Aurelia Butler

ZURICH (Reuters) – Four bankers who helped a close friend of Vladimir Putin move millions of francs through Swiss bank accounts have been convicted of failing to perform due diligence in financial transactions.The four were found guilty on Thursday of helping Sergey Roldugin, a concert cellist who has been dubbed “Putin’s wallet” by the Swiss government.The executives – three Russians and one Swiss – helped Roldugin, who is godfather to Putin’s eldest daughter Maria, deposit millions of francs in Swiss bank accounts between 2014 and 2016.The men, who cannot be identified under Swiss reporting restrictions, were found guilty at a hearing at Zurich District Court and were given fines totaling 741,000 Swiss francs ($809,040.29), suspended for two years.In Switzerland, banks are obliged to reject or terminate business relationships if there are doubts about the identity of the contracting party.A spokesman for Gazprombank, where the four executives worked, described the decision as a “black day,” adding the bankers would all appeal.The four executives helped Roldugin operate two bank accounts at Gazprombank in Zurich, through which millions of francs flowed, without conducting sufficient checks, the court heard.Judge Sebastian Aeppli said it was not possible to establish the real owner of the funds, but the bankers had failed in their duty to conduct due diligence and check.”It has been proven without doubt that Roldugin cannot be the beneficial owner,” Aeppli said. Gazprombank had asked Roldugin about the origins of the money in spring 2016, but did not receive an answer, the judge said. The bank eventually closed the accounts in September 2016.It was only in February 2022 that Roldugin said he was the owner, but still did not provide the documents requested in 2016.RED FLAGSFurther investigations should have been conducted because of the amount of assets involved, which was more than 10 million Swiss francs, the judge said.The bankers should have asked if information provided about the origin of the assets was plausible, he added.Other red flags such as the political situation in Russia, the use of intermediaries, offshore and intermediary accounts were ignored, the judge said.”It must be taken into consideration that millions in funds was going into the accounts,” Judge Aeppli said. “This was at a time when the U.S. had already announced measures against Russia.”The case highlights how people like Roldugin were used as “strawmen”, the indictment seen by Reuters said, a way to hide the true owners of money.Prosecutor Jan Hoffmann said he welcomed the court’s decision.”It is an important sign that diligence of the law against money laundering has to be respected,” he said on Thursday.Sums of around 30 million Swiss francs ($31.84 million) were involved in the case, Hoffmann told an earlier hearing.This happened even though the musician, who appears on Switzerland’s list of sanctioned Russians, had no listed activity as a businessman.Roldugin was among members of Putin’s inner circle sanctioned by the West, including Switzerland, after Russia invaded Ukraine in 2022.Putin has in the past described Roldugin as a friend, a brilliant musician and benefactor, who has honestly earned some money from a minority stake in a Russian company.The Kremlin has previously dismissed any suggestion that Roldugin’s funds are linked to the Russian leader as anti-Russian “Putinophobia”, saying Putin’s finances were a matter of public record. The defence had argued there was no reason to doubt that Roldugin was the real owner of the accounts, and it was “plausible” that Roldugin was rich because he was a friend of Putin.”Sergey Roldugin is not just any cellist and conductor, but also a Kremlin favourite who obviously had access to special financing possibilities that allows him to accumulate substantial wealth,” the defence said, according to a pre-trial briefing.($1 = 0.9159 Swiss francs) More

First things first: in last week’s Free Lunch I unforgivably got my European royal houses mixed up; my apologies. It was of course the Bourbons and not the Habsburgs of whom Talleyrand supposedly said they had learnt nothing and forgotten nothing. It may still be that our financial regulators are worse than the Bourbons, as I meant to say. But the only one who has learnt nothing and forgotten everything is clearly me. Thanks to all our erudite readers who pointed out the error, not least because it proved they read last week’s very long column to the end.Last month, I wrote a series of pieces on the western sanctions against Russian financial assets (the whole list is here). Since sanctions-related news keeps flowing in, it is time for an update.Sanctions are a cat-and-mouse game, where any new restriction gives rise to evasion efforts. Two cracking stories from the FT illustrate this. Our energy reports document that Switzerland-based commodities trader Paramount Energy & Commodities SA has given up shipping Russian oil, but the new Dubai-based company Paramount Energy and Commodities DMCC has picked up the business. And our Vienna and Moscow reporters revealed that Raiffeisen Bank, whose Russian operations made huge profits last year, is thinking about a “prisoner exchange” of money trapped in Russia’s frozen assets that the sanctioned Russian bank Sberbank holds in Europe. It would be extremely surprising if the Russian state were not also trying to sanctions-proof its assets (those assets that aren’t already immobilised in the west). Examples such as the ones above, even if they relate to other sanctions than those on foreign exchange reserves, are part of the reason why I think Russia may be trying to put the dollars and euros accumulated from unsanctioned energy sales beyond the reach of the western sanctioning coalition — but without converting them (all) out of hard currency. I described how they might plausibly be doing this in the last piece of my series.But it is also clear that the shift of Russian cross-border finance out of western currencies altogether is accelerating. The FT’s Anastasia Stognei shows that in the past year, renminbi-denominated activity in Russian trade invoicing and currency exchange has soared. This is, however, a rise from a very low base, and there is little sign that western currencies are being abandoned. Russia’s sovereign wealth fund holds Rmb300bn ($44bn), according to Russia’s finance ministry. But this number has been constant for many months; indeed, total Russian foreign exchange reserves are on a downward trend. Wherever Russia is saving its surpluses, it is not in the official numbers, even the renminbi-denominated ones.Stognei reports that the renminbi’s share of currency trading activity on the Moscow Exchange has jumped to 40 per cent, reflecting a sudden need to buy and sell renminbi because trade patterns have shifted to China. No doubt Beijing would be delighted to see a redenomination into renminbi of all China-Russia trade and even Russia’s trade with third countries. Beijing can, to some extent (but not fully), force the former. It cannot force the latter. In any case, doing more and more transactions in China’s currency is not the same as keeping more and more of one’s savings in it. It is not clear why Russia, let alone third countries, would make themselves overly dependent on a non-convertible renminbi and put all their savings in it unless they were content to source all their imports from China forever.So the rise in renminbi exchange activity is consistent with Russians keeping their wealth (public and private) in western currencies much as before. To the extent they are accumulating renminbi balances, the hard currency with which the renminbi were bought — Russia’s energy exports are still overwhelmingly sold for euros and dollars — may remain in the German and US correspondent accounts of the Moscow Exchange’s National Clearing Centre. If so, western governments could still seize this money, as I have argued before.That shows the relevance of another recent piece of news, namely that Russia is going to require payments for grains to be converted into roubles on the NCC, just like it has already done for gas sales (hat tip: Maria Shagina). Here, too, the motivation is surely to make it awkward for the west to freeze the NCC’s hard currency accounts, which would expose them to accusations of causing a hunger crisis by frustrating the grains trade. That motivation itself, however, is a sign that Moscow does wish to keep “shadow reserves” of western currencies at its disposal.But that amounts to a vulnerability that can be targeted by harsher sanctions, albeit a vulnerability that Russia is doing its best to conceal. As sanctioning authorities are trying to make their sanctions less leaky — both the US and Europe say they are going to boost enforcement — they should read a terrific new academic study that applies network analysis to the intermediation of offshore finance based on previously leaked information. Their findings are striking: “Our ‘knock-out’ experiments pinpoint this vulnerability to the small group of wealth managers themselves, suggesting that sanctioning these professional intermediaries may be more effective and efficient in disrupting dark finance flows than sanctions on their wealthy clients. This vulnerability is especially pronounced amongst Russian oligarchs, who concentrate their offshore business in a handful of boutique wealth management firms.”Or as Brooke Harrington, one of the authors, puts it in an accompanying New York Times op-ed: “Break the chain between Russian oligarchs and managers, and you break everything.” For state assets (and oil trade) too, there is no doubt that particularly important “nodes” (financial professionals or entities that are expert intermediaries) can be found which can be targeted to disable the sanctions circumventions.And what about the immobilised official reserves? Western governments can access those if they want, but even “access” is a misleading term, since these reserves do not consist of some locked-up treasure chest where we are discussing who has the right to a key. Instead, they consist of the promises to pay Moscow defined amounts of money, made by western governments themselves (in the case of bonds) or their central banks (in the case of deposits with them).The debate on whether to confiscate keeps evolving. One unedifying is how the EU keeps exploring the very acrobatic idea of temporarily “investing” Russia’s reserves and capturing the returns. The European Commission has now prepared a detailed “non-paper” on the idea for member states. It’s a mess, resulting from too much legal contortion with too little economic understanding.For example, the paper suggests there is no problematic interference with Russia’s property so long as the principal and contractually agreed payments are not touched. This creates a senseless difference between a low-coupon bond with a high rate of appreciation to maturity and a high-coupon bond with regular interest payments but little appreciation. The paper also suggests that because any transaction to do with managing Russia’s reserves is prohibited, and eurozone central banks therefore may not add interest to Moscow’s accounts, there is no accumulated interest owed and no confiscation would be involved in not compensating that lost interest if sanctions are one day lifted. To be consistent with this logic, one must surely say that since the principal of a maturing bond also cannot be paid out, there is no confiscation involved in never paying that either. But then the whole alleged legal problem of confiscation dissolves into a hopeless muddle. Then there is the plain economic illiteracy of the initial idea. If all you are going to do is to “work the assets”, why do you need to take control of the reserves even temporarily? You could just as well have the central bank print the same amount of money, invest it as proposed, keep the returns and then withdraw the money: a “quantitative easing for Ukraine” programme. The economic effects would be identical, and you would avoid the risk of serious embarrassment if you invest badly and have to compensate Moscow for losses. To be clear, I am not proposing this solution — I just offer it as an illustration of how misguided this way of thinking is.(I have seen one even crazier idea, floated by Russian arch-propagandist Margarita Simonyan: that Moscow could give up its immobilised official reserves in payment to Ukraine for keeping the Donbas.)Much more coherent are the calls for outright confiscations, which some state leaders make. The weightiest recent contribution to this view is the op-ed by Lawrence Summers, Philip Zelikow and Robert Zoellick, who between them have legal and economic understanding in spades. They argue that the moral (obviously) and legal (less obviously) case for seizing Russia’s reserves to pay for Ukraine’s reconstruction is clear-cut. Their piece is mostly directed at a Washington audience, trying to sway the US position, and rightly so. I think they may be right that the US faces few domestic legal hurdles; it could, if necessary, legislate to explicitly allow confiscation like Canada has done, but may not even need to do that. Invoking the precedent of Iraq is unhelpful, however, as they neglect to mention the key difference that today’s coalition has gone out of its way to define itself as non-belligerent. And most importantly, there is no doubt that Russia will mount serious legal challenges to confiscation in Europe’s courts, and it is crucial to think ahead about the repercussions of any legal victory for Moscow and not rush in without laying the groundwork. But I agree with them that the political goal must be clear and ambitious, and the work must be done to find a way. The best conclusion to draw from the legal debate, I think, is simply to say that international law is undefined in this case, and that the task is to develop it in a way that promotes the purpose of freedom, self-determination and the protection of rights. Making new law that removes the property protection of rogue states is clearly the right thing to do.Other readablesIn my column this week, I explained how European leaders face a trilemma: they can’t have more investment, continued strict limits on public budgets, and no additional common EU spending all at the same time.Adam Tooze collects the key recent articles about Ukraine’s economic predicament and how the new IMF programme may help.A large European ammunitions maker is struggling to source enough electric power because of . . . cat videos.Extend and pretend with Chinese characteristics.Numbers newsA key measure of Japanese inflation hit a 41-year record high.The World Bank warns of a global lost decade.One of the world’s biggest shipping groups says China’s economic recovery is weaker than expected. More

Back in 2018, two economists made a £1,000 bet about future child poverty figures for the UK and I had the job of deciding who would win.Jonathan Portes of King’s College London wagered that harsh social security policies would raise the headline poverty rate from 30 per cent of children in 2016-17 to more than 37 per cent by 2021-22. His economic model was predicting a rise to more than 41 per cent. Christopher Snowdon of the Institute of Economic Affairs took the other side of the bet, saying he’d seen similar forecasts far too often and they never reflected reality. My role was as an independent arbiter if there was a disagreement over the bet’s outcome. There were various clauses that would nullify the bet — for example, if ministers did not implement the policies they had promised. But they did, and the child poverty rate for 2021-22 was published last Thursday and showed a rate essentially unchanged at 29 per cent. To my relief, my judgment was not required. Portes conceded and paid up. Both Portes and Snowdon have outlined what they learnt from their big bet. In my view, there are four important lessons for social policy, how we talk about poverty and the complicated forecasts that arise from economic models. First, we need to understand why Portes got it wrong. The child poverty measure in question was the proportion of children living in households with incomes after housing costs below 60 per cent of the median. The problem for Portes was not a government U-turn and greater generosity to the poor, nor more employment in response to stingy benefits, but a failure to foresee that median incomes could grow so slowly. Social security levels barely increased over the period, but roughly kept up with incomes rather than falling behind — this meant that the headline relative poverty measure was left unchanged. The failure of Portes’ bet had nothing to do with poverty and everything to do with a much more disappointing period of general economic performance than he expected. Second, it follows that the results demonstrate that the headline relative measures abuse the word “poverty”. Measured poverty tends to rise in good times because real median incomes increase faster and more people fall below a threshold linked to the median. They fall in bad times when true poverty is increasing. Deprivation exists in many communities in the UK and genuine destitution in some. Tom Clark of the Joseph Rowntree Foundation highlights stories of families suffering on incomes below the breadline in his new book, Broke. The numbers involved, unable to feed their kids properly, are almost certainly rising, but account for far fewer than 30 per cent of children. We shouldn’t rely on a flawed inequality measure to describe the plight of those worst off in the UK. Third, Portes’ lost bet should not stop economists trying to predict the consequences of state policy. But they need to be more transparent about what can go wrong with forecasts. The past decade has seen many respected economic institutions, including the Institute for Fiscal Studies and the Resolution Foundation, making similarly erroneous predictions about rising income inequality and poverty levels. The Office for Budget Responsibility is alone in regularly highlighting the errors it has made in its forecasts and publicly listing the lessons learnt. This should be normal practice. Finally and most importantly, what really matters for genuine poverty reduction is economic growth. It improves employment prospects for the poorest households while also providing more funds for the government to redistribute without making others worse off. Of course, addressing genuine poverty is more complicated than generating economic growth, but, truth be told, not that much more [email protected] More

Brussels must develop “new defensive tools” for sectors such as quantum computing and artificial intelligence as it updates its security policies in the face of an increasingly assertive China, the European Commission president has said. Ursula von der Leyen said the EU needed to establish a clear line for trade in highly sensitive technologies where military use cannot be excluded, or where there are human rights implications, as it seeks to determine “whether investments or exports are in our own security interests”.  “A strong European China policy relies on strong co-ordination between member states and EU institutions and a willingness to avoid the divide and conquer tactics that we know we may face.”Von der Leyen was speaking ahead of a planned trip to Beijing next week with French president Emmanuel Macron. She has tried to steer a line on China that is distinct from that of the US, stressing her goal is not to “decouple” Europe’s economy from China but rather a process of “de-risking”. The commission is for example examining the creation of a mechanism for scrutinising overseas investment by EU companies in a small number of sensitive technologies that could enhance the military capabilities of rivals, she added.The commission president’s speech comes as the US steps up pressure on its allies to align closer with Washington and harden their approach to China as tensions rise over Taiwan and Beijing’s support for Russia’s war against Ukraine. Von der Leyen, who held talks in Washington DC with US president Joe Biden this month, warned of a “deliberate hardening” of China’s strategic stance, adding that Beijing was becoming “more repressive at home and more assertive abroad”. The EU needed to ensure that its companies’ capital, expertise, and knowledge were not used to enhance the military and intelligence capabilities of the bloc’s “systemic rivals” — of which China is one.The commission president said she wanted to leave space for discussing “a more ambitious partnership” and making competition fairer and more disciplined. “We do not want to cut economic, societal, political and scientific ties,” she said. But her speech at the European Policy Centre and the Mercator Institute for China Studies represented what she described as a “sober assessment” of relations and China’s strategic intentions. Chinese president Xi Jinping, she said, “essentially wants China to become the world’s most powerful nation”.“The EU needs to define its future relationship with China and other countries in sensitive high-tech areas such as microelectronics, quantum computing, robotics, AI, biotech and others,” she said. “Where dual-use purposes cannot be excluded or human rights might be implicated, there will need to be a clear line on whether investments or exports are in our own security interests.”The Netherlands recently said it would block exports of the most advanced silicon chipmaking tools to China after pressure from the US.Initial ideas would be presented as part of a new economic security strategy this year, she said. The commission president also called for EU unity over the “bolder and faster” use of existing trade instruments in areas such as foreign direct investment, foreign subsidies and so-called economic coercion. Von der Leyen said the EU would need to “reassess” the Comprehensive Agreement on Investment with China, a trade deal that was not ratified and has stalled since 2021. “We have to recognise that the world and China have changed in the last three years, and we need to reassess CAI in light of our wider China strategy.“There are some areas where trade and investment poses risks to our economic or national security, particularly in the context of China’s explicit fusion of its military and commercial sectors,” she warned. This goes especially for sensitive technologies, dual-use goods and investment that entails forced technology transfers. The EU, she added, would be “stress-testing our relationship to see where the greatest threats to our resilience, long-term prosperity and security lie”.

The EU also needed to make its own economy more competitive and resilient, including by strengthening and diversifying supplies of raw materials. Referring to Xi’s visit to Russian president Vladimir Putin in Moscow last week, von der Leyen said it was clear that China sees Putin’s weakness as a way of increasing its leverage over Russia. “Far from being put off by the atrocious and illegal invasion of Ukraine, President Xi is maintaining his ‘no limits friendship’ with Putin’s Russia,” she said. “It is clear that the power balance in that relationship — which for most of the last century favoured Russia — has now reversed.“Any peace plan which would in effect consolidate Russian annexations is simply not a viable plan. We have to be frank on this point.”She warned: “How China continues to interact with Putin’s war will be a determining factor for EU-China relations going forward.” Similarly, China’s compliance with international human rights obligations will also be a “test” for how much the EU can co-operate with China.Additional reporting by Andy Bounds in Brussels More

We used to call it “Isa Season” but this year, stampede would be more appropriate. April’s tax changes mean there has been a near fourfold increase in the number of investors doing a “Bed and Isa” — selling down holdings in general investment accounts and repurchasing within a stocks and shares Isa wrapper, according to AJ Bell. Investors have a few days left to sell up and utilise the full force of their capital gains tax allowance before it is reduced on April 6, shielding their assets from CGT and dividend taxes. What’s more, rising interest rates have reignited the cash Isa market. Many legacy savings accounts are paying the square root of sod all, but the best cash Isa deals offer rates of 4 per cent or more — assuming you can actually get your money into one.Cash Isas have been insanely popular with higher earners in particular this year as, for the first time in ages, it’s possible that savings interest will be enough for them to have to pay tax on. However, transferring your cash Isa to a provider offering a better rate of interest is easier said than done. When Barclays launched its 4 per cent Isa deal at the end of last year, I applied and opened one in seconds online as I already had another Barclays account. However, my husband did not, and his transfer is still “in progress”.As our local Barclays branch has recently become a PizzaExpress, he had to make an appointment in another part of London and queue up for an hour to show someone his ID and open an account. Transfer forms were then posted, signed and sent back (the postal strike didn’t help) but here we are nearly in April and his transfer is still “pending”.He has had to make several frustrating phone calls to both old and new Isa providers in an attempt to get things moving, but he’s one of the lucky ones — at least he was able to get an appointment and open an account before Barclays cut its best rate to 3.2 per cent in mid-March!

Barclays admitted that increasing rates had “driven a lot more activity this year”, reassuring customers in transfer limbo that interest will be backdated, and as long as they opened the account before March 14, the 4 per cent rate will still apply. Santander, which launched a market-leading cash Isa paying 4.25 per cent this week, could learn much from the tangle at Barclays.But the truth is that all of the banks are very out of practice when it comes to dealing smoothly with Isa transfers. Last Saturday, in the midst of me making soothing cups of tea for my irate hubby, an email arrived from a reader: “Over four months to make an Isa transfer, and still not done — help!”Andrew, 71, manages the financial affairs of a beloved aunt in her 90s, now sadly in very poor health. In November, last year, he decided to de-risk and transfer her stocks and shares Isa with Handelsbanken to a cash Isa with Lloyds Bank. He had to visit a branch to do this (ID checks and wet signatures) but then . . . nothing. “I have spent over 25 hours in total on the phone to Lloyds, visiting my local branch, writing to their CEO and raising a case with the Financial Ombudsman, but still nothing has happened,” he wrote. And the sum of money missing? Only £150,000. Well, the good news is that after FT Money intervened on Andrew’s behalf Lloyds has resolved the problem. “We are really sorry . . . and fully recognise the length of time taken is not acceptable,” the bank said, adding it would make a further payment “in recognition of the poor experience” on top of the compensation and lost interest that had already been promised. “I can’t thank you enough. This has been such a worry with my aunt’s health rapidly deteriorating, but luckily, there were other funds I could draw on,” Andrew said. Yet again, the key issue was using paper forms rather than digital transfer requests — something the Financial Ombudsman Service says is a widespread issue with cash Isas in particular. Its latest statistics show there were 264 complaints about cash Isas in the three months to the end of December 2022; a 64 per cent rise on the same period a year previously. Unsurprisingly, transfer issues were behind most of these complaints. UK Finance, the banking industry trade body, sets a seven-day target for Isa transfers, and HM Revenue & Customs’ own guidance is no more than 14 working days. Yet it is increasingly apparent that the archaic nature of Isa transfers, compounded by the shrinking number of bank branches and difficulties of meaningfully communicating with bank staff, means it is virtually impossible for many savers to access advertised rates on the top accounts. My strategy of having a little bit of money with eight different banks has proved wise — if you are classed as an “existing customer” you can more easily get access to preferential rates, as long as you can keep track of your multiple passwords.Yet with the huge rush to protect cash and savings interest from tax, I fear the quantum of complaints about cash Isa transfers can only increase — definitely an area of the market where the incoming Consumer Duty being imposed on financial services companies is sorely needed. I’ll leave you with one final idea to squeeze in before April 6.Rich or poor, every household in Britain has received a rebate of £400 on their energy bills in the current tax year. Those £66 a month credits will now cease — but if your family won’t really notice the financial impact, perhaps you could consider donating your rebate to a fuel poverty charity?

Millions of people are still struggling to afford their energy bills, and this is a particular issue for 4.5mn customers on prepayment meters. Running out of credit will literally leave them sitting in the dark.This is why we have donated our £400 to the Fuel Bank Foundation and CapUK, which are still experiencing record demand for fuel vouchers from prepayment customers who cannot afford to top up. Both charities work closely with food banks, which are grappling with a drop in donations.Since I started the #donatetherebate campaign in the FT, these charities tell me they have received many tens of thousands of pounds in donations from our readers — a huge thank you to everyone who has done so. UK taxpayers can of course boost their donation by adding Gift Aid. If you’re a higher or additional rate taxpayer and donate by April 5, you can claim back some more tax when next January’s bill comes in — and if you’re feeling very generous, you might want to donate that too. Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. [email protected] Instagram @Claerb More

Central banks are turning their attention to companies using high inflation as an excuse to boost their profit margins, warning that businesses’ price gouging risks triggering persistent cost pressures. Profit margins of US companies hit their highest level since the aftermath of the second world war in 2022, research by economists at the University of Massachusetts Amherst has found. Eurozone businesses have also enjoyed the biggest expansion in their profitability since the 2008 financial crisis over the past two years, according to research by French bank Natixis. “Pent-up demand during the [coronavirus] pandemic meant people were less price-sensitive as they came out of lockdowns,” said Dirk Schumacher, head of European macro research at Natixis. “So companies could take advantage of high inflation to boost profits.”The focus on fatter profit margins marks a shift by policymakers who have been concerned about the risk of 1970s-style wage price spirals, in which companies have to raise prices to cover increasing employee costs. “Part of the high inflationary pressure may indeed be due to greater market power of companies,” Isabel Schnabel, European Central Bank executive board member, told the Financial Times. Her remarks come a few weeks after the ECB added a reference to the impact of rising profit margins on inflation to its monetary policy statement for the first time. Esther Lynch, general secretary of the European Trade Union Confederation, said: “I’m pleased that central banks are finally waking up to the fact that inflation is being driven by profits and not by wages.” She added: “Corporations, particularly those in the energy and food sectors, have caused inflation by using supply bottlenecks as a cover to hike up their prices.”US Federal Reserve chair Jay Powell was rebuked for ignoring the issue during his testimony to Congress this month. “The Fed can’t force corporations to change their ways or rewrite the Wall Street business model on its own. But you could talk about it,” said Sherrod Brown, chair of the Senate banking committee. Andrew Bailey, the Bank of England governor, last week urged companies to refrain from price rises that could perpetuate high inflation just as its original causes — supply chain snarl-ups and the surge in commodity prices as coronavirus restrictions were lifted — began to fade. “When companies set prices, I understand that they have to reflect the costs that they face,” Bailey told the BBC. “But . . . we do expect inflation to come down sharply this year.”Unions seized on his comments. “The UK is in the grip of a profiteering epidemic,” said Sharon Graham, general secretary of Unite.But data published by the Office for National Statistics last month showed that, once oil and gas producers were excluded, the profitability of UK manufacturing and service companies fell between the first and third quarters of 2022.Bank of England governor Andrew Bailey last week urged companies to refrain from price rises that could perpetuate high inflation just as its original causes began to fade © Leon Neal/PAIn Germany, the behaviour of Volkswagen, BMW and Daimler, which have reported record profits over the past year, shows how supply bottlenecks, coupled with resilient demand, have allowed companies to boost their margins. With semiconductor chips in short supply, companies focused on producing larger cars, as well as more electric vehicles. These are more expensive and profitable, as they can be sold to richer, less price-sensitive consumers. Germany’s Big Three automakers have also been able to boost their margins by forcing makers of their components to absorb some of their higher costs for raw materials and transportation. Andreas Wolf, chief executive of power-train maker Vitesco Technologies, said the carmakers’ dominance meant that only 80 per cent of its higher costs could be passed on. “It is not sustainable if we always swallow the cost increases.”Wolf told the FT that the industry risked pricing people on lower incomes out of the market. “If [prices] continue to go up, mobility will no longer be affordable to everybody.”The big question now is how long businesses will continue to raise their prices by large increments as energy costs and the price of other feedstocks fall back. There are some signs that they are adjusting to lower demand caused by higher interest rates and the depletion of excess savings built up during the pandemic.

BMW had said this month that it expected price rises to taper off, as orders had started to soften slightly in Europe this year. Philip Lane, ECB chief economist, said last week that BMW’s statement was a signal that high profit margins were likely to be squeezed by weaker demand, adding that competition should be boosted by the reopening of China’s economy after it ended its zero-Covid policy. “European companies know that they will lose market share if they raise their prices too much.” Schnabel agreed that weaker demand was likely to reduce companies’ price gouging opportunities. “If prices rise faster than wages over a longer period of time and real wages fall as a result, households will at some point no longer be able to afford the higher prices.”Other economists are more sceptical that companies in sectors with just a few big players will be able to resist the urge to use high inflation to boost their profits. “If market imperfections are sufficient, with oligopolies in several sectors, it is still possible for companies to compensate for falling sales by raising margins,” said Eric Dor, an economics professor at the IESEG School of Management in Paris. More

There are few things more indignant than members of the US Congress prevented from throwing their weight about, and defence of their amour propre is on full display over the Biden administration’s habit of making trade agreements without asking them.On Tuesday, the two highest-ranking Democratic lawmakers on trade policy, Oregon senator Ron Wyden and Massachusetts congressman Richard Neal, attacked the White House’s new agreement with Japan on securing critical minerals. The deal has little binding content: it is essentially a trick to meet the letter of Congress’s requirement for countries to have a trade agreement with the US to access electric vehicle subsidies under the Inflation Reduction Act.Last week, Katherine Tai, US trade representative, was given an even tougher time in a hearing on Capitol Hill. Lawmakers from both parties and both houses complained that the administration has failed to ask Congress for the “trade promotion authority” needed to put trade deals to a straight up-or-down vote, and has neglected the World Trade Organization.These critiques are largely accurate. The Biden administration has given up on signing substantive binding trade deals requiring congressional authorisation. It’s stayed out of the Trans-Pacific Partnership (TPP), for which the US led negotiations under George W Bush and Barack Obama but then abandoned under Trump. As a replacement, it has invented a frankly rather feeble “Indo-Pacific Economic Framework” based on soft co-operation agreements.The Biden administration certainly has policies affecting trade. It’s spending large amounts to build domestic green tech and semiconductor supply chains, and is rapidly expanding sanctions on Russia and controls on tech exports to China. But many are implemented directly using various executive powers or interpretative leeway without reference to Congress, and as such have a shoot-from-the-hip quality which alarms Capitol Hill — and often US allies too. Even if you approve of the general drift of Biden’s interventions, it looks risky to further expand the Trumpian precedent of a largely unconstrained executive improvising trade policy with whatever tools come to hand.For Congress to complain about this, however, ignores recent history and its own role in undermining US trade strategy. As Kathleen Claussen, law professor at Georgetown University and former USTR associate general counsel, points out, mini-deals didn’t start with Biden or even with Donald Trump — though Trump’s “phase 1” deal with China, which included ineffectual Chinese promises to buy US exports, certainly publicised them.Claussen notes that there are already more than 1,200 “trade executive agreements” stretching back decades. Legally they exist in a somewhat fuzzy area outside the formal process where the administration negotiates deals and Congress approves them. The pressure for more such agreements has come partly because exports increasingly encounter non-tariff regulatory barriers such as food safety, access to energy pipelines or rules on medical devices, which traditional trade deals have struggled to address. But Congress hasn’t helped matters by allowing itself to be captured by special interests which hold agreements hostage to tiny corners of the US economy and treat international law as an optional extra.As Claussen says, the House and Senate have managed to pass precisely one major formal trade agreement over the past decade — the updating of the Nafta deal with Canada and Mexico in 2020. They failed to approve TPP, a far more important deal, after the text was signed under the Obama administration in 2016 following eight years of negotiations.TPP was designed to project a US model of trade and development across a high-growth region in competition with Chinese influence. But even before Trump pulled the US out, the deal had stalled on Capitol Hill over short-sighted special interests, having been blocked by the pharmaceutical and tobacco industries over provisions they didn’t like. TPP was itself a Plan B after the failure of the so-called “Doha round” of trade talks, the death of which was hastened by the congressional satraps of American agriculture (farming amounts to a mighty 0.7 per cent of US GDP) demanding politically unfeasible access to export markets in countries like India. Congress also, in effect, prevented the US complying with WTO rulings on issues like cotton subsidies for years on end.As for standing up to the executive, Congress failed to muster the courage to rein in Trump and his destructive unilateral trade war with China. Complaints from Pennsylvania senator Pat Toomey, who later stood down from Congress — there’s nothing as brave as a retiring lawmaker — got too little support from colleagues.The rapidly changing nature of globalisation and an increased role for geopolitics and security were always going to be a strain on the US’s slow, deliberative means of striking trade deals. But the system sliding quite so quickly into one driven by unconstrained White House action represents a failure of Congress as well as a power-grab by the executive. Recent history suggests the US either risks having a trade policy that shoots from the hip or having no trade policy at all. More

BEIJING/HONG KONG (Reuters) – Some of China’s most indebted local governments are on a hiring spree, a move that analysts say could put fragile regional finances under more strain as officials seek to create jobs for a record number of graduates entering the workforce this year.China’s huge and rising local government debt, totalling $9 trillion, or about half the nation’s gross domestic product, is one of the biggest threats to fostering sustainable growth in the world’s second largest economy.Beijing has said defusing these debt risks is one of the government’s major tasks this year, while it’s also prioritising job creation in an economy still reeling from years of costly COVID-19 lockdowns, travel curbs and other containment measures.In poorer areas, which are bleeding people and private business to urban centres, the task of providing jobs falls more squarely on local governments at a time they are struggling to raise revenue through income tax and state land sales. “This type of strategy could be partly calculated to keep educated young people within the province, rather than seeing them leave for more developed regions,” said Jack Yuan, vice president and senior analyst at Moody’s (NYSE:MCO).However, “budgetary and debt pressures are more acute for these provinces, so increasing expenditure comes with additional fiscal risks,” Yuan noted.The provinces of Gansu and Yunnan as well as the region of Guangxi, are set to see the biggest percentage increase in hiring for civil servants in China this year, according to Offcn Education Technology Co, one of the country’s largest tutoring firms for the public service examination.Gansu, in China’s arid, remote northwest, plans to hire 4,249 civil servants, nearly 80% more than last year, while Yunnan and Guangxi in the country’s mountainous frontier to the south, will add 5,696 and 6,781 personnel, an increase of 59% and 55%, respectively. The overall number of jobs being added across mainland China’s 31 provinces, regions and municipalities, is around 190,000, a 16% increase from 2022, financial media outlet Caixin reported.The local governments adding the most jobs in relative terms are also among the most indebted. Yunnan’s outstanding debt to fiscal revenue hit 1087% last year, the highest among all provincial-level economies. Gansu was third at 970% and Guangxi was fifth at 910%, according to research by Chinese brokerage TF Securities. The local governments of Gansu, Yunnan and Guangxi did not respond to a request for comment and Reuters could not establish exactly why the governments are ramping up hiring and how it will impact their finances. But it is causing anxiety among economists.”If state land sales continue to worsen in those regions, such large-scale government hiring spree will be unsustainable,” said Nie Wen, a Shanghai-based economist at the investment firm Hwabao Trust.’EMPLOYMENT FIRST’In his first speech as China’s new premier earlier this month, Li Qiang said the country needed an “employment-first” agenda, with the government setting a job creation target of 12 million, up from last year’s 11 million, even as it aims for a conservative GDP growth target of around 5% this year.China needs to create jobs for a record 11.58 million college graduates expected to join the workforce this year, a hard task at a time the jobless rate for those aged 16 to 24 is at 18.1%, hovering near an all-time high. The jobs being sought by Gansu, Yunnan and Guangxi are mainly in the law, finance and accounting departments, and application requirements are more friendly to college graduates, said Offcn, the tutoring firm.A civil servant in Gansu, who spoke to Reuters on condition of anonymity because he was not authorised to speak to media, said the hiring spree is partly to replace retiring staff but comes as some local employees have also suffered pay cuts.As well as central government funding, many of China’s localities rely on so-called local government financing vehicles (LGFVs) to raise extra capital from bond markets for the likes of infrastructure projects.The total debt of China’s LGFVs has swelled to a record 66 trillion yuan ($9.5 trillion), from 57 trillion yuan last year, according to an International Monetary Fund (IMF) report last month.These LGFVs, which proliferated after the financial crisis of 2008 as a way to let local governments get round a ban on direct borrowing, are not technically guaranteed and many hold assets of dubious quality like roads to nowhere and empty airports, analysts say.While there have been no public reports of an LGFV default, some have had loans extended. Moody’s Yuan said local governments including Gansu have faced increased refinancing pressure to meet their debt obligations.This is why he and others are concerned that any attempt to create jobs and pursue growth too aggressively, could lead to more financial problems in places already fiscally stretched. “Usually this high growth rate and high debt rate is a very risky story,” said Iris Pang, chief economist of Greater China at ING. More