supposed heirs, who live in the Philippines and are not wealthy.
Then there’s the fact that the Madrid high court annulled a proceeding presided over by the arbitrator in the case, Gonzalo Stampa, who then moved the case to Paris, where a verdict going against Malaysia was pronounced. Arbitration cases can be relocated, but only when they become “unduly difficult.” The Malaysian government has now initiated criminal proceedings against Stampa, which is indicative of the way this case has played out. To make it all even more complicated, there are historical records showing that the land never belonged to sultan of Sulu in the first place, but to the sultan of Brunei instead. In sum, it is probably not too exaggerated to speak of a hornets’ nest. Whatever one thinks of it, it is contributing to the challenges between Malaysia and Western Europe that could gravely undermine the EU’s relationships with ASEAN, just when the EU is attempting to deepen trade and diplomatic ties with the region. It is of course all very complex, but European governments must not overlook concerns in the region. In the age of decoupling, alienating friendly trading partners is just not a good idea.
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