Economy

The US is poised to announce a ban on new investment in Russia while increasing sanctions on the country’s financial institutions, state-owned enterprises and government officials, people familiar with the matter said on Tuesday.“These measures will degrade key instruments of Russian state power, impose acute and immediate economic harm on Russia, and hold accountable the Russian kleptocracy that funds and supports Putin’s war,” one of the people said, adding that the new sanctions would be unveiled on Wednesday and co-ordinated with the G7 and the EU.“These measures will be taken in lock step with our allies and partners, demonstrating our resolve and unity in imposing unprecedented costs on Russia for its war against Ukraine,” the person added.Calls for additional sanctions on Moscow have multiplied in recent days in the wake of mounting evidence of war crimes in Ukraine, including a massacre of civilians in the town of Bucha on the outskirts of the capital Kyiv. The EU this week moved to ban Russian coal and other measures to further reduce its dependence on energy imports from Russia.The US had already banned new investments in Russia’s energy sector, but the step expected on Wednesday would apply the prohibition across the Russian economy, as part of a package designed to send the country “further down the road of economic, financial, and technological isolation”, said the person familiar with the plan.

The US and its allies have imposed massive sanctions on Russia since its invasion of Ukraine, including banning any transactions with the Kremlin’s central bank. It is becoming harder to find additional ways to inflict economic punishment on Moscow without risking big negative spillovers for the global economy.At the same time, the US and the EU are trying to firm up the enforcement of existing sanctions on Russia to limit Moscow’s ability to circumvent the financial punishment by shifting assets to other jurisdictions around the world.Jake Sullivan, the US national security adviser, on Monday defended the aggressive use of sanctions from criticism that they had failed to stop the war. “It will take time to grind down the elements of Russian power within the Russian economy, to hit their industrial base hard, to hit the sources of revenue that have propped up this war and have propped up the kleptocracy in Russia,” he said. “[Sanctions] are a critical tool in ultimately producing a better outcome to this conflict than would otherwise be produced,” he added.Separately on Tuesday, the US Treasury announced that it was placing sanctions on Hydra, the Russian dark web marketplace, after its servers were seized and shut down by German authorities. It also announced sanctions on Garantex, a virtual currency exchange that operates largely out of Russia. Launched in 2015, Hydra is the largest marketplace on the dark web by revenues, and last year it accounted for an estimated 80 per cent of all cryptocurrency transactions on darknet markets. It is popular among cyber criminals seeking hacking tools and money laundering services and looking to trade in stolen data and drugs. It has received some $5.2bn in cryptocurrency since it launched in 2015, according to the justice department.Treasury said that both Hydra and Garantex were being used by ransomware criminals — many of whom operate out of Russia or Russian-affiliated countries with impunity — to launder millions of dollars of proceeds of their crimes. German authorities confiscated $25mn in bitcoin as part of the Hydra shut down, according to the DOJ, which also announced criminal charges against Russian resident Dmitry Olegovich Pavlov for conspiracy to distribute narcotics and conspiracy to commit money laundering in connection with administering Hydra’s servers.Western experts have warned there may be an explosion of financially-motivated cyber crime coming from Russia as existing sanctions bite and hurt the economy.“The global threat of cyber crime and ransomware that originates in Russia, and the ability of criminal leaders to operate there with impunity, is deeply concerning to the United States,” said Janet Yellen, Treasury secretary. “Our actions send a message today to criminals that you cannot hide on the darknet or their forums, and you cannot hide in Russia or anywhere else in the world.” More

Poland has blocked progress of an EU directive seeking to implement the global minimum corporate tax agreed last year, setting back the bloc’s efforts to adopt the measure. In a landmark agreement in October last year, 137 countries backed the introduction of a new 15 per cent minimum effective corporate tax rate on large businesses, known as pillar two. The reform is set to raise global tax revenues by more than $150bn a year. The same agreement also backed forcing the world’s 100 biggest multinationals to declare profits and pay more tax in the countries where they do business, known as “pillar one”.In order to make the deal a reality, countries need to put the minimum tax into their domestic law. The EU plans to do this via a directive and requires unanimity from all member states for the measure to go ahead. However, on Tuesday, Poland disrupted the plans by opposing the proposed directive at a meeting of EU finance ministers in Luxembourg. Magdalena Rzeczkowska, Poland’s finance minister, argued that the country could not support the minimum tax going ahead without first having “legally binding” assurances that reforms targeting the largest 100 companies would be enacted. That part of the deal requires countries to agree a multilateral convention, and negotiations are running slower than the plans for the global minimum tax. Rzeczkowska said: “We strongly believe that we should be mindful of the inadequacy of placing additional burden on European businesses under pillar two without ensuring the digital giants are fully taxed under pillar one.”The decision sparked frustration from other member states including France, whose finance minister Bruno Le Maire has been leading negotiations on the directive as part of France’s presidency of the EU, which ends in June.He pointed out that the deal had been supported by all EU member states, including Poland, at the international level via the OECD negotiations. The council had “addressed” Poland’s concerns by including wording that indicated the EU’s intention for the two parts of the deal to work as a package. “I’ll say very clearly, I am absolutely not convinced by the Polish argument,” Le Maire said at the council meeting. All member states had worked towards finding consensus, he added, saying he “deeply regret[ed] that Poland does not understand that”.Speaking after the meeting of the economic and financial affairs council, Valdis Dombrovskis, commission executive vice-president, said he was not in a position to interpret the motivations and justifications of Poland. But he was hopeful that there would be agreement at next month’s meeting.“This mystery has to be brought up with Warsaw, rather than the French presidency,” added Le Maire.The US Treasury said it was “ disappointed that Poland did not join EU consensus on an important measure that will raise crucial new revenue for 137 participating countries”. The “EU draft directive process is ongoing, and we are confident that the EU countries will ultimately meet that commitment”, it added. Separately, Poland is engaged in negotiations with Brussels to unlock its portion of the EU’s recovery funds. The development means that implementation of the global tax deal remains stalled on both sides of the Atlantic. The draft legislation contained in US president Joe Biden’s build back better bill, which would align the US tax system with the international proposal on a global minimum tax, has been delayed as a result of the Democrats’ inability to gain backing from within the party. No draft legislation has yet been brought forward in Washington and Brussels on pillar one. However, when asked if the global tax deal was in “jeopardy” because of hurdles in the US and EU, Le Maire said that determination to pass the deal remained strong. Additional reporting by James Politi in Washington More

Generali had asked IVASS in February whether a 16.3% combined stake acquired by two of its main investors, Italian tycoons Francesco Gaetano Caltagirone and Leonardo Del Vecchio, and a third smaller shareholder Fondazione CRT, would have required prior authorisation.Generali declined to comment on the IVASS decision.Europe’s third-largest insurer is at the centre of a shareholder battle that has cast doubts on the reappointment of CEO Philippe Donnet, whose term ends in April and is backed by the largest investor Mediobanca (OTC:MDIBY) and the outgoing board. The three investors had struck a consultation pact last year to challenge Mediobanca over the renewal of Generali’s board.Caltagirone quit the pact in January, to prevent, sources said at that time, regulatory scrutiny on whether the alliance was indeed a consultation pact or represented a more substantial concert party which could have seen its voting power curtailed.Del Vecchio and CRT dissolved the pact last week. Caltagirone has put forward an alternative candidate for the role of CEO in a challenge to Donnet’s reappointment.As part of its ordinary supervisory activities, IVASS continues to closely monitor events regarding the company’s shareholding structure, and it reserves the right to take steps if needed, it said in a statement. More

Here’s some happy reading for the world’s central bankers this evening. It comes courtesy of the Bank for International Settlements’ general manager Agustín Carstens, who says the fixes they’ve relied upon for the past few decades belong in the trash: (emphasis ours here and elsewhere)Central banks may also need to reassess how they respond to inflation resulting from supply side developments. These will typically spark relative price changes at first. The textbook prescription is to “look through” this type of inflation, because offsetting their impact on inflation would be costly. But that assumes inflation overshoots are temporary and not too large. Recent experience suggests it can be hard to make such clear-cut distinctions. What starts as temporary can become entrenched, as behaviour adapts if what starts that way goes far enough and lasts long enough. It’s hard to establish where that threshold lies, and we may find out only after it has been crossed.Monetary policy frameworks have, in recent decades, been based on the idea that central banks can provide stable growth by controlling the level of aggregate demand in the economy. This is done by easing or tightening monetary policy. If the economy is overheating, and inflation is too high, rates can rise – hitting demand in the process. And vice versa if demand needs a little bit of a boost in order for the economy to reach its potential. The framework implies that inflation is ultimately a demand-driven phenomenon. Any surge in prices resulting from supply shocks will be short-lived, as investment and government policy adjust to fill the gap. That view has merit. It helps explain why the European Central Bank was wrong to respond to the rise in oil prices in 2011 by hiking rates only to be confronted with a sovereign debt crisis and recession a year down the line. But what happens when you have a situation like the present where supply bottlenecks linger and price pressures begin to broaden?

One consequence is that workers (in some parts of the world at least) begin to call for more money:

While we remain unconvinced that we’re about to see wages spiral out of control, it’s looking less likely that what we’re seeing happen to price growth is a blip.So where do we go from here? Well, there are no easy answers. Combining rate rises with a cost of living crisis is hardly a recipe for societal bliss. In the longer term, however, persistently high inflation would be even worse. The BIS’s head somewhat glosses over the challenges this creates: The good news is that central banks are awake to the risks. No one wants to repeat the 1970s. It seems clear that policy rates need to rise to levels that are more appropriate for the higher inflation environment. Most likely, this will require real interest rates to rise above neutral levels for a time in order to moderate demand.Of course no-one wants a repeat of the stagflation for which that decade is renowned. Yet the idea that this generation of central bankers can draw on the Volcker playbook like it’s no biggie is barking. Suppose what Carstens means by a “neutral” level is that real rates will rise to zero. Well right now that would mean the European Central Bank hiking its deposit rate, currently minus 0.5 per cent, by a whopping eight percentage points. The Federal Reserve would need to raise the federal funds rate by around 7.5 percentage points. At Threadneedle Street, the bank rate would have to shoot up by more than 5.5 percentage points. Meanwhile, here’s what’s happened to debt levels over the past five years:

We said earlier this year that people seemed to be ignoring just how wildly out of sync real rates are with historical norms and warned that borrowing costs may have to rise by a far greater amount than realised. We’re not the head of the central bankers’ bank though, so it doesn’t really matter what we say. That Carstens now seems to be promoting the same view is altogether more concerning for anyone counting on relatively modest rate hikes. It could be that debt burdens are so heavy that smaller moves will be good enough to choke off enough demand that prices begin to fall. Or we could get lucky and see inflation fall back towards the end of this year. The BIS was one of the few to voice their concerns in the run-up to the great financial crisis. Central bankers largely ignored the warnings from Basel then. But if inflation persists, will they do so again? We’re not so sure. More

Stop burning fossil fuels. Sell more electric cars. Make buildings greener. Save more forests. The world is already awash in scientific advice on how to address the widening risks of global warming. Yet this week’s report from the UN’s Intergovernmental Panel on Climate Change is different. At nearly 3,000 pages, it is the most comprehensive analysis of what can be done to ward off dangerous levels of warming since the Paris climate accord was agreed in 2015. It will help to shape climate policy debates for years to come. Its message is both stark and compelling. The window for limiting global warming to 1.5C is closing fast. Global emissions should ideally peak within just three years. Greener lifestyles can help, but more sweeping structural changes are needed. Gas, oil and especially coal use must fall steeply.The good news is that a lot of what is needed is under way. The study shows prices of green alternatives to fossil fuels have not merely dipped, but plunged. Between 2010 and 2019, solar power and lithium ion battery costs fell by 85 per cent, while wind energy dropped by 55 per cent. Solar panels and wind turbines can now compete with fossil-fuelled power generation in many places and the deployment of green technologies has ballooned.Some of this growth is due to an impressive expansion of climate policies and laws since the last big IPCC assessment was finalised in 2014. This in turn has led to the avoidance of emissions and pumped up investment in low-carbon infrastructure.At least 18 countries have reduced their emissions for more than a decade, sometimes by 4 per cent a year, a rate in line with what is needed globally to keep temperatures at safer levels. If all countries acted to limit warming to 2C or less, the authors say global GDP would be just a few percentage points lower by 2050. And that calculation does not take account of the economic benefits of avoiding climate damage and lowering the cost of adapting to higher temperatures.Most encouragingly, the growth in greenhouse gas emissions has slowed, from an annual average of 2.1 per cent at the start of this century to 1.3 per cent between 2010 and 2019. Yet this is not nearly enough. Progress in some countries has been outweighed by soaring emissions elsewhere. Climate finance for poorer countries is lacking. For all the vows of action, the authors say the world is on track for a catastrophic 3.2C of warming by the end of the century — more than double the 1.5C limit agreed in the Paris accord.To have a chance of meeting that 1.5C goal, emissions need to peak by 2025 at the latest and fall by an unprecedented 43 per cent by 2030. Even then, the report says it is “almost inevitable” that the 1.5C threshold will be exceeded, at least temporarily — a sobering prospect given the weather extremes that have occurred at just 1.1C of warming.The scale of change needed is colossal. Aiming for 1.5C requires coal use to drop by 95 per cent, oil by 60 per cent and gas by 45 per cent by 2050. These goals look even harder to reach at a time of high inflation, though the war in Ukraine might conceivably speed up a green transition as western markets cut off Russian fossil fuels. The science of climate change is now well understood, as are the technical solutions. The larger problem is politics, as the IPCC itself showed. Its report was held up by wrangling among the 195 countries approving it, some of which depend heavily on fossil fuels or lack the resources to build a greener economy. After more than a century of unsustainable energy and land use, the world has begun to turn. New ways of shifting even faster must now be found.

Video: Can we stop wind turbine blades ending up in landfill? | FT Rethink More

Disruption is everywhere in the global economy. Russia’s war in Ukraine — and sweeping western sanctions on Moscow — has wrecked havoc in commodity markets. The prospects for co-operation over addressing these supply problems look limited. The turmoil is contributing to rising inflation, which is at levels unseen in a generation. Such strains in the real economy have raised questions over whether the monetary order based on the US dollar can remain unaffected.Some change may be inevitable, but prevailing trust in the greenback will not be easily displaced. For now, the US dollar’s status as the leading global reserve currency is assured. It still makes up a majority of foreign exchange reserves and dominates trade invoicing. US Treasuries are the safe asset of choice for global markets, while the country’s institutions are still trusted and adept at managing crisis.If threats to the dollar do emerge, they are unlikely to come from central banks diversifying some of their reserves away from US dollars, towards smaller, western currencies. This trend has been held up as evidence that the need to hold US dollars is fading as technology has made direct transfers between smaller currencies possible in ways that remove the need for the dollar to act as gatekeeper.This may be so but most, if not all, of diversification’s beneficiaries have well-established links with the greenback. Swap lines between the central banks of these countries and the Fed in effect make these currencies nodes in a broader dollar system. Those who hold them as reserves do so in the knowledge that access to dollar funding, and — if the need arises — a smooth “flight to safety”, is practically guaranteed.A bigger threat is that countries feeling the brunt of western sanctions might look to avoid transacting in and out of the US dollar. These countries certainly don’t trust the currency in the same way that other players in global markets do — the US has shown a willingness to use the status of the dollar as an economic weapon. The most direct alternative here is a second monetary order built through China. Beijing’s digital currency program — which could soon enable relatively frictionless cross-border transactions — makes clear an ambition to improve the global attractiveness of the renminbi. However, while greater use of the currency might appeal to those shut out of dollar markets, its broader attractiveness as a replacement for the greenback is still questionable. China’s unwillingness to loosen its control over offshore renminbi trading is a considerable barrier to any hopes of truly competing with the US dollar. The US cannot afford to be complacent, though. The Fed has been slow to pick up on innovations in the digital currency space. This could yet prove to be costly as other countries look to gain a first-mover advantage. A digitised rival currency which combines ease of use across borders with access to relatively deep bond markets could pose a legitimate alternative to the dollar. Europe, for example, has long been determined to broaden global use of the euro and has its own well-developed digital currency program.Control over the global reserve currency is sought after for a reason: the seemingly insatiable demand for dollars gives the US a steady stream of funds that it can tap on demand, as well as an outsized influence over global economic affairs. These benefits mean that challenges to the dollar’s status from other ambitious issuers are inevitable. But in the game for primary “reserve status”, trust is hard won. At present, no other currencies seem ready to compete. More

Rising pressure on prices is likely to keep inflation at its highest level for more than three decades in many countries and cause long-term problems for central banks, warned the head of the Bank for International Settlements.Agustín Carstens, general manager of the BIS, the umbrella body for central banks, pointed to a “new inflationary era” amid signs that price expectations of consumers and businesses are becoming “unmoored” from their historically low levels.Rising expectations are likely to feed further inflation as companies pass on higher costs to their customers and workers demand higher wages, Carstens said, citing an increased risk of “a dangerous wage-price spiral”.“A generation of society, workers and business managers who had never seen meaningful inflation — at least in advanced economies — are learning that rapid price rises are not merely the stuff of history books,” Carstens said in a speech on Tuesday in Geneva.“The structural factors that kept inflation low in recent decades may wane as globalisation retreats,” he added. “The pandemic, as well as changes in the geopolitical landscape, have already started to make firms rethink the risks involved in sprawling global value chains.”Russia’s invasion of Ukraine has added to disruption in supply chains caused by the pandemic, triggering sharp price rises in food, energy and other commodities since the war began on February 24. “Such increases will feed directly into higher consumer prices,” he said. “Others, for example metals, will further stretch global value chains.”He also said loose monetary policy and generous fiscal programmes helped to cause the latest “flare-up” in consumer prices, adding: “Policy settings, at least over the past year, may have served as a springboard for the rapid expansion.”Consumer prices in the world’s 30 richest countries already rose at an annual rate of 7.7 per cent in February, up from only 1.7 per cent in the same month last year and the highest since December 1990, the latest OECD data showed on Tuesday.Carstens said almost 60 per cent of advanced economies have inflation above 5 per cent — the highest proportion since the 1980s — while more than half of emerging market countries have inflation over 7 per cent — the most since a brief period during the 2008 global financial crisis.“The forces behind high inflation could persist for some time,” said the BIS head. “Central banks will need to adjust, as some are already doing . . . No one wants to repeat the 1970s,” when advanced economies were hit by persistent high inflation. Several of the world’s central banks have started raising interest rates to tackle inflation rates well above their 2 per cent targets, including in the US, UK, Canada, Brazil, South Korea, Mexico and South Africa.

Carstens said the “adjustment to higher interest rates will not be easy”, pointing out that households, companies, investors and governments have “become too used to low interest rates and accommodative financial conditions, also reflected in historically high levels of private and public debt”.“It will be a challenge to engineer a transition to more normal levels and, in the process, set realistic expectations of what monetary policy can deliver,” he said. “Nor will the required shift in central bank behaviour be popular.”Instead of relying on monetary and fiscal policy to prop up economic growth, Carstens called for “structural policies that strengthen the productive capacity of the economy”.“Many of the economic challenges we face today stem from the neglect of supply-side policies over the past decade or more,” he said. “Central banks have done more than their part over the past decade. Now is the time for other policies to take the baton.” More

The reports of massacres of civilians in Bucha, close to Kyiv, cannot, alas, be a surprise. In response, Emmanuel Macron argued that, “What happened in Bucha demands a new round of sanctions and very clear measures, so we will co-ordinate with our European partners, especially with Germany.” He added that “on oil and coal, we must be able to move forward. We should certainly advance on sanctions . . . We can’t accept this.” But sanctions on Russian oil and coal are insufficient. It is necessary to embargo imports of Russia’s gas, too.According to the US Energy Information Agency, in 2021, 74 per cent of Russia’s exports of natural gas went to European members of the OECD. That would amount to 5 per cent of Russia’s export earnings. The difference between these exports and those of oil and coal is that it is easier for Russia to shift their destination than it is of gas, whose transport depends on inflexible infrastructure.Adding gas to the list of embargoed products would therefore increase the pain on Russia. The objections to this idea are that some European countries are particularly dependent on Russian gas and so the costs of cutting imports substantially for them would be huge.Among the most vulnerable countries are Germany and Italy. Germany, for example, depends on Russia for a third of its energy consumption. Moreover, Germany received 58 per cent of its gas from Russia in 2020, while Italy received 40 per cent. These countries are also heavily reliant on gas: Germany’s consumption is more than double that of France, whose nuclear generation capacity is large. An embargo on gas supplies would, it seems, devastate the economy of Germany and similarly vulnerable countries. Recent economic research suggests, however, that this fear — though understandable — is exaggerated. A paper on Germany by economists headed (alphabetically) by Rüdiger Bachmann of Notre Dame university notes that the focus should indeed be on gas, since oil and coal are supplied in global markets. If necessary, as the paper notes, “Sufficient world market capacity exists from other oil- and coal-exporting countries to make up the shortfall.” Russia could also shift its exports elsewhere, though it might have to do so at a discount.So what about sanctions on gas? In the short run, the loss of Russian gas could not be made up by imports from elsewhere. The paper assumes that the result of an embargo on Russian energy would be a cut of 30 per cent in gas deliveries, which is about 8 per cent of total German energy consumption. The key points in the analysis are that substitutability of gas in consumption and production is lower in the short run than the long run and higher in some uses than others. With very low short-run substitution elasticities (a pessimistic assumption), an 8 per cent decline in consumption of oil, gas and coal leads to a 1.4 per cent decline in gross domestic product — a cost of €500-€700 a year for each German citizen. With a 30 per cent fall in gas usage, the economic losses rise to 2.2 per cent of GDP (2.3 per cent of gross national expenditure) or €1,000 per year per citizen. If one allows for possible second-round macroeconomic effects, this impact might reach 3 per cent of GDP.Alternative estimates exist. A survey by Clemens Fuest of the ifo institute in Munich presented at last weekend’s Ambrosetti economic and finance forum, shows that estimates of the decline in GDP vary between a tiny 0.2 per cent and 6 per cent. As he states, “We don’t really know”. But we do know that if an embargo became necessary, it would be best to do it now: as the paper cited above explains, the justification “is the seasonality of gas demand. A cut-off from Russian gas over the summer months could be substituted from Norwegian and other sources, keeping industrial supply going.” Such an early move would also “trigger the substitution and reallocation dynamics that are central to reducing economic costs”.Above all, a comprehensive embargo on Russian energy imports into Europe would be a statement of collective will in defence of the values on which postwar Europe was founded against its fiercest enemy. It is Germany’s duty to lead. Yes, it would bear significant costs. But the reasons it is so vulnerable are, after all, what the economist Hans-Werner Sinn rightly calls “Germany’s Energy Fiasco”, with its closure of nuclear energy and excessive reliance on Russia. Moreover, even on the worst assumptions, these costs would be modest compared with the ones suffered by those hit by the eurozone crisis.Of course, Germany and other vulnerable countries must be helped. The gas available should be treated as a European resource, so far as is practical. It would be a magnificent gesture if the UK were to join in. It will also be necessary to adopt fiscal policies that cushion the blow on vulnerable people. Beyond that, it is essential to build an infrastructure that delivers maximum flexibility.The long-run goal should be for Europe to be able to import from anywhere, while Russia remains reliant on European markets. The short-run goal should be to make life as difficult as possible for Putin. A superior alternative would be the suggestion of Harvard’s Ricardo Hausmann of a penal tax on Russian imports by most buyers, worldwide. Alas, that is not going to happen.It is possible that Putin’s demand for payment in roubles will end up cutting off supplies, anyway. But this should not be necessary. Rightly or wrongly, Nato decided not to defend Ukraine militarily. The least Europeans can do is to use all other tools at their disposal. They must bear and share the costs of cutting off Russian energy imports. They must create an energy policy that will maximise flexibility and resilience. It is time to [email protected] Martin Wolf with myFT and on Twitter More