Author: itsupport

Can India become a developed economy by mid-century?

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At an economics conference in the early 1960s, one speaker began his presentation on development by citing India as an example. Before he could continue, an economist interrupted and asked: “What other country in the world is like India?” The room fell silent. To this day, this question remains unanswered.

Earlier this year, Prime Minister Narendra Modi announced that India aims to achieve developed-country status by 2047, the centenary of its independence from the British Empire. This ambitious goal, which could transform the Indian economy and reshape the global economic landscape, has generated widespread excitement.

But reaching this milestone is no small feat. Conservative estimates suggest that India’s per capita income growth would need to outpace China’s by 3.5 percentage points each year to meet Modi’s 2047 target. While India has experienced strong annual growth of six to eight percent in recent years, the economy is already showing signs of slowing. Moreover, even if a slowdown can be averted, sustaining this growth momentum over the next two decades will be challenging.

India is a country of extremes. It has a thriving software industry, and its biometric identification system, Aadhaar, has enabled the government to co-ordinate public services for the world’s largest population. And India is home to world-class universities, particularly the Institutes of Technology and Institutes of Management.

From rural to urban
But India’s shift from rural to urban employment has lagged behind most developing countries, exacerbating inequality. While the country has 167 billionaires, more than 129 million people still live below the poverty line. These disparities extend to the education system, where over half of the country’s fifth-grade students struggle to read at a second-grade level.

At the end of World War II, China and India were both impoverished countries with large populations. As recently as the 1980s, their living standards were nearly identical. China’s command-and-control system relied on state ownership of virtually all means of production, while India’s model combined private ownership with government control over key industries.

Four areas require urgent attention: labour, education, trade and regulation

Neither system produced positive outcomes. In the early 1980s, China began implementing sweeping economic reforms, ushering in an era of spectacular growth. India, prompted by a foreign-exchange crisis, followed a decade later. But although the country’s GDP growth accelerated, it never matched the rapid pace of China’s economic rise. In its latest World Economic Outlook, the International Monetary Fund estimated India’s per capita income at $2,730, compared to China’s $13,140.

Despite China’s current economic challenges, most analysts expect it to achieve developed-country status by the 2040s. For India to do the same, it must address several glaring economic weaknesses. But given that the pace of reforms has slowed over the past decade, it is unclear whether it can muster the political will to pursue the changes needed to meet the 2047 target.

Four areas require urgent attention: labour, education, trade and regulation. India’s restrictive labour laws, which make it extremely difficult to fire workers, present a particularly serious policy challenge.

Industrial growth has been relatively slow, leaving much of the labour force stuck in low-productivity rural jobs. Consequently, while 46 percent of India’s labour force works in agriculture, the share of manufacturing workers declined from 12 percent to 11 percent between 2023 and 2024. Moreover, India’s stringent regulations on overtime pay, apprenticeships, health care, and other benefits significantly increase employer costs.

Powerful labour unions further deter businesses from hiring unskilled workers, causing employers to invest in capital equipment rather than expanding their workforce.

Enhancing productivity
To meet the demands of today’s global economy, India must overhaul its education system. Although it has significantly increased school enrolment rates, the quality of education – especially at the primary and secondary levels – is not sufficient to build a productive labour force. One major driver of India’s earlier economic reforms was the loosening of tight controls on foreign trade and capital flows. But under Modi’s ‘made in India’ policies, the country has reverted toward protectionism, imposing tariffs and erecting other import barriers while subsidising the domestic production of essential goods. This protectionist turn casts a shadow over India’s growth prospects. Without a rapid expansion of labour-intensive industries and exports, it is doubtful that the country can maintain the growth rate needed to achieve developed-country status by 2047.

Another major concern is bureaucratic red tape and onerous licensing requirements, which increasingly hamper economic activity. Previous efforts to streamline regulations have led to significant improvements and spurred growth, but achieving Modi’s ambitious goals will require a new wave of bold structural reforms.

The state of the global economy in 2050 will partly depend on how quickly and effectively India implements these changes. Given the right policies, the country could reach high-income status by 2047. Otherwise, it risks remaining a middle-income country plagued by low productivity and sluggish growth.

Private equity scores again

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When US private equity firm 777 Partners decided that the world of sports would become its new playground, it went all in. Early investments included promising assets like the UK basketball powerhouse London Lions and a minority stake in the country’s basketball league, but its real speciality was football. Like a collector of old football shirts, the Miami-based firm acquired a list of fine specimens from the palette of the beautiful game worldwide, owning stakes in Genoa, Vasco da Gama, Standard Liege, Melbourne Victory, Hertha Berlin, Sevilla and Red Star in France.

Last spring it came close to acquiring Everton too, but its failure to meet the Premier League’s strict ownership conditions and trouble at 777-owned Australian airline Bonza put off the club’s owner and the deal fell through. This October, 777 Partners collapsed, leaving its football assets high and dry. “777 probably went too wide, too quickly, without sufficient intelligence on the European sporting market – investments inside and outside football,” says Rob Wilson, founder of Investinsoccer.com, a strategic sport advisory service that helps match prospective football club owners with the best sporting assets.

The great private equity attack
For all its mishaps, 777 Partners’ sporting adventure was far from an isolated case. Over the last decade, private equity capital has poured into the sports industry, lured by its global appeal as leagues with a soaring fan base like the Premier League offer immense growth possibilities for investors. Annual global investment in the sports industry has trebled to over $30bn within 15 years, according to CNBC data. In the US, the world’s biggest sports market, within just two decades average NBA team values have increased by a staggering 1,176 percent and NFL valuations by 523 percent, estimates JPMorgan Chase. Changes in the media landscape have turned sports into a golden goose for streaming platforms like Amazon Prime, massively increasing games rights. Digital technology has also transformed sports into a brave new world for marketers, with stadium sponsorships, digital scoreboards, jumbotrons and branded areas offering new opportunities.

If private equity investment in established sports has its critics, for less popular ones it’s a boon

Team owners have welcomed the sudden interest of institutional investors, which has shaken up what used to be a slow-moving and often loss-making industry. “Given the restrictions on how much private equity firms can own, it provides some liquidity and an exit to legacy owners who would otherwise hold an interest in a very illiquid market,” says Michael Rueda, head of US sports and entertainment at law firm Withers, adding: “It is not necessarily a vanity asset now – it is a real business with growth potential.”

As the world’s most popular sport, football has been a major target for investment. The pandemic deprived many clubs of revenue streams like ticket sales and TV rights, making their owners less sceptical of investors with little football expertise. More than one third of Europe’s top five league clubs had financial backing from private equity, venture capital or private debt firms in 2023, according to the financial data company PitchBook, a total of $5.4bn up from less than $71m in 2018. US private equity firms have rushed to benefit from economies of scale, as the acquisition of stakes in European clubs allows them to share resources across the Atlantic.

Ares, a firm that manages around $450bn, has invested in Chelsea and Inter Miami, while Sixth Street is a major investor in the San Antonio Spurs and Real Madrid.

“Revenues are high in several European leagues (see Fig 1) and for clubs consistently playing in UEFA competitions, but losses are common, which creates a potential for efficiency gains,” says Christina Philippou, who teaches accounting and sport finance at the University of Portsmouth, adding: “Many private equity investors come in with the idea of controlling costs and increasing commercialisation as a means to enabling the extraction of profit, particularly those that look to learning from US sport league models which are far more commercial.” Another reason why private equity investment has increased is better regulation, notably improvements in UEFA’s financial fair play rules, according to Rob Wilson: “A regulatory framework is beginning to take a firmer grip on financial sustainability. If private equity waits another five years, the assets will see higher entry value, and thus become less attractive.”

Despite the buzz all that investment has created, some scepticism remains in parts of the sports industry. Last August, the National Football League (NFL) became the last major US sports league to let private equity capital in, allowing investors to buy stakes of up to 10 percent in its teams, provided that they hold them for at least six years. It has selected six private equity powerhouses as preferred buyers on the premise that they can invest large sums from the get-go. As the world’s most lucrative league with a $110bn media rights deal under its belt, the NFL had enough leeway to keep its ownership rules stricter than those set by other leagues, which have permitted investors to acquire 30 percent stakes and in some cases even control teams.

“They want to benefit from institutional investors, but in a way that doesn’t change the makeup of the game and the way it’s governed,” says George Pyne, founder of the private equity fund Bruin Capital, which invests in the sports sector, adding: “With just 10 percent the investor has no rights. For the owners, not giving up those rights is important to the integrity of the game.” The league is also aware of public scepticism over private equity’s priorities, says Roy Lockhart, managing director at the global consultancy Stax, who specialises in private equity: “NFL owners still want to project the image of long-standing family ownership as the typical model, and where that has been the case, winning has always been a priority in addition to financial success. By including these restrictions as they open up franchises to private equity investment, they are able to maintain this illusion while preparing for a future where franchises are treated more as investment vehicles than passion projects.”

An own goal?
The massive inflow of capital has sparked fears that there is already a bubble in parts of the sports sector. In the case of football, it has led to “massively inflated” valuations based on “facile notions” about growth, warned Gerry Cardinale, owner of AC Milan, at a business summit last September. “The problem with my crowd is they are asset managers. They just want to buy stuff, and that is not great for intellectual property based businesses,” said the founder of the private equity firm RedBird Capital Partners.

Cardinale’s statement echoes a broader concern over the financial sustainability of European football. Many of its iconic clubs are mired in a spiral of growing debt; in 2023, Europe’s top five leagues owed a total of over €10bn. A 2023 report commissioned by the UK government found that many English clubs are “run in unsustainable ways” and rely on owner funding and underwriting of losses, which increases the possibility of insolvency.

A major risk is that inflation of club values may price future investors out, argues Philippou from the University of Portsmouth, co-author of the report: “This is good for owners short-term, but poses a potential problem in the long run if valuations are pushed too high to enable clubs to find buyers, particularly if the financial landscape where loss-making is the norm continues, which may lead to insolvency events.” As an example of what could go wrong, she points to the English rugby league, which saw three top-tier teams going bust last year. For the clubs, the main concern is that debt-fuelled deals involving private equity firms that are looking for quick returns could eventually leave them high and dry, as in the case of 777 Partners. Last October, Moody’s warned that an increasing number of private equity groups struggled under heavy debt, with Chelsea co-owner Clearlake being singled out as one of the firms with the highest leverage ratios.

It is not necessarily a vanity asset now – it is a real business with growth potential

Another worry is that private equity firms are not equipped with the patience needed to thrive in a relatively illiquid industry that is smaller than their traditional targets and requires long-term investment. “One challenge is that sports teams are not necessarily high cash flow conversion investments. They are investments that are challenging to put down, which is the opposite of what classic private equity is all about,” says Bruin’s Pyne.

A particular problem US firms face when investing overseas is differences in regulations and sporting cultures. European football clubs need steady investment to avoid relegation and enter competitions like the Champions League, while US franchises are less risky and offer an opportunity for underdogs to sign promising young athletes through the yearly draft system. What’s more, measures that in other industries are accepted without any problems, like cost-cutting and pursuing new commercial opportunities, can cause a fierce backlash in sports if fans perceive them as a threat to their team’s history and identity. Protests that involved German football fans throwing chocolate and tennis balls on the pitch forced the Bundesliga to abandon its plan to sell a stake of up to eight percent in its media rights business to a private equity firm.

All in the game
If private equity investment in established sports has its critics, for less popular ones it’s a boon. The explosion of women’s sports, for example, can be partly attributed to the recent inflow of private capital. Sixth Street entered the game last year by becoming the main investor in Bay FC, the latest entry in the increasingly popular US National Women’s Soccer League. “An increasingly common consideration for investors in European football is the ability to invest in two markets with a single purchase: the mature men’s market and the effectively start-up but high-growth women’s football market,” says Philippou. Sports like lacrosse and pickleball also have an opportunity to attract a bigger audience through investment that creates a virtuous circle of growth. “With income growth there is a role for private equity to play as league values grow and the need for capital increases,” says Rueda from Withers. “It’s the only way to grow a business.”

Tone from the top? The flawed ideal of executive leadership

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The focus on executive leadership setting the example for the rest of the organisation to follow is deeply ingrained in corporate life. The idea behind the concept of ‘tone from the top’ is laudable: if the rest of the board, management, and employees see the exemplary conduct set by the head of the company, the values and example they demonstrate will be understood and followed by everyone else in the organisation.

Similarly, the ‘positive’ actions the CEO takes to stamp out ‘bad’ business practices, as well as the efforts they take to promote key issues such as ethics, diversity, sustainability, and corporate governance, will inspire everyone else in the organisation to regard such matters in the same way and adopt the same behaviour.

But time and again the idea of CEOs and other members of the C-suite setting the tone for others to follow becomes risible, especially in light of a swathe of corporate governance scandals (which executives are ultimately responsible for) and enormous pay awards that bear no resemblance to other workers’ salaries (some 200 times a typical worker’s pay in the US), corporate performance, best practice, or even common sense. Nor does executives’ behaviour always chime with the conduct they are meant to champion: instead, it often exposes the attitudes they think are permissible (at least for themselves), but which are out of sync with progressive society.

“Every leader sets the tone, whether they intend to or not,” says Robert Ordever, European managing director of workplace culture and recognition specialist O.C. Tanner. “Their words, and more importantly their actions, set expectations as to what is acceptable. The danger area is the gap between corporate rhetoric and the actions of leadership.”

The ivory tower
There are plenty of recent examples to demonstrate the appalling moral compass and/or laughable lack of self-awareness exhibited by some corporate leaders. For instance, the newly announced boss of Starbucks, Brian Niccol, has come under fire after it was revealed he would commute almost 1,000 miles on a company jet from his home to the firm’s headquarters in Seattle – despite the company’s pronouncements that it is a sustainability leader.

The perception of leadership has changed over the past decade

Meanwhile, Chris Ellison, managing director of Australian mining firm Mineral Resources, said during a financial results presentation in August that he wants to “hold staff captive all day long” after he complained that employees who go out to buy a coffee (rather than get one at work) are costing the company too much money. In February 2021, the UK chairman of Big Four firm KPMG, Bill Michael, was forced to resign when his motivational speech to employees on a virtual meeting went off the rails (and went public) after he told staff to “stop moaning” about the impact of the Covid-19 pandemic and lampooned unconscious bias as “complete crap.”

That same year, Barclays Bank CEO Jes Staley resigned after an investigation by the UK’s financial regulators uncovered a cache of emails that suggested his relationship with disgraced financier and paedophile Jeffrey Epstein was closer than he had admitted. Two years later the Financial Conduct Authority (FCA) fined him £1.8m and banned him from serving in a senior management role in the financial services industry – a rarely used sanction. Staley had previously had his knuckles rapped by the FCA when he tried to out a whistleblower who raised concerns about his past employment history.

It is perhaps unsurprising that such incidents lead some experts to suggest the concept has its limits. “The tone from the top works in practice all the time, but whether the tone that is being set in practice is the one that we might choose is a different matter,” says Diane Newell, managing director at coaching consultancy OCM Discovery. She adds that managing how people interpret and understand the behaviour that they see from executives and other senior leaders is “never going to be an exact science.”

Raised expectations
Part of the problem is that the perception of leadership has changed over the past decade, as has the notion of corporate and executive accountability. “The C-suite and board of any organisation needs to recognise that expectations around conduct and culture have changed and expectations have increased,” says Piers Rake, partner at legal services firm Astraea. Previously, he says, the principle corporate stakeholders were limited to shareholders, customers and employees, but wider societal pressures “have resulted in heightened expectations from a wider cohort of interested parties.” This may include “rights holders” – those who may be impacted by the business’ operations – as well as activist groups. “Companies are more likely to face adverse or negative press for entirely legal business activities where they are considered to be inconsistent or at odds with wider societal trends,” Rake warns.

Liz Sebag-Montefiore, director of HR consultancy 10Eighty, says employees want – and expect – strong, ethical leadership from the top, with a focus on actions rather than words. “A company can talk about ethics but if they are gouging their suppliers, exploiting staff, treating employees as disposable and treating customers unfairly, then they won’t inspire a workforce committed to best practice,” she says. With that said, should the ‘tone from the top’ mantra be scrapped? And – if so – what should replace it? And who should workers and stakeholders look to for better leadership?

Melissa Hewitt, head of HR outsource at recruitment company Morson Group, suggests others have a role in helping executives fulfil their roles as ethical leaders. She believes there is a strong argument for elevating the HR director onto the board role because “company culture and values are part of their remit,” while regulators should also do more to set clear parameters for leaders in their sector. Ultimately, she concedes that commercial – rather than ethical – factors may be the most important short-term influencer because Gen Z recruits (typically those people born between 1996 and 2010) are more likely to leave if they feel the organisation is not living up to expectations of corporate best practice, leaving companies with a skills gap they may find hard to plug.

Room at the top?
Sarah Miller, CEO at Principia, an ethics advisory firm, says there is already a shift away from focusing on a core group of executives to set expectations around ethical leadership. “It is increasingly the exception – not the norm – to rely on a small group of executive leaders to shape, champion and model the tone and tenor of a culture,” she says, partly because it is such a risky approach. With both higher expectations and greater scrutiny, she says, the chance of failure for a small number of top leaders becomes more concentrated and exposed, so it is better to share the responsibility with more – not fewer – people in the organisation, which means relying on middle management.

Employees want – and expect – strong, ethical leadership from the top

“Many companies are focusing on values activation and ethical decision-making skills for the top 100 people, with a recognition that it is not just the executive team that needs to consistently reinforce and apply hallmark cultural attributes,” she says. “This is arguably still the ‘top,’ but in a much more expansive, diffused understanding than the term has tended to apply to,” she adds. Miller believes this trend is “encouraging” because seeing how middle and/or line managers deal with ethical dilemmas and how they understand and abide by rules on a daily basis is going to make a much bigger and deeper impact to a wider range of workers. “I would rather have a strong ‘tone at the middle’ any day, particularly in larger organisations,” she says. While there might be an acknowledgment in some quarters that the tone from the top is flaky and needs rethinking, it appears that the majority are prepared to stick with it – largely because there does not appear to be anything better to replace it.

The devil you know
Kevin Gaskell, former CEO of Porsche UK and chairman of ITS Technology Group, a fibre broadband firm, believes the ‘tone from the top’ should work in practice, but its effectiveness “depends heavily on consistency, transparency and authenticity.” He adds that if executives are not the best people to demonstrate ethical and correct leadership, “it becomes difficult to imagine who else could effectively set the tone. Leadership by its very nature is hierarchical, and the values and behaviours of those at the top of an organisation trickle into the entire workforce,” he says. “If executives fail to embody the ethical standards or correct behaviours expected of them, it creates a leadership vacuum where confusion, inconsistency, or poor practices can easily spread,” Gaskell added.

Even some of those who believe a re-examination of the ‘tone from the top’ is necessary, do so “not for the reasons you might think,” according to Mike Greene, an entrepreneur and executive business coach. Leadership, he says, is not about popularity – it is about making tough, often unpopular decisions for the organisation’s benefit. The trend of deferring ethical leadership to inexperienced majorities or feel-good committees is “dangerously misguided,” he adds.

“Executives are not just accountable – they are essential,” says Greene. “They have the experience and authority to navigate complex ethical landscapes. Diluting this responsibility is short-sighted and potentially harmful. The notion that middle management or employee-led initiatives can effectively set ethical standards is naive. It often creates echo chambers of inexperience, reinforcing biases rather than challenging them.” Greene believes ‘tone from the top’ works when implemented “with backbone, not as a PR exercise” and demands “leaders unafraid of unpopularity, who understand that real-world ethics are not always clean-cut or politically correct.”

For ethical leadership that withstands real-world pressures, Greene says companies need “experienced executives who are not afraid to take charge. Remember: sheep may be soft and cuddly, but they need a guard dog and shepherd to protect them from wolves. If you want to be popular, sell ice cream.”

Unravelling the global web of crony capitalism

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Over the last decade, exponential growth rates have turned Southeast Asia into an unmitigated success story of 21st century capitalism. However, behind the facade lurks a murky underworld, argues the University of Chicago sociologist Kimberly Kay Hoang in her book Spiderweb Capitalism. Through fieldwork in Vietnam and Myanmar and interviews with hundreds of insiders, she exposes an intricate nexus of bankers, accountants, lawyers, bureaucrats and investors who facilitate capital flows through shell companies and financial centres like Singapore to hide the origin of dirty money, enabling local elites to accumulate obscene amounts of wealth. What’s more, after the 2008 financial crisis, the West lost its supremacy in frontier markets, with a rising China that is unconstrained by Western regulations gaining the upper hand. Is corruption a price worth paying for Asia’s ascendancy? In an exclusive interview to World Finance’s Alex Katsomitros, Hoang shares her thoughts on the origins of this murky ecosystem and how to unravel it.

What is spiderweb capitalism?
We usually think of global capital movement as capital moving from nation A to B. Spiderweb capitalism is a system that features a complex web of subsidiaries, offshore shell companies and money flows interconnected across multiple countries that obfuscate the origin of capital. Offshore financial centres have enabled economic and political elites – often the same people in developing economies – to secure exclusive, quasi-legal opportunities for wealth accumulation. These are multi-layered deals sometimes not available on the public market.

I differentiate between ‘big spiders,’ ultra-high-net-worth individuals (UHNWIs) whose capital flows through these webs, and ‘smaller spiders’: high-net-worth individuals (HNWIs) who are highly compensated agents building these webs on behalf of UHNWIs, but bearing the criminal and reputational risks. Every piece of the web is connected by different financial professionals: bankers, lawyers, accountants, PR agents. They are purposely obfuscated from one another in their relationship with the web. Each specialist builds one part, but they don’t know how other parts are constructed.

What are the power dynamics between UHNWIs and HNWIs?
I use the words ‘co-ordination’ and ‘sabotage.’ There are instances where they build these webs together. But between emerging and developed economies, there is also sabotage. You have joint ventures between local investors and entrepreneurs from overseas where the former will find ways to kick the foreign investor out by mobilising capital restriction laws or engaging the state to issue back taxes. So there can be co-ordination at the beginning and sabotage towards the end as a way to consolidate the resources. Sometimes there is also a protective approach to the local economy in regard to natural resources, such as oil, gas, minerals.

Do HNWIs aspire to become UHNWIs?
Many UHNWIs I have studied were once HNWIs who grew wealthier. HNWIs want to ultimately become UHNWIs, but it is more nuanced than simply a story of greed. Inequality has become wider since 2008. We thought that the financial crisis would democratise the system with the Occupy Wall Street movement. What I have uncovered during my research is that there are variations in the one percent, and we should differentiate between the 0.1 percent and the rest.

What is hard for the public to understand is that HNWIs feel economically precarious. We can make assumptions that it is just greed, but it is deeper. Their socio-emotional feeling is typically middle class. They talk about securing their children’s future, higher education costs, helping them buy homes. So it is less about wanting to get on the Forbes list and more about the fear of falling behind. That motivates them more than anything else.

One aspect of spiderweb capitalism is what you call ‘relational capitalism,’ which includes ‘homosocial bonding rituals’ like wild nights out. Is that specific to Southeast Asia or a broader phenomenon?
I first captured these rituals in my book Dealing in Desire, where I argued that the Vietnamese sex industry plays an important role in cementing relationships of trust between political officials and private entrepreneurs. In Spiderweb Capitalism, I talk about relationships of mutual hostage and destruction. Through these experiences they build homosocial bonding rituals, but it is also a way of getting dirt on one another. If something goes wrong on a deal, they can release to the media photos of their partners at orgy parties.

When you don’t have faith in the rule of law and each bureaucrat can interpret laws differently, relationships are crucial to moving around the regulatory apparatus. They are especially important when something goes wrong. If there are charges of corruption or back taxes, how do you manage that? You go to the bureaucrats. Even in relationships between entrepreneurs, how do you trust your partner? That is why relational capitalism is important in these economies.

Initially I thought it was a very Asian way of doing business. I have given talks in the US and Europe and bankers told me that their rituals are not that different. Before 2008, strip clubs and prostitution were a big part of the culture.

The Epstein case is very Western. If a business person ingratiated himself with high-level politicians, including Bill Clinton, Prince Andrew and Donald Trump, who knows what dirt he had on them? So perhaps it is more generalisable and not culturally specific to Asia, but we don’t have empirical evidence.

You mention in the book that the US is the largest offshore jurisdiction. So did this system originate in the West?
My research subjects would repeatedly remind me that this system was invented in the West. It goes back to colonialism, the British Empire and small sovereigns linked to it. Delaware has always been there, and we pretend it is not. Interestingly, after the Panama Papers leak, Mossack Fonseca moved their headquarters to Delaware. In the words of my research subjects, the biggest gangsters are in Delaware!

One thing that is different in Asia is that when you have an authoritarian state, offshoring is one mechanism that makes investors feel they can protect their investments from arbitrary state capture. They worry that the state can capture assets at any moment. We are seeing that in China right now, as Xi Jinping is weaponising charges of corruption to consolidate power.

Offshore structures have a bad rap, but if you take a conservative economist approach where you don’t want to stop all investment, it is a mechanism to protect assets as much as a way to evade taxes.

Is corruption a price worth paying for rapid development?
Many government officials feel that if there was a crackdown on corruption, it would affect their bottom line, and capital would stop coming in. They look at how rapid development has been, even in authoritarian states like China. Some were hoping that Myanmar would leapfrog Vietnam by introducing a democratic state with the election of Aung San Suu Kyi. It turned out that the military still had a strong hold on the economy and crony capitalists wouldn’t suddenly disappear. China and Vietnam have experienced rapid growth, but inequality is extremely wide. We imagine this trickle-down economy, but many people have been dispossessed. They have better infrastructure, but they have not gained from it.

For many economists, however, Vietnam is a success story. So what is the right balance between pro-growth and anti-corruption policies?
That is a short-term success story. What will it look like 20 years from now? Much of the growth is linked to money lent from other countries. For example, sovereign wealth funds channel massive private investments through these offshore vehicles. With spiderweb capitalism, it is challenging to differentiate between funds from sovereign and private investors. China, the world’s largest lender, uses offshore vehicles to mask its origin as state capital.

China has a long-term vision that the West does not have because of our election cycles

They form shell companies that make private investments in these countries and offer loans that will have to be paid back in 20–50 years. Many people I studied told me that China is a more benevolent lender than the West, pointing to bad lending practices of the World Bank and IMF in Latin America as an example of what not to follow. So I would ask economists to take a long view. Can we build models that project 20–50 years from now, particularly with China’s Belt and Road Initiative? China has a long-term vision that the West does not have because of our election cycles.

Is the West missing out on investment opportunities in frontier markets by being too moralistic compared to China?
When the West dominated the global economy, having global laws around corruption made sense. We now live in a different world with the rise of China. You have competition for investment from all around the world. I empathise with Western investors who are constrained by things like the Foreign Corrupt Practices Act. JPMorgan Chase paid hundreds of millions in fines for the Sons and Daughters programme in Hong Kong. Meanwhile, their competitors from China, Russia, even Eastern European countries, don’t have to adhere to those laws. Does that mean that we should enable corruption? The answer is no, it is just that we do not live in a world where there is cross-border collaboration. Because of geopolitical conflicts, China, US, Europe and Russia will not share information on which oligarchs are offshoring their funds.

So how can we unravel this web?
Berkeley economists Gabriel Zucman and Emmanuel Saez have suggested a global asset registry. That is very optimistic. One challenge is that we are asking regulators to regulate themselves. The only way is separation between the political and economic spheres: regulators and private investors. We see less of that with the revolving door system where people spend years working in the US regulatory apparatus and then work for Wall Street. In Asia, the political and economic spheres are one and the same. So separation is the solution. That means that local and foreign investors couldn’t capitalise on their political ties, and that would hurt their bottom line, so I don’t know how it could happen. Vietnam is a young economy. There is a new generation rising, people who have been educated abroad and have a broader worldview. Not a ‘let-me-get-rich’ attitude, but a more nationalistic, community-orientated perspective that is about the long-term view. Perhaps that is the future.

Rebuilding trust with investors is key for boards

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A series of high-profile controversies at leading global companies has forced a re-evaluation of corporate governance. Tensions between corporate boards and investors persist, as seen during 2023’s AGM season, with notable disagreements at companies like Disney, Ocado and Smith & Nephew.

Internal corporate leadership struggles, such as OpenAI’s brief dismissal and reinstatement of CEO Sam Altman, have further underscored the need for better governance. According to a Harvard report, these events reflect a growing consensus that many of these issues stem from poor corporate governance. McKinsey research supports this, showing that around 70 percent of recent activist investor demands have focused on governance reform.

Addressing these governance issues, especially complex topics like executive pay, isn’t straightforward. However, adopting best practices can help rebuild trust between boards and investors. Here are several key areas where corporate governance can be improved.

Focus on regulation
One crucial step for companies is ensuring they fully understand and comply with industry regulations. Failures in this regard have led to significant scandals, such as the collapse of the cryptocurrency exchange FTX, where poor due diligence and asset handling were partly to blame. FTX’s CEO, Sam Bankman-Fried, later admitted ignorance of many regulations, highlighting the need for boards to ensure compliance at all levels.

Board accountability is vital in preventing scandals and ensuring proper governance

Boards cannot rely solely on legal departments to handle regulations. They need a comprehensive strategy that covers regulatory monitoring, compliance programmes, regulatory engagement, and risk management. With new regulations like the Corporate Sustainability Reporting Directive (CSRD) on the horizon, boards must prepare by understanding the requirements, developing data reporting systems, and adopting frameworks like the Global Reporting Initiative. Proper preparation will help companies avoid the pitfalls of ‘greenwashing’ or ‘greenhushing’ as they navigate sustainability efforts.

Board accountability is vital in preventing scandals and ensuring proper governance. Recent years have revealed numerous examples of companies faltering due to a lack of clear roles and transparency. One notable example is the UK Post Office scandal, where the board repeatedly failed to address management issues. Similarly, the Federal Deposit Insurance Corporation (FDIC) faced allegations of employee mistreatment that went unaddressed by its board. To improve accountability, boards should include experts in key areas like supply chains and environmental, social, governance (ESG). They must clearly define roles and responsibilities for board members, ensuring they can effectively oversee management, regulatory compliance, and transparency.

Upgrade communication
Improving communication with shareholders is another key area for reform. The use of outdated communication methods, such as paper-based ballots, has caused friction between investors and corporate leadership. For instance, Marks & Spencer’s chairman, Archie Norman, has pointed out how these methods hinder effective dialogue.

A lack of communication has led to misunderstandings, with investors accusing companies of secrecy. ExxonMobil shareholders, for example, criticised management in 2023 for not disclosing the financial impact of its net zero proposals. Digital investor relations should become standard practice, allowing for more transparent and efficient communication. This would enable boards to share documents and proposals with shareholders, while also facilitating early feedback ahead of AGMs. This approach would reduce conflicts, especially as many proxy disputes are resolved before AGMs.

As cyberattacks become a regular threat, corporate boards must prioritise data security. Cybercriminal groups like Scattered Spider and ShinyHunters have increasingly targeted private companies, making it essential for boards to focus on data integrity, confidentiality, and system resilience. Companies need to protect sensitive information and ensure that their cybersecurity measures are robust enough to maintain stakeholder trust.

Executive compensation continues to be a contentious issue. While there is a strong business case for competitive executive pay, boards must be transparent and communicate the benefits of attracting top talent to investors. Benchmarking executive pay against competitors can help ensure compensation is appropriate, and clear communication can reassure shareholders that these decisions benefit the company long-term.

While ESG policies have faced backlash, they still play an important role in corporate governance, particularly as regulations increasingly require sustainability initiatives. Boards should set company-wide ESG targets, bring in experts, and ensure compliance. At the same time, it’s essential to clearly communicate the fiduciary impact of ESG measures to avoid shareholder dissatisfaction, as seen in several revolts from 2023–24.

Finally, increasing board diversity has often been handled on an ad hoc basis, but formalising this process is essential. Boards should set diversity targets and appoint members to promote inclusivity throughout the company. Creating subcommittees dedicated to this goal can ensure that diverse voices contribute meaningfully to corporate decision-making. While issues like executive compensation and ESG will continue to spark debate, the broader challenges surrounding corporate governance are solvable. By adopting straightforward reforms, companies can significantly enhance their governance practices and meet the demands of today’s business environment.

The economic impact of de-globalisation

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It was in 2014 that many were introduced to the term ‘conscious uncoupling,’ a term originally coined by sociologist Diane Vaughan, when Gwyneth Paltrow announced her separation from Coldplay frontman Chris Martin. For those emotionally invested in the love lives of celebrities, I imagine such events induce a lot of hand-wringing (and a collective shrugging of shoulders from everyone else).

In recent years, however, economic commentators the world over have made hand-wringing an internationally recognised sport. More surprising still, it is over the quarrelsome decoupling and occasional bitter divorce settlement of economies (see Brexit).

Inarguably, the two ‘A-list celebrity’ economies most talked about in recent years have been the US and China. Over the last 20 years, China has become a production powerhouse, attracting upstream players – those focused on components and raw materials – and handling their needs.

A 2021 Harvard Business Review article indicated that in 2010 China “overtook the US to become the largest value-added manufacturer in the world, accounting for 28 percent of all global production by 2018.” The article goes on to say that in order to achieve this dominant position, China had not only leveraged its size and low-skilled labour workforce, but also invested heavily in education and infrastructure to achieve its aims.

It was during 2018 that Trump began his trade war with China, with the US placing “25 percent duties on around $34bn of imports from China, including cars, hard disks and aircraft parts,” according to an article in the South China Morning Post.

China did not come close to meeting the purchasing targets of the phase one trade agreement in the first year

It set off a long retaliatory back and forth involving tariffs, duties and taxes. With over a million foreign companies operating in China, the implications of moving production anywhere else is seriously complicated – not to mention costly. Many of these companies, having invested significant time developing a fruitful relationship with China, were now weighing up the tearful possibility of packing up and moving out.

US over-reliance on Chinese labour (see Fig 1) is at least partly to blame for the scaling back of imports. From a US perspective, decoupling was about preserving or repatriating American jobs, to paraphrase the Harvard Business Review, but as the world’s largest trading partners, this has to be delicately navigated. What strikes me as remarkable is how clumsy and indelicate both sides so often appear to be.

Speaking about his opposite number in China at Davos in January 2020, mere months before the pandemic hit (another curveball for US-Sino relations), Trump said: “our relationship with China has now probably never, ever been better,” adding “He is for China, I am for the US, but other than that, we love each other.”

This seemingly rosy assessment of the relationship followed the signing of a phase one trade deal, not quite putting an end to the past two years of tariff brinkmanship, but easing some of the tension. In a Rose Garden speech four months later, the rekindled spirit of healthy relations seemed to have evaporated, with Trump stating “China’s pattern of misconduct is well known. For decades, they have ripped off the US like no one has ever done before.”

Undoubtedly the arrival of the pandemic played its part, but despite Trump’s boasts that the deal “could be closer to $300bn when it finishes,” China did not come close to meeting the purchasing targets of the phase one trade agreement in the first year. According to the Peterson Institute, they were “never on track to meet any of the additional commitments” and “ended up buying none of that extra $200bn of US exports it had promised to purchase.”

We need to talk
Reflecting on her marriage in a 2022 article for Vogue, Paltrow writes that the beginning of the end was something more unconscious than conscious, like “the inadvertent release of a helium balloon into the sky.” Not more than a couple of months after the publication of that article, a literal helium balloon was released by China, flying across Alaska and western Canada before appearing in the sky over Montana, home to some of the US’s nuclear missile silos. China maintained it was a meteorological balloon that had been blown off course, while US defense officials claimed it to be a “high-altitude surveillance device.”

If there were not already enough signs that relations between the two countries were strained, this was the clincher. Many had expected a Biden administration to take a tamer stance on the trade war with China, but on the back of his election win in 2020 were numerous pledges: investing in infrastructure, clean energy and manufacturing, and the promise to “create millions of good paying American jobs,” as well as overseeing America’s recovery from Covid-19. In his first speech to Congress, Biden said “there is simply no reason the blades for wind turbines can’t be built in Pittsburgh instead of Beijing.”

Following the alleged spy balloon incident he appeared to step up the rhetoric against China, saying “China is real – has real economic difficulties. And the reason why Xi Jinping got very upset in terms of when I shot that balloon down with two boxcars full of spy equipment in it is he did not know it was there. No, I am serious. That is a great embarrassment for dictators, when they do not even know what happened.”

In light of this statement, it is worth bearing in mind that in 2022 “goods worth $576bn were imported by the US from China and $179bn by China from the US” according to UNCTAD (UN Trade and Development). It can only have been an expression of frustration over China’s antics.

Friends with benefits?
For China, there has been a decoupling strategy in place since 2005, when it introduced its medium- and long-term plan for science and technology development (MLP) with goals to increase domestic content by 30 percent in several sectors by 2020. It then revisited these targets a decade later with the introduction of Made in China 2025 (MIC 2025), aiming for 70 percent by 2025. At the same time, China has turned its trade to developing economies, including Latin America and the ASEAN member states.

Similarly for the US, it has shifted its trade away from China to countries like Mexico, Vietnam and other ASEAN member states. McKinsey recently reported that “in 2023, Mexico became America’s largest goods trade partner” and “between 2017 and 2023, US imports of laptops from Vietnam more than doubled, rising by about $800m.” It might interest you to know that Vietnam sourced its parts for those laptops with another trading partner: China.

From a US perspective, decoupling was about preserving or repatriating American jobs

While this diversification is perhaps the trade equivalent of ‘I think we should see other people,’ for some time now, both the US and China’s strategy has been rooted in the notion of lying back and thinking of economic nationalism. With both of these large economies aiming at trade sovereignty, what has happened seems a logical outcome.

Both countries have taken action to disentangle their economic systems to a degree, but it is still a stretch to start ringing de-globalisation alarm bells.

McKinsey concludes that a deglobalised fragmentation of global trade would be significant, and could see drops of up to 90 percent in trade of critical goods and services between Eastern and Western group economies. If the future of trade is diversification, however, the “global trade map is largely preserved.”

In an article for JP Morgan, Zidong Gao and Joe Seydl posit that the world’s economies are not rapidly deglobalising. Instead they say “supply chains are mostly diversifying – what might be called a slow-moving maturation away from excessive concentration in China.”

And I think this assessment does go some way to ease the anxieties of those monitoring the love lives of global economies.

While I have already seen the light and now take all of my advice concerning matters of the heart from Paltrow, I can’t help but feel that the US and China could take heed of it too. Conscious uncoupling, or an amicable break-up, is the way to go.

The colour of money

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Housing markets in a number of countries have in recent years shown a puzzling kind of behaviour, where an apparent shortage of homes is accompanied by an unusually low transaction rate. People need houses, but they aren’t buying them. A good example is Canada. In 2023 it saw a population increase of 3.2 percent, the highest in decades. Politicians are trying to ramp up the supply of new homes to match this influx. But at the same time, metropolitan areas such as Toronto also experienced one of the slowest housing markets on record. There are more unsold condominiums in Toronto than at any time in history.

According to classical economics, the law of supply and demand states that the price for any commodity including a roof over your head will adjust so that the market clears. However, instead of clearing, housing markets are going dark. So what is going on? To understand this conundrum, a useful analogy can be found in an even more vexing phenomenon, which troubled physicists at the turn of the previous century: the photoelectric effect.

Making a spark
The photoelectric effect refers to the tendency of some materials to emit electrons when light is shone on them. In the late 19th century, physicists demonstrated it by experiments in which they placed two metal plates close together in an evacuated jar, connected the plates to the opposite poles of a battery, and shone a light on the negatively charged plate. If conditions were right, then the light would dislodge electrons, which raced across to the other, positively charged plate, in the form of a sudden spark. According to classical physics, the energy of the emitted electrons should depend only on the intensity (brightness) of the light source. Shine a bright light, get a bigger spark. But in practice, it turned out that what really mattered was the colour: blue light created a bigger spark than red light. And depending on the material, for some colours no amount of light would work.

What counts is not the total number of buyers (the brightness) but how much each buyer can actually spend (the colour)

In a 1905 paper – one of a stream of results including his famous formula E=mc2, which would define the new physics – Albert Einstein showed that the photoelectric effect could be explained by the idea, recently proposed by Max Planck, that energy is transmitted only in discrete chunks known as quanta, from the Latin for ‘how much.’ According to this theory, electrons were emitted when individual quanta of light struck individual atoms – which meant what counted was not the total energy, but the energy of each quantum of light. And this was measured by colour.

Think of the metal plate as a marketplace of atoms, each selling electrons at a particular price. The quanta of light represent the spending power of individual shoppers. Shining red light onto the plate is like sending a lot of low-budget shoppers into a high-end store. No matter how many there are, the expensive electrons stay firmly locked inside their cases. High-frequency blue light, on the other hand, is like a cruise ship full of high-spenders ripping the electrons off the shelves.

Down payment blues
Einstein of course did not use a shopping metaphor – he gave his paper the cautious title ‘On an heuristic viewpoint concerning the nature of light’ – but it was clear that, unlike most of his contemporaries, he saw these light quanta (now known as photons) not as mathematical abstractions, but as real things. As he wrote, “Energy, during the propagation of a ray of light, is not continuously distributed over steadily increasing spaces, but it consists of a finite number of energy quanta localised at points in space, moving without dividing and capable of being absorbed or generated only as entities.”

This sounds mysterious when applied to light, but again is similar to the way that we make financial transactions. When you pay at a store, there isn’t a little needle which shows the money draining from your account – instead it goes as a single discrete lump. When you buy a house, you need a quantum of cash for a down payment – and you can’t usually band together with other people, at least if you expect them to not live there with you.

In fact the comparison with photons is more than an analogy, because as shown by quantum economics it turns out that you can model transactions using the same kind of mathematics as is used to model particles of light. So for a model of the housing market, again what counts is not the total number of buyers (the brightness) but how much each buyer can actually spend (the colour).

Central banks will no doubt try to jump-start the markets by further lowering interest rates, in the hope of generating a spark. In the meantime, if you want to buy a house in a country like Canada, then what counts is the colour of your money.

Eurozone shares wobble while investment banking sees boost

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Despite concerns about a tougher outlook, many of the Eurozone’s biggest banks beat second quarter earnings expectations. Reuters says they have benefited from high interest rates and “bumper investment bank business,” even though their shares were held back. Shares may be lower than anticipated because of business performance – financial results, “where the market suspects the organisation is taking more risk than might be appropriate,” says Chris Burt, Director of the Risk Coalition Research Company. He adds: “Think Titanic powering full speed across the Atlantic making excellent progress…”

Mathieu Rosemain, Tom Sims and Valentina Za write in their article, ‘Eurozone banks see investment banking boost but outlook stalls shares,’ that while European banking shares rose 20 percent between January and July 2024 – reaching near nine-year highs – “the STOXX Europe 600 Banks index was down 0.5 percent after a raft of bank earnings fed into analyst and investor concerns about the sustainability of the sector’s profit growth.”

Deutsche Bank saw a quarterly loss, sending its stock down seven percent – not helped by a lawsuit provision linked to its troubled Postbank Unit. It also axed plans for a buyback and a rise in bad loan loss charges. BNP Paribas expects to exceed its €11.2bn net profit target, but there are concerns at its retail unit because of an 11 percent fall in net interest income (NII).

Moody’s Ratings also believes that Santander’s and UniCredit’s NII have mostly peaked. Risk charges are therefore likely to increase – despite rising profits, which have bolstered investor sentiment. Lenders have nevertheless traded below their tangible book value, raising concerns about whether their profitability is sustainable.

Despite this, BNPP and Deutsche’s investment banking divisions offset any weaknesses, helping to diversify revenue streams in recent quarters. Rosemain, Sims and Za add: “At BNPP, revenue from equities trading and prime brokerage services jumped 58 percent.”

Mixed outlook
Olivier Panis, Associate Managing Director of Financial Institutions Group, Moody’s Ratings, points out that Eurozone bank profits’ outlook was quite stable. The zone’s banks had managed to boost their net interest margins (NIMs) in 2023. He says that “in countries where variable-rate lending predominates, we expected profitability to stabilise.”

Italian and Nordic banks, as well as HSBC, outperformed their peers in the first half of 2024

Moody’s expects banks’ profitability in the Eurozone in 2025 to decline, “but remain strong.” Panis explains that policy rates have started to move down this year, and so Moody’s thinks that most of the margins have peaked. Yet there will be a slowdown in the shift from current accounts to more expensive term accounts.

Panis adds: “Steady economic growth and inflation close to central bank targets will offer the opportunity for stronger lending volumes, after two years of modest lending activity, while also supporting asset quality and risk charges.” He nevertheless sees operating costs continuing to rise, though. This is put down to technology and higher compensation costs. Despite this, Moody’s thinks there might be some diverging profitability trends between banking systems with a higher proportion of assets at variable rates – helped by increased interest rates in countries such as Spain, Portugal and Italy.

Fitch Ratings believes that Europe’s largest banks are likely to achieve 2024 profitability in line with the strong levels of 2023. In its ‘Large European Banks Quarterly Credit Tracker’ for September 2024, Fitch found that most of the 20 large banks performed well in the first six months. They achieved “better than expected earnings,” which led it to push its full year forecasts upwards for some banks. For example, in a press release it says Italian and Nordic banks, as well as HSBC, outperformed their peers in the first half of 2024. They were expected to continue to perform strongly from July to December. However, French banks are lagging behind their peers, and are only expected to achieve moderate profitability improvements.

Hugh Morris, Senior Research Partner at Z/Yen, concurs that the outlook is generally positive. He says the growth rate in the Eurozone is probably in the realm of three to four percent, and that should feed through to bank profits across the banking sector because half of Eurozone bank lending is mortgages, which have been generally experiencing low levels of demand over the last couple of years. The ECB, he explains: “thinks the banks will be able to improve with a forecast of global GDP growth of 3.4 percent for the next two years. The ECB believes that the Eurozone will not be too far off that. One of the drivers is that mortgages are expected to see long-term growth, whereas previously they weren’t growing at all in the Eurozone.”

Net interest income
To Morris, one of the most interesting things is presented by the banks’ net interest incomes (NIIs). They are at the core of banking medium-term profits. Factors that drive short-term growth include cost management, which he says has been a real driver of BNP Paribas. He explains that NII is the bedrock measure because other factors can come and go. Morris adds: “BNP had record profits, for example, partly driven by cost management. Over a 40–50-year cycle, when banks must manage costs, they do so, and when they don’t have to, they don’t. The market is sceptical about whether BNP can sustain aggressive cost management, and it therefore looks at NII. That’s at the heart of the dilemma. Why is the market sceptical about BNP? NII is a big piece of the answer.”

Continuing, Morris said: “There could also be a full-scale war in the Middle East. If that part of the globe sneezes, the whole world will catch a cold. There has been an increase, caused by more than Ukraine, to Brent Crude Oil prices. These types of price shocks will hit investment decisions and bank lending. Nobody knows what is going to happen, but these are the major factors.” Morris also sees the Eurozone being on a slow growth path, and predicts that a lack of latent productivity in the West will put a cap on banks’ growth.

Banks held back
As to why some banks have been held back, it is possible that they were undervalued and that they are not getting the full reflection of profitability. Morris believes this could be due to concerns over NII and the sustainability of headline profits. “Much depends on how each bank is made up, and there is cyclical falling in love and out of love with investment banking as a way of kick starting growth,” he remarks before adding: “Deutsche Bank paid a huge penalty for getting that wrong. They set out to be a global investment bank to compete with the Americans 20 years ago, but five to 10 years ago the wheels fell off it. It is the 22nd largest bank in the world, and by assets it is smaller than Santander. It is only just bigger than the Toronto Dominion Bank by assets. Stock markets are trying to price in the value of future performance, and the markets see NII as a key indicator of medium-term performance, and if they see its performance diverging from short-term profits, they will focus more on that.”

Panis explains that interest rate challenges have held some banks back. “The benefits of higher rates to banks’ net interest margins have also started to fade, and this could potentially impact the sustainability of their profit growth,” he says. He suggests that borrowing costs will remain higher than before 2022 – despite central banks’ rate cuts. This will weigh in on borrowers’ ability to repay loans and to refinance themselves.

Making matters worse is the higher cost of living, and the fact that asset values have not materially adjusted since 2022 in Europe. He therefore thinks this could impact asset quality and moderate lending volumes, and adds: “Also, the cost of funding has materially increased, as a result of the monetary tightening, with the end of targeted longer-term refinancing operations (TLTROs), and a material shift in the deposit mix towards more expensive term deposits.” While this shift may have stabilised, the central banks have begun to cut rates again, and the deposit mix remains different to what it was before 2022.

Adding to these challenges are capital market income and costs. He explains that capital markets income supports revenue, salary inflation and one-off items are raising costs, which could negatively impact the sustainability of profit growth. He concurs with Morris, too, that there are multiple sources of uncertainties related to “geoeconomic fragmentation, which could increase volatility, impact banks’ operating environments, their asset risk and profitability.” Prime examples of this are the war in Ukraine and the widening conflict in the Middle East.

The NII impact
Morris nevertheless thinks that the concerns about the sustainability of profit growth are chiefly to do with NII. “It is the bread and butter business and it is not looking so rosy,” he says before commenting that the market has seen the focus on cost control and the fascination with volatile sectors, such as investment banking, come and go.

Europe’s largest banks are likely to achieve 2024 profitability in line with the strong levels of 2023

Despite this, NII is here to stay, even though the market is trying to price its likely performance into the current stock value. To Morris, it is Economics 101 because the share price should be the current value of projected medium-term profit streams. This means “the markets’ perception of forward value will outweigh one set of half-year results,” he explains.

Although he doesn’t know Unicredit well, he considers the company’s CEO Andrea Orcel’s decision to return nearly all profits to shareholders in buybacks and dividends as being an interesting tactic. As to whether it led to a three percent fall in shares, and whether the decision to buy a Belgian digital bank led to a drop in quarterly revenues, he suggests it is an open question – particularly about the latter.

While buying a digital bank will cost cash in the short-term, it could be a good thing long-term for Unicredit. Meanwhile, in the medium-term it is not going to be noticeably clear for at least a little while. “It is this uncertainty that would lead to a fall in its shares, and while the markets like to see innovation, they are wary of money pits and white elephants,” Morris remarks.

Panis reveals that investment banking is creating a boost in business because of higher market volatility, and client transactions are boosting capital markets income. He says this is supporting revenue growth in 2024. This is particularly so for banks that “could be negatively impacted by low commercial banking lending activity, which is the case for instance for French banks.”

Despite that, there is a capital markets business expansion, which he explains “drove a six percent rise in adjusted revenue to $65bn for European global investment banks in Q2 2024, with a significant boost from equity and investment banking income.” Then you have underwriting and advisory fees, which are from underwriting and advising on equity, debt issuances, and M&A deals. He says they are all contributing to overall revenue. Yet Morris also claims that there are fewer deals around, but “when a deal is there to be done, the fees and margins are probably better than they have been.”

There is a need to leverage against the cost-base, and he finds that if you need three people to deliver a $50m deal, you may need them all to do a $500m deal. This means that the cost-base remains relatively fixed, and he advises that this is good while you can “find deals to be done, but when the tide goes out you can be left with an uncovered cost-base.” Profitability tends to be very volume-dependent because of increasing economies of scale.

Capital market diversification
Investment banking has nevertheless profited from a diversification of capital markets activities in Europe – partly due to events such as the Covid-19 pandemic, which led to some banks experiencing material losses. Panis says some banks also decided to reduce their risk appetite limits to certain exotically structured equity derivatives.

Geopolitical crises, such as the Russia-Ukraine war that caused price instability, also led banks to develop more balanced global market divisions with a more diversified product mix. Yet while he says European banks do not all have an equal access to the depth of the US capital market, “this diversification is rather credit positive, when implemented successfully, because it exposes less the overall business model of those banks to market turbulences and makes capital market revenues relatively less volatile.”

Morris nevertheless feels that some banks are papering over the cracks, and that banks should return to their core purpose – acting as a store of value. To him banking ought to be a medium-margin, dull business. However, he thinks that “human ingenuity has added multiple layers of risk and complexity to that, to the point that banks’ report and accounts” make balance sheets extremely difficult to interpret accurately. This causes a misinterpretation of share value and causes a wobble.

Yet to banking futurist and author Brett King, there is a need for philosophical change and a need to rethink how performance is measured to align investments with “broader social initiatives and shifts in value creation.” Despite their gains, he says investment banking is simply not fit for purpose for the world we are moving towards today. To continue to prosper, he believes investment banks, and banks more generally, need to have fundamentally different thinking. In his view, this requires more diverse income streams that are aligned with emerging value systems.

The yo-yoing yen

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It may be overshadowed by the US dollar or euro, but the yen is the world’s third most traded currency, accounting for 13 percent of global foreign exchange transactions in 2022. Confidence is returning: the yen saw hedge funds inject nearly $5bn into bullish positions, the largest net long stance in almost eight years. The Bank of Japan’s (BoJ) decision to raise interest rates for the first time in 17 years has finally broken its longstanding ultra-loose monetary policies and opened the door to further reform.

Expectations for a yen recovery are growing. As of May 2024, scheduled earnings in Japan increased by 4.7 percent year on year – the fastest wage growth since 1992. Will this strengthening labour market be enough to support the yen’s recovery?

Its recent movements have been heavily influenced by geopolitical events like the Russia-Ukraine war and tensions in the Asia-Pacific region. Wealth management strategies have to change in line with the economic climate and central bank decisions, just as our collective investment choices affect not only world economies but the stability of societies as a whole. So how does Japan’s ability to adapt to movements in the yen affect global investment opportunities as well as domestic economic growth?

Understanding the yen’s legacy
The yen was born back in 1872, when Japan was brimming with optimism after the Meiji Restoration, abandoning centuries of isolation and encouraging modernisation. It was a currency that symbolised the identity of a newly self-confident nation embracing the wider world. Originally bound to the gold standard, it underwent major changes after 1945. With the world in chaos, the 1949 Bretton Woods system provided a lifeline for shattered economies desperate for stability. Under this new regime, the yen was fixed at 360 yen to the dollar, offering Japan security even if it constrained flexibility. In retrospect, this balancing act reflected the nation’s resilience.

By the early 1970s, Bretton Woods collapsed as the US abandoned the gold standard, and Japan let the yen float freely in 1973. The resulting combination of uncertainty and potential generated substantial movements in its value.

Geopolitical tensions, economic shifts and unexpected global events can all trigger tremors in currency values

The 1980s were turbulent for the yen, not least because of international agreements. The 1985 Plaza Accord intended to weaken the dollar, although this triggered a chain reaction that severely buffeted the yen. Although underpinned by Japan’s economic prowess, trade tensions with the US saw its value tumble to a low of 79.75 against the dollar by 1995. Unsurprisingly, Japan’s Ministry of Finance soon began directly buying and selling yen to stabilise its value and protect exporters from economic downturns.

More recently, the yen’s movements have been impacted by global financial crises and shifts in monetary policy, creating a challenging environment for managing future risk. As the Japanese proverb ‘fall seven times, stand up eight’ implies, responding with resilience is what counts.

Over the years, the yen has exemplified this resilience, especially in uncertain times. From the fallout of the 2008 financial crisis, when it surged to around 90.87 against the dollar as investors ran for safety, to its role as a haven during the Covid-19 pandemic, the yen has proved itself. However, its apparent stability remains vulnerable to external pressures, particularly when other nations grapple with inflation: the 2022 uplift in US interest rates battered the yen and widened the yield gap between Japanese and US government bonds. This growing divergence in monetary policies has made the yen more volatile and more subject to investor sentiment.

As of September 2024, inflation in Tokyo met the BOJ’s two percent target, signalling a return to growth and the promise of further rate hikes. However, the yen today is trading at about 147.83 to the dollar – the weakest rate in decades. This is no blip, but part of a bigger struggle for Japan, with geopolitical tensions, especially in the Asia-Pacific region, supply chain problems and the decision to keep interest rates near zero, all contributing factors.

A fragile position against inflation
Speculation about changes in Japan’s monetary policy suggests that the yen might bounce back, but with inflation creeping upwards and mounting global uncertainty, the situation is more precarious for consumers and policymakers alike, leaving the currency exposed. The defining moment came in July 2024 when the BoJ raised its short-term policy range from zero percent to a tentative 0.1 percent. While a stronger yen may temper inflation, it may also dampen Japan’s export-driven economy.

Dominic Schnider, Head of Global FX & Commodities at UBS Global Wealth Management’s Chief Investment Office, spoke with World Finance about how UBS adjusts its strategies to manage risk in terms of the yen. Schnider stressed that the UBS approach to currency management has not changed: investors are advised to hedge their exposure to G10 foreign exchange as a starting point in strategic asset allocation. He explained that wherever they foresee long-term appreciation, such as in Japan, UBS opts for unhedged positions, while constantly hedging their fixed income exposure to limit risk.

According to the Economic Complexity Index, Japan is the world’s most complex economy, due to its sophisticated infrastructure, diverse export base, advanced industrial sector and leadership in technologies like electronics, robotics and automotive manufacturing. Nevertheless, Japan’s low interest rates, domestic inflation challenges and total reliance on energy imports in a highly volatile global energy market all continue to influence the yen’s value. The widening gap between Japanese rates and those of other major economies has prompted the yen’s slide to a 24-year low: 132 against the dollar. According to JP Morgan’s 2024 forecast, the USD/JPY differential will continue to be influenced by market expectations of US Federal Reserve policy, rather than by the actions of the BoJ. While BoJ interventions could create short-term risks, they are unlikely to affect the main factors driving the yen’s depreciation. Despite the bank’s recent departure from negative interest rates, the yen remains tied to the US economy, as shown by a strong rally after a US CPI report in March.

In this environment, wealth management strategies need to stay flexible. In Schnider’s view, “The move in the yen and broader market implications was the result of several factors converging. First, we had a double surprise from the BoJ, and slowing US economic data. Second, investors were heavily chasing Japanese equities and were materially JPY short. Lastly, the valuation of the JPY stood at extremes, being out of balance with relative rates or from a PPP perspective. Current USD/JPY levels are more aligned with relative interest rate differentials.”

Schnider’s observations underline how quickly the market can be rattled when unexpected economic developments coincide with investor positioning, and while the yen’s recent correction could restore some balance, the situation remains fluid. Investors and wealth managers therefore need to monitor central bank actions in line with economic conditions, as developments could once again disrupt the currency’s stability at any time.

During a discussion about the recent foreign exchange market environment with the investment banking firm, Schnider explained how CHF and JPY tend to benefit from falling rates, particularly since these currencies are among the most reactive to US rate changes. For UBS, the Swiss franc has been their primary focus. In light of the current market conditions Schnider stated, “we played the unwinding of carry trade positions via our most preferred guidance in the CHF. From a positioning perspective, speculative accounts in the futures market have room to cut more CHF short positions compared to the JPY. We are therefore positioning the CHF in our mandates at present, both versus the USD and the CNY.”

Long-term investment strategies
The current challenge arising from currency volatility has to be addressed correctly for investors to protect their portfolios while seizing opportunities in an uncertain market. UBS recommended three essential strategies: “First, hold a diversified portfolio, so swings in one currency don’t alter overall investment performance. In that context, a global USD-based investor should not hold more than eight percent exposure to Japanese equities (eight percent high depending on the risk profile). A good equity and bond mix does help, as we have seen in 3Q. Second, have a strategic approach as to how to deal with FX exposure. This can go from fully hedged to hedged, depending on preference. And third, have a tactical investment framework, so you can take controlled exposure when FX dislocations emerge. Also make use of the option market to take asymmetric risk-reward playoffs (on both sides). Even if you are a long-term investor, considering extreme positions in the currency market requires investors’ attention.”

The yen’s movements have been impacted by global financial crises and shifts in monetary policy

Although spreading investment across a variety of different assets can mitigate sudden currency swings by allowing some areas to absorb the effect of shifting rates while others thrive, Schnider views managing FX exposure as critical to maintaining predictable returns and making sure investors are not caught out.

The real win, though, comes from finding opportunity in market instability. A flexible, tactical investment strategy allows investors to profit from changing conditions, turning uncertainty to their advantage.
After all, uncertainty is the name of the game. Geopolitical tensions, economic shifts and unexpected global events can all trigger tremors in currency values. It’s about remaining vigilant and proactive. Those who embrace change are better positioned to protect their assets. It is the ability to adapt proactively that makes the difference.

The great big tech break-up

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or Apple and Google, September 10, 2024 was a judicial bloodbath. For the EU’s regulatory apparatus, a rare victory in its war against big tech. The European Court of Justice ruled that Apple should pay €13bn in back taxes to the Irish tax authorities, while Google failed to overturn a €2.4bn fine over abuse of its online search dominance. For the EU’s previous competition commissioner Margrethe Vestager, an anti-big tech crusader to her enemies and a defender of fair competition to her friends, this was not a temporary triumph, but an omen for the future, with more similar cases in the pipeline.“I am afraid we are only at the beginning,” Vestager told the media a few hours after the decisions were announced, adding: “Or, rather, the end of the beginning.”

A global crackdown
The EU is not alone in its quest to rein in technology powerhouses, which dominate smartphones (Apple), digital search and advertising (Google), e-commerce (Amazon) and social networks (Meta). From California to India, a global wave of regulatory crackdowns on the digital powers that be is raging on. Governments deploy an old tool against this new enemy: antitrust law, with the prospect of break-ups looming large as the ultimate penalty to bring offenders into line.

The rise of AI has also convinced regulators that they must act now before it is too late

There are four reasons why big tech faces such a fierce backlash. One is a chronic concern among regulators and antitrust academics that competition in the tech industry is diminishing because tech companies exploit their dominance to stifle new entrants, which harms innovation and economic growth. Regulators like Vestager and her US counterpart, Lina Khan, see themselves as modern versions of Theodore Roosevelt, the first US President who dared to assail monopolies. Big tech gets more attention because of rapid technological transformation, says Christopher Sagers, an expert on antitrust law at Cleveland State University, pointing to antitrust activity in the early 20th century as a precedent. Although concentration was a problem across the US economy back then, the railroads became the main target of regulators due to the changes they had brought in people’s lifestyles. “It is easier to get average consumers and voters to care about market power in a sexy, highly visible, exciting business like e-commerce or social media than it is in most other business sectors,” he says.

Politics plays a role too. Populism left and right bases its allure on scepticism towards elites, big corporations and mainstream media, exemplified by tech companies and their leaders, such as Facebook’s founder Mark Zuckerberg. Deglobalisation due to rising geopolitical tensions is also pushing policymakers to rein in multinational corporations, with antitrust law effectively becoming a protectionist tool. In the EU, concerns over the bloc’s loss of competitiveness, expressed in a recent report authored by former ECB head Mario Draghi, may be linked to measures against US tech companies.

Finally, platform economies have reached a tipping point. With the increasing convergence of digital technologies, the level of horizontal and vertical integration these companies have achieved is unprecedented. Take Google for example. More than a simple firm, it is an ecosystem that has expanded its tentacles from online search to mobile operation systems and email, all under the same entity. That is reflected in the valuation of its mother company, Alphabet, which accounts for over four percent of the S&P 500 stock market index. Facebook and Apple are not very different in their sprawling operations, while Amazon has built its own e-commerce empire. From Amazon’s suppliers to software developers, governments face pressure to level the playing field. The rise of AI has also convinced regulators that they must act now before it is too late. But it is exactly this complexity that makes antitrust action against tech giants tricky, as the repercussions are unknown and the measures taken possibly counterproductive.

Court of Justice of the European Union, Luxembourg

Breaking up is hard to do
As big tech’s homeland, the US is the jurisdiction where the industry’s future will be decided. After decades of unfettered growth, big tech now faces regulators with a strong antitrust agenda. The head of the Department of Justice (DoJ) antitrust unit, Jonathan Kanter, has made his mission to tighten the screws on digital oligopolies, while Lina Khan, chair of the competition regulator Federal Trade Commission (FTC), made her name as an academic with an influential paper on Amazon’s monopolistic practices. “For a long time, antitrust has been percolating various theories of harm that regulators feel have been underused, particularly about potential nascent competition. There is this view that conglomerates are increasingly important in terms of the scrutiny they deserve and that mergers are too permissive,” says John Yun, an expert on antitrust law and former FTC executive who teaches at George Mason University.

For the EU, reining in big tech is as much about competition as competitiveness

Currently, Google is the major target of this regulatory crackdown. Last October the DoJ proposed that breaking the firm up may be one option to end its online search monopoly. In a landmark case, judge Amit Mehta ruled that the firm had violated antitrust rules and operated as a ‘monopolist’ in its pursuit of search dominance. Google may have to offer remedies such as sharing with competitors search data or even divesting its Chrome browser and Android smartphone operating system, which it is accused of using to promote its search engine. Crucially, it may be forced to ditch a $20bn exclusivity contract with Apple that makes Google the preselected search engine on Safari, Apple’s browser. A decision is expected by August, although Google is expected to take the case up to the Supreme Court.

Alphabet’s antitrust troubles don’t end there. The firm is also the target of a different DoJ lawsuit over anti-competitive practices in its digital advertising business. Although less well known than its search engine dominance, advertising is the real golden goose for the company, which effectively controls supply, demand, measurement and auctions of online ads. What’s more, last October a San Francisco court ordered Alphabet to open Android to rivals, permitting Android apps to be listed on alternative app stores other than Google Play and be paid for via alternative payment systems.

Although break-up orders are rare, given that courts disfavour them and governments use them mainly as a negotiating tactic to scare companies into compromises, Google may be an exception, according to Sagers from Cleveland State University, as the firm has been accused of a range of anticompetitive conduct and has established power in various sectors: “The situation that Google currently finds itself in may be uncommonly favourable to break-up remedy,” he says. Separation of its ad tech business is the most likely scenario, he argues: “The government’s whole theory is that Google uses its ownership of different parts of the ‘ad stack’ to squeeze out competitors and raise prices. If you break up the different pieces and give them to separate owners, they might have less incentive to behave anti-competitively.”

One reason why there have been few tech break-ups is that digital platforms have developed network effects, meaning that they provide a service whose appeal is based on the power of the crowds: the more people use it, the better it is. Breaking them up is impractical and expensive because the resulting firms may not be able to match previous efficiencies or may even try to consolidate again. However, in Google’s case, a structural remedy for its search dominance would make sense, says Sagers: “The government might argue that if Chrome and Android were broken off into separate firms, which don’t directly profit from search engine ad revenues, they will no longer have the incentive to give preference to Google search over competing search engines.”

China was the first superpower to employ antitrust law to curb the power of its tech companies

For its part, Apple faces a DoJ antitrust lawsuit for making it harder for consumers to switch to third-party software and hardware by exploiting its dominant position in the US smartphone market; iPhones account for roughly two out of three smartphones sold in the country. The FTC is also pursuing antitrust cases against Meta and Amazon, accusing the former of monopolising social media through its acquisitions of Instagram and WhatsApp and the latter of favouring its own products and services and stifling competition from other retailers on its e-commerce platform. More ominously, the regulator has launched an investigation into digital price discrimination that could disrupt one of the pillars of the digital economy: how firms tap into users’ data to set individualised prices online.

Part of the regulatory conundrum is that few relevant precedents exist. Since the US telecoms powerhouse AT&T was broken up four decades ago, no tech company has faced a similar fate. Although some believe that the separation boosted competition in parts of the market that drove the internet explosion of the 1990s, others point to the decline of the research centre Bell Labs as one reason the US was left with no major player in telecommunications technology, allowing foreign competitors to emerge. Another danger is that oligopolies can slowly reform, as in AT&T’s case, says Sagers: “Lax merger enforcement allowed the companies that had been broken up to slowly knit themselves back together into larger and larger companies, until once again just a handful of firms controlled all of communications.” Alternative antitrust tools could be compulsory licensing of key technologies, which was used in the case of AT&T, or mandating interoperability and data portability, according to Luise Eisfeld, an expert on digital platforms who teaches finance at HEC Lausanne: “Both might effectively break the impact of network effects that is cementing the market power of large companies.”

Margrethe Vestager, European Commissioner for Competition

Europe’s dilemma
For the EU, reining in big tech is as much about competition as competitiveness, leading many critics to accuse the bloc of deploying antitrust law as a protectionist tool. “Competitiveness is a very dangerous term used to say that we should fight non-EU big corporations to allow EU corporations to merge and concentrate. That would create so-called ‘EU champions’ but in reality, it would enable EU oligopolies or monopolies to rise to the detriment of consumers and businesses,” says Claire Lavin, a researcher at the antitrust think tank Open Markets Institute.

By splitting big tech you generate incremental changes, but another giant will take over

Last spring the Commission launched an investigation against Apple, Meta and Alphabet for potential violations of the EU’s Digital Markets Act (DMA), which aims to prevent tech powerhouses from abusing their dominant position and facilitate the emergence of new firms. It singles out platforms with at least 45 million EU-based users and a turnover of at least €7.5bn, dubbed ‘gatekeepers,’ as potential offenders. The Commission is investigating whether the companies allow app developers to provide users with alternative options outside their stores. Google, which has paid €8.25bn in EU fines in the last decade, is also under scrutiny for giving preference to its own services over rivals in its search results.

In a separate case, the Commission has accused the firm of using anti-competitive practices to protect its adtech business, suggesting that its ownership of various tools such as the ad management platform Google Ad Manager, the exchange AdX and buying platforms Google Ads and DV360 creates a conflict of interest that could be resolved only through divestment. A final decision is expected by the end of the year, but a potential break-up order involving Google would face fierce opposition and long battles in court. “Although it seems feasible on paper, the Commission is wary of judicial review, essentially intervening too much and then having the decision appealed and subsequently annulled by EU courts,” says Lavin. Tech break-ups may also disrupt a rising EU tech ecosystem, which the Draghi report highlights as a source of future growth. “It could backfire, generating criticism and even cancellation of so many new ideas that get developed on the basis of traditional competition law,” says Oles Andriychuk, an academic who specialises in competition law and digital markets at the University of Exeter.

Facebook’s parent company Meta may also face a fine over alleged efforts to dominate classified advertising. EU regulators are expected to claim that the firm links Marketplace, an e-commerce platform, with Facebook to undercut competition. The firm has also come under scrutiny for using data collected from third parties to sell ads to users and for offering users ad-free versions of its social networks for a fee. As for Apple, beyond its tax troubles in Ireland, last March it received its first antitrust fine of nearly €1.8bn for favouring its own music streaming service over competitors.

As the EU’s antitrust chief for a decade, Vestager presided over a trust-busting crusade, fighting against tech companies, lobbyists, politicians and even Eurocrats. “The European Court of Justice in its current composition increased the evidentiary standards, making them harder and harder for the European Commission, and yet the Commission won several cases,” says Andriychuk. Her successor, Teresa Ribera, has joined a new Commission focused on helping create EU-based big tech companies, a priority set out in the Draghi report. “The vocabulary of industrial policy had a bad reputation in competition cycles for many decades. Now it has been partially rehabilitated and people have started rediscovering the correlation between competition and industrial policies,” says Andriychuk. However, Ribera will also have to balance conflicting priorities. “She will likely face pressure to apply competition differently and to lessen competition when applied to EU companies, driving from the Draghi report. But she also has a vigorous agenda to update EU merger rules to address the risks posed by killer acquisitions,” says Lavin.

Shou Zi Chew, CEO of TikTok, Linda Yaccarino, CEO of X, and Mark Zuckerberg, CEO of Meta testify before the Senate Judiciary Committee

The first big tech killer: China
China was the first superpower to employ antitrust law to curb the power of its tech companies. It all started in late 2020 with an anti-government statement by Jack Ma, co-founder of the e-commerce platform Alibaba. Ma’s defiant attitude angered the authorities so much that he had to disappear from the public eye, while the IPO of Alibaba’s sister company Ant Group was suspended and China’s financial regulator forced the firm to restructure to comply with financial regulations. What may have triggered the fierce reaction, argues Wendy Chang, an expert on Chinese digital policy at the think tank Mercator Institute for China Studies (MERICS), was the group’s aggressive expansion into finance, which defied the government’s intention to keep control of the industry.

China’s competition watchdog also launched an investigation into Alibaba, fining it a record ¥18.2bn (£1.96bn) for abusing its e-commerce dominance. This was just the beginning of a broader crackdown. Chinese authorities released a guideline to curb digital monopolies and pushed the country’s biggest tech firms, including Tencent Holdings, food delivery giant Meituan, and TikTok owner ByteDance, to change their monopolistic practices. One reason for the crackdown was the government’s preference for investment in manufacturing rather than services, says Chang. “It wanted to signal to the market a pullback from software industries, and to focus on areas it considers critical, such as electric vehicles.” Regulators also investigated older merger cases, fining Alibaba, Tencent and ride-hailing giant Didi Global for failing to report deals for antitrust reviews, resulting in a significant drop in tech mergers and acquisitions.

The clampdown officially ended with another regulatory guideline promoting a healthier model of development for the digital economy. Although authorities maintained the pledge to battle monopolies, they also recognised the importance of tech platforms for economic growth.

One lasting result is that the Chinese government now has seats on the boards of major digital platforms, influencing their strategy and potentially getting hold of their data. However, significant damage has already been done, with massive loss of stock market valuation; most affected companies have yet to recover, which restricts their ability to innovate and grow in sectors that the government disfavours, including gaming, virtual currencies and financial services, according to Chang. “The chilling effect was also to a certain extent transferred to the AI industry – a sector struggling with geopolitical headwinds already,” says Xiaomeng Lu, a Chinese digital policy expert at the consultancy Eurasia Group. Although it is difficult to measure the crackdown’s impact on the economy, it is widely accepted that it contributed to the drop in China’s growth rate. “The government might have had second thoughts in driving foreign capital away with its aggressive measures, had it foreseen the financial troubles it finds itself in now,” says Chang. Ironically, however, antitrust activity in advanced economies may have offered a post-hoc justification. “I don’t think the Chinese government regretted that decision, since more governments worldwide began to put pressure on big tech,” says Lu.

Should the rising AI powerhouses be broken up?

Since ChatGPT’s launch in 2022, artificial intelligence (AI) has become more than the subject of science fiction novels. Generative AI, which involves the creation of images, texts and videos, is already used by billions worldwide. Google, Amazon and Microsoft have taken notice, acquiring hundreds of AI start-ups and offering AI developers cloud services and funding in exchange for equity and licences.

Developing advanced AI models involves costly computing hardware, energy and data, which gives an advantage to established tech firms over smaller competitors, raising concerns that they will dominate this market too. A case in point is ChatGPT creator OpenAI, which is backed by Microsoft. However, AI is also expected to disrupt markets where big tech currently reigns supreme, such as search; OpenAI is developing SearchGPT, an AI-based search tool that could potentially undercut Google’s dominance. In its case against Google, the US DoJ expressed concerns that the firm may tap into its unique dominance in crucial markets to build an AI empire, with suggested remedies against potential monopolistic practices including restrictions to its use of third-party data to train its AI models.

Should the rising AI giants face antitrust action before it’s too late? Some think that is necessary, given the significant barriers for new entrants. “The current dynamics of the AI ecosystem give incumbent tech giants like Alphabet, Amazon and Microsoft the ability and incentive to entrench their power in AI markets and suppress meaningful competition,” says Jack Corrigan, a researcher at Georgetown University’s Center for Security and Emerging Technology, adding: “Competition authorities seem to be aware of these dynamics, and by closely monitoring these firms’ behaviour and intervening as necessary, they can prevent the market for AI products from becoming as stagnant as those of other digital technologies.” Some suggest that governments should step in to provide public resources that would reduce the reliance of AI developers on big tech. Another way of preventing oligopolies from controlling AI is more vigorous enforcement of rules on merger control and anti-competitive practices, including considering break-ups, says Lavin from the Open Markets Institute, adding: “The EU Digital Markets Act should also be updated as it suffers from certain gaps. For instance, AI foundation models are not considered a core platform service.”

The end of an era
Beyond the world’s biggest economies, regulators in several jurisdictions including Brazil, Australia, South Africa and India have taken similar measures. “Authorities have realised that the current application of antitrust laws did not work for big tech and failed to stop oligopolies and big tech companies from expanding,” Lavin says. From policymakers to smaller tech firms and consumers, big tech has made some powerful enemies with its rule-breaking streak. Leftwing economists accuse digital platforms of indulging in a form of ‘techno-feudalism’ that undermines the basic tenets of capitalism; rightwing politicians castigate it for its ‘woke’ political correctness. All agree that its power should be curbed, its edgiest pieces taken apart. And yet, few know how to do this. Most of these digital powerhouses are not ordinary companies – they have created new markets whose unravelling might be too expensive, temporary, or even have unintended consequences. “By splitting big tech you generate incremental changes, but another giant will take over, maybe from an authoritarian jurisdiction,” says Andriychuk, adding: “I don’t expect that the law of gravitation will change and digital markets will stop being monopolistic.”

The future of green banking

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As the world confronts the escalating impacts of climate change, the financial sector has become a pivotal force in driving sustainability. Banks, in particular, are aligning their lending, investment strategies, and product offerings with environmental, social and governance (ESG) objectives. This transformation is integral to achieving global net-zero carbon emissions, ensuring that green banking is no longer a niche concept but a central strategy for financial institutions aiming to support the green transition and safeguard the planet.

However, this shift is not without its challenges. From mitigating greenwashing risks to navigating increasingly complex regulatory frameworks, banks face significant hurdles in balancing profitability with sustainability commitments. To navigate this multifaceted landscape, financial institutions are developing new financial products, leveraging innovative technologies, and investing in transparency and data verification to meet both their financial and sustainability goals.

The financial imperative
The role of banks in the green transition is no longer optional; it has become a business imperative. Leading financial institutions like HSBC have made bold commitments to align their portfolios with the Paris Agreement’s goal of net-zero financed emissions by 2050. These ambitious targets reflect a growing recognition that integrating sustainability into core operations is not just about fulfilling social responsibility but is also critical to long-term business viability.

The rapid growth of sustainable finance presents a wealth of opportunities for banks

Yet, these commitments come with significant risks, particularly for banks with substantial exposure to high-emission sectors like energy and mining. Reducing exposure to carbon-intensive industries can weigh on short-term profitability, but financing the shift to a low-carbon economy presents enormous long-term opportunities. Peter Panayi, Head of Global Go-To-Market at BuildingMinds, explains, “Banks are finding that while reducing exposure to carbon-intensive sectors may affect short-term profits, financing green transitions opens new growth avenues and positions them as leaders in the future of green finance.”

For banks, this transition requires a fundamental rethinking of traditional business models, where profitability and sustainability are no longer mutually exclusive. Instead, they are interdependent. As demand grows for sustainable products and investments, financial institutions that successfully integrate ESG factors into their business strategies are poised to outperform their competitors, both in terms of market share and profitability.

The rise of green financial products
One of the key strategies banks are employing in their transition to sustainability is the development of green financial products. Green bonds, sustainability-linked loans (SLLs), and ESG-focused instruments are at the forefront of this financial innovation. These products enable banks to fund projects that support sustainability objectives while maintaining strong financial performance.

The global green bond market, for example, has seen exponential growth in recent years, reaching hundreds of billions of dollars in annual issuances. Richard Bartlett, co-founder and CEO of GreenHearth, a fintech focused on financing renewable energy projects, notes the increasing importance of such products: “Green bonds and sustainability-linked loans are essential in meeting the growing demand for sustainable investments. They offer performance-based financing that encourages companies to meet their ESG targets while maintaining financial viability.”

However, despite the rapid growth of green financial products, challenges remain. Banks must manage the reputational risks associated with accusations of greenwashing – where companies falsely claim to meet ESG standards – and navigate an evolving regulatory environment. Frameworks like the EU Green Taxonomy and the UK’s Sustainability Disclosure Requirements (SDR) demand that banks provide detailed ESG data and ensure that their products align with sustainable finance principles.

For banks to meet these requirements, they need robust systems for collecting and verifying ESG data. Without transparent and measurable outcomes, banks risk losing credibility and investor confidence. Rajul Sood, Managing Director and Head of Banking at Acuity Knowledge Partners, underscores the importance of data in this process: “Banks monitor green loans through impact reports and key metrics, such as renewable energy projects financed, energy efficiency improvements, and carbon emissions reductions. This data is essential for ensuring that investments are both financially sound and aligned with sustainability goals.”

The issue of greenwashing is a significant concern for banks and their stakeholders. Greenwashing occurs when companies or financial institutions exaggerate or falsely claim their environmental credentials to attract capital. In response, regulatory bodies are tightening the rules around sustainable finance to ensure transparency and prevent misleading claims. The EU’s Green Taxonomy, for instance, provides a clear framework for what constitutes a ‘green’ investment, making it more difficult for institutions to claim green credentials without substantiating them.

Panayi points out the growing regulatory scrutiny in this area: “Banks assess and mitigate greenwashing risks by auditing climate disclosure reports and working with external rating agencies to ensure ESG compliance. Regulatory penalties for greenwashing encourage banks to prioritise transparency and authenticity in their sustainability initiatives.” The risks of failing to comply with these new standards are high, as banks could face hefty fines, reputational damage, and loss of investor trust.

In the UK, the Sustainability Disclosure Requirements (SDR) aim to increase transparency around ESG reporting. However, Bartlett notes that the UK lags behind the EU in implementing comprehensive regulatory frameworks. “The UK’s regulatory framework is still under consultation, which creates a window of opportunity to develop a more practical and user-friendly regime,” he says. Nevertheless, once these rules are fully in place, banks operating across both the UK and EU markets may face additional compliance challenges.

The role of technology
Technology is playing a crucial role in overcoming the challenges associated with ESG data collection and verification. Fintech solutions, such as digital twin software, are enabling banks to monitor the financial and environmental performance of green projects in real time. These technologies allow banks to provide stakeholders with clear, measurable outcomes, enhancing both transparency and accountability.

In addition to improving data accuracy, technology is also helping banks streamline compliance with regulatory frameworks. By automating the reporting process, banks can ensure that they meet regulatory requirements efficiently, reducing the risk of non-compliance and the associated penalties. The rapid growth of sustainable finance presents a wealth of opportunities for banks, particularly in the development of innovative financial products. Sustainability-linked loans and green bonds are among the most promising tools for banks looking to support the green transition while maintaining profitability.

Sustainability-linked loans provide companies with financial incentives to meet specific ESG targets, such as reducing carbon emissions or improving energy efficiency. If the company meets these targets, it benefits from lower interest rates, making the loan more affordable. This type of performance-based financing is becoming increasingly popular as companies strive to align their operations with global sustainability goals.

Green bonds are another powerful tool, allowing banks to raise capital for projects that have a positive environmental impact, such as renewable energy or sustainable infrastructure. The success of these products demonstrates the strong demand for ESG-aligned investments, which not only deliver financial returns but also contribute to a more sustainable future.

As Panayi explains, “Banks are seizing the opportunity to develop new financial products that align with the growing demand for sustainable investments. These products help diversify funding sources and improve access to capital for companies committed to sustainability.”

Authenticity in ESG investments
While financial metrics are essential for evaluating the success of ESG investments, authenticity is equally important. Stakeholders are increasingly demanding that banks not only talk about sustainability but also demonstrate genuine commitments to ESG principles through their actions.

Sustainability-linked loans and green bonds are among the most promising tools for Banks

Dre Villeroy, CEO of Beyorch, a wealth management firm specialising in ESG investments, stresses the importance of authenticity in green finance. “You can talk about improving society or the environment, but unless you make a real difference, it’s just talk,” Villeroy says. He emphasises that at Beyorch, investments are evaluated not only on their financial returns but also on their impact on society and the environment. “We prioritise investments that contribute to a better future. If there are no positive outcomes, the investment is not worth it.”

This emphasis on authenticity reflects a broader shift in the financial industry, where ESG investments are increasingly judged by their real-world impact, rather than just their financial performance. Banks that can balance profitability with meaningful sustainability contributions will be well-positioned to thrive in the green finance landscape.

A delicate balance
As green banking continues to evolve, financial institutions must strike a delicate balance between profitability and sustainability. While the road ahead is fraught with challenges – from regulatory compliance to greenwashing risks – the opportunities for those who can successfully navigate this landscape are immense.

Innovation, technology, and transparency will be key to driving this transformation. By embracing new financial products, leveraging cutting-edge fintech solutions, and committing to authentic ESG practices, banks are well-positioned to lead the global shift towards a low-carbon economy. For those willing to invest in a sustainable future, the rewards – both financial and environmental – are vast. Green banking is not just a passing trend; it is the future of finance. The integration of sustainability into core banking strategies will not only reshape the finance industry but also play a pivotal role in protecting the planet for future generations. For banks that successfully balance these priorities, the potential to drive both profits and positive global change is enormous.

Sanctions: the financial front line

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The tidal wave of geo-political volatility that has surged around the world in the last decade has propelled financial institutions into the frontline. Many were unprepared and have paid a heavy price in terms of fines and reputational damage. This has forced the sector onto a war footing, with armies of new experts recruited to help guide them through the increasingly complex battlefield of international sanctions.

Some of the fines are eye-watering (see chart) and all the signs are that they will be getting larger and strike deeper into the complex worlds of insurance, banking, trade financing and investment. The number, scale and breadth of sanctions make this a fraught area, says Oliver Brifman of Miami-based card payments business eMerchant Authority: “The key risks for financial institutions regarding sanctions include regulatory complexity, third-party risks, geopolitical uncertainty, indirect exposure, and reputational risk. With over 11,632 sanctioned individuals and 5,935 entities across the US, EU, Canada and Australia, the regulatory environment is complex, and institutions must navigate it carefully to avoid penalties.”

There may be thousands of sanctions in place but regulators around the world have been stung by criticism of the ineffectiveness of some of their sanctions, especially the numerous ways in which Russia evades the oil price cap, although this new determination to tighten the sanctions noose around Russia extends beyond Russian oil. Serious questions are being asked about how so many western manufactured goods are finding their way into Russia through countries friendly to the Putin regime. Trade finance, insurance, foreign exchange management and banking are all in the firing line.

With the focus moving from following the oil to following the money, financial institutions can expect some tough questioning from regulators. The recent criticism of the UK Treasury and its Office of Trade Sanctions Implementation (OTSI) for its poor record in prosecuting sanctions breaches by Sir William Browder, who heads the Global Magnitsky Justice Campaign and is a longstanding critic of Putin’s Russia, is likely to push the UK to take tougher action: “There seems to be both a resource problem and a culture problem when it comes to prosecuting people for economic crimes or sanctions evasion here,” he told the BBC, adding that the UK “was one of the most lax enforcers of these types of laws.”

This situation is not likely to last much longer, as the UK government injected £50m into the OTSI budget earlier this year. Watch this space, says US lawyer John Smith from Morrison Foerster: “The UK government has indicated it expects to catch up rapidly and that we should stay tuned for some bigger enforcement cases coming there but we have not seen them yet. I think it is not a lack of will when it comes to the UK, it is a lack of the experience getting them through the government channels.”

World police
While negotiating sanctions against Russia has forced its way into the day-to-day monitoring of transactions in a wide range of financial institutions since Russia launched its invasion of Ukraine in February 2022, it is by no means the only part of the world that presents a complex sanctions challenge.

The complexity of sanctions lies in their rapid evolution and the extra-territorial nature of US policies

The Middle East has long been a part of the world where sanctions have been used to isolate regimes such as Iran, and the rapidly escalating conflict between Israel and Hamas, Hezbollah and Iran is set to trigger a new round of sanctions. Israel’s attacks on branches of Al-Qard Al-Hassan, a financial institution sanctioned by the US since 2007 because of its links to Iran and Hezbollah, in Beirut on October 20 are an example of how the sanctions war can meet the brutal reality of military conflict. It might be an extreme example but nevertheless it is a reminder of how complex and intertwined geo-political risks are.

The US has had tough sanctions against Cuba in place for decades and periodically imposes – and relaxes – sanctions against some of its Latin American neighbours as friendly and unfriendly regimes come and go. The US is also very hot on clamping down on organised crime, especially the international drugs trade. HSBC found out how serious they are about this in 2013 when it had to pay $1.3bn for conducting transactions on behalf of customers in Cuba, Iran, Libya, Sudan and Burma, all of which were on the sanctions list. Federal authorities also alleged that HSBC helped to launder around $881m in drug proceeds through the US financial system.

And then there is China. There are already several sets of sanctions against China, mainly imposed by the US but some by the EU, but they are nothing compared to what could come hurtling towards financial institutions facilitating trade with China if the aggression towards Taiwan escalates, or the numerous territorial disputes in the South China Sea get out of hand. The determination of the Chinese government under Xi Jinping to make this the Chinese century has meant that China has embedded itself deeply into the world economy. Contemplating the rapid imposition of the sort of sanctions that came in the wake of Russia’s invasion of Ukraine sends shivers down the spines of global businesses and their financial backers. It would be brutal, disruptive and almost as damaging to those countries that might impose sanctions as it would be to China.

Fear of the potentially catastrophic consequences of escalating sanctions wars does not mean governments are going to stop reaching for them anytime soon, says David Chmiel, managing director of Global Torchlight, a geopolitical analysis and advisory firm: “I think it is important to understand why sanctions are now in many ways the largest arrow in the quiver. The first is purely geopolitical, which is if you look at polling data, populations around the world are still hugely reluctant to see military responses to foreign policy crises. Just look at polling around getting involved directly with Russia over Ukraine, as an example, in the US and Europe, UK and elsewhere.”

Chmiel continued: “That is combined with the fact that for all that we can talk about how much globalisation is being unwound, there are all of these economic and financial links that are in place that give governments the tools to leverage them when there is pressure to respond, but when there is a reluctance to go with the kinetic military response. So that is why sanctions have just come front and centre.”

Currency of trust
“There is also a third element that we should take into account in all of this and that is the colossal trust deficit that currently exists. The public are still hugely distrustful of institutions, be it business, be it government. There is very little political capital to be lost in imposing sanctions on business because the public do not trust financial institutions in the wake of the global financial crisis. Sanctions are a way for governments to shift cost and risk in foreign policy crises to the private sector,” Chmiel told World Finance.

A key risk for financial institutions is inadvertently facilitating transactions that violate sanctions

The message is simple: financial institutions are in the firing line and likely to remain so. The key player is the US Treasury Department’s Office of Foreign Assets Control (OFAC) which has long lists of companies and individuals that are subject to sanctions and, crucially, extends its reach beyond US businesses, known as extra-territoriality.

This has caught out many institutions over the last decade, according to Dennis Shirshikov, head of growth at Gosummer.com, a US property management business. “The complexity of sanctions lies in their rapid evolution and the extra-territorial nature of US policies, which can impact non-US institutions. Banks and asset managers, in particular, face heightened exposure due to the sheer volume of cross-border transactions. A key risk for financial institutions is inadvertently facilitating transactions that violate sanctions, which can result in fines reaching billions of dollars, as we have seen with major banks in recent years. For insurers, the challenge is equally significant – insuring assets linked to sanctioned entities can lead to retroactive penalties,” said Shirshikov. “One example is the case of BNP Paribas, which was fined $9bn for violating US sanctions by processing transactions for Sudan, Cuba and Iran. This demonstrates how banks, even when attempting to work within third-party countries, are vulnerable to severe enforcement actions,” Shirshikov continued.

This extended reach of the US sanctions can sometimes cause confusion with locally imposed sanctions and even conflict with local laws, a potential minefield for firms, but the watchword is now one of huge caution, says Michael Feller, a former Australian diplomat now advising global businesses on geo-political risks: “All those banks in Europe and the UK who are providing trade finance to Turkish exporters selling into Kazakhstan are on notice and so they will be having serious talks about de-risking from that exposure.”

Risking reprimand
The International Underwriting Association of London (IUA), an insurance market trade body, provides regular updates to its members to help them identify and avoid such hazards. These updates have changed dramatically over the last decade, highlighting the growing exposures insurers face, says Helen Dalziel, director of public policy: “I have been working at the IUA for 12 years. We do a sanctions spreadsheet for our members, with a monthly update of all the new sanctions. So we keep a close eye on what is going on and during that period we have never known as much activity on sanctions as there is now.”

The biggest challenge, Dalziel says, is getting insurers to look beyond the immediate entities they are insuring, because that is what the regulators are now doing. “You have all these facilitators with the money that are not necessarily sanctioned entities. The enforcement authorities in the US and UK realise they really need to go after the money to try and prevent profit from circumventing sanctions. How does that impact insurance? Because obviously insurance is multi-layered and you have got complex reinsurance arrangements so following the money is not always easy,” explained Dalziel.

This risk is acknowledged by many firms, according to David Langran, a specialist aviation underwriter at Hive Underwriting in London, and is made more complicated by the lack of detail when so many new sanctions are imposed in rapid succession, such as after the Russian invasion of Ukraine: “You know there is a real risk there that we might inadvertently breach sanctions and then find ourselves, as a relatively small insurer, with an existential sort of sum of money that we have got to hand over. Secondly, there is also the political risk that you know sanctions pose a risk to our clients that they may also end up on the wrong side of them,” said Langran.

“With Russia, sanctions were rushed out and they were quite generic. They were not specific and certainly not specific to aviation insurance, so you are left trying to interpret them how they impact us and our clients. And so you end up going back and forth with US, UK Treasury or the EU, asking, what does this mean? And what does that mean? And can you clarify this and clarify that? Particularly when you have got multiple jurisdictions involved and they are not all applying the same sanctions to the same people, the same entities, so you get a mismatch,” Langran told World Finance.

Political risk underwriter Finn McGuirk at Mosaic Syndicate Services in London had a perfect example of this complexity: “We had a claim for a trading client in Switzerland, who, when Belarus was not sanctioned, was doing some metals trades there but when it came to responding to a claim after Putin’s camping exercise turned into something more serious and sanctions were imposed we hit problems. We were paying a Swiss client who had lost money because they had prepaid for steel coming out of Belarus. There should not have been any issue in terms of paying that Swiss client for that loss. But it was just an absolute nightmare to get a clear enough answer out of the UK authorities that was sufficiently helpful to convince the various banks involved in movement of funds and so forth that this was all above board,” McGuirk said.

Sanctions fall under two broad headings

Financial sanctions: Asset-freezing measures affecting the provision of funds and economic resources to certain entities or individuals (designated persons). They may include restrictions on the use of assets by designated persons, receipt and transfers of funds to particular types of persons and prohibitions on the provision of financing or financial assistance connected to designated persons and prohibited transactions. The current list maintained by the UK Treasury alone contains over 4,800 individuals and corporate entities.

Trade sanctions: These can be more sweeping and prohibit trade in certain goods from affected countries, usually arms and commodities such as oil, timber, gold and diamonds; and equipment for use in the nuclear, oil and gas or petrochemical sector. Many activities related to such trade may be prohibited, such as shipping and construction.

The sanctions slalom
Keeping track of sanctions is a major challenge for every financial institution. Many have expanded their own internal compliance teams, while others rely on external consultancies to keep them up-to-date and raise the red flags when they might be in danger of breaching sanctions. Often the tools used are rather blunt, throwing up the sort of challenges Mosaic had to deal with: “For banks, insurers and asset managers, keeping up with frequent changes to sanctions lists and regulations across multiple jurisdictions can overwhelm compliance teams. A notable issue is the high rate of false positives in sanctions screening which results in wasted time, resources and added operational costs. This is particularly problematic in cross-border payments, where each institution in the chain might repeat the same screening processes, causing delays and inefficiencies,” according to Austin Rulfs, a director of Australian investment and property advisory firm Zanda Wealth.

The reach of sanctions across the financial sector is constantly expanding and is impacting every element of the global financial infrastructure. Clearstream, an international central securities depository based in Luxembourg and part of the Deutsche Börse Group, was fined €9m by the European Central Bank in 2021 for processing payments related to sanctioned Russian entities. The major targets of sanctions such as Iran and Russia have been gradually eased out of SWIFT, the world’s international payments system. This has led to the setting up of parallel payments systems, one of the examples of the perverse way sanctions can work, says Feller, who highlights how some of the BRICS economies have worked together to protect themselves against the impact of sanctions: “Although some of these countries do not have much affinity with Russia they looked at what was happening in the wake of the war in Ukraine and said, I do not want that to happen to me next time I do something bad in my neighbourhood. So let’s buddy up and create an alternative payments architecture. So the answer to being sanctioned off SWIFT is you just invent a new SWIFT and bring the world’s most dynamic emerging markets on board. And the scary thing we are seeing now is that potentially the Saudis are going to be joining this group,” Feller noted.

Crypto crackdown
Cryptocurrencies are also firmly on the regulatory radar screens. “There have been efforts to start targeting cryptocurrency organisations that were allowing the financing of weapons procurement and terrorist financing that were seen as a way of avoiding the US dollar,” says Chmiel.

The US authorities have already targeted one firm, Tornado Cash, which anonymises cryptocurrency transactions which are otherwise recorded. The US alleged these so-called ‘mixers’ were being used to launder stolen cryptocurrency and illicit funds to send to places like North Korea and, hence, imposed sanctions in 2022.

What was innovative about this was that Tornado Cash effectively produced code that was hosted on several cryptocurrency platforms and it was the use of the code itself that was sanctioned. This was the first time that software code had been sanctioned rather than simply putting individuals or entities on the sanctions list. It created the risk that if you were using the code you would be violating sanctions, even if it was not obvious.

These service providers are on a steep learning curve, says Maximillian Hess, principal of Enmetena Advisory and author of Economic War: Ukraine & the Global Conflict Between Russia and the West.

“One of the things that is happening right now in sanctions is we are trying to upskill and institute policies that mean, for example, technology owners and IP owners have to bring in the same kind of compliance departments as banks do,” says Hess.

He points out that other participants in the financial system, such as Euroclear, feel they are caught in the middle as they are forced to freeze Russian and Belarussian assets but fear they could face counter-action by Russia. This issue becomes particularly sensitive when politicians start talking about using frozen Russian assets to rebuild Ukraine.

Hess explains: “Euroclear is really the main story here because it holds $200bn, roughly, of the $300bn frozen. I have some criticisms of how they have retained some of the earlier money although I would not say that they have been directly opposed to releasing it. I think they are taking these Russian counter lawsuits too seriously. I think that the West should do more to make clear that it will defang those counter lawsuits.” If the present looks complex and threatening, the future could be even worse.

Decoding China
The big unknown is China. Nobody knows how Xi Jinping’s pursuit of his dream of this being the Chinese century and his determination to reclaim Taiwan will play out. Nobody really knows how the West will react. The US will undoubtedly lead the way but even it will have to think long and hard about how drastic sanctions action – let alone a military response – will impact its own economy and the economies of its allies.

The cardinal rule of sanctions is that you want to harm the target more than you harm yourself or your allies

“A lot of global institutions, not just financial institutions, and businesses have so much trade, so much business with China it would be so massively dislocating. It is almost too hard to contemplate, isn’t it?” says Smith.

“In many ways it is so hard to contemplate that the US and other countries could take the sort of action we have seen with other countries because any kind of large-scale sanctions on China would boomerang against our own economies and the cardinal rule of sanctions is that you want to harm the target more than you harm yourself or your allies. It is hard to find ways to do that to a jurisdiction like China if the need would ever arise in a way that would not harm US and allied economies as much as China could be hurt,” Smith added.

Does that mean the potential risk of drastic sanctions being imposed on China is only minimal? Ask that question of the experts quoted in this article and you will get many variations of the same answer. Any financial institution that is not assessing its exposure to China and that of its clients would be foolish because the West will not sit back and let China continuously flout the international rule of law: somewhere it will draw a line. When it does it will be equally as disruptive and as rapid as when the West threw a barrage of sanctions at Russia and Belarus in February 2022.

ISDA close-outs: counter-hedges and free bets

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We wish to highlight an important point for any party unfortunate enough to face a close-out in an ISDA (International Swaps and Derivatives Association) transaction. In the course of acting for parties in that position as their banking litigators, we have identified an apparently common practice among investment banks, by which they obtain a short-term directional bet on the market at the potential expense of the defaulting counterparty. This leads to inflation of the amounts demanded in the close-out if the bank loses money on those trades.

Picture the fictional scene. You are counterparty to a derivatives contract with ‘bank A.’ The market has gone against you and the trade is under water. Perhaps you were sent margin calls you could not meet. Whatever the reason, ‘bank A’ has issued a notice of event of default in which it notifies you of the early termination date. As non-defaulting party, ‘bank A’ will be determining the close-out amount due on termination on that future date. Close-out protocols vary a little between the 1992 and 2002 master agreements, but for present purposes they can be treated as identical. Under either, the early termination date has to be at least 20 days after service of the notice of event of default.

Ordinarily, ‘bank A’ will have hedged the risk of your transaction when it entered into it with you. ‘Bank A’ should largely be protected by that hedge against market risk in the period between declaring default and closing out. Indeed, the master agreements provide that the non-defaulting party may include hedging costs in the close-out valuation. Nothing controversial there.

Now, imagine you are a little fortunate as your market position improves somewhat in the period before termination (but not enough to cure the position). When the early termination date arrives, that is reflected in a better close-out valuation for your trade than would have been the case on the date when notice of default was served. However, ‘bank A’ includes larger than expected claims for hedging costs in its valuation. It is, as ever, unrealistic to expect great transparency. Details of trades and pricing may be absent or thin, and supporting materials are unlikely to be volunteered.

Close-out chicanery
But, with the fortitude of a sensible defaulting party (and tenacious advisors), you probe ‘bank A’ about the valuation. You press for the detailed calculations behind the headline figures, and for evidence supporting them. Skill and persistence eventually uncovers that large sums are demanded for the losses incurred on new ‘hedging’ transactions entered into around the date of service of notice of default (so three weeks or so before the valuation).

There is an expectation that any losses can be claimed as hedging costs

What are these transactions? Well, these turn out to be new trades ‘bank A’ entered into in the same direction as it sees your trade, so in the opposite direction to its original hedge. Just as you have made some relative gains since the default notice was served, so these trades lost money for ‘bank A.’ Therefore ‘bank A’ says that it is entitled to claim the losses on the new trades as costs of adjusting its hedging.

There are two questions which arise. The first is a legal one – are the costs of such ‘counterhedges’ entered into around service of the notice of event of default costs which can be lawfully claimed from the defaulting party in the close-out amount due under the ISDA framework? After considered legal analysis, my view is that they are not.

The second question is practical. Why would ‘bank A’ enter into these new ‘counterhedges,’ especially when they cancelled out the prior hedge which was its protection against market risk? One reason might be it perceives credit risk on your leg of the trade, although in our view that does not provide the basis for a lawful claim under the ISDA valuation mechanism.

The more cynical view is that if there is an expectation that any losses can be claimed as hedging costs, there is no reason not to place a directional bet. In our experience of how close-outs work, ‘bank A’ is unlikely to be economically irrational enough to volunteer to give credit for any such trade which made money – they would simply become unconnected rewarding trades.

In reality, this is not a fictional scenario. I have witnessed a number of investment banks executing this strategy in close-outs where they have attempted to demand very significant losses on such ‘counterhedges’ under the cloak of generalised ‘hedging costs.’

The economics of sleep

Posted on by itsupport

In 2014, the American Centers for Disease Control and Prevention (CDC) declared sleep disorders a “public health epidemic”; two years later, the World Health Organisation released a study, Sleep Problems: An Emerging Global Epidemic?

Roll on a decade, and the world is finally starting to take note. Sleep trackers, wearable devices, digitised mattresses and sleep supplements – from CBD oil to herbal remedies – are everywhere. Hotels are putting the focus on sleep tourism, while corporate sleep programmes are being introduced to help employees get a better night’s kip.

Sleep has become big business – so much so that consulting firm Frost & Sullivan predicted the global sleep economy could be worth $585bn this year. That’s opening up a whole new raft of opportunities for start-ups and investors, as well as targeting an issue at the core of society. But how pervasive is the sleep ‘epidemic,’ and are we doing enough to tackle it?

A global health crisis
Experts agree with the CDC’s analysis; we aren’t getting enough sleep. “It is 100 percent on point to say lack of quality sleep is a health crisis,” says John Lopos, Chief Executive of the National Sleep Foundation (NSF), an American non-profit founded to improve public health and wellbeing by educating the public on sleep issues.

Long-term sleep loss is also linked to a higher risk of depression, anxiety disorders and burnout

Research by the organisation found that nearly six in 10 adults in the US are not getting the recommended seven to nine hours of sleep a night. “Our results tell us that if a letter grade were given to US adults and teens for sleep satisfaction and practice of healthy sleep behaviours, we would get between a D and an F,” he says.

“NSF data from the US and some other global markets make it clear too many of us are not getting the recommended amount of sleep, we are not satisfied with the sleep we are getting, and there are strong associations between our sleep and priorities like mental health, public safety and performance,” he says. It isn’t unique to the US; a 2023 survey by Nuffield Health found that in the UK, the average sleep time was just under six hours, with 11 percent of those asked getting just two to four hours a night. A 2021 study by the OECD meanwhile found that Japan ranked the lowest of all 33 countries surveyed for average hours of sleep – with 71 percent of men in the country regularly getting less than seven hours a night, according to the Japanese Society of Sleep Research – prompting widespread concern from health officials.

The health impacts of insufficient sleep have been researched far and wide – and experts are concerned. “Sleep duration of less than seven hours is associated with increased risks for cardiovascular disease, obesity, diabetes, hypertension, depression, and all-cause mortality,” wrote researchers in a paper, Workplace Interventions to Promote Sleep Health and an Alert, Healthy Workforce.

A study by academics in the UK and Italy meanwhile found that sleeping less than six hours per night raised mortality risk by 12 percent compared to those getting six to eight hours.

“Sleep is vital in cleaning the brain,” sleep neuroscientist and adjunct Professor at IE Business School, Els Van der Helm, told World Finance. “During wakefulness, the brain builds up waste products; sleep clears these toxins, helping prevent cognitive decline associated with neurodegenerative diseases such as Alzheimer’s disease,” she says.

“Alongside physical health risks, long-term sleep loss is also linked to a higher risk of depression, anxiety disorders and burnout,” she says. “It’s also important for immunity; just one night of poor sleep weakens the body’s ability to fight infections.”

In 2017, acclaimed book Why We Sleep: The New Science of Sleep and Dreams, by British neuroscientist Matthew Walker, put a further spotlight on the health impact of insufficient sleep, getting the public talking about a “low level exhaustion” that has for many become an accepted norm. “Individuals fail to recognise how their perennial state of sleep deficiency has come to compromise their mental aptitude and physical vitality, including the slow accumulation of ill health,” he wrote.

The bottom line
It is not just our minds and bodies bearing the brunt of sleep deprivation, though; widespread lack of sleep is impacting businesses’ bottom lines, too. “Lack of sleep has a measurable impact on business performance,” says Van der Helm, who helps leaders and organisations address sleep issues. “It affects memory, focus and problem-solving and impairs creativity and logical reasoning. Sleep-deprived employees make more errors, have slower reaction times, and are more likely to make poor decisions. Research shows that two nights of restricted sleep can lead to a 300 percent increase in errors,” she says.

Just one night of poor sleep weakens the body’s ability to fight infections

“Research also shows that sleep-deprived workers are 50 percent less productive than well-rested colleagues,” she continues. “Sleep-deprived employees are also more likely to experience burnout, leading to higher turnover rates and hiring costs. In addition, employees who sleep poorly are more likely to take sick days and require costly medical interventions. On a leadership level, sleep deprivation impairs emotional regulation, leading to increased stress and strained workplace relationships,” she says.

A large-scale survey by the CDC found that more than 23 percent of those asked (almost 50 million people) reported problems concentrating during the day due to lack of sleep, while 8.6 percent (18 million people) said sleep deficiency was directly interfering with their job performance.

That is taking its toll economically, according to statistics; a study by research organisation Rand Health (Why Sleep Matters – The Economic Costs of Insufficient Sleep) estimated that up to $680bn was being lost every year across five OECD countries as a result of insufficient sleep, owing to factors including absenteeism, reduced performance and mortality. $411bn of that was in the US, while Japan ranked second with an estimated annual loss of $138bn. In the UK, losses amount to up to £50bn – or 1.86 percent of national GDP – according to research, resulting from decreased productivity, healthcare costs and accidents and errors linked to sleep deprivation.

It isn’t just on an economy-wide level, either; a study by LSE professors found that a one-hour increase in weekly sleep boosted an individual’s earnings by five percent in the long term. “These results are economically relevant,” wrote researchers in the report, Sleeping our way to being productive. “They suggest that an extra hour of sleep per week raises earnings by roughly half as much as an additional year of formal education.”

The ‘sleep economy’
The world is waking up to all this – and both consumers and employers are starting to take heed. “The general public started turning a corner on this about 10 years ago,” says Lopos. “Now the importance is even better understood by regular consumers who are willing to spend on things that can help them get enough of the quality sleep they want and need,” he says. According to research by the foundation, 93 percent of adults asked were willing to use a ‘sleep promoting environment’ to improve their sleep health.

That is taking shape in various ways – not least in the rapid rise of sleep tech. Wearable devices, timed lights, weighted blankets, smart thermostats and even smart mattresses that can detect sleeping conditions – and adjust firmness and temperature accordingly – are among the products being promoted, and consumers are making the most of them; in the US, more than a third of people have used a sleep-tracking device, according to a survey by the American Academy of Sleep Medicine.

That is not only going some way in addressing the sleep ‘epidemic’ – it’s also creating a whole new industry for investors and entrepreneurs. Venture capital funding for sleep tech rose from just under $400m in 2017 to nearly $800m in 2021, according to Crunchbase. Venture capital firms dedicated to sleep have also started to crop up; among them San Francisco-based Supermoon Capital, which launched in 2021 with a $36m fund for sleep-focused start-ups.

“There are real opportunities for products and services to help sleep health everywhere we have a lived experience,” says Lopos. “That could be in our residential spaces, in our work and social places, or on our bodies,” he says. “The list is hard to cap, limited only by the bounds of our entrepreneurial creativity.”

Slumber-focused holidays
Sub-sectors are opening up within the market, too. ‘Sleep tourism’ is being widely touted in the travel industry as hotels, airlines and others cater to consumers’ growing demand for a good night’s rest. Analysis by research firm HTF Market Intelligence estimated the sleep tourism market alone could grow by $400bn globally from 2023 to 2028.

“High-net-worth travellers are now seeking treatments for issues like insomnia, cognitive decline and disease prevention,” says Misty Belles, Vice President of Global Public Relations at Virtuoso, a leading global network of travel advisors. “These initiatives include bespoke spa treatments, sleep-optimised retreats, customised in-room amenities and cutting-edge technologies, such as smart lighting systems,” she says.

All of this is leading analysts to believe the ‘sleep economy’ to be a major area for growth. “The global sleep economy has been estimated at nearly $600bn,” says Lopos. “But I think that is potentially underestimated when we consider the full range of daytime and night-time actions we understand can contribute to healthy sleep,” he says. “The global value starts expanding beyond the hundreds of billions of dollars and closer to estimates like McKinsey recently suggested for the wellness market – in the realm of trillions.”

The silver bullet?
These new revenue streams are good news for entrepreneurs and VC firms working in the sleep space; but are sleep-enhancing environments, sleep supplements and digital gadgets enough to fix deep-rooted issues?

Some experts are sceptical – among them Van der Helm, who points out that not all of these products are scientifically backed, for starters. “Wearables and smart products can help raise awareness around sleep by giving consumers day-to-day insights,” she says. “But many products on the market make unsubstantiated claims about improving sleep, and this is where I remain sceptical.

“Consumers are becoming more informed, and they will begin to reward products that are backed by solid science,” she says. “There is a growing need for companies to work with sleep scientists to validate their products and make real, measurable improvements in sleep quality.”

It isn’t just about the efficacy of the products, of course. While sleep-boosting products and sleep-focused holidays can go some way in raising awareness around sleep as an issue, we need to look beyond them. Corporate interventions are one potential solution.

Experts at Rand Health believe organisations have a role to play. “Employers should recognise the importance of sleep and the employer’s role in its promotion,” they wrote in the Why Sleep Matters paper. “They should design and build brighter workspaces; combat workplace psychosocial risks; and discourage the extended use of electronic devices.”

In recognition of the impact sleep can have on the bottom line, some companies have already taken action; back in 2014, American private health insurance company Aetna even began offering financial incentives for employees sleeping at least seven hours per night (monitored by sleep trackers). A few years later, Japanese wedding company Crazy Inc took a similar approach, awarding points to employees clocking up at least six hours a night, as measured by high-tech mattresses.

Specialist companies such as Circadian and the Sleep Works are meanwhile offering corporate sleep programmes to help employees get the rest they need.

While monitoring employees’ sleep might seem a step too far, employer interventions could certainly have their place; in the Workplace Interventions paper, researchers found that educational sleep programmes resulted in “self-reported improvements in sleep-related outcomes, and may be associated with reduced absenteeism and better overall quality of life,” suggesting clear value for organisations making sleep a focus.

But there is still some way to go; the majority of businesses still aren’t prioritising sleep, “despite compelling evidence of the negative impact,” according to the researchers.

Damaging work culture
And in any case, while these initiatives can go some way in addressing sleep-related issues, they can only go so far; a plaster does not heal the wound. For that, we need to dig deeper and get to the root of the issue; and that starts with fundamental working models. It’s no surprise that long working hours in industrialised nations correlate to poorer sleep; an oft-cited study by economists Jeff Biddle and Daniel Hamermesh estimated that for every extra hour of work, sleep was reduced by 13 minutes. A recent survey by the Sleep Charity meanwhile found that three-quarters of respondents had experienced sleep problems due to work-related stresses in the previous six months.

“Access to screens and the 24/7 economy is a clear sleep disrupter,” says Joan Costa-Font, Professor of Health Economics at the London School of Economics (LSE), whose research found that people sleep better during economic slow-downs, and worse when economic activity bounces back.

Lack of sleep has a measurable impact on business performance

That is backed by recent experience; Americans surveyed by the National Sleep Foundation during the pandemic said they were getting more sleep than before, attributed to the extra flexibility working from home gave them.

Continued hybrid working models have gone some way in maintaining that flexibility, but some experts believe it isn’t enough. “We are seeing shifts in work models, particularly with the rise of flexible and hybrid working,” says Van der Helm. “This allows people to align their work schedules with their natural sleep patterns, improving wellbeing and productivity – but there is still more work to be done.
“Many businesses still equate long hours with high productivity, which is a damaging mindset,” she says. “From my experience working with companies, those who prioritise sleep see significant improvements in both employee wellbeing and business performance.”

Higher powers
But while individual companies can do their bit in changing corporate culture and working hours, it is perhaps policymakers that hold the greatest powers. In 2021, the Japanese government recommended companies allow staff the option to work four-day weeks as part of a wider plan to create a better work-life balance across the country, amid growing health concerns. Trade unions across Europe have also called for shorter working weeks, and some have bitten; in 2022, Belgium gave workers the legal right to request a four-day week, becoming the first European country to do so. Several other countries in Europe have also trialled shorter working weeks. Reducing working hours or providing increased flexibility could go some way in addressing sleep issues, but it is not just the workplace affecting our sleeping patterns.

Constant screen use, blue light exposure, late-night TV and round-the-clock connectivity are all interfering with our sleep, too.

The impact of all of this is well-documented. “Playing video games, using PCs or smartphones and watching TV or movies are correlated with shorter sleep duration,” wrote researchers in a study, Broadband internet, digital temptations, and sleep. “The ubiquity of media devices and the ‘digitalisation of the bedroom’ before sleep can interfere with human circadian rhythms, the physiological processes that respond to the dark-light daily cycle.”

In his book, Why We Sleep, Walker meanwhile highlighted how modern societies have diverged from more traditional – and arguably evolutionary – sleep schedules. “Midnight is no longer ‘mid night’,” he wrote. “For many of us, midnight is usually the time when we consider checking our email one last time. Compounding the problem, we do not then sleep any longer into the morning hours to accommodate these later sleep-onset times. We cannot. Our circadian biology, and the insatiable early-morning demands of a post-industrial way of life, denies us the sleep we vitally need.”

Calling for change
In light of all this, many are advocating for higher-level change, and for sleep to be prioritised as a global health issue. Last year, experts from the World Sleep Society’s Global Sleep Health Taskforce (established in 2022) published a paper in The Lancet calling for sleep to be “promoted as an essential pillar of health, equivalent to nutrition and physical activity,” and for the World Health Organisation (WHO) to take action.

A one-hour increase in weekly sleep boosted an individual’s earnings by five percent

“We recommend developing sleep health educational programmes and awareness campaigns,” they wrote. “We also recommend increasing, standardising and centralising data on sleep quantity and quality in every country across the globe; and developing and implementing sleep health policies across sectors of society. Until sleep is recognised as a health priority by WHO, countries are less likely to include sleep in their national health agenda,” they wrote. Experts behind start-up Sleep Sanity agree more needs to be done. “Policymakers must start taking sleep deprivation seriously, incorporating public health campaigns and potentially even regulatory changes to encourage better sleep health,” they wrote in a recent article. “As a society, we must push for structural changes that not only acknowledge the importance of sleep but actively promote it. The sleep loss epidemic is not just a personal issue; it is a societal one that needs urgent attention.”

Curbing an ‘epidemic’
They might well have a point. If the reams of research are anything to go by, this is a serious issue that needs attention on both an individual, corporate and societal level. And while entirely transforming the way we live our lives from the inside out might be a tall order, implementing feasible changes to our daily lives and work schedules might be a good first step.

If the right steps are taken, in time we might lessen the need for sleep trackers, digitised mattresses and other gadgets. In a perfect world, we might not need them at all (dark and light sufficed for our ancestors).

For now, it looks like we do – and that at least has some benefit. If nothing else, this flurry of new products is putting the spotlight on an issue that has long pervaded society, and acting as a literal wake-up call for us to all make sleep a priority.

If we heed the alarm and start to address the root causes, we might just be able to start curbing what some scholars have termed “the most prevalent risky behaviour in our society.” If we don’t, only time will tell of the impact – but it’s clearly not just businesses’ bottom lines that stand to lose from this ‘epidemic.’

Georgia rises as a tech hotspot – but for how long?

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Just four years ago, in 2020, there were only 1,971 IT companies operating in the small Caucasian country of Georgia, with 79 percent of them being locally owned. Fast forward to 2024, and the landscape has shifted dramatically. Official data reveals that the number of IT companies has surged to 24,117, with 84 percent now being international.

A recent study by Galt & Taggart, Georgia’s leading investment banking and management firm, highlights the information and communication technology (ICT) sector as the country’s fastest-growing industry since 2022. This growth has been driven largely by the IT sub-sector, which recorded a turnover of GEL 2.4bn ($816m) in 2023 – a significant boost to Georgia’s economic landscape.

International companies are increasingly relocating to Georgia, with many moving their entire operations. Currently, 72 companies are classified as large or medium-sized, while the majority of the remaining businesses are foreign sole proprietors. The sector’s growth was initially spurred by tax incentives introduced in 2020. To strengthen Georgia’s appeal as a regional hub and attract multinational firms, the government lowered income tax rates to five percent for companies with international status.

However, it wasn’t just fiscal policy driving this growth. According to Kakha Samkurashvili, head of sector research at Galt & Taggart, while tax incentives were vital, the war in Ukraine reshaped the global IT landscape, creating unforeseen opportunities for Georgia. “Following the war in Ukraine, many IT companies and developers relocated to Georgia, primarily from Belarus and Russia. The surge in code production and the number of developers in the country directly aligned with the peak influx of migrants,” Samkurashvili says. According to various studies, the peak of emigration to Georgia – totalling approximately 100,000 people – was recorded in the first and second quarters of 2023. Samkurashvili notes that it was during this period that the IT sector experienced its highest growth rate.

A new strategic location amid the war
Russia’s full-scale invasion of Ukraine impacted one of the leading international companies, Exadel. The war transformed the company’s newly opened Georgian office into one of its major strategic locations.

“We had our offices in Belarus and Ukraine, but the war has brought significant changes and challenges. While we have managed to keep our offices open, the situation for developers working in Ukraine is far from easy; periodical power outages and other disruptions make the work difficult. Additionally, there is an emotional impact on everyone,” said George Khoshtaria, a marketer at Exadel.

The arrival of international companies has played a crucial role in the country’s economy

Exadel, an international technology company with over 25 years of experience in the digital market, entered Georgia in 2021. According to Khoshtaria, there were a few reasons why Exadel initially decided to enter the Georgian market.

“One of the main reasons is the tax incentives offered to international companies. The second is the high proficiency in English among developers, who are generally considered some of the strongest,” Khoshtaria says. “Our clients are American and European companies that require highly qualified developers for international projects, and we can find such talent in Georgia. This is why Exadel operates in the country,” he adds.

However, the war in Ukraine soon underscored the strategic importance of the Georgian office, as it became essential to relocate some operations from Ukraine and Belarus. Georgia, beyond being a base for companies like Exadel, has also become a new home for thousands of foreign developers from Belarus. Once a thriving centre for IT, Belarus saw its tech industry crippled by a crackdown on protests following rigged elections and the government’s complicity in Russia’s aggression against Ukraine, leading to an exodus of talent.

A similar pattern emerged in Russia, where President Putin’s mobilisation order led thousands of developers to flee to neighbouring Georgia, reshaping the local IT landscape.

Looking ahead, Khoshtaria believes Georgia has significant potential to grow its IT industry, and become an even more attractive location for international companies and foreign developers.

“This is just the beginning, and further development is essential. We aim to contribute by offering free training and mentorship programmes, with our developers providing free instruction for beginners. Additionally, we collaborate with universities and participate in their projects,” Khoshtaria said.

Emerging opportunities for locals
International companies have created numerous opportunities in a developing country like Georgia, where the average nominal annual salary is GEL 24,000 ($8,750) and the unemployment rate stands at 13.7 percent.

By 2023, the number of employees in Georgia’s IT sector reached 30,200, a sharp increase from just 5,000 in 2021. Meanwhile, the average annual salary in the industry has doubled, now standing at GEL 83,280 ($30,400). Nika Kapanadze, an economist at the Policy and Management Consulting Group (PMCG), states that the arrival of international companies has played a crucial role in the country’s economy.

“International IT companies serving clients across different continents hire Georgian personnel and conduct operations locally. This effectively acts as an export of labour, and it is crucial that these individuals are physically present in Georgia. The money generated stays within the country’s economy, contributing significantly to its growth,” Kapanadze said.

Samkurashvili believes that highly paid developers created a ripple effect across various sectors such as retail and real estate, where they have become key consumers. “Additionally, the IT sector, which employs most of these high earners, has boosted the economy by exporting services and bringing in foreign currency. This inflow of dollars has strengthened the GEL, contributing to its appreciation,” he notes. Lineate is another international software development company that entered the Georgian market in 2022, establishing a regional hub to expand its business across Europe. With an investment of $14m, the company has contributed to the country’s technological development by creating 200 new jobs. Beyond job creation, Lineate has also launched the Lineate Dev School programme to support aspiring developers. The company collaborates with schools and leading Georgian universities to promote education in the field. Giorgi Tsikolia, Vice President at Lineate, outlines several reasons the company established its regional office in Georgia.

“The company found hiring qualified staff in Georgia highly attractive. Additionally, the tax system is quite flexible, especially regarding technology. Furthermore, Georgia’s geography provides the opportunity to access both European and Asian markets,” Tsikolia said.

However, Tsikolia also notes the importance of monitoring geopolitical risks. “We, like all international businesses engaged in the region, are concerned about the escalation of hostilities across the wider geography. Similarly, the company is actively monitoring political developments in Georgia,” Tsikolia says.

Political turbulence threatens industry
In March 2024, the ruling Georgian Dream party reintroduced a Russian style draft law on transparency of foreign influence. This law requires non-governmental organisations receiving over 20 percent of their funding from foreign sources to register with the Ministry of Justice as organisations serving the interests of a foreign power.

Following the war in Ukraine, many IT companies and developers relocated to Georgia

Although President Salome Zourabichvili vetoed the law, Parliament overruled her decision. Despite widespread protests and international condemnation, the Speaker of Parliament signed the law on June 3, 2024.
The protests, which saw tens of thousands of demonstrators, lasted nearly two months and were frequently met with excessive force by Georgian security forces. The crackdown, combined with the passage of the law, has severely strained Georgia’s relations with the West. The country’s EU accession process has stalled, and the EU has frozen €30m in financial assistance.

Meanwhile, the US has imposed sanctions on two high-ranking Georgian officials – Ministry of Internal Affairs Special Task Department Chief Zviad ‘Khareba’ Kharazishvili and his deputy, Mileri Lagazauri – for their involvement in human rights abuses during the violent suppression of protests. The US State Department also introduced visa restrictions on more than 60 individuals and their families, citing their role in undermining democracy in Georgia. Secretary of State Antony Blinken warned that further actions might follow if the situation does not improve.

In the October parliamentary elections, the ruling Georgian Dream party declared victory, according to the Central Election Commission, igniting further protests across the country and widespread international condemnation over alleged election fraud.

These developments have sparked widespread concern in Georgia, with fears that the impact will extend beyond politics, affecting the business environment and the overall well-being of the population.

Kapanadze is convinced that the overall political environment must remain stable, with no ambiguity regarding Georgia’s Western orientation. “I wouldn’t say that companies already established here will leave, but the real concern is that talent may start to exit the country as they no longer feel comfortable. We are talking about high-income individuals who seek a comfortable lifestyle. Now, with discussions around cancelling the visa-free regime with Europe, this could deliver a significant blow to the entire economy, especially the IT sector,” Kapanadze explains. He further emphasises that maintaining Georgia’s reputation is key to becoming a regional IT hub. “We are the connecting link between the West and the East. If this connection is severed with either side, the potential to thrive as a hub will disappear.”