Raphael Stevens

NOTHING SHORT of outright war and plague is as likely to tank India’s economy as much as rising oil prices. Petroleum products made up more than a quarter of the country’s overall spending on imports last year—more than for any other big economy. Could cheap Russian crude lower the bill?India has refrained from condemning Russia for its invasion of Ukraine, even as the West has imposed sanctions. But big Russian banks have been cut off from the SWIFT messaging system used for cross-border transactions and American measures have largely blocked the use of dollars, complicating trade. Sergei Lavrov, Russia’s foreign minister, was due to visit Delhi on March 31st, after we wrote this. One item on the agenda was expected to be finding ways to work around sanctions to enable Russian oil sales to India.Oil-and-gas firms in the two countries already work together. ONGC Videsh, the Indian government’s overseas oil-and-gas exploration and production arm, is involved in three projects in Russia, for instance; Rosneft, a Russian state-owned giant, owns 49% of Nayara Energy, a Mumbai-based firm with 6,000 filling stations and a large refinery in Gujarat.Yet overall oil trade between the countries is limited: according to India’s government, less than 1% of its oil imports last year came from Russia. The fact that trade is a mere trickle is a reflection of geography rather than politics. India bought oil from Iran, another country that faced American sanctions, until about 2019. But Iran is separated from India only by a body of water. By contrast, there are neither direct overland routes nor short water crossings from Russia to India.In recent weeks a spate of reports in the Indian media have detailed new purchase agreements for Russian crude by Indian state-run oil companies. Hindustan Petroleum was said to have purchased 2m barrels and Indian Oil 3m barrels; Mangalore Refinery and Petrochemicals has sought to buy 1m. Others are said to have made bids for Russian oil, too.All told, the amount comes to perhaps 15m barrels, around three days of India’s consumption. But this is seen as the first sign of closer engagement. Russia is said to have offered to pay transport and insurance costs, while offering steep discounts.The main difficulty, though, is payments. To deal with Iran after it came under sanctions in 2011, India used Uco Bank, a state-run firm with foreign operations that extended only to Singapore, Hong Kong and Tehran, and which was therefore outside the West’s regulatory net. This time around, however, Singapore has cracked down on Russian transactions, meaning Uco cannot be used.India’s government and central bank are therefore mulling other options. One idea that is reportedly being considered is using SPFS, Russia’s alternative to SWIFT, to conduct cross-border transactions, which would circumvent the dollar’s financial plumbing. Another proposal, according to the Economic Times, involves using the Indian operations of several large Russian banks as a conduit for transactions, by opening rupee accounts for Russian exporters.The problem, however, is that trade between the two countries is unbalanced: India imports more than twice as much from Russia as it exports, which would leave Russian sellers holding on to unwanted rupees. Plenty for Mr Lavrov and his hosts to chew over. ■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 Finance & economics section of the print edition under the headline “Side channels” More

MOST AMERICANS want the government to impose higher taxes on the ultra-rich. Every few months or so Democratic lawmakers unveil plans for doing just that, only to stumble well before enacting them. It is not just that the wealthy can afford powerful lobbyists. The nature of their fortunes also makes them an elusive target for tax authorities. A new proposal by the Biden administration may offer a partial solution, provided it can overcome political and legal hurdles.The idea, contained in President Joe Biden’s new budget proposal on March 28th, is that Americans worth more than $100m would pay a minimum tax of 20% on all their income, including, controversially, the appreciation of their investments. If an ultra-rich American makes a paper gain of, say, $10m on his stock portfolio in a year, he would face a liability of $2m.The goal is to close a gaping loophole. Wealthy Americans must pay capital-gains taxes of at least 20% when they sell assets. But when assets are inherited, the price at the time of the transfer forms the new basis for calculating capital gains. In this way the ultra-rich can shrink their tax bills: they owe nothing on unsold assets while alive and their heirs then benefit from the “stepped-up basis” for capital gains. Economists in the Biden administration have calculated that the 400 wealthiest American families pay an average federal income-tax rate of just 8%, far below the rates paid by most in the middle class.A simple way to close this loophole would be to recognise all capital gains upon inheritance. Indeed that was Mr Biden’s preference in legislation last year. But opponents tarred it as a “death tax” that would bankrupt family farms. Although that charge was unfair—almost all farms would have been below the tax threshold—the Democrats dropped the idea.The Biden administration dubs the new proposal a “billionaire minimum income tax”. Steve Rosenthal of the Tax Policy Centre, a think-tank, calls this an ingenious rebranding of the stepped-up basis idea. “It would operate like a pre-payment,” he says. Taxes owed at death would be reduced by those paid previously.The White House reckons the new tax would bring in $360bn over the next decade, impressive for a levy that hits the wealthiest 0.01% of households. That, however, reflects a windfall for the state when it collects on decades of gains for the likes of Jeff Bezos and Elon Musk. To pay the tax, they may need to sell down stakes in their firms, potentially remaking their ownership structures. The government would cushion the blow by breaking payments into instalments (spread over nine years at first and, later, five years). Once established, the revenues would be slimmer. “The $360bn estimate makes it look more promising than it really is in the long run,” says Kyle Pomerleau of the American Enterprise Institute, a think-tank.There are two immediate obstacles. As with every idea from the Biden White House, the political question is whether Joe Manchin and Kyrsten Sinema, two moderate Democratic senators, support it. They have, for different reasons, opposed previous tax increases. Then there are the courts. The constitution limits the federal government to taxing incomes, not wealth. The White House would argue that accrued capital gains are a form of income, but its proposal would face legal challenges.Even if Mr Biden were to succeed in shepherding the tax into law, another concern would emerge. The levy would be complex, especially for assets that do not trade in public markets. Lawyers would devise new structures to shelter wealth. “Their pencils are being sharpened even as we speak,” says Joel Slemrod, an economist at the University of Michigan. ■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 Finance & economics section of the print edition under the headline “Before death do us part” More

THE SRI LANKAN economy was in danger well before Russian tanks began rolling into Ukraine. Burdened by foreign debts and squeezed by the effects of the pandemic on its tourist receipts, Sri Lanka’s government dithered over approaching the IMF for help as the year began. Now a devaluation of the currency and the impact of the war on commodity markets is sending consumer prices soaring. Troops have been deployed to calm the crowds queuing for fuel, and a debt default may be unavoidable. As the prices of everything from oil and gas to corn and wheat surge, other countries may fear a similar fate.Food makes up a modest share of households’ budgets in the rich world, but accounts for more than 20% of consumer spending across most of the emerging world and about 40% in sub-Saharan Africa. Prices had already risen substantially over the past couple of years, owing to interruptions to production and extreme weather. Global food prices, in real terms, approached an all-time high in February, according to an index maintained by the UN Food and Agriculture Organisation. They will have only gone up further since.One consequence of this is a surge in poverty. The Centre for Global Development, a think-tank, estimates that 40m people worldwide will be pushed into extreme poverty as a result of Russia’s invasion of Ukraine. (By comparison, the World Bank estimated in 2021 that roughly 100m people may have fallen into poverty because of the covid-19 pandemic.) High commodity prices will also add to macroeconomic strains in many places.Total debt across emerging and developing economies stood at a 50-year high last year, relative to GDP. The cost of servicing those borrowings is rising, as central banks worldwide begin pushing up interest rates in order to check inflation. The tough economic conditions are weighing on emerging-market currencies, raising the cost of foreign-currency debt and forcing governments to drain currency reserves in order to shore up exchange rates. Higher commodity prices could also further complicate the fiscal picture for emerging economies, given that many governments offer generous food and energy subsidies to households.Sri Lanka’s case is illustrative. Its foreign-exchange reserves shrank from more than $8bn in 2019 to around $2bn earlier this year. Though the government has sought aid from both India and China, it will almost certainly require help from the IMF, with which it is expected to begin negotiations in April (and which may ask for a reduction in subsidies as part of any rescue package).Egypt has also struggled. It imports nearly two-thirds of the wheat it consumes, the vast majority of which comes from Russia and Ukraine. At a pre-pandemic level of consumption, Egypt’s annual bill for food and energy imports amounts to about 40% of its foreign-exchange reserves (see chart). Sensing trouble, foreign investors began pulling money out of the country, which in turn forced the government to devalue the currency by 14%. On March 23rd it officially sought the IMF’s help.According to estimates by the World Bank, at least a dozen countries may find themselves unable to service debts over the next 12 months, as stores of hard currency run low. Some south Asian and north African economies are in danger; Pakistan and Tunisia look particularly vulnerable. Even emerging markets with healthier financial positions can expect to face slower growth, higher inflation and grumpier citizens as a result of Russia’s war.The news is not all grim. Economies that specialise in the production of the commodities most disrupted by the war stand to reap some benefit from soaring prices. Oil-exporting Gulf states will collect a windfall, which higher prices for imported foodstuffs will only partly offset. Some Latin American currencies have appreciated since the outbreak of war, in expectation of higher earnings for their oil and grain exports. In 2021 Brazil seemed to be slipping into crisis, weighed down by high inflation and fiscal profligacy. The war has given the country, which is a big commodity exporter, a reprieve. For much of the rest of the world, though, it has been anything but. ■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 Finance & economics section of the print edition under the headline “Menu costs” More

FIGHTING INFLATION gets harder the longer it is put off—and the Federal Reserve has waited quite a while. For most of 2021 the central bank said that it had the tools to slow price rises, but saw no need to put them to use. Now investors are coming to terms with the fact that the Fed will have to deploy them at scale. Since March 1st the three-year Treasury yield has risen by more than a percentage point, the biggest absolute change since yields collapsed in January 2008 during the global financial crisis.The move reflects the emergence of expectations that the Fed will increase interest rates by another two percentage points this year, having already raised them by a quarter of a point on March 16th. The impact has been felt worldwide. On March 28th the Bank of Japan promised to buy Japanese government debt in unlimited quantities over four days in order to defend its cap on the ten-year government-bond yield. The yield on ten-year German bunds, which turned positive only in January, now stands at over 0.6%, even as soaring energy prices darken the growth outlook.The most important question for bond investors in America is whether the higher interest rates that are arriving hard and fast can bring about a fabled “soft landing”, in which the heat is taken out of the economy without provoking a recession. Past experience suggests that this will be difficult; tightening has often preceded downturns. Jerome Powell, the Fed’s chairman, has pointed to successful soft landings in 1964, 1984 and 1993. But those comparisons do not account for the difficulty of the present situation. In none of those cases did the Fed let inflation rise as far as it has today.The central bank’s latest projections are rosy, portraying what its critics have dubbed an “immaculate disinflation”: three years of steadily falling inflation, despite GDP growth remaining above its long-run trend and both the unemployment rate and the Fed’s policy rate remaining unusually low. Mr Powell may have given up calling inflation “transitory”, but these forecasts make sense only if inflation goes away of its own accord.It seems likelier that the central bank will have to squeeze inflation out of the economy. Noting that there is no precedent for doing so gracefully, Bill Dudley, a former head of the New York Fed, wrote in a Bloomberg column on March 29th that a recession was now inevitable. The r-word is also in the air because yields on some short-term bonds have risen above those on longer-term bonds. Such a yield-curve “inversion” suggests that investors expect interest rates to be cut eventually as the economy weakens.An inverted yield curve is often regarded as a sign that markets think the central bank is making a mistake. The uncomfortable truth, however, is that a recession and a mistake are not the same thing if causing a downturn is the only way to restore price stability. In the 1980s Paul Volcker’s Fed vanquished inflation by inducing recessions that pushed the unemployment rate to 10.8%. Nobody accuses it of having done so inadvertently; rather, it chose to pay the high price of disinflation. That is not a position in which today’s central bankers want to be; they talk as much about their duty to support jobs and growth as they do about ensuring stable prices.The good news for Mr Powell is that for all the chatter about the yield curve, investors remain mostly on his side. Most economists put the neutral level of interest rates, at which monetary policy is pressing on neither the accelerator nor the brake, at around 2-2.5%. Both the Fed and the bond market expect the policy rate to overshoot that level only slightly. Rates a notch or two above neutral can hardly be compared with Volcker’s tightening. The market expects immaculacy, too, believing that modestly tight money will be enough to control inflation.The recent predictive record of both central bankers and bond markets has been poor, however. Just a year ago the Fed’s message was that it was not even “talking about talking about” tightening monetary policy, and investors expected consumer prices to rise by just 2.7% over the following year. If they are caught out again, the Fed could find that meeting its inflation target demands that it induce a recession. The yield curve would then invert more steeply.In that scenario America would pay a dear price for the glacial pace of action in 2021, which was justified, ironically, by the supposed dangers of sudden moves. It has left the central bank, the world economy and asset prices on more perilous ground.Read more from Buttonwood, our columnist on financial markets:The parallels between the nickel-trading fiasco and the LIBOR scandal (Mar 26th)Can foreign-currency reserves be sanction-proofed? (Mar 19th)Iran’s flourishing stockmarket reflects its resilient economy (Mar 12th)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 Finance & economics section of the print edition under the headline “Late to disinflate” More

Amazon has chosen to renew a deal allowing JPMorgan Chase to issue the tech giant’s flagship rewards credit card, ending months of heated negotiations, CNBC has learned.
American Express, Synchrony and Citigroup were among the issuers involved in discussions, and Mastercard had hoped to displace Visa as payments network, said people with knowledge of the talks.
Known for driving hard bargains with partners, Amazon pushed issuers to accept their terms, which included having to fork over part of the bank’s revenue from making loans, as well as rebate some of the interchange fees the bank would normally keep, said the people.

Jeff Bezos and Jamie Dimon.
Getty Images | CNBC

Amazon has chosen to renew a deal allowing JPMorgan Chase to issue the tech giant’s flagship rewards credit card, ending months of heated negotiations, CNBC has learned.
The Amazon Prime Rewards card was one of the industry’s most highly coveted co-brand deals, a rare prize because of the massive scope of Amazon’s loyalty program, with its estimated 150 million U.S. members, according to people with knowledge of the talks.

While JPMorgan has issued Amazon’s card since it was little more than an online bookseller two decades ago, that didn’t stop Amazon from soliciting bids to replace the bank in mid-2021. American Express, Synchrony and Citigroup were among the issuers involved in discussions, and Mastercard had hoped to displace Visa as payments network, said the people, who declined to be identified speaking about the private process.
“This was a once-in-a lifetime opportunity to penetrate Amazon and have a step change in your card business,” said one of the people.  “If Chase were to lose it, it would be the shot heard around the payments world. Any winner would gain instant credibility and a new growth story for Wall Street.”
Credit card deals with popular brands including Amazon, Costco and American Airlines have become some of the most hotly contested contracts in the financial world. That’s because they instantly give the issuing bank a captive audience of millions of loyal customers who spend billions of dollars a year. The biggest pacts can make up a disproportionate share of an issuer’s business; American Express lost 10% of its cards in circulation when Citigroup won the bid for Costco’s card in 2015.
The card deals are so important to banks that CEOs including JPMorgan’s Jamie Dimon and Citigroup’s Jane Fraser are known to get involved hashing out the transactions, the people said.

Tense talks

Discussions for the Amazon card included JPMorgan’s stance that it could walk away from the two-decade long partnership and sell its loan portfolio, Bloomberg reported in June. Loans made by Amazon Prime customers held at the bank’s Chase division total roughly $20 billion, said the sources. Doing so would ignite an arduous process of switching over millions of customers to a new bank while making sure their cards still worked perfectly.

That may have been a negotiating tactic on the part of JPMorgan, because while Amazon experienced torrid growth during the pandemic as people were forced to stay home, other segments that Chase cards are known for — hotels, restaurants and entertainment — declined sharply. That made Amazon even more important for the biggest U.S. bank by assets.
Despite their importance for banks and to American consumers, who have become obsessed with maximizing card rewards, the contracts themselves are shrouded in secrecy. Amazon required participants to sign non-disclosure agreements and ran its own RFP, or request for proposal, for the deal, largely excluding third-party consultants, said one of the people.
Known for driving hard bargains with partners, Amazon pushed issuers to accept their terms, said the people. That included maintaining the card’s rich 5% rewards rate for Amazon.com and Whole Foods purchases, while also having to fork over part of the bank’s revenue from making loans, as well as rebate some of the interchange fees the bank would normally keep, said the people.

Longer deals

As big retailers flexed their leverage over banks during the past decade, forcing lenders to accept more onerous revenue-share terms and offer richer rewards, the deals have grown longer in duration. What had typically been five-year contracts have stretched into seven- and ten-year deals, or even longer, according to industry participants, giving the banks a better chance at making money on the cards. For instance, Citigroup’s Costco deal is effectively a decade long, said two of the people.
Several of the banks involved had hopes that they could dislodge JPMorgan for at least part of the business, perhaps by being named as a secondary issuer along with Chase.  American Express and Synchrony already had other cards with Amazon, including small business and private label offerings. They and the other banks declined to comment for this story.
Payments network Mastercard sensed an opening last year amid a dispute between Amazon and Visa over the interchange fees the ecommerce giant is forced to pay. Mastercard solicited interest from banks including American Express, seeing if they could partner up to displace Chase and Visa, said one of the people. Conveniently, Visa and Amazon reached a global agreement last month that allowed Visa cardholders to continue using their cards.
In the end, Amazon chose to stay with JPMorgan and the Visa network. The corporate relationship stretches all the way back to 2002, when a Chicago-based lender called Bank One (led by CEO Jamie Dimon at the time) first signed up the promising young internet company to a card deal. Bank One was acquired by JPMorgan two years later.

Dimon-Bezos

The personal relationship between Dimon and Amazon founder Jeff Bezos goes back even further, to Amazon’s early days. Dimon has said he even briefly entertained joining Amazon before taking the Bank One job. More recently, the leaders formed a three-company joint venture with Berkshire Hathaway called Haven that aimed to disrupt American health care before disbanding the effort in 2021.
The companies’ latest deal means that for users of the popular Amazon Prime Rewards Visa Signature card, little will change. Prime members will still earn 5% back on Amazon.com and Whole Foods purchases — a top rate among rewards cards — as well as 2% at restaurants, gas stations and drugstores, and 1% elsewhere.
In a brief statement provided to CNBC, Amazon Vice President Max Bardon said the company looked forward to “continuing our work with Chase and its technology and capabilities to enable this seamless, benefit-added payment option to Amazon customers.”
For its part, JPMorgan touted the “multi-year” co-brand deal and said it was “incredibly proud” of its relationship with Amazon.
“Looking to the future, we’re excited to continue delivering new features for this product that delight card members,” said Chase co-CEO Marianne Lake.

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