Economy

The scheme, according to the Kremlin and Russia’s finance minister, would allow Moscow to pay bondholders while bypassing Western payment infrastructure. It comes days after Washington decided against extending a license that had permitted U.S. creditors to receive bond payments while enabling Russia to dodge default.That move by the U.S. Treasury pushed Russia a step closer to defaulting on hard currency debt. Foreign Eurobond holders are now awaiting two coupon payments which fell due last week but carry a 30-day grace period. Russia says it has cash and is willing to pay, refusing any talk of default. Finance Minister Anton Siluanov said on Monday that Moscow will continue to service its external debts in roubles. But for foreign Eurobond holders to receive payments in foreign currencies as per Russia’s obligations, they would have to open rouble and hard currency accounts at a Russian bank, he told Vedomosti newspaper. “As happens with paying for gas in roubles: we are credited with foreign currency, here it is exchanged for roubles on behalf of (the gas buyer), and this is how the payment takes place,” he said. “The Eurobond settlement mechanism will operate in the same manner, only in the other direction.” The money would be channelled through Russia’s National Settlement Depository (NSD), Siluanov told Vedomosti. Unlike many Russian financial institutions, the NSD is not under Western sanctions. There will be no limit on rouble conversion into other currencies and the scheme will be reviewed by the government soon, he said. In a conference call with reporters, Kremlin spokesman Dmitry Peskov endorsed Siluanov’s plan but said the finance ministry will consult with bondholders before introducing it. “There is money, there is a willingness to pay, be that in roubles or under a scheme most convenient for the bondholders. Everything will depend on those contacts,” Peskov said. The finance ministry did not reply to a Reuters request for comment. A financial market source said Russia plans to present the scheme to investors before its next payments, on two bonds, fall due on June 23.SCEPTICISM Russia has around $40 billion of international bonds outstanding, on which just under $2 billion of payments are due before year-end. Some of its bonds, issued after 2014, have provisions to be settled at the NSD and in alternative currencies, including roubles.Bond terms usually stipulate that all creditors are paid, and not doing so can be considered a default. Investors said default looks inevitable now that U.S. creditors have been barred from accepting Russian debt payments. “It’s feasible from the legal point of view as a way to get money to bondholders, but not as a way to avoid an event of default,” a Europe-based investor said.However, investors in the European Union can still receive payments, said Zia Ullah, partner and head of corporate crime and investigations at law firm Eversheds Sutherland, “unless a bank subject to asset freezes is involved in the payments chain”.Some European energy companies have opened rouble accounts at Russia’s Gazprombank, after the Kremlin demanded “unfriendly” countries pay for gas in roubles or be cut off. Buyers must deposit euros or dollars into an account at a Russian bank, which converts the cash into roubles.The financial market source said it had not been decided which bank would be used for Eurobond payments. Ullah said Russia would not be able to make payments in dollars as U.S. banks are restricted from clearing such deals.”Anything dollar-denominated would have to be paid in a different currency … As long as you were comfortable accepting non-dollar payments, there is nothing to prevent it,” he added.But investors were sceptical, given the stigma attached to dealing with Russia. “Legally it seems possible, but I don’t think people will pick it up,” a Europe based bondholder said, calling the payment scheme a “difficult grey area.” “The reality is that for a global fund that holds both business in the U.S. and in Europe would be difficult to accept this mechanism.” More

European stocks extended their gains on Monday, while government bonds in the region were hit by a fresh bout of selling as traders assessed how far inflationary pressures would push the bloc’s central bank to tighten monetary policy.The regional Stoxx Europe 600 share gauge and Germany’s Dax index finished the day up 0.6 and 0.8 per cent, respectively. Those moves followed upticks in Asian markets, with Hong Kong’s Hang Seng index and Japan’s Topix rising 2.1 and 1.9 per cent, respectively. The FTSE All-World index rose 0.7 per cent, having snapped a seven-week losing streak on Friday. This was driven by the best performance for Wall Street’s benchmark S&P 500 since November 2020 after softening economic data encouraged investors that the Federal Reserve could slow its tightening of monetary policy. US markets were closed on Monday for a holiday.Monday’s equity moves also came as Chinese authorities signalled the easing of some pandemic restrictions on business activity in Shanghai, with European consumer businesses making some of the largest gains. European luxury goods companies were among the stocks to climb, with LVMH up 2.6 per cent and Gucci owner Kering up 3.3 per cent. In government bond markets, Germany’s 10-year Bund yield rose 0.09 percentage points to 1.06 per cent as its price fell. The pressure on the debt instrument, viewed as a proxy for eurozone borrowing costs, came as the preliminary German inflation reading for May came in at 8.7 per cent year on year, higher than analysts’ consensus expectations of 8 per cent. “Inflation in the eurozone’s largest economy is still taking no prisoners,” Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, wrote in a note. “The pressure on the ECB over the summer is only going one way: up.” Economists polled by Reuters expect consumer price growth for the broader eurozone area to have reached a new high of 7.7 per cent when data are released on Tuesday.Yields for French and Italian 10-year bonds on Monday rose by 0.08 and 0.1 percentage points, respectively. Bonds were hit by selling even though Philip Lane, chief economist of the European Central Bank, said that gradual quarter-percentage point interest rate rises in July and September would be its “benchmark pace”. He told Spanish business newspaper Cinco Días that “what we see today is that it is appropriate to move out of negative rates by the end of the third quarter, and that the process should be gradual”. The ECB’s current deposit rate sits at minus 0.5 per cent.Paul Flood, a multi-asset portfolio manager at Newton Investment Management, said: “The economy remaining strong might result in a further sell-off in bonds. We think we’ll get a peak in inflation [towards the end of the year], allowing a little more space [to central banks] going forward.”

Central banks have engaged in the most widespread tightening of monetary policy for more than two decades, according to Financial Times analysis, in an effort to tame inflation provoked by the war in Ukraine, tightened global supply chains and a rebound in demand.Investors will also look for signs of cooling in the US jobs market when the country reports unemployment data on Friday. A hot labour market has been a driver of climbing prices in the world’s biggest economy.The US dollar, which is typically perceived as a haven asset and is up almost 6 per cent this year in comparison with peer currencies, was on course for a monthly fall in May. The US dollar index, which measures the greenback against a basket of six currencies, was down 0.3 per cent on Monday.In commodities, international oil benchmark Brent crude rose higher than $120 a barrel for the first time since March as EU members continued to debate an embargo on Russian supplies. More

Federal Reserve Governor Christopher Waller said Monday he expects 50 basis point interest rate hikes to continue.
The central bank official said he would support hikes that exceed the “neutral” level, currently pegged around 2.5% for the Fed’s benchmark borrowing rate.
Waller added that he thinks the Fed can raise rates and tamp down demand without causing a severe economic downturn

Christopher Waller testifies before the Senate Banking, Housing and Urban Affairs Committee during a hearing on their nomination to be member-designate on the Federal Reserve Board of Governors on February 13, 2020 in Washington, DC.
Sarah Silbiger | Getty Images

Federal Reserve Governor Christopher Waller said Monday he sees interest rate increases continuing through the rest of the year as part of an effort to bring inflation under control.
Specifically, the central bank official said he would support hikes that exceed the “neutral” level considered neither supportive nor restrictive for growth.

Estimates Fed officials provided in March point to a 2.5% neutral level, so that means Waller sees rates increasing at least another 2 percentage points from here.
“Over a longer period, we will learn more about how monetary policy is affecting demand and how supply constraints are evolving,” Waller said in remarks delivered in Frankfurt, Germany. “If the data suggest that inflation is stubbornly high, I am prepared to do more.”
The statements support sentiment reflected in minutes from the rate-setting Federal Open Market Committee meeting held in early May. The meeting summary said officials believe “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
Markets currently are expecting the Fed to raise benchmark borrowing rates to a range between 2.5%-2.75%, in line with a neutral rate. However, if inflation continues to rise, the Fed likely will go even further. The fed funds rate currently is set between 0.75% and 1%.
Minutes also indicated that policymakers see rates rising by 50 basis points at the next several meetings. Waller said he is on board with that position, as the Fed seeks to tame inflation running close to its highest level in more than 40 years.

“In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target,” Waller said. “And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation.”
Data released Friday indicated that inflation still accelerated in April but at a slower pace. Core personal consumption expenditures, which is the metric the Fed watches closest, increased 4.9% for the month from a year ago, down from 5.2% in March. Headline PCE inflation, including food and energy costs, rose 6.3%, compared to 6.6% the previous month.
Waller added that he thinks the Fed can raise rates and tamp down demand without causing a severe economic downturn. In part, the Fed’s aim will be to reduce labor demand without causing a big rise in the unemployment rate. There are currently 5.6 million more job openings than there are available workers, according to the Bureau of Labor Statistics.
“Of course, the path of the economy depends on many factors, including how the Ukraine war and COVID-19 evolve. From this discussion, I am left optimistic that the strong labor market can handle higher rates without a significant increase in unemployment,” he said.

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(Reuters) – The Federal Reserve needs to move interest rates much higher and soon if high inflation does not begin to subside, Fed Governor Christopher Waller said on Monday.”If inflation doesn’t go away, that… rate is going a lot higher, and soon,” Waller said following a speech given to the Institute for Monetary and Financial Stability in Frankfurt, Germany. “We are not going to sit there and wait six months…I am advocating 50 on the table every meeting until we see substantial reductions in inflation. Until we get that, I don’t see the point of stopping.” More

A senior Federal Reserve official has called for the US central bank’s main interest rate to rise to a level at which it starts to stunt economic growth by the end of the year, brushing off concerns that a sharp monetary tightening would hurt the labour market.In a speech at Goethe University in Frankfurt, Germany on Monday, Christopher Waller, a Fed governor, said he backed increasing interest rates by another 50 basis points “for several meetings” and would not stop that pace “until I see inflation coming down closer to our 2 per cent target”.“By the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labour, bringing it more in line with supply and thus helping rein in inflation,” Waller said. The Fed does not specify an exact figure as the “neutral” rate, the point at which monetary policy neither boosts nor stunts economic activity. However, central bank officials forecast interest rates will settle at 2.4 per cent over the long run, a good approximation for the “neutral rate”. Waller said his expectations were roughly in line with those of investors in financial markets, who are predicting the policy rate to hit 2.65 per cent by the end of the year. “If the data suggest that inflation is stubbornly high, I am prepared to do more,” he said.Top Fed officials have said they were prepared to increase interest rates above the “neutral” level if needed, but Waller has gone slightly beyond that by saying this should now be the goal of the Fed.Waller said it was crucial for inflation expectations to remain in check. “What I care about is getting inflation down so that we avoid a lasting escalation in the public’s expectations of future inflation. Once inflation expectations become unanchored in this way, it is very difficult and economically painful to lower them,” he said. He also sought to dismiss fears that steep interest rate rises along the lines he is advocating would deliver a substantial hit to the jobs market and possibly trigger a recession. “The unemployment rate will increase, but only somewhat because labour demand is still strong — just not as strong — and because when the labour market is very tight, as it is now, vacancies generate relatively few hires,” Waller said. “Thus, reducing vacancies from an extremely high level to a lower — but still strong — level has a relatively limited effect on hiring and on unemployment.” Waller, a former senior economist and official at the St Louis Fed, is seen as a relatively hawkish Fed governor. His comments come as central bankers debate the best way to reduce inflation without excessively harming economies, and Waller’s argument is that the Fed should not be too wary of the negative impact of higher rates on jobs. “Of course, the path of the economy depends on many factors, including how the Ukraine war and Covid-19 evolve. From this discussion, I am left optimistic that the strong labour market can handle higher rates without a significant increase in unemployment,” he said. Waller also gave a nod to transatlantic co-operation, both with regards to the war in Ukraine and the fight against inflation. “Europe and the US have strengthened our ties and I believe we are more unified today than we have been for decades. We see that in the deepening and possible broadening of our security commitments, and we also see it in the strong commitment that central banks in Europe and elsewhere have made to fight inflation,” he added.Meanwhile, Jay Powell, the Fed chair, is scheduled to hold a relatively rare meeting with Joe Biden on Tuesday at the White House, in a sign of how worried the US president is about soaring inflation and the consequences for his Democratic party at midterm elections in November. More

European leaders will intensify efforts to get food out of Ukraine by land as a Russian blockade of the country’s ports threatens tens of millions of people across the world with starvation. An EU summit finishing on Tuesday will pledge to improve attempts to find alternative routes to bring out millions of tonnes of grain over the next three months and free Ukraine’s warehouses for the coming harvest, according to draft conclusions seen by the Financial Times.Dozens of countries rely on cereals from Ukraine, mostly exported via its Black Sea ports, which are now either in Russian hands or blockaded by warships. Russia’s president Vladimir Putin has said he will only allow grain ships to leave the port of Odesa if the EU lifts the sanctions it imposed after his invasion of Ukraine three months ago. Russia wants the EU to lift its ban on Russian ships entering the bloc’s ports, an EU diplomat said.Kyiv needs to export 20mn tonnes of grain in the next three months or some crops will rot with nowhere to store them after August’s harvest. In April, just 1.2mn tonnes were exported. EU diplomats in Ukraine say only about 5mn tonnes of grain can be transported in that timeframe without the Black Sea route. It throws the fate of the 30m tonnes Ukraine plans to harvest this year into question.Ukraine produces 12 per cent of the world’s wheat, 15 per cent of its corn and 50 per cent of its sunflower oil. “We will discuss concrete ways to help Ukraine export its agricultural produce using EU infrastructure,” Charles Michel, president of the European Council, told leaders in a letter inviting them to this week’s summit. The EU announced on May 12 a plan to take up to 4mn tonnes of grain out of Ukraine a month through neighbouring countries. But Brussels accepts that the challenges are huge. Attempts to boost rail transport are hindered by Ukraine’s Soviet-era gauges, which are wider than those used in the EU so train chassis have to be changed before the trains can run in the bloc. Brussels has launched a plea to member states to provide equipment to do the transfer as well as rolling stock, trucks, drivers and barges.A total of 467 wagons can be handled per day at the eight railway border crossings with Poland, Hungary, Romania and Slovakia. Poland is reluctant to build a Soviet-gauge railway route to Lithuania, bypassing Belarus. A proposed plan to run the shipments to Lithuania through Belarus is politically unpalatable in Ukraine after Alexander Lukashenko, Belarus’s strongman leader, allowed Russia to use the country as a base of operations for the invasionAdina Vălean, the EU’s transport commissioner, last week also instructed the bloc’s agriculture ministers to speed up border crossings, which are subject to huge tailbacks. There were “shocking examples of entire convoys being delayed for four days or sometimes even 10 days for one missing certificate for types of cargo where such certificates were not even required at the destination”, she said. “We are also asking the member states to increase inspection capacity at border posts to deal with arrivals 24/7.”EU diplomats said freight networks were already congested, meaning trains were moving slowly. Private companies are reluctant to send trucks into Ukraine as they cannot get insurance and could be bombed by Russian forcesBarges can take grain up the Danube to Romania, for onward shipment from the port of Constanta, although Russia has bombed this route in the past. But Vălean earlier this month outlined the scale of the challenge, referring to a seagoing grain carrier that left Constanta with 70,000 tonnes. “To fill it to capacity, a combination of 49 barges and trains was used. One 600m train can carry around 1,900 tonnes of grain. A convoy of six barges, which is how the grain travelled from Ukraine’s Danube ports, can carry a maximum of 18,000 tonnes.” Many believe the EU plan is simply undeliverable. David Beasley, head of the UN World Food Programme, told the FT’s Rachman Review podcast that trucks could handle only 1mn tonnes a month. “Twenty-six countries get 50 per cent or more of their grain from Ukraine or Russia,” he said, including Egypt, Lebanon and Senegal. With 49mn people threatened with famine, “we are taking food from the hungry children to give to the starving children”.Michel has invited Senegal’s president, Macky Sall, chair of the African Union, to join the summit remotely on Tuesday. The European Commission has said Russian propaganda has told Africans that the EU, rather than Moscow, is responsible for spiralling prices and food shortages because of its sanctions.Putin said on Monday that Russia was ready to facilitate the shipment of grain out of blockaded Ukrainian ports in coordination with Turkey, the Kremlin said in a statement. “Vladimir Putin noted the readiness of the Russian side to facilitate unimpeded maritime transit of cargo in coordination with our Turkish partners. This also applies to the export of grain from Ukrainian ports,” the Kremlin said, summarising a phone call with Recep Tayyip Erdoğan, Turkey’s president. Russia has demanded that some sanctions against it be lifted before it will increase its own export of agricultural products and fertilisers.Additional reporting by Max Seddon in Kyiv and Polina Ivanova in London More

Oil rose higher than $120 a barrel on Monday as increasing prices for fuels, such as petrol and diesel, combined with lingering concerns over supplies from Russia to propel crude to its highest level in two months.Brent crude, the international benchmark, hit $120.50 a barrel, up 1 per cent ahead of the July contract’s expiry on Tuesday. US benchmark West Texas Intermediate rose by a similar amount to more than $116 a barrel. The rally in crude oil comes as supplies of refined products, such as petrol, remain tight at major delivery hubs at a time when demand is expected to pick up steam in many countries, including the US.Lower exports of diesel from Russia, which many western companies are shunning or cutting back on following the invasion of Ukraine, have tightened markets even more so than crude. The gas oil contract in Europe, a proxy for diesel and other distillates, is trading close to record levels near $1,200 a tonne. Sky-high product prices mean that motorists in many countries are paying record prices for diesel and gasoline despite crude being well below its all-time high of $147.50 a barrel, which it hit in 2008. The key US summer driving season kicked off on Monday with the Memorial Day holiday.An easing of Covid-19 restrictions and government subsidies have both helped to support demand, said Keshav Lohiya at consultancy Oilytics.“Despite record high prices in local currencies, political decisions like subsidies continue to distort the market,” said Lohiya. “In addition, post-Covid demand continues to keep mobility very high in Europe, especially with the run-up to summer.”In a sign of pressures on the market, traders are willing to pay a premium to secure supplies immediately because of tightness in the market. Brent for delivery in July is trading at a roughly $4 premium compared with August.Analysts are also monitoring any EU decision on restrictions or an outright embargo on Russian oil purchases in the coming days. Bloc members are due to meet on Monday and Tuesday. A full ban on Russian oil purchases has been opposed by some members such as Hungary, but the EU is keen to increase pressure on Russia.An EU leader’s summit starting on Monday evening is expected to vow to include oil and petroleum products in a sanctions package, but will allow a “temporary” exemption for crude delivered by pipeline, according to draft conclusions seen by the Financial Times.Reticence from the Opec+ group to accelerate oil production increases is also supporting prices. The group meets on Thursday and is widely expected to stick with its plan of raising production by about 400,000 barrels a month, a target that has been in place since last year. Concerns about shipping through the Strait of Hormuz, through which a third of seaborne oil exports pass every day, after Iran seized two Greek-flagged tankers on Friday, have added to factors boosting the price.Greece, which has more supertankers sailing under its flag than any other country, has warned Greek oil tankers and other vessels to avoid sea waters close to Iran. More

Consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), increased an annual 8.7%, the Federal Statistics Office said on Monday. The last time inflation had been similarly high in Germany was during the winter of 1973/1974, when mineral oil prices spiked as a result of the first oil crisis, said the office.The figure, which beat the 8.0% predicted by analysts in a Reuters poll, marks a second month in a row of record highs, after April’s rise of 7.8% was the biggest in four decades. [L5N2WQ6JB]According to the office, energy prices rose by 38.3% in May compared to the same month last year, while food prices also rose at an above-average rate of 11.1%.Holger Schmieding, chief economist at Berenberg Bank, said there is still some inflationary pressure in the pipeline for goods affected by supply bottlenecks and food before the situation eases from autumn. More