Aurelia Butler

STRASBOURG (Reuters) – European Union governments are preparing a new round of travel bans and asset freezes on some 100 Russians over Moscow’s invasion of Ukraine and a decision could come later on Wednesday, the EU’s top diplomat said.”Member states are working on a package of sanctions, around 100 people responsible at different levels of government,” Borrell told the European Parliament in Strasbourg. He said he hoped for agreement “by the end of this session today”, without giving more details. More

China’s biggest smartphone makers are slashing their shipments to Russia because of the rouble’s collapse and western sanctions despite pressure from Beijing to support Vladimir Putin after his invasion of Ukraine.The cutbacks, led by Huawei and Xiaomi, show that efforts by China’s president Xi Jinping and his counterpart Putin to build a close personal relationship are not shielding Chinese groups from the economic fallout of the war. The sanctions are also making it difficult for Chinese companies to exploit opportunities created by an exodus of western groups from Russia. Shipments from leading Chinese smartphone producers Xiaomi, Oppo and Huawei have fallen by at least half since the outbreak of the war, people familiar with the matter said. Chinese brands comprise about 60 per cent of the Russian smartphone market. Xiaomi and Huawei did not comment. Oppo was not immediately available for comment. “It is politically sensitive to openly announce a sales suspension in the Russian market like Apple and Samsung,” said one former Xiaomi executive, referring to Beijing’s support for Moscow. “But from a business perspective, it makes [sense] to stand by and watch what happens next.”Chinese factories making everything from smartphones to air conditioners have counted on Russia in recent years for their overseas growth, gaining a strong foothold in the country of 140m people. Bilateral trade hit a record high of $146bn last year with China accounting for about 14 per cent of Russian imports, including almost all electronic goods. Within days of Russia’s assault on Ukraine, western companies pledged to cut ties with Moscow — among them BP, Apple, Nike and Netflix — to avoid reprisals stemming from any association with the Kremlin.

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But the more than 35 per cent plunge in the rouble against the dollar since the invasion has also made it difficult for Chinese companies to sell their products in Russia without incurring a loss. They need to charge Russian customers a much higher price in roubles to make up for the exchange rate, yet that is difficult given the deteriorating economy.“You need to set a new price every day in order to avoid making losses,” said Ivan Lam, a Hong Kong-based analyst at Counterpoint Research, a consultancy. Lam added that many Russian smartphone distributors have stopped placing new orders with Chinese manufacturers because of the exchange rate risks. “It is very risky to operate in Russia right now,” said one former Huawei executive who has worked in Moscow. According to experts, the risk of secondary sanctions being imposed on China was also expected to grow as the war dragged on if the US believed Beijing was significantly undermining efforts to punish Russia.Beijing was thinking “very seriously about the potential costs of embroilment in Russia’s confrontation” despite “considering most restrictions imposed by the US and its allies as illegitimate”, said Andrew Gilholm, the head of China analysis at Control Risks, a consultancy.The former Xiaomi executive said the nation’s technology industry expected the impact of US-led sanctions on Russia to ultimately be as severe — if not more so — as US actions against Iran.“A lot of US-made goods, including even small parts, could be banned from being shipped to Russia while a violation of the rules may lead to another Meng Wanzhou incident,” said the executive, referring to the Huawei chief financial officer who was detained in Canada on allegations she misled banks into breaching sanctions against Iran.

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Zhan Kai, a Shanghai-based lawyer at East & Concord Partners who has advised Chinese companies on their Russia operations, said he had received an influx of inquiries on the new sanctions.“The Russia-related sanctions are still not very clear and a lot depends on enforcement, on which the US government has a lot of leeway,” he said. Despite strong international opposition to the war, Beijing has refused to condemn Putin for the invasion. Instead China has pledged “normal” business and trade ties with Russia. Chinese brands have not left Russia en masse. Great Wall Motor and Geely, two of China’s biggest carmakers, said they had no plans to immediately suspend their operations in Russia, a signal that some Chinese groups retained long-term ambitions in the market despite the toughening business conditions. “The foreign brands leave this vacuum but the Russian consumers are probably in no shape to buy the Chinese goods that will fill that vacuum,” said Tu Le, managing director of Sino Auto Insights.Policymakers are assessing how China-Russian trade can be financed, after the west imposed sanctions on Russia’s central bank and cut Russia from the Swift international payments system. While Beijing has for years touted Cips, a renminbi-based payment system, as a replacement for dollar-powered Swift, progress has been slow.

Multiple Chinese companies have reported increased use of renminbi payments by their Russian clients but complain of problems.“It takes at least two weeks to open a renminbi account at the Bank of China Moscow branch because of a surge in demand,” said John Jin, overseas sales manager at a Huizhou-based toy company with Russian clients.An executive at Wuhan Zoncare Bio-medical Electronics Co, a medical equipment maker, said many Russian clients have cancelled their orders as the Swift ban made it difficult for them to make dollar or euro payments. Most Russian banks did not provide renminbi payments or did not have enough Chinese currency in hand.“We believe the Russian market bears a lot of potential and the country will need Chinese products more than ever after the war,” said the executive. “But for now, we will wait for better timing to enter the country.”Additional reporting by Emma Zhou and Maiqi Ding in Beijing More

(Reuters) – An oil-driven inflation shock triggered by the war in Ukraine is forcing Asia’s policymakers to rethink their assumptions for 2022, with the risks of weak growth coupled with surging prices adding unwanted complexity to monetary setting plans.Having largely lagged their Western counterparts in scrapping harsh pandemic restrictions, Asian economies, among the largest consumers of global commodities, now face the threat of crippling inflation.For some central banks in the region, such as New Zealand, South Korea and Singapore, deep worries about prices and imported inflation have already set off aggressive policy tightening cycles. For most others, however, the need to sustain a fragile recovery from the pandemic slump is likely to complicate deliberations.Matt Comyn, chief executive at Commonwealth Bank of Australia (OTC:CMWAY), the country’s largest retail bank, said his customers are already talking about surging input costs for their businesses.”Raising interest rates doesn’t necessarily help that – it’s a different funding proposition for central banks,” he told a conference this week. “They’re taking extreme steps because extreme steps are warranted in light of what’s happening in Ukraine and Russia.”Analysts worry the Ukraine crisis could upend the region’s economy through various channels including slowing trade, though the biggest hit will likely come from soaring energy costs. Barclays (LON:BARC) expects the energy shock to knock 0.3-0.5 of a percentage point off China’s economic growth by boosting output costs, curbing consumption and dampening external demand.Soaring fuel costs will deal a severe blow to the economy of resource-poor Japan, forcing the central bank to keep monetary policy ultra-loose even as inflation creeps up towards its elusive 2% target.Fending off the hit to growth from high fuel costs appears to be the priority for many other Asian central banks.Even though rising fuel costs and the risk of abrupt capital outflows keep pressure on them to tighten policy, many emerging Asian central banks appear to prefer going slow in raising interest rates.BIGGER RISK IF WAR PERSISTSThailand might miss the government’s forecast of 3.5-4.5% economic growth this year due to the impact of the Ukraine crisis on tourism, trade and domestic consumption, its finance minister Arkhom Termpittayapaisith said on Tuesday.While inflation is already at a 13-year high, Thailand’s central bank won’t hike rates any time soon, analysts say.”If we acknowledge that the root of inflation is from a supply shock rather than excessive demand, it is prudent to keep monetary policy accommodative,” said Kobsidthi Silpachai, head of capital markets research at Kasikornbank.The Philippines’ central bank warned that under a worst-case scenario of oil prices reaching $120-$140 a barrel this year, inflation would average between 4.4% and 4.7% – above its 2.0-4.0% target band.But Bangko Sentral ng Pilipinas Governor Benjamin Diokno said in a statement on Sunday the country has sufficient buffers, signaling that it won’t resort to imminent rate hikes to counter capital outflows.Australia’s central bank chief said on Wednesday the Ukraine conflict was a major downside risk for the global economy, with the biggest impact coming through inflation.However, he noted underlying inflation in Australia was still well below levels seen in the United States and Britain.”The recent lift in inflation has brought us closer to the point where inflation is sustainably in the target range. But we are not yet at that point,” Reserve Bank of Australia (RBA) Governor Philip Lowe said on Wednesday.”We can be patient in a way that countries with substantially higher rates of inflation cannot,” he said in a sign the RBA will carefully assess the impact of the crisis before likely raising rates later in the year.Some analysts, however, warn of bigger challenges for Asian policymakers if the war and rising fuel costs persist, particularly for those reliant on fuel imports.”Inflation has been fairly subdued in many Asian emerging economies, allowing central banks to maintain easy monetary policy,” said Toru Nishihama, chief economist at Dai-ichi Life Research Institute in Tokyo.”But they could be forced to tighten” if their economies and currencies weaken and lead to higher inflation, he said. More

The U.S. could “essentially shut” down Semiconductor Manufacturing International Corp or any Chinese companies defying U.S. sanctions by continuing to supply chips and other advanced technology to Russia, Raimondo said in an interview published on Tuesday.Washington is threatening to add companies to a trade blacklist if they skirt new export curbs against Russia, as it ramps up efforts to keep a vast array of technology out of the country that invaded Ukraine last month.If the United States were to find that a company like SMIC was selling its chips to Russia, “We could essentially shut SMIC down because we prevent them from using our equipment and our software,” Raimondo was quoted as saying.SMIC did not immediately respond to a request for comment. In Beijing, a foreign ministry spokesman said China opposed any unilateral sanctions and curbs by the United States, and urged that Washington’s policy towards Ukraine and Russia “should not harm China’s rights and interests”.The spokesman, Zhao Lijian, told a regular news briefing, “China will take all necessary measures to resolutely defend Chinese companies’ and individuals’ rights.” More

The war in Ukraine threatens to derail the eurozone’s recovery, drive consumer prices higher and reopen divisions at the European Central Bank over the future direction of monetary policy, putting officials in an uncomfortable position ahead of their meeting on Thursday.Europe’s dependence on Russian energy means it is bound to suffer more than most regions from the economic fallout of the war in Ukraine, said analysts, leaving the ECB torn between fighting record inflation and cushioning the expected hit to growth.The eurozone economy was facing “a huge stagflation shock risk” — the toxic mix of stagnant growth and high inflation, said Frederik Ducrozet, a strategist at Pictet Wealth Management. “Uncertainty has never been this high, so it makes absolutely no sense for the ECB to make any firm commitments to change anything.”Only last month, the ECB governing council agreed it could speed up a “gradual normalisation” of its ultra-loose monetary policy, setting the stage for it to end net purchases under its €4.8tn bond-buying programme and to raise interest rates by the end of the year.But now investors are betting the central bank will put those plans on hold, opting to maintain as much flexibility as possible while it assesses the implications of the crisis for the 19 countries that share the euro. “For policymakers what dominates here is the negative impact to growth,” said Katharine Neiss, chief European economist at PGIM Fixed Income. “The ECB needs to take control of the inflation narrative and clearly indicate that it is being driven by an external shock with negative consequences for growth — that is the dominant theme.”ECB president Christine Lagarde has already signalled it could keep a high level of monetary support for longer by promising last month “to take whatever action is needed” in response to the Ukraine crisis.Philip Lane, the bank’s chief economist, went further last week, saying it should accept inflation surging above its 2 per cent target for longer when facing “an adverse supply shock” like the one caused by the conflict. The ECB could even consider “new policy instruments” to support European financial markets, he added.However, some ECB governing council members are still convinced it needs to speed up the withdrawal of its stimulus in response to inflation that hit a new eurozone record of 5.8 per cent in February and is expected to rise as high as 7 per cent this year.“We need to keep our sights trained on the normalisation of our monetary policy,” Joachim Nagel, head of Germany’s central bank, said last week. Other hawkish ECB officials say it is better to tackle high inflation now before the Ukraine crisis makes it even worse. They say Russia accounts for only 4 per cent of EU exports, limiting the direct impact of an economic blockade on the country. Russia provides about 40 per cent of the EU’s natural gas and economists think the biggest risk is if it cuts off this supply. But hawkish officials say this is unlikely, pointing out that Russia continued to supply gas to Europe throughout the cold war.Stiffening the resolve of the hawks is the surge in prices for energy and other commodities. Oil hit a 14-year peak this week, with JPMorgan predicting it could rise another 50 per cent by year-end, while European gas hit a new record. Wheat and nickel have reached all-time highs.The fall in eurozone unemployment to a record low of 6.8 per cent in January makes it more likely that workers will soon push for much higher wages, which the hawks fear will make inflation harder to bring back down. The euro’s fall close to a five-year low against the dollar will add further inflationary pressure by increasing the cost of imports.“It is obvious that inflation will stay with us, so we have to do something,” one hawk on the ECB governing council told the Financial Times. “We cannot just say we will wait and see.”The ECB will publish new forecasts on Thursday, widely expected to project lower growth and higher inflation. But some economists, such as Reinhard Cluse at UBS, expect it to keep its inflation forecast just below its 2 per cent target for the next two years — allowing it to say that a key condition to raise interest rates remains unfulfilled.The Bruegel think-tank estimated that if Russian gas supplies to Europe are cut off it would leave the region unable to refill storage tanks before the next winter and force it to reduce energy usage by 10-15 per cent via painful rationing. The EU is due to unveil a plan to cut Russian gas imports by two-thirds within a year, by increasing supplies from other producers and boosting energy efficiency.But Goldman Sachs calculated a total shutdown of Russian gas supplies to Europe could cut eurozone gross domestic product by 2.8 percentage points. PGIM estimated the impact could be as much as 5 percentage points of GDP, raising the prospect of a third recession in two years.Elga Bartsch, head of macro research at BlackRock Investment Institute, said: “This crisis is another supply shock that reinforces our view that central banks will choose to live with high inflation.”Economists think the ECB is likely to seek a compromise between hawks and doves by making subtle but symbolically important changes to how it describes its future intentions. One option is to remove the word “shortly” from the ECB’s statement that it will end net bond purchases “shortly before” it raises interest rates, which would give it more leeway to stop buying bonds without signalling a rate rise is imminent.A second could be to drop a reference to a potential rate cut from its guidance, making it clearer that the next move on rates will be upwards. Even so, the ECB’s divisions over how to respond to the pressures caused by the Ukraine crisis mean any such compromise could be hard to find. More

The downwardly revised growth is bad news for policymakers tasked with keeping the country’s fragile recovery on track as a jump in commodity prices due to the Ukraine crisis and persistent supply disruptions heighten economic uncertainty.Revised gross domestic product (GDP) data released by the Cabinet Office on Wednesday showed Japan expanded an annualised 4.6% in October-December. That was lower than economists’ median forecast for a 5.6% gain and the preliminary reading of 5.4% released last month.On a quarter-on-quarter basis, GDP expanded 1.1%, falling short of the median market expectations for a 1.4% gain.Private consumption, which makes up more than a half of Japan’s GDP, increased 2.4% in October-December from the previous quarter, revised down from an initially-estimated 2.7% gain.Domestic demand as a whole contributed 0.9 of a percentage point to revised GDP figures, while net exports added 0.2 of a percentage point.Economists in a Reuters poll last week forecast annualised growth of 0.4% in the January-March quarter, slashing their previous projections given rapid Omicron coronavirus variant infections and uncertainties caused by the war in Ukraine. More

LONDON (Reuters) -Recession in Europe and North America may be the inevitable price for defending freedom, resisting aggression and upholding international law in Ukraine.U.S. and European leaders now face an unpleasant choice as they decide how aggressively to use economic sanctions in response to Russia’s military invasion of Ukraine.The moral imperative is to exert maximum economic pressure rapidly on Russia to end the fighting in Ukraine as quickly as possible and repel Russian forces, which Moscow says are involved in a “special operation” with no plans for occupation.But the economic imperative is to protect businesses and employment at home, minimise the fallout for lower income households and sustain support for sanctions policies.In mid-February, top policymakers appeared to have thought they could reconcile these objectives through a carefully controlled sanctions escalation strategy exempting oil and gas trade.But that plan has broken down as a result of Russia’s slow progress on the battlefield and immense diplomatic and public pressure on U.S. and European leaders to maximise sanctions swiftly.U.S. and European policymakers must choose between imposing maximum pressure on Russia by cutting off oil and gas purchases or a more modest approach that will avert recession.RECESSION INDICATORSEven before the invasion, the rapid economic rebound after the pandemic was beginning to decelerate, price increases were accelerating and interest rates were set to rise.The flattening U.S. Treasury yield curve indicated a heightened probability of a mid-cycle slowdown or end-of-cycle recession in the next year.Russia’s invasion and the sanctions that have followed super-charged these trends, disrupting supply chains, sending energy and food prices soaring and flattening the yield curve further.The financial crisis in 2008/2009 and the pandemic in 2020/2021 were demand-side shocks that could be offset by lowering interest rates, buying bonds, cutting taxes and boosting unemployment insurance.But the invasion and sanctions are a supply-side shocks that have cut the global economy’s production capacity so they cannot be offset in the same way.Boosting demand by more bond buying, cutting taxes or increasing government spending would simply worsen the production-consumption gap and fuel even faster inflation.The crisis threatens to disrupt global trade in critical raw materials and industrial components ranging from aluminium, nickel and noble gases to car parts, ocean shipping and overland rail freight.But the biggest and most immediate impact is being felt in petroleum and natural gas, where Russia is one of the world’s top exporters, and grain, where both Russia and Ukraine are major global suppliers.Energy and food prices, which were already rising before the invasion, are now climbing at the fastest rate for 50 years, at a time when wages are increasing slowly, putting pressure on businesses and household finances.Lower income households in advanced and developing economies will be hit particularly hard since they spend a much higher share of their income on food and fuel and have fewer options to modify spending patterns.UNCONTROLLED ESCALATIONTop U.S. and European policymakers seem to have been alert to the risks when threatening to impose unprecedented sanctions in an effort to deter Russia’s invasion.U.S. and European sanctions were carefully crafted to exclude trade in oil, gas and other energy items from the embargo and to permit energy-related financial transactions.Planning had assumed that sanctions would be intensified progressively and measures targeting oil and gas flows would be imposed last, if at all.The controlled escalation strategy was designed to deter and punish Russia while limiting costs for motorists, households and energy-intensive industries in the United States and Europe.But both sides of the conflict appear to have miscalculated the resolution of the other and underestimated what it would take to bring the conflict to a swift end.For Russia, that meant misjudging its ability to deliver a rapid victory before sanctions plunged its economy into turmoil.The United States and Europe, meanwhile, seemed to have assumed incremental sanctions could deter an invasion or bring it to a quick halt before the wider economic fallout was felt.For the West, the result is now broader sanctions that could last longer than anticipated, increasing economic disruption.LIMITING DISRUPTIONU.S. and European policymakers seem to have calculated they could take a strong public line on sanctions while letting oil and gas traders to continue purchasing Russian fuel.But most traders have concluded that the legal and reputational risks are too great and have shunned Russian exports, bringing oil flows to a halt.Shell (LON:RDSa) felt the impact acutely. It purchased a Russian crude cargo on March 4, only to be met with such a public outcry that on March 8 it apologised and said it would stop spot purchases immediately.Now political pressure is mounting in the United States, and to a lesser extent in Europe which is far more reliant on Russia, for a complete ban on Russian oil and gas imports.The possibility that the United States and Europe might initiate an embargo has already sent oil and gas prices surging to levels that will be unaffordable for many households and firms if sustained for an extended period.In response, Russia has indicated it could cut oil and gas exports if economic warfare continued to escalate, a move that would trigger an immediate full-blown energy crisis.There is no way the United States and Europe can replace Russian oil and gas exports fully within the next 12 months or absorb the consequences of a further price spike without entering recession.European economies, with much bigger economic exposure to Russia, are particularly at risk of heading into a downturn.PHASED SANCTIONS?U.S. and European policymakers may try to announce that they will progressively reduce oil and gas purchases from Russia according to a fixed timetable over the next two to three years.Such a phased reduction in Russian oil and gas purchases every six months would be similar to previous progressive sanctions on Iran’s oil exports.Such a move would give more time to secure replacement supplies from others including Saudi Arabia, Qatar, Iran, Venezuela and the U.S. shale industry over the 12-36 months.It could also give U.S. and European policymakers negotiating leverage with Russia while reducing, if not eliminating, the immediate upward pressure on energy prices.Progressive sanctions might even prove more effective if they limit the economic fallout in North America and Europe, and make them more economically and politically sustainable in the medium term.Related columns:- Global recession risks rise after Russia invades Ukraine (Reuters, March 4)- Inflation shock threatens oil consumption and prices (Reuters, Feb. 10)- Fed searches for elusive soft landing (Reuters, Feb. 2)- John Kemp is a Reuters market analyst. The views expressed are his own More

LONDON (Reuters) – Middle Eastern and Chinese sovereign wealth funds are likely to avoid new deals in Russia for now after its invasion of Ukraine, said the author of a report published on Wednesday that showed record investment last year by funds around the world.Russia attracted the sixth-highest number of sovereign wealth deals from October 2020 to December 2021, according to the Sovereign Wealth Funds report, a collaboration between IE University’s Center for the Governance of Change and ICEX-Invest in Spain.Investors and companies have rushed to announce they are getting out of Russia, after the United States, the European Union and their allies imposed harsh sanctions over the invasion of Ukraine, sparking a raft of countermeasures from Moscow.”We have seen Western funds pulling out (of Russia) … What is interesting is to see whether Middle East and China funds will decide to do the same or remain or maybe increase because there is less competition,” said Javier Capape, the report’s author.”Probably, I assume, given their typical prudence, particularly in the Middle East, we will not see new agreements until this clarifies a little bit.”Three times as many deals were done as in the previous period, worth about $120 billion, the report said, with the United States the top destination, attracting 129 deals, or 28.8% of the total, followed by India and China. The Russian Direct Investment Fund (RDIF), which had $10 billion under management in February, had prominently cited its record in attracting international co-investments into Russian companies on its website, which is now down, Capape said.There were 14 sovereign wealth investments in Russia in the October 2020-December 2021 period, worth $2.6 billion, his research found.Half were made by the RDIF in conjunction with Abu Dhabi’s investment fund Mubadala or the China Investment Corporation, four by just Mubadala and three by the RDIF on its own.Gulf Arab states have so far taken a neutral stance in the crisis between Western countries and Russia, with the Gulf Cooperation Council (GCC) calling for de-escalation, restraint and diplomacy to end the war in Ukraine.China has refused to condemn Russia’s attack on Ukraine or call it an invasion. China’s foreign minister on Monday described the country’s friendship with Russia as “rock solid.” More