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Singapore’s sling, good COP bad COP and Russia and Ukraine’s battle of Britain

Policy preview: Singapore’s sling
The Organisation for Economic Co-operation and Development (OECD) and G20 agreement to implement a global minimum 15% corporate tax faces a long road to implementation, particularly as governance standards for policing adherence remain undefined. Singapore is likely to prove a key test case. It has a 17% corporate tax, but offers an array of incentives that can reduce this significantly for many corporate residents, including those tech giants who operate regional headquarters from the city-state or the investment managers based there.

Prime Minister Lee Hsien Loong acknowledged as much earlier this month, noting that the city state will have to see how its current tax incentives “will have to be modified”. Singapore is not a member of the OECD, unlike many other alleged ‘tax havens,’ or the G20, but has signalled support for the effort for years now, and members of its government have called out the “artificial shifting of profits” to minimise their tax bills in the past, even as others have accused Singapore of profiteering off such practices.

Singapore remains well-positioned as a corporate hub outside tax competition, but it is nonetheless still likely to ensure that its business environment is as attractive as possible for the multinationals and other businesses that make their home there. It is set to benefit from concerns about the political environment in Hong Kong as well as its membership in the Regional Comprehensive Economic Partnership (RCEP), due to come into effect next year.

Singaporean authorities have indicated that they will seek to take action aimed at making Singapore an even friendlier business environment, including by offering incentives to hire locals and lowering requirements for leasing government-owned office space, a considerable portion of Singapore’s commercial property stock.

However, the temptation for tax adjustments may prove too great – particularly as its strident COVID-19 regulations and increased requirements for permanent residency visas have raised concerns about the quality-of-life and employment advantages it has long held.

Singaporean authorities may state they do not intend to continue to compete on a tax basis, but such declarations have been made in the past with little follow-through. The extent to which it is possible to enforce and regulate the OECD-G20 agreements is likely to be evidenced by Singapore’s corporate tax adjustments.

Power play: good COP bad COP
COP26 has set the stage for a new series of measures to stimulate private markets for climate financing.

British Prime Minister Boris Johnson used the conference to renew a longstanding goal, first agreed at the 2009 iteration of the COP conference, to provide US$100bn of climate finance – intended to enable developing countries’ attempts to mitigate and adapt in the face of climate change – annually by 2020.

One year beyond the deadline this target has not been met. Latest OECD estimates show climate finance amounted to some US$80bn in 2019, three-quarters of it provided on a state-to-state basis. Announcements made during COP26 suggest the target will not be met until 2023. Diplomats and negotiators are hard at work trying to pull together enough public and private finance to make the target. Building on Germany and Japan’s positions as the largest providers of climate finance in 2019, we have seen new commitments in recent weeks from the UK, Italy, and Denmark, while US climate envoy John Kerry is confident that the total will be met in 2022. So far, so good?

It is not so simple – what is meant by ‘climate finance’ is itself contested. There are a range of definitions, accounting for the financial instruments used (such as loans or grants), whether contributions are from the private or public sector, and the favourability of interest rates or notice periods. The OECD’s definition of climate finance is broad, encompassing grants, loans and export finance credits from both public and private sectors.

Many developing countries find this definition overly generous, arguing that it obscures how useful and beneficial climate finance might be. For instance, many contributions focus on development projects with only a partial focus on climate goals, and very often governments do not meet their fair share of climate finance contributions.

This contributes to the anger and mistrust felt by developing nations. The founder of a Nairobi-based climate charity, said that the missed US$100bn in 2020 had “hugely damaged” trust in the UN climate summit process, while the Gambia’s energy minister has said that the consequences for developing nations would be grave: “It would be catastrophic because we need those resources”.

This widespread feeling that developed countries cannot be trusted to pull their weight is a challenge to negotiations at COP26, where talks are being held to determine target levels of climate finance beyond 2025. Geopolitical pressure on wealthy countries to deliver is growing. The bulk of climate finance at present is public, but given the political headwinds we can expect to see OECD countries lean on the private sector to find the environmentally and politically necessary levels of finance.

“We [the world’s least-developed countries] bear the biggest brunt of the impact of climate change and we would like to see the commitment that was taken by the developed countries be fulfilled” Lamin B Dibba, The Gambia’s Environment Minister

Dollars and sense: Russia and Ukraine’s battle of Britain

Moscow and Kyiv have been locked in war in eastern Ukraine for some seven years now. Casualties remain a weekly occurrence on the frontlines, even as life goes on largely unaffected in both capitals. The bitter falling out between the erstwhile close allies has had ramifications for international gas markets, NATO, and much more. One front of the conflict has even struck into the heart of Britain, which while not a violent threat, could have major ramifications outside the scope of the conflict.

On 11 November, the UK Supreme Court is due to hold its final hearing in a lawsuit between the two sovereign states, as Kyiv claims that Moscow foisted a US$3bn bond loan on the former, disgraced, government of President Viktor Yanukovych (whose ouster in large part sparked the war) in 2013. Subsequent Ukrainian governments have refused to repay, arguing duress. Russia for its part argues that though the loan was structured under UK laws, that these arguments are not justiciable in the UK.

Ultimately, Kyiv’s bar for a ‘victory’ is lower than Russia’s – if the Supreme Court merely orders a full trial on the merits of any of the various legal arguments Ukraine has made (legal scholars have labelled its approach a ‘kitchen sink strategy) then a series of further appeals by Russia can be expected and the bond will remain outstanding.

The British government has in the past indicated it does not approve of Russia’s approach to the bond, though suggestions that it legislate in support of Kyiv have been dismissed as unworkable – and caused concern this could undermine London’s position as a key market for selling emerging market debt. London and New York have long been the preferred markets for doing so, with their respective legal regimes providing comfort to investors.

Anything other than a ruling in favour of Russia, however, risks affecting London’s attractiveness as a market for such debt – if there is an argument of coercion, this will likely be picked up by activists from groups like the Jubilee Debt Campaign. As is so often the case, much will be determined by the messaging around the ruling and whether Russia seeks to engage in a public relations effort over the judgement. This should be expected; British banks and investors should be prepared for Moscow engaging in its own effort to disparage the standards of English law for such contracts in the event of an adverse ruling.

“Is it really incomprehensible that such an unprecedented policy of double standards could open a Pandora’s box, cause enormous damage to global finances and generally undermine confidence in international financial institutions”

former President of Russia, Dmitry Medvedev
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The other transition deal, stage set for surge of sovereign lawsuits and the man reshaping Treasury’s tools

Policy Preview: The UK’s other transition deal
On 14 December, the UK Government released its much-awaited Energy White Paper, laying out a simultaneous pledge to seek a net-zero basin for the UK Continental Shelf by 2050 and the pioneering of “a new British industry dedicated to (carbon) capture and return under the North Sea”. No mean feat by any measure, and the debates on how to achieve this remains very much under wraps. Yet, the paper did give the Government one deadline, agreeing a ‘North Sea Transition Deal’ in the first half of 2021.

A more bankable date arguably is 1 November 2021, when the UN Climate Change Conference in Glasgow kicks off – a key event that Prime Minister, Boris Johnson, believes can be used to recast his global image. Regardless of timing, however, what the White Paper and other recent government statements have made clear is that the transition – deal or no deal – will be painful.

One area of hope has been the Government’s spending plans, particularly the £1 billion fund Johnson announced last month for establishing carbon capture, utilisation, and storage (CCUS) facilities in four “SuperPlaces” (the Government’s term). However, only one will be in Scotland, the hub of the UK’s existing offshore energy industry. The outlook for support for legacy industries there is poor. The White Paper explicitly states that, “Government support is in the context of our net zero target”. The only policy directly tied to the offshore fields is Government’s commitment to seeking the North Sea Transition Deal include an end all routine flaring by 2030.

The sole opportunity it discusses in depth, is making the UK oilfield services sector a leader in the decommissioning of offshore facilities, positively spinning the expectation the UK will “become the largest decommissioning market globally over the next decade”. Greenfield development is not on the cards, and just two days prior to the paper’s launch Johnson laid out plans to end state export financing for new crude oil developments. Nonetheless, the paper claims to recognise that any North Sea Transition deal will be a ‘quid pro quo’ between industry and Government.

Previous Conservative governments have already cut oil and gas taxes, including effectively eliminating the petroleum revenue tax and slashing the supplementary charge (SR) in 2015 and 2016, but there is little room to go. Cutting the SR would be ineffective at stimulating investment in the current environment. The white paper indicates that only non-fiscal support will be on offer, and that this will only be for those transitioning heavily away from their previous area of business. Whether the Government can extract such a hefty quo for such a potentially meagre quid, remains to be seen, however.

Dollars and sense: stage set for surge of sovereign lawsuits
The difficulty of pursuing foreign governments in domestic courts has long been a major hindrance to developing hard currency capital markets for emerging markets. But the idea of sovereign immunity in such spats has been steadily eroded – while over the last eight years, ever-riskier countries have been able to borrow dollars, euros and pounds out of London and New York. Infamously recalcitrant Argentina even issued a 100-year dollar bond in 2017, only to default again earlier this year. Sovereign credit markets have nonetheless remained frothy, with investors scouring opportunities for any real yield as Western interest rates are expected to remain at or near zero.

Advances in the enforceability of funds owed by uncooperative government creditors are rare, but often quite meaningful. The intervention of the late Judge Thomas Griesa in a group of hedge funds attempts to secure payment from Argentina following a previous dispute kept Buenos Aires frozen out of Western markets for years.

Many bond investors argued that the ruling strengthened emerging country debt markets. However, for non-bond investors, the ability to recover funds from governments when financing agreements go awry is more limited. Such investment disputes are typically heard by arbitration panels rather than by New York State and UK judges, as is the case with most bond spats.

Yet a recent legal settlement involving Guatemala has likely shifted matters slightly in such investors’ favour. On 3 November Guatemala missed a payment on a US$700m bond. Although it transferred funds for the payment to its custodian, Bank of New York Mellon, the bank told bondholders it was barred from making payment due to a restraining notice issued by the New York State Supreme Court. The court issued the order in response to a request from Florida-based firm TECO Energy, which secured a US$35.5 million judgement in its favour from the World Bank’s arbitration institute.

Guatemala protested the court’s order but by 24 November agreed to pay TECO, although it has not exhausted all appeals, even with the spat in its eleventh year. Put simply, Guatemala wished to avoid any blot on its heretofore spotless bond payment record lest it affect its ability to tap capital markets in the future. The process TECO took was rather simple by the standards of sovereign litigation. It secured an order from a D.C. court upholding its arbitral victory, then registering that with New York State Supreme Court, resulting in the restraining notice.

While there are very few countries in default on their foreign bonds at present, Guatemala is one of many countries entangled in lengthy arbitration disputes. We expect the New York State Supreme Court will soon face a barrage of applications for restraining notices from investors hoping to mimic TECO’s success.

Power play: the man reshaping Treasury’s tools
US President-elect Joe Biden’s nomination of Adewale ‘Wally’ Adeyemo as Deputy Treasury Secretary signals the agency’s international role is only likely to grow more activist. Adeyemo has a low public profile, but is a stalwart of the Democratic elite. He most recently served as the first President of the Obama Foundation. Before that as Deputy Chief of Staff to Treasury Secretary, Jack Lew, before concurrently serving as Elizabeth Warren’s Chief of Staff at the Consumer Financial Protection Bureau and as Deputy National Security Advisor, holding the International Economics Brief. Towards the end of the Obama Administration, he also served as lead negotiator for the Trans-Pacific Partnership and as presidential representative to the G7 and G20.

Adeyemo is tasked with overseeing a review of sanctions policy and will oversee the elements of the US Treasury that relate to its role in international affairs. If confirmed by the Senate, Adeyemo will essentially be the Biden Administration’s point man for ‘geo-economic’ policies, or the use of economic policies to affect geopolitical goals.

Adeyemo’s experience and writings provide an indication of the course he is likely to take. In the negotiations for the TPP, it was Adeyemo who focused on the inclusion of currency manipulation rules, though this was largely abandoned even before US President, Donald Trump withdrew the US from the negotiations. He was a key figure in shaping sanctions both while serving under Lew at the Treasury and in liaising the effort to respond to Russia’s invasion of Ukraine in 2014 in his dealings with the G7 and G20.

Both in and out of the White House, he has also focused on China, and been an advocate of the argument that the biggest threat to Beijing’s rise is its still-maturing financial market. During his 2016 Senate confirmation hearing, he took a relatively soft line on China when asked about his view on the role of the Committee on Foreign Investment in the United States (CFIUS). But the Trump Administration has since thrown up far more barriers to Chinese investment, and it is unlikely the Biden Administration will reverse many of these, if any. Biden’s nominee for US Trade Representative, Katherine Tai, further supports the belief that the Biden Administration will continue to take a hard line on Chinese investment. Adeyemo will ultimately determine how the Treasury supports such policies.

Do not expect any major surprises from Adeyemo’s sanctions review. The new Administration is not going to reverse the Trump Administration’s acceleration of sanctions. It will instead adjust its focus, from unilaterally blacklisting individual firms to working with allies to target China’s relations with the global financial system. Policy will be slow to emerge, and measured, but Adeyemo’s focus will be on limiting China’s ability to become a lynchpin of the global financial system. Given Beijing’s expansive lending abroad in recent years, however, the effort will prove extremely challenging.

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