Aurelia Butler

Such is the shock over Russia’s invasion of Ukraine that western sanctions have gone much further than seemed likely even a week ago. Not only have several Russian banks been barred from the Swift messaging network, but the EU, US and UK have placed sanctions on Russia’s central bank, sharply reducing access to its foreign currency reserves. These moves will not stop Vladimir Putin’s war in its tracks. But they will put huge pressure on the Russian economy, and squeeze over time the Kremlin’s capacity to wage its war.Since Russia’s aggression towards Ukraine in 2014, Moscow has sought to protect its financial system from possibly being cut off from international markets by the US. Its central bank amassed $630bn in foreign exchange reserves and shifted them away from the dollar and towards the euro, China’s renminbi and gold. Moscow seemed to believe a disunited Europe, dependent on Russian gas, would not join with the US. But around half of Russia’s total reserves are now frozen.Combined with broader financial sanctions, the impact has been sizeable. The rouble has already fallen by more than during Russia’s 1998 default, even though the central bank has doubled interest rates to 20 per cent. Bank runs have not yet materialised but many Russians have been queueing to get hold of cash. While the west is not seeking to target the Russian people directly, the package will squeeze living standards, potentially eroding support for a leader who came to power promising stability after the chaotic 1990s.Oil and gas payments remain largely excluded from sanctions. That may be regrettable, but for as long as Europe depends on Russian supplies to avoid shortages, sanctions on payments would be pointless. If Moscow’s shipments were only partially restricted and not completely stopped, moreover, higher global energy prices would offset some of the cost to Russia. Some of the measures have been put together at high speed. The west now needs to take stock of their impact. Democracies are seeking both to ensure the Putin regime pays a high price for its increasingly bloody attack, and alter the Russian president’s calculus on how far he is prepared to go in his aggression. They must also take into account that imposing a rapid economic collapse would risk provoking a backlash among Russians, who are not responsible for the war, and driving an increasingly paranoid leader into a corner. Sanctions must be calibrated to impose heavy but controlled pressure.Public messaging around their goal also needs to be united and consistent. Loose talk such as France’s finance minister suggesting the purpose was “total economic and financial war against Russia, Putin and his government” can be seized on by the Kremlin. Dmitry Medvedev, former president and now deputy head of Russia’s security council, warned that economic wars often turn into real ones. Signalling to the Kremlin is needed over “off-ramps” — or under what circumstances sanctions could start being eased — to avoid both sides becoming locked into an escalatory cycle.Urgent political and technical planning is required, too, to manage spillover effects on the western financial system. The negative consequences could be unpredictable, with some investors forced to sell their most liquid, safe assets — such as US Treasuries — to compensate for Russian-linked assets being frozen. The effect may also ripple through supply chains in unforeseen ways, with missed payments from Russian trade partners affecting European and US companies. The west has shown unexpected resolve; it will need to show it can take economic pain as well. More

Australia is grappling with record levels of rain and flooding that have killed eight people so far. It is just one more example of extreme weather events that are becoming far more frequent. In grimly apt timing, it underscores the point of a UN report this week that laid bare the irreversible damage climate change is already wreaking on the planet: it is worse than was predicted. Even if, by some miracle, countries abide by pledges to keep global warming to 1.5C above pre-industrial levels, some consequences are now unavoidable. That requires a sea change in tackling the climate emergency. While trying to cut emissions is fundamental, just as much focus is now needed on adapting to the inevitable — while it is still possible.The report by the UN’s Intergovernmental Panel on Climate Change, and its stark conclusions, may seem distant doom-mongering when civilians are being killed today in Russia’s senseless war against Ukraine. Scenes of conflict on European soil not seen since the 20th century have ushered in equally retrograde calls to revive fossil fuel extraction in the west. Reducing Europe’s energy dependence on Russia will be key over the long term but there ought not to be a dichotomy between security and climate. To safeguard both, governments must now redouble efforts to boost renewable energy. In the short term, the unpalatable truth is that western countries may be forced to look closer to home for their oil and gas just to keep the lights on and avoid political and economic instability. But this is precisely because little more than lip service has been paid by many countries to weaning themselves off their dirty energy habit. More geopolitical risk, more instability and ultimately more conflict is inevitable if they do not try to break this addiction in the longer term.Not least this is because 40 per cent of the world’s population, or as many as 3.6bn people, now live in countries that are “highly vulnerable” to climate change, according to the IPCC report. It concludes that just a small temperature rise could trigger significant risks to life. Unsurprisingly, it is people in the very poorest countries that are most vulnerable. A climate “apartheid” that at the very least could spark mass migration is an all too real prospect. As has been proven true during the pandemic, it is in richer countries’ enlightened self-interest to help others. This will take money. The IPCC tried to sidestep the issue of “loss and damage” — a politically charged term that implies richer nations should pay poorer ones for the damage wrought by historical emissions. Countries led by the US have pushed hard against the concept of climate compensation, and the issue is forecast to be a flashpoint of negotiations during the next COP summit in Egypt later this year. Regardless, richer countries need to keep promises already made. A 2009 pledge to channel $100bn in both public and private climate finance to poorer nations by 2020 still has not fully materialised. Doing nothing will only push up costs in the long run.But how money is spent is also key. Climate finance to date has overwhelmingly focused on mitigation rather than adaptation, as the jargon has it. This has meant trying to cut emissions and curb the rate of global warming. As crucial as that still is, finance is needed to help populations adapt to the dangers they already face. That could be in bolstering coastal defences and early warning systems, in improving water efficiency in cities, in better pest control or in rolling out carbon sequestration and storage. These concrete steps should be taken now, before it is too late. More

Target delivered an upbeat outlook in anticipation that supply chain bottlenecks will gradually ease, as the US retailer looks to build on the growth it generated during the pandemic.The Minneapolis-based retailer forecast low- to mid-single digit revenue growth in fiscal 2022, compared with analysts’ expectations of about 2.2 per cent. Target on Tuesday also predicted adjusted earnings per share would rise by high-single digits, while analysts had expected only a modest increase.Beyond this year, the company predicted revenues will grow in the mid-single digits and adjusted earnings will grow in the high-single digits.The quarter “capped off a year of record growth”, chief executive Brian Cornell said a statement, reinforcing the “durability of our business model and our confidence in long-term profitable growth”.Target’s shares closed nearly 10 per cent higher on Tuesday.Consumers are becoming more price-conscious with inflation accelerating to the highest rate in four decades, driving more shoppers to seek discounts at Target and other large chains that are better able to navigate supply chain and labour disruptions.“We have many levers to combat costs, and price is the one we pull last, not first,” Target’s chief financial officer Michael Fiddelke said on an earnings call.Walmart, which reported an unexpected increase in sales for the holiday quarter, said last month that its stores were offering roughly the same number of price “rollbacks” as they did at the end of the first quarter last year.However, some retailers including Home Depot and Macy’s have cautioned that higher costs for merchandise, shipping and labour will squeeze profits further this year.Target, like its peers, has been hit by increased supply chain costs. The retailer’s fourth-quarter gross margin rate shrank to 25.7 per cent, down from 26.8 per cent in the same period a year earlier, because of higher freight and merchandising costs and increased pay and headcount.But the company allayed investors’ cost concerns with forecast-beating earnings in the holiday quarter and guidance calling for an operating margin rate of 8 per cent or higher in fiscal 2022, compared with 8.4 per cent in 2021. Target cautioned that its operating margin in the first quarter would be “well below” its year-ago level but said profitability would improve as the year progresses.Cornell told analysts that companies were dealing with “supply chain constraints that are steadily working themselves out but will likely take more time”, adding that the Ukraine crisis had made inflation and supply challenges “more uncertain.”Big-box stores, where shoppers can stock up on everything from groceries and cleaning supplies to video games and kids’ clothing, generated robust sales during the pandemic, particularly as consumers favoured home delivery and kerbside pick-up options. Target, as a purveyor of essential goods, remained open during stay-at-home orders in 2020. The company’s revenues increased by almost $28bn, or 35 per cent, over the past two years during the pandemic. Its full-year sales rose to $106bn in 2021, crossing the $100bn threshold for the first time. Fourth-quarter earnings at Target advanced to $3.19 a share on an adjusted basis, beating Wall Street’s estimate of $2.86 and up from $2.67 a year earlier. Sales increased 9.4 per cent to about $31bn, slightly below Wall Street’s forecast for $31.4bn in revenues.Comparable store sales rose 8.9 per cent and digital sales increased 9.2 per cent in the holiday quarter that ended on January 29, compared with a year earlier. Target on Monday said it would invest $300mn more on its workforce this year to boost pay and other benefits as American companies compete to lure back workers. It added it would raise its starting wage for hourly workers from $15 to a range of $15 to $24 an hour. More

Italy’s economy expanded at a slightly faster-than-expected rate of 6.6 per cent last year, while its fiscal deficit came in far below official targets, as investment, consumption and exports bounced back from the shock of the Covid pandemic.Italy recorded a fiscal deficit of 7.2 per cent of gross domestic product in 2021, well below the government’s own official target of 9.4 per cent, as Prime Minister Mario Draghi’s bet on a significant fiscal stimulus helped support a robust rebound after the 9 per cent GDP contraction in 2020. Italy’s public debt fell to 150.4 per cent of GDP, down from the government’s official target of 153.5 per cent. The official figures, released on Tuesday, came just a day after Ursula von der Leyen, president of the European Commission, declared that Italy would soon be able to receive its first €21bn tranche from the EU’s Covid recovery fund. “So far, Italy has made good progress in the reforms needed to make its society and economy fit for the future,” von der Leyen said.Italy is set to be the largest recipient of the EU’s Covid recovery fund, and will potentially be eligible to receive nearly €200bn in grants and concessional loans, though the money will only be released in tranches, and requires Rome to adhere to a time-bound agenda of structural reforms. As well as positive GDP figures, there had also been a surge last year in housing investment, which had been sluggish for more than a decade, Stefano Manzocchi, a professor of economics at Rome’s LUISS University, said. “We had a very strong rebound of housing investment, construction investment, which has been stagnant in Italy for a long time,” he added.However, analysts warned that Russia’s invasion of Ukraine — and the impact of the sanctions imposed on Moscow — would put new strains on the Italian economy.Italy is already starting to feel the effects of higher energy prices, which pushed inflation to 5.7 per cent year on year in February, well above the 4.8 per cent year on year recorded in January, which was already a 26-year-high. Draghi’s government has announced that it will allocate €8bn to shield the poorest consumers from surging energy prices. But it insisted that the additional spending would not affect its ability to reduce its fiscal deficit to its target of just 5.6 per cent of GDP in 2022.Italy also remains vulnerable to higher interest rates. “If energy prices boost inflation, and if that triggers a tightening of the monetary policy of the ECB, you are in a worse position than if you don’t have high debt. That is the real risk,” said Italian economist Marco Magnani. Magnani also said Rome could feel tempted to use EU funds to increase spending on energy subsidies — rather than on productive investment, which he said “is not the best place to put that money.” Manzocchi added that business confidence would also likely take a hit as a result of current turbulence. “Investment spirit — or the investment confidence — of our entrepreneurs will be in a way damaged by the crisis,” he said  More

Government bonds staged a powerful rally on Tuesday as investors bet the economic fallout from Russia’s invasion of Ukraine will push central banks to raise interest rates more slowly than previously anticipated. The biggest moves came in Europe, where Germany’s 10-year bond yield sank below zero for the first time in a month as markets reacted to a string of comments from senior European Central Bank policymakers arguing against any drastic shift in monetary policy until it becomes clearer how the crisis in Ukraine will affect the eurozone economy. Derivatives linked to short-term interest rates show that investors now expect the ECB to lift interest rates by less than 0.2 percentage points from the current record low of minus 0.5 per cent by the end of the year. Two weeks ago markets were pricing in a return to zero this year. UK yields also tumbled as investors dialled down their bets on UK rate rises. The 10-year gilt yield fell 0.28 percentage points to 1.13 per cent, the biggest one-day decline since the day after the Brexit referendum in June 2016. US Treasuries were also swept up in the rally, with the 10-year yield falling by 0.12 percentage points to 1.72 per cent, its lowest since late January. Investors still forecast the Fed to press ahead later this month and deliver its first quarter-point interest rate increase since 2018, but expectations about how aggressively it can tighten monetary policy after that point have moderated. Traders are now pricing in roughly five rate rises this year, down from six on Friday. Bets that the Fed may even consider a double half-point adjustment, which wound down significantly before the invasion following tacit opposition from two senior officials, have now been fully priced out.“There’s a big dovish repricing going on,” said Antoine Bouvet, a rates strategist at ING. “The market has taken the view that the implications from Ukraine are that the ECB and other central banks will move more slowly.”Energy prices have surged since the Russian invasion began last week, adding to the headache for central bankers trying to keep a lid on the highest inflation in decades across many global economies. That leaves the Fed to grapple with both the inflationary impacts of the war and the potential for an economic slowdown. “This also has a significant impact on growth globally and in the US,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. “This is clearly going to keep inflation high for a longer period of time. But much of these dynamics are not in the Fed’s control.”He added: “The Fed’s going to have to move but growth will moderate to the point that as you get into the second half of the year I’m not sure the Fed is in a rush.” Rieder said the potential for a slower-moving Fed had made yields on short-term US government debt attractive.Luke Ellis, chief executive of Man Group, one of the world’s biggest hedge fund managers, echoed that view, telling the Financial Times on Tuesday that the Ukraine situation “pushes back” central bank rate rise expectations.Ahead of next week’s policy meeting, ECB officials said the crisis in Ukraine was likely to push up eurozone inflation from its already record levels by aggravating pressures in energy markets and could lower growth by disrupting trade and hitting confidence of businesses and households. “It would be unwise to pre-commit on future policy steps until the fallout from the current crisis becomes clearer,” said Fabio Panetta, an ECB executive board member, in a speech on Monday. “We should aim to accompany the recovery with a light touch, taking moderate and careful steps as the fallout from the current crisis becomes clearer,” he added. This marks a shift in tone from the ECB. Several of its officials signalled before Russia invaded Ukraine that they expected it to “normalise” monetary policy by ending asset purchases earlier than planned ahead of an interest rate rise later this year. The ECB governing council is due to meet next week, when it will publish new economic forecasts that are expected to signal inflation stabilising close to its 2 per cent target over the next two years — a key condition for it to start raising interest rates. However, the heads of the Greek and Portuguese central banks both said on Monday that the war in Ukraine increased the chances of the eurozone economy suffering a period of stagflation — a toxic mixture of stagnant growth and inflationary supply shocks. “I am convinced that the traction of growth that the economy was following will prevail,” said Mário Centeno of Portugal, who is an ECB governing council member, while warning: “A scenario close to stagflation is not out of the possibilities that we can face.”Yannis Stournaras, head of the Greek central bank, said: “We will review the evidence carefully, since we do not want to repeat past mistakes of tightening too early, especially in the face of such an important supply shock like the one caused by the Ukrainian crisis.”Additional reporting by Eric Platt More

Nobody knows how this will end. But we do know how it began. Vladimir Putin has mounted an unprovoked assault on an innocent country. He has committed the worst act of aggression on European soil since 1945 and has justified this vile act with outrageous lies. He has also, for the moment, united the west against him. Putin is not the first tyrant to confuse a wish for peace with cowardice. He has instead roused the anger of western peoples. The result is a range of sanctions on Russia as impressive as it is justified.Putin may be the most dangerous man who has ever lived. He is dedicated to restoring Russia’s lost empire, indifferent to the fate of his own people and, above all, master of a vast nuclear force. Yet resistance, however risky, is imperative. Some will insist that Putin’s actions are the west’s fault and above all the result of its decision to extend Nato. The reverse is the case. Putin has reminded us why the countries that knew Russian rule best were desperate for Nato’s expansion. He has also demonstrated why it was necessary. Europe needed a defended border between Russia and its former possessions. Ukraine’s tragedy is to be on the wrong side of that line. It did not pose a threat to Russia, other than by wanting to be free; Russia posed a threat to it.Sanctions are often ineffective. Those imposed this time will not be. The US imposed sanctions on the secondary market in sovereign debt on February 22. Germany suspended the certification of the controversial Nord Stream 2 gas pipeline on the same day. On February 24, the US, EU and other members of the G7 limited Russia’s ability to transact in foreign currencies. And two days later, a number of Russian banks were removed from the Swift payments network, a freeze was imposed on the Bank of Russia’s assets and transactions with the central bank were prohibited.A thorough analysis by the Institute for International Finance sums all this up: “We expect sanctions imposed in recent days to have a dramatic effect on Russia’s financial system as well as the country as a whole.” A big share of the country’s $630bn in liquid reserves will be rendered useless. The central bank has already had to double interest rates. There are runs on banks. With the exception of energy, the economy will be substantially isolated. (See charts.)The pain will not all fall on Russia. Costs of oil and gas will be high for longer, exacerbating global inflationary pressure. Food prices will also rise. Should Russia cut off its energy exports (at great cost to itself), the disruption would be even more severe. Russian natural gas generates 9 per cent of gross available energy in the eurozone and the EU as a whole. But winter, the season of greatest need, is at least passing.Beyond these relatively specific effects, the combination of war, nuclear threats and economic sanctions hugely increases uncertainty. Central banks will find deciding how to tighten monetary policy even more difficult. The same will be true for governments trying to cushion the blow of energy shocks.In the long term, the economic effects will follow geopolitics. If the outcome is a deep and prolonged division between the west and a bloc centred on China and Russia, economic divisions will follow. Everybody would try to reduce their dependence on contentious and unreliable partners. Politics trumps economics in such a world. At a global level, the economy would be reconfigured. But in times of war, politics always trumps economics. We do not yet know how. Europe will surely change most. A huge step has been taken by Germany, with its recognition that its post-cold war stance is now untenable. It has to become the heart of a powerful European security structure able to protect itself against a revanchist Russia. This must include a huge effort to reduce energy dependency. Tragically, Europe needs to recognise that the US will not be a reliable ally so long as Donald Trump, who views Putin as a “genius”, commands the Republican party. Britain, for its part, has to recognise that it will always be a European power. It must commit itself more deeply to the defence of the continent, above all of its eastern European allies. All this will need resolve and cost money.In this new world, the position of China will be a central concern. Its leadership needs to understand that supporting Russia is now incompatible with friendly relations with western countries. On the contrary, the latter will have to make strategic security an overriding imperative of their economic policy. If China decides to rely on a new axis of irredentist authoritarians against the west, global economic division must follow. Businesses have to take note of this.A war of choice on the children of a peaceful democracy is not an action we in the west can allow ourselves to forget. Nor can we forgive those who started it or those who support it. The memories of our own past must forbid it. We are in a new ideological conflict, not one between communists and capitalists, but one between irredentist tyranny and liberal democracy. In many ways, this will be more dangerous than the cold war. Putin holds unchecked and arbitrary power. So long as he is in the Kremlin, the world will be perilous. It is not clear whether the same is true of China’s Xi Jinping. But we may yet learn that it is.

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This is not a conflict with the Russian people. We should still hope for them a political regime worthy of their contribution to our civilisation. It is a conflict with their regime. Russia has emerged as a pariah ruled by a gangster. We cannot live in peace and security with such a neighbour. This invasion must not stand, since its success would threaten us all. We are in a new world. We must understand that and act [email protected] Martin Wolf with myFT and on Twitter

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