Economy

The European Central Bank made no profits for the first time in 15 years in 2022 after suffering writedowns on its bond investments, with analysts predicting years of losses following the reversal of its ultra-loose monetary policies.The ECB said on Thursday it would have made an annual loss of more than €1.6bn if it had not drawn on the provisions it has built up in recent years to cover financial risks, adding it would scrap the dividend it usually pays to eurozone national monetary authorities. Those dividends — amounting to €5.8bn since 2018 — are usually passed on by the national central banks to eurozone governments. Several national central banks, including those in the Netherlands and Belgium, have warned their governments that they expect to make significant losses. As rates rise, the interest central banks pay on commercial lenders’ reserves is likely to be far greater than the interest earned on bonds bought under the ECB’s crisis-fighting programmes. Losses at the ECB and other central banks are likely to reignite the debate about aggressive monetary easing. Since the global financial crisis, rate-setters around the world have bought vast amounts of bonds at ultra-high costs to counter low inflation and financial risks, but are now starting to shrink their balance sheets. The ECB began its quantitative easing programme in 2015. Daniel Gros, a fellow at the Centre for European Policy Studies think-tank, estimated that eurozone central banks including the ECB could suffer about €600bn of losses on their investments in government bonds, if interest rates rise to 3 per cent and stay there for six years. The bank’s benchmark deposit rate has risen from minus 0.5 per cent last July to 2.5 per cent. Rate-setters have hinted it will hit 3 per cent in March. “The ECB’s bet that interest rates would stay low is now backfiring,” said Gros. Critics are likely to seize on the losses to support legal challenges against the ECB’s bond-buying programme, with one case still pending in the German constitutional court.Most analysts think these shortfalls should not matter as central banks do not aim to make profits and cannot go bust when they have the power to print money, earning revenue on the production of currency through a process called seigniorage.“ECB losses should have next to no impact on the conduct of monetary policy unless it becomes a political issue,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, adding that some parliaments could call for central banks to be recapitalised. Ducrozet estimated the ECB would suffer €90bn of “flow losses” on the mismatch between the higher interest it pays to national central banks and the interest it earns on bonds in 2023 and again in 2024. But this would be lower if it cuts rates next year.The ECB is yet to take any writedowns on the value of the €4.9tn of bonds it and national central banks bought under its QE programme, despite the value of government debt falling sharply last year. The Frankfurt-based institution has built up large buffers it can use to absorb future losses, including its €6.6bn provisions, €8.9bn of capital and €36bn of revaluation accounts stemming from unrealised gains on investments.The last time the ECB made zero profits and distributed no dividends to the national central banks that are its shareholders was in 2007. Its last annual loss was in 2004 when it was hit by foreign exchange losses due to the rapid appreciation of the euro. More

Turkey has cut borrowing costs as the central bank sought to support the economy following this month’s devastating earthquake, the latest in a series of big interest rate reductions ahead of this year’s election. The central bank on Thursday cut its main interest rate by 0.5 percentage points to 8.5 per cent, matching expectations of economists polled by Refinitiv. The benchmark one-week repo rate has been cut from 19 per cent in March 2021 to 9 per cent by the end of last year under pressure from Turkish president Recep Tayyip Erdoğan. Policymakers said the latest interest rates cut was made in part to dull the effects of the February 6 earthquake, which toppled thousands of buildings, killed more than 47,000 people and upended the lives of millions more. “It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake,” the central bank said. The central bank also cited international recession risks and indications that cost pressures across the Turkish economy are easing as part of its rationale for its decision. Erdoğan, who exerts a heavy influence on central bank decision-making, has taken a series of measures in a bid to bolster the economy and the finances of those affected by the disaster. The government on Wednesday banned businesses from dismissing workers for three months in the 10 affected provinces, while also laying out plans to provide affected businesses with help paying employees’ wages. Erdoğan’s government has been criticised for its initial reaction to the earthquake and over a building amnesty programme that analysts say worsened the scale of the disaster. The quake struck as the Turkish president was waging the toughest election campaign of his two decades in power. He had previously signalled that elections would be held on May 14, but some analysts expect him to push it back. Economists are worried that fresh cuts to borrowing costs could inflame Turkey’s already severe problem with soaring prices. Inflation registered at just under 58 per cent in January, down from a high of 85.5 per cent in October — but still a highly elevated reading.Enver Erkan, an independent economist, said inflation had been falling because of very high prices in the previous year’s period, which is known as the “base effect”, and that the falls could give the central bank the “confidence” for further pre-election rate cuts. “Monetary and fiscal policy will remain broad until the election,” he said. The central bank has put in place a broad set of other measures that affect the borrowing costs and deposit rates for individuals and businesses, which many economists say has reduced the overall effect of changes in interest rates. The lira was little changed after the interest rate decision, trading near an all-time low of TL18.87 against the US dollar. It has fallen 27 per cent over the past 12 months as a result of the high inflation and low interest rates. Moves by the government to push businesses and individuals to hold more lira, along with interventions by the central bank have helped keep the currency from sliding further. More

BEIJING (Reuters) – China’s top graft-busting body on Thursday vowed to “resolutely” crack down on corruption in the financial sector, days after a well-known Chinese dealmaker became the latest business executive to go missing without explanation.In a strongly worded commentary on its website, the Central Commission for Discipline Inspection (CCDI) vowed to “seriously punish … corrupt elements” in “resource-rich, capital-intensive areas” including finance, state-owned enterprises and grain purchasing entities.”We must resolutely investigate and deal with corruption where political and economic issues are intertwined, resolutely prevent leading cadres from becoming spokesmen and agents for interest groups and powerful groups, and resolutely prevent political-business collusion,” it said.The wording suggests that President Xi Jinping’s signature anti-corruption campaign is increasingly turning towards the corporate sector.CCDI corruption probes in recent years felled government and Communist Party officials, including in the police and the judiciary.The abrupt disappearance last week of Bao Fan, founder of investment bank China Renaissance, sent chills through the business sector and was the latest in a series of cases of high-profile Chinese executives to suddenly vanish from public view.The CCDI, which roots out and punishes corruption within the 97 million-member ruling Communist Party, is extremely powerful and operates above state oversight. Fighting corruption to advance the party’s “self-revolution” has been a signature tool of Xi’s rule since he became China’s supreme leader in 2012.Xi’s corruption fight has proven popular among a public that had grown fed up with widespread graft, and has also helped him consolidate power by replacing rivals with his own loyalists, analysts have said.Thursday’s statement comes more than a year after the CCDI launched a high-profile investigation of the state banking and insurance regulator in October 2021, as part of a broader campaign to weed out corrupt Communist Party officials in the financial sector. More

While the 1.6 billion euro ($1.7 billion) loss was entirely covered by provisions, it raises questions about whether the ECB might one day run out of such buffers and who will foot the bill of its past largesse now that inflation is back and rates high.Most of the loss revealed on Thursday came from writedowns in the ECB’s relatively small own-funds and U.S. dollar portfolio, and from the interest it paid to central banks of euro zone member countries. But the ECB has yet address the valuation of hundreds of billions of euros worth of bonds bought under its stimulus programme, a much bigger issue, especially for the national central banks which actually made most of the purchases. Values have probably plunged since the ECB started raising borrowing costs and curbing asset purchases last year to fight a sudden surge in inflation.Policymakers decided against writing down the value of those bonds on the ECB’s balance sheet, where they are accounted for “at amortised cost subject to impairment” – a formula that gives them scope to ignore some market fluctuations.The ECB valued bonds held on its balance sheet and bought under its stimulus programmes at 457.3 billion euros as of the end of December – equivalent to just under 10% of all the bonds held by the Eurosystem of central banks under such schemes. The central bank for the euro zone, which now has 20 member countries, has still 6.6 billion euros worth of provisions, 8.9 billion euros of capital and 36.1 billion euros in a “revaluation account” designed to cover market losses. If these buffers were to become depleted, it could ask its shareholders – the 20 national central banks of the euro zone – for a capital increase or, more likely, carry the losses forward into future years. That would represent a challenge to the ECB’s own longstanding doctrine that a central bank with low equity “may be regarded as not being financially independent and, as a result, its policy actions may be deemed not to be credible”.Some of the euro zone’s largest national central banks will also present their annual reports in the coming weeks.($1 = 0.9435 euros) More

WASHINGTON (Reuters) – Shanna Hayes in 2007 became the first member of her immediate family to attend college. She did not realize she was setting off on a path toward another, less-welcome family first – racking up more than $150,000 in student debt.”At no point did I actually have that conversation,” Hayes said, referring to her lack of financial planning before enrolling at New England College in New Hampshire. “And to be honest, I didn’t ask.”The finances of Hayes and millions of other Americans are in the hands of the U.S. Supreme Court as it hears arguments next Tuesday in appeals by President Joe Biden’s administration of lower court rulings blocking his plan announced last August to cancel $430 billion in student debt.Legal experts said Biden’s program, intended to ease the financial burden on debt-saddled college-educated Americans like Hayes but criticized by Republicans as an overreach of his authority, may be scrutinized by the court under the so-called major questions doctrine. Its 6-3 conservative majority has employed this muscular judicial approach to invalidate major Biden policies deemed lacking clear congressional authorization.Hayes, 34, said she plans to join a rally outside the court on Tuesday supporting Biden’s plan. The Alexandria, Virginia resident earned an undergraduate degree in mathematics and taught high school math before obtaining graduate degrees in higher education administration and sports management at Southern New Hampshire University, where she went on to work in various roles supporting students. She is now seeking a job promoting higher education access and equity.The major questions doctrine is an outgrowth of an approach favored by many conservatives and business groups to curb what they call the excesses of the “administrative state.” They object to what they see as accumulated power by the U.S. government’s executive branch without proper checks by the courts and Congress.The conservative justices already have shown skepticism toward giving deference to federal agency decisions.”It now looms over any big agency action that the administration wants to do,” University of San Diego law professor Mila Sohoni said of the major questions doctrine. “The doctrine allows courts a great deal of leeway to pick and choose which agency actions to strike down and which to sustain.”$1.6 TRILLION DEBTAbout 45 million U.S. borrowers hold $1.6 trillion in federal student loan debt, with the typical undergraduate finishing college with $25,000 in debt, according to White House figures.Many borrowers experienced financial strain during the COVID-19 pandemic. Beginning in 2020, the administrations of President Donald Trump, a Republican, and Biden, a Democrat, repeatedly paused federal student loan payments and halted interest from accruing.Both administrations relied upon a 2003 federal law called the Higher Education Relief Opportunities for Students Act, or HEROES Act, that allows student loan debt relief during wartime or national emergencies.Biden relied upon the HEROES Act when he unveiled plans to cancel up to $10,000 in federal student debt for Americans making under $125,000 and $20,000 for recipients of Pell grants awarded to students from lower-income families.The program drew swift legal challenges. Two lawsuits – one by six conservative-leaning states and the other by two student loan borrowers who opposed the plan’s eligibility requirements – prompted lower courts to block it.In the case brought by individual borrowers, Texas-based U.S. District Judge Mark Pittman, a Trump appointee, in November found the plan violated the major questions doctrine – a ruling that the New Orleans-based 5th U.S. Circuit Court of Appeals declined to put on hold pending appeal.’INSUFFICIENT FUNDS’The major questions doctrine gives judges broad discretion to invalidate executive agency actions unless Congress clearly authorized them in legislation. Sohoni said a policy being blocked under the major questions doctrine was like “an agency trying to cash a check and the court saying, ‘No, you’ve got insufficient funds.'”The justices used the doctrine since Biden took office in 2021 to block the U.S. Centers for Disease Control and Prevention from extending eviction protections for cash-strapped residential renters, stymie his COVID-19 vaccination-or-testing mandate for large businesses and restrict the Environmental Protection Agency’s power to regulate carbon emissions from power plants.Chief Justice John Roberts, writing in the EPA ruling, said the major questions doctrine “developed over a series of significant cases, all addressing a particular and recurring problem: agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted.”Student borrowers hope their stories are not overlooked. For Hayes, Biden’s loan forgiveness would enable her to buy a home.”It will be the difference between us being able to include both of our incomes on a new place or only my wife’s income,” Hayes said. “As we look ahead for what’s to come, it will directly impact how we are able to live.” More

Investing.com — The U.S. publishes revised data for fourth quarter gross domestic product, a day after the Federal Reserve’s minutes indicated frustration with markets trying to bounce it into an early pivot. Other central banks around the world are executing their own pivots, as Korea stops raising rates and Turkey cuts. Nvidia brings cheer to the chipmaking sector with a forecast of an AI-driven boom. Stocks are finding a floor after steady losses over the last week. Alibaba reports earnings. And crude oil prices edge higher despite another steep rise in U.S. inventories. Here’s what you need to know in financial markets on Thursday, 23rd February.1. U.S. GDP, jobless claims dueThe U.S. will release updated figures for gross domestic product in the final quarter of last year. While the numbers are inevitably backward-looking, the susceptibility of GDP data to big revisions appears to have risen since the pandemic, owing to difficulties in capturing changed patterns of work and consumption.The first reading showed the economy growing at an annualized rate of 2.9%, with the index for core personal consumer expenditure prices (the Federal Reserve’s preferred inflation measure) growing at 3.9%.Of more up-to-date interest may be the week’s jobless claims data, which are also due at 08:30 ET (13:30 GMT), while the Kansas City Fed releases its monthly business survey at 10:00 ET.2. Nvidia forecasts AI-driven boomNvidia (NASDAQ:NVDA) threw itself onto the AI bandwagon, forecasting a boom ahead in demand for its chips from data centers that, it expects, will be busy using the new generation of AI tools such as ChatGPT.The company also noted a rebound in demand from the video gaming sector, after the slump that followed the end of the pandemic. That’s of more immediate value to the company, given its dominant position in the sector.The stock jumped over 8% in premarket trading and also lifted contractor Taiwan Semiconductor Manufacturing (NYSE:TSM), and rivals BE Semiconductor Industries (AS:BESI) and Advanced Micro Devices (NASDAQ:AMD).Nvidia’s update came on the same day that Intel (NASDAQ:INTC) slashed its dividend by two-thirds to fund a massive expansion of chipmaking capacity in the U.S.3. Stocks set for modest bounce; Nvidia lifts chipmakersU.S. stock markets are set to open modestly higher, coming off the one-month lows that they hit on Wednesday. The minutes of the last Fed meeting contained little that was not already priced in, and analysts noted that the spate of stronger-than-expected economic data since the meeting had reduced the minutes’ relevance.By 06:48 ET, Dow Jones futures were up 72 points or 0.2%, while S&P 500 futures were up 0.4% and Nasdaq 100 futures were up 0.8%, with chipmakers leading the way after Nvidia’s update.Other stocks likely to be in focus later include shale producer Pioneer Natural Resources (NYSE:PXD), which posted better-than-expected earnings at the end of a day when its stock hit a five-month low, and Lucid Group (NASDAQ:LCID), whose forecast of a doubling of production this year disappointed market hopes. The stock fell over 10% in premarket.Elsewhere, the National Transportation Safety Board is due to release its report on the derailment of a Norfolk Southern (NYSE:NSC) train carrying hazardous chemicals.Alibaba (NYSE:BABA) is the big earnings update of the day, with American Tower (NYSE:AMT), Keurig Dr Pepper (NASDAQ:KDP), Newmont Goldcorp (NYSE:NEM) and Cheniere Energy (NYSE:LNG) in the supporting cast.4. Eurozone core inflation sticky in January; Korea pauses hikes, Turkey cutsEurostat drew a line under the great inflation mystery of January 2023, saying that prices fell 0.2% on the month, bringing the annual rate down to 8.6% from 9.2%. Core prices fell a stronger 0.8%, but the annual rate ticked up to 5.3% from 5.2%.Economists zeroed in on the last figure in particular, seeing it as the main reason for the upward repricing of ECB rate expectations over the last week.Elsewhere in Europe, Bank of England policymaker Catherine Mann echoed a concern that also featured in the Fed minutes – namely, that expectations of a ‘pivot’ by central banks had led to an easing of financial conditions. This made it more likely that inflation stays higher for longer.In Asia, the Bank of Korea kept its key rate unchanged after 12 months of successive rate hikes. However, the Turkish central bank cut its key rate by 50 basis points to 8.5%, the lowest in two years.5. Oil shrugs off big rise in U.S. inventoriesCrude oil prices rose, undeterred by another massive build in U.S. crude stockpiles. The American Petroleum Industry said inventories rose by nearly 10 million barrels last week, far above estimates. The U.S. government’s data may or may not corroborate that at 11:00 ET.By 06:15 ET, U.S. crude futures were up 0.9% at $74.64 a barrel, while Brent crude was up 0.9% at $81.30 a barrel.Prices had been supported on Wednesday by a Reuters report suggesting that Russia intends to cut exports from its western ports by as much as 25% for a month in an effort to squeeze more revenue out of shipments that are being restricted by western sanctions. More

It was exactly a year ago, and the Ukrainian pet food maker Kormotech had concluded its annual meeting. The mood was buoyant. Business was booming, the factory was running 24/7, and sales were projected to grow by double digits. “We had a beautiful budget,” Rostyslav Vovk, the company’s chief executive and founder, recalled almost dreamily.The next morning, air sirens sounded.Russia had invaded. Mr. Vovk called his top managers to meet at a nearby hotel, avoiding the company’s windowed seventh-floor headquarters in Lviv. They had a plan for what had been considered a very unlikely risk — Russian aggression — but it soon proved wholly inadequate.“We were not ready,” Mr. Vovk said. He closed the plant. Raw materials couldn’t get into the country, and deliveries headed abroad couldn’t get out. Staff from the besieged eastern part of the country needed to be evacuated. Employees were joining the military. And the company’s biggest export market, Belarus, was a close ally of Vladimir V. Putin, the Russian president.“We would make decisions,” Mr. Vovk said of that first week after the invasion, “and then the next morning, we would change all the information.”Like leaders at tens of thousands of companies throughout Ukraine, Mr. Vovk and his team were suddenly confronted with a new and bewildering responsibility: keeping a business going through the chaos and danger of war.For many, the task has proved impossible. Before the war, Ukraine’s private sector, including its huge steel and agricultural industries, accounted for 70 percent of the country’s gross domestic product, said Elena Voloshina, head of the International Finance Corporation in Ukraine. Eighty-three percent of businesses experienced losses related to the war, she said. Forty percent suffered direct damage, like a factory or store decimated by a missile, while 25 percent were in what is now occupied territory.Kormotech employs 1,300 people, some of whom had to be evacuated from the eastern part of Ukraine.Maciek Nabrdalik for The New York TimesLast year, Ukraine’s overall output plunged by nearly a third, wrecking the country’s economy and hampering its ability to battle Russian forces.Kormotech, a family-owned business with 1,300 employees worldwide, does not produce weapons or drones. It isn’t involved in supplying critically needed electricity, transport or fresh water to ravaged cities. But it employs people, produces income, earns foreign currency from exports, and contributes tax revenue that the government in Kyiv desperately needs to pay soldiers, repair power lines and buy medical equipment.A year later, Mr. Vovk and his management team have found reason to again celebrate. Mr. Vovk was back in his offices getting ready for the latest annual meeting with his staff — and some of their dogs, which are fixtures around the office and often serve as product taste testers. Despite the odds, business grew more than expected.The State of the WarBiden’s Kyiv Visit: President Biden traveled covertly to the besieged Ukrainian capital, hoping to demonstrate American resolve and boost shellshocked Ukrainians. But the trip was also the first of several direct challenges to President Vladimir V. Putin of Russia.Contrasting Narratives: In sharply opposed speeches, Mr. Biden said Mr. Putin bore sole responsibility for the war, while Mr. Putin said Russia had invaded in self-defense. But they agreed the war would not end soon.Nuclear Treaty: Mr. Putin announced that Russia would suspend its participation in the New START nuclear arms control treaty — the last major such agreement remaining with the United States.In the North: A different sort of war game is playing out in northern Ukraine, where Russian shelling is tying up thousands of Ukrainian troops that might otherwise defend against attacks farther south.Kormotech had a few things going for it. The company’s plant was outside Lviv in the westernmost part of the country, near the Polish border, one of the safest parts of Ukraine. The two factories in Prylbychi were able to reopen less than two weeks after the war began.An earlier decision to start an additional factory in Lithuania, which opened in 2020 and was operating around the clock, turned out to be a boon. It could continue smoothly producing and delivering tons of Kormotech’s Club 4 Paws, Optimeal, Miau and Gav brands.After a helter-skelter start, Mr. Vovk and his top managers reorganized. The company, which sells its products in 35 countries including the United States and Europe, had a little wiggle room because they had avoided just-in-time practices that eliminated backup inventory — a cost-cutting approach that had stymied so many companies worldwide during the pandemic. Kormotech routinely kept stock in its warehouses — at least a month and a half’s worth in Ukraine, two months in other countries in Europe and two and a half in the United States.Kormotech was able to recover from supply chain turmoil in part because it had routinely stocked its warehouses with up to two months of ingredients for its pet food.Maciek Nabrdalik for The New York TimesStill, Kormotech’s supply chain was disrupted. Before the war, roughly half its raw materials, like meat and chicken meal, came from abroad. Now border crossing delays and rising import prices had prompted a search for domestic producers. It found two that had never produced pet meal before and taught them what to do.Kateryna Kovaliuk, Kormotech’s chief reputation officer, emphasized that pet food standards could often be more exacting than food produced for people. During a recent tour of the Lviv plant, she picked up a few kibble-size bits chopped up from long ropelike strands of cat food fresh off the production line.“Try it,” she urged, before popping a couple of pieces in her mouth and smiling. “It’s good. It tastes like meat without salt.”As it turned out, the local producers, less than 40 miles from the plant, were not only cheaper but also didn’t have to be paid in precious foreign currency. Instead of buying 500 tons of meal from abroad, the company now buys 100 tons.Kormotech stepped up its purchase of Ukrainian grains and corn as well. The war and Russian blockade caused a drastic drop in grain exports, spiraling food prices and a global hunger crisis. But it also meant that domestic businesses like Kormotech could buy at a discount.Manufacturing the product was one hurdle; getting it delivered abroad was another. At a time when Ukraine has barred men under 60 from leaving the country, the trade ministry provided exemptions for delivery drivers.“We would make decisions, and then the next morning, we would change all the information,” Rostyslav Vovk, the chief executive of Kormotech, said of the first week after the invasion.Maciek Nabrdalik for The New York TimesBut the wait at the borders could extend from a few days to a few weeks. And with seaports mostly blocked, exporting remained an expensive and tricky problem.“No one knew where to go or how,” Mr. Vovk said. The first truck sent to Azerbaijan, he said, cost more than $8,000 — before the war, it was roughly $2,000.Domestic demand for its products stayed steady, but finding new export markets was another challenge. Belarus, which has allowed Russia to stage attacks from inside its border, represented 25 percent of Kormotech’s export market. The management team decided to pull out but needed to replace those customers.Supermarket chains, particularly in the Baltic countries and Poland, were eager to step in and replace Russian-made goods with Ukrainian ones.“For the first time in my life, ‘Made in Ukraine’ was a premium,” Mr. Vovk said. Previously, when the company appeared at international pet supply exhibitions, he said with a laugh, people were so unfamiliar with the country’s products, they would ask if the letters “u” and “k” referred to “the U.K.,” for the United Kingdom.Even so, good will extended only so far. Buyers wanted assurances that Kormotech’s products would keep flowing. So the company provided guarantees, setting up a warehouse in Poland with backup stocks of its 650 different products, outsourcing some production to facilities in Germany and Poland, and drawing up last-resort plans to move production out of Ukraine.The enormous growth in both the European and American markets means that the company’s sales are expected to increase to $155 million this year from $124 million. The main obstacle to expanding even more is capacity.Its growth in Europe and the United States is expected to propel Kormotech to a big revenue increase in 2023, an unlikely development after a year of war.Maciek Nabrdalik for The New York TimesKormotech scrapped plans for a new 92 million-euro factory because of uncertainty and the difficulty in getting financing. But it invested €5 million ($5.34 million) in the Prylbychi plant and €7 million ($7.5 million) in Lithuania.Of course, many businesses have not been as successful as Kormotech, either because their facilities were damaged or demand for their products was eviscerated when people fled the country, as well as by ravenous inflation and shrunken incomes. Mr. Vovk said the exodus of millions of mothers and children had left a friend’s diaper manufacturing business in tatters.A new report from the American Chamber of Commerce in Ukraine and McKinsey & Company found that only 15 percent of companies grew last year, while nearly half saw a decline in sales.Others have adapted by relocating to places like Lviv, or changing their output to fill new wartime demands, like the lingerie seamstresses who have switched to sewing cloth vests to fit body armor plates. Ukraine’s large and mobile information technology sector has also remained strong.Businesses are still struggling to adapt. Russian attacks on Ukraine’s power grids compelled Kormotech to buy two generators at €150,000 apiece, supersize versions of the small colorful units that noisily hum outside nearly every shop and cafe on Lviv’s streets.Now, the Russians are stepping up missile strikes. On a recent weekday, air raid alerts caused 200 plant workers to spend more than half of their 12-hour shift in a tunnel-like storage area about three paces wide that doubles as a bomb shelter.Vira Protsyk, who normally would be packing boxes, sat on one of the wooden benches that lined the 100-foot-long wall. “It’s a bit boring,” she said of the forced breaks. This was the second alert of the day. “I didn’t want to go to the shelter. I’d rather work.”Russia has stepped up its missile strikes, and on a recent weekday, plant workers had to seek safety in a storage area.Maciek Nabrdalik for The New York TimesYurii Shyvala contributed reporting. More

A year ago tomorrow was when Russia’s campaign to subject Ukraine to Vladimir Putin’s will turned into a full-scale invasion. By launching it, the Russian president and his colonialist autocracy broke two things. One was the postwar international order, until then threadbare but still holding. The other was the reigning perception in the west that autocracies could be somehow accommodated for mutual benefit. But if the former shattered, the latter merely cracked.It is something to celebrate that the scales have fallen from many western eyes — the most important cases being Germany’s Zeitenwende and its recognition that it was a mistake to cultivate energy dependence on Russia, as well as how impressively fast Europe has freed itself from that dependence. Yet too many western leaders hold on to old misconceptions about the Russian regime. Some think “we” must eventually push for some solution that Putin, too, finds acceptable (which is what we did in Georgia in 2008 and Ukraine after 2014 — bringing to mind the apocryphal Einstein remark defining insanity as doing the same thing over and over while expecting a different result). Some say Putin/Russia (these views tend to conflate the two) must not be humiliated (as if the dictator’s life-long sense of humiliation, rooted in the Soviet Union’s collapse, would be overcome by anything less than totally dominating Ukraine).I think what sustains this misplaced awe for Russia is the tendency to see its war on Ukraine as “merely” a war over who gets to control territory. It is, however, so much more a war about how the territory in question is governed. To see this, we need to pay more attention to the nature of Russia’s occupation, both in regions it has seized in the past year and those it invaded since 2014. A good place to start is Anne Applebaum and Nataliya Gumenyuk’s article, based on the work by the Ukrainian Reckoning Project. (It doesn’t hurt, too, to reread the literary classics on totalitarian regimes, as explained by their own henchmen in works such as Darkness at Noon or 1984.) The difference in “governance” — too bloodless a term — between Russia and Ukraine is not just down to one sanctioning torture, rape and plunder and the other not. As I wrote on the day of last year’s invasion, it is also a matter of the economic system each country has been putting in place: Ukraine has been violently punished for Europeanising its economy — a system that for all its flaws is inimical to Russian control. Understanding these differences, which go deeper than simply where the border is drawn, is crucial for keeping our eye on the ball and staving off “Ukraine fatigue” in the west. I warned about that risk last May and was pleasantly surprised to see that my fears were not confirmed: western resolve has held up well.This must continue. And that means redoubling support for Ukraine’s existential struggle and European future. What does that mean? This is not a column for military analysis, but with an economist’s game theory glasses on, we can at least point out that the weapons the west has slowly become willing to give would have done more good — on the ground and in terms of deterrence — had they been granted faster and with less hand-wringing: it would have made clearer, sooner, the cost to Russia of Putin’s crimes.This is, however, a column for economic analysis, and in economic terms this is already a war between Russia and the west. Putin unleashed his economic warfare in 2021 when he dialled down gas deliveries to Europe, which meant its reservoirs were unusually empty as winter arrived, and higher prices were intended to soften up Ukraine’s western friends. Since then, of course, the west’s response has been much more forceful than anyone thought. The EU has put together 10 sanctions packages in almost the same number of months, and the scale and scope of the sanctions from the united west have been unprecedented. So, in the next two weeks, I want to look more closely at a particular set of sanctions. From an economic point of view we can distinguish between sanctions on stocks of valuable assets that belong to the Russian state or individuals connected with it, and those on the flows of resources in and out of Russia. Some of the early sanctions were on stocks, most significantly the path-breaking move to sever Russia’s access to its foreign exchange reserves in western countries. In addition, of course, many private assets of the Kremlin’s henchmen and corporate proxies were frozen.In sanctions policy since then, the focus has mostly been on further restricting the flow of resources to and from Russia. In sanctions on flows, two areas have rightly taken pride of place. One is Russia’s sale of energy resources — with most oil sales now banned from most of the west, and a price cap required for any other sales serviced by western companies. The other is Russia’s ability to import goods that helps it perpetrate its assault on Ukraine, such as advanced semiconductors and other tech that hugely enhance military strength. These have done a lot of good and should all be tightened further.But there is a need to go back to the earliest sanctions on asset holdings, for a number of reasons. First, because the move of blocking official reserves was unprecedented and done at extreme speed, it had flaws. Over time, the sanctioning coalition has had to recognise both that it did not cause the financial collapse it was intended to, and there were many shortcomings in the way the measure was designed. An overhaul is overdue.Second, while sanctions on flows may be expected to hurt more over time — the longer you are without an income, the worse it gets — that is not necessarily true for sanctions on stocks of assets. German chancellor Olaf Scholz recently wrote in Foreign Affairs that “sanctions would have to be in place for a long time, as their effectiveness increases with each passing week”. But in the case of central bank reserves, the opposite is the case. Not just because of design flaws, but because even the best-designed asset freezes hit at once. If anything changes over time, it is that those whose assets are frozen find ever better ways of coping without.And also because, third, flows become stocks over time if they are not consumed. The fact that the sanctioning countries left untouched Russia’s energy sales to Europe for so long, even as they made it harder for the country to import most things, means that the country has built up a cumulative surplus nearly as big as the reserves that were blocked after the invasion: in all of 2022, Russia’s current account surplus was more than $220bn. There is, in other words, a big pot of Russian state money that can in principle function as “shadow” foreign currency reserves. That makes it timely to ask whether they blunt the effect of blocking the reserves, and what to do about this.Last but not least, because the amounts involved in the stocks of assets are enormous. The Central Bank of Russia itself estimated that it lost access to about half of its reserves, or a staggering $300bn or more. The saved export surpluses come on top. This is serious money, and only amounts of this magnitude will be enough for Ukraine’s reconstruction. The frozen private assets of oligarchs are woefully inadequate in comparison — the European Commission’s “freeze and seize task force” has put them at €30bn across the EU.What happens with Russia’s state assets, both official reserves and accumulated energy surpluses free from sanctions, matters enormously both for winning the war and for winning peace. It’s good that the sanctioning coalition has returned its attention to them (not before time): last week the Swedish prime minister announced the creation of a working group looking at the possibility of using Russian assets to rebuild Ukraine. So, in the next few weeks, I will pick up the pace here in Free Lunch, with a series of twice-weekly newsletters. On the next Tuesdays and Thursdays, I will go through what we know and what we don’t know about both the blocked reserves and the accumulated energy profits. I will also cover the debate that’s being had — and the debate I think we should be having but aren’t — on what to do about both.Other readablesThe rest of the world does not share the west’s support of Ukraine. Ivan Krastev reports the findings from an important new survey: “Paradoxically, it is Russia’s lack of soft power that leaves the non-western world relatively unmoved by what Moscow is doing in Ukraine . . . Russia is no longer important enough to hate.” The Upshot column asks whether China can reverse its population decline. How anti-vax conspiracy theorists got triggered by the 15-minute city concept.Numbers newsKetchup-bottle economics is at work again, with European natural gas prices hitting an 18-month low!EU bankruptcies jumped to their highest level in at least eight years — but not everywhere. The biggest jump was in Spain which recently passed reforms to make insolvency procedures more efficient. More