Neutral Global Infrastructure

Larry Fink, Chairman of BlackRock has based on the Western response to Russia and the rapid termination of business with the country, declared that globalization is over. These events highlight the existing global interdependencies and vulnerabilities, prompting calls for reevaluation and redesign of global financial infrastructure. And ultimately a shift towards self-reliance.

This article was first published in The Mint. You can read the original at this link.

Last week, in a letter to his shareholders, Larry Fink, the Chairman of BlackRock, declared that globalisation was over. The manner in which the Western world came together to impose sanctions on Russia, coupled with the alacrity with which global businesses terminated decades-old business arrangements with the country virtually overnight, seemed to suggest that many of the assumptions upon which global trade has been based so far can no longer be counted upon to hold true anymore. Coming, as they have, fast on the heels of the pandemic that, itself, shone a light on many vulnerabilities, these events, he argued, “mark a turning point in the world order of geopolitics, macro-economic trends, and capital markets”.

It is clear that the events of the past few weeks have been a sharp reminder to countries of their global interdependencies. Europe is heavily dependent on Russian oil and while plans are underfoot to find alternatives, there is little doubt that there will be some short term hardship. It is also evident that the war will have an impact on global food supplies - even India, as The Ken points out in this newsletter, is likely to struggle in unexpected ways.

At the same time, the global response to the war has raised questions about whether the dollar should still be used as the global currency for trade and shone a light on how vulnerable many of the core elements of our global infrastructure are to geopolitical pressures. The swiftness with which Russian banks were ejected from the SWIFT network, for instance, has prompted calls for alternatives for cross-border flow of funds even as Russia tries to find bilateral workarounds.

Among nation-states, the immediate fallout of all this has been a hardening of nationalistic agendas. Twice-burnt (first by the pandemic and now by war-induced disruptions to global trade), countries have begun to take a more self-reliant approach to national requirements in an attempt to reduce the geopolitical risk of external eventualities. This has changed the tenor of discussions at international fora as countries prioritise sovereignty over multilateral cooperation.

But can we really halt humanity’s inexorable march towards greater globalisation? Is it even possible for us to reverse trends that have been so many millennia in the making?

Common Cause

One of the reasons why humans became the dominant species on the planet was our extraordinary ability to co-operate with each other to further our common objectives. As hunter-gatherers we learned to leverage the shared skills of all the members of our hunting parties allowing us to bring down prey beyond the ability of any one of us to slay. When we put down roots and established permanent settlements, we learned to depend even more on each other - realising that instead of having everyone develop basic expertise in a wide range of skills, it was far better to encourage specialisation so that the entire community could benefit from the mutual exchange of differentiated goods and services.

As towns and villages coalesced into nation-states, this philosophy of co-operation extended even further. Communities that found common cause with each other, allowed monarchs or elected representatives to chart their collective destinies, demonstrating their commitment to these national agendas by paying their taxes and complying with national laws. Most recently this idea of collective participation has gone global with multinational arrangements like the European Union extending these principles of co-operation to coalesce many countries of Europe into a single economic and political unit.

When viewed in this light, globalisation, is the logical (and perhaps inevitable) extension of the very human tendency to work together to achieve common goals. And while Russia’s invasion of Ukraine (and the response it has provoked) might seem like a rejection of this core philosophy, when viewed as part of a larger timeline of human development, it is but a minor blip in the evolution of the species towards a more co-operative and inter-dependent future.

Global Public Infrastructure

That said, when events of this scale and magnitude give rise to questions about the core assumptions upon which our global arrangements are based, we would do well to understand the reason for these concerns and, if possible, address them in ways that will allow us to continue to reap the benefits of globalisation.

Take the concerns around SWIFT for example. When Russia was removed from the global financial system, not only could no-one from all the nations that had imposed sanctions have any commercial dealings with Russia, it made it difficult for anyone else to do so either. And there were a lot of countries who had not imposed sanctions.

This is not how a global (and supposedly politically-neutral) infrastructure is supposed to function. In contrast, when Ukraine requested ICANN to boot Russia off the internet it received a very different response. How is it that supposedly neutral global financial infrastructure came to be used as an economic weapon?

It turns out that the secure messaging system that lies at the heart of all international fund flows, is operated by a Belgian company that is, as a result, subject to the sorts of pressures that any entity regulated by domestic law has to face. While it has resisted previous requests for sanctions against other countries, the alacrity with which key Russian banks were ejected from the SWIFT network raises concerns as to whether managing such a key element of our global financial infrastructure in this manner poses a risk to the financial system as a whole.

Re-balance and Re-design

It is clear we need better alternatives.

Rather than allowing a single entity to control the switch through which all financial messages, could we not set up a financial messaging infrastructure that is based on open protocols. Central banks would then be free to use these protocols to interconnect their national financial systems with those of every other countries they choose to interact with. This will allow nations to interoperate with those countries that they want to have dealings with while ensuring that their unwillingness to interoperate with any given country does not come in the way of others engaging with them as they please.

We should re-evaluate all our global public infrastructure using a similar lens. Where effective control lies with a small group of nations, we need to re-balance control appropriately so that we mitigate the risk of one political group dictating how the rest of the world should behave. Where the infrastructure is being managed by private entities, we should consider wresting control away from them and re-integrate them with the rest of the global commons.

Wherever possible we should ensure that the infrastructure itself is always remains neutral and incapable of being subverted to only serve the political objectives of a few, nations of the world are free to connect to this core global infrastructure as they see fit in their own national interests. Or not.