A Blog by Jonathan Low


Dec 30, 2014

What Does Online Shopping Have To Do with Hyperinflation?

The west laughs whenever some tinhorn dictator - real or aspiring  -  attempts to 'close the internet.' The sophisticated world chuckles at such pathetic exercises in self-delusion, believing that nothing can withstand the power of technology.

Of course, the west's devotion to the power of tech has gotten a few tests of its own in the past year, Russia's invasion of the Ukraine and whoever's attack on Sony being but two of them.

The reality is that the world is more interconnected than ever. And the more that becomes true, the more we learn new lessons about just what the implications of that lost control may be.

One of the most pointed of those revelations may be emerging as this is written. And it has to do with the impact of online shopping on the further loss of sovereignty being experienced by any country with internet access. The result, as the following article explains, is that any money spent outside a nation's physically tangible retail sector is an exercise in currency conversion which evades controls maintained by serious people in uniforms waving rubber stamps. In others words, ecommerce may be just as subversive politically as it is commercially, exactly as the dictatorial powers that be - whether economically or militarily inclined - have always feared.

So just as new backdoors to our putative secrets continue to open, so do new flights of fancy - and currency - continue to confound those who would prefer a more orderly and easily managed world. JL

Izabella Kaminska reports in the Financial Times:

Whenever shortages do emerge in places like Argentina or Russia, online shopping platforms pose a capital flight risk, because even if citizens think they’re using roubles and pesos to pay for those goods, in reality someone is exchanging those currencies for dollars, euros, etc
The Russian rouble’s collapse is taking a particularly heavy toll on Belarus, Europe’s last standing autocratic economy, which remains hugely dependent on Russia to this day.
According to the report, the regime of Alexander Lukashenko has started to block independent news sites and several online-shopping outlets in an apparent attempt to prevent a bank run.
This follows an emergency rate hike by 2,6000 basis points last week.
The trouble relates to the fact that the Belarusian rouble is supposed to be pegged to the US dollar, the euro and the Russian rouble, which has understandably put pressure on its valuation. As analyst at Danske Bank explained this week:

To avoid a sudden fall, the Belorussian currency has been allowed to lose 15% within 12 months, as we previously expected. Last Friday, the National Bank of Belarus (NBB) reacted to this pressure and hiked its key policy rate to 50%, from 24% previously. Furthermore, the authorities tightened currency controls by imposing a 30% tax on buying foreign currency and banning OTC trades in the BYR until 2017.
The commitment to continue with the peg means we expect a very significant tightening of monetary conditions in Belarus and as nearly always happens when such a tightening occurs the country will see a sharp fall in economic activity. Once again, it seems as though the Belarusian authorities are importing a crisis from Russia, not only from the foreign trade channels but through monetary policy mechanisms too. Thus, we expect the country’s GDP to shrink by up to 3.1% y/y in 2015 despite the expected 1% per month devaluation of the BYR. In addition, we believe 2015 will be an ‘interesting’ year for Belarus –presidential elections are due to be held in November 2015.
Yet, what’s really interesting in all this, we think, is the emergence yet again of online-shopping controls whenever domestic currency crises strikes.
Readers may remember, for example, that back in January 2014 Argentina restricted online shopping so as to stop its own foreign currency reserves draining away during its debt crisis. As the BBC reported at the time, anyone buying items through international websites would now need to sign a declaration and produce it at a customs office where the packages are collected.
Then there’s the fact that Apple was one of the first to suspend online sales in Russia as soon as the rouble’s volatility became too much for it.
All this demonstrates that online shopping has a significant influence on the evolution of hyperinflationary crises.
And it’s easy to see why.
Before the days of online shopping, currency and inflationary crises were largely the product of mismanaged local economies which failed to provide the goods and services demanded by the domestic inhabitants. With too few goods circulating relative to local currency, inflation and devaluation were a natural byproduct, since local currency units now had to compete ever more aggressively for foreign imports, which were unlikely to be settled in anything but foreign currencies. The whole situation would be further exacerbated if on top of a lack of goods, resources and services, the local economy had foreign debt liabilities to service as well. Foreign imports via wholesaler and suppliers networks, however, had the means to hedge some of that currency risk themselves, and/or change diversify supply chains fluidly. Yes, eventually, the currency devaluation would probably have an effect, but the process by which the crisis unravelled was slowed by the natural speed bumps associated with intermediary networks.
But nowadays — thanks to the internet — access to goods and services is unlimited and available to all. Everyone, in fact, has the means to access an international market that is (more often than not) more than capable of supplying the stuff they want.
The only problem comes by way of settlement. Sadly for mismanaged economies, most online retailers still demand to be paid in currencies that have a strong track record of stability thanks to being issued by well managed economies that rarely experience shortages of goods and services of their own.
That means, whenever shortages do emerge in places like Belarus, Argentina or Russia, online shopping platforms begin to pose a major capital flight risk, because even if citizens think they’re using roubles and pesos to pay for those goods, in reality someone somewhere is exchanging those currencies for dollars, euros, etc and bearing currency risk which has to be managed via the international FX market.
That naturally creates as much of a currency exposure for the local economy as selling roubles for dollars direct. Close the online shopping platforms, and you slow the drain of foreign reserves out of a local economy.
If you’re a multinational retailer like Apple dealing in digital goods that can be purchased and delivered instantaneously, chances are you may be inclined to bear the currency risk directly — i.e. agree to settlement in local currency. But then, just like Apple, you may find yourself suddenly exposed to currency risk you can’t manage quickly enough as well.


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