Aurelia Butler

Talking to sanctions officials across Europe, the word of the moment is “attestation” — the term used for a vital piece of compliance paperwork required when shipping Russian oil. There is a growing sense that tinkering with the administration of the price cap can make it bite harder.To take a quick step back: the price cap is a set of measures that prevent people or companies from participating countries from touching Russian oil unless it is sold below a ceiling. It aims to keep Russian oil flowing to the world while trying to squeeze the Kremlin’s finances. The policy — introduced by the G7, the EU and Australia — has had more effect on some routes than others. The flows from the Russian far east to China have, for example, long been priced above the cap, which stands at $60 per barrel for crude. The price cap coalition has little traction there.But oil coming out of the Russian Baltic ports, such as Primorsk and Ust-Luga, has been sold at hefty discounts. Pressure from the big buyers in India, who worry about flouting US sanctions, and the need for western ships and shipping insurance kept the discounts pretty steep.But some of the downward price pressure there was overstated by a wheeze. Imagine I want to buy Russian oil for $65 a barrel and plan to sell it for $75 to a refiner in India — and let us say the refiner’s bankers are worried about the price cap. I can reorganise the deal such that the oil price is, say, $58 a barrel, but I seemed to spend $17 on shipping. That would get me past the price cap. We wrote about some of these schemes earlier this month.In the past fortnight there have been hints that this sort of scheme may be stepping up a gear. Over the summer, the global rise in oil prices dragged Russian prices up with them. By mid-July, Argus, the pricing agency, started to quote spot prices of Urals and ESPO crude above $60 per barrel everywhere, even in those Baltic ports.But here is a thing: customs filings made to the Russian authorities in July for shipments from the Baltic ports to India do not show any declarations above $60. A gap between the Argus data and the customs data opened up in late July just as the Argus price headed north of the cap.

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This might all be innocent; the data is not measuring the same thing. It diverges often. The Argus data is a pricing estimate for the spot market and is based on traders’ assessments. Euan Craik, head of Argus oil market services, explains: “We’ve got a contact book of people who will talk to us about the Urals FOB market. And on any given day, they’ll tell us what the prices are in the market.” The customs data, meanwhile, is not merely the spot market: it includes shipments that may have been agreed a long time ago. There is also a timing problem: the dates given for the Russian customs data are unreliable, and often appear with a delay. So treat this with caution, but here’s the thing: a marked divergence between the two data series as the pricing agency broke through the $60 mark is exactly what you would expect if there were widespread price-cap evasion going on. That also makes sense of why, even when Argus is being told that the price for oil in Primorsk is about $70 a barrel, a sizeable flow is still being carried on western-insured vessels. This sort of evasion would enable them to use these ships. Under the rules, insurers and shipowners are so-called tier 3 entities, meaning they are not expected to know any pricing information. Their duty is merely to gather an “attestation” that the oil is priced below the cap. But the attestation is empty. Here is some of the usual wording:“The Assured . . . warrants that for any provision of services related to the maritime transportation of Russian origin oil or Petroleum Products by any party entitled to cover such transportation has been, is, and will be in compliance with the price cap policy.”That is why sanctions officials are talking about attestation reform. To make it difficult to pull this ruse, shipowners and insurers need to be given enough pricing information to act as checks on these wheezes. But to make attestations bite, you will also need guidance on what “normal” costs look like. There is at present no benchmark for when shipping costs go from being hefty to suspicious. Introducing guidance on that would also help Indian buyers of Russian oil to squeeze down prices.The price cap is deeply flawed and full of holes. But it has forced Russia to offer costly discounts to India, in particular, at a time when it needs the cash for its continuing invasion of Ukraine. With a bit of reform to how it is implemented, it should be possible to make those transfers a bit larger and more painful. Other readablesTony Barber on the broader Russian economic context. For a surprisingly gripping story about, uh, shipping insurance, I recommend Dead in the Water. Chris Giles is quite glum on the challenges facing the world economy. More

The Bank of England’s chief economist has indicated that he will vote to keep interest rates at their current 15-year high of 5.25 per cent for a long period rather than raising them much further. Huw Pill told an audience at South Africa’s central bank on Thursday that the BoE still had to “see the job through” and be vigilant with “stubbornly high inflation”, but pushed back against financial market expectations that this meant further interest rate rises. At present, markets are pricing in an increase in the BoE’s policy rate to 5.75 per cent by the end of the year, before lowering it in 2024 and beyond.In slides that the central bank did not publish, Pill compared possible paths for UK interest rates to the Matterhorn mountain in the Alps, with sharp rises and falls, and Table Mountain in South Africa, with a long period of rates around 5.25 per cent, which the BoE considers to be depressing demand. Pill — who has voted in favour of higher interest rates at the last 14 meetings of the BoE’s Monetary Policy Committee — said he “tend[ed] to favour the latter” path, resembling Table Mountain, with a “resolute profile [of interest rates] rather than a spike profile”. If Pill followed his comments with votes at MPC meetings in September and November, it would imply keeping interest rates at 5.25 per cent rather than lifting them further and communicating that they were likely to stay at that level for a long time.

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In charts presented alongside the speech, Pill showed inflation falling from July’s annual rate of 6.8 per cent to the BoE’s 2 per cent target if interest rates remained at 5.25 per cent for the next three years.By contrast, financial markets expect rates to rise to 5.75 per cent this year and fall to 4.25 per cent in three years’ time. In a sign of his continued hawkish stance, Pill said the BoE’s emphasis was “still on ensuring we are sufficiently restrictive for sufficiently long to meet out target”, adding: “Core inflation remains stubbornly high and doesn’t show any obvious decline.”

But he said a smoother path for rates remaining high for longer was preferable because it lowered the risks to financial stability, squeezed the economy more gently and transmitted higher rates into two- and five-year fixed rate mortgages more effectively. These are the most common lending vehicles on property in the UK. The BoE warned last week that British companies faced a higher risk of default as a result of tighter monetary policy, with 70 per cent of medium-sized companies likely to suffer debt-servicing stress if rates went above 6 per cent. Pill’s speech did not move financial markets, with sterling and government borrowing costs little changed in morning trading on Thursday. BoE insiders say there is, as yet, no settled internal view on whether to rapidly raise interest rates or allow them to squeeze demand slowly now they are in restrictive territory. Ben Broadbent, BoE deputy governor for monetary policy, said on Saturday that to bring down high inflation, “monetary policy may well have to remain in restrictive territory for some time yet”. More

Eurozone core inflation has edged down, compounding the dilemma for the European Central Bank over whether to continue the biggest set of interest rate rises since the creation of the single currency.The EU’s statistical office said on Thursday that overall inflation for the region was unchanged at 5.3 per cent in the year to August, but noted that prices excluding energy and food cooled.The figures come ahead of the ECB’s September 14 meeting, when it faces one of its most finely balanced decisions in years: whether to risk pushing the eurozone economy into a painful recession by raising rates further, or allow inflation to become entrenched far above its 2 per cent target.“There is plenty to pick and choose for both hawks and doves in today’s inflation data,” said Ángel Talavera, head of European economics at consultants Oxford Economics.The headline inflation figure was above the 5.1 per cent forecast in a poll of economists by Reuters.But core inflation, which excludes energy and food and is closely watched by the ECB as a gauge of underlying price pressures, fell in line with expectations to 5.3 per cent, down from 5.5 per cent in July. Investors reacted by paring back bets on a 10th consecutive ECB rate rise as the euro extended its fall against the dollar to slide 0.5 per cent. The yield on Germany’s rate-sensitive two-year bond was down 5 basis points at 3.03 per cent. Bond yields fall as their prices rise.As the ECB nears the end of its rate-rising cycle, markets have become increasingly sensitive to small shifts in economic data, highlighting how close the September decision is likely to be.The latest figures mean inflation has remained above the ECB’s target for 26 consecutive months and is not below that level in any of the eurozone’s 20 member countries.In an effort to slow economic activity and cool price pressures, the ECB has increased its benchmark deposit rate from minus 0.5 per cent to 3.75 per cent since the middle of last year. But it has left the door open to a potential pause at its next meeting, with some policymakers arguing it risks driving the economy into an unnecessarily painful recession.Isabel Schnabel, an ECB executive board member, said in a speech earlier on Thursday that recent data “point to growth prospects being weaker than foreseen” by the central bank’s bullish June forecasts, while adding the eurozone “may not be on the brink of a deep or prolonged recession”. The ECB had predicted growth of 0.9 per cent this year — a more optimistic forecast than most economists. Until recently one of the more “hawkish” ECB board members advocating further increases in borrowing costs, Schnabel also acknowledged there was “a risk” that the effects of its earlier rate rises would feed through “more forcefully” in the coming quarters.

But she also said a recent decline in overnight borrowing rates adjusted for inflation back to levels last seen in February could “counteract” efforts to reduce price pressures. Inflation in the eurozone has fallen more slowly than in the US, where it was 3.2 per cent in July, but faster than in the UK, where the latest reading was 6.8 per cent. Energy prices dropped 3.3 per cent in the year to August, a more modest decline than in the previous two months. This offset falls in food, alcohol and tobacco inflation to 9.8 per cent and in industrial goods inflation to 4.8 per cent. Services inflation dipped from last month’s record high to 5.5 per cent.Separate data from Eurostat showed the number of unemployed people in the eurozone rose 73,000 in July from June, but the jobless rate remained at a record low of 6.4 per cent.Adding to the signs of weakening economic activity, German retail sales were down more than expected in July, falling 0.8 per cent from the previous month, according to the federal statistical agency.  More

(Reuters) – Even a robot invasion can’t beat a slowing economy.Companies in North America sharply cut orders for the high-tech machines in the second quarter, according to data compiled by the Association for Advancing Automation, an industry group.The slowdown in orders began at the end of last year, as rising interest rates and sagging economic growth curbed appetites for new robots, the group, also known as A3, said.”We wouldn’t even consider buying a robot right now,” said Nancy Kleitsch, chief financial officer of ICON Injection Molding, a maker of plastic components in Phoenix.Like many producers, ICON’s business shot up during the COVID-19 pandemic, including demand for its plastic tubes used in pandemic testing. But demand for the tubes and other parts of the company’s business have now slumped to levels not seen in at least seven years, Kleitsch said.INFLATION, GROWTH WORRIESMany other companies appear to share ICON’s hesitation on robots. Factories and other industrial users, including e-commerce warehouses and medical testing companies, ordered 7,697 robots in the second quarter, a 37% decline from a year ago. That followed a 21% drop in the first quarter and 22% decline in the fourth quarter of last year.Robot sales boomed through the pandemic, as producers scrambled to use the machines to churn out badly needed goods. Indeed, even with the slowdown that hit late last year, 2022 marked a record year for orders, according to A3.But robots are just one type of equipment companies need, and other gauges of spending have held up somewhat better in the U.S. economy. Orders for non-defense capital goods excluding aircraft – closely watched by economists to track trends in business spending – rose 0.1% last month, according to the Commerce Department, suggesting that investments in a wide array of equipment could continue to grow after rebounding in the second quarter.”It’s not that we’ve soured on automating,” Jeff Burnstein, president of A3, said in an interview with Reuters. “But when people are worried about inflation and the economy, it puts a damper on everything – they hold off.”Some industries appear to have over-invested in robots during the recent boom. E-commerce companies, for instance, rushed to build highly automated warehouses in anticipation of continued torrid growth in demand for goods. It hasn’t. Another problem, said Burnstein, were companies that ordered too many robots as they feared supply-chain delays.”They were worried they wouldn’t get what they needed, so they overbought,” he said. Burnstein added that A3 expects the softness in robot orders to continue until the fourth quarter or early next year.WIDENING USESOne factor that helped drive robot sales over the past few years was a tight labor market. The unemployment rate in July – at 3.5% – was near levels last seen more than 50 years ago. But worker shortages are easing. Another gauge measuring U.S. job openings dropped to the lowest level in nearly 2-1/2 years in July as the labor market slowed, the Labor Department said on Tuesday.Meanwhile, robots continue to worm their way into an ever-wider variety of jobs. In the past, they were concentrated in auto factories and their suppliers, which still make up a large share of all robot orders. But the A3 data shows that in recent years robots have spread to everything from construction sites – where they are now used to do tasks like laying down lines on floors to guide crews on where to install walls – to hospitals and food-processing plants.Aaron Anderson, director of innovation at Swinerton, a large construction company based in Concord, California, said his company has started using a robot that drills holes in concrete ceilings, opening the way for plumbing other mechanical systems to be installed by workers.But Anderson said it’s difficult to justify the cost of buying one of the machines. Since construction projects vary in size and complexity, he said, there are spells when the robot isn’t needed at all.Swinerton’s answer: It leases the machine instead, which costs far less. More

The ECB has raised rates at every meeting over the past 13 months but policymakers are now contemplating a pause given a deterioration of the economic growth outlook and the risk of a recession. Still, Holzmann, an outspoken conservative, said that he has not yet seen enough evidence for a pause and he’s leaning towards a hike, even if he has not yet made up his mind.”I have not made up a decision because I don’t have all the data, but I would not exclude that I would go for a hike,” he told the Reuters Global Markets Forum. “We are not yet at the highest level (for rates); it could be that we do another hike or two.”The ECB will next meet on Sept. 14. Markets are increasingly betting on a pause but still see another hike, the last in the cycle, later this year.If the ECB’s deposit rate, now at 3.75%, moved higher this year, then rate cuts could also come quicker, already next year, Holzmann argued.”If we were to move this year to above 4% … and inflation comes down, then we could be able, perhaps to change it already to lower rates in 2024. If that’s not the case, we’ll have to wait for 2025.”The big issue is that inflation remains elevated. Data showed overall price growth steady at 5.3% in August, confounding expectations for a drop. This shows that price growth is persistent, fuelled by an exceptionally tight labour market, Holzmann said.Holzmann also said that the ECB should soon discuss ending reinvestments in its 1.7 trillion-euro ($1.85 trillion) Pandemic Emergency Purchase Programmed earlier than the 2024 deadline.($1 = 0.9198 euros) More