Economy

Steps by banks and building societies to help UK borrowers cut their monthly mortgage payments risk storing up financial trouble later in their lives, as they face a higher total interest bill and lower income in retirement, financial advisers warned. Following the surprise announcement by the Bank of England that it was raising interest rates by half a point to 5 per cent, borrowers were hit by another wave of mortgage rate rises last week, leaving households coming off a fixed-rate deals in the months ahead facing a “mortgage shock”.Big lenders, including Barclays, Halifax, HSBC, Nationwide, NatWest, Santander, TSB and Virgin Money pushed up the cost of their products. Santander raised rates twice in a week.The surge in mortgage costs has piled pressure on the government. An owner of an average priced property with a 25 per cent deposit, who is refinancing a two-year fixed-rate deal, would have to pay an extra £580 a month on a new fix, according to consultants Oxford Economics.In the wake of the BoE’s decision, chancellor Jeremy Hunt brokered a deal with the UK’s biggest lenders for a “mortgage charter” designed to give struggling borrowers options for slimming — at least temporarily — their monthly mortgage payments as their budgets groan under the weight of higher bills. Measures include the option of switching from a capital repayment mortgage to an interest-only loan; or extending the term of their mortgage, which spreads repayments out over a longer period. In either case, borrowers can ask for six months under the new arrangement with no effect on their credit score. After that, if they wish to prolong it, they must take an affordability test with the lender. 

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The initiative could provide a lifeline for those on the cusp of affordability. But property analysts and financial advisers fear that those who choose not to switch back risk damaging their finances in the long term. Extending a mortgage terms beyond the historical norm of 25 years is a long-running trend, particularly among first-time buyers. Stretched by affordability tests and high house prices, they have been increasingly signing up to “marathon mortgages” as long as 40 years.The proportion of first time buyers taking out mortgages of at least 35 years more than doubled over the 12 months to March to 19 per cent, according to the latest data from UK Finance. There was a similar trend among those moving house with the proportion of loans of between 30 to 35 years rising from a fifth to a quarter.For many it can be the only way to get on or move up the housing ladder. One consequence, however, is a bigger total interest bill over the life of the mortgage.Extending a £200,000 mortgage from 25 to 35 years would cost almost £39,000 more in interest, assuming 3 per cent interest over the life of the loan. At £400,000, that 10-year extension means an extra £77,500, according to investment broker AJ Bell. “Before households leap to take advantage of the new flexibility they need to really consider the long-term impact,” said Laura Suter, AJ Bell personal finance analyst. Moreover, the relief provided may not be as great as borrowers hope, warned Adrian Anderson, director at mortgage broker Anderson Harris. “If you’re coming off a rate of 2 or 3 per cent to a current rate of 5 or 6 per cent, even if you move to an interest-only mortgage the problem is you’re still paying far higher monthly payments than you were before. It may not be enough of a saving for a lot of people.”Financial planners also fear the mortgage crisis will seriously affect pension saving. Officials figures from March found 38 per cent of working-age people were not saving enough even before higher housing costs to provide them with an adequate income in retirement relative to their pre-retirement earnings. The figure rises to 55 per cent for higher earners. Signing up to a mortgage term that extends into retirement compounds this problem, said Gail Izat, managing director for workplace at Standard Life. “I absolutely understand why easing the short term burden by adding to the mortgage term makes sense. But it does exacerbate that savings gap and we need to think about how we can mitigate that.”Gary Smith, partner in financial planning at wealth manager Evelyn Partners, fears “quite a lot” of borrowers will fund pricier mortgages by either reducing pension contributions or from savings that were intended for the medium to long term “with inflation negating wage rises and stealth income tax rises in operation.”Reducing or pausing pension contributions will mean missing out on employer contributions and government tax relief. And without a feasible plan to get their savings back on track, they may need to work longer to achieve the quality of life they had planned in retirement. Some may also be tempted to solve their mortgage problems by tapping into the 25 per cent tax-free lump sum from their pension pot when they reach 55 (rising to 57 from 2028). “This is by no means an unusual strategy but it obviously leaves less savings to provide a retirement income and the mortgage crunch could mean it is employed by savers with less of a pot to work with,” Smith said.With little certainty over when inflation might cool and allow interest rates to drop back, raised housing costs are “bound” to have a disruptive effect on saving, he warned, particularly if higher inflation proves more stubborn than expected. The government said the best way to help households was to drive down inflation but it had offered “significant” cost of living support and put the mortgage charter in place to ensure “borrowers and savers are protected from rising costs.”It added: “We always want to encourage pension saving and with automatic enrolment an extra £33bn was saved in 2021 compared to 2012.” More

Property consultant CoreLogic figures showed national home prices were up 1.1% in June from the previous month, after bottoming in February and starting a sustained rise.Australia’s households are among the most indebted in the world, while housing affordability has recently plumbed all-time lows.The Reserve Bank of Australia is set to raise its key interest rate by 25 basis points to 4.35% on Tuesday to curb stubbornly high inflation, although a Reuters poll of economists suggested the decision would be a close call.Every state and territory capital except Tasmania’s Hobart recorded higher prices for dwellings, according to CoreLogic. Sydney, Australia’s biggest city and capital of New South Wales, led the way with a 1.7% surge. Brisbane, the capital of Queensland, followed at 1.3%.CoreLogic’s Tim Lawless said a lack of supply was still the main driver of price rises, adding that “the flow of new capital city listings was nearly 10% below the previous five-year average” in June.While values continued to record “broad-based upswing”, the pace of growth in most capitals slowed, according to CoreLogic.”A slowdown in the pace of capital gains could be a reflection of a change in sentiment as interest rate expectations revise higher,” Lawless said. “Higher interest rates and lower sentiment will likely weigh on the number of active home buyers, helping to rebalance the disconnect between demand and supply.” More

From personal affairs to corporate life, freedom of action requires economic robustness. The same applies to countries: strong growth and productivity are a necessary, if not sufficient, condition for effective self-determination.It is good, then, that this realisation features prominently in the new economic security strategy proposed by the European Commission. It names “promoting our own competitiveness [and] deepening the single market” as the first priority for economic security. It could be just the principle around which to reconcile the conflicting preferences of political and corporate Europe.The commission acknowledges that an effective economic security strategy must enjoy buy-in from the corporate sector as well as consensus among member states. Neither exists at the moment. China looms unnamed behind each of the economic security risks Brussels identifies. That puts the commission’s proposed remedies at cross-purposes with the commercial strategies of many European companies and their political backers.For them, the danger is not so much dependence as the fear of missing out (on China’s growth) and losing out (to both Chinese and US rivals in global markets). From this perspective, you “derisk” economic entanglements with China at the cost of adding risks to company competitiveness. This contradiction will not be resolved — and policy will remain confused and indecisive as a result — without learning the right lessons from the Chinese and US achievements that make Europeans nervous.While corporate Europe obsesses about export markets, the recent successes of others flow from prioritising demand at home. The power of US president Joe Biden’s Inflation Reduction Act comes not from discriminating against imports, but from its success in making everyone expect an imminent, huge and profitable market for green technologies in the US, in which they would like to have a share.As the US Treasury has documented, the boom in American factory-building since the passage of Biden’s main industrial policy acts is unprecedented and unrivalled. This massive construction wave surely did not hinge solely on World Trade Organization-incompatible subsidies. Such a big market would always require a large scale-up of local supply.As for China, its growth strategy has of course long been export-led, using cost-efficient scale to compete on price in global markets and gradually moving up the value chain. But even before Beijing formalised a doctrine of “dual circulation”, the regime had begun to use the domestic market as a growth motor for important sectors such as electric vehicles, where Chinese carmakers are at the technological frontier and sales leaders at home. Consider also how Europe lost its lead in photovoltaic manufacturing in the 2000s. The first phase of that process fits the conventional narrative. Consumer subsidies accelerated PV installations in Europe, but China outbid Europe’s manufacturers. Less attention is paid to the second phase. As EU governments cut subsidies and imposed tariffs on Chinese PV imports, Europe’s solar power growth flatlined. China picked up the slack, overtaking Europe in solar PV installations around 2013. By 2020, it had 253 gigawatts of solar energy capacity installed, more than 50 per cent above Europe’s level.At the time, the diagnosis was oversupply. In hindsight, it was about insufficient demand. Had Europe boosted its PV installation rate rather than let it fall, it would have helped Chinese exporters, true. But it would also have created a market big enough for European producers to succeed again, just like Beijing did for Chinese ones.Today, Europe risks repeating that mistake in other green tech. Pleas to weaken green regulations, from the future ban on combustion engines to tightening rules of origin on batteries, only serve to shrink the expected size of the domestic markets for green-tech goods and services. Their supply capacity would naturally slow in response.The EU has actually been very good at creating such markets — that is why it remains an export leader in many green tech industries. So it should not forget that its actively market-shaping regulation is the root of this success. Nor that the scale of its domestic markets boosts its influence on market-shaping and standard-setting abroad, as the commission’s strategy notes.Doubling down on boosting domestic green tech demand is Europe’s route to economic security. Companies confident enough that they can profit from investing in their home markets’ growth are less likely to resist the “derisking” that will reduce Europe’s dependency on political choices elsewhere. Politically, economic security starts at [email protected] More

Is the US labour market cooling? US hiring is expected to have slowed in June after two months of unexpected rises that have helped make the case for the Federal Reserve to continue raising interest rates this year. The Labor Department is forecast to report on Friday that the US added 200,000 jobs in June, according to economists polled by Bloomberg, down from the 339,000 added in May. The unemployment rate is expected to be 3.6 per cent, down from the current rate of 3.7 per cent. Average hourly earnings growth is expected to be stable at 0.3 per cent month over month. The US jobs market has been much more resilient this year than economists and analysts expected, running at pre-pandemic levels even as the Fed has raised interest rates at a blistering pace over the past 15 months. The median estimate from the Bloomberg survey of economists has underestimated the headline jobs figure every month for the past 14 months. The unemployment figure has, however, slowly begun to rise.June’s jobs data will be a crucial part of the Fed’s deliberations when it meets for its next policymaking session in July. The Fed indicated at its June meeting that it was prepared to raise interest rates twice more this year, with an increase coming as soon as July. Investors in the futures market are currently placing an 84 per cent chance on the Fed delivering that quarter-point increase. Kate DuguidCan the eurozone economy return to growth?The eurozone economy has contracted slightly for the past two quarters and next week will provide more clues on whether it is showing signs of emerging from this rut.High inflation and rising borrowing costs have eroded the purchasing power of many European households over the past year, but there are signs that rising wages and falling energy prices have given consumers a boost recently.This led to a month-on-month rise in retail sales in France, Spain and Germany in May, pointing to a strong probability that the overall eurozone figure will return to growth for the first time since January when that data is released on Friday.There could also be more encouraging news for Germany’s struggling manufacturing sector this week. Thursday’s industrial orders data is expected to show a partial rebound with 3 per cent monthly growth in May and output figures on Friday are expected to be up 1 per cent.However, surveys of businesses and households are pointing to a fresh downturn of activity and demand in June. Jörg Krämer, chief economist at German lender Commerzbank, is sceptical about the chances of a sustained rebound, predicting “the German and euro area economies will contract again in the second half of the year”. Martin ArnoldWhere is China’s economy heading?After a run of downbeat data in China, investors will be looking to next week’s releases on manufacturing and services for clues about the health of the world’s second-largest economy.The Caixin Manufacturing purchasing managers’ index, due to be released on Monday, is expected to come in at exactly 50 according to a Bloomberg poll of economists, straddling the PMI threshold between expansion and contraction.Meanwhile, the Caixin Services PMI on Wednesday is expected to show a reading of 56.2, down from 57.1 in May, another Bloomberg poll showed.Expectations for zero growth in manufacturing in June follow on from this week’s official manufacturing reading, which came in at 49 and signalled a third straight month of contraction among the large and largely state-run manufacturers covered by the government survey. Monday’s reading will reflect conditions among the smaller and private factories employing most of the sector’s workers.“Apart from a shortlived bounce in the manufacturing sector after the zero-Covid measures were shelved in early December 2022, China’s manufacturing has been limping along,” said Robert Carnell, head of Asia-Pacific Research at ING.Carnell said the most recent underperformance from the official manufacturing PMI “was not much of a surprise” and that the slowdown in non-manufacturing activity reported on Friday confirmed that much of the growth in services this year has been driven by a “pent-up demand” from consumers previously constrained by China’s zero-Covid policies.But he warned that “there is only so long that this can go on.” Hudson Lockett More

China has urged poorer countries to oppose a levy on shipping emissions and stronger targets for decarbonising one of the world’s most polluting industries, criticising wealthy nations for setting “unrealistic” goals with “significant” financial costs.Beijing distributed a “diplomatic note” to developing nations as they prepared for a critical meeting at the UN’s International Maritime Organization in July, according to four people present at IMO discussions. The lobbying effort comes days after France rallied 22 allies behind a shipping emissions levy.China warned that “an overly ambitious emission reduction target will seriously impede the sustainable development of international shipping, significantly increase the cost of the supply chain and will adversely impede the recovery of the global economy”, according to a document seen by the Financial Times.It added: “Developed countries are pushing the IMO to reach unrealistic visions and levels of ambition. [They are advocating] a flat [levy that] will lead to a significant increase in maritime transport costs.” Wealthy nations have not agreed a price for the emissions levy.The efforts by China, the world’s biggest exporter which also has a large state-owned shipping industry, have deepened concerns over a lack of progress on decarbonising a fuel-intensive sector that delivers up to 90 per cent of traded goods globally, according to the OECD. By the end of next week the IMO has committed to strengthening its ambition, which has long been criticised by environmental campaigners as weak, to halve annual shipping emissions from their 2008 levels by 2050. But participants in the talks at the IMO this week said China had helped to rally countries in closed-door negotiations that had become deeply divided between developed and developing member states.Brazil, Argentina and South Africa have also opposed a levy on shipping companies’ emissions, which they fear would increase the cost of exports for their large commodities markets, according to two people close to the discussions. Poorer countries are not united in opposition. The Marshall Islands, which are particularly exposed to rising sea levels as a result of climate change, have called for a $100-a-tonne emissions levy. Albon Ishoda, the country’s ambassador to the IMO, expressed concerns that the level of “polarisation has become unhelpful”, with some in the private discussions not living up to their national commitments on decarbonisation.He added it was ironic that some developing countries had complained that a shipping emissions levy would increase their financial burden while at the same time calling for any money generated by this measure not to be invested outside the shipping industry.According to the note seen by the FT, China called for any revenues generated by IMO regulations to be invested “in-sector”, arguing that wider use of these funds would transfer “the climate change financing responsibility from developed countries to . . . international shipping”.It opposed setting 2050 as the final year to achieve net zero emissions, instead backing a broader goal of “net zero GHG emissions from international shipping around mid-century”. It said a shipping emissions levy was “a disguised way by developed countries to improve their own market competitiveness”.

President Xi Jinping has promised to cut China’s net carbon dioxide emissions to nearly zero by 2060. Beijing’s State Council Information Office did not respond to emailed questions on Saturday.The diplomatic note echoes comments by Premier Li Qiang, who argued at a World Economic Forum event last week: “It is unfair for developing countries to go by the standards of developed countries. Developed countries should shoulder more responsibilities in meeting the climate challenge.”At a summit in Paris during the same week, France and other wealthy countries called for the IMO to set targets that would align shipping with international ambitions to limit global warming to 1.5C above pre-industrial levels. The EU already plans to impose a financial cost on shipping pollution by introducing the sector into its emissions trading scheme.China’s warnings about the effects of such measures were last week countered by the World Bank, a lender to developing countries. It argued in a blog post that allowing wider use of any revenues from an emissions levy would support poorer countries which have little opportunity to invest in the shipping sector directly.Additional reporting by Cheng Leng, Thomas Hale and Edward White More

“The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” Ivascyn told the FT, noting that when rates have risen in the past, a lag of five or six quarters for the impact to be felt has been “the norm”.The market is “too confident in the quality of central bank decisions”, he told the FT. More

The world’s largest active bond fund manager says markets are too optimistic about central banks’ ability to dodge a recession as they battle inflation in the US and Europe. Daniel Ivascyn, chief investment officer at Pimco, which manages $1.8tn of assets, said he was preparing for a “harder landing” than other investors while top central bank chiefs prepare to continue their campaign of interest rate rises. “The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” Ivascyn said in an interview with the Financial Times.He noted that when rates have risen in the past, a lag of five or six quarters for the impact to be felt has been “the norm”. “We would argue that the market may still be too confident in the quality of central bank decisions and their ability to engineer positive outcomes,” he said. “We think the market is a bit too optimistic about central banks’ ability to cut policy rates as quickly as the yield curves are implying.”The US Federal Reserve, the European Central Bank and the Bank of England have all been rapidly raising rates after criticism that they had been too slow to react as inflation gathered pace. At a conference in Sintra, Portugal, this week, the heads of all three indicated more action is likely to be needed while inflationary pressures persist. On Friday, the Nasdaq Composite stock market index recorded its strongest first half of the year in 40 years, in part on expectations that US interest rates would soon peak.But core inflation, which is used as a gauge of underlying price pressure because it strips out volatile food and energy prices, has hovered around 5 per cent in the US and eurozone in recent months, while surging as high as 7.1 per cent in the UK for the year to May.Ivascyn said: “Today we have a real legitimate inflation problem. It will likely be harder for central banks to cut policy even if the economy is weakening as long as inflation is comfortably above their [2 per cent] targets.” Pimco, which is owned by German insurer Allianz, is repositioning funds to be “more defensive and more liquid” as it draws back investors following a terrible year for bond funds in 2022.The California-based manager suffered €75bn of outflows last year, but Ivascyn said flows had “materially improved” as investors grab the higher yields now on offer. Pimco has attracted €14bn of assets in the first quarter of this year, Allianz has reported. While Pimco thinks a “soft landing” is the most likely outcome for the US economy, Ivascyn said the group is avoiding areas of the market that would be most vulnerable in a recession.Favouring high-quality government and corporate bonds for now, he is waiting for company credit ratings to be downgraded, which he said will prompt forced selling among vehicles such as collateralised loan obligations in the coming months and years. That will be the time to snap up bargains, he said.“A great trade will be to take advantage of the violent repricing of the public markets and then wait for private markets to adjust over the next few years and then rotate into what should be a really attractive opportunity,” he said.“Hold some cash because we think the next two, three years is going to be quite target rich for opportunities in the higher yielding space.” However, he cautioned this cycle might be different to previous ones. Central banks may be less willing to provide support for fear of fuelling rising prices, while the fact that so much risk has been transferred to private markets would slow down the deterioration of credit valuations, but not prevent it.“This could be more of an old fashioned cycle that lingers for a few years with inflation high but policymakers don’t come to the rescue,” he said.

Pimco’s move to safer bonds is part of a wider industry shift towards higher quality fixed-income assets. The latest survey of fund managers by Bank of America showed investors were the most overweight in investment-grade bonds compared with their high-yield counterparts since 2008.Even for investors who do not think central banks will be able to bring inflation back down to target, Ivascyn said fixed income provided the best value we have seen for “many, many years”, with real inflation-adjusted yields in the US at levels not seen since the global financial crisis.“You can be defensive in terms of interest rate risk, inflation risk, credit risk and generate a very, very attractive return,” he said.“Which is different from saying ‘buy everything, it’s all going to be fine’.” More

For the past week, Belarusian president Alexander Lukashenko has revelled in being at the centre of events after he helped broker the truce that ended the Wagner militia’s mutiny against the Kremlin. State controlled media have gone out of their way to herald the achievement. “The peacemaker of Slavic civilisation,” said one Belarus news anchor: “The hero of Russia,” gushed a Russian TV analyst. The reality is a lot more prosaic. The deal, the importance of which was also played up by the Kremlin, “does not mean he’s a master negotiator, but he did benefit from the right place, right time,” says Rosemary Thomas, a former British ambassador to Belarus. But for now Lukashenko is “delighted to be seen as an indispensable actor on the world stage and sell this for all it’s worth”.The opportunity to pose as a mediator could not have come at a better time for Lukashenko. During his three decades in power, he has argued that he could combine loyalty to Moscow while also safeguarding his country’s sovereignty. Belarus, he insists, can be close to Russia without becoming completely dependent. But that claim has come to appear increasingly thin — especially to his domestic critics, who accuse him of being a puppet of Russian president Vladimir Putin. Lukashenko’s reliance on Moscow was underlined in 2020 when he had to ask Putin to help his brutal crackdown on pro-democracy demonstrators following his re-election. Sviatlana Tsikhanouskaya. the exiled Belarusian opposition leader, says that having Wagner mercenaries in Belarus threatens regional security and shows ‘the role of Belarus is growing’ © Ting Shen/BloombergPutin used Belarus as a launch pad for last year’s all-out attack on Ukraine and Lukashenko recently agreed to host Russian tactical nuclear missiles in the country. “Without Putin, Lukashenko will not survive,” says exiled opposition leader Sviatlana Tsikhanouskaya.The risk of outright dependency now hangs over the economy. Belarus has displayed unexpected resilience under tough western sanctions, but that has come as a result of assistance from Moscow, both direct and indirect. The economy is on track to grow this year by around 3.3 per cent — the same as in 2019, before the pandemic halted world trade — says Dzmitry Kruk, an economist at Beroc, a think-tank now based in Vilnius in Lithuania, which is home to a large Belarusian diaspora. As part of the bargain reached last week to call off the mutiny, Wagner boss Yevgeny Prigozhin has been allowed to take refuge in Belarus. The probable payback for Lukashenko’s role in the negotiations is that Putin will expand Russia’s financial lifeline to Belarus, estimated by Kruk to have already surpassed $3bn since last year, including a debt restructuring agreement. “I guess it’s a short-term success story in as far as there’s not been the deep recession that could have come after the war began,” Kruk says. “Lukashenko always seemed to understand that dependence on Russia was dangerous, but he has now chosen this as the lesser of two evils, although I really think Russia is as risky for him as democratic transition.”Finding replacement partsJust how heavily the Belarusian economy has had to lean on Russia is evident at Bobruiskagromash, the state-owned maker of agricultural machinery.The company used to import the vacuum pumps it uses in its tractor trailers from Battioni Pagani in Italy, until they got caught up in the EU’s ban on exports that could potentially be used by the military against Ukraine. Now, says marketing director Vladimir Daineko, Bobruiskagromash uses pumps made in Russia.“After last year’s sanctions, it took us six to 10 months to work out how to replace all the parts that we need, but we’ve managed,” says Daineko. “What doesn’t kill you makes you stronger.” Vladimir Daineko of Bobruiskagromash says that sanctions forced his company to turn to Russia for the parts it needed. ‘We’ve managed,’ he says. ‘What doesn’t kill you makes you stronger’ © Raphael Minder/FTThe unwavering support that Lukashenko has offered Putin during the war has only added to the country’s economic isolation. Western governments placed new sanctions on Belarus after denouncing Lukashenko’s 2020 re-election as fraudulent.The following year Minsk was slapped with further sanctions after forcing a Ryanair flight destined for Lithuania to land in Belarus in order to arrest an anti-Lukashenko activist on board, while more sanctions followed the invasion of Ukraine. The most recent sanctions have come from the UK, which in June banned imports from Belarus of commodities including rubber, wood and gold. But Bobruiskagromash is only one example of how the Belarus economy has been able to absorb the blow of sanctions.Belagromech, the state agricultural engineering centre, now makes copies of cylinders and alternators which were previously shipped from Ukraine. For the western parts that it still needs, “we’re using a lot more private sellers from Kazakhstan and Uzbekistan,” says Belagromech’s head engineer Vladimir Golomako. These intermediaries add 15 per cent to costs, he estimates, but price controls ensure that Belarusian manufacturers only pass on a 5 per cent price increase to buyers.

Moscow supplies Minsk with crude oil and gas on preferential terms. Minsk has stopped publishing detailed trade statistics, but Lev Lvovskiy, another Beroc economist, estimates Belarus earned $1.7bn last year from selling Russian oil, some through intermediaries in the United Arab Emirates. Lvovskiy’s research is based partly on comments from regional officials: “In my experience the regime keeps many secrets, but what is published or said is true.”Lukashenko has made a rhetorical virtue of the closer links with Russia, talking about a common fatherland that stretches from Brest — near the Belarus border with Poland — to Vladivostok. Imperial Russia has been reintroduced into accounts of Belarus’s history and the Belarusian Latin alphabet is being replaced with Russian-language text on street signs in Minsk. Lukashenko’s administration has become “a new driver of Russification,” according to the latest Belarus tracker study, sponsored by Germany’s Friedrich Ebert Foundation. Some officials in Minsk also wax lyrical about rebuilding an economic bloc resembling the Soviet Union, minus the Baltic states. Aliaksandr Yarashenka, a former deputy economics minister, recalls how his father moved the family from Ukraine to take part in the reconstruction of devastated Minsk after the second world war. “I then saw the Soviet Union, a huge country, getting destroyed, so I’ve seen much worse times than now,” he says. There has been a clear economic cost to Lukashenko’s tight embrace of Putin. At least 2,000 companies have left Belarus since he crushed demonstrations in 2020, according to the Association of Belarusian Business Abroad.

Many engineers joined this exodus, and those still in Minsk now worry either about getting drafted into the army or losing jobs tied to western customers. A software developer explains that his French client, telecom company Transatel, is increasingly employing Belarusians who resettled in Poland. “I could also work in Poland, but my life is here as long as I can keep my job,” he says. “Everything is just now more uncertain.” However, the IT sector is helping Russia’s military industrial complex, notably supplying semiconductors from an industry that once powered the Soviet Union’s Lunokhod moon rovers in the 1970s. Well after the Berlin Wall had fallen, Lukashenko kept the country’s semiconductor industry on a lifeline, as part of his promotion of a Soviet-modelled planned economy. “Like with other state-owned enterprises, Lukashenko kept making semiconductors whether there was demand or not, because it’s also his way to pay salaries to those who support him,” says Aliaksandr Alesin, a Minsk military analyst.Alesin says Moscow is investing $350mn in Belarusian semiconductor company Integral, as part of its latest subsidy programme. “Putin needs to win the war, but he also wants to make Belarus an example of successful and peaceful integration in order to draw more countries into union with Russia rather than China,” Alesin says. Counterbalancing RussiaLukashenko has made some efforts to counterbalance the economy’s reliance on Russia. The Belarus leader is trying to forge closer ties with China and other partners such as Iran, two nations he visited in March. But although China is building a new embassy in Minsk, its interest in Belarus is not comparable to Russia’s. When China’s president Xi Jinping visited Great Stone industrial park near Minsk in 2015, it was presented as a milestone in China’s Belt and Road infrastructure initiative. Instead, China’s Covid lockdown halted investments before Ukraine’s war then punctured Beijing’s hopes of making Belarus a gateway to the EU. A park designed to host 100,000 residents by 2030 has so far only got 3,500, according to Yarashenka, who is now Great Stone’s administrator.Presidents Alexander Lukashenko of Belarus and Ebrahim Raisi of Iran in Tehran in March. Lukashenko is trying to counterbalance his economy’s reliance on Russia by forging closer ties with Iran and China © WANA/ReutersStill, Great Stone says current occupants doubled income in the first quarter — again helped by Moscow, since more than 80 per cent of the China-sponsored park’s exports now go to Russia. “European brands left a lot of niches in Russia that we can fill, also more cheaply than if you transport from Turkey or other places,” says another Great Stone official, Kirill Koroteev.Great Stone lost Swiss bus maker Hess and German logistics company Duisburger Hafen, but Yarashenka warns against concluding that all westerners are leaving. “Some European companies don’t want to be known to be here because it could hurt them or mean more sanctions,” he says. At an agricultural trade show, some Belarusian companies displayed Chinese rather than Russian substitution equipment. TTZ, which sells drones, replaced its US supplier Trimble with China’s CHC Navigation. TTZ’s owner, who declined to be named, praises Trimble’s technology but says that “it took a lot of work to partner with Trimble, and I won’t try again even if sanctions stop”. But lack of access to western financial markets is also pushing companies towards Russia. Western international lenders stopped financing Belarus and the European Bank for Reconstruction and Development is trying to exit three Belarusian shareholdings, notably Alivaria, a brewer owned by Carlsberg. Minsk-based Priorbank recently stopped clients from getting money transfers from the west, amid pressure on the bank’s Austrian owner Raiffeisen to also abandon Russia. Great Stone industrial park in Minsk. More than 80% of the China-sponsored park’s exports now go to Russia © Getty ImagesStill, at least two local banks — Gazprom’s Belgazprombank and BSB — continue to facilitate western transfers and officials who attended a banking conference in Minsk presented growing financial integration inside the Commonwealth of Independent States and with neighbours such as Turkey as a buffer against sanctions, echoing a claim made by Moscow. More than half of international transfers in and out of Belarus have switched to “new currencies”, mostly Russian roubles and Chinese renminbi, says Nikolay Luzgin, chair of the association of Belarusian banks: “There were problems last year with international payments, but now it’s better.” Nurlan Baibosunov, a senior finance official in Kyrgyzstan, says post-Soviet nations have achieved a level of financial co-operation over the past year that would have required a decade without the pressure of sanctions.“I think sanctions are having a very good impact because western companies have left and our own companies can step in with our own systems, our software and local processes,” says Baibosunov. The very few western companies still manufacturing in Belarus have been caught between trying to comply with sanctions and the potential lure of the Russian market. At its factory outside Minsk, Swiss train maker Stadler cut its workforce to 200 from a peak of 1,600. Stadler relocated 300 workers to its Polish subsidiary, but most scrambled to join other companies, some helping Moscow’s war. Dmitry Logashin of Swiss train maker Stadler, which cut its Belarusian workforce to 200 from a peak of 1,600 after the war in Ukraine began © Raphael Minder/FT“Russia is on the military path, so there are new work opportunities for Belarusian civil engineers,” says Dmitry Logashin, head of project management at Stadler Minsk.Logashin compares the sanctions to “losing our arms and legs”, particularly after a bumper 2021, when his factory thrived while foreign competitors halted production during lockdowns to stop a pandemic that Lukashenko decided to ignore.Without western components such as cables since last year, Stadler halted some production. The train factory is finishing three orders — from Italy, Serbia and Azerbaijan — and then relying on a €2.3bn contract to make sleeper carriages for Kazakhstan. Stadler transferred some contracts to Poland, also because customers in Slovakia and Norway worried about a public backlash for ordering from Belarus. “The sanctions are our bible, we have a strong reputation to keep and we don’t want work from Russia, but that’s not the same for everybody here and many companies have turned to Russia,” says Logashin. Tougher sanctions?One objective of the sanctions was to punish Lukashenko for helping Putin. But with Minsk moving ever closer into Moscow’s orbit, there is a debate among western governments about what to do next. Tsikhanouskaya, the opposition leader, insists the west must toughen sanctions, as well as demand an immediate withdrawal of Russian troops from Belarus. Having Wagner mercenaries in Belarus also threatens regional security, she says, and shows “the role of Belarus is growing”. She also sounds dumbfounded by the west’s “non-clear response” to Lukashenko welcoming Russian nuclear warheads, as well as by how western officials recently discussed with her who might replace Lukashenko if he dies, following a health scare in May. “Democratic countries don’t have any specific plan for what they would do next,” she says.

Some European diplomats in Minsk understand her concerns. “We keep looking back at what went wrong in 2020 rather than preparing for the future, although we’re now much nearer to the parliamentary elections of 2024 and the next presidential ones of 2025,” says one. Despite this debate, a number of EU nations are also lobbying to soften a ban on potash, of which Belarus is a major exporter, which they believe could help contain global food price inflation. But Lithuania, which stopped Belarusian potash from entering its Klaipėda port, is leading the drive for stricter sanctions instead.Yauheni Preiherman, founder of the Minsk Dialogue think-tank, argues that sanctions policy does not have a clear purpose. “Western officials change their explanations about their goals,” he says, “but if the expectation is that sanctions can force Lukashenko to make concessions or turn 180 degrees, that’s a wish rather than the reality.” But Thomas, the former ambassador, argues Lukashenko is caught in “a vicious spiral”, trying to quash any opposition within a country that already has 1,500 political prisoners while “his position becomes less and less secure because of his illegitimacy”. In such a context, hosting trigger-happy Wagner troops also “seems mightily risky”, she argues. Whatever happens next, Lukashenko “will never be forgiven by his people for more or less selling away the sovereignty of Belarus.” More