Economy

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyDue to the invasion of Ukraine, Russia is being disconnected from the global system, one economic and financial wire after another. This will devastate the economy, once the world’s 11th largest and still a G20 member. Together with a crippled financial system, it will result in a depression undermining the wellbeing of generations of Russians.What’s happening economically and financially in Russia and Ukraine won’t stay there. In addition to the tragic forced migration of millions of Ukrainians, there are consequences for the global economy and markets, both immediately and in the longer term.By the time the spillovers and spillbacks have made their way through the world, we will have faced some of the toughest economic and financial challenges of the 1970s, 1980s, and 1990s. But there is one important difference: they will all have materialised at the same time.Russia’s vulnerability to the west’s sanctions is visible in the collapse of its currency, queues outside banks, goods shortages, multiplying financial restrictions and so on. The resulting sharp contraction in gross domestic product will take years to reverse and will necessitate a costly transformation of how the economy operates internally and interacts externally.The major implications for the rest of the world, while uneven across and within countries, are a combination of challenges we’ve seen before.Due to disruptions in the availability of commodities from both Ukraine and Russia, as well as renewed supply chain breakdowns, the world faces big inflation in costs reminiscent of the oil shock of the 1970s.Also similar to the 1970s, the US Federal Reserve, the world’s most powerful central bank, is already dealing with self-inflicted damage to its inflation-fighting credibility. With that comes the likelihood of de-anchored inflationary expectations, the absence of good monetary policy options, and a stark choice for the Fed between enabling above-target inflation well into 2023 or pushing the economy into recession.Like the 1980s, mounting payments arrears will be a feature of emerging markets. This will start with Russia and Ukraine, albeit for different reasons.Increasingly, Russia will be both unwilling and unable to pay western bond creditors, banks and suppliers. In sharp contrast, Ukraine will attract considerable international financial assistance — but this will increasingly be conditional on the private sector sharing some of the funding burden by agreeing to a reduction in contractual claims on the country’s public sector.This mix of default and restructuring is likely to spread to other emerging economies, including some particularly fragile commodity importers in Africa, Asia, and Latin America. Already, they are feeling the pain of elevated import prices, a stronger dollar, and higher borrowing costs.Like the 1990s, when a surge in market yields caught many by surprise, we should also expect more financial market volatility.Investors are slowly recognising that the “buy-the-dip” strategy for investing has been undermined. That approach had proved very profitable when supported by massive and predictable injections of liquidity by central banks. But it is now facing headwinds, with US monetary policymakers having no good policy alternatives. This comes when the price of many assets is significantly decoupled from fundamentals by the many years of central bank interventions.Unlike the 1990s, however, investors should not expect a quick normalisation of Russia’s relationship with international capital markets and, with that, a recovery in its debt securities. This time will be messier and lengthier.All this has three main implications for the global economy. Stagflation has gone from being a risk scenario to a baseline one. Recession is now the risk scenario. And there will be significant dispersion in individual baseline outcomes, ranging from a depression in Russia to a recession in the eurozone and stagflation in the US.While differentiation will also be visible in market performance, this will come after a period of contagion for some as global financial conditions tighten. The major risk scenario for markets has changed, too — potentially with unsettling volatility and market malfunction.It is a risk that, unlike in 2008-09, is of less relevance to banks and, therefore, the payments and settlement system. That’s the good news. But its morphing and migration to the non-bank sector still poses blowback risks for the real economy. More

Editor Marina Ovsyannikova holds up a protest sign during a news broadcast by Yekaterina Andreyeva on Russia’s Channel One © AFP via Getty ImagesA state television employee burst on to Russia’s main state television evening news broadcast on Monday to protest against Vladimir Putin’s invasion of Ukraine, the largest sign yet of simmering discontent at the three-week war.Marina Ovsyannikova, an editor at Channel One, appeared for a few seconds live on air holding a sign that said “Stop the war — Don’t believe propaganda — They’re lying to you” and chanting “Stop the war! No to war!”Though the channel cut the feed after a few seconds, Ovsyannikova’s unprecedented intervention was an extraordinary act of defiance after Russia ramped up already draconian censorship laws when the war began in late February.Police detained Ovsyannikova under a new law that criminalises acts such as “discrediting the Russian armed forces” and spreading “fake news” of the conflict, said Pavel Chikov, whose Agora legal defence foundation is representing Ovsyannikova. Though the strictest punishments carry a potential prison sentence of up to 15 years, Chikov said Ovsyannikova was likely to be fined Rbs30,000 to Rbs60,000 ($250 to $500).Channel One told state newswire Ria Novosti it was investigating the incident.In a video recorded beforehand and posted by Ovd-Info, a website that monitors arrests at protests, Ovsyannikova blamed Putin, Russia’s president, for the war and said she was ashamed of her role in it as a Channel One employee.“What’s happening in Ukraine is a crime, and Russia is the aggressor. The responsibility for this aggression lies with one man: Vladimir Putin,” Ovsyannikova said. More

Alex Chung is about to lose one of his senior executives and has no idea how he is going to replace her.Chung’s technology consultancy firm is just one of thousands of businesses struggling to find qualified staff as a brain drain out of the Chinese territory intensifies. Hong Kong’s status as Asia’s premier financial centre was already under pressure from coronavirus controls put in place since 2020 and a Beijing-imposed security law but the Omicron outbreak that struck in December has deepened the city’s economic woes. On top of weeks-long quarantine for travellers, residents have been further spooked by the possibility of a lockdown and a threat to isolate positive cases in government facilities and separate children from their parents. Businesses have responded by temporarily basing staff outside the city while an increasing number of ordinary Hong Kongers have fled. In February, the city recorded a net loss of 65,295 residents.“Hong Kong has always been an ‘emigration city’. If people come in at the same time as people leave, the impact should be minimal. But the problem now is that no one is coming,” Chung told the Financial Times. Chung said the shrinking talent pool made expanding his business difficult. “More fresh graduates, including mainland and overseas students graduating from local universities, are now looking to work elsewhere than Hong Kong these days,” he said.

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The exodus, combined with stricter social distancing and border controls, has prompted warnings that Hong Kong’s economy could be “permanently” damaged and retreat back into recession.The economy recovered in the second half of last year after entering its first recession in a decade in 2019 after sometimes violent pro-democracy demonstrations. But analysts expect a return to negative growth as the city cleaves to its “dynamic zero” policy aimed at eliminating cases. “Either zero-Covid or dynamic zero, the government can rename it in whatever way . . . but the consequence is a lack of economic activity,” said Gary Ng, a senior economist with Natixis, an investment bank.Ng predicts an economic recession in the first half of 2022 and 1 per cent growth for the full year. “What we are seeing is the divergence of Hong Kong versus the rest of Asia in 2022, he said. “Most other economies are seeing a relaxation of restrictions.”Despite the gloom, Hong Kong’s solid fiscal reserves of an estimated HK$946bn (US$120bn), or 33 per cent of gross domestic product, have helped shield the city from any economic shocks. “Hong Kong’s strengths, which include the [government’s] significant fiscal and external buffers and highly effective economic institutions, continue to offer resilience to shocks and negative long-term trends,” Moody’s rating agency said last week. But economists predict that the anxiety gripping the city could mean fewer companies basing fewer staff in Hong Kong and businesses registering their revenue elsewhere, chipping away at the tax base.Covid restrictions have prompted economists to warn that fewer businesses would base staff in Hong Kong © Bertha Wang/Bloomberg“There is increasing concern that a brain drain out of Hong Kong will affect the ecosystem, where people from all over gather together. Hong Kong is based on free flows of people and capital,” Ng said. “My worry is that if this aspect has been lost, and if these [restrictions] continue for a long time, these changes could be permanent.” A policy to isolate even asymptomatic cases in government quarantine as well as the separation of Covid-positive children from their parents sparked fear among many professionals. In an effort to assuage some of those concerns, the Hong Kong Monetary Authority has told banks in recent weeks that their staff were unlikely to be forcibly quarantined in such facilities, two people with knowledge of the discussions said. “They are taking the initiative to talk to the financial community, but it’s probably quite late in the game,” one of the people said, referring to the exodus. Another big frustration has been the government’s refusal to articulate a Covid exit strategy or to offer a definitive answer on when citywide testing and a lockdown would begin. Stephen Chong said his accounting firm had attracted a 10 per cent increase in clients after many in his profession emigrated. “Dozens of accountants I know, most of them working at big firms, have left Hong Kong over the past months,” Chong said.

Increased social distancing restrictions that accompanied the latest outbreak have suppressed consumption, prompting economists to revise down their GDP growth forecasts. Bank of America projected a 1.6 per cent growth rate for the year with a possible recession in the first half, while a Bloomberg survey of economists predicted a contraction of 1 per cent in the first quarter.Economic activity in the city, as measured by IHS Markit Purchasing Managers’ Index survey, plummeted in February to 42.9 from 48.9 in January, the lowest recorded in 22 months. Even some pro-government businesspeople have raised the alarm. “Hong Kong is facing an exodus of educated workers on a scale not seen since the early 1990s,” said Peter Wong, chair of the Hong Kong General Chamber of Commerce and former HSBC Asia Pacific chief executive. “This will have a material knock-on impact on the economy . . . there is real cause for concern if we cannot stem the brain drain.” More

WASHINGTON (Reuters) – A default on Russia’s sovereign debt would add further pain to Russia’s economy and financial system, making it harder for Moscow to find new lending sources and raising future borrowing costs, a U.S. Treasury official said on Monday.The official told Reuters the Treasury believes there are limited direct exposures in the U.S. financial system to Russian sovereign bonds and the main impact would fall on a Russian economy already reeling under the weight of Western sanctions.”A default would make it increasingly difficult for Russia to find new lenders, and those who do lend to them will demand higher interest rates, leading to a further drain on the Russian economy,” the official said.Russia, which is pursuing an increasingly destructive invasion of Ukraine, has $117 million in payments due on Wednesday on two dollar-denominated eurobonds. Its finance ministry has said it will make the payments in roubles if sanctions prevent it from paying in dollars – a move markets would view as a default.Western sanctions have immobilized the foreign exchange assets in Russia’s central bank and prohibited international banks from dollar and euro transactions with sanctioned Russian financial institutions – including the central bank – complicating any payments.Deputy U.S. Treasury Secretary Wally Adeyemo earlier told CNBC that Russia’s choices in how it pays its debts will drain resources from President Vladimir Putin’s ability to continue the war in Ukraine.”Those choices will ultimately put (Putin) in a position where he has to make a decision about whether he continues the invasion or stops that invasion,” Adeyemo said. The Russian eurobonds in question, maturing in 2023 and 2043, traded at 20 cents on the dollar or lower on Monday. They are among the first to have scheduled payments after Russia was hit by sanctions over its invasion of Ukraine.The U.S. Treasury official said the dramatic falls in the price of Russian sovereign bonds suggested a high probability of default.”Investors are paying close attention to payments coming due soon and are preparing for alternative outcomes,” the official added. More

Raskin’s “previous public statements have failed to satisfactorily address my concerns about the critical importance of financing an all-of-the-above energy policy to meet our nation’s critical energy needs,” Senator Joe Manchin, a conservative Democrat from West Virginia, said in a statement.”I have come to the conclusion that I am unable to support her nomination,” he said.With Manchin casting a thumbs down on her nomination, Raskin would need to win over at least one Republican in the evenly divided U.S. Senate to have a hope of being confirmed.Raskin, however, is the most contentious of Biden’s five nominees to the Fed’s Board of Governors and faces strong Republican opposition. The Democratic president also has nominated Fed Chair Jerome Powell for a second term.Manchin’s announcement “probably” ends her nomination “as a practical matter,” Senator Pat Toomey, the Senate Banking Committee’s top Republican, told Bloomberg TV. “I’m not aware of any Republican support for Ms. Raskin.”After Manchin’s statement, the White House signaled it was sticking with her and was trying to line up Republican support. Senator Susan Collins, a moderate Republican whose support Democrats have courted on key votes in the past, told reporters she also would not vote for Raskin, citing “gaps in experience” among other issues.Toomey and his fellow Republicans on the banking committee have blocked Raskin’s nomination from advancing by refusing to appear for a panel vote on the Fed nominees. They say past remarks indicate she would further a green energy policy that they fear could reduce fossil fuel companies’ access to capital.Manchin, who represents the country’s second-biggest coal producing state and one that voted overwhelmingly for former President Donald Trump in the 2020 election, has been a persistent roadblock for Biden administration initiatives.Powell, expected this week to announce the first in a series of interest rate hikes to combat soaring inflation, has broad bipartisan support. Several Republicans have also said they will vote to confirm a second Fed nominee, Davidson College’s Philip Jefferson. Toomey on Monday told Bloomberg TV he would vote against Biden’s pick for Fed vice chair, current Fed Governor Lael Brainard, as well as against Michigan State University’s Lisa Cook, who if seated would be the first Black female Fed governor. More

In a securities filing, the Warren Buffet-backed star of Latin America’s fintechs said the change does not have a significant impact on its “business model or our ability to grow.”Nubank’s U.S.-listed shares were up nearly 2% at $6.04 after market. Despite Monday’s bump, however, Nubank’s shares have lost nearly 37% so far this year, in line with souring investor sentiment in the broader tech market.On Friday, Brazil’s central bank announced tougher rules for fintechs, subjecting payment institutions to regulations based on their size and complexity, while also raising standards for required capital.The new framework, which will start taking effect in January 2023 with full implementation by January 2025, will extend the proportionality of regulatory requirements currently used for conglomerates of financial institutions to include financial conglomerates led by payment institutions. More

Good morning. The US has told allies that China signalled its willingness to provide military assistance after Russia requested equipment including surface-to-air missiles to support its invasion of Ukraine, according to officials familiar with American diplomatic cables on the exchange. Two officials familiar with the content of the cables said Washington had told allies that Russia had asked China for five types of equipment, including the surface-to-air missiles. The other categories were drones, intelligence-related equipment, armoured vehicles, and vehicles used for logistics and support. The cables, which were sent by the US state department to allies in Europe and Asia, were not specific about the level or timing of any assistance that may be provided to Moscow by Beijing. The Russian request and Chinese response have sounded alarm bells in the White House. US officials believe China is trying to help Russia while its top officials publicly call for a diplomatic solution to the war. Meanwhile, Jake Sullivan, US national security adviser, met in Rome on Monday with Yang Jiechi, China’s top foreign policy official, which another senior US official described as “an intense seven-hour session reflecting the gravity of the moment”.Tensions have only deepened as Chinese diplomats and prominent state media have repeated Russian disinformation reports about US-run biological laboratories in Ukraine.More on UkraineLatest from Ukraine: Russian forces allowed some trapped in Mariupol to leave as officials from Moscow and Kyiv held the fourth round of negotiations. A pregnant woman caught in last week’s Russian air strike that hit a Mariupol children’s hospital and maternity ward has died along with her baby.Markets: Some of the few Russian shares still trading on a global exchange are changing hands at a blistering pace in Hong Kong, but US banks refuse to touch them.Protests: A state television employee burst on to Russia’s main state television evening news broadcast on Monday to protest against Vladimir Putin’s invasion of Ukraine, the most public sign yet of simmering domestic discontent.Sanctions: The UK government is preparing to sanction hundreds of individuals linked to Vladimir Putin as parliament fast-tracks legislation to crack down on the flow of “dirty money” into the country.Business: Bayer has threatened to suspend crop supply sales to Russia next year unless the country stops its attacks on Ukraine. Across the globe, the war is impacting US farmers’ spring planting plans.Free to read: Volunteer soldiers prepare to make their stand on battle-scarred suburban streets.Opinion: It is often assumed that China will be the senior partner in the “no limits” partnership with Russia but Xi’s decision to embrace Putin now looks likes a miscalculation, writes Gideon Rachman. Follow our live blog and updated maps for the latest on the conflict.Coronavirus digest China is battling its biggest Covid surge since the start of the pandemic and has locked down multiple cities including Shenzhen, its technology hub.JPMorgan Chase’s US operation is discontinuing a policy of hiring only vaccinated people and has ended mandatory mask wearing and testing.Chinese stocks in Hong Kong fell the most since the global financial crisis as the country’s Covid-19 surge threatened valuations across every sector.Five more stories in the news1. Chinese metals group wins respite from banks on nickel bet Chinese metals group Tsingshan has reached a deal with its bank counterparties to resolve a bet on nickel that plunged the market into turmoil, paving the way for trading to resume on Wednesday at the London Metal Exchange.2. Hong Kong threatens British campaigner with national security law Benedict Rogers, head of Hong Kong Watch, has been ordered to shut down the website of the organisation he leads or face imprisonment by Hong Kong’s police in a rare extrajudicial use of Beijing’s national security law. 3. Former Wirecard chief executive charged with fraud Markus Braun has been formally charged by Munich public prosecutors with fraud, breach of trust and accounting manipulation after a 21-month criminal investigation into the collapse of the German payments group.4. SoftBank-backed Paytm shares tumble 13% Shares in Paytm fell more than 13 per cent yesterday after India’s central bank barred a division of the payment group from signing up new customers in the latest setback for the company following its blockbuster initial public offering last year.5. ENRC drops lawsuit against FT and journalist Tom Burgis A Kazakh mining group has dropped a libel claim against the Financial Times and one of its journalists over a book detailing the influx of “dirty money” into the west’s financial system. The day aheadJapan balance of trade data Figures for February are set to be released today. In January, Japan’s trade deficit hit an eight-year high. (Reuters) Opec monthly oil market report The group is set to release its monthly data today as UK prime minister Boris Johnson appeals to Saudi Arabia to increase production. Sign up here to receive our Energy Source newsletter. Are you involved with training at your organisation? The FT wants to hear from chief learning officers, heads of leadership development and other executives involved in the development of middle and senior managers. Results of the survey will be published in the FT Executive Education report in May 2022. What else we’re reading What you need to know about South Korea’s new president South Korea’s new conservative president-elect Yoon Suk-yeol, a former chief prosecutor, has no foreign policy experience and has never held office. Elected last week by a margin of less than 1 per cent, Yoon will take charge when he assumes office in May. Read up on his policy positions.Economic pressures squeeze Iran as nuclear talks stall Farmers, teachers, pensioners, sugar industry workers, oil sector labourers and others have all taken part in protests over the past 12 months. Each outburst of anger underlines what Tehran is grappling with as it battles to revive its heavily sanctioned economy and keep a lid on simmering discontent.What does it mean to say you are Ukrainian? All of us are “Ukrainians” but when people use that word they don’t mean the same thing — just as when people say they are British they don’t all mean the same thing, writes author Marina Lewycka. But only one kind has been treated as truly Ukrainian by the west.We need a grand bargain on energy Within the current crisis, there is opportunity: namely, the possibility of an US-EU grand bargain on energy security and climate change. It should not be missed, writes Rana Foroohar. Read more from Rana on this topic in her Swamp Notes newsletter. Modi’s wins show how the power of his personal story endures The repeated embrace of autocratic candidates with democratic roots suggests that the well-worn story of democracy’s retreat in India is more complicated than it appears from afar, writes Ruchir Sharma. ArtThe art market is feverish for non-fungibles. So how come they’re all so ugly? Talk to many art insiders and — if only privately — they’ll express horror at the stuff which is, apparently, a hot commodity.

“XYZ 0868 (Chinoiserie)” NFT, 2012-21, by Lucas Samaras © Lucas Samaras/Courtesy of Pace Gallery More

BRUSSELS (Reuters) -The European Union agreed on Monday new rules to limit access to its 2 trillion euros ($2.2 trillion) worth of public tenders in a move designed to pressure countries such as China to open up their markets.The rules are part of an EU push to develop a more assertive trade policy and insist on fair play after the pain of Brexit, clashes with the Trump presidency and a new realism over China.European Parliament lawmakers and France, which holds the rotating EU presidency, settled on a text on Monday, paving the way for the launch of the International Procurement Instrument (IPI) later this year.French trade minister Franck Riester said Europe was stepping away from naivety and looking after its own businesses and insisting on reciprocity. Under the proposal, the European Commission will determine if third countries allow fair access to their public tenders to EU companies and, if not, seek remedies.Otherwise, the EU would apply penalties to companies from that country, such as adding as much as 100% to the price of the bid during the selection process.The rules would apply for central governments and any local authority with 50,000 people or more and cover tenders of at least 15 million euros for works and concessions, such as road construction, and 5 million euros for goods and services.Exemptions would only be allowed if the only bids were from targeted countries or in cases of overriding public interest, such as for health.In some cases, the EU could even exclude bids from particular countries.The IPI, first proposed in 2012, was blocked for years, but the Commission urged EU governments and the parliament in 2019 to revive talks on a revised text, stressing the challenge posed by China, which EU members now regard more suspiciously.($1 = 0.9112 euros) More