Recent events should force everyone to think about the nature of the global financial system and how their money can just be taken away
10-Mar-2022 •Dhirendra Kumar
Ever since foreign equity investments became available to individual Indian investors, I've always said that this is an extremely useful and underutilised asset class. While direct equity investments into foreign investments are difficult, buying into foreign-investing funds from Indian mutual fund companies is straightforward. It's a good way to diversify for Indian investors. However, over the last few days, I've had some misgivings about this that have arisen from an unanticipated source - the war in Ukraine.
Over the last few days, there has been an alarming new development which we need to pay attention to. This is the willingness - even eagerness - of western countries to use the financial systems that they control as a weapon. From the news, one learns that not only are the large international interbank systems like SWIFT have stopped working in Russia, but even consumer systems like VISA and Mastercard as well as the mobile phone payment systems like Apple's and Google's have also stopped working. Large parts of the Russian central bank's forex reserves appear to be unusable.
I have no interest in expressing my opinion about an issue which is not in my brief, so I'll choose my words carefully. The fundamental problem has nothing to do with what Russia is or is not doing or how severe an action against the western powers it wants to take. Instead, what we have here is a demonstration of a unilateral financial weapon which can be deployed in response to some misdeed. The people who wield this weapon are judge, jury and executioner. As we have seen countless times, measures like this, once used, become a precedent. They tend to get used for less and less serious things.
It's a slippery slope. Forget about the war, look at what happened in Canada in the month before that. There was a large protest of truckers against enforced vaccinations. Over the period of a month or so, Justin Trudeau's government, with the full support of the media, ran a campaign of demonising the protestors. Eventually, they froze bank accounts of everyone who had donated money to the protestors, no matter how small. The donors had given money at a time when it was an entirely legal activity and yet their entire bank accounts were frozen. That story is still going on.
I find these events disquieting. Financial freedom, the freedom to transact, the surety that your money will not be seized arbitrarily, these are cornerstones of the global financial system. If we invest abroad, we do it with a certain amount of trust that there is a fair system that works. Quite clearly, recent events have undermined that trust. If you buy the equity of a foreign company, and a few years down the line, someone decides that your country or even that company is a 'climate criminal' (actual term being used) and must be stopped for the greater good, then will you be able to get your money back? Suddenly, these types of questions are being asked by a lot of people around the world.
It's a relief that India has systems like UPI and Rupay already in place. It, at least, is the basis of a financial system which has the basis of being independent. However, our savings and investment systems are intertwined with the whole world. Till the early 1980s, we Indians lived in a financial system that we all knew was confiscatory at its heart. We knew that the government could take away anything at any time and thus our faith was deep in gold, land and cash. After the economic reforms, we got used to the fact that we were part of the global (in reality, western) financial system that was not arbitrary. That faith is now shaken, and quite seriously.