Aurelia Butler

China has urged poorer countries to oppose a levy on shipping emissions and stronger targets for decarbonising one of the world’s most polluting industries, criticising wealthy nations for setting “unrealistic” goals with “significant” financial costs.Beijing distributed a “diplomatic note” to developing nations as they prepared for a critical meeting at the UN’s International Maritime Organization in July, according to four people present at IMO discussions. The lobbying effort comes days after France rallied 22 allies behind a shipping emissions levy.China warned that “an overly ambitious emission reduction target will seriously impede the sustainable development of international shipping, significantly increase the cost of the supply chain and will adversely impede the recovery of the global economy”, according to a document seen by the Financial Times.It added: “Developed countries are pushing the IMO to reach unrealistic visions and levels of ambition. [They are advocating] a flat [levy that] will lead to a significant increase in maritime transport costs.” Wealthy nations have not agreed a price for the emissions levy.The efforts by China, the world’s biggest exporter which also has a large state-owned shipping industry, have deepened concerns over a lack of progress on decarbonising a fuel-intensive sector that delivers up to 90 per cent of traded goods globally, according to the OECD. By the end of next week the IMO has committed to strengthening its ambition, which has long been criticised by environmental campaigners as weak, to halve annual shipping emissions from their 2008 levels by 2050. But participants in the talks at the IMO this week said China had helped to rally countries in closed-door negotiations that had become deeply divided between developed and developing member states.Brazil, Argentina and South Africa have also opposed a levy on shipping companies’ emissions, which they fear would increase the cost of exports for their large commodities markets, according to two people close to the discussions. Poorer countries are not united in opposition. The Marshall Islands, which are particularly exposed to rising sea levels as a result of climate change, have called for a $100-a-tonne emissions levy. Albon Ishoda, the country’s ambassador to the IMO, expressed concerns that the level of “polarisation has become unhelpful”, with some in the private discussions not living up to their national commitments on decarbonisation.He added it was ironic that some developing countries had complained that a shipping emissions levy would increase their financial burden while at the same time calling for any money generated by this measure not to be invested outside the shipping industry.According to the note seen by the FT, China called for any revenues generated by IMO regulations to be invested “in-sector”, arguing that wider use of these funds would transfer “the climate change financing responsibility from developed countries to . . . international shipping”.It opposed setting 2050 as the final year to achieve net zero emissions, instead backing a broader goal of “net zero GHG emissions from international shipping around mid-century”. It said a shipping emissions levy was “a disguised way by developed countries to improve their own market competitiveness”.

President Xi Jinping has promised to cut China’s net carbon dioxide emissions to nearly zero by 2060. Beijing’s State Council Information Office did not respond to emailed questions on Saturday.The diplomatic note echoes comments by Premier Li Qiang, who argued at a World Economic Forum event last week: “It is unfair for developing countries to go by the standards of developed countries. Developed countries should shoulder more responsibilities in meeting the climate challenge.”At a summit in Paris during the same week, France and other wealthy countries called for the IMO to set targets that would align shipping with international ambitions to limit global warming to 1.5C above pre-industrial levels. The EU already plans to impose a financial cost on shipping pollution by introducing the sector into its emissions trading scheme.China’s warnings about the effects of such measures were last week countered by the World Bank, a lender to developing countries. It argued in a blog post that allowing wider use of any revenues from an emissions levy would support poorer countries which have little opportunity to invest in the shipping sector directly.Additional reporting by Cheng Leng, Thomas Hale and Edward White More

“The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” Ivascyn told the FT, noting that when rates have risen in the past, a lag of five or six quarters for the impact to be felt has been “the norm”.The market is “too confident in the quality of central bank decisions”, he told the FT. More

The world’s largest active bond fund manager says markets are too optimistic about central banks’ ability to dodge a recession as they battle inflation in the US and Europe. Daniel Ivascyn, chief investment officer at Pimco, which manages $1.8tn of assets, said he was preparing for a “harder landing” than other investors while top central bank chiefs prepare to continue their campaign of interest rate rises. “The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” Ivascyn said in an interview with the Financial Times.He noted that when rates have risen in the past, a lag of five or six quarters for the impact to be felt has been “the norm”. “We would argue that the market may still be too confident in the quality of central bank decisions and their ability to engineer positive outcomes,” he said. “We think the market is a bit too optimistic about central banks’ ability to cut policy rates as quickly as the yield curves are implying.”The US Federal Reserve, the European Central Bank and the Bank of England have all been rapidly raising rates after criticism that they had been too slow to react as inflation gathered pace. At a conference in Sintra, Portugal, this week, the heads of all three indicated more action is likely to be needed while inflationary pressures persist. On Friday, the Nasdaq Composite stock market index recorded its strongest first half of the year in 40 years, in part on expectations that US interest rates would soon peak.But core inflation, which is used as a gauge of underlying price pressure because it strips out volatile food and energy prices, has hovered around 5 per cent in the US and eurozone in recent months, while surging as high as 7.1 per cent in the UK for the year to May.Ivascyn said: “Today we have a real legitimate inflation problem. It will likely be harder for central banks to cut policy even if the economy is weakening as long as inflation is comfortably above their [2 per cent] targets.” Pimco, which is owned by German insurer Allianz, is repositioning funds to be “more defensive and more liquid” as it draws back investors following a terrible year for bond funds in 2022.The California-based manager suffered €75bn of outflows last year, but Ivascyn said flows had “materially improved” as investors grab the higher yields now on offer. Pimco has attracted €14bn of assets in the first quarter of this year, Allianz has reported. While Pimco thinks a “soft landing” is the most likely outcome for the US economy, Ivascyn said the group is avoiding areas of the market that would be most vulnerable in a recession.Favouring high-quality government and corporate bonds for now, he is waiting for company credit ratings to be downgraded, which he said will prompt forced selling among vehicles such as collateralised loan obligations in the coming months and years. That will be the time to snap up bargains, he said.“A great trade will be to take advantage of the violent repricing of the public markets and then wait for private markets to adjust over the next few years and then rotate into what should be a really attractive opportunity,” he said.“Hold some cash because we think the next two, three years is going to be quite target rich for opportunities in the higher yielding space.” However, he cautioned this cycle might be different to previous ones. Central banks may be less willing to provide support for fear of fuelling rising prices, while the fact that so much risk has been transferred to private markets would slow down the deterioration of credit valuations, but not prevent it.“This could be more of an old fashioned cycle that lingers for a few years with inflation high but policymakers don’t come to the rescue,” he said.

Pimco’s move to safer bonds is part of a wider industry shift towards higher quality fixed-income assets. The latest survey of fund managers by Bank of America showed investors were the most overweight in investment-grade bonds compared with their high-yield counterparts since 2008.Even for investors who do not think central banks will be able to bring inflation back down to target, Ivascyn said fixed income provided the best value we have seen for “many, many years”, with real inflation-adjusted yields in the US at levels not seen since the global financial crisis.“You can be defensive in terms of interest rate risk, inflation risk, credit risk and generate a very, very attractive return,” he said.“Which is different from saying ‘buy everything, it’s all going to be fine’.” More

For the past week, Belarusian president Alexander Lukashenko has revelled in being at the centre of events after he helped broker the truce that ended the Wagner militia’s mutiny against the Kremlin. State controlled media have gone out of their way to herald the achievement. “The peacemaker of Slavic civilisation,” said one Belarus news anchor: “The hero of Russia,” gushed a Russian TV analyst. The reality is a lot more prosaic. The deal, the importance of which was also played up by the Kremlin, “does not mean he’s a master negotiator, but he did benefit from the right place, right time,” says Rosemary Thomas, a former British ambassador to Belarus. But for now Lukashenko is “delighted to be seen as an indispensable actor on the world stage and sell this for all it’s worth”.The opportunity to pose as a mediator could not have come at a better time for Lukashenko. During his three decades in power, he has argued that he could combine loyalty to Moscow while also safeguarding his country’s sovereignty. Belarus, he insists, can be close to Russia without becoming completely dependent. But that claim has come to appear increasingly thin — especially to his domestic critics, who accuse him of being a puppet of Russian president Vladimir Putin. Lukashenko’s reliance on Moscow was underlined in 2020 when he had to ask Putin to help his brutal crackdown on pro-democracy demonstrators following his re-election. Sviatlana Tsikhanouskaya. the exiled Belarusian opposition leader, says that having Wagner mercenaries in Belarus threatens regional security and shows ‘the role of Belarus is growing’ © Ting Shen/BloombergPutin used Belarus as a launch pad for last year’s all-out attack on Ukraine and Lukashenko recently agreed to host Russian tactical nuclear missiles in the country. “Without Putin, Lukashenko will not survive,” says exiled opposition leader Sviatlana Tsikhanouskaya.The risk of outright dependency now hangs over the economy. Belarus has displayed unexpected resilience under tough western sanctions, but that has come as a result of assistance from Moscow, both direct and indirect. The economy is on track to grow this year by around 3.3 per cent — the same as in 2019, before the pandemic halted world trade — says Dzmitry Kruk, an economist at Beroc, a think-tank now based in Vilnius in Lithuania, which is home to a large Belarusian diaspora. As part of the bargain reached last week to call off the mutiny, Wagner boss Yevgeny Prigozhin has been allowed to take refuge in Belarus. The probable payback for Lukashenko’s role in the negotiations is that Putin will expand Russia’s financial lifeline to Belarus, estimated by Kruk to have already surpassed $3bn since last year, including a debt restructuring agreement. “I guess it’s a short-term success story in as far as there’s not been the deep recession that could have come after the war began,” Kruk says. “Lukashenko always seemed to understand that dependence on Russia was dangerous, but he has now chosen this as the lesser of two evils, although I really think Russia is as risky for him as democratic transition.”Finding replacement partsJust how heavily the Belarusian economy has had to lean on Russia is evident at Bobruiskagromash, the state-owned maker of agricultural machinery.The company used to import the vacuum pumps it uses in its tractor trailers from Battioni Pagani in Italy, until they got caught up in the EU’s ban on exports that could potentially be used by the military against Ukraine. Now, says marketing director Vladimir Daineko, Bobruiskagromash uses pumps made in Russia.“After last year’s sanctions, it took us six to 10 months to work out how to replace all the parts that we need, but we’ve managed,” says Daineko. “What doesn’t kill you makes you stronger.” Vladimir Daineko of Bobruiskagromash says that sanctions forced his company to turn to Russia for the parts it needed. ‘We’ve managed,’ he says. ‘What doesn’t kill you makes you stronger’ © Raphael Minder/FTThe unwavering support that Lukashenko has offered Putin during the war has only added to the country’s economic isolation. Western governments placed new sanctions on Belarus after denouncing Lukashenko’s 2020 re-election as fraudulent.The following year Minsk was slapped with further sanctions after forcing a Ryanair flight destined for Lithuania to land in Belarus in order to arrest an anti-Lukashenko activist on board, while more sanctions followed the invasion of Ukraine. The most recent sanctions have come from the UK, which in June banned imports from Belarus of commodities including rubber, wood and gold. But Bobruiskagromash is only one example of how the Belarus economy has been able to absorb the blow of sanctions.Belagromech, the state agricultural engineering centre, now makes copies of cylinders and alternators which were previously shipped from Ukraine. For the western parts that it still needs, “we’re using a lot more private sellers from Kazakhstan and Uzbekistan,” says Belagromech’s head engineer Vladimir Golomako. These intermediaries add 15 per cent to costs, he estimates, but price controls ensure that Belarusian manufacturers only pass on a 5 per cent price increase to buyers.

Moscow supplies Minsk with crude oil and gas on preferential terms. Minsk has stopped publishing detailed trade statistics, but Lev Lvovskiy, another Beroc economist, estimates Belarus earned $1.7bn last year from selling Russian oil, some through intermediaries in the United Arab Emirates. Lvovskiy’s research is based partly on comments from regional officials: “In my experience the regime keeps many secrets, but what is published or said is true.”Lukashenko has made a rhetorical virtue of the closer links with Russia, talking about a common fatherland that stretches from Brest — near the Belarus border with Poland — to Vladivostok. Imperial Russia has been reintroduced into accounts of Belarus’s history and the Belarusian Latin alphabet is being replaced with Russian-language text on street signs in Minsk. Lukashenko’s administration has become “a new driver of Russification,” according to the latest Belarus tracker study, sponsored by Germany’s Friedrich Ebert Foundation. Some officials in Minsk also wax lyrical about rebuilding an economic bloc resembling the Soviet Union, minus the Baltic states. Aliaksandr Yarashenka, a former deputy economics minister, recalls how his father moved the family from Ukraine to take part in the reconstruction of devastated Minsk after the second world war. “I then saw the Soviet Union, a huge country, getting destroyed, so I’ve seen much worse times than now,” he says. There has been a clear economic cost to Lukashenko’s tight embrace of Putin. At least 2,000 companies have left Belarus since he crushed demonstrations in 2020, according to the Association of Belarusian Business Abroad.

Many engineers joined this exodus, and those still in Minsk now worry either about getting drafted into the army or losing jobs tied to western customers. A software developer explains that his French client, telecom company Transatel, is increasingly employing Belarusians who resettled in Poland. “I could also work in Poland, but my life is here as long as I can keep my job,” he says. “Everything is just now more uncertain.” However, the IT sector is helping Russia’s military industrial complex, notably supplying semiconductors from an industry that once powered the Soviet Union’s Lunokhod moon rovers in the 1970s. Well after the Berlin Wall had fallen, Lukashenko kept the country’s semiconductor industry on a lifeline, as part of his promotion of a Soviet-modelled planned economy. “Like with other state-owned enterprises, Lukashenko kept making semiconductors whether there was demand or not, because it’s also his way to pay salaries to those who support him,” says Aliaksandr Alesin, a Minsk military analyst.Alesin says Moscow is investing $350mn in Belarusian semiconductor company Integral, as part of its latest subsidy programme. “Putin needs to win the war, but he also wants to make Belarus an example of successful and peaceful integration in order to draw more countries into union with Russia rather than China,” Alesin says. Counterbalancing RussiaLukashenko has made some efforts to counterbalance the economy’s reliance on Russia. The Belarus leader is trying to forge closer ties with China and other partners such as Iran, two nations he visited in March. But although China is building a new embassy in Minsk, its interest in Belarus is not comparable to Russia’s. When China’s president Xi Jinping visited Great Stone industrial park near Minsk in 2015, it was presented as a milestone in China’s Belt and Road infrastructure initiative. Instead, China’s Covid lockdown halted investments before Ukraine’s war then punctured Beijing’s hopes of making Belarus a gateway to the EU. A park designed to host 100,000 residents by 2030 has so far only got 3,500, according to Yarashenka, who is now Great Stone’s administrator.Presidents Alexander Lukashenko of Belarus and Ebrahim Raisi of Iran in Tehran in March. Lukashenko is trying to counterbalance his economy’s reliance on Russia by forging closer ties with Iran and China © WANA/ReutersStill, Great Stone says current occupants doubled income in the first quarter — again helped by Moscow, since more than 80 per cent of the China-sponsored park’s exports now go to Russia. “European brands left a lot of niches in Russia that we can fill, also more cheaply than if you transport from Turkey or other places,” says another Great Stone official, Kirill Koroteev.Great Stone lost Swiss bus maker Hess and German logistics company Duisburger Hafen, but Yarashenka warns against concluding that all westerners are leaving. “Some European companies don’t want to be known to be here because it could hurt them or mean more sanctions,” he says. At an agricultural trade show, some Belarusian companies displayed Chinese rather than Russian substitution equipment. TTZ, which sells drones, replaced its US supplier Trimble with China’s CHC Navigation. TTZ’s owner, who declined to be named, praises Trimble’s technology but says that “it took a lot of work to partner with Trimble, and I won’t try again even if sanctions stop”. But lack of access to western financial markets is also pushing companies towards Russia. Western international lenders stopped financing Belarus and the European Bank for Reconstruction and Development is trying to exit three Belarusian shareholdings, notably Alivaria, a brewer owned by Carlsberg. Minsk-based Priorbank recently stopped clients from getting money transfers from the west, amid pressure on the bank’s Austrian owner Raiffeisen to also abandon Russia. Great Stone industrial park in Minsk. More than 80% of the China-sponsored park’s exports now go to Russia © Getty ImagesStill, at least two local banks — Gazprom’s Belgazprombank and BSB — continue to facilitate western transfers and officials who attended a banking conference in Minsk presented growing financial integration inside the Commonwealth of Independent States and with neighbours such as Turkey as a buffer against sanctions, echoing a claim made by Moscow. More than half of international transfers in and out of Belarus have switched to “new currencies”, mostly Russian roubles and Chinese renminbi, says Nikolay Luzgin, chair of the association of Belarusian banks: “There were problems last year with international payments, but now it’s better.” Nurlan Baibosunov, a senior finance official in Kyrgyzstan, says post-Soviet nations have achieved a level of financial co-operation over the past year that would have required a decade without the pressure of sanctions.“I think sanctions are having a very good impact because western companies have left and our own companies can step in with our own systems, our software and local processes,” says Baibosunov. The very few western companies still manufacturing in Belarus have been caught between trying to comply with sanctions and the potential lure of the Russian market. At its factory outside Minsk, Swiss train maker Stadler cut its workforce to 200 from a peak of 1,600. Stadler relocated 300 workers to its Polish subsidiary, but most scrambled to join other companies, some helping Moscow’s war. Dmitry Logashin of Swiss train maker Stadler, which cut its Belarusian workforce to 200 from a peak of 1,600 after the war in Ukraine began © Raphael Minder/FT“Russia is on the military path, so there are new work opportunities for Belarusian civil engineers,” says Dmitry Logashin, head of project management at Stadler Minsk.Logashin compares the sanctions to “losing our arms and legs”, particularly after a bumper 2021, when his factory thrived while foreign competitors halted production during lockdowns to stop a pandemic that Lukashenko decided to ignore.Without western components such as cables since last year, Stadler halted some production. The train factory is finishing three orders — from Italy, Serbia and Azerbaijan — and then relying on a €2.3bn contract to make sleeper carriages for Kazakhstan. Stadler transferred some contracts to Poland, also because customers in Slovakia and Norway worried about a public backlash for ordering from Belarus. “The sanctions are our bible, we have a strong reputation to keep and we don’t want work from Russia, but that’s not the same for everybody here and many companies have turned to Russia,” says Logashin. Tougher sanctions?One objective of the sanctions was to punish Lukashenko for helping Putin. But with Minsk moving ever closer into Moscow’s orbit, there is a debate among western governments about what to do next. Tsikhanouskaya, the opposition leader, insists the west must toughen sanctions, as well as demand an immediate withdrawal of Russian troops from Belarus. Having Wagner mercenaries in Belarus also threatens regional security, she says, and shows “the role of Belarus is growing”. She also sounds dumbfounded by the west’s “non-clear response” to Lukashenko welcoming Russian nuclear warheads, as well as by how western officials recently discussed with her who might replace Lukashenko if he dies, following a health scare in May. “Democratic countries don’t have any specific plan for what they would do next,” she says.

Some European diplomats in Minsk understand her concerns. “We keep looking back at what went wrong in 2020 rather than preparing for the future, although we’re now much nearer to the parliamentary elections of 2024 and the next presidential ones of 2025,” says one. Despite this debate, a number of EU nations are also lobbying to soften a ban on potash, of which Belarus is a major exporter, which they believe could help contain global food price inflation. But Lithuania, which stopped Belarusian potash from entering its Klaipėda port, is leading the drive for stricter sanctions instead.Yauheni Preiherman, founder of the Minsk Dialogue think-tank, argues that sanctions policy does not have a clear purpose. “Western officials change their explanations about their goals,” he says, “but if the expectation is that sanctions can force Lukashenko to make concessions or turn 180 degrees, that’s a wish rather than the reality.” But Thomas, the former ambassador, argues Lukashenko is caught in “a vicious spiral”, trying to quash any opposition within a country that already has 1,500 political prisoners while “his position becomes less and less secure because of his illegitimacy”. In such a context, hosting trigger-happy Wagner troops also “seems mightily risky”, she argues. Whatever happens next, Lukashenko “will never be forgiven by his people for more or less selling away the sovereignty of Belarus.” More

The writer is chair of Rockefeller International“Resilience” is one of the buzzwords of the year. It’s used widely to describe the US economy, which continues to stave off recession and lift global growth, despite the sharpest interest rate rises in decades. But there is a more surprising tale of fortitude unfolding in the developing world.Among the 25 largest emerging economies, three-quarters of those reporting data have beaten growth forecasts this year — some, including India and Brazil, by a wide margin. Forecasts for global growth in 2023 are rising and most of that uplift is coming from emerging economies.Few analysts saw this revival coming. They expected emerging economies to be especially vulnerable to rising rates and that perception still rules, based on the weaknesses of China, weighed down by its heavy debts, and of a few smaller countries such as Ghana or Bolivia. But this picture excludes big developing nations outside China, from India to Mexico, which account for half the emerging world by economic output and more than half by population.True, rising interest rates did cause emerging world crises in the 1980s and 1990s, but many of the big emerging economies entered the pandemic of 2020 with repaired banking systems and heightened financial discipline. They borrowed less heavily for stimulus spending, and saw deficits rise on average by 15 per cent of gross domestic product from 2020 to 2022, half as much as the US. The old notion that “emerging” is another word for reckless no longer applies.Now, it is the American story that rests on questionable foundations. The US stock market is rallying again thanks in part to the boom in artificial intelligence, which like all manias is likely to prove part hype. Meanwhile, economic growth is kept alive by the billions of dollars in stimulus funds that still sit in US savings accounts, and by financial conditions that remain much looser than the Federal Reserve would like. Despite the scale of interest rate rises so far, the Fed says there is more to come before inflation is under control. By comparison, having moved earlier than the Fed to raise rates, central banks in the emerging world are closer to meeting their inflation targets — and cutting rates again. Normally inflation runs much hotter in emerging economies but, excluding outliers, the median rate is now running at 5 to 6 per cent — no higher than in developed economies. That has not happened in four decades. Some central banks in the developing world have started to cut rates and many others are likely to follow soon.Emerging economies are on track to grow faster than 4 per cent on average over the coming year, or four times faster than developed ones. Though developing economies typically grow faster than developed ones, that gap shrunk last decade and is now widening again. And money follows growth: foreign investment in the big emerging markets is on the rise. Their currencies have been strengthening against the dollar since late last year.While the fiscal deficit is on track to stay unusually high in the US through the 2020s, it is already heading down in most big emerging economies. As a result, the emerging world recovery could be more sustainable.Yet commentators keep warning of looming crises in the emerging world, as if nothing has changed. Back in the 1980s and early 90s, there were never fewer than 25 emerging nations in default, and that often included major ones such as Brazil and Turkey. Today there are just five, all small ones like Belarus and Zambia.Though the major emerging economies are generally in good financial shape, each has its own strengths. So far this year, much of Asia is rising on the back of strong domestic demand. In Latin America, the key driver is exports, particularly commodity exports, with prices holding up. Net exports are contributing 2 points to Latin American growth, and as much as 8 points in Chile — in part thanks to sales of metals used in electric vehicles.They are also “decoupling” from China. Emerging economies used to grow in lockstep with China, their leading trade partner, but that link has weakened in recent years. As Beijing turned inward, developed countries sought to reduce their dependence on trade with China, creating opportunities for other emerging economies.The developing world never fits neatly into one storyline. There are 155 emerging countries and if tightening financial conditions eventually does trigger a US recession, as many still expect, it will ripple outward and stir trouble in some of them. But to borrow that buzzword, their story so far is one of genuine “resilience”. More