asy money usually has a catch. A growing body of evidence supporting that logic is guiding new pushes to stem corrosive capital, foreign financing that exploits governance gaps and undermines the rule of law. From Argentina to Zambia, reports are pouring in about these kinds of investments, mostly from authoritarian sources, which are leaving recipient countries more vulnerable to economic and political manipulation.
These growing threats to economic security have prompted many governments, business leaders, and civil society groups to work together to develop approaches that will support greater economic resilience. Reports about potential policy solutions and other measures often skip some valuable history lessons. A look at actions by Russia and China in recent years provides insights about patterns and typical practices of authoritarian lenders. This is yielding new thinking about protective efforts to fend off corrosive capital and instead attract constructive capital investments that lead to opportunity and greater prosperity.
The Russia model
Russia leveraged its economic ties to former Soviet states and the “near abroad” for much of the 1990s, however efforts later became somewhat curtailed amid internal economic reorganization, privatization, and oligarchy. By President Vladimir Putin’s third term, Russia had developed an economic coercion playbook, which includes forced sales of state assets at deep discounts to Russian firms and skirting import–export standards. Examples include the sale of the Kyrgyz and Armenian gas pipeline networks to Gazprom for a pittance and inflated fuel prices by Lukoil in Bulgaria. Russia also pursued military actions in Georgia and Ukraine when its economic warfare did not accomplish foreign policy objectives.
The China model
Beijing has been conducting the world’s largest infrastructure program over the past decade, pumping more than one trillion dollars into projects in emerging markets through its Belt and Road Initiative. While the concept might have originated as a way for Chinese firms to invest and export following a global financial crisis, leaders quickly seized on the geopolitical opportunities. Key projects include ports for blue water naval vessels, rail projects secured by resources along the routes, mining operations, and telecom deals. Many projects have limited host government oversight, little public input, or involvement of local businesses and workers. Information about terms and costs are often scarce.
Creating dependencies
The strategic scope of these projects suggest an intent to create dependencies, handcuffing recipients to the authoritarian state investors. As in the case of Argentina, which attempted to scuttle two hydropower plants, and realized other infrastructure projects and Chinese Sovereign debt guarantees were cross collateralized. In Tajikistan, the government settled its debt to a Chinese state–affiliated firm through the grant of gold mining concessions.
In such cases, vulnerability to economic or political manipulation can worsen. And foreign investors offering constructive capital stay away, because they see rule of law eroding and transparency decreasing. They are not willing to risk going into operating environments with unreliable systems and shaky processes.
Previously measures such as sanctions and tariffs helped to protect sovereignty and security, but are considered much less effective now. That is in part because corrosive capital lenders are not playing by the same rules or adhering to universal standards. Coordinated action among governments, business leaders, and civil society that are committed to transparency and accountability is required.
Forging new business–led solutions
Many democracies are collaborating with the private sector to find direct and indirect pathways to addressing these new challenges involving transparency and accountability. For example, in Chile, a country rich in natural resources and with deep commercial ties to both the United States and China, the government will implement a new ultimate beneficial ownership registry. Japan has the Economic Security Promotion Act, which creates incentives and costs for business to better insulate the country from economic coercion and intellectual property theft.
Meanwhile, other countries are moving toward different forms of investment screening, Bulgaria being one of the most recent. Many of these initiatives include a strong anti–corruption component. And all of them can serve as models for countries to watch and possibly emulate, as more tools are needed to curb corrosive capital and support economic security and resilience.
a global affairs media network
Address corrosive capital to foster economic resilience
April 16, 2024
Corrosive capital is a growing threat to economic security from Argentina to Zambia. While public and private sector actors are working together to address this, some proposed policy solutions skip valuable history lessons, writes Eric Hontz.
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asy money usually has a catch. A growing body of evidence supporting that logic is guiding new pushes to stem corrosive capital, foreign financing that exploits governance gaps and undermines the rule of law. From Argentina to Zambia, reports are pouring in about these kinds of investments, mostly from authoritarian sources, which are leaving recipient countries more vulnerable to economic and political manipulation.
These growing threats to economic security have prompted many governments, business leaders, and civil society groups to work together to develop approaches that will support greater economic resilience. Reports about potential policy solutions and other measures often skip some valuable history lessons. A look at actions by Russia and China in recent years provides insights about patterns and typical practices of authoritarian lenders. This is yielding new thinking about protective efforts to fend off corrosive capital and instead attract constructive capital investments that lead to opportunity and greater prosperity.
The Russia model
Russia leveraged its economic ties to former Soviet states and the “near abroad” for much of the 1990s, however efforts later became somewhat curtailed amid internal economic reorganization, privatization, and oligarchy. By President Vladimir Putin’s third term, Russia had developed an economic coercion playbook, which includes forced sales of state assets at deep discounts to Russian firms and skirting import–export standards. Examples include the sale of the Kyrgyz and Armenian gas pipeline networks to Gazprom for a pittance and inflated fuel prices by Lukoil in Bulgaria. Russia also pursued military actions in Georgia and Ukraine when its economic warfare did not accomplish foreign policy objectives.
The China model
Beijing has been conducting the world’s largest infrastructure program over the past decade, pumping more than one trillion dollars into projects in emerging markets through its Belt and Road Initiative. While the concept might have originated as a way for Chinese firms to invest and export following a global financial crisis, leaders quickly seized on the geopolitical opportunities. Key projects include ports for blue water naval vessels, rail projects secured by resources along the routes, mining operations, and telecom deals. Many projects have limited host government oversight, little public input, or involvement of local businesses and workers. Information about terms and costs are often scarce.
Creating dependencies
The strategic scope of these projects suggest an intent to create dependencies, handcuffing recipients to the authoritarian state investors. As in the case of Argentina, which attempted to scuttle two hydropower plants, and realized other infrastructure projects and Chinese Sovereign debt guarantees were cross collateralized. In Tajikistan, the government settled its debt to a Chinese state–affiliated firm through the grant of gold mining concessions.
In such cases, vulnerability to economic or political manipulation can worsen. And foreign investors offering constructive capital stay away, because they see rule of law eroding and transparency decreasing. They are not willing to risk going into operating environments with unreliable systems and shaky processes.
Previously measures such as sanctions and tariffs helped to protect sovereignty and security, but are considered much less effective now. That is in part because corrosive capital lenders are not playing by the same rules or adhering to universal standards. Coordinated action among governments, business leaders, and civil society that are committed to transparency and accountability is required.
Forging new business–led solutions
Many democracies are collaborating with the private sector to find direct and indirect pathways to addressing these new challenges involving transparency and accountability. For example, in Chile, a country rich in natural resources and with deep commercial ties to both the United States and China, the government will implement a new ultimate beneficial ownership registry. Japan has the Economic Security Promotion Act, which creates incentives and costs for business to better insulate the country from economic coercion and intellectual property theft.
Meanwhile, other countries are moving toward different forms of investment screening, Bulgaria being one of the most recent. Many of these initiatives include a strong anti–corruption component. And all of them can serve as models for countries to watch and possibly emulate, as more tools are needed to curb corrosive capital and support economic security and resilience.
