Philippa Kaur

AS THE TRAGIC human consequences of Russia’s invasion unfold, there is little to celebrate beyond the stoic resistance of outgunned Ukrainian forces and Western unity in facing up to the unprovoked aggressor. One side-effect of the war is a sudden and profound shift in European attitudes to defence spending. Those expectations are behind a surge in the market value of firms that supply the weapons with which war is waged (see chart).The idiosyncratic nature of the defence industry explains why it was having a good year even before Vladimir Putin sent tanks into Russia’s smaller neighbour. Arms makers’ customers are mainly governments. Guaranteed sales translate into predictable revenues. Contracts designed to pass on cost increases shield companies against inflation. The ability to withstand rising prices was a big reason for the sector’s outperformance relative to the stockmarket as a whole in the past few months.McKinsey, a consultancy, notes that defence budgets—and so armsmakers’ revenues—are a function of threats and affordability. The spike in share prices since the attack on Ukraine reflects investors’ belief that the threats will outweigh the costs in governments’ calculations. Germany made the first move, surprising pundits with an about-turn. On February 27th it said it would spend an extra €100bn ($111bn) on defence in 2022, tripling its defence budget for the year. Besides this one-off investment, Germany aims to raise its annual spending from around 1.5% to 2% of GDP by 2024. A slug of the annual increase, equivalent to €18bn or so, will go on weapons.The Russian threat may well encourage other laggards such as Italy, the Netherlands and Spain to meet NATO’s guidelines for all members to spend 2% of GDP on defence. Citigroup, a bank, reckons that spending will now rise more rapidly and that 2% will become a de facto minimum across NATO. Jefferies, another bank, points out that if all NATO members meet the target, their combined defence budgets (excluding America’s giant one) will go up by 25% to a total of around $400bn a year. Outside NATO, Sweden and Finland, both within striking distance of Russia, are likely to ramp up spending, too.Defence spending covers an array of costs such as wages and operational expenses. Kit accounts for between a fifth and a quarter of the total. Jefferies reckons that procurement budgets in NATO (excluding America) could rise by 40-50% as armed forces gear up to face the Russian threat. Because European countries favour domestic arms manufacturers, European firms have seen the sharpest gains in their share prices. That of Rheinmetall, which makes military vehicles, weapons and ammunition, surged by nearly 70% in a matter of days. Hensoldt, a maker of military sensors, more than doubled its market value. Britain’s BAE Systems, Europe’s biggest defence firm, saw its share price rise by a quarter thanks to its large business serving European infantries. Thales of France and Leonardo of Italy made similar advances.For once, America’s military-industrial complex has lagged behind its European equivalent. Lockheed Martin, Raytheon and L3Harris sell equipment around the world, but mostly to America’s government. The Pentagon already accounts for nearly two-fifths of global spending (or nearly half if you exclude countries such as Russia and China, which are not markets for American weapons). American military spending is unlikely to rise as sharply as Europe’s. But the revived threat from Russia will put paid to the idea, floated by some in Washington, to limit it on the margin. Russian revanchism raises the likelihood that Congress will shovel more money to the armed forces in the coming years.Bernstein, a broker, points out that past regional conflicts, such as Russia’s invasion of Georgia in 2008, its annexation of Crimea in 2014, and the first Gulf war in 1990, boosted defence stocks for roughly six months, while the rest of the market wilted in the fog of war. The scale of the threat to Europe and the world, and the possibility of a long confrontation in Ukraine, may mean the boost lasts longer this time. That would perpetuate a secular trend. As Bernstein observes, weapons-makers have “massively outperformed” the S&P 500 index of big American firms for more than 50 years. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Advancing on all fronts” More

AFTER RUSSIA’S annexation of Crimea in 2014 Europe feared that Vladimir Putin would cut supplies of piped gas passing through Ukraine to European customers. That worry led Poland’s then prime minister, Donald Tusk, to issue a stark warning: “Excessive dependence on Russian energy makes Europe weak.” As a full-scale invasion of Ukraine by Mr Putin’s forces unfolds, Europe looks, if anything, weaker. Despite some efforts to diversify supply, install cross-border gas connections and build plants to import liquefied natural gas (LNG), in the decade to 2020 Russian exports of piped gas to the EU and Britain shot up by a fifth by volume, to make up roughly 38% of all that fossil fuel consumed in Europe. That year more than half of German gas came from Russia.Mr Putin’s latest aggression may at last shake the old continent out of its energy complacency. On February 22nd, as Russian tanks were preparing to roll into Ukraine, Germany suspended final approval of Nord Stream 2, a controversial new gas pipeline linking it with Russia. Days later the chancellor, Olaf Scholz, vowed “to change course in order to overcome our import dependency” with more renewables, bigger domestic stores of gas and coal, and revived plans for LNG terminals. At the EU level, a wide-ranging proposal to guarantee the bloc’s “energy independence”, due to be unveiled by the European Commission on March 2nd but postponed as a result of the war, is expected to advocate strategic stocks and mandatory gas storage to deal with the Russia risk in the short term, and a dramatic expansion of renewable energy and clean technologies such as hydrogen in the long run.That would be a giant shift in EU energy policy, which used to focus merely on ensuring that energy markets remain competitive. In the past few years, as climate became the dominant concern, the policy’s goals broadened. With the threat of Mr Putin’s weaponisation of energy looming ever larger, even the twin objectives are “not enough”, says Teresa Ribera, a Spanish deputy prime minister. The EU must now reconcile three competing objectives: cost, greenery and security.Europe has made real progress on the first horn of this “energy trilemma”. Liberalisation of energy markets has helped keep prices down through competition. The continent has also got serious about decarbonisation. But if Europe is to shake off its reliance on Russian gas, sacrifices on cost and climate may be unavoidable.Start with the short term. Last month Ursula von der Leyen, the commission’s president, insisted the EU could survive this winter even with “full disruption of gas supply from Russia”. Gas storage units were emptier than usual a few months ago, owing in part to low levels in those operated by Gazprom, Russia’s state-controlled gas giant which controls 5% of the EU storage capacity. They are fuller now. High prices have lured LNG cargoes from Asia. If Mr Putin turned off the taps, prices would rocket again—attracting more LNG. European governments would squirm, then pay up for the remaining weeks of winter, after which gas consumption drops off sharply. They have also secured promises of emergency supplies from Japan, Qatar, South Korea and other allies if needed. And they could tap “cushion gas”, a layer of stores not normally meant for consumption.Over the medium term, the outlook darkens. Nikos Tsafos of the Centre for Strategic and International Studies, a think-tank, reckons that Europe imports around 400bn cubic metres of gas a year. Replacing the 175bn-200bn it gets from Russia with a mix of alternative supplies and reduced gas consumption will be “very tough” beyond 2022, he says. Stumbling into spring with badly depleted stocks will make preparing for next winter difficult.To gird itself for a possible crunch, Europe needs to stockpile Russian gas while it is still flowing (ideally over the summer, when gas prices tend to dip). It has to find alternatives to Gazprom’s molecules, lest these evaporate. It needs somewhere to keep those alternative molecules until next winter. And it must tap non-gas energy sources to use the reserves sparingly.Easier said than done. EU law makes it hard to make Gazprom pump more gas to stockpile even in normal times, which these patently are not. European gasfields in Britain and the Netherlands are past their prime. North Africa, which typically supplies less than a third as much as Gazprom, cannot increase exports enough to offset the Russian deficit.Europe could regasify a lot more LNG than it is doing (see map)—if, that is, it could get more of the stuff. Contracted flows and limited global liquefaction capacity make that unlikely, explains Richard Howard of Aurora Energy, a research firm. LNG cargoes can be redirected from Asia at a price, but Asian customers preparing for their own winters will be eyeing them, too.To complicate matters, much of Europe’s regasification capacity sits on its western coasts in Spain, France and Britain. Trans-border gas connections and “reverse-flow” capabilities are better than a decade ago but still lacking. Spain’s under utilised regasification plants are useless in a crisis because its gas links over the Pyrenees are puny and hard to upgrade. Getting all that gas to Germany and other big inland customers is a (literal) pipe-dream, worries a European regulator.Given these constraints on supply, European demand may need to fall by 10-15% next winter to cope with a Russian cut-off, estimates Bruegel, a think-tank in Brussels. Matthew Drinkwater of Argus Media, an industry publisher, believes that “some rationing” may be necessary.The problems do not disappear in the longer term. Shell, a British energy giant, forecasts a gap between global supply of gas and demand for it in the mid-2020s. Europe will feel the pinch more than most because of the ways it has discouraged investment in gas. A reliance on spot markets attracts short-term supplies in a crunch but does not send a clear signal about longer time horizons. Adrian Dorsch of S&P Global Platts, a research firm, notes that despite risk for the winter after next, European utilities have done little to secure future supplies. Without government mandates or subsidies, seasonal price differentials are insufficient to justify investments in more storage, says Michael Stoppard of IHS Markit, a research firm.Europe’s green policies aren’t helping. The EU has been schizophrenic about gas. Some member states, like Germany and Ireland, accept that new gas plants are needed as back-up and a bridge to a cleaner future. Others, such as Spain, want to deny natural gas the “green” label for climate reasons. Although the EU has recently reclassified gas as a “green transition” fuel, the designation comes with lots of strings attached. The confused boss of a big American LNG exporter grumbles that no European utility will sign a long-term contract with him “because they don’t know what their governments will or won’t allow” a decade from now.Various think-tankers reckon Europe can wean itself off gas almost entirely. Simon Müller of Agora estimates that wind and solar energy could generate 80% of Germany’s power in less than eight years. Lauri Myllyvirta of the Centre for Research on Energy and Clean Air thinks it is feasible on paper to replace all of Europe’s Russian gas imports, equivalent to 370 gigawatts (GW), with renewables capacity. China plans to install more than that by 2025.Such projections look too rosy. Wind and solar farms are harder to build in democratic Europe than they are in command-and-control China. Christian Gollier of the Toulouse School of Economics points to “massive local opposition” in France to wind projects. Regional squabbles among regulators and other bureaucratic delays can stretch the approval process for Italian wind and solar installations to six years. According to S&P Global Platts, western Europe shut down 9GW of coal power and more than 5GW of nuclear power in 2021. Non-intermittent low-carbon replacements, such as battery storage and biomass, have not kept pace.As with gas, EU member states talk at cross-purposes when discussing alternative energy sources. While Germany has been shutting down its nuclear fleet, France and the Netherlands want to expand theirs. By 2030 Spain will phase out coal, whereas Poland will still get more than half its power from the dirtiest fuel (and replace most decommissioned coal plants with ones burning gas). This confused approach makes it harder to reach the common goal of ditching Russian gas.Even if Europe managed to pull off the shift to renewables, it would still need gas to heat homes and businesses. Though the power sector is often in the cross-hairs, it represents less than a third of western Europe’s gas demand. Residential use accounts for some 40%. Reducing gas use in homes requires heavy investments in electric heating, better insulation and super-efficient heat pumps.Some uses, like high-temperature heat in industrial processes, cannot be easily replaced by green electricity. On one estimate, only 40% of Europe’s industrial use of gas is in low-temperature applications that can be readily electrified. Hydrogen may one day do the job, as well as powering vehicles, generating electricity or providing long-term energy storage. But even the technology’s boosters like Ms Ribera in Spain concede that the hydrogen dream will take a decade or more to realise.None of this is impossible for Europe to achieve with wise policymaking and pots of money. If war on its door step doesn’t focus European minds, nothing will. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Out of Russia’s shadow” More

IT TOOK MORE than 30 years for BP, a British energy company, to build its Russian business. It took less than four days to decide to dismantle it. As Vladimir Putin’s forces invaded Ukraine early on February 24th, the logic of BP’s 20% stake in Rosneft, Russia’s state-owned oil giant, began to collapse. BP’s board met to discuss the matter on February 25th; later that day Britain’s business secretary, Kwasi Kwarteng, expressed the government’s concern to Bernard Looney, BP’s boss. By February 27th the board was ready to make its decision public: BP would sell its stake in Rosneft. Mr Looney has resigned from Rosneft’s board (as has his predecessor, Bob Dudley). The company may face a write-down of up to $25bn.Mr Putin’s war has prompted a reckoning for multinational firms. Russia presents a host of risks, from reputational damage to logistical disruption and the peril of violating sanctions. For many firms disentangling from Russia, a middling market, will do little damage to their broader business. For others it will be financially painful and logistically difficult.Many other multinationals have, like BP, spent decades scouring for opportunity in Russia. In 1974 Pepsi became the first Western product made and sold behind the Iron Curtain. Disney hoped to charm sullen Soviets with screenings of “Snow White” and “Bambi” in Moscow and Leningrad in 1988. More companies arrived after the collapse of the Soviet Union—Danone, a French yogurt-maker, peddled its snacks from a store on Tverskaya Street in Moscow in 1992. BP opened its first petrol station in 1996.Now companies are racing to devise new strategies for an uncertain era. The most decisive breaks with Russia came from entities with the least to lose. Norway’s sovereign wealth fund said it would freeze all investments in Russian equities—which account for a piddling 0.2% of its portfolio. Companies with larger exposures to the Russian market are more circumspect. Renault, a carmaker, and Danone earn 9% and 6% of revenue in Russia, respectively, and have announced no plans to scale back.Many Western businesses find themselves somewhere in between. Their response is similarly middling: a pause rather than a rupture. UPS and FedEx, two American logistics companies, have suspended deliveries to Russia. CMA CGM, Maersk and MSC, three European shipping giants, said they would not sail there. Bain, Boston Consulting Group and McKinsey, three management consultancies, are rethinking their business in Russia. Boeing is suspending deliveries of parts, maintenance and technical support for Russian airlines that use its aeroplanes.Some of these actions were doubtless provoked by companies’ fears that they might fall foul of an expanding array of Western sanctions against Russia. Volvo, a Chinese-owned carmaker based in Sweden mentioned “potential risks associated with trading material with Russia, including the sanctions imposed by the EU and US” as a reason for suspending sales in Russia.But companies are fielding explicit or implicit demands from their home governments and, in some cases, domestic consumers in effect to boycott Russia even beyond the scope of official measures. On March 1st Apple stopped selling its products in Russia. Disney and other Hollywood studios said they will delay the release of films on Russian screens. Google, Meta and Twitter are seeking to limit Russian propaganda on their online platforms.Some of these moves present quandaries for companies. Any decisions by tech firms in Russia, for instance, may complicate their situation in other controversial markets. Apple’s tough stance over the Ukraine war highlights its historically pliant position in China, a giant market that has admittedly not invaded any neighbours but whose rulers are accused of human-rights abuses. McKinsey’s declaration that it would not do business with “any government entity” in Russia comes after years of criticism for its work with state-backed enterprises there and in China. Complying with demands from governments seeking to punish Mr Putin presents practical problems for firms, as well as moral and reputational ones. Non-Russian companies that lease aircraft to Russian airlines are a prime example. They have more than 500 jets and turboprops in the country, according to Cirium, a consultancy. Those lessors have the unenviable task of trying to recover the planes before sanctions against the supply of aircraft take effect later this month.It is energy companies that have the most at stake. For years international oil firms provided capital and expertise to their Russian partners, who controlled the reserves and had the local know-how. In a sign of companies’ enthusiasm for Russia, European supermajors maintained investments there even as they trimmed their oil business elsewhere. Last year Rosneft accounted for 50% of BP’s reserves and 11% of operating profits. Shell, a rival British giant, operates joint ventures with Gazprom, Russia’s state-owned gas company. For TotalEnergies, a French company, Russia could supply 17% of growth in output over the next five years, reckons Wood Mackenzie, an energy consultancy.TotalEnergies, which has long tolerated risky jurisdictions, is resisting calls to exit. But energy firms are re-evaluating their positions in real time. Three other big firms—Shell, Equinor of Norway and ExxonMobil of America—have all said they would follow BP’s lead and leave. How quickly that might happen is another question. ExxonMobil has cautioned that safely exiting its project in Russia’s far east would take time. Selling stakes in joint ventures or in Rosneft itself may prove difficult, particularly if Russia’s government maintains the ban it has just imposed on the sale of foreign-owned Russian assets in order to stanch capital flight. The moral and reputational case for firms to leave Russia will become stronger the longer the war goes on. It may also become financially and logistically harder. Our recent coverage of the Ukraine crisis can be found here More

IN RUSSIA’S FROZEN north is a megaproject that has long been seen as an answer to President Vladimir Putin’s prayers. By the mid-2020s the Vostok oilfield is expected to supply about 15% of Russia’s crude exports. By that time Rosneft, the Russian oil giant leading the effort, plans to ship Vostok oil via the Northern Sea Route, a shortcut through the Arctic to Asia. The route will enable Russia to bypass the West geopolitically as well as geographically, allowing oil to travel along waters beyond the control of the American navy and out of reach of Western sanctions. Besides Rosneft, its backers include two mostly European oil-and-gas traders, Trafigura and Vitol. For years they have competed fiercely to be amongst the biggest buyers of Russian crude.These firms are part of a group of commodities traders, including Glencore and Gunvor, that often thrive amid geopolitical turmoil. They are clear-eyed realists who in the past have struck deals with autocrats to gain access to cheap raw materials. In recent years some have doubled down on Russia, doing business with the figures that surround Mr Putin, such as Rosneft’s boss, Igor Sechin, and winning big oil and liquefied natural gas (LNG) contracts (piped gas is the domain of Gazprom, a state monopoly). The arrangement served both sides well. The traders invested in Russia and secured more supply from the world’s third-biggest oil-producing country and biggest natural-gas exporter. Higher energy prices bolstered Russia’s hard-currency reserves.But if they believed Mr Putin’s goal was a modern economy that he would not jeopardise by invading Ukraine, they were wrong. In fact, oil revenues have financed an ever more autocratic and belligerent regime. After the West moved to strengthen penalties on Russia’s financial system on February 26th, they faced the consequences of their bet. As one executive put it two days later, everything in the Russian oil business was “frozen”: banks, ports, ships and suppliers. Auctions of Russian crude found no buyers. Prices of oil soared on global markets but so did the discounts on Russian Urals relative to international benchmarks. Fearing sanctions, Russian cargoes became kryptonite.Some traders initially said the paralysis would be short-lived. After all, oil and gas producers were spared sanctions in order to keep Russian energy flowing to the West. One executive described the biggest risk as “overzealous bank compliance officers” causing more damage to Russia’s oil market than the architects of sanctions intended. Yet the traders may have been in denial. The speed with which two European supermajors, BP and Shell, pledged to dump their Russian assets suggested that political and social pressure to withdraw from Russia was mounting in the wake of the invasion. On March 1st Glencore said it was reassessing its equity stakes in EN+, an Anglo-Russian aluminium producer, and Rosneft. A day later Trafigura said it was reviewing its investment in Vostok Oil as it unconditionally condemned the war. Usually the trading houses thrive in times of conflict by keeping their heads down and capitalising on volatility. Not this time. Russia’s war on Ukraine suggests their gamble on Mr Putin may have been a throw of the dice too far.In theory, excluding Russian oil and gas from sanctions should enable the trading houses to continue their day-to-day operations. In practice, it doesn’t because energy trading is as much about the flow of money as of molecules. Cargoes are financed by banks. They require letters of credit guaranteeing payment. They involve frequent messaging between banks working for the buyers and sellers. Until March 1st, when names were released of the seven Russian lenders potentially blocked from the SWIFT interbank-communications system, many energy-related transactions in Russia were halted, traders said, owing to the counterparty risk. Moreover, fears surfaced that as Russia’s aggression on Ukraine escalates, sanctions will be strengthened. “The tit has to be reasonably in line with the tat,” says Jean-François Lambert, a commodities consultant.The problem is exacerbated by the length of time cargoes of oil and LNG spend at sea. By the time they reach port, sanctions on Russian energy may be in place. “The biggest grey area is that no one knows what comes next,” says Daniel Martin, who specialises in shipping rules at HFW, a law firm. Logistical chaos compounds the uncertainty. Oil-tanker rates on the Black Sea adjacent to Russia and Ukraine have surged as fighting has intensified.As well as business risks, the trading firms face reputational ones. This is exacerbated by long-standing links with firms and individuals at the heart of the regime. In “The World for Sale”, a recent book, the authors argue that the merchants have probably been more engaged with Mr Putin’s autocracy than anyone in the world of international business. Despite a standoff between Russia and the West, they made vast loans to Rosneft in exchange for oil-supply deals. Two years after Russia seized Crimea in 2014, Glencore co-invested $11bn to buy part of the Russian government’s stake in Rosneft (it has since sold almost all of it). Trafigura and Vitol invested in Vostok and afterwards received supply deals from Rosneft. Mark Rossano, CEO of C6 Capital Holdings, a consultancy, believes that both the oligarchs and the traders were caught out by the economic reprisals that the war has unleashed.Merchant misadventurersThey will survive. Even with business in Russia in free fall, crisis breeds opportunity. As Western countries such as America release strategic reserves of crude to stop the price of oil soaring, they are queuing up for cargoes. If Western sanctions on the sale of Iranian oil are lifted so that it can offset a potential loss of Russian crude, they have the contacts to move the stuff. But these are dangerous times. The West’s reaction to Mr Putin’s war is visceral. It is one thing to be considered a non-aligned merchant providing the world with what it needs. It is another to be seen as a mercenary.Editor’s Note: After this article was published Trafigura issued a statement about its operations in Russia and condemnation of the war in Ukraine. We have updated the article to reflect this. More

ON FEBRUARY 24TH President Joe Biden announced a suite of sanctions against Russia in response to its invasion of Ukraine. The focus was on the country’s biggest banks, cutting them off from the dollar and limiting their ability to raise money abroad. But the announcement also contained a new kind of sanction, one that attempts to choke Russia’s supply of technological components. Mr Biden reckoned these measures would cut off “more than half of Russia’s high-tech imports”.The American government has done something like this before to Huawei, a Chinese telecoms manufacturer, which it suspected of spying. Donald Trump’s administration spent years honing its export rules in an attempt to stop the firm gaining access to cutting-edge technology. When it finally got the rules right in 2020, Huawei was instantly blocked from buying vital microprocessors from any company in the world that used American technology to produce them. The firm’s revenues plunged by 30% the next year. But export controls have never before been used to punish an entire country. The results are hard to predict. The American government’s stated goal is to “cut off Russia’s access to vital technological inputs, atrophy key sectors of its industrial base, and undercut its strategic ambitions to exert influence on the world stage”. Even if they fall short of that goal, Mr Biden’s measures will be felt by the Russian state. Russia’s companies and citizens are certain to be hit, too. The new controls mean the American government is in effect claiming jurisdiction over any person or company in the world that uses American technology to make products for sale in Russia. It forces anyone who wishes to sell a vast array of technologies, including semiconductors, encryption software, lasers and sensors, to request a licence—which is denied by default. The control is enforced through the threat of further sanctions against any company, person or country which sells to Russia in contravention of the rules. The dominance of American technology, which is used to make products all over the world, means that a huge array of products will be caught in the net. The new rules went into effect as soon as they were published by the Bureau of Industry and Security, the arm of the Department of Commerce which manages America’s export-control regulations. Company lawyers around the world are now poring over them, attempting a first-pass analysis of their clients’ compliance, or lack of it. For some, the task of assessing their entire supply chain for the use of any American technology will be too onerous, and they will simply stop supplying components to Russia as a precaution. This cautionary halt will be the first impact of these sanctions. Most of the sanctions’ intended impacts will only become clear over time, however. Their focus is on businesses operating in specific sectors—defence, aerospace and shipbuilding—not on individual consumers. Software updates for Google and Apple smartphones can continue without licences, for instance, thanks to an explicit exemption for consumer-software updates. Russians did not wake up on February 25th to error messages and failed updates on their phones. Instead, the sanctions will probably bite lightly at first. Only later will they clench their jaws. The reason is structural. American export-control law regards software which carries out encryption to be “controlled”. That makes it subject to the new rules. This means that Russian defence, aerospace or maritime-construction companies that rely on software produced using American technology will lose access to it. The impact on hardware will be felt afterwards, as the components of Russian systems fail and need replacing. Telecom networks are a patchwork of hardware and software supplied by firms from all over the world, many of which will be reliant on American tools for production. Where those networks are operating in the service of the armed forces or aviation, they will face constraints. American tools are unavoidable in the production of chips. All of the biggest producers, including Intel in America, TSMC in Taiwan and Samsung in South Korea, will have to stop sending them to Russia. That will have little immediate effect on end users, whose laptops and phones are all made abroad; it may have a more immediate effect on Russian data centres. These are great arrays of computers, whose data-processing underpins digital services, banks and government systems. As with telecoms gear, individual machines break down (and often). They therefore need a regular supply of hardware to keep going. The new rules will cut that supply, and so Russia’s computing infrastructure will start decaying. Unlike the Trump administration when it went after Huawei, the Biden administration has consulted allies and affected companies ahead of time. This makes the net tighter. In a statement made after the announcement, the Semiconductor Industry Association, an American lobby group, voiced its support for the measures, noting that Russia’s market is too small for its members to be very upset. They were far more worried when America applied the rules to Huawei, a large customer for many firms.Russia has seen this day coming, and attempted to prepare itself by promoting domestic technology over the foreign sort. Some substitution has been successful in areas such as social media and payments. But in the industries targeted by America’s tech sanctions it has not got far. America says its controls on the flow of technology to Russia will be “severe and sustained”. Mr Biden hinted that there were more to come, if needed. America has built a new kind of wall around Russian technology, one that is abstract and legal, but no less formidable for that. ■Our recent coverage of the Ukraine crisis can be found here More

THROUGHOUT MOST of the pandemic Sea Group, a Singaporean super-app, had wind in its sails. Both its e-commerce business, Shopee, and its gaming unit, Garena, were thriving thanks to growing appetite for all things digital. In October Sea’s stockmarket value surpassed $200bn, making it the first South-East Asian stock in history to break into the exclusive ranks of the world’s mega-cap companies.Since then the weather has turned, wiping more than $130bn from Sea’s market capitalisation. The global tech sell-off is only part of the story. Investors also harbour fears that are specific to the company. In January Tencent, a Chinese internet giant, trimmed its stake in Sea from 21.3% to 18.7%. Tencent had earlier reduced its holding from nearly 40% at the time of Sea’s listing in 2017 and gave no explanation for the latest divestment. Whatever the reason, the market didn’t like it, perhaps fearing that Tencent’s retreat implies doubts over Sea’s prospects.This month those prospects took another knock. On February 14th Sea’s stock price tumbled again, after Garena’s flagship mobile game, “Free Fire”, was abruptly made unavailable on app stores in India. Indian media reported that the government had banned “Free Fire”, along with 53 Chinese apps. Sea’s association with Tencent may again have played a role.Sea is Singaporean, and India has no obvious beef with the city state. But it does have one with China. Tensions between the two nuclear-armed giants have been rising. In the past year the two countries’ soldiers have clashed, sometimes violently, at their Himalayan border. This has led India’s government to impose restrictions against hundreds of Chinese apps—or, it now appears, ones with perceived links to China. Sea says it complies with Indian laws and does not transfer any Indian user data to China or store them there.Many existing users in India appear able to keep playing the game. But the loss of new Indian players is a huge blow to Sea. Indians are avid mobile gamers, and there are lots of them. India downloads more gaming apps than any other country, according to App Annie, an analytics firm. In the latest earnings call, Sea’s founder and chief executive, Forrest Li, trumpeted the fact that “Free Fire” was the highest-grossing mobile game in India (as well as in South-East Asia and Latin America, where his firm has been expanding its operations). Sea does not publish a breakdown of Garena’s earnings by country, but some analysts believe that Indian sales may account for around a tenth of the Sea’s digital-entertainment revenue.Lost in the Indian oceanIt would thus be bad enough for Sea if its Indian troubles remained confined to the “Free Fire” saga. Worse, Shopee could be in trouble, too. The e-commerce platform’s rapid ascent up the rankings of Indian apps since a quiet launch last year has apparently irritated the Confederation of All India Traders (CAIT), a lobby group representing small businesses. CAIT has called for Shopee to be banned along with “Free Fire”, claiming in a letter sent on February 15th to India’s minister of commerce and industry that Sea is controlled by Tencent. The fact that CAIT’s claim is patently false may not matter to the Indian government, if the prohibition on “Free Fire” is a guide.Sea’s troubles in India could spell similar problems for South-East Asia’s other super-apps as they try to expand beyond their region. Grab (which in November merged with a special-purpose acquisition company in a $40bn deal that was the largest ever of its kind) and GoTo (the result of a merger between two Indonesian online groups that is likewise eyeing a listing) have also received Chinese investments. Both are focusing primarily on business closer to home for the time being. But as those markets become saturated, India’s 1.4bn consumers would be the obvious next target—not least with China sequestered behind the Great Firewall and the West largely spoken for by America’s technology giants.Despite the recent battering, Sea’s share price is still around three times what it was before the pandemic, outperforming many other technology bets. The Singaporean star remains South-East Asia’s most valuable listed company. Unlike many youngish tech darlings, parts of Sea make money. In the third quarter of 2021 its digital-entertainment arm raked in around $715m in adjusted gross operating profits.That cash, combined with ready access to capital afforded by its size and prominence, allows Sea to cross-subsidise loss-making divisions such as Shopee (which lost $684m in that period on the same measure) or SeaMoney, a fast-growing financial-services unit consolidated in 2019. As the stock suffered in the wake of the Indian “Free Fire” ban, ARK Next Generation Internet exchange-traded fund, a vehicle run by Cathie Wood, a high-profile tech stockpicker, loaded up on Sea shares. Still, investors will need Ms Wood’s famously strong stomach to weather the increasingly choppy waters Sea finds itself in. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Perfect storm” More

PURCHASING A NEW Porsche often involves a long wait. If limited production and aloof dealers weren’t enough of a bottleneck, some buyers face further delays after a fire that broke out last week mid-Atlantic on a ship carrying 4,000 vehicles, including Porsches, from the stable of brands owned by Volkswagen (VW).As with Porsches, so, too, with Porsche the company. Talk of letting investors buy a slice of the illustrious sports-car maker has been in the air almost ever since it combined with VW after Porsche’s audacious attempt to take over the much larger German company in 2008. That misadventure brought Porsche close to bankruptcy, averted thanks to a rescue by VW. One upshot of the affair was for the Porsche brand to become VW’s wholly owned subsidiary in 2012. Another was that the holding company controlled by the secretive Porsche and Piëch families, descendants of the sports-car maker’s founders, became VW’s largest shareholder.A parting of the ways now looks closer than ever. On February 22nd VW and the families’ holding company said they were in “advanced discussions” over an initial public offering (IPO) of Porsche.For VW’s boss, Herbert Diess, the spin-off could not come soon enough. He has been trying to streamline VW’s unwieldy collection of ten distinct marques. Dealing with flashy Porsche, which has always regarded itself as a cut above the rest of the group, is a headache he can do without. Porsche insisted, for example, on developing its own platform to underpin electric models rather than cutting costs by sharing one with the group’s other brands.An IPO would also raise cash for Mr Diess to plough into his reinvention of VW as a maker of software-intensive electric vehicles. Manufacturers of upmarket cars have looked enviously at Ferrari since its flotation in 2015. The Italian firm’s stockmarket value has doubled in three years, to €35bn ($40bn). It is valued more richly, relative to earnings, than the luxury-goods firms it sought to match—let alone than lowly carmakers. (The family holding company of Ferrari’s chairman owns part of The Economist’s parent company.)Porsche is no Ferrari. Its operating margin of over 15% is well below the Italian company’s 25% or so. But it handily outperforms the rest of VW. Despite making only 277,000 of the 11m vehicles that the group turned out in 2019, before the pandemic and the ensuing chip crunch, it accounted for a tenth of the group’s revenues and a quarter of its operating profit. The Taycan, a battery-powered model, shows it has a clear and profitable strategy for electrification that most other sports-car firms lack. Philippe Houchois of Jefferies, a bank, reckons that Porsche is worth €60bn-90bn. That is more than half of VW’s current market capitalisation of €109bn.And the Porsche and Piëch families? By some estimates their members would now be twice as rich had they not attempted the abortive takeover in 2008. And their holding company will need to raise money to buy Porsche stock, perhaps by selling some of their VW shares. But, as Mr Houchois points out, they would at least reclaim a more direct stake in the firm that bears the family name. Perhaps that is what they have been waiting for. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Reverse gear” More

FOR MOST of his life Carl Icahn was vilified for his abrasive personality and his activism as an investor. His mother said he had the spirit of Genghis Khan. Oliver Stone based Gordon Gekko, a fictional predator-in-chief of the junk-bond boom, in part on Mr Icahn. Bill Ackman, no softie, called him a bully who is not used to someone standing up to him, when the two pugilistic financiers fought over Herbalife, a nutritional-supplements business. He is most chief executives’ worst nightmare.Late in life the 86-year-old Mr Icahn seems to be showing his milder side. This month HBO, a TV network, launched “The Restless Billionaire”, a largely sympathetic documentary that tracks his rise from modest beginnings in Queens to one of Wall Street’s titans. And on February 20th Mr Icahn launched a proxy fight for two board seats of McDonald’s to press the fast-food behemoth to require its suppliers to improve their treatment of pregnant pigs. “Animals are one of the things I feel really emotional about,” he told the Wall Street Journal. He reserves especial affection for pigs, which are unusually clever.Mr Icahn’s activist strategy typically involves buying sizeable stakes in under valued companies and seeking to shift the management’s focus to cost-cutting. If managers refuse his demands, he stirs up a shareholder revolt, launches aggressive campaigns on social media to win over public opinion and pushes his own line-up of board members. Such methods have boosted the target’s share price often enough to earn a moniker, the “Icahn lift”, and let Mr Icahn sell out at a juicy profit.All this makes his McDonald’s manoeuvre look out of character. He owns only 200 of the $186bn company’s shares, worth some $50,000. And McDonald’s has heeded his demands for better treatment of pigs, which he first made ten years ago. In 2012 it pledged to stop buying pork for its McRib and breakfast sandwiches by 2022 from producers who use cramped crates to constrain sows for all 16 weeks of pregnancy. McDonald’s concedes that it has not quite fulfilled its pledge, which it blames on delays caused by the covid-19 pandemic and outbreaks of swine disease. Yet by the end of 2022 it expects to source 85-90% of its American pork from sows not housed in gestation crates during pregnancy. By the end of 2024 all of its American pork will come from pigs housed in larger group enclosures when they are with piglet.Mr Icahn’s campaign is also unusual in that McDonald’s is in rude health. Most shareholders are happy with the chief executive, Chris Kempczinski. The company is reporting “some of the highest margins ever”, notes Sara Senatore of Bank of America. Mr Kempczinski, who took over as CEO months before covid-19 spread around the world, has enjoyed tailwinds from the pandemic, which increased McDonald’s online orders and business at its drive-throughs. He has also jazzed up the brand, by teaming up with celebrities such as BTS, a South Korean boy band, Travis Scott, an American rapper and J. Balvin, a Colombian singer. For a limited time, star-struck clients could order a BTS meal (Chicken McNuggets, a medium packet of chips and a medium Coke) or a Travis Scott one (a medium Sprite, a quarter-pounder with bacon and chips with barbecue sauce).Seemingly underpowered activists have notched up several surprise victories against managements of late. Most notably, a year ago Engine No.1, an activist hedge fund with a stake of just 0.02% in ExxonMobil, secured three seats on the oil giant’s board for climate-friendly shareholder representatives. That made large companies think again about dismissing small activist investors as unserious, especially on environmental or social issues that other shareholders may also see as worthy causes. But the ExxonMobil coup took place when the company was underperforming its rivals like Chevron. McDonald’s, by contrast, is running onion rings around its competitors (see chart).Mr Icahn’s nominees are Leslie Samuelrich, an asset manager focused on sustainability, and Maisie Ganzler, an executive at Bon Appétit, a restaurant company. Shareholders will vote on the board’s composition at their annual meeting this spring. The wily Mr Icahn may not get his way, for once. Even if he does, any Icahn lift he cashes in on would scarcely pay for one dinner at the higher-end restaurants he normally frequents. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Burger flip-out” More