Aurelia Butler

UK households face a £38bn hit to their budgets from an expected doubling in electricity and gas bills following Russia’s invasion of Ukraine, according to new analysis highlighting the intensifying cost of living crunch.The big increase in the cost of heating and lighting homes in 2022-23 will be the equivalent of a 6p rise in the basic rate of income tax, said Aurora Energy Research, a consultancy. The majority of the UK’s 28.5mn households are due to see their annual energy bills exceed £3,000 from October after the surge in wholesale electricity and gas prices, according to economists at Investec and Goldman Sachs.The anticipated hit to household budgets will heap pressure on chancellor Rishi Sunak to impose a windfall tax on British energy producers that profit when they can sell gas and oil extracted from North Sea fields at much higher prices. Rising wholesale prices for gas and electricity last year prompted Ofgem, the regulator, to raise the energy price cap from £1,277 for those households with average gas and electricity usage to £1,971 from April.The 54 per cent increase in the cap, which applies to the majority of families, resulted in Sunak promising a £200 loan to households to be issued in October and then repaid over the subsequent four years, plus a £150 rebate on council tax bills for those in property bands A to D.Rising wholesale gas and electricity prices since Russia’s invasion of Ukraine are “baking in” a higher cap for the coming winter, said Dan Monzani, UK managing director at Aurora Energy Research.Economists at Investec and Goldman have estimated that Ofgem will need to impose another 50 per cent plus increase in the cap from October, pushing average household energy bills over £3,000.Monzani estimated that for the households connected to the power grid, such an increase in the cap would push the likely cost of aggregate electricity and gas consumption to £74bn in 2022-23, some £38bn more than in 2021-22. “That’s the equivalent of 6p on the basic rate of income tax, but with the money never getting to the Treasury,” said Monzani. “It’s a hugely substantial impact, especially on lower-income households.” That has raised expectations that Sunak will use the spring statement on March 23 to set out further measures to alleviate the pressure on household energy bills. Downing Street has sought options from the business department, which recommended doubling the £200 loan and delaying the point when households start repaying the money. However, government officials played down the idea that Sunak would make an announcement on energy bills this month given that the next change in the regulatory price cap will not be announced until August, and not take effect until October. Officials said energy prices have been fluctuating wildly in recent weeks, making it impossible to predict where they will be by the summer.One confirmed the Treasury was looking at ways to provide more help for households but said: “It’s not a live discussion with any expectation of an imminent announcement.”Sunak has rejected calls for a windfall tax on oil and gas producers because of concerns it could reduce investment in the North Sea.The Labour party on Thursday reiterated its case for a windfall tax to help mitigate rising bills for struggling families.Ed Miliband, shadow energy secretary, said the case for the one-off levy had been strengthened in recent days. “Oil and gas companies were already set to make record profits and now these will be even higher than originally thought,” he added. More

(Reuters) -Camel and Lucky Strike cigarette maker British American Tobacco (NYSE:BTI) Plc said on Friday it would exit Russia and cut its fiscal 2022 guidance as a result, the latest company to leave the country due to worries about the safety of its employees.Western companies have pulled out of Russia en masse as the United States, the European Union and Britain imposed sanctions aimed at curbing Moscow’s access to funding.In response, a government commission approved this week the first step towards nationalising assets of foreign firms that leave the country.To exit the business or stop selling or manufacturing would be regarded as a criminal bankruptcy by Russia, and they may enforce criminal actions on local management, BAT (LON:BATS) Chief Executive Officer Kingsley Wheaton told Reuters in an interview. “There’s no way, consciously, we can expose our people to criminal repercussions.”The company employs about 2,500 people in Russia, and Wheaton said it would continue to pay their salaries until it transfers its business in the country to another entity.He said potential parties that could be interested include its Russian distributor of 30 years, which he declined to name. In 2021, Ukraine and Russia accounted for 3% of revenue, and a slightly lower proportion of adjusted profit from operations.The company represents just under a quarter of Russia’s tobacco market.The exit prompted the cigarette maker to cut its annual revenue growth outlook to 2%-4% from 3%-5% announced last month.It now also expects mid-single figure growth for adjusted earnings per share in 2022 on a constant currency basis, down from its previous high-single figure forecast.Shares of the company ended the day down more than 1% on the news.The decision to exit Russia comes two days after the company said it had suspended all its planned capital investment in the country.Stating that “the context is highly complex, exceptionally fast-moving and volatile” after reviewing its presence in Russia, BAT said it had started the process to rapidly transfer the Russian business “in full compliance with international and local laws”.($1 = 0.7664 pounds) More

COLOMBO (Reuters) -Sri Lanka will begin talks with the International Monetary Fund (IMF) next month on a plan to help the crisis-hit country, where a foreign exchange shortage has squeezed essential imports amid looming debt payments, three sources said on Friday.Sri Lanka is facing its worst financial crisis in years. With foreign exchange reserves standing at a paltry $2.31 billion, the country is struggling to pay for critical imports including fuel, food and medicines.The move to approach the IMF for help comes after months of resistance from Sri Lanka’s government and central bank, despite calls from opposition leaders and experts to seek a bailout package.Finance Minister Basil Rajapaksa will travel to Washington in mid-April to present Sri Lanka’s proposal to senior IMF officials, two sources with knowledge of the ongoing discussions told Reuters.”We are taking our proposal and a plan,” one of the sources said, declining to be named since the discussions are confidential. “The government is serious about fixing things.”In a tweet late on Friday, Central Bank Governor Ajith Nivard Cabraal said the aim of the upcoming talks with the IMF was not restructuring Sri Lanka’s debt.”Meetings of Sri Lankan authorities with @IMFNews officials over the next few weeks are NOT for the purpose of #debt restructuring,” he said.Through repeated cycles of borrowing since 2007, Sri Lanka had piled up $12.55 billion worth of debt through international sovereign bonds (ISB), which make up the largest part of its external debt. The island nation has to repay about $4 billion in foreign debt this year, including a $1 billion ISB maturing in July.”We will discuss options based on our plans,” the source said.Sri Lanka’s finance ministry and the IMF did not immediately respond to questions from Reuters.’TOUGH SITUATION’A combination of historically weak government finances, badly timed tax cuts and the COVID-19 pandemic, which hit the country’s lucrative tourism industry and foreign remittances, have wreaked havoc on Sri Lanka’s economy.In a periodic review last week, the IMF called on the government to implement a “credible and coherent” strategy to repay debt and restore macroeconomic stability. “The country faces mounting challenges, including public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years,” the IMF said.To find a way out of the crisis, the government will seek assistance with debt restructuring, the foreign exchange crisis, bolstering revenue generation and reforming state-owned enterprises, the source said.”This is a tough situation,” the source said, “We want to see what support we can get from the IMF.”In recent weeks, the country of 22 million has faced rolling electricity cuts. Bakeries have run out of gas and many fuel pumps have run dry. Soaring oil prices have added to the government’s woes.Late on Monday, the central bank implemented a flexible exchange rate for the rupee, triggering a devaluation of about 30% and driving up the prices of many essential items. More

The G7 nations said they would end normal trade relations with Russia on Friday as part of a series of new measures to inflict economic punishment on Moscow for its invasion of Ukraine.The joint step, first announced by US president Joe Biden, includes revoking Russia’s “most-favoured nation” status, which allows it to trade goods on preferential terms with many western countries under rules set by the World Trade Organization. The move will lead to higher tariffs on many Russian exports.The G7 agreed on other measures as well, including stopping Russia from obtaining any financing from international institutions such as the IMF and the World Bank.“Democracies are rising to meet this moment, rallying the world to the side of peace and security. We are showing our strength and we will not falter,” Biden said from the White House.While the sanctions differ by country, the US and EU said they would ban exports of luxury goods to Russia and impose further curbs on members of Russia’s elite. The US will also create the legal authority for bans on investment in any sector of the Russian economy, beyond energy.The announcement comes after the US this week banned Russian energy imports into America — targeting the biggest source of trade between the two countries and a key source of hard currency for Moscow. The US will now ban key Russian imports including seafood, alcoholic beverages and diamonds, while Brussels announced a block on imports of key iron and steel products.“This will hit a central sector of Russia’s system, deprive it of billions of export revenues and ensure that our citizens are not subsidising Putin’s war,” said Ursula von der Leyen, president of the European Commission.The move is expected to be approved by the EU’s 27 member states next week.The G7 also said they would ensure that cryptocurrencies could not be used by Russians to circumvent sanctions and send money out of the country.The White House has been under pressure from Congress to revoke Russia’s status as a permanent normal trading partner for days. The move on Friday was the latest in a series of sweeping sanctions on Moscow including targeting members of the country’s business elite, the inner circle of officials close to President Vladimir Putin, the central bank, and other key financial institutions.Canada, a G7 member, first made the move last week and has also banned Russian oil imports. More

One of the first big market bets to emerge from the Russian invasion of Ukraine was that central banks would take fright.A massive rally in government bonds – in the UK’s case, the biggest since the EU referendum in 2016 – was a clear sign that investors thought they would take this opportunity to slow or delay the process of jacking up interest rates.Not so fast. On Thursday, the European Central Bank concluded its regular two-day rate setting meeting and indicated it would stick to its hawkish path. All things are relative – this was hawkish only for a central bank that has its main interest rate wedged below zero per cent. But it scaled back its bond-buying stimulus scheme and said net purchases could stop in the third quarter if the war in Ukraine keeps bumping up inflation expectations. The first rate rise in over a decade could still come this year.Sporting a bright brooch in the colours of the Ukrainian flag, ECB president Christine Lagarde said the war would, of course, have a “material impact on economic activity”. Naturally, the path from here depends on how the economic data turn out.But all the market can hear is “keep calm and carry on”. The euro popped higher. Bond prices fell.“President Lagarde was at pains to highlight the uncertainty that the war in Ukraine presented and characterised the tapering change as an increase in optionality for the ECB in both directions; something that fails to pass the smell test in our opinion,” said Andrew Mulliner, head of global aggregate at Janus Henderson Investors. “This ECB seems to be for a reduction of accommodative policy at all costs.”With the US Federal Reserve due to make its own pronouncement on rates next week, and US inflation standing close to 8 per cent, this is a message worth heeding.“I feel like we are somewhat trapped here,” says Greg Peters, chief investment officer at PGIM Fixed Income. Either geopolitical risk intensifies further, shoving commodity prices even higher and nourishing the hawks on rate-setting committees, or geopolitics miraculously calm down, the global economy springs back and the hawks stay in control. Either way, the hawks win. “The market is not thinking about this properly at all,” he says.This is still likely to be a bigger drag on US markets than the war in Ukraine, which has, so far at least, been a very local affair. At the epicentre, Russian markets have, of course, been fried to a crisp. Moving westward, the damage is also clear. Central banks in Poland, the Czech Republic and Hungary have been forced in to a combination of interest rate rises and interventions to support their currencies. This was to try to tame the likely inflationary impact of weaker currencies combined with pricier commodities.Beyond that, very conspicuously, European markets have suffered a much heavier blow than the US. Outflows from European equity funds have smashed records. This is not an indiscriminate flight to safety.In stocks, the German market dropped by a hefty 15 per cent from the start of Russia’s invasion to March 7. US stocks, meanwhile, dropped heavily on day one and then sprang back. They have just ended this week around the same level as they were when the invasion began.“You can draw a correlation map between proximity to the conflict areas and market impact,” says Kasper Elmgreen, head of equities at Amundi in Dublin. In some cases, this might generate opportunities to pick up bargains. “When markets panic, they get irrational, and opportunities emerge. The human bias is not to do anything. But you have to act on the opportunities in front of you.” So where does this all leave professional investors? It is not supposed to be an easy job, but they are now up against the prospect of sky-high inflation while there is a pullback or even reversal in economic growth. And there is the risk that the defenestration of Russia from the global financial system could throw out unexpected stink bombs. “Russia might not matter as an economy but it matters as part of supply chains,” Elmgreen says. “There could be some trouble brewing that we have not thought about.”Already, oil and gas – two of Russia’s main exports beyond human misery – have rocketed in price. Some European companies are likely to buckle under the strain. Worldwide trading in nickel, another Russian speciality, has effectively ground to halt after one trader’s bet against a rise in price blew up in spectacular fashion. Wheat prices have soared.Generally speaking, in comparison to, say, March 2020, when Covid (remember that?) briefly pulled the rug from under the entire financial system, markets have functioned pretty normally through the shock of war. But it is a brave investor who assumes this will continue.“I feel a little better about this stuff,” says Peters at PGIM, noting that central banks’ enhancements to the global financial-market plumbing brought in during the Covid shock are still available to avert disasters. “But we’re watching carefully. An accident is almost expected at this point.”[email protected] More