Aurelia Butler

The European Council says further sanctions against Russia are “on their way”. Gruesome images of Russian atrocities in Bucha underline — graphically and horrifically — the need for more action. French president Emmanuel Macron wants the EU to ban imports of the country’s oil and coal. Germany, with its heavy dependency on Russian fuel, has resisted such moves. Could the US tighten economic restrictions on Russia unilaterally, by imposing secondary sanctions?At first blush, the move, mooted recently by US national security adviser Jake Sullivan, appears logical. When foreign organisations transact with entities placed under US sanctions, such as Russian bank VTB, Washington would impose sanctions on them too. That reduces the scope for such businesses to find new counterparties in China, India, Europe or elsewhere.But secondary sanctions are imperfect weapons. The EU created a blocking statute following US sanctions and embargoes on Iran and Cuba. This is intended to protect EU companies from the US extraterritorial threat. It is flimsy because few of them would risk isolation from US markets. China last year implemented its own law “to preserve national sovereignty” by countering US sanctions. This carries a bigger kick than the EU version. Chinese companies are used to being blacklisted by the US and fret less over stand-offs with Washington. Countries can also avoid secondary sanctions using what Tom Keatinge, of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, dubs “burner banks”. These have the sole purpose of dealing with entities that are under sanctions. Examples include the Bank of Kunlun, controlled by state body China National Petroleum Corporation and used as the conduit for oil payments to Iran. Washington imposed sanctions on the bank in 2012, barring it from accessing the US financial system — hardly punitive given Kunlun’s remit.Avoiding US dollars is another defensive tactic. India and Russia are considering a rupee-rouble arrangement for exports. Cryptocurrency payments may also be an option.Secondary sanctions rank alongside selective bans on Russian banks using the payments messaging system Swift. They claim the moral high ground but are of only accretive and compromised usefulness. Secondary sanctions would also fuel the flames of deglobalisation, pushing non-aligned nations away from developed democracies. The only meaningful escalation of the economic war against Russia remains European import embargoes on Russian energy, of the kind advocated by Macron.The Lex team is interested in hearing more from readers. Please tell us what you think the west should do next to put financial pressure on Russia in the comments section below More

“A yield-curve inversion should never be dismissed just because the backdrop has changed,” Seidner, Pimco’s chief investment officer of non-traditional strategies, wrote in a blog post. “The curve’s signal may be less clear than in the past.” Yet some current inversions are “signaling caution, rather than recession.”The Federal Reserve’s plans to likely lift rates at each of its remaining policy meetings this year, after hiking by a quarter-point last month, has unmoored short-term yields and inverted several parts of the Treasury curve. That has brought to the fore an array of opinions over whether an inversion is still the historic foreshadowing event to a recession or not.Two-year Treasury yields exceeded 10-year rates by about 4 basis points at 9:16 a.m. New York time Monday while five-year tenors traded with about a 9 basis-point premium over 30-year yields. Money-market traders are pricing in over 200 basis points of additional Fed rate increases in 2022.“Longer-dated gauges like the two-year/10-year and five-year/30-year Treasury curves can be more valuable than the widely followed three-month/10-year curve, in our view,” Seidner said. “The reason is that the Fed has already laid out its rate-hike projections in its ‘dot plot’ forecast, and looking at market rates over a short-term horizon may be less informative than focusing on what the Fed is saying it will do.”In the Fed’s latest “dot plot,” officials’ median projection was for the target rate to end 2022 at about 1.9% and rise to about 2.8% in 2023. Campbell Harvey at Duke University’s Fuqua School of Business was one of the first to show the historic link of inversions to recessions, focused on the spread between three-month and 10-year yields — which is currently positive by around 185 basis points. High inflation and “geopolitical risk — which we haven’t even felt the economic outcome of yet, besides at the gas pump — is all acting like a tax,” Harvey said last month. “It all indicates slower economic growth.”Read more: Powell-Backed Yield Curve Gives Fed Leeway to Go Max Hawkish (1)Pimco’s Seidner said the most-important sector to watch is the forward curve, which projects the spread between current rates into the future. He notes that the inversion between current one-year rates relative to where they are priced one year in the future in the forward market.“Does this mean a recession is imminent? No, but it is a risk to monitor,” Seidner said. “Pimco is calling for above-trend growth and a gradual easing of inflation pressures from higher peaks in developed market economies. However, the risks of higher inflation and lower growth have increased, along with the risk of recession in 2023,” he said, adding that has sparked the firm to be underweight duration, primarily in the long-end of the curve.©2022 Bloomberg L.P. More

Turkey’s official inflation rate hit its highest level in 20 years as soaring energy and food prices compound the economic challenges confronting President Recep Tayyip Erdogan.The consumer price index rose 61 per cent year on year in March, according to the Turkish statistical institute — up from 54 per cent in February and leaving it at the highest level since March 2002.Food costs, which make up about a quarter of Turkey’s inflation basket, rose 70 per cent year on year. Energy costs rose almost 103 per cent and transport costs rose 99 per cent as a jump in commodity prices caused by Russia’s invasion of Ukraine took its toll on a country that imports almost all of its oil and natural gas supplies.Separate data released on Monday showed that the producer price index, which reflects costs for manufacturers, rose almost 115 per cent year on year. Responding to the inflation figures, finance minister Nureddin Nebati said his country was going through an “extraordinary period” as a result of two years of the coronavirus pandemic followed by the war in Ukraine.Opposition politicians claimed that true inflation was even higher than the official numbers. Ali Babacan, a former economy minister who now leads an opposition party, described price rises as “out of control.”Veli Agbaba, an MP with the opposition Republican People’s party, said the country was heading “step by step towards hyperinflation” — often defined as annual inflation of more than 50 per cent for several consecutive months. Goldman Sachs analysts said they expected the pace of price rises to exceed 65 per cent “and remain above this rate for most of 2022” before declining to around 45 per cent in December.Even before the Russian invasion of Ukraine caused commodity prices to soar, Turkey was grappling with the highest inflation since Erdogan’s party came to power almost two decades ago.The central bank slashed its benchmark rate by a total of 5 percentage points in the final months of last year as Erdogan, a self-described “enemy” of high interest rates, ordered policymakers to prioritise economic growth despite growing pressure on prices.Polling suggests that spiralling living costs have hit support for the Turkish leader, who built much of his early electoral success on delivering economic prosperity for millions of people. But Erdogan, who rejects the established economic orthodoxy that high interest rates help to cool inflation, has refused to allow the country’s central bank to raise borrowing costs.

With the central bank’s benchmark lending rate set at 14 per cent, real interest rates stand at minus 47 per cent once March’s inflation rate is taken into account. The deeply negative real interest rate risks putting further pressure on the lira, which has been the worst-performing emerging market currency after the Russian rouble so far this year, losing about 9 per cent of its value against the dollar. MUFG bank warned that the latest inflation data would “further undermine confidence” in the Turkish currency, adding that monetary policy settings were “way too loose to combat inflation risks”. Nebati told an event in the north-western city of Bursa that supply chain problems in agriculture and energy, in particular, had created inflationary pressures.He insisted that Ankara was taking steps to “permanently” bring down inflation, pointing to the contentious state-backed scheme that seeks to lure savers back to the lira by promising to protect them from exchange rate risk. The government has also announced several rounds of VAT cuts, along with a 50 per cent rise in the minimum wage, in an attempt to limit the pain on households.Analysts warn that the war in Ukraine could also hit Turkey’s tourism sector, which relies on both Ukrainian and Russian visitors and serves as a vital source of foreign currency for the country’s economy. More

Kishida’s government should unleash as much as $400 billion in public spending over the next five years to boost medical and anti-disaster investment, businessman George Hara also told Reuters in an interview on Friday.The vision of Hara, who heads an organisation that aims to reduce poverty around the world, likely served as a backbone of Kishida’s “new capitalism” agenda through which the premier is pushing for greater wealth distribution.As the U.S. Federal Reserve and other central banks move forward with hiking interest rates, the Bank of Japan (BOJ) should follow along to avoid Japan’s yield spreads widening too much, according to Hara, who published a book in 2009 also called “New Capitalism”.”The yen is weakening on yield differentials, so there’s no problem if rates in Japan rise,” said Hara, who added that Japan’s monetary policy should move in line with the rest of the world.Keeping rates around zero was negative for the many people in Japan who rely on savings or pensions to get by, Hara said. He added that those who would be hurt by higher rates in Japan were likely financial players such as hedge funds and high-frequency traders.Hara got to know Kishida during the premier’s 2012-2017 stint as foreign minister when Hara was serving as adviser to Japan’s Cabinet Office, which oversees the government’s long-term economic planning.Hara, who also served as a finance ministry adviser for four years through 2010, said the government should ramp up spending on medical and anti-disaster infrastructure by as much as 10 trillion yen ($81.55 billion) a year over five years.Kishida has so far ordered his cabinet to put together a relief package to offset the economic blow from rising energy prices, which would be funded by special reserves.The premier has also faced pressure, including from his party’s ruling coalition partner Komeito, to compile an extra budget to enlarge the size of that spending.Japan entered the coronavirus pandemic already saddled with debt more than double the size of its $4.6 trillion economy, making it the industrial world’s most-indebted nation as a result of decades of massive spending aimed at reviving growth.($1 = 122.6300 yen) More