Economy

Speaking at a banking forum near Moscow, Governor Elvira Nabiullina said the regulator was concerned by declining standards in mortgage lending and falling rates of early repayments, suggesting consumers were feeling the pinch after a year of economic pressure on the Russian economy.”We will not let systemic risks come to pass,” Nabiullina said, pledging the central bank was paying close attention to banks’ lending practices and was ready to tighten the regulatory screws if needed. More

When western nations blocked the Central Bank of Russia’s access to its reserves days after President Vladimir Putin invaded Ukraine on February 24 2022, they inflicted arguably the most expansive financial sanctions in history. Yet a year on, the verdict on their effects is mixed. Early on, it seemed like the sanctions, which included freezing some private assets and cutting many Russian banks off from international transactions networks, could collapse Russia’s financial system: the rouble plummeted, inflation and domestic interest rates shot up, and the central bank imposed capital controls. But the currency soon stabilised at normal levels, and the Russian economy seems to have shrunk just by a few percentage points, as opposed to early predictions of a double-digit contraction.If the ultimate point of the sanctions was to stop Putin’s ravages in Ukraine, they have obviously not (or not yet) succeeded. They have achieved the more modest goal of raising the cost to him of his assault, although not to the extent originally hoped for. Notwithstanding that these were the sanctioning coalition’s stated goals, however, they are not the only yardstick by which we should assess the sanctions’ success.When it comes to sanctions on “stocks” of assets, in particular on central bank reserves, there are at least two other effects we could hope for. One is straightforwardly punitive: we should inflict pain on Putin’s regime regardless of whether it actually makes him stop committing his crimes. The other is that we should make it pay for the cost of the destruction he has wrought.This leads us to the confiscation debate. Blocking Russia’s access to more than $300bn in reserves causes financial dysfunction. But these reserves do not just support smooth financial flows; they are valuable resources in themselves. The legal status quo is that Russia will one day regain access. A further step — for punitive or retributive reasons — would be to seize them and potentially deploy them to rebuild Ukraine.Earlier this week, I mentioned the new working group set up by the EU to examine ways in which Russia’s central bank reserves could be used for these purposes. When Prime Minister Ulf Kristersson of Sweden, which holds the rotating EU presidency, announced it, he said: “In principle, it is clear-cut: Russia must pay for the reconstruction of Ukraine. At the same time, this poses difficult questions. This must be done in accordance with EU and international law, and there is currently no direct model for this.”I have seen three or four proposals. Ukrainians and their staunchest supporters are pushing for an outright confiscation. The Yermak-McFaul expert working group on sanctions has set out the clearest arguments for this. All the other ideas attempt to square the circle of those who think both that this would be the right thing to do but that it would be against international law. EU leaders have suggested that the bloc could take temporary custody of the reserves, invest them and put the returns into the Ukraine reconstruction kitty. Two economists at investment manager PGIM, Daleep Singh and Giancarlo Perasso, have proposed to use CBR reserves as collateral for new Ukrainian public debt, to lower the cost the market will demand. The idea is inspired by the “Brady bonds”, collateralised by US Treasuries, which restructured Latin American debt to US banks in the late 1980s.A final idea that is circulating is not to confiscate the reserves but to hold them hostage, as it were, until Russia accepts an obligation to pay reparations in some future peace agreement. Money is money, and from a purely pecuniary point of view, it makes little difference if Russia pays reparations to Ukraine and gets its reserves back, or sees its reserves confiscated to pay Ukraine. You may have noticed the acrobatics involved in all these alternative proposals. They are all premised on the idea that international law makes it very difficult to confiscate Russian state assets outright. To understand the worry here, I asked Ghent university professor Tom Ruys, who explained that a basic principle of sovereign immunity comes into play. While “the starting point” is broad-based immunity, the “extent to which international law compels states” to grant it is “in question”, and there is controversy over whether it applies beyond judicial procedures. That is why an administrative measure such as temporary blocking may be seen as easier to defend. Policymakers’ concern to remain well within the limits of international law is in principle laudable. That concern is extreme in the EU, but can be felt in other jurisdictions as well. The EU’s self-image is bound up in it being a creature of the law and its sense that without the law it is nothing is, in my experience, palpable among its policymakers across the board (there is also an acute fear of the embarrassment of being ruled against by the European Court of Justice). The result is sometimes to give legal limits and an excessively wide berth — or using the law as a cover for political timidity. For example, as I mentioned on Tuesday, Ruys told me there doesn’t seem to be any reason in international law why sanctioning countries cannot make public the amount of Russian reserves in their jurisdiction. (To be fair, other countries are as guilty as the EU of this failure.)“Playing it safe” risks the legal conservatism that favours evident violators of international law such as Russia, especially when the law is vague, unsettled, inconclusive, or evolving. And there are plenty of reasons to think this is the case. One is the glaring contradiction set out by US deputy Treasury secretary Wally Adeyemo when he says (though without drawing out the full implications): “You can’t violate the sovereignty of another country and then reap the benefits of being connected to the international economic system.” Another is the range of different interpretations of what international law requires, and not just by commentators but by democratic states.Last summer, Canada amended legislation that provided for freezing a foreign state’s assets to also include the possibility of confiscation or forfeiture when “a grave breach of international peace and security has occurred” or “gross and systematic human rights violations have been committed in a foreign state”. The law now also allows paying out the proceeds for “the reconstruction of a foreign state . . . the restoration of international peace and security [or] the compensation of victims of a grave breach of international peace and security, gross and systematic human rights violations or acts of significant corruption”. Canada, then, has already established the domestic legislation to confiscate Russia’s central bank reserves placed there (nearly $20bn, according to the CBR itself). When I ask Europeans about Canada’s approach, the polite answers revolve around words such as “problematic” or “challenging”. Yet nobody in the sanctions coalition has so far accused Canada of going too far and breaching international law. Maybe they will. But then they will also face the equally challenging question: “If Canada can do this, why can’t we?”Then there is the purported content of the presumed international law constraints on confiscation. This is not a newsletter on the law but one on economic policy. While economists and policymakers should pay due deference to the law, however, they — and lawyers who interpret the law — run into problems if their legal analysis fails to pay due regard to basic economics. So here are some economic considerations that I think should make it much harder to sustain the legal conservatism that for now seems to prevail.The alternatives to outright confiscation are designed to pass legal muster. But if international law permits these acrobatics intended to achieve the economic effects of confiscation, yet do not permit confiscation itself, then surely the law is an ass and in need of reform. Look again at the idea of taking temporary control of Russia’s reserves and “sweating the assets” for profits that would benefit Ukraine. If the assets have to be returned, what happens if the temporary investment management makes a net loss: should European taxpayers compensate Russia? As for making Russian reserves into collateral for new Ukraine debt, again the legal attraction is the temporary nature of the seizure. But what if Ukraine were to default and the creditors claimed their collateral? And if they can successfully claim their collateral, what would legally stop Russia today from pledging its immobilised reserves as collateral for a loan from a friendly third-country central bank?Similarly, if sovereign immunity in international law is perfectly compatible with blocking the reserves indefinitely, until and unless Russia pays reparations to Ukraine, but incompatible with taking the reserves to pay reparations to Ukraine, is not legality made to hinge on an illusory distinction? In all these cases, perhaps the law really is this contradictory in economic terms. But if so, internal contradiction weakens its claim to be respected.There is another important economic insight that seems completely ignored in the legal debate. We have a tendency to discuss assets as some kind of medieval treasure: gold nuggets and jewels in a chest to which we have, in Russia’s case, temporarily taken away the keys. In this perspective, the question is whether we should (and legally could) take the whole chest. But official reserves are not like that. Russia’s foreign exchange assets are mostly just the flip side of other governments’ liabilities, in particular deposits with western central banks and holdings of their public debt securities. In other words, Russia’s reserves largely consist of our own governments’ promises to pay Moscow money. So instead of asking the question of whether we should confiscate Russia’s assets, we can ask whether we should selectively repudiate Moscow’s financial claims on us. In technical terms, either can be done at the stroke of a pen. I don’t know if the law, in particular international law, treats selective debt repudiation (or reassignment) differently from confiscating sovereign assets. My point is that understanding the economics reveals that these are the same thing in this case. If they lead to different legal analyses, that is bad news for the law, but good news for those of us who insist that Russia must pay for the destruction Putin has wrought. When I spoke to Anders Ahnlid, who chairs the EU working group, he made clear that his working group’s mandate was “to look at all relevant legal, financial, economic and political aspects”. When I asked whether the group would only give technical advice, he said he hoped it would “absorb technical advice and then use it for producing a result that takes all these four aspects into account”. I trust, then, that that includes the economic points I have mentioned above. In the meantime, I invite Free Lunch readers to judge whether those points mean that, on the question of confiscation, international law is silent, self-contradictory, or merely in need of reform.Other readablesUnaccompanied child migrants to the US are being exploited in some of the country’s most punishing jobs, a New York Times investigation has found: “Twelve-year-old roofers in Florida and Tennessee. Underage slaughterhouse workers in Delaware, Mississippi and North Carolina. Children sawing planks of wood on overnight shifts in South Dakota.” Yet some states are trying to loosen child labour laws.Four employees of Gazprombank’s subsidiary in Switzerland are facing criminal charges for allegedly helping to hide Vladimir Putin’s personal assets.Lithuanian energy company Ignitis calls on other groups to follow its lead and donate one-tenth of their profits to Ukraine.Numbers newsChina’s factories expanded at their fastest rate in more than a decade. More

The annual rate of inflation was 8.5 percent in February, down from 8.6 percent a month earlier, among countries using the euro.With the winter drawing to a close, inflation levels eased in Europe last month, the European Commission reported on Thursday, even as concerns grew that stubbornly high prices could put pressure on central bankers to keep raising interest rates.Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 8.5 percent in February, down slightly from January’s rate of 8.6 percent. Year-over-year rates have been declining since reaching a peak 10.6 percent in October.But some of the largest economies showed troubling increases, and core inflation — a measure that excludes the most erratic categories like food and energy — rose to a record high of 5.6 percent in February, from 5.3 percent.In France, inflation hit 7.2 percent in February, its highest point in more than two decades while in Spain, inflation grew at an annual rate of 6.1 percent. Germany, Europe’s largest economy, reported that the annual rate crept up to 9.3 percent.The grim economic outlook for Europe that had been predicted last fall has considerably brightened. Fears of a deep recession turned out to be overblown. Vertigo-inducing energy prices have dropped thanks in part to a warm winter and conservation efforts. Still, the road is bumpy.Inflation F.A.Q.Card 1 of 5What is inflation? More

The central bank has kept its main interest rate at a high 7.00% since last June. Some board members and analysts have argued that the rate should have gone higher to help keep inflation expectations in check.”Lately, the (central bank’s) monetary policy has been very restrictive,” Frait said in an article co-authored with board adviser Jakub Mateju, posted on the central bank’s website.”Both main components of monetary conditions affect the economy and inflation in a way which subdues demand, and thus the inflationary pressures too. It cannot be ruled out that the restrictiveness of monetary policy could show as insufficient in the coming months,” they said.Frait and Mateju said further tightening could come via interest rates or crown exchange rate conditions, without giving details.The bank has had a pledge since last May to intervene “to prevent excessive fluctuations of the crown”, which it has used to prevent significant weakening, although it was able to stay out of markets in recent times as the crown scales more than 14-year highs.In the article, Frait identified accelerating wage growth, inflation decreasing too slowly in core items, or rapidly reviving loan dynamics as possible signals for more tightening.The central banker has voted with the majority for stable rates since he joined the board last July. More

Eurozone inflation fell less than many economists forecast in February, fuelling expectations that the European Central Bank will raise interest rates significantly higher this year.Consumer price growth for the region dipped slightly to 8.5 per cent in the year to February, from 8.6 per cent in January, the EU statistics agency said on Thursday. While energy price inflation slowed, price rises for services, goods and food all gained pace.Thursday’s figures outstripped the expectations of economists polled by Reuters that inflation in the bloc would fall to 8.2 per cent.Analysts said the data indicated inflation was likely to fall more slowly for the rest of the year than previously expected and that the ECB would keep raising rates even after an expected 0.5 percentage point rise on March 16.“We think ECB hawks will use today’s data to call for the bank to extend its string of 50 basis point rate hikes into the second quarter,” said Melanie Debono, an economist at research group Pantheon Macroeconomics. She suggested those arguments could be bolstered by data also released on Thursday showing the resilience of the eurozone labour market — unemployment remained at 6.7 per cent — and a new eurozone record high for core inflation.Core inflation, which central bankers watch closely as it excludes energy and food prices to give a clearer picture of underlying pressures, rose to 5.6 per cent — up from 5.3 per cent in the previous month.ECB president Christine Lagarde said before Thursday’s figures were released that while inflation was likely to have risen “a little bit” in February, it was on track to fall “much more” in March, due to the base effects of year-on-year comparisons with last year’s high energy prices. Borrowing costs for eurozone governments fell after the flash estimates, indicating some investors had expected high February inflation figures. Germany’s two-year borrowing costs fell slightly to 3.18 per cent, but remain more than 50 per cent higher than in December.Lagarde told Spanish TV station Antena 3 on Thursday that rising food prices would prevent inflation from falling in a straight line and that more rate rises may be needed after this month.The ECB has raised rates by 3 percentage points since last summer. Financial markets are pricing in a jump in the bank’s deposit rate to 4 per cent later this year, up from the current 2.5 per cent. That would overtake the 2001 peak of 3.75 per cent, when the ECB was still trying to shore up the value of the newly launched euro.Compared with the previous month eurozone consumer prices rose 0.8 per cent in February, rebounding from a monthly decline of 0.2 per cent in January, indicating a resurgence of price pressures.Inflation rose in half the countries that make up the 20-member single currency zone, where price growth ranged from more than 20 per cent in Latvia to just below 5 per cent in Luxembourg. Higher inflation in Germany, France and Spain was offset by falls in countries such as Italy and Belgium.Food, alcohol and tobacco prices in the eurozone rose by 15 per cent in February, their fastest rate on record. Energy price rises slowed to 13.7 per cent, the lowest rate since June 2021. Services inflation jumped from 4.4 per cent in January to 4.8 per cent in February. The figures indicate services companies are still being hit by the knock-on effect of last year’s energy shock and are passing on the cost of higher wage growth, which has doubled in the eurozone in the past year to 5 per cent, according to a job ad tracker monitored by the ECB.“Surveys point to continued gains in employment,” said Jack-Allen Reynolds, an economist at research group Capital Economics. “That should keep services inflation, which accounts for nearly two-thirds of core inflation, very strong.” More

The agency said in November it was looking at a problem with its energy price measurements, which it said had caused the country – and possibly others in Europe – to overstate inflation.CBS currently uses only newly signed contracts to determine gas and electricity costs in the basket of goods and services purchased by a typical Dutch household, but many households have older contracts struck at a lower price.The agency said that from the first inflation estimate for June, to be published on June 30, it would start using transaction data from energy suppliers to determine the real costs for consumers.It said its research showed that inflation would have been lower than reported between mid-2021 and the end of last year, while the current methodology leads to an underestimation now that energy prices have started to fall.Based on its current estimates inflation peaked at 14.5% in September last year, which would have been between 7.6 and 8.1% based on the new method, CBS said. More

LONDON (Reuters) – Countries in debt distress such as Zambia and Sri Lanka turning to the International Monetary Fund (IMF) for financial help are facing unprecedented delays to secure bailouts as China and Western economies clash over how to provide debt relief. IMF funding is often the sole financial lifeline available to countries in a debt crunch, and key to unlocking other financing sources, with delays putting pressure on government finances, companies and populations. For Zambia, it took 271 days between reaching a $1.3 billion staff-level agreement with the IMF – a preliminary financing deal usually agreed during a country visit – and the fund’s executive board signing off, a prerequisite for actual disbursements.The first African country to default in the COVID-19 pandemic era in 2020, Zambia’s ongoing debt relief negotiations involving China have been closely watched by other countries as a test case for the major emerging market lender. Though staff agreements can be reached without financing assurances, the IMF board needs them to approve the programme. These are guarantees that sovereign lenders – and to some extent commercial creditors – will negotiate a restructuring in line with the IMF’s debt sustainability analysis, providing relief and financing when needed.Sri Lanka has been waiting for 182 days to finalize a bailout after a $2.9 billion September staff level deal while Ghana, having defaulted on its overseas debt in December following a preliminary IMF deal, has yet to get board approval 80 days later.This compares to a median of 55 days it took low- and middle-income countries over the last decade to go from preliminary deal to board sign-off, according to public data from over 80 cases compiled by Reuters.These delays have been caused by a number of reasons, but debt experts mainly point to the fact that China is still reluctant to offer debt relief in comparable terms with other external creditors.”They are part of the reason why these negotiations are so painfully slow,” said Kevin Gallagher, director of the Boston University Global Development Policy Center. “It’s not just the Paris Club and a few New York banks anymore.”China’s Ministry of Foreign Affairs didn’t immediately respond to a request for comment. Chinese Premier Li Keqiang said on Wednesday the country is willing to “constructively” participate in solving debt problems of relevant countries under a multilateral framework. But Beijing has always emphasised all creditors should follow the principle of “joint action, fair burden” in debt settlements.An IMF spokesperson said it was a “very small number of countries” that suffered “significant delays,” acknowledging this was in particular where there was a need to restructure debt owed to official bilateral lenders. However, the time from staff level agreement to lending approval had remained “broadly consistent for a vast majority of countries,” the spokesperson added. Besides members of the Paris Club of creditor nations such as the United States, France and Japan, cash-strapped nations now have to rework loans with lenders such as India, Saudi Arabia, South Africa and Kuwait – but first and foremost China. Beijing is the largest bilateral creditor to developing nations, extending $138 billion in new loans between 2010 and 2021, according to World Bank data.For countries such as Sri Lanka facing shortages of food, fuel and medicines as well as painful reforms to alleviate a debt crisis after years of economic mismanagement, the delays can be devastating. The war in Ukraine added pressure as global commodity prices soared. “Sri Lanka going beyond March without an IMF programme will be challenging for us,” said the country’s State Minister of Finance Sehan Semasinghe. “We need the programme to justify the reforms that need to be made for the economic stabilization process.”A MORE COMPLEX DEBT WORLDAfter the COVID-19 pandemic raised pressure on highly-indebted economies, the Group of 20 economies launched in 2020 the Common Framework, a platform designed to help low-income nations restructure sovereign debt. For the first time, China joined a multilateral effort aimed at reworking sovereign debt. Chad, Ethiopia and Zambia signed up in early 2021. Chad secured a deal in November with its creditors, including Swiss commodities trader Glencore (OTC:GLNCY), an outcome without debt reduction that some analysts said undermined the Common Framework efforts. Ethiopia’s progress was delayed by civil war, and Ghana joined the platform earlier this year. In a recent letter sent to Sri Lanka, a non-Common Framework country due to its middle-income status, China’s Export-Import Bank offered a two-year debt moratorium, raising concerns over how much of a hit Beijing was prepared to take. “The question remains whether China is willing to accept a real extension of maturities that locks in a concessional interest rate for a long period of time,” said Brad Setser, senior fellow for international economics at the Council on Foreign Relations (CFR), in Washington. Gregory Smith, emerging markets fund manager at London-based M&G Investments, said China had a legacy of providing debt relief “but it typically involves maturity extensions or temporary freeze in interest payments”, while face-value reductions in the principal are rare. Unlike the Paris Club, Chinese lenders tackle restructuring or cancellation on a loan-by-loan basis rather than for the entire portfolio, according to a working paper of the China Africa Research Initiative (CARI), which found 1,000 Chinese loans commitments in 49 African countries since 2000.Adding another layer of complexity to these debt talks, the Common Framework doesn’t lay out precise rules on how a debt restructuring with bilateral creditors should work. The IMF recognized that “greater clarity on the different steps and timelines” is vital, as well as clear mechanisms to enforce the comparability of treatment.For Setser, time is slipping away for Zambia. “If there isn’t an agreement at least on the basic outlines of the financial terms of restructuring in Zambia by this quarter, it’ll be time to declare the Common Framework a failure,” he said. More

Multinationals wanting to reduce their geopolitical vulnerability are on the hunt for the “plus one” in a “China plus one” production strategy — or increasingly, as tensions rise between Washington and Beijing, a “China plus one, minus China”.India, especially given last year’s big expansion in high-end Apple iPhone production, is an obvious contender. It’s low-cost, English-speaking and has a substantial domestic market. Prime Minister Narendra Modi presents himself as an enthusiastic globaliser, and has signed or is negotiating bilateral trade deals with the UAE, Australia, the UK and the EU. His “Make in India” strategy, launched in 2014, aims to replicate the success of multiple east Asian countries creating globally competitive manufacturing and lifting millions out of poverty.The reality is less impressive. India has already had a decade of opportunity to scoop up the industrial production leaving China. It has performed poorly, and its trade and investment policy is regressing towards unhelpful Indian traditions of protectionism and import substitution.Whatever attempts Joe Biden makes to cut China out of global value networks altogether, world trade is likely to see a reconfiguring rather than a drastic schism. (US-China goods trade itself hit a record high last year of $690.6bn.) China may take a different position in global goods supply chains, but its size and efficiency — and role as a massive consumer market — mean it will continue to be present.But unhelpfully, India is more concerned about the competitive threat from China than it is enticed by the possibilities of taking a bigger role in the Asian supply network. The Regional Comprehensive Economic Partnership (RCEP) trade agreement of 15 Asia-Pacific countries, which came into force last year, did not involve radical across-the-board cuts in tariff protection. But it did help to harmonise its member countries’ “rules of origin”, which determine how many imported inputs can be used in exports — an alignment which will facilitate flexible production and location decisions.India, whose industrial lobby was concerned about being hollowed out by Chinese competition, considered but ultimately baulked at joining RCEP. It preferred instead to imagine it could create supply chains within India for export to rich markets, especially Europe. To that end, the Modi government adopted a philosophy of Atmanirbhar Bharat (“self-reliant India”). It reached into the familiar tool bag of Indian industrial policy and pulled out a series of domestic subsidies to favoured industries, including telecoms, electronics and pharmaceuticals, plus higher tariffs to give companies protection from foreign competition.India’s attempts to build competitive manufacturing have not inspired confidence. Arvind Subramanian, an academic at Brown University in the US and former chief economic adviser to the Indian government, points out that well before the Trump-Biden trade conflict with Beijing, rising Chinese costs and wages were pricing out labour-intensive manufacturing and creating opportunities for other countries.Subramanian calculates that in the decade or so since the global financial crisis, China gave up about $150bn of global market share in labour-intensive goods, of which India attracted no more than 10 per cent. Unlike fellow lower-middle-income countries Vietnam and Bangladesh, and even upper-middle-income Turkey, whose export-oriented electronics and garment industries have expanded hugely, the share of manufacturing in the Indian economy actually declined over that period.Clothing and shoes, ceramics, leather goods, furniture — these are all mass-employment, labour-intensive manufacturing industries in which India ought to specialise. But raising tariffs to deter imported inputs means it struggles to be competitive in global supply networks. When China and Vietnam began their textiles and clothing export booms, respectively in the mid-1990s and the mid-2010s, foreign inputs made up more than 40 per cent of their exports. For India in 2015 the equivalent number was just 16 per cent.India tries to do too much at home, which means it’s not sufficiently competitive to sell enough abroad. New Delhi can sign bilateral trade deals with rich markets like Australia and possibly the UK (and more improbably the EU, where talks are going slowly) all it wants, but protected domestic companies will struggle to compete. Moreover, even if it is successful, the Modi government’s industrial policy is primarily aimed at sectors like mobiles and pharmaceuticals, which may have prestige value but are more capital-intensive and create fewer jobs.As for that prized iPhone production in southern India, it’s having a tricky start. The FT has reported that engineers and managers are encountering problems in quality control, infrastructure, tariffs and bureaucracy — all familiar to investors in India. The Apple investment may well end up as less a standard-bearer and more a cautionary tale.Calling yourself a globaliser doesn’t make you one. Modi sounds a lot more ambitious about competing in the world economy than many of his predecessors. But despite his government’s professed outward-looking export policy, it’s still too allergic to two-way trade to take full advantage of the huge space in global supply networks that is being opened up as China moves [email protected] More