PM — The end of USD supremacy? (Take 17)

It’s one of those days that aren’t quite slow, but haven’t quite taken shape with a clear leading story or theme to the news day. Instead, there’s a smattering of interesting tidbits on the homefront to keep your eye on as you wind down your afternoon.

THE BIG STORIES TODAY

#1- CBE gives OPay greenlight to issue pre-paid cards: Nigeria-based fintech player OPay has received preliminary approval from the Central Bank of Egypt (CBE) to issue pre-paid cards in partnership with Masria Digital Payments.

#2- Elsewhere, we’ve got some activity over in planet startup: Teleradiology platform Rology has raised an undisclosed sum series A round, with Egypt Ventures providing the bulk of the financing, a press release (pdf) read. The round saw participation from Sequence Ventures, Saudi Arabia’s Waseel and Tawaref, and Kenya’s Viktoria Ventures. Previous investors include HIM Angels, AAIC, DAI and Cubit Ventures.

Meanwhile, Egypt-based e-commerce startup Kemitt has launched Kemitt Business, “the first of its kind” B2B platform, for furniture, home accessories and raw materials for furniture manufacturing among others, a press release (pdf) read. The platform will act as an online marketplace connecting businesses with furniture and materials suppliers.

^^We’ll have more on these stories and others in tomorrow’s edition of EnterpriseAM.

THE BIG STORY ABROAD

It’s another afternoon where news of fresh sanctions against Russia are topping headlines in the global press. The UK announced today it is sanctioning 206 people today, including 178 Russian separatists, “six oligarchs, close associates and employees, and an additional 22 individuals.” The new sanctions bring the total number of individuals and businesses under UK sanctions to 1,400, according to the statement.

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** CATCH UP QUICK on the top stories from today’s EnterpriseAM:

• ADQ announced the launch of the first MENA-based SPAC in cooperation with our friends at Chimera. The fund and Chimera’s PE arm yesterday announced the establishment of their SPAC, dubbed ADC Acquisition Corporation, which hopes to raise AED 367 mn (EGP 1.85 bn) through an IPO on the Abu Dhabi exchange.
• GASC wants to see wheat buys outside of tender system as reserves dip: The government could soon allow buying wheat outside of tenders, Sherif Bassili, the chairman of the Egyptian Holding Company for Silos and Storage, told Enterprise.
• Paymob launches in Pakistan: High-profile Egyptian fintech startup Paymob has officially launched in Pakistan. The digital payments provider said it will launch a number of payment services in the country, including payment gateways, POS, SoftPOS, and contactless payments.

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???? CIRCLE YOUR CALENDAR-

Consoleya is hosting an investors’ talk and sohour with Cairo Angels next Sunday, 17 April at 9pm. The event will begin with a Fireside Chat on e-commerce, featuring former Jumia CCO François D’hautefort, with Cairo Angels Founder Hossam Allam as moderator, with a sohour and networking session for investors following the talk. You can register for the event here.

Companies have one week left to file their first quarterly ESG compliance report: Listed firms and non-bank financial services companies need to submit their first quarterly ESG report by 20 April, the Financial Regulatory Authority (FRA) announced last week. The regulator is making it mandatory for corporates to publicly disclose their performance on key environmental, social and governance metrics each year when they submit their annual financial statements, starting 2023.

Reach out to Moustafa Taalab at InkankIR, our parent company, if you need some help.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

☀️ TOMORROW’S WEATHER- Expect a daytime high of 28°C and a nighttime low of 13°C, our favorite weather app tells us.

Honda banks on hybrid vehicles until global infrastructure is ready for EVs: While Honda has committed to investing USD 40 bn to develop electric vehicles (EVs) over the next decade, the carmaker is banking on greater demand for hybrid vehicles in the near future, its chief executive Toshihiro Mibe said, reports the Financial Times. Honda was Japan’s first automaker to announce the phaseout of gasoline cars last April, but will transition to cars with a petrol-electric system, which will “be their strength” in 2030 or even 2035, Mibe said. The rationale is that infrastructure is not yet ready to support a full transition to EVs, with several factors still needed to be taken into consideration such as the living environment and the penetration rate of renewable energy, he said. Nonetheless, Honda announced that it will develop EVs in a JV with GM with production scheduled in 2027.

One of the main reasons EVs may have to wait: Obtaining batteries. Honda is still scrambling to set up viable supply chains to access EV batteries, an issue carmakers around the world are also facing. The Japanese manufacturer is moving away from in-house production and is instead looking to set up a JV to manufacture batteries or else find suppliers in the markets they operate in.

This comes as a dire lithium shortage is sparking questions on the sustainability of the global rise in EV manufacturing, as the West attempts to unfasten China’s control of the entire supply chain for lithium-ion batteries and EVs, battery manufacturers say, according to the Financial Times. Companies and governments abroad have fallen short of building sufficient supply chains for the white gold, making targets in EVs manufacturing unsustainable, chairman of Australian lithium producer Lake Resources said. But there are some efforts being made to replace China and build adequate supply chains, as Lake Resources builds a lithium production plant in Argentina. The plant, which owners hope will produce 50k tons of lithium carbonate annually by 2025, will use new technology developed by Bill Gates-backed US Company Lilac Solutions to extract lithium directly from brine, instead of traditional extraction methods.

Not helping matters: China’s lockdowns are threatening to exacerbate component shortages: A city-wide lockdown of Shanghai, which has now expanded to other parts of the country due to record surges in covid-19 cases, is leading to mass factory shutdowns and halting production of electronics, the Financial Times reports, citing researchers and economists. More than 30 Taiwanese electronics manufacturers have just today shut down factories close to Shanghai, with analysts saying that important components like printed circuit boards — used in almost every electronics gadget, including smartphone and laptop casings — would be affected most by the factory shutdowns. “Even if some companies are allowed to continue production, their utilization rates have fallen to between 40-60%. Raw materials can’t be moved in and finished products can’t be moved out,” one analyst said.

Fellow iSheep will remember that the lockdown has already hit Apple, with iPhone assembler Pegatron halting production at two of its plants in China.

???? ON THE TUBE TONIGHT-

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Ahlam Saeeda is shaping up to be a mosalsal about karma: Yousra’s character in the TV show is harsh and unforgiving, treating everyone around her with a bit of snobbiness. While she likes to act like she’s got everything together, the audience catches glimpses of cracks in the facade when she doesn’t have enough money to pay for an item from an auction or when she has an accident and no one is there to help her. However, things change when she joins a support group for insomnia, where several women share what (literally) keeps them up at night. It’s there that she meets people who are willing to be her friend, played by Ghada Adel, Mai Kassab, and Shaimaa Seif. Together, the four very different women band together to solve their individual problems and meet a host of challenges along the way as their past comes back to haunt them. You can watch Ahlam Saeeda on Shahid or WatchIt.

⚽ In case you missed it — Erik ten Hag might be Manchester United’s new manager: Manchester United are reportedly close to reaching an agreement that would see Ajax’ manager Erik ten Hag take over as manager, Sky Sports reports. The Dutch coach, who rose to fame on the back of his leadership of a young Ajax in the Champions League, comes as Manchester United are having one of their worst seasons in living memory, and their temporary manager Ralf Ragnik moves over to the head office.

You don’t want to miss out on today’s Champions League matches: Mo Salah’s Liverpool will go up against Benfica while Man City will face Atletico Madrid, with both matches kicking off at 9pm.

???? OUT AND ABOUT-

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Zawya Shorts film festival is kicking off tomorrow at Zawya Cinema. The festival, which features short films from across Egypt, celebrates the talent of local filmmakers and tells a myriad of stories. The event will run from Thursday to Sunday, with short films being screened consecutively starting at 8pm each day. Follow Zawya Cinema’s Instagram page to check the schedule and read more about the films that will be shown.

The French Institute in Cairo is hosting Yunis as part of their Les Nuits du Ramadan series. Yunis started off in the rap scene before shifting to the world of Arab and oriental music by learning to play the ney. He’s also one of the founders of Kafr El Dauwar Records — an independent label that focuses on contemporary and experimental music.

???? UNDER THE LAMPLIGHT-

The Green Grocer is a realistic guide on how to create a sustainable business: Written by one of the UK's leading corporate activists, Richard Walker, the book looks at climate activism through the lens of supply chain disruptions and the post-covid world. Walker walks readers through ways to incorporate eco-friendly business practices using case studies from businesses and governments, showing what works and what doesn’t and why. The book comes at a time where businesses worldwide are being urged to embrace their corporate social responsibility while management struggles to make that move while still pushing up their bottom line. However, Walker managed to do both, with his GBP 3 bn supermarket chain in Iceland embracing sustainable initiatives for years now and still seeing growth.

MARKET NEWS-

Raya Holding will not be distributing dividends to shareholders for the year ending on 31 December 2021, the company’s general assembly agreed, according to an EGX disclosure (pdf).

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MARKET ROUNDUP-

The EGX30 fell 0.5% at today’s close on turnover of EGP 765 mn (19.7% below the 90-day average). Foreign investors were net sellers. The index is down 9.2% YTD.

In the green: Mopco (+2.5%), EFG Hermes (+1.3%) and ADIB Egypt (+1.2%).

In the red: Fawry (-3.9%), Heliopolis Housing (-3.6%) and Ezz Steel (-2.5%).

Are US sanctions on Russia harming USD supremacy? Ever since the US announced its unprecedented package of financial sanctions on Russia, a growing contingent of analysts and economists have warned that the measures risk undermining the greenback’s reserve currency status and balkanizing the global monetary order. The US Treasury’s ‘shock and awe’ move to sanction the central bank, something never attempted on an economy of Russia’s size, could have unintended consequences by causing other countries to rethink their relationship with the USD, they say.

The IMF is voicing concern: The IMF’s deputy managing director, Gita Gopinath, said just that last month. “The USD would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” she told the Financial Times in an interview last month. “We are already seeing that with some countries renegotiating the currency in which they get paid for trade.”

The USD is the world’s reserve currency. Central banks across the world store most of their reserves in USD or in USD-denominated assets such as treasuries, and the bulk of international trade and financial transactions are performed using the greenback. How much of global reserves are in USD? The most recent data from the IMF shows that the currency makes up around 55% of the world’s foreign exchange reserves. In comparison, the next most-popular FX currency is the EUR, which accounts for less than 20% of the global total.

Crucially, foreign currency reserves are hardly ever held physically by the central bank, making them vulnerable to appropriation by other countries. Most of the world’s reserves are held as securities, which are stored in central securities depositories (CSDs) either in the host country or with a major international CSD such as Euroclear. For more information on this: Read monetary economist and payments specialist Ousmane Mandeng’s piece in the FT where he explains the financial plumbing of international reserves.

The USD as a weapon: In recent years, the US has used its control of the global financial system as a coercive foreign policy tool with increasing regularity. Iran, Venezuela and most controversially Afghanistan have all had their reserves frozen and been excommunicated from the USD system.

Moscow thought it had itself covered: Since dragging itself out of its financial crisis in 1998, Russia has been busy accumulating a vast stockpile of reserves which is now worth more than USD 630 bn. This, policymakers thought, would hand the central bank more than enough firepower to support the RUB should the US intensify its trade and financial sanctions. It had also worked to reduce its holdings of USD assets to less than 7% of its total reserves in a bid to reduce its exposure to the greenback.

So much for that warchest…: Prior to the conflict, few genuinely expected the US to go straight for the Russian central bank and most held up Russia’s huge reserve stockpile as a powerful  buffer against future financial crises. But just four days into the invasion, Washington went for the jugular. Together with the EU and Japan — which together hold more than 40% of Russia’s reserves ⁠— the US confiscated some USD 300 bn from the Russian central bank. The measure blindsided the Russians, with Foreign Minister Sergei Lavrov admitting last month that no-one in Moscow had predicted that the G7 would go for its reserves.

Other countries are watching: For countries holding a substantial portion of their reserves in USD assets, the sanctions on Russia have been instructive on how Washington is able to leverage the dominance of the greenback to mount financial warfare against hostile countries. Importantly, most countries outside of the G7 are not on board with sanctions. Major emerging economies such as China, India, Brazil, Indonesia and Mexico have refused to embargo Russia and are eager to continue business.

A “major break” in the system: For these countries, the sanctions are a potential watershed moment that could push them to reduce their exposure to the USD and transition to new bilateral and regional financial relationships. Economist Kenneth Rogoff called the decision “absolutely historic.” It will “probably accelerate moves in the international financial system” to compete with the USD, he said earlier this month. Shahin Vallee, economist at Soros Fund Management, called it a “major break” in the international financial system. “Central bank reserves are now worth as much as the dominant reserve currencies issuing them want. This could have profound long-term consequences.”

And that’s not all: There are also question marks over the integrity of international payment mechanisms after the US and Europe disconnected a large part of Russia’s financial system from Swift, the interbank messaging service used to facilitate most of the world’s cross-border payments. This makes it harder for many banks to process USD- and EUR-denominated payments, and though carve-outs do currently exist — notably for institutions processing oil and gas transactions — most Russian businesses now need to rely on channels such as encrypted telegrams and emails to continue trading overseas. It was a big move and one that will “likely fundamentally change the geopolitics of cross-border payments,” writes Robert Greene, a nonresident scholar at the Carnegie Endowment for International Peace.

Russia + India are moving to drop the USD: Russia and India are on the way to dropping the USD in bilateral trade and replace it with RUB and INR, a move that would allow the two countries to skirt sanctions and maintain their trading relationship. Indian exporters are reportedly waiting on USD 500 mn of payments that Russian banks have been unable to process, forcing Moscow and New Delhi to explore new payment mechanisms including Russia’s SPFS messaging system.

And China is accelerating its move to build an alternative financial system: China has been building its RMB-based answer to Swift — the Cross-Border Interbank Payments System (CIPS) — for a number of years, and though it remains small by comparison, the recent moves against Russia seem to have stirred policymakers into action. China’s central bank recently announced that it would limit the country’s use of Swift and ramp up the usage of the RMB in cross-border trade. The head of the country’s central bank has said it will provide support to countries in Southeast Asia to reduce the use of the USD. Former IMF economist Eswar Prasad called the CIPS a “potential game changer.” “China is setting up an infrastructure for payments and payment messaging that could one day provide an alternative to the western-dominated international financial system and in particular Swift,” he told the FT.

But how close are we really to a displacement of the USD? China still faces challenges. Chinese policymakers remain reluctant to fully liberalize the currency and allow it to be fully-convertible. Having countries store reserves in RMB would be a hard sell if they cannot freely convert it into any other currency. And the fact remains that the RMB is still not used that often in international trade. “We have very accommodative monetary policy, we are very open with our markets, things are easily convertible and we are safe as an economy. Until those things change, the rest of it ain’t changing,” Brian O’Toole, a sanctions expert at the Atlantic Council and former US treasury official told the FT. “Where else are you going to go? There’s no place else that has anything approaching the level of liquidity and access that the US market has. It doesn’t exist anywhere.”