Aurelia Butler

The UK’s labour shortage worsened at the end of 2021, with vacancies climbing to a record, but average earnings began to fall as inflation outstripped growth in pay.Official data published on Tuesday showed unemployment fell to 4.1 per cent in the three months to November, 0.1 percentage points above its pre-pandemic rate. The employment rate rose to 75.5 per cent, but remained 1.1 percentage points below its pre-crisis rate — due to a rise in inactivity that the Office for National Statistics said was driven by older workers dropping out of the labour force.With employers struggling to recruit, the number of vacancies rose to a record of 1,247,000 in the three months to December, equivalent to four in every 100 employee jobs in the economy, with a quarter of a million posts unfilled in health and social care alone.There was little sign of any hit to employment in the early stages of the Omicron outbreak, with real-time data for December showing the number of payroll employees rising by 184,000.Rishi Sunak, chancellor, said the figures showed the jobs market was “thriving”, and economists said the data strengthened the case for higher interest rates to stop the economy overheating. Yael Selfin at KPMG said that if remaining coronavirus restrictions were lifted next week, “the labour market could become even hotter, vindicating the Bank of England’s hawkish stance before Christmas”.But Tony Wilson, director of the Institute for Employment Studies, said the figures were “disappointing”, with inactivity rising despite unprecedented demand for staff. “With nearly as many vacancies as there are unemployed people, employers are facing the tightest labour market in at least 50 years, with labour shortages now holding back our recovery,” he said.

“The good news is that the unemployment rate is back to within a whisker of its pre-pandemic level, but the same cannot be said for the number of people actually employed,” said Kitty Ussher, chief economist at the Institute of Directors, adding: “the legacy of the pandemic appears to be this rise in economic inactivity”.Helen Barnard, policy director at the charity Pro Bono Economics, said there would be “no quick fix” to the rise in economic inactivity because it was driven by growing numbers leaving the workforce due to long-term illness, with “sustained and tailored support” needed to reverse the trend. While staff scarcity has driven faster wage growth in some sectors, the ONS said average earnings were now falling in real terms, with inflation outpacing pay gains. Its headline measure of growth in average weekly earnings, excluding bonuses, was 3.8 per cent for the three months to November — leaving earnings flat in real terms over the same period, and down 1 per cent in November alone.James Smith, economist at ING, argued that growth in employment and wages would slow over the coming months, after a period in which both employers and employees had been “playing catch-up”, and that the Bank of England would not raise interest rates as much as markets were currently expecting. Hannah Slaughter, senior economist at the Resolution Foundation, said that while the jobs market was healthy, falling wages would worsen a cost-of-living crunch, adding: “The big picture is that Britain will emerge from the pandemic with pay packets shrinking, and over a half a million fewer people in the labour market.” More

The Bank of Japan has shifted its view on inflation risk for the first time since 2014, driving the yen lower as a nation that has battled deflation for decades faces the mounting pressure of price rises in food and energy. Despite the historic change of view, the BoJ made no change to its monetary stance on Tuesday, opting to keep its negative interest rate, asset purchases and yield curve control policies unchanged.The BoJ revised its inflation projection upward from 0.9 per cent to 1.1 per cent for the fiscal year starting in April. The central bank, which said that a pick-up in Japan’s economy had become “evident”, also changed its price risk assessment from “skewed to the downside”, an expression that had been used since October 2014, to “generally balanced”.Although the BoJ’s move was widely expected, speculation that the central bank might come under pressure to respond more aggressively to rising prices had grown ahead of this week’s meeting. Japan’s price rises, though striking in a country that has grown used to flat or falling prices, remain lower than elsewhere in the world, particularly the US and Europe.After the BoJ’s announcement, the yen fell against the US dollar, at one stage dropping back below the ¥115 mark and into a range close to a five-year low.The BoJ left a minus 0.1 per cent target for short-term interest rates unchanged and pledged to guide long-term rates around zero as inflation remained below its 2 per cent target, even as other big central banks have shifted to tighten ultra-loose policies. “We need to keep a close eye on whether the rise in prices will have a negative impact on the income environment and sentiment of households before the improvement in employment and wage increases begin,” said Haruhiko Kuroda, BoJ governor, on Tuesday afternoon.When asked whether the softening yen could become a burden, Kuroda said that “for now, there is no change to our view that the weaker yen helps boost the prices and therefore has a positive impact on the Japanese economy”.

Marcel Thieliant, senior Japan economist at Capital Economics, said in a note after the announcement: “We are even more pessimistic than the bank about the medium-term outlook for inflation. “Tightening in those circumstances would make a complete mockery of the 2 per cent inflation target and we’re sticking to our view that the bank will keep interest rates low for the foreseeable future.”Since the previous outlook report was compiled in October, import costs have risen due to high energy prices and the weaker yen. The year-on-year increase in Japan’s wholesale prices in November and December remained high at 8 to 9 per cent, reflecting a surge in input costs. Companies selling everything from food to household items have started to pass those costs on to consumers. Consumer spending has increased since Japan lifted a state of emergency in cities including Tokyo in October, but coronavirus infections have also surged with the spread of the Omicron variant. The government is set to place prefectures, including the capital, under a quasi-state of emergency again, which could have a knock-on effect on consumer behaviour. More

Good morning and welcome to Europe Express.The long road to implementing last year’s global deal on corporate taxation is only beginning, but the French approach to advancing at least the 15 per cent minimum tax rate is hitting resistance in several member states. With EU finance ministers discussing the plans today, we’ll unpack the issues and why Paris seeks maximum celerity on this ahead of April’s presidential elections.Meanwhile in Strasbourg, the European parliament, which is voting on a new president today, paid tribute last night to David Sassoli, attended by several EU leaders, including France’s Emmanuel Macron and Italy’s Mario Draghi. European Commission president Ursula von der Leyen, who was headed to Strasbourg by car yesterday, made a U-turn after finding out that her driver had tested positive for Covid-19.In Spain, prime minister Pedro Sánchez received the new German chancellor and fellow centre-left family member Olaf Scholz. But political affinities aside, Madrid still has to wait for Berlin to allow changes to EU’s fiscal rules that would exempt green investments from deficit and debt calculations.And with the French presidency having started with a strong rhetoric on trade, we’re exploring what “reciprocity” means in the context of farming after yesterday’s first agriculture council of the year.Taxing TimingLast year’s OECD deal agreeing a framework for corporate taxation was never meant to be the end of the battle, write Sam Fleming in Brussels and James Shotter in Warsaw.The next stage is implementation into national laws, and the process promises to be politically fraught in both Europe and the US. As a reminder, the global deal signed in October contains two “pillars” — one forcing the major multinationals to declare profits and pay more in the countries where they do business, and the second requiring a 15 per cent global minimum effective corporate tax rate. The European Commission late last year put forward a draft directive implementing Pillar 2, which will need approval of governments and the European parliament. Proposals bringing into force Pillar 1 will, on the other hand, only come after a multilateral convention containing the details of the arrangement, expected by the OECD this summer. It falls to France, which holds the EU’s rotating presidency, to drive the process forward. Paris is eager to show as rapid progress as possible on the minimum tax as Emmanuel Macron prepares his expected bid to seek re-election in April.Finance ministers will hold a discussion today during the Ecofin in Brussels over where things stand, and not all capitals like what they see. Some member states — among them Hungary, Poland and Estonia — want to firmly link implementation of the two pillars together, rather than allowing one to run ahead of the other. Their reasons vary, but one motivation is sustaining pressure on the US to drive through both parts of the agreement and not just half of it.Estonia was in any case cautious about the international tax deal given the particularities of its tax system. Hungarian prime minister Viktor Orban meanwhile has elections looming this spring, sharpening his appetite for fights with Brussels. The French presidency and the commission both oppose the idea of making implementation of one part of the package legally contingent on the other. “We intend to advance on both pillars as quickly as possible,” said one EU official, who warned that holding progress up for Pillar 1 would endanger plans for implementation by 2023. “We should avoid negative spillovers by allowing a delay in agreeing one pillar to affect progress on the other.”While some EU diplomats profess optimism about the parallel process in the US, the outlook there is increasingly dicey. The minimum tax was attached to the Build Back Better legislative package that was torpedoed late last year. And the Pillar 1 element faces a rocky road as the midterm elections loom later in 2022. Chart du jour: Covid pass effectEuropean countries that introduced Covid passes increased uptake for vaccines and improved public health and economic performance, potentially helping to avert lockdowns, according to a study by Bruegel. (More here) Olaf and PedroWill Germany’s new Social Democratic-led government allow the EU’s fiscal rules to become a bit more forgiving? That’s the hope that Sánchez expressed when Scholz came calling yesterday. But the German chancellor made clear his esteem for the Stability and Growth Pact that southern Europe is far less fond of, writes Daniel Dombey in Madrid. Meanwhile in Brussels, Germany’s new finance minister, Christian Lindner who hails from the frugal-minded Free Democratic party, told fellow eurozone ministers that returning to the bloc’s fiscal rules would help control inflation. Germany is open to suggestions on how to improve the framework, but a “real debate” on reforming the rules will only start in June, he said. In Madrid, Scholz struck an evasive tone, lauding the stability pact as a “framework” for European co-operation and avoiding committing to any loosening of the bloc’s deficit and debt rules. With a debt-to-GDP ratio of 120 per cent, Spain is particularly keen to revise the stability pact, which France and Italy have already demanded be revised to favour debt raised for “necessary investments”.Standing next to Scholz, Sánchez said the rules were “too complex and hard to meet in the context of the pandemic”, arguing they needed to be reformed to facilitate investments in the energy transition and digitalisation.Sánchez declared the two leaders were “in tune” and shared ambitions about strengthening the EU, “moving forward social Europe and defending our Social Democratic values and principles”. Ties between the German SPD and Spanish Socialists go back decades — notably to Spain’s transition to democracy, when the German party gave its Spanish counterpart a helping hand.The meeting appeared highly amiable, with Scholz waxing lyrical about Europe walking forward hand in hand, and Sánchez decrying any attempt to divide the EU into rival camps. And neither evinced much sympathy for Novak Djokovic, the unvaccinated tennis player just deported from Australia. “The rules have to be followed,” said Sánchez, striking a slightly different note from his disquisition on the stability pact.Reciprocity for farmersLiberté, égalité, fraternité, réciprocité! The French presidency of the EU loves a slogan. And French agriculture minister Julien Denormandie was anxious to ram home his message yesterday after chairing his first council of agriculture ministers this year, writes Andy Bounds in Brussels.Denormandie uttered the phrase at least a dozen times in a post-meeting press conference as he made clear Paris’s priorities for the next six months.The council defined reciprocity as ensuring “that agri-food products imported into Europe abide by the EU’s environmental and health standards, particularly in the sustainable use of phytopharmaceutical products”. Farmers complain about the costs of complying with EU agricultural standards while the bloc accepts imports from countries with less stringent rules. The theme is not new but Denormandie said debate had shifted in France’s favour recently. (The UK was a big opponent). “Reciprocity was a camp — you would be pitting yourself against others who would defend a more liberal approach. That is no longer the case,” he told reporters after the meeting. No minister objected to the idea, he said. Paris wants to use “mirror clauses”, which would allow bans on products produced with lower standards, arguing they would be WTO compliant. However, some member states and commission officials disagree and fear a slew of legal cases. The ministers were also briefed about a 27 per cent annual rise in global food prices in the year ended November 2021. Banning cheap imports might yet prove a hard sell to cash-strapped voters.What to watch today EU finance ministers meet in Brussels to discuss a draft minimum corporate taxation lawThe European parliament votes for its new presidentNotable, Quotable

Back to Normandy: German foreign minister Annalena Baerbock is pushing to revive the France-Germany-Russia-Ukraine (“Normandy”) dialogue format to de-escalate tensions over Ukraine.Zemmour fined: French presidential candidate Éric Zemmour was convicted of hate speech by a Paris court and ordered to pay a fine of €10,000 for “inciting racial hatred”. He would face 100 days in prison if he did not pay, the court ordered.Suisse Covid-gate: Credit Suisse chair António Horta-Osório was ousted on Sunday after an internal investigation into his serial Covid-19 quarantine breaches and “excessive” use of the bank’s corporate jet. Recommended newsletters for you More

Cookies on FT Sites

We use
cookies
for a number of reasons, such as keeping FT Sites reliable and secure,
personalising content and ads, providing social media features and to
analyse how our Sites are used. More

Sometime in the spring of 2020, Sam O’Leary’s phone began ringing off the hook. The callers were managers from the auto and aerospace industries. They were all seeking help from his industrial 3D printing business in Germany, SLM, in producing vital parts that were suddenly becoming scarce as the Covid-19 pandemic disrupted international shipping.“I didn’t do a single day away from the office,” says O’Leary, who took to showing off the company’s specialised machines to clients over video calls. His customers’ worries were always the same, he says: “I’ve got a massive problem, I need to de-risk, I need to reshore.”SLM’s customers had hitherto used its technology for niche applications, such as producing gooseneck brackets for planes and brake callipers for performance vehicles.But, despite the increased cost and complexity of 3D printing metal components, they turned to the technology for more commonplace parts — such as hinges that keep regular car seats in place.So, while many other industrial businesses saw their order intake slow to a standstill, revenues at the Lübeck-based company — whose shares had fallen to record lows before the pandemic hit — grew by more than a quarter in 2020.Sales were on track to have increased by a similar amount in 2021. For 2022, O’Leary expects SLM’s sales to grow by 40 per cent.High-profile disruptions to global supply chains in the past couple of years — including the temporary blockage of the Suez Canal, floods and fires in Texas and Japan, as well as ongoing semiconductor production bottlenecks — have led to similarly rosy forecasts for the rest of the so-called “additive manufacturing” sector.Last year, a study by Lux Research estimated that the market for 3D printed parts, which was worth $12bn in 2020, would grow to well over $50bn by the end of the decade.Governments across the world have sought to address how, and where, components are made. In Germany, the recent chronic shortage of semiconductors led to millions fewer cars being produced than customers wanted to order. As a result, it is one of many countries to have pledged to support the “reshoring” of crucial component manufacturing to protect their economies.

But, despite such enthusiasm, evidence increasingly points to the fact that businesses like SLM are serving a small market. A survey of European companies conducted by EY in the early spring lockdowns of 2020 found that more than four-fifths were considering bringing their supply chains closer to home. When the same survey was conducted in April last year, however, that view was shared by just 20 per cent of respondents. Similarly, only 15 per cent of the multinational companies surveyed by the Association of German Chambers of Industry and Commerce (DIHK) said they would relocate production.Their stance was echoed by sports goods group Adidas. Just five years ago, the company launched a scheme to build factories in Germany and the US that would use local materials and advanced manufacturing techniques, such as 3D printing, to produce bespoke trainers for nearby customers.

It had to all but abandon this plan as the Covid-19 pandemic began. But, after supply chain disruptions cut Adidas’ revenue growth by around €600 million in the three months to the end of September 2021, boss Kasper Rorsted was adamant that he had not changed his view on reshoring manufacturing.“We have approximately 800,000 people deployed in our [suppliers’] factories,” he said in November. “It is an illusion to believe that you can move an industry that has grown over 30 years in Asia, to a very sophisticated industry, to some regions.”Even if that was theoretically possible, Rorsted added, raw materials would still need to be sourced from around the world to produce the parts, making the prospect of reshoring a “total illusion”.“You wouldn’t even be able to find the people [that would need to do the work currently being done in Asia],” he said. Economists in Germany are also unconvinced. “If the EU were to decouple even partially from international supply networks, this would considerably worsen the standard of living for people inside the EU as well as for its trading partners, and should thus be avoided by all means,” warns Alexander Sandkamp. He is one of the authors of a study by the Kiel Institute for the World Economy that suggested that regionalising production would cost Europe hundreds of billions of euros.The recent flood disasters in Germany, which cost the country €40bn, according to insurance group Munich Re, was further proof that “shocks can also occur on our doorstep,” Sandkamp adds.

Even SLM’s O’Leary is quick to add a caveat to his company’s bullish forecast. “We work primarily with regulated industries,” he says. “So, if you’re in an aerospace supply chain . . . you don’t just buy a 3D printer and say: ‘OK, well, I’ve decided to move away from my supplier wherever [they are] in the world and I’m going to do this in-house’.”A recent development programme with a major UK aero-engine manufacturer, he adds, took two years to get up and running, due to the time needed to install the necessary machines on-site and get the necessary approvals from Britain’s Civil Aviation Authority.“The demand is definitely increasing,” says O’Leary. “But there’s also a reality in that this is a technology and a change that is regulated and takes time.”Additional reporting by Olaf Storbeck More

In October last year, Volvo Group unveiled the world’s first vehicle made using “green” steel. The autonomous electric truck weighed eight tonnes and was designed for use in quarries and mines.It was the result of an industrial partnership between Swedish steelmaker SSAB, the state-owned electricity generator Vattenfall, and iron-ore miner LKAB. Their aim was to make the first steel free of fossil fuel by replacing the coking coal traditionally used in its manufacture with green hydrogen.The partnership, dubbed “Hybrit”, is at the cutting-edge of European industry efforts to develop more energy-efficient, low-carbon manufacturing techniques. Many initiatives were already under way before the coronavirus hit, but the pandemic has focused industrial leaders’ minds on the importance of reshaping and strengthening supply chains, and coping with longer-term challenges — in particular, climate change. “It is no longer about the lowest cost producer, it is about resilience in your supply chain,” says Stephen Phipson, chief executive of British trade body, Make UK. Manufacturing executives in the UK, he points out, are re-evaluating ‘just-in-time’ manufacturing processes and how much inventory to hold in future to ensure greater resilience. The importance of skills has also moved up the agenda, especially as companies battle to attract and maintain workers after the pandemic, which has left many short of staff. But business leaders caution that wholesale transformation will not happen overnight.

SSAB’s Hybrit ‘fossil-free’ pilot steel plant © SSAB

A survey by McKinsey last November underlined the challenges. In a previous survey, in May 2020, most companies stated that they planned to pursue several paths to improve supply-chain resilience, including diversifying supply bases. But, in practice, by the end of 2021, most had mainly increased their inventories. The more recent survey found that 61 per cent of companies had increased inventory of critical products and 55 per cent had taken action to ensure they had at least two sources of raw materials. Only 11 per cent had “nearshored” production, to avoid the risks of disruption from geographically remote suppliers. Duncan Johnston, UK manufacturing leader at Deloitte, says: “Changing things in manufacturing takes time. You can’t change what was a global supply chain into something that is more near-shored or UK-centric very quickly”.The same, he says, is true of sustainability ambitions. While companies have done some thinking about it, they have not yet “really embarked on the substantial journey that is needed to reduce carbon emissions in the UK economy”. Manufacturers face several challenges along the way. Apart from reducing the emissions in their own processes, they need to consider those in their supply chain. They need to find new ways to power their activities and, in some cases, such as the automotive sector, completely re-engineer their products. Heavy manufacturing industries, such as steel and cement, are among those at the forefront of efforts to decarbonise countries’ economies. Outside of power generation, the iron and steel sector is the largest industrial producer of carbon dioxide. It accounts for 7 per cent-9 per cent of all direct fossil fuel emissions, according to the World Steel Association. To meet global climate and energy goals, the steel industry’s emissions must fall by at least half by the middle of the century, according to the International Energy Agency. Achieving such a reduction will require more than incremental improvements in the efficiency of traditional blast furnaces. “We have come to a point where, in terms of efficiency improvement efforts, there is not much more room left,” says Martin Pei, chief technical officer at SSAB. “It is really breakthrough technology that we are looking at now.”

The delivery of fossil-free steel in Oxelösund © SSAB

In the blast furnace process, companies use carbon to take oxygen from iron ore to get iron. SSAB will instead use clean hydrogen gas, produced in a facility called an electrolyser powered by Sweden’s abundant renewable electricity. The output will be a solid intermediate, called sponge iron, which goes into an electric arc furnace, where it is mixed with scrap and refined into steel.The successful production of Volvo’s first heavy-duty truck shows that the “whole value chain works,” says Pei. SSAB has estimated that metal from its hydrogen-based process will, at least initially, be 20-30 per cent more expensive than conventional production. Pei, however, says that customers are keen and that demand for greener steel is growing as more and more companies commit to decarbonising their supply chains. Policymakers will need to play their part, too, in helping manufacturers transition to a low-carbon economy. For Europe’s steel industry to switch en masse to hydrogen, for example, would require a massive expansion of renewable power. State support would be needed to fund the necessary investment in expanding power grids and other infrastructure to accommodate the transformation to low-carbon economies.

Hydrogen is a prime example. The EU and the UK have both published ambitious plans to develop a hydrogen economy but obstacles remain to making this a commercial reality. For example, says Phipson, the UK has a “very small innovative sector on hydrogen . . . the challenge is to scale that up”. Britain, he adds, is very good on innovation and research funding but what is needed is “scale-up capital”. As for funding sources, he says: “There is a big commitment from companies to use private capital but the government also needs to play its part.”Transforming the workforce to deal with this transition is another concern. Even before the pandemic, manufacturers were worried about the effects of an ageing workforce and how to attract younger talent with more digital skills. “We don’t know any manufacturing business that has as much in the way of digital skills as they would like,” says Johnston. Those worries have grown, with many employers emerging from the pandemic with even more unfilled jobs. Phipson wants to see more action from the government on this front, as well.“[It] needs to get more ambitious about its skills,” he believes. At the moment, the skills shortage is a “drag on growth”. More

Ayatollah Ruhollah Khomeini once said the purpose of the 1979 revolution in Iran was to promote Islam, not the economy. Focusing on the latter would reduce human beings to animals, according to the founder of the Islamic republic. More than four decades later, the regime’s ideology and hostility to the US remain intact but the economy is very much at the forefront of leaders’ minds. New president Ebrahim Raisi has sought to assure Iranians that his priorities were tackling economic woes and boosting their welfare.The solution has been adopting a “resistance economy” against sanctions imposed by Washington, which accuses Tehran of developing the atomic bomb and fomenting terror operations in the Middle East. Iran can foil hundreds of US punitive measures by focusing on its domestic market; curbing its reliance on imports; increasing exports of non-oil goods to neighbours; and selling more oil to China.Iran’s leaders say the economy has started growing again as a result. Indeed, the Islamic republic has weathered some of the biggest economic and military threats in recent years, a resilience partly reflected in the World Bank’s latest report.In its economic forecasts published last week, the international lender said Iran’s economy was “gradually recovering following a lost decade (2011-2020) of negligible economic growth”.After a two-year contraction, Iran’s gross domestic product grew by 6.2 per cent year on year in the period from March to May, the first quarter of the country’s 2021-22 fiscal year. This was thanks to expansion in oil and services sectors and less stringent Covid-19 restrictions.

Meanwhile, oil production — Iran’s lifeline — is rising: it reached 2.4 mbpd in January-November 2021, although it is still behind the pre-sanction level of 3.8 mbpd in 2017, the bank said.The positive developments have emboldened Tehran at a time when its diplomats are negotiating with world powers in Vienna to resurrect the 2015 nuclear deal, from which the US under Donald Trump withdrew in 2018. Iran promises it will roll back its huge nuclear advances only if the US lifts all sanctions first and guarantees no other US leader would abandon the deal. Economic resistance would continue if not. Hardliners in Tehran, who control the Islamic republic’s most powerful bodies, shrug off warnings at home that such a stance could dearly cost the country as well as the regime in the long run.The World Bank report noted that GDP growth was “from a low base”. It said real GDP in the previous financial year ended in March 2021 stood at the same level as a decade ago “while the country forewent the demographic window of opportunity (a highly educated young population)”. The latest economic rebound “only marginally reduced” the income gap with economies in the Gulf, the report noted.In Iran, patience is running thin. Iranians say numbers are meaningless when their purchasing power is being eaten away with 43.4 per cent inflation (even though it has started going down). Inflation coupled with high unemployment and fluctuations in the currency and capital markets is fuelling pessimism. The government’s plans to further cut subsidies on basic commodities and medicine have heightened inflationary fears. Masoud Mir-Kazemi, Iran’s vice-president for budget affairs, said Iran could at most earn a net income of $16bn in petrodollars next financial year, just enough to import basic commodities and pay civil servants. “We are under sanctions and it’s impossible” not to slash subsidies, he said last week.But for a regime that came to power through street protests, fears of history repeating itself, this time against the Islamic republic, are never far away. Demonstrations are no longer sparked by the educated middle class to demand more social and political freedoms. Recent protests have been mostly over economic woes, whether caused by the government or by a severe drought.Mehdi Asgari, a member of parliament opposing a cut in subsidies, said last week that more than 10m families struggled with poverty “and millions more [were] heading” in that direction. “They no longer can afford meat and rice and now you want to take away their bread and cheese, too?” More

Russia’s efforts to reduce its reliance on the global financial system have made it better prepared to weather the sanctions that the US and Europe have warned would follow a new attack on Ukraine.The relative success of what investors have called Moscow’s “Fortress Russia” strategy is likely to make western threats less of a deterrent, analysts say. Meanwhile, the EU has not weaned itself off Russian gas, making any restrictions on Russian energy exports potentially self-damaging — and leaving the possibility for Moscow to retaliate by limiting supplies.The western sanctions under discussion could go far beyond those passed following Russia’s annexation of the Ukrainian peninsula of Crimea in 2014. They could ape punitive measures used against Iran and North Korea that all but cut the countries off from the global economy.But Russia’s finance ministry, which has stress-tested worst-case scenarios for years and set up a unit working to counter possible measures from the US Treasury’s Office of Foreign Assets Control, says Russia’s economy could withstand even those types of measures.“Obviously, it’s unpleasant, but it’s do-able. I think our financial institutions can handle it [if] these risks emerge,” finance minister Anton Siluanov said last week.The possibility of Russian aggression against Ukraine and subsequent financial retaliation from the US and Europe has increased after talks in Geneva and Brussels to defuse tensions were deemed “unsuccessful” by the Kremlin last week. Russian president Vladimir Putin has deployed more than 100,000 troops along the Ukrainian border and threatened military action unless the west meets a series of security demands.“When Putin asks what do we do if we get punished with sanctions for military actions, his officials can salute and say, ‘Yes, Vladimir Vladimirovich, we know exactly what to do’. And that gives them a sense of confidence that sanctions aren’t anything to worry about,” said Alexander Gabuev, a senior fellow at the Carnegie Moscow Center. Since 2014, Russia has ramped up its foreign currency reserves and sought to start “de-dollarising” its economy.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Central bank reserves have soared more than 70 per cent since late 2015 and now surpass $620bn. Dollar reserves made up about 16.4 per cent of total reserves last year, from 22.2 per cent in June 2020, according to data published last week. About a third of the reserves are in euros, 21.7 per cent are in gold and 13.1 per cent are in renminbi.In 2017, Russia gave its coffers another boost by merging its reserve fund with a newly created National Wealth Fund that accumulates surplus oil and gas revenue.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Surging oil prices, which have climbed beyond Russia’s budgetary break-even price of $43 per barrel, have boosted the fund to $190bn as of the third quarter of 2021. Russia expects it to grow to $300bn by 2024. Meanwhile, government debt is equivalent to about 20 per cent of GDP and is forecast to fall to 18.5 per cent by the end of 2023, according to credit agency Fitch Ratings.Russia has also learned to lean less on foreign investors. Foreign ownership of Russian government bonds has dropped to 20 per cent after Washington barred US investors from trading in newly issued state debt last year. The measures have reduced foreign investment but also made the country less vulnerable to future external shocks or a sudden sell-off. The finance ministry sold most subsequent issuances following the ban to state-owned banks. Russian companies have learned the lesson of the first sanctions, when many struggled to raise funds to pay off loans from western banks: corporate loans from foreign lenders have slumped from $150bn in March 2014 to $80bn last year.The 2014 sanctions and those sanction-proofing efforts have had a cost: The Russian economy has grown 0.8 per cent annually on average since 2013, compared with 3 per cent for the global economy. The conservative fiscal policy has restricted social spending and infrastructure investment. Real incomes have plummeted in the same time period.Putin declined to spend the National Wealth Fund on pandemic relief, favouring a more limited stimulus than most western countries and a faster easing of Covid-19 restrictions, which epidemiologists say contributed to one of the world’s highest death tolls per capita.The stability of Fortress Russia “is a sort of post-Soviet style stability, where you sacrifice economic growth for the sake of stability”, said Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs.While Russia worked at reducing its dependence on foreign financing, the EU did little to reduce its reliance on Moscow’s energy exports — running the risk that sanctions could backfire.The bloc imports more than 40 per cent of its gas and a quarter of its oil from Russia — leaving it exposed to shocks.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

“The EU hasn’t learnt from its mistakes since 2014,” said Shagina. “It aimed to diversify from Russia in terms of gas, it aimed to become more resilient and more geopolitical. But we don’t see it.”The west also relies on Russia for other important natural resources such as titanium. This could deter any sanctions against VSMPO-Avisma, the largest supplier of titanium for Boeing’s aircraft.That interdependence may even make it more difficult for the west to pass broader sanctions against Russia’s financial sector. The US and EU are discussing a ban on transacting with major Russian state banks or cutting the country off from the SWIFT global payments system — but could only do so effectively if they stopped buying its exports, Gabuev said.“You have to leave a channel open to pay Russia for oil and gas. [Sanctions] won’t make Putin change his mind, because any damage will be acceptable and the Kremlin thinks it has an answer,” Gabuev said. More