Aurelia Butler

More than $1bn of EU exports targeted by sanctions have disappeared in transit to Russia’s economic partners, a flow of “ghost trade” that western officials believe has helped sustain Vladimir Putin’s wartime economy.Public data analysed by the Financial Times found that only about half of a $2bn sample of controlled “dual use” items shipped from the EU actually reached their stated destinations in Kazakhstan, Kyrgyzstan and Armenia. These goods, which are deemed by the EU to have potential uses for military or intelligence services and are subject to export controls, may have entered Russia directly from the EU under the pretence that they were only passing through. A disproportionate share of the ghost exports, which never reached their official destination, left the EU from Baltic countries bordering Russia and Belarus.The items were dispatched in 2022 after Russia’s full-scale invasion of Ukraine, when sensitive EU trade with Kazakhstan, Kyrgyzstan and Armenia — three ex-Soviet states now in an economic union with Russia — surged to unprecedented levels. The mismatch in records suggests Russia has sidestepped sweeping sanctions by middlemen, agents or suppliers putting fake destinations on EU customs declarations. The technique has helped Moscow maintain access to crucial European products, including aircraft components, optical equipment and gas turbines. “Where else could it go?” asked Erki Kodar, Estonian minister for sanctions. “Why would those countries suddenly need those goods at this time? Who needs those goods the most in the region? It’s obviously Russia.”

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For some specific categories of goods — including gas turbines, soldering irons and radio broadcast equipment — almost none of the items sent from the EU appear to have reached their purported destinations, according to import data.This missing trade underlines the complexity of efforts to close off Russia’s access to sensitive goods, even when the items are subject to concerted restrictions by G7 nations. “Some discrepancies in global trade mirror stats are not unusual, but this is beyond your typical minor errors,” said Elina Ribakova, a senior fellow at the Peterson Institute for International Economics.“It took almost a decade and many multibillion-dollar fines for the financial sector to start paying attention to sanctions. Why would companies be any different with export controls?” Western efforts to tighten sanctions have largely focused on loopholes around re-export, where goods reach Russia via a third country. FT analysis suggests the ghost trade, where items go missing in transit and never arrive at their destination, has potentially also been a big economic crutch for Russia.In February, the EU banned dual-use goods from transiting through Russia, meaning they cannot enter Russia directly from the EU, even if ultimately destined for another country.But officials in Baltic states fear the ban remains insufficient to stem the flow and are trying to stop the smuggling at a national level. Lithuania has pushed for tighter restrictions on a broader range of dual-use and sensitive goods, in particular advanced technology and aviation parts, and wants to stop banned goods being sent to Russia’s ally Belarus. Ministers have also began looking at national measures to stop some items from leaving Lithuania. Gabrielius Landsbergis, Lithuania’s foreign minister, said the EU would need a lot of “political will” to adopt the measures necessary to enforce the sanctions regime against non-compliant countries or companies. “We are ready to take national steps to make sure sensitive technologies do not appear in the battle field,” he said.The Estonians have also backed a complete ban on transit for items leaving the EU, covering not just dual-use goods, but also other categories of goods subject to sanctions and restrictions. “The question is whether it’s better to have a full ban on transit — with humanitarian exceptions. It’s easier to implement a full ban than an open-ended list that keeps growing,” Kodar added.The true figure for Russia’s likely ghost import flow is significantly higher, since the $1bn only relates to a sample of restricted goods that the FT was able to match to international trade flows data.

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Taking all EU trade together in the year after the war in Ukraine started, the gap between the EU and Kazakh statistics implies that $2.9bn of trade has gone missing between the two countries. In 2021, the last complete calendar year before the full-scale invasion of Ukraine, the equivalent figure was $450mn. The FT’s analysis also confirms that items subject to restrictions are much more likely to have become ghost exports than other items.Heli Simola, a senior economist at the Bank of Finland Institute for Emerging Economies, said: “This mirror data [matching export and import records] is never identical, but the discrepancies and the sudden surge tells you something is in there. There are real exports to Kazakhstan. But in some cases it is clear that it is sanctions evasion.”None of the data is complete. Kyrgyzstan has only published trade data up to October 2022. The bulk of the data from other countries only runs up to December. The figures cited by the FT do not include the separate, large flow of goods that do appear to arrive in Kazakhstan and are then re-exported to Russia. The surge in export-controlled goods from the EU with Kazakhstan listed as the destination is now enough to make up for about 40 per cent of the decline in exports to Russia and Belarus after the imposition of sanctions at the start of the war.

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The data hints at possible long-term problems with the abuse of transit rules. Russia has been subject to sanctions since it first seized Ukrainian territory in 2014, creating an incentive for the country to use the transit exemption to skirt the rules.In the 13 months leading up to the war, Lithuania reported sending $28mn of statistically trackable dual-use goods to Kazakhstan, while the Kazakhs reported receiving only $9mn worth.The 2022 full-scale invasion has significantly increased the size of the flows — and the import gap. In the 13 months after the war began, Lithuania’s data shows it sent $84mn of such goods to Kazakhstan, which reported receiving just $11mn worth, meaning stated exports to the country rose by $56mn over the period, but stated imports increased by just $2mn.The Kazakh government has recently taken measures against re-exporting goods to Russia. “As a matter of principle, we as a government have not joined the sanctions, yet we are doing our best to protect our economy from [their] unintended knock-on consequences,” said a senior Kazakh official.“That means we are taking measures to prevent the use of our territory for the circumvention of these sanctions. And we maintain regular and frank dialogue with our partners on that.” More

Today’s top storiesUS inflation was slightly weaker than forecast in April in a sign that the Federal Reserve’s programme of interest rate rises was taking effect. CPI dipped to an annual rate of 4.9 per cent, its lowest level since April 2021, while core inflation, which strips out volatile energy and food prices, dropped slightly to 5.5 per cent.Ryanair won a European court case against the EU’s decision to grant Lufthansa billions in state aid to help the German carrier during the pandemic in a setback for regulators in Brussels. Binance, the world’s largest cryptocurrency exchange, said a crackdown on crypto had made it “very difficult” to do business in the US, adding it now hopes to be regulated in the UK.For up-to-the-minute news updates, visit our live blogGood evening.“It is little exaggeration to say the future of economic globalisation is at risk.”That’s the view of the FT’s editorial board on the intensifying crackdown on US consultancies operating in China, making it more difficult than ever for foreign investors to glean even basic information on potential acquisitions, Chinese partners or suppliers.China on Monday said state security services had raided the offices of Capvision in Shanghai, Beijing, Suzhou and Shenzhen, broadcasting the action on primetime TV. It follows raids on Mintz and Bain & Company.The US Chamber of Commerce warned that Chinese scrutiny of American companies had risen “dramatically”, particularly after a new counter-espionage law widened the scope of material that could be deemed sensitive for national security reasons, prompting visits from the “men in black”. The clampdown threatens to undo the recent charm offensive by Li Qiang, China’s second-ranked leader after President Xi Jinping, to woo back foreign investors as it seeks to restart growth after a long period of pandemic disruption.Ker Gibbs, former president of the American Chamber of Commerce in Shanghai, said it was “sending chills to the whole [foreign business] community . . . The lawyers and the due diligence people are like swamp guides. If you don’t have a swamp guide you are not going into the swamp.”China is also caught up in a tit-for-tat diplomat expulsion row with Canada, which has ramped up measures to curb China’s development of advanced semiconductor technology.In addition, China’s relations with the EU are under pressure over Beijing’s support for Russia. Beijing yesterday said it would retaliate if Brussels went ahead with sanctions on eight Chinese companies accused of selling equipment that could be used in weapons. The proposed new measures, seen by the FT, are being discussed by EU member states this week. It may be that, as China’s domestic companies improve and expand, (exemplified by the rapid rise of the country’s motor industry), investment from western multinationals is becoming less essential, the FT notes. However, it is these companies that have pleaded the case for continued engagement with China in the face of increasingly hostile domestic political opposition. If Beijing does not act swiftly to assuage their concerns, the FT concludes, “the result could be a fundamental breach between China and the multinationals that have long been its biggest supporters in the west”.Need to know: UK and Europe economyUK manufacturers urged ministers to stop “flip-flopping” and come up with an effective industrial strategy. The head of trade body Make UK said the country was the only major economy not to have one.Recent more encouraging data on the UK economy has, however, led to a revival in the strength of sterling. Interest rates could hit their highest level since 2008 when the Bank of England makes its decision tomorrow. Here’s our explainer on the latest thinking.Turkish president Recep Tayyip Erdoğan gave 700,000 public sector workers a 45 per cent pay rise just days before this weekend’s hotly contested election. Our Big Read has all you need to know on the battle between Erdoğan and his main challenger Kemal Kılıçdaroğlu. The latest target for western sanctions on Russia is its lucrative diamond business. Our Big Read examines how G7 plans for an inspections regime could risk destabilising the global market.Need to know: Global economyUS president Joe Biden failed to reach a breakthrough with Republicans to avert a crisis over the debt ceiling after a meeting yesterday. The issue is likely to dominate US politics and could shake up global financial markets over the coming weeks.China’s imports fell in April, casting doubt over the pace of the country’s economic bounceback. Western companies said they had overestimated how quickly China would recover. Indonesia has overtaken Australia and the Philippines to become the world’s second-largest supplier of cobalt, a battery metal, after the Democratic Republic of Congo. Many operations are being driven by joint ventures of Chinese companies and local groups, fuelling western anxieties about Beijing’s dominance of the electric car supply chain. The market for lithium, another battery component, is also booming. Allkem, one of Australia’s largest lithium companies, is to merge with US rival Livent in a $10.6bn deal.Latin America has abundant and cheap renewable energy, is one of the world’s biggest food exporters, is at peace, and is well placed to profit from the US shifting production from China. Yet the region’s leaders are squandering its opportunities, argues LatAm editor Michael Stott. Ecuador’s president Guillermo Lasso faces an impeachment trial related to contracts with state oil transport company Flopec.Chief economics commentator Martin Wolf analyses the threats and promises of artificial intelligence and in particular its effect on work and productivity. Need to know: BusinessDespite the dramatic headlines of the past few months, profits in the US banking sector hit an all-time high of $80bn in the first quarter, an increase of 33 per cent on last year, as institutions benefited from rising interest rates, low loan defaults and an expanding job market. Former regulator Sheila Bair says Congress needs to protect smaller banks from investor nerves.ChangXin Memory Technologies, a Chinese chipmaker, is going ahead with a listing in Shanghai to fund its expansion after receiving confirmation from US chip toolmakers that they can supply its new production lines. Glencore, one of the world’s largest diversified natural resources groups, plans to build Europe’s biggest battery recycling plant.Dividends at Britain’s privatised water companies surged to £1.4bn in 2022, according to FT analysis, despite rising household bills and public criticism over sewage outflows. The opposition Labour party said it planned a new regulator for England and Wales if it won the next general election.A new global task force, in conjunction with Interpol and Europol, aims to crack down on sport streaming piracy that is costing the broadcast industry $28bn a year.The World of WorkThe debate over whether the UK is losing its top talent — and falling further behind New York as the home of the world’s top companies — has intensified in recent months. Does it pay for British executives to move to the US?The Generation Z cohort of young lawyers — those born between 1995 and 2012 — are increasingly shunning the biggest global law firms for their lack of work-life balance and clashes with their personal ethics, according to a new survey.The latest Working It podcast discusses the changing nature of recruitment and why employers now believe skills matter more than your degree.LinkedIn is closing down its Chinese version, becoming the latest western company to shut services in China amid increased competition and a tightening regulatory environment. Hybrid work has improved working lives for many, not just the elite, argues columnist Sarah O’Connor, and that is progress we shouldn’t throw away. Hybrid work is also fuelling demand for female networks.Some good newsThe World Health Organization said a new solution to manage post-partum bleeding could be a major breakthrough in reducing maternal deaths. The problem affects an estimated 14mn women each year with around 70,000 deaths — mostly in low and middle-income countries — or one death every six minutes. More

A thing, via Bloomberg:The BRICS group of nations will discuss the feasibility of introducing a common currency and shouldn’t rush any decision, according to South Africa’s foreign minister.In a new instalment in the endlessly running “Is the dollar dying?” debate, the five geopolitically, ethnically and economically diverse nations that make up the BRICS block — Brazil, Russia, India, China and South Africa — are likely to discuss the matter at a late-August summit in Johannesburg.If you’re lucky enough to have had the recent discourse pass you by, Capital Economics has a good tl;dr summary of the situation (their emphasis):— The importance of the dollar gives the US enormous power over global trade and financial flows. Increasingly it has been wielding that power. Most starkly, the US imposed heavy financial sanctions on Russia in the wake of the war in Ukraine. In doing so, it exposed how much other economies’ international transactions are dependent on the mercy of Washington.— That has spurred a new push, particularly by geopolitical adversaries of the US, to push back against the hegemony of the dollar. One idea that has surfaced in some quarters is the creation of a new currency by the BRICS (Brazil, Russia, India, China, South Africa). Perhaps unsurprisingly, the most vocal advocates have been Russian, with backers including President Vladimir Putin and Foreign Minister Sergei Lavrov. But Brazil’s President Lula has also recently voiced his support.They also have a good tl;dr of how utterly vibes-based the current discourse is:It’s not clear what these policymakers have in mind when talking about a BRICS currency. It may even be that they are referring to different things.Capital’s Mark Williams and Shilan Shah laid out a couple of ways this ethereal BRICcoin could become more solid:1) A monetary union between the BRICS countries, creating a bloc similar to the eurozone.2) A reserve asset based on the BRICS’ currency modelled on the IMF’s special drawing rights. CapEcon: “One way this could work would be for each country’s central bank to be issued “BRICS currency” assets constituting a claim on the other central banks. For each central bank, the value of their new asset would be matched by the value of the liability formed by the other central banks’ claims.”They also laid out several big reasons it would absolutely not work…— India is almost certainly absolutely definitely not going to turn its back on the US to side with China. India and China do not get along super well!— Trade between the members is severely imbalanced, with India and South Africa both running long-term deficits with the other members— Introducing an entire new system and market to replace the dollar in International transactions is substantial more difficult than, you know, just continuing to use the dollar

. . . concluding:In sum, a BRICS currency wouldn’t solve any of the problems that make moving away from the dollar hard, and in some ways would make those problems worse.Bank of America has taken a similar “DollarDefender44 has logged into the chat” approach.In a long note released last week, analysts said reports of USD replacement are “greatly exaggerated” — pointing to a lack of credible alternatives, the greenback’s continued dominance in financing, and the unsteady progress of the renminbi and euro.

Death-of-dollar advocates of course, will point to many examples in history where things appeared had no alternative until, suddenly, a very much superior alternative arrived. Could BRICcoin be that thing?Focusing on Brazilian president Lula’s call for a dollar replacement, the BofA gang write:It would take time and would need co-operation at multiple levels among countries that are not always able to co-operate very well with each other. It is not at all obvious which currency President Lula was suggesting using instead of the USD. It is also not clear whether, how and when other countries could follow such initiative. We note that back in 2009 there were reports that some major oil producers were planning to start trading oil in non-USD currencies, which of course has yet to happen…We would not necessarily completely dismiss the possibility, but we don’t see it as a threat to the USD for now. It is not clear to us that President Lula’s call will be followed any time soon with specific action. Even if it does, it will take considerable time and will involve difficult decisions in our view, unless they go with the RMB right away. And even in this case, it is far from clear whether other countries will follow, eventually replacing the USD.To our eyes, there’s actually a fair bit of wriggle room baked into that analysis, but it’s hardly a glowing endorsement of a mooted dollar-slayer.Another obvious response to all this might be… why BRICS? Sure, the five countries’ relations have a degree of structure already via regular summits since 2008, but, really? They’ve got more beef than Brazil (boo — ed). And South Africa — a late entrant to the group, which was simply BRIC when Lord Jim O’Neill coined the acronym in 2001 — looks increasingly like an economic basket case. (O’Neill has expressed apparent scepticism over South Africa’s inclusion, indicating in a recent paper that other countries had a better claim at the spot).From this perspective, the BRICS countries hardly seem like the starting point from which to launch a dollar rival.O’Neill’s perspective is of course interesting. Writing in Project Syndicate last month, he said:The eclipse of the dollar would not necessarily be a bad thing for the US, given all the added responsibilities that come with issuing the world’s main reserve currency…But the fact that a US-excluding group of emerging powers has higher aspirations for itself does not necessarily mean anything for the US-centered financial system.And pointing the impact the inclusion of Saudi Arabia or Iran could have, he added:[This] increases the likelihood of some oil being priced in currencies other than the dollar. But unless edging out the dollar is an explicit, genuinely shared, and deeply held goal, such invoicing changes will be exciting only to niche financial writers. I have lost count of the times I have heard arguments about why oil could soon be priced in a new currency. First it was going to be the Deutsche mark, then the yen, then the euro. It’s still the dollar.Can the BRICS make it work? Will they even try? To our eyes, the answer to both is no, but then we’re a desperately cynical financial blog. Maybe Lula knows better.Further reading— Dollar :-(— Dollar 🙂 More

The writer is a former prime minister and foreign minister of FinlandThree days into the war in Ukraine I sent a text message to Sergei Lavrov, Russian foreign minister. I asked him to “please, please stop this madness. You are the only one who can stop him”. I received a response within a minute: “Whom? Zelenskyy? Biden?” I tried again. The answer was straight from Vladimir Putin’s playbook, blaming the west and following the official line, “denazification” and all. That was when I realised that the liberal world order was under serious attack. There are moments in history when an old order dies, and a new one is yet to be born — 2022 was one of them. There are many events that could plausibly be interpreted as marking the end of the post-cold War era: 9/11 and the war in Iraq; the financial crisis; or the Russian annexation of Crimea. But Russia’s full-scale attack on Ukraine in 2022 was something else. It seemed to force the rest of the world to take sides. There is a general misconception in the west that the world is united in its support for Ukraine. It is not. One might take comfort in the fact that over 140 of the UN’s 193 members condemn Russia. But the 35 that abstained represent over half of the world’s population. More significantly, only around 40 countries, mostly western, have placed sanctions on Russia. Only two from Asia have done so, and none from either Africa or Latin America. Russia might be isolated from the west, but not from the rest. The new world order will be determined by a triangle of power oscillating between the global west, the global east and the global south. The global west — essentially the US, EU and their allies, roughly 50 countries — wants to preserve the existing liberal order.At the other extreme, the global east — China, Russia, Iran and around 20 countries that support them — wants to ditch the liberal order and create new rules and institutions which are less about sharing sovereignty and more about traditional state power and transaction.The global south — led by the likes of India, Saudi Arabia, South Africa, Nigeria and Brazil — comprises 125 states, from across Asia, Africa and Latin America. For many of these countries the war in Ukraine is less about hegemony and more about food security, energy and inflation. The global south does not necessarily want to take sides for the time being. Sitting on the fence is one way of achieving its goals and shaping the emerging order. The global west is mistaken in framing the new order as a battle between democracies and autocracies. The situation is much more complex than that. For the global east it is about power and managed dependencies. For the global south it is about agency, representation and economic growth and development.If the global west wants to maintain the remnants of a liberal world order, it will have to start conducting a more dignified foreign policy. This does not mean sacrificing values on the altar of interests. It means listening and engaging rather than preaching and moralising. The global east has been better at the game of persuasion. Despite its expansionism, Russia does not have the burden of a colonial past, at least in Latin America and Africa. China has skilfully created dependencies in finance, infrastructure and raw materials since the end of the cold war, becoming in the process the biggest trading partner for 120 countries.The world is once again facing a choice. Will it be able to end the war and find a new system of co-operation? Or will big power competition lead to further escalation or even conflict on a global scale? Perhaps the choice is not binary. As always, at stake will be a mix of values, interests and power. My prediction is that we will see the creation of multiple regional orders and overlapping alliances. No single power will dominate. And while their values and political systems are different, they all need to solve problems, some of them unique, some shared. This decade is likely to frame the world order for the rest of the century. As in 1919 with the botched creation of the League of Nations, 1945 and the establishment of the UN and 1989, when many of us believed the rest of the world would eventually accept the three pillars of a successful society (liberal democracy, the market economy and openness to globalisation), we can get it wrong, right or somewhere in between. We must avoid the mistakes of 1919, learn from the balance of power established in 1945 and make the liberal order of 1989 universally appealing. More

Compass has emerged as a rare winner from the highest UK food price inflation in almost half a century, as businesses turn to the world’s largest catering group to help keep a lid on the cost of feeding their workforces.Chief executive Dominic Blakemore said the high level of inflation had helped drive new business in the first half of the company’s financial year, when operating profits jumped by just over 40 per cent.The FTSE 100 company, which provides food for work canteens across 40 countries, said 45 per cent of its new clients in the six months that ended in March were outsourcing for the first time.“Inflation is good because it makes us an attractive partner,” said Blakemore. “We think that our ability to manage food inflation is really critical. Typically someone outsourcing for the first time would see a 25 to 30 per cent reduction in food costs because of the capability we bring” due to Compass’s ability to purchase at scale.While food prices have been rising across major economies, the UK has been hit particularly hard. Overall food prices jumped 19.2 per cent in March from a year earlier.“We are going to see food costs inflation some way above the long-run average for a while to come,” Blakemore said. “Will it be 20 per cent [like today]? No. Could it be high single-digit or low double-digit? Possibly . . . I think it would certainly apply to the rest of 2023.” In the six months to the end of March, revenues at Compass climbed by almost a quarter to £15.8bn. Its operating profits hit £1.1bn, up 41 per cent from a year earlier, with operating margins edging up to 6.6 per cent.Compass said it expected operating profit growth for the full year of “towards 30 per cent”, up from a previous forecast of “above 20 per cent”. It also raised its forecast for revenue growth to about 18 per cent, up from roughly 15 per cent.After suffering when pandemic lockdowns kept workers at home, Compass continued to benefit as people returned to the office.Shares in the group were up 1.8 per cent in early afternoon trading on Wednesday, taking their gain for the past 12 months to 33 per cent. More