Economy

WASHINGTON (Reuters) -President Joe Biden on Friday took new steps along with U.S. allies to punish Russia economically over its invasion of Ukraine, targeting trade and shutting down development funds while also announcing a ban on imports of Russian seafood, vodka and diamonds.Biden also criticized voices in the United States clamoring for an active U.S. military presence in Ukraine or American backing of a “no-fly zone” to protect Ukrainians from Russian forces.”The idea that we’re gonna send in offensive equipment and have planes and tanks and trains going in with American pilots and American crews …that’s called World War Three, OK? Let’s get it straight here, guys,” Biden told Democrats in Philadelphia.”We will defend every inch of NATO territory, every single inch,” including NATO members bordering Russia, Biden said. “Granted, if we respond it is World War Three, but we have a sacred obligation on NATO territory … although we will not fight the Third World War in Ukraine.”Biden said the economic moves collectively will deliver “another crushing blow” to Russia’s economy, already weighed down by global sanctions that have cratered the rouble and forced the stock market to close. Biden again put the blame on Russian President Vladimir Putin.”Putin is an aggressor. Putin is the aggressor. And Putin must pay a price,” Biden said at the White House, noting he had earlier spoke by phone to Ukraine President Volodymyr Zelenskiy.At the White House, Biden joined fellow Group of Seven leaders in calling for revoking Russia’s “most favored nation” trade status, which would allow G7 nations to increase tariffs and set quotas on Russian products. The U.S. Congress would need to pass legislation to revoke the trade status, and lawmakers recently have been moving in that direction.”We remain resolved to isolate Russia further from our economies and the international financial system,” the G7 said in a statement. Trade made up about 46% of Russia’s economy in 2020, much of that with China or linked to energy exports that European nations depend on for heat and electricity, making it unclear how deeply these moves will impact Russia’s economy. Biden also banned the U.S. import of Russian vodka, seafood and diamonds.He warned that Russia would pay a “severe price” should it use chemical weapons against Ukraine. The United States has expressed fears that Russia could be paving the way for a chemical weapons attack, without citing evidence.White House spokesperson Andrew Bates told reporters on Air Force One that if Russia is targeting civilians in Ukraine “that would be a war crime.” Russia calls its actions in Ukraine a “special operation.”Biden said the United States would add new names to a list of Russian oligarchs who are sanctioned, and ban the export of luxury goods to Russia.In a separate statement, the White House said Biden would ban U.S. investment in Russia beyond the energy sector, and that G7 nations would move to block Russia from funds from the International Monetary Fund and World Bank. “Those are the latest steps we’re taking but they’re not the last steps we’re taking.” Biden said. The coordinated moves by the United States, Britain and other allies come on top of a host of unprecedented sanctions, export controls and banking restrictions aimed at pressuring Putin to end the largest war in Europe since World War Two.Russia on Thursday banned the export of telecom, medical, auto, agricultural, electrical and tech equipment, as well as some forestry products, in retaliation. The United States is expanding sanctions on Russia to include executives of sanctioned banks and Russian banker Yuri Kovalchuk, as well as Russian lawmakers. “Russia cannot grossly violate international law and expect to benefit from being part of the international economic order,” the White House said in a statement.CAVIAR, HEAVY METALSStripping Russia of its favored nation status paves the way for the United States and its allies to impose tariffs on a wide range of Russian goods.Russia is among the world’s top exporters of oil, natural gas, copper, aluminum, palladium and other important commodities, and accounted for 1.9% of global trade in 2020. China is its biggest export destination. In the United States, removing Russia’s “Permanent Normal Trade Relations” status would require congressional action but lawmakers in both chambers – and on both sides of the political aisle – have signaled their support. The White House will work with lawmakers on legislation to revoke Russia’s status, administration sources said.In 2019, Russia was the 26th-largest goods trading partner of the United States, with some $28 billion exchanged between the two countries, according to the U.S. Trade Representative’s office.The ban on U.S. luxury exports to Russia and Belarus – including high-end watches, vehicles, clothes, alcohol and jewelry – takes effect immediately, the Commerce Department said in a separate statement as part of the effort to further isolate Moscow and its allies.A person familiar with the move said Biden’s administration planned to ban the export to oligarchs of everything from cashmere and cosmetics to track suits, snow mobiles and sails. The United States imported $1.2 billion in Russian fish and shellfish in 2021, according to the U.S. Census Bureau, including sturgeon black caviar. America that year also imported from Russia $275 million worth of diamonds, and about $21 million in alcoholic beverages, according the Census Bureau.Top U.S. imports from Russia included mineral fuels, precious metal and stone, iron and steel, fertilizers and inorganic chemicals, all goods that could face higher tariffs once Congress acts to revoke Russia’s favored nation trade status. More

Deutsche had faced stinging criticism from some investors and politicians on Friday for its ongoing ties to Russia after saying that leaving would go against its values, as other banks cut off ties.”Like some international peers and in line with our legal and regulatory obligations, we are in the process of winding down our remaining business in Russia while we help our non-Russian multinational clients in reducing their operations,” the bank said on Friday.”There won’t be any new business in Russia.” More

UK households face a £38bn hit to their budgets from an expected doubling in electricity and gas bills following Russia’s invasion of Ukraine, according to new analysis highlighting the intensifying cost of living crunch.The big increase in the cost of heating and lighting homes in 2022-23 will be the equivalent of a 6p rise in the basic rate of income tax, said Aurora Energy Research, a consultancy. The majority of the UK’s 28.5mn households are due to see their annual energy bills exceed £3,000 from October after the surge in wholesale electricity and gas prices, according to economists at Investec and Goldman Sachs.The anticipated hit to household budgets will heap pressure on chancellor Rishi Sunak to impose a windfall tax on British energy producers that profit when they can sell gas and oil extracted from North Sea fields at much higher prices. Rising wholesale prices for gas and electricity last year prompted Ofgem, the regulator, to raise the energy price cap from £1,277 for those households with average gas and electricity usage to £1,971 from April.The 54 per cent increase in the cap, which applies to the majority of families, resulted in Sunak promising a £200 loan to households to be issued in October and then repaid over the subsequent four years, plus a £150 rebate on council tax bills for those in property bands A to D.Rising wholesale gas and electricity prices since Russia’s invasion of Ukraine are “baking in” a higher cap for the coming winter, said Dan Monzani, UK managing director at Aurora Energy Research.Economists at Investec and Goldman have estimated that Ofgem will need to impose another 50 per cent plus increase in the cap from October, pushing average household energy bills over £3,000.Monzani estimated that for the households connected to the power grid, such an increase in the cap would push the likely cost of aggregate electricity and gas consumption to £74bn in 2022-23, some £38bn more than in 2021-22. “That’s the equivalent of 6p on the basic rate of income tax, but with the money never getting to the Treasury,” said Monzani. “It’s a hugely substantial impact, especially on lower-income households.” That has raised expectations that Sunak will use the spring statement on March 23 to set out further measures to alleviate the pressure on household energy bills. Downing Street has sought options from the business department, which recommended doubling the £200 loan and delaying the point when households start repaying the money. However, government officials played down the idea that Sunak would make an announcement on energy bills this month given that the next change in the regulatory price cap will not be announced until August, and not take effect until October. Officials said energy prices have been fluctuating wildly in recent weeks, making it impossible to predict where they will be by the summer.One confirmed the Treasury was looking at ways to provide more help for households but said: “It’s not a live discussion with any expectation of an imminent announcement.”Sunak has rejected calls for a windfall tax on oil and gas producers because of concerns it could reduce investment in the North Sea.The Labour party on Thursday reiterated its case for a windfall tax to help mitigate rising bills for struggling families.Ed Miliband, shadow energy secretary, said the case for the one-off levy had been strengthened in recent days. “Oil and gas companies were already set to make record profits and now these will be even higher than originally thought,” he added. More

(Reuters) -Camel and Lucky Strike cigarette maker British American Tobacco (NYSE:BTI) Plc said on Friday it would exit Russia and cut its fiscal 2022 guidance as a result, the latest company to leave the country due to worries about the safety of its employees.Western companies have pulled out of Russia en masse as the United States, the European Union and Britain imposed sanctions aimed at curbing Moscow’s access to funding.In response, a government commission approved this week the first step towards nationalising assets of foreign firms that leave the country.To exit the business or stop selling or manufacturing would be regarded as a criminal bankruptcy by Russia, and they may enforce criminal actions on local management, BAT (LON:BATS) Chief Executive Officer Kingsley Wheaton told Reuters in an interview. “There’s no way, consciously, we can expose our people to criminal repercussions.”The company employs about 2,500 people in Russia, and Wheaton said it would continue to pay their salaries until it transfers its business in the country to another entity.He said potential parties that could be interested include its Russian distributor of 30 years, which he declined to name. In 2021, Ukraine and Russia accounted for 3% of revenue, and a slightly lower proportion of adjusted profit from operations.The company represents just under a quarter of Russia’s tobacco market.The exit prompted the cigarette maker to cut its annual revenue growth outlook to 2%-4% from 3%-5% announced last month.It now also expects mid-single figure growth for adjusted earnings per share in 2022 on a constant currency basis, down from its previous high-single figure forecast.Shares of the company ended the day down more than 1% on the news.The decision to exit Russia comes two days after the company said it had suspended all its planned capital investment in the country.Stating that “the context is highly complex, exceptionally fast-moving and volatile” after reviewing its presence in Russia, BAT said it had started the process to rapidly transfer the Russian business “in full compliance with international and local laws”.($1 = 0.7664 pounds) More

COLOMBO (Reuters) -Sri Lanka will begin talks with the International Monetary Fund (IMF) next month on a plan to help the crisis-hit country, where a foreign exchange shortage has squeezed essential imports amid looming debt payments, three sources said on Friday.Sri Lanka is facing its worst financial crisis in years. With foreign exchange reserves standing at a paltry $2.31 billion, the country is struggling to pay for critical imports including fuel, food and medicines.The move to approach the IMF for help comes after months of resistance from Sri Lanka’s government and central bank, despite calls from opposition leaders and experts to seek a bailout package.Finance Minister Basil Rajapaksa will travel to Washington in mid-April to present Sri Lanka’s proposal to senior IMF officials, two sources with knowledge of the ongoing discussions told Reuters.”We are taking our proposal and a plan,” one of the sources said, declining to be named since the discussions are confidential. “The government is serious about fixing things.”In a tweet late on Friday, Central Bank Governor Ajith Nivard Cabraal said the aim of the upcoming talks with the IMF was not restructuring Sri Lanka’s debt.”Meetings of Sri Lankan authorities with @IMFNews officials over the next few weeks are NOT for the purpose of #debt restructuring,” he said.Through repeated cycles of borrowing since 2007, Sri Lanka had piled up $12.55 billion worth of debt through international sovereign bonds (ISB), which make up the largest part of its external debt. The island nation has to repay about $4 billion in foreign debt this year, including a $1 billion ISB maturing in July.”We will discuss options based on our plans,” the source said.Sri Lanka’s finance ministry and the IMF did not immediately respond to questions from Reuters.’TOUGH SITUATION’A combination of historically weak government finances, badly timed tax cuts and the COVID-19 pandemic, which hit the country’s lucrative tourism industry and foreign remittances, have wreaked havoc on Sri Lanka’s economy.In a periodic review last week, the IMF called on the government to implement a “credible and coherent” strategy to repay debt and restore macroeconomic stability. “The country faces mounting challenges, including public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years,” the IMF said.To find a way out of the crisis, the government will seek assistance with debt restructuring, the foreign exchange crisis, bolstering revenue generation and reforming state-owned enterprises, the source said.”This is a tough situation,” the source said, “We want to see what support we can get from the IMF.”In recent weeks, the country of 22 million has faced rolling electricity cuts. Bakeries have run out of gas and many fuel pumps have run dry. Soaring oil prices have added to the government’s woes.Late on Monday, the central bank implemented a flexible exchange rate for the rupee, triggering a devaluation of about 30% and driving up the prices of many essential items. More

The G7 nations said they would end normal trade relations with Russia on Friday as part of a series of new measures to inflict economic punishment on Moscow for its invasion of Ukraine.The joint step, first announced by US president Joe Biden, includes revoking Russia’s “most-favoured nation” status, which allows it to trade goods on preferential terms with many western countries under rules set by the World Trade Organization. The move will lead to higher tariffs on many Russian exports.The G7 agreed on other measures as well, including stopping Russia from obtaining any financing from international institutions such as the IMF and the World Bank.“Democracies are rising to meet this moment, rallying the world to the side of peace and security. We are showing our strength and we will not falter,” Biden said from the White House.While the sanctions differ by country, the US and EU said they would ban exports of luxury goods to Russia and impose further curbs on members of Russia’s elite. The US will also create the legal authority for bans on investment in any sector of the Russian economy, beyond energy.The announcement comes after the US this week banned Russian energy imports into America — targeting the biggest source of trade between the two countries and a key source of hard currency for Moscow. The US will now ban key Russian imports including seafood, alcoholic beverages and diamonds, while Brussels announced a block on imports of key iron and steel products.“This will hit a central sector of Russia’s system, deprive it of billions of export revenues and ensure that our citizens are not subsidising Putin’s war,” said Ursula von der Leyen, president of the European Commission.The move is expected to be approved by the EU’s 27 member states next week.The G7 also said they would ensure that cryptocurrencies could not be used by Russians to circumvent sanctions and send money out of the country.The White House has been under pressure from Congress to revoke Russia’s status as a permanent normal trading partner for days. The move on Friday was the latest in a series of sweeping sanctions on Moscow including targeting members of the country’s business elite, the inner circle of officials close to President Vladimir Putin, the central bank, and other key financial institutions.Canada, a G7 member, first made the move last week and has also banned Russian oil imports. More

One of the first big market bets to emerge from the Russian invasion of Ukraine was that central banks would take fright.A massive rally in government bonds – in the UK’s case, the biggest since the EU referendum in 2016 – was a clear sign that investors thought they would take this opportunity to slow or delay the process of jacking up interest rates.Not so fast. On Thursday, the European Central Bank concluded its regular two-day rate setting meeting and indicated it would stick to its hawkish path. All things are relative – this was hawkish only for a central bank that has its main interest rate wedged below zero per cent. But it scaled back its bond-buying stimulus scheme and said net purchases could stop in the third quarter if the war in Ukraine keeps bumping up inflation expectations. The first rate rise in over a decade could still come this year.Sporting a bright brooch in the colours of the Ukrainian flag, ECB president Christine Lagarde said the war would, of course, have a “material impact on economic activity”. Naturally, the path from here depends on how the economic data turn out.But all the market can hear is “keep calm and carry on”. The euro popped higher. Bond prices fell.“President Lagarde was at pains to highlight the uncertainty that the war in Ukraine presented and characterised the tapering change as an increase in optionality for the ECB in both directions; something that fails to pass the smell test in our opinion,” said Andrew Mulliner, head of global aggregate at Janus Henderson Investors. “This ECB seems to be for a reduction of accommodative policy at all costs.”With the US Federal Reserve due to make its own pronouncement on rates next week, and US inflation standing close to 8 per cent, this is a message worth heeding.“I feel like we are somewhat trapped here,” says Greg Peters, chief investment officer at PGIM Fixed Income. Either geopolitical risk intensifies further, shoving commodity prices even higher and nourishing the hawks on rate-setting committees, or geopolitics miraculously calm down, the global economy springs back and the hawks stay in control. Either way, the hawks win. “The market is not thinking about this properly at all,” he says.This is still likely to be a bigger drag on US markets than the war in Ukraine, which has, so far at least, been a very local affair. At the epicentre, Russian markets have, of course, been fried to a crisp. Moving westward, the damage is also clear. Central banks in Poland, the Czech Republic and Hungary have been forced in to a combination of interest rate rises and interventions to support their currencies. This was to try to tame the likely inflationary impact of weaker currencies combined with pricier commodities.Beyond that, very conspicuously, European markets have suffered a much heavier blow than the US. Outflows from European equity funds have smashed records. This is not an indiscriminate flight to safety.In stocks, the German market dropped by a hefty 15 per cent from the start of Russia’s invasion to March 7. US stocks, meanwhile, dropped heavily on day one and then sprang back. They have just ended this week around the same level as they were when the invasion began.“You can draw a correlation map between proximity to the conflict areas and market impact,” says Kasper Elmgreen, head of equities at Amundi in Dublin. In some cases, this might generate opportunities to pick up bargains. “When markets panic, they get irrational, and opportunities emerge. The human bias is not to do anything. But you have to act on the opportunities in front of you.” So where does this all leave professional investors? It is not supposed to be an easy job, but they are now up against the prospect of sky-high inflation while there is a pullback or even reversal in economic growth. And there is the risk that the defenestration of Russia from the global financial system could throw out unexpected stink bombs. “Russia might not matter as an economy but it matters as part of supply chains,” Elmgreen says. “There could be some trouble brewing that we have not thought about.”Already, oil and gas – two of Russia’s main exports beyond human misery – have rocketed in price. Some European companies are likely to buckle under the strain. Worldwide trading in nickel, another Russian speciality, has effectively ground to halt after one trader’s bet against a rise in price blew up in spectacular fashion. Wheat prices have soared.Generally speaking, in comparison to, say, March 2020, when Covid (remember that?) briefly pulled the rug from under the entire financial system, markets have functioned pretty normally through the shock of war. But it is a brave investor who assumes this will continue.“I feel a little better about this stuff,” says Peters at PGIM, noting that central banks’ enhancements to the global financial-market plumbing brought in during the Covid shock are still available to avert disasters. “But we’re watching carefully. An accident is almost expected at this point.”[email protected] More

It is only a minor exaggeration to say that the 1973 oil shock created the modern global economy. That year the Arab oil producing countries stopped exports to many western countries as punishment for providing aid to Israel during the Yom Kippur war. The embargo helped birth a new energy economy, aiming to reduce dependence on foreign oil. Its effects on inflation, meanwhile, brought the Keynesian era, where central banks sought full employment, to an end. Eventually, the effects would usher in the world of inflation targeting independent central banks.Almost half a century on, the Russian war in Ukraine and the sanctions imposed in retaliation are raising the risk of a new oil shock. While there is, as yet, no embargo of similar scale to the 1970s on Russian oil — the US, which announced an end to imports this week, and the UK, which plans to more gradually phase them out, buy little compared to other countries — global prices have risen over the past couple of years by a similar proportion. The cost of a barrel quadrupled during the 1973-74 embargo. Today, prices have risen at an equivalent pace since their, admittedly pandemic-induced, low in 2020.But oil is much less important to today’s world and Russia less of a dominant producer than the Opec cartel was in the 1970s. The International Energy Agency estimates oil accounts for 32 per cent of total energy generation compared to 48 per cent in 1973 and is mostly used to fuel cars rather than power stations. Natural gas, though, has increased its share of energy supply since 1973 from 16 per cent to 23 per cent, and prices for gas in Europe have risen more than eightfold. Taken together, the rise in the cost of both fuels could have scope to cause a similar “shock” to the world economy.While economists are still debating the exact mix, the inflationary spiral of the 1970s probably had as much to do with the strength of labour and relatively loose monetary policy as with the energy price shock. With markets deregulated and lower rates of unionisation today, workers have less capacity to ensure their wages keep pace with prices. It is true that central banks have, once again, begun to put more focus on increasing employment rather than limiting inflation, but they will hopefully not be as slow to react to the warning signs as they were in the 1970s.The economic outlook is still worrying: while the 1970s tend to be primarily associated with inflation, the rise in unemployment and the recession that accompanied the “oil shock” were equally devastating. Even if the knock-on effect on consumer prices can be contained, sharp drops in real household incomes, and perhaps even a recession, are likely to follow today’s steep increase in fuel costs. Some poorer countries, which export oil or gas, may benefit but many of the very poorest, who rely on imported food and fuel, will suffer. Ultimately, the Arab states’ oil embargo did not work: Israel’s allies remained resolutely committed to the country. Instead, the oil shock of the 1970s encouraged a renewed focus on energy efficiency and bolstered attempts by the west to blunt what became known as “the oil weapon”. President Jimmy Carter urged Americans to put on a sweater and installed solar panels on the White House. The west will undoubtedly feel significant pain in the short term from a new oil shock. But in the longer term it will drive speedier adoption of renewables, the “energy of freedom”, as German finance minister Christian Lindner put it. More