I have put together a metaverse discussion paper. This post is the executive summary of the metaverse discussion paper. The full paper has much more context including context on the history of the metaverse, the current reality and separating out the hype.
This originally started as a discussion paper drafted during quiet moments at work. Client work got in the way developing it further. I didn’t have time to complete writing the metaverse discussion paper beyond an outline and supporting research.
A good deal of my work is to do with brand experience. So, it made sense for me to dig in and find out more about the metaverse from the perspective of what it means to brands. I structured my approach in understanding the metaverse, in terms of:
What is currently being said
The past developments leading up to the metaverse
Possible futures
How to use the metaverse discussion paper
This document contains a large amount of content. I would advise that you read the executive summary and everything else you can dive into as your muse or boredom strikes you.
The link to the full metaverse discussion paper is at the bottom of the post. I am giving it away for free under a Creative Commons Attribution – No Derivatives licence.
Available for free download at the bottom of the post.
The current state of the metaverse and the technology sectors attitude to it can be best understood through the words of a mid-20th century political thinker Ivan Chtcheglov. Chtcheglov reflected on an illusory imagined construction.
And you, forgotten, your memories ravaged by all the consternations of two hemispheres, stranded in the Red Cellars of Pali-Kao, without music and without geography, no longer setting out for the hacienda where the roots think of the child and where the wine is finished off with fables from an old almanac. That’s all over. You’ll never see the hacienda. It doesn’t exist.
What became apparent as I researched for this document was how companies were trying to solve problems that were a small part of what will be needed for a metaverse. This is because the metaverse as envisaged in science fiction and technology as ‘thought leadership’ will require a wide range of technology problems to be solved. For instance, the current technologists haven’t been able to surpass the vivid experiences created in mid-to-late 20th century cinemas and theme parks.
Broadly the technology challenges would be characterised as:
Scalability
Believable and immersive
Open and portable in nature from a technology perspective
Decentralized
Traversable – the ability to ‘travel’ around and between worlds
Able to conduct commerce and exchange
Social
Secure and trusted
Many companies have deep expertise in some parts of the metaverse problem. Some work builds on decades of work in areas such as virtual reality and haptic technology. But these areas haven’t progressed with the kind of pace one would expect from Moore’s Law.[2] Technologists are trying to work out how existing technologies, like distributed databases, games physics engines and realistic computer rendering could be used to solve some of the problems needed to be addressed to build a future metaverse.
What we saw with the web, but are not seeing with the metaverse at the moment is collaboration. There isn’t open collaborative work towards a maturing standards environment necessary for interoperability as well as a solid direction to help define future metaverse technologies. The lack of collaboration makes it hard to predict, if or when we would be likely to see a metaverse. We can speculate how the future supporting technologies for the metaverse might net out based on heuristics like Moore’s Law or Metcalfe’s Law[3].[4] It would be impossible to speculate on the realpolitik required to build the ‘metaverse’ and what would drive its universal adoption over time.
But that isn’t stopping companies thinking about how the metaverse work with their brands. Governments are also giving a lot of thought to the coming metaverse including:
The provision of services in a ‘metaverse’ environment
How to manage market competition
Understanding the potential of the metaverse to foment social disturbances and imperil security
Since the metaverse, doesn’t currently exist as envisaged, it makes sense to look for analogues. These analogues include social trends in highly evolved technology markets and precursor technologies such as gaming and VR. The goal of the research would be to try and understand what it might look like when digital immersive experiences become commonplace.
Consultants like Forrester Research[5] and McKinsey are recommending that organisations get involved with precursors to learn, but also temper their expectations. There is a limitation to this approach, technology and culture evolve with use. Scale changes things further. Norms that were established when platforms have 100,000s of users evolve or fade away when the user number goes to 100s of millions or even billions.
One of the ways that this research happens is through a resurgence of technologist and marketer interest in virtual worlds like Roblox and AltspaceVR. These virtual worlds allow experimentation to discover what works (and what doesn’t) far in advance of the future metaverse. Deloitte Consulting considered that one of the three business model scenarios for the metaverse was what they termed a ‘Low Orbit’ where the metaverse like VR, continues to be used for niche rather than general purpose uses. The current virtual worlds lean more towards the ‘Low Orbit’ model. The current belief[6] that games are the metaverse falls firmly into the ‘Low Orbit’ model.
Assuming for a moment that businesses manage to retain and build on the body of knowledge they get through this experimentation they will hopefully answer questions like:
Using VR early adopters as a proxy for metaverse users, what works from a marketing effectiveness perspective, in driving brand awareness and brand activation?
How effective are virtual world experiences in terms of brand awareness and brand activation? How does it benchmark against web-based media, mobile apps, out of home (OOH), cinema and broadcast media like connected and conventional television?
What are the dos and don’ts acquired through experimentation in virtual worlds from user experience design perspective for brands?
How would a virtual world assist in digital consumer testing and virtual crowdsourcing before committing to manufacture an item at scale? What are the strengths and limitations in this approach?
What tactics are drive brand awareness in a virtual world in an effective manner?
When do experiences get old and have to be refreshed?
How can the brand be a better citizen in the virtual world? How much interaction is required with ‘real’ brand ambassadors?
Some of the platforms like Meta’s Horizon Worlds and Animoca Brands’ The Sandbox hope to be the metaverse. They desire to incorporate the consumers entire perceived metaverse. An analogue to the business models of Horizon Worlds or The Sandbox would be walled garden ‘super apps’ WeChat and the Taobao that currently represent most of the consumer mobile web in China today. Or the walled garden ‘desktop web’ experience[7] of AOL[8] in pre-broadband America. Deloitte Consulting outlined this approach as one of their likely business model scenarios of the metaverse. They called it a ‘Double Star’.
Platforms face a big challenge; consumer expectations are well over a decade ahead of what the technology can actually deliver.
Even if the technology is successful, the challenge for brands, walled garden and open metaverse platforms are many. Here are two of the biggest challenges to get started:
How do brands and platforms show that sufficient effort has been done to keep users safe? This isn’t only about filtering content, but filtering behaviour. Will post-censure of bad behaviour be sufficient? Will the environment be sufficiently safe for brands to participate and advertise?
In a world of ESG[9] considerations, would an energy intensive virtual pleasure palace be too much for investors or purpose-driven brand owners like BlackRock, Proctor & Gamble or Unilever?
[1] Chtcheglov, I.V. (1953) Formulaire pour un urbanisme nouveau. France – http://www.bopsecrets.org/SI/Chtcheglov.htm
[2] Gregersen, E. (July 21, 2011) Moore’s Law. United States: Encyclopaedia Britannica – https://www.britannica.com/technology/Moores-law
[3] Metcalfe, R. (August 18, 2006) Guest Blogger Bob Metcalfe: Metcalfe’s Law Recurses Down the Long Tail of Social Networks. United States: VCMike via wordpress.com – https://vcmike.wordpress.com/2006/08/18/metcalfe-social-networks/
[4] Shapiro, C. and Varian, H.R. (1999). Information Rules. United States: Harvard Business Press
[5] Proulx, M., Ask, J., Bennett, M., Gownder, J.P., & Truog, D. (March 29, 2022) There Is No Metaverse Today, But Be Prepared. United States: Forrester Research – https://www.forrester.com/blogs/there-is-no-metaverse-today-but-be-prepared/
[6] Whatley, J. (May 17, 2022) The metaverse doesn’t exist! You’re talking about gaming. United Kingdom: The Drum – https://www.thedrum.com/opinion/2022/05/17/the-metaverse-doesn-t-exist-you-re-talking-about-gaming
[7] (September 4, 2000) AOL’s ‘Walled Garden’. United States: The Wall Street Journal – https://www.wsj.com/articles/SB968104011203980910?reflink=desktopwebshare_permalink
[9] Environmental, Social and Governance criteria. Standards used by socially conscious investors as a way to filter investment decisions. More here – https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
Will supply chain technology facilitate problematic global supply chain management?
Investors Are Piling Into Supply-Chain Technology – WSJ – Newly minted unicorns, or companies that exceed $1 billion valuations, in the logistics sector in 2021 include e-commerce fulfillment specialist ShipBob Inc., digital warehouse and distribution provider Stord Inc. and Flock Freight, a platform that matches shipper loads to trucks and is backed by a venture arm of Japan-based conglomerate SoftBank Group Corp. Backers including big investment funds are pumping money into logistics technology at a rapid pace, driving up valuations for digital-focused ventures across freight, delivery and warehousing. The influx of cash is giving startups in a once-overlooked sector expanded access to capital to build out their businesses, particularly for the top companies that have already developed their core products, according to venture-capital executives who focus on logistics and supply chains. Supply-chain technology startups raised $24.3 billion in venture funding in the first three quarters of 2021, 58% more than the full-year total for 2020, according to analytics firm PitchBook Data Inc. Besides venture-capital firms, backers included global investment managers like Tiger Global Management LLC and Coatue Management LLC and the venture arms of large corporations such as shipping giant A.P. Moller-Maersk A/S and Koch Industries Inc. And then you have Venture capitalists chase industrial tech start-ups as supply shocks widen | CNBC – this reminds me of the B2B dot com frenzy around companies like GoIndustry, i2 Technologies and JDA Software / Blue Yonder.
Supply chain technology underpins supply chain management (SCM). SCM as a term sprang out of management consultancy Booz Allen Hamilton in 1982. But the originals of supply chain technology go back much further. Railway companies were experimenting with barcode type readers with British Rail having a system that read the codes on trains passing at 100mph error free. This system was eventually shut down when British Rail was privatised. In the US they were using KarTrak in the late 1960s, but that was later abandoned. The codes were incorporated into the computer software used to schedule freight rail transport. Shipping containers sprung out of work done for the US military and were proved successful in Korea. The standards for the ‘intermodal’ container where hammered out from 1968 through 1972 covering everything from the containers themselves to safe handling. So you had a standard box and a method of tracking it, which is at the core of supply chain technology.
Containers did a number of things:
It helped prevent ‘shrinkage’. Seiko no longer had to worry about shrinkage due to dockers kicking in the corner of a crate to steal a watch or ten and sell them down the pub.
It encouraged automation of docks and handling, reducing the amount of unskilled labour required
Simplified freight forwarding and handling through standardisation
Facilitated easier global supply chains. Goodyear would know how many tractor tyres it could fit in a 40 foot trailer and ship from Singapore. The ports of Singapore and Hong Kong managed to parlay their use of logistics management software to move containers faster, which proved to be a competitive advantage for a number of years, even after Hong Kong deindustrialised with the mainland opening up
Once logistics management was in place, attention could be turned to sourcing, procurement and the integration of enterprise resource planning to provide an end-to-end picture through supply chain technology. The Japanese developed a lot of management practices designed to master supply chain management and these practices drove a wider demand for supply chain technology.
Packet network infrastructure provided a way to connect systems from channel partners, intermediaries and third party suppliers with a company through a standard interface for supply chain technology to work. What is called EDI or electronic data interchange. The rise of the web made it even easier which is why you had a plethora of supply chain technology companies to simplified the process of EDI. They democratised supply chain technology.
It also allowed retailers like Tesco to use supply chain technology to become vertically integrated from upstream suppliers and downstream customers.
Divergent views on China’s investment landscape | Financial Times – JPMorgan last month called China’s internet sector, once an engine of growth, “uninvestable”. Many big investors have headed for the exits. This week we revealed that Weijian Shan, the chair of PAG, a $50bn fund and one of Asia’s biggest investors, has diversified away from China.
The age taboo in workplaces means we miss out on talent | Financial Times – Research by two Harvard psychologists, Tessa Charlesworth and Mahzarin Banaji, suggests that negative stereotypes of ageing are actually more persistent than those about race and gender. Drawing on data from more than 4mn tests of conscious and unconscious bias, they have found that attitudes to sexual orientation, race and skin tone have improved during the past decade, compared to stubborn biases about age and disability, and increasing negativity about people who are overweight. Charlesworth and Banaji predict that anti-gay bias could reach “neutrality” in 20 years’ time, but that on current trends it will take 150 years for the same to happen to ageism. The raw reality is that older workers tend to be more expensive than younger ones, and are more vulnerable to cuts to middle management. But it may be a false economy to lower initial salary costs by hiring the young, if familiarity with procedures and teamwork are lost
FMCG
Investigating the Pink Tax: Evidence Against a Systematic Price Premium for Women in CPG by Sarah Moshary, Anna Tuchman, Natasha Bhatia :: SSRN – We find that women’s products are more expensive in some categories (e.g., deodorant) but less expensive in others (e.g., razors). Further, in an apples-to-apples comparison of women’s and men’s products with similar ingredients, the women’s variant is less expensive in three out of five categories. Our results call into question the need for and efficacy of recently proposed and enacted legislation mandating price parity across gendered products. – so there is actually a ‘blue tax’ rather than a pink tax
British Historian Antony Beevor: “Putin Wants to Be Feared – Like Stalin and Hitler” – DER SPIEGEL – the liberal West is now facing a decline, and even possibly a collapse, in confidence in parliamentary democracy. The heroic resistance of Ukraine is perhaps the only hope that we will recognize in time the dangers of the general slide towards authoritarianism in an increasingly Manichaean world – that is to say, a new dualism of two power blocs confronting each other: one with a free and liberal stance, and one without.
The cognitive dissonance of corporate life | Financial Times – employers’ efforts to drag people back into the office by offering them “perks” from free snacks to company swag. One particularly eager (and rich) organisation offered workers who were willing to trek back in the chance to win a Tesla. But Spiers, like me, isn’t biting. “I’ve come to think of these corporate toys and rewards as the work equivalent of the cheap prizes you win at a carnival after emptying your wallet to play the games,” she writes. “The difference is that the point of the carnival is to have fun and the prizes are incidental. In the workplace, this is just a laughably terrible trade-off. Who wants to give up the two hours a day they gain by not commuting for a free coffee mug? – interesting challenge that probably only a recession will right
Indonesia’s new law removes redtapes for foreign investors | DigiTimes – With abundant natural resources and young labor, Indonesia attracts – and needs – more foreign investment. The three largest foreign investors in Indonesia are Singapore, China (including Hong Kong), and Japan. Data provided by Indonesia’s Ministry of Investment (BKPM) showed that in the first three quarters of 2021, Singapore accounted for 32% of the total foreign investment, Hong Kong 13.8%, China 10%, and Japan 7.7%. – its also a great option for the move away from Chinese manufacturing
Crypto crackdown stifles China’s ability to offshore cash | Financial Times – With the government applying more scrutiny to digital asset transactions, one of the oldest and most conventional methods to bypass capital controls is gaining popularity: the luxury collectible trade. While it’s difficult to bring suitcases filled with cash through customs, a Tang dynasty-era vase or a couple of Patek Philippe watches can easily pass as personal belongings. Rich buyers can purchase them in China and resell outside the country. Indeed, demand for designer time pieces is taking off, high-end watch sellers in China told the FT. One wealthy Chinese heir also told the FT about another existing loophole, in which Chinese developers building condo projects in Thailand or Malaysia market them at home, and accept renminbi. Once properties are purchased, they can be sold locally into currencies that can be more easily exchanged into dollars – this probably explains why auction houses Sotheby’s and Phillips have expanded their Hong Kong operations
RupertMurdoch’s Sky realised that you could buy football rights for far more than anyone had ever thought of paying before, and you could make your money back by selling the games on subscription instead of pay-per-view or advertising, and you would be able to deliver that subscription using encrypted satellite channels. This was a big deal, both for Sky and for the UK Premiership league, and it was the beginning of something much bigger.
Skyused technology as a crowbar to build a new TV business. Everything about how it executed that technology had to be good, and by and large it was. The box was good, the UI was good, the truck-rolls were good, and the customer service and experience were good. Unlike American cable subscribers, Sky subscribers in the UK are generally pretty happy with the tech. The tech has to be good – but, it’s still all about the TV. If Sky had been showing reruns of MASH and I Love Lucy no-one would have signed up. Sky used tech as a crowbar, and the crowbar had to be good, but it’s actually a TV company.
I look at Netflix in very much the same way today. Netflix realised that you could spend far more moneyon far more hours of scripted drama than anyone had ever spent before, and you could (hopefully) make your money back by selling it on subscription directly to consumers instead of going through aggregators, using a new technology, broadband internet, that both gave you that access and made it possible for people to browse that vast selection of shows – and this: Ads are coming to Netflix: What do top media buyers and analysts think? – It’s plausible that Netflix will play a key role in driving the roll out of hybrid AVOD/SVOD around the world. Today, such models are mostly found in the U.S. and in Asia, but should Netflix add this on a global basis, it could be the next big thing. It’d force others to move beyond pure paid-for streaming models. I’ve long argued that it is unsustainable to expect customers to buy more than five SVOD services — so hybrid models are part of the solution as it eases the pressure on consumerwallets.
Ad agencies have persistently asked Netflix over the last few years to start running ads on the service. But they’ve been firmly against this until now. However, as Netflix management said on the investor call, what has changed is that this is a proven model that works: Hulu, HBO Max and Disney+ are doing it, so ofcourse
Singaporeans must benefit’: expats fleeing Hong Kong meet rising resentment | Financial Times – Chia is not alone in holding anti-expat beliefs. Over the past decade, perceptions that international employers have discriminated against locals have placed increasing pressure on the government to clamp down on immigration. While some anger has been directed towards manual labourers from elsewhere in Asia, Singaporeans are also frustrated by the significant proportion of westerners that make up the city’s elite workforce. After the recession triggered by the coronavirus pandemic refocused attention on employment and inequality in Singapore, the discontent has intensified. Experts warned that an influx of white-collar staff from Hong Kong risked deepening tensions, complicating Singapore’s bid to attract foreign money and talent. – Singapore’s answer to populism?
The military race for low Earth orbit satellites – and why China is behind | South China Morning Post – LEO satellite broadband projects going on in addition to Elon Musk’s StarLink – In Europe, Germany-based Airbus Defence and Space has teamed up with satellite internet firm OneWeb to provide services to the military. Canadian firm Telesat, partly funded by Ottawa, is eyeing the US Defence Department as a customer for its global LEO internet service, which is expected to start in 2024. Amazon’s Kuiper project also has been approved to launch 3,236 satellites but has been tight-lipped on its plans in the defence market. In China, LEO satellite internet is a fledgling industry working to connect remote parts of China and countries involved in the Belt and Road Initiative. GalaxySpace, a private start-up in a field of state-owned giants, launched China’s first LEO broadband constellation comprising six satellites in March. But state media reports have described them as commercial and made no reference to military services. Separate state-owned enterprises also launched test satellites for the Hongyun and Hongyan LEO broadband projects in 2018 but little has been said publicly about them since. Another state-owned company, China Satellite Network Group, aims to create a Chinese version of Starlink but was only formed last year
Hino Motors is a car and truck manufacturer best known for its iconic Hino trucks. It started its convoluted origin story spinning out of manufacturing company owned by Tokyo Gas.
Before there was Hino trucks, there were a small amount of half tracks and armoured personnel carriers made for the Imperial Japanese Army. After the war Hino got into the truck business and for a brief while also made cars. The pretty Hino Contessa coupé showed potential, but becoming part of the Toyota group saw Hino focus on commercial vehicles under its own name.
Hino trucks with their winged logo marked my childhood in Ireland. Hino trucks pulled palleted loads on taunt liner trailers, shipping containers and flat bed trailers of hay. The supermarket delivery wagons, the bakers lorry, skip deliveries, ready mix and the dairy picking up milk from my Uncle’s farm were all using Hino trucks. The distinctive unblinking three green lights on the roof of oncoming Hino trucks stood out of the total darkness of rural Irish roads.
I had Robert ‘Pino’ Harris to thank for making Ireland the Hino trucks capital of Europe at the time. And his Hino trucks success story is one of a singular focus on relationships and customer service.
Adidas ousts China chief as sales suffer after consumer boycott over Xinjiang | Financial Times – Allison Malmsten, sportswear analyst at China-focused consultancy Daxue Consulting, said that since the boycott, Nike and Adidas have ceded their top position on ecommerce apps such as Alibaba’s Tmall. In their place, local online retailers have promoted Li-Ning and Anta, making the “competition a lot stiffer”.Jonathan Cummings, Asia-Pacific president of brand consultancy Landor and Fitch, said that after years of market dominance, Adidas and Nike were being challenged by “cheaper domestic brands that have become stronger”.Adidas generated nearly a quarter of its sales in the Greater China region in the first half of last year, the bulk of which came from mainland China. – it will be interesting to see where adidas will try to go in China and whether they feel it is worth riling western customers to arrest their decline in China
The rising costs of China’s friendship with Russia | Financial Times – When the Russian invasion of Ukraine started two weeks ago, Jane Yan, a senior executive at a machine parts maker in eastern China, says she was not too worried about the impact. After all, buyers in Russia and Ukraine accounted for less than 5 per cent of the company’s overseas sales last year. But as the full ferocity of the Russian onslaught started to become apparent, the outlook shifted dramatically. Important clients in countries such as Poland and Germany cancelled orders with the Zhejiang-based company. “A Munich-based client said ‘it feels terribly wrong to send money to a country that is tolerating war in Ukraine — sorry’,” said Yan, who asked that her employer not be identified. She added that inquiries from European buyers have also fallen sharply since the conflict started. “I hope the war ends as soon as possible.” – I wonder how prevalent this consumer boycott actually is of Chinese products?
Culture
Why disco will never truly die — Quartz – interesting, but full of American privilege, but no love for producers like Giorgio Moroder, Luxxury, Dimitri from Paris, Late Night Tuff Guy or The Reflex
Ideas
How factory robots lead to human deaths – Futurity – “For decades, manufacturers in the United States have turned to automation to remain competitive in a global marketplace, but this technological innovation has reduced the number of quality jobs available to adults without a college degree—a group that has faced increased mortality in recent years,” says lead author Rourke O’Brien, assistant professor of sociology at Yale University.
“Our analysis shows that automation exacts a toll on the health of individuals both directly—by reducing employment, wages, and access to healthcare—as well as indirectly, by reducing the economic vitality of the broader community.”
Since 1980, mortality rates in the United States have diverged from those in other high-income countries. Today, Americans on average die three years sooner than their counterparts in other wealthy nations.
EACH NEW ROBOT PER 1,000 WORKERS LED TO ABOUT 8 ADDITIONAL DEATHS PER 100,000 MALES AGED 45 TO 54 AND NEARLY 4 ADDITIONAL DEATHS PER 100,000 FEMALES IN THE SAME AGE GROUP. Automation is a major source of the decline of US manufacturing jobs along with other factors, including competition with manufacturers in countries with lower labor costs, such as China and Mexico.
Previous research has shown that the adoption of industrial robots caused the loss of an estimated 420,000 to 750,000 jobs during the 1990s and 2000s, the majority of which were in manufacturing.
Can Intel out-design Apple in terms of chips? I think that is certainly possible, possibly even extremely likely
Can Intel compete with Apple on process? Possibly soon, if they managed to partner with Samsung or TSMC. Certainly in the longer term if Intel’s process engineers get their mojo back, or they continue to partner with TSMC or Samsung
Roundtable: A Brutally Honest Conversation on the Metaverse – Web 2.0 Is about the individual/the corporation, and Web 3.0 is about the collectivist statement, or the community / collectivist environment, in some ways. – interesting that there is a whole piece missing about web 1.0 being about personal and organisation publishing and communications. Web 2.0 being a web of data and creativity
Its really hard to get your head around the situation playing out in Ukraine. One of the best set of videos that I have seen to try and make sense of what’s going on in Ukraine is done by Chris Cappy. He admits in the last video that his jocular tone is a way of dealing with the horror of it all and his analysis seems to be on point. I have embedded his Ukraine related videos here:
Beyond the horror playing out with Russia’s invasion of Ukraine; what will be some of the global impact of the Russian invasion of Ukraine?
I have put down some thoughts on the effects of Russia’s invasion of Ukraine into three buckets:
Short term effects
Medium term effects
Long term effects
Short term effects
Bread riots and inflation
The invasion of Ukraine will disrupt the country’s wheat harvest. Ukraine is responsible for 10% of all global wheat production and is a major exporter.
Developing world consumers are already suffering from the rise in food prices. This might be felt especially hard in the Middle East, where the price of bread is often subsidised by the government to help prevent riots. It was one of the factors that drove the ousting of former Egyptian president President Hosni Murbarak as part of the Arab spring series of movements.
There have been past bread riots in other countries like Algeria and Jordan at a time of massive civil disturbances. One of the first impacts of Russian actions in Ukraine may play out with disturbances in the developing world.
Russia is also a wheat exporter, but ironically won’t benefit from the price rise due to long term contracts that it has with China. China previously leased land responsible for 5 percent of wheat production in Ukraine. China had also invested in Ukrainian pork farms.
Oil and gas
The impact on global oil and gas prices has been immediate. Oil prices had been high anyway as the oil industry ramped up and tried to match post-COVID shock supply chains struggle to get back in sync. Sanctions on Russian oil have been implemented by oil traders faster than western governments have implemented them. Taking Russia out as a supplier is likely to drive western customers in a number of directions in the medium and long term. In the short term we may have power and heating shortages. Russia currently doesn’t have pipeline capacity to ship oil and gas to China in the kind of volumes that would compensate for reduced Western demand. So you might see some of that oil being shipped in sanctions busting tankers, again the challenge would be finding ‘ghost boats’ that have capacity.
Western inflation versus China inflation
China has probably worked out the calculus of products that it loses in the short term, versus long term products from Russia as a pariah state at below global prices as Russia won’t have a choice. So we can expect China to benefit from lower inflation inputs than other countries in the short to medium term. It will be inputs from oil and gas to wheat or titanium foam. This gives some Chinese businesses a comparative advantage versus their competitors, particularly western countries.
Western European concerns about energy, particularly running into winter are acute and energy transformation to lower carbon options will take time.
Russian inflation
The rouble has dropped in value by 30 percent as soon as sanctions went in. So one would think that the effect on inflation would be immediate. But you also have multinational companies withdrawing from Russia. In the short term, many products from fast moving consumer goods to clothing and home furnishings will quickly no longer be available. Even smartphone sales of Chinese brand smartphones have plummeted, which gives you and idea of what western sanctions don’t do, the plummeting rouble will do instead.
Many of these multinational companies will no longer be manufacturing in Russia either, which will create a decrease in both supply and demand. So the impact on short term inflation may take a while to become clear. It is likely to impact unemployment as well.
Russian banks and the central bank are extremely capital constrained which will not only affect monetary policy but providing sufficient credit to keep businesses going. What you will see is a brain drain of the educated and the talented as they don’t really have a future at home. Which is why Russian’s have been paying €9,000 for a railway ticket from St Petersburg to Helsinki. Talented Ukrainians are either engaged fighting the Russian army in Ukraine, are internally displaced in western Ukraine or have already left the country.
If Russia goes to martial law then all bets are off in terms of financial damage because that would likely be the least of government’s concerns in terms of maintaining other aspects of control.
Medium term effects
CHIPS Act & strategic capability
The US has looked to promote domestic semiconductor manufacturing through government investment. However inert neon and krypton gas, which is used in the semiconductor manufacturing process is supplied by Ukraine. Russia and the Ukraine were responsible for half of all global production of these gases. This will impact US national security and development of semiconductor manufacturing as a strategic capability.
Neon mirrors shortages of critical materials for western countries that will impact high technologies and engineering using performance materials. Western countries will have to think about how they update their own strategic capacity to make these materials. This covers a wide swathe of materials including:
Lithium – something that Ukraine has large deposits of
Industrial and jewellery grade diamonds.
Uranium
Titanium foam. Titanium foam is the raw material that titanium alloys are made from. Currently two out of the top three producers are China and Russia. Given what has happened with Russia, the risk calculus will change around China.
There has been a steady tempo of voices on the need to have strategic capability in critical areas like lithium and rare earth metals. This will likely be mirrored by China with its five year plans. The degrees of will to achieve strategic independence will dictate the amount of time that it takes to implement.
Innovation
Being cut off from western capability will place two problems on Russian innovation:
Access has been cut off to critical resources. Yandex has already expressed concern on how this will affect their business.
Over time, access will be reestablished through extraordinary means, but will incur additional costs. So Russian innovators might be able to acquire foreign critical materials with enough money. These will have to be funnelled through front companies in third countries in places like China and the Middle East. This is effectively a tax on Russian innovation.
Russia has some semiconductor capability, but it is way behind modern manufacturing, so it relies on foreign manufacture.
This all means Russia will be an ideal market for Chinese vendors. Huawei has already been helping Russia with their networking and information security needs. Other Chinese vendors will end up dominating other aspects of Russian technology from automation to smartphone apps. Over time Russia will fall behind and end up being a supplier of raw materials and source of skilled labour for Chinese enterprises. Having a Russian version of WeChat and Weibo with similar censorship would be attractive to the Russian government.
Russia is already behind in semiconductor manufacture, but it might be helped by China’s similarly sanctioned semiconductor companies. Russia has been trying to get self sufficient in products like computer servers, but Chinese chips will be seriously behind the chips that they’ve already had made in Taiwan.
Russia will probably do everything that it can to shield its defence industry from impact. Not only in support of its policy aims, but its one of the few value add sectors where Russia is a peer with China. Otherwise post-Ukraine, Russia’s negotiating position with China would be more akin to China’s relationship with sub-Saharan African countries or Sri Lanka.
Maintenance
Most of the civilian Russian aircraft fleet is of Boeing and or Airbus aircraft. The only access to maintenance parts will be the ones that they have on the shelves. Over time Russia might be able to reverse engineer and manufacture at least some parts. Electronics may prove harder. However Russian aircraft no longer have the amount of destinations that they can fly to with passengers or air freight, so they can likely cannibalise much of the fleet for spare parts. And since the majority of the aircraft are leased from Irish companies, there will be little blow-back that the Russian government would be bothered about at the moment.
Maintenance will also need to be done on trains and the railway network, oil and gas extraction equipment, manufacturing production lines and even hospital medical equipment. A similar mend and make do approach will likely be needed for all these sectors, which will slow down economic activity and make it harder to climb out of recession.
Rebuilding
If the second Chechen war is anything to go by, rebuilding Ukraine will be a very costly endeavour that will need to be bankrolled by either Russia or the west. As the west found out in Iraq, winning the war is the easiest and cheapest part. Rebuilding and trying to a puppet government in power with an insurgency funded by western citizen direct contributions and government funding could be a real challenge. As would trying to integrate Ukraine into Russia. Even the most draconian of measures have a high financial cost as well as societal and moral related issues.
Footage has also indicated that Russia will need to rebuild its military apparatus. The tyres were rotting off Russian and Belorussian vehicles for the want to proper care and maintenance programmes. In preparation of a future conflict with NATO, or further down the line China, Russia couldn’t afford to take those kind of losses. Wars are a shop window for the defence industries and this won’t be doing any favours for foreign sales of Russian armed vehicles, anti-aircraft systems or aircraft.
The performance of equipment in Ukraine is in sharp contrast to the veneer of professionalism and technical excellence shown by Russian forces operating in support of, and on the ground in Syria.
Russia will need to replenish ammunition supplies, maintain or replace artillery barrels and replenish field rations. Word will get around about the poor state of field rations. It will need to revamp its approach to logistics and supply chain management because everything that I listed was entirely preventable. All of this rebuilding will be challenging if Russia faces a sustained insurgency. China spends more on internal security than it spends on external facing military. NATO estimates that Russia would need to have a minimum 400,000 soldiers to maintain control of Ukraine. If Russia followed the same density of soldiers to population that it had in Chechnya, it would need 4 million soldiers.
There are some terrible options to consider:
Cull a proportion of the population, Russia is already a pariah state after all. Ignoring for morality of this for a moment which would be a huge issue in Russia, we know that this would represent tremendous logistical challenges as it did for Nazi Germany. But former Russian leaders, notably Josef Stalin killed a lot of Ukrainians including starving many of them to death and Mr Putin has proved himself to be a student of history
Internal exile. Stalin exiled the Cossack community of Crimea to Siberia. It decimated social cohesion and the ramifications of this exile is still felt by the Cossacks. Russia could do this to portions of the Ukrainian people. This would present a logistical challenge and an economic burden on Russia. If Russia thinks that sanctions are bad now, either of these two options would make current economic decline sound like paradise.
Paying for rebuilding will be challenging, if Russia manages to hold Ukraine, it might be able to exploit its rich natural resources like lithium deposits. But these will be sold at a considerable discount to the likes of China or India. We are unlikely to see Russia as a serious player in the lithium ion battery market.
Russian recession
When you take jobs, economic activity and capital flow out of an economy a recession will be inevitable. Many of the jobs that Russia will lose will be in middle class sectors including management, banking, the professions and business services. No matter what these companies do to try and mitigate the impact on their former staff, the impact will be felt economically in Russia.
Add to that the obliterated economy in Ukraine that might be dragging Russia down even further.
Over the longer term Russia will be selling their export products at a discount due to fewer customers and a more expensive route to market. So it will be harder for Russia to climb out of recession.
Reshaping of supply chains
Russian oil and gas has previously focused predominantly on selling oil and gas to Europe and Turkey and will be covered with sanctions. It will take a while to make alternative pipeline capacity to go east to China. Previously Russia has made use of foreign LPG terminals. Presumably these will cut access to transport by sea for Russia. Liquified natural gas tankers are expensive and Russia’s largest domestic LPG terminal is on the wrong side of the world, just down from St Petersburg on the Gulf of Finland. This would be the equivalent of drinking a venti mug of coffee with a teaspoon.
Russia has been experimenting with shipping some LPG by train to Northeastern China. In terms of helping finance future projects, China isn’t likely to fund LPG projects that would give Russia to foreign markets other than itself. This would be one of the first areas where we see Russia clearly as the junior geopolitical partner beholden to China. So a gas pipeline to China is likely to be the preferred route to market.
Russia is in a slightly better position with oil. its easier to ship by sea and for the right price, Russia could find customers beyond China.
Consumer sanctions busting
Russia will have already started thinking about sanctions busting, but doing this in a big way will take time, money and planning. At a consumer level, Russians will be looking to safeguard wealth through portable assets that are liquid, or can be easily made liquid. This means foreign currency, crypto-wallets, luxury watches, diamonds and precious stones. There has already been a run on the rouble at Russian banks as citizens look to obtain foreign currency and Russia has implemented capital controls on people leaving the country.
Cybercrime
It’s only a matter of time for Russia to tap its cyber criminal community and state hackers to come up with a source of foreign currency to help the Kremlin. These will be more capable than what North Korean state hackers have historically being doing. Ransomware payments will likely come over cryptocurrency. The problem with cryptocurrency is that the exchanges are becoming increasingly centralised, so criminals will be playing cat and mouse with the likes of Binance. The cryptocurrency sector in Hong Kong may be more fruitful. The COVID quarantine situation and regulatory uncertainty in Hong Kong won’t deter Russians keen to launder crypto into foreign currency and access to the global financial system.
Finance
Russia will try to get around foreign payments through a number of ways. Asianometry have done a really good exploration of this topic and I figure that you could do with a video break in this dystopian discussion of Russia and Ukraine. We have seen Russian banking systems sign up with Union Pay, which has limited acceptance in the west (usually big department stores that rely on the Chinese tourist trade like Selfridges in London and Brown Thomas in Dublin).
Long term effects
At the moment there isn’t a clear off-ramp for sanctions against Russia. One might see softening of sanctions in the developing world, for Russian products at the right price. The longer that sanctions remain, the harder it will be for Russia to regain its global economic standing once they are lifted. Russia hasn’t been a trusted partner at the best of times due to systemic corruption. Systemic corruption will be further fuelled as the country falls under Chinese influence, there won’t be a need to meet ESG driven checks and balances. It will face sustained cynicism in the west with regards its motives and will increasingly become less relevant.
In addition it will be locked into draconian financial deals with China which would make it harder to kick start the Russian economy. Globalisation will have created alternatives for its higher value goods, so will need to rely its commodities. It will be a third line supplier for strategic materials like industrial diamonds, uranium or titanium because of the trust deficit.
Russia declining, China rising
Russia is already struggling for relevance in the Russian Far East. The economic gravity is moving away from Russia towards China. Chinese companies are leasing farm land and forestry. Russian financial distress will encourage this trend much faster. The Russian Far East is part of an ‘unfair treaty’ between Russia and China during the 19th century. While China tries to keep a lid on the discussion about this, it is on the radar of Chinese nationalists. The question of Russian sovereignty will come up at some point and Russia won’t be able to secure any foreign support.
China will be Russia’s banker of last resort and given that the yuan isn’t transferrable, Russia won’t be able too disconnect at a later date. China will use favourable pricing to get hold of Russian resources, Russian expertise and privileged market access. All of this will come at the expense of Russian businesses, entrepreneurs and the Russian taxpayer.
Russia will have been cleared off the map for sporting events, an area that China attaches great importance to for national pride.
The fall against China will transform the China-Russia relationship in a coercive way, similar to what we have seen China do with African countries.
Sanctions busting
Taking apartheid era South Africa as an example. South Africa was able to buy arms from East Germany, despite the communist state’s support of the ANC. Chinese arms were purchased by South Africa and used to equip their allies fighting in Angola. If the price is right, Russian arms will still be sold abroad. We know that North Korea has serviced and refurbished Soviet-era equipment like T-55 tanks for a long time and Iranian arms pop up across the developing world including medium range missiles and drones. So there will be customers there for Russia, at the right price. What we might end up seeing is that Chinese arms are seen as ‘more premium’ due to superior technology. Russian private military contractors will be used to earn foreign currency, wherever there is money on the table.
We can expect Russia to be able to obtain at least some material that it considers to be vital to its needs and there will be some strange bedfellows involved. This might be through convoluted and more expensive means. Countries that fully supported Russia in the UN are pariah states anyway, so they would be of limited use as conduits. But they are likely to be customers for Russian exports. For instance, North Korea could be enjoying more oil at a lower price, if the rail link across the Russian border would be able to handle a long tanker train. Or if Russian ‘ghost tankers’ manage to do transhipment.
So they may use third parties countries that abstained from the UN motion
Algeria, Equatorial Guinea and Iraq. Russia presents an arbitrage opportunity for these countries. If Russia is desperate for foreign currency reserves, these countries could buy Russian oil at less than their own cost of production. Perform an offshore ship-to-ship transfer or fake paperwork for a full tanker and sell Russian oil as their own. Russia would be losing money this way but it offers an opportunity to get hold of foreign currency.
China is going to be Russia’s leading economic and development partner. This is likely the key conduit for foreign products into Russia. However, where China is restricted in key areas such as technology, Russia will need to look further afield.
Bangladesh and Pakistan. Pakistan has a lot of experience in sanctions busting and used to build their nuclear weapons programme over the past number of decades. It also has an ambivalent relationship with western countries, although its tight relationship with China might make its willingness to help Russia have limits.
Bangladesh and Pakistan are the number two and number three countries in ship breaking. When Russia needs ‘ghost tankers’, being able to buy ships that are due to be scrapped will be the easiest way of doing this. Having ships pirated in the straits of Malacca by corrupt Indonesian military or Filipino Islamic terrorist groups would be a higher risk, less reliable source of ‘ghost tankers’. If Russia wants to sell oil or arms, it will need access to shipping. Ghost ships are already estimated to represent about 10 percent of global oil tanker capacity. Prices have already been rising for older ships due to be scrapped prior to the Ukraine invasion as the demand for ‘ghost ships’ had increased.
South Africa and India. India and South Africa are long-time partners of Russia in the diamond trade and would be likely called upon to help Russia get its diamonds on the global market. India is responsible for most of the diamonds cut globally. Its diamond businesses also have a crisis of credit. Both South Africa and India are part of the Kimberley Process. Both of these factors make them ideal countries to launder Russian diamonds through if the price is right.
The United Arab Emirates is in a unique position. It is an established Russian trading partner with an established Russian community and the kind of financial sector infrastructure to help build an offshore shell game to hide Russian sanctions busting. It has many of the benefits of London in terms of expertise, but none of the ESG related problems that ‘Londongrad‘ now has due to the invasion of Ukraine.
Cultural impact
Russia feels that it is linked culturally much more closely to the west in terms of music, literature and even sports. This will be unprecedented, even during the cold war, there were cultural and sports exchanges. Being cut off from these exchanges had a huge impact on apartheid-era South Africa. It is likely to impact how Russia sees itself, the sense of isolation due to its pariah status will be palpable. I can’t see Russia pivoting to China in those areas, they have too little in common from a cultural perspective.
The rich and powerful who enjoy a global cosmopolitan lifestyle will feel this impact in a very acute way, the middle classes will also feel the impact but will be equally concerned with their reduced financial status.
Spanx commits to all-female board after Blackstone investment — Quartz – More than a quarter of board seats in the Russell 3000 Index belonged to women during the last quarter, compared to 15.1% just five years ago, according the corporate leadership research firm Equilar. Still, just 84 of these boards had achieved gender parity, meaning that they were represented by 50% women. And companies still struggle to achieve adequate racial and LGBTQ representation on their boards as well. Justine Smyth, chair of the New Zealand telecommunications company Spark, has suggested that while the first “diverse” appointees on company boards may feel like tokenism, those members can help advocate for change once they are given decision-making power – Spanx is an American underwear company that does foundation garments to make the wearer appear thinner. Spanx innovated around testing with real people, having multiple sizes and packaging colours that increased brand salience. The back story of Spanx is similar to the ‘founder in a garage’ story that was the starting point of many Silicon Valley firms. Spanx is a private company. It is interesting that Spanx are taking private equity money from Blackstone rather than going public. Will we get to a situation in the future where all-women boards like Spanx come under the kind of pressure that all-men boards come under now? If we got to that stage, then we’d have equality. I think that will be a while.
Microsoft Executives Told Bill Gates to Stop Emailing a Female Staffer Years Ago – WSJ – interesting that we haven’t seen this kind of expose about Larry Ellison or Steve Jobs. Secondly, there is the timing with Mr Gates’ divorce. Finally, all of the money and hard work to reinvent Mr Gates as a philanthropist looks as if its becoming undone. While Mr Gates
The soft bigotry of America’s cultural left | Financial Times – imposing conformity through intimidation is not what is supposed to happen in democracies, still less on their most-prized campuses. Crushing free thought is McCarthyism. This new consensus is profoundly illiberal. It treats a person’s race as their primary fixed identity and assigns roles on that basis. This obliterates the individual moral autonomy on which liberalism rests. Since everything in society boils down to race, everything must change. California, for example, is trying to alter its mathematics curriculum to downplay the idea there are right and wrong answers in the science. The debate is fuelled by a proposal for new math standards called “A Pathway to Equitable Math Instruction”. The framework states that “objectivity”, “worship of the written word”, and “either/or thinking” are tools of white supremacy
Reforms in Hong Kong Encourage Homecoming of Offshore Funds | Winston & Strawn LLP – In July 2021, the Hong Kong government gazetted a fund re‑domiciliation mechanism to encourage offshore funds set up in corporate or limited-partnership form to register in Hong Kong as OFCs and LPFs, respectively. This mechanism does not create any new legal entity; therefore, it does not require the dissolution of the original funds or require investors to exchange their interests from the old fund to the new fund. Upon re‑domiciliation, these funds would be de‑registered in the original place of incorporation and would have the same rights and obligations as any other newly established OFCs and LPFs in Hong Kong. The Wealth Connect, which formally commenced trading on September 10, 2021, allows Hong Kong-domiciled funds to be offered to mainland Chinese investors in the Guangdong-Hong Kong-Macao Greater Bay Area. This adds to the Mutual Recognition of Funds scheme, which started in 2015, allowing Hong Kong-domiciled funds to be distributed in mainland China. These connect schemes serve as another incentive to encourage fund managers to re‑domicile offshore funds to Hong Kong – I suspect that this is designed to do a few things over time.
Allows Chinese citizens on the mainland access to more ways to do investments, whilst still being in full view of the Chinese government.
It allows the Chinese government to expand ‘capture’ of western financial institutions
It will allow China to put pressure on VIEs ran out of the likes of the British Virgin Island and similar territories out of scrutiny
How Hong Kong’s Elite Turned on Democracy – The Atlantic – there is something performative about the face and patriotism on display that I suspect may be driven less by a drive to get on and more by the fear of what might happen to them or their loved ones if they didn’t
Apple’s privacy changes create windfall for its own advertising business | Financial Times – “Apple was unable to validate for us that Apple’s solutions are compliant with Apple’s policy,” he said. “Despite multiple requests and trying to get them to confirm that their products are compliant with their own solutions, we were unable to get there.” Apple said its privacy features were designed to protect users. “The technologies are part of one comprehensive system designed to help developers implement safe advertising practices and protect users — not to advantage Apple.” – this has my spidey sense tingling right now
What blockbuster? China spurns Hollywood’s advances | Financial Times – “If I was an investor, I would be very concerned about a strategy at this point that depended on access to the Chinese market and the good graces of Chinese film regulators,” said Aynne Kokas, the author of Hollywood Made in China and a media studies professor at the University of Virginia. “To make very expensive films in anticipation of being able to deliver them to the Chinese market and then not being certain that’s possible is actually a much more financially irresponsible strategy from my perspective.”
Alibaba Faces New Threat: an Evolving Chinese Shopper – WSJ – consumers have started to embrace new ways of shopping that favor browsing and interaction over targeted product searches. That trend has left Alibaba playing catch-up in some areas, and competitors have used the shift to gain a foothold in the world’s largest online retail market. Alibaba remains the leading platform in online shopping, but its share of China’s retail e-commerce market has fallen to a projected 51% in 2021 from 78% in 2015, according to research firm eMarketer. Interesting that WeChat, BilliBilli, Pinduoduo and Douyin are claiming part of the e-commerce pie. What this article doesn’t cover is the relative importance by comparison of O2O (offline to online) (paywall)
