Economy

Might that change if the sanctions ring continues to tighten? “I assume [questions] will come eventually,” says Fritz Dietl, president and founder of Delaware Freeport LLC, who says he has yet to be contacted by law enforcement agencies of any kind regarding assets potentially owned by sanctioned Russians. “But when it comes, and if it comes through the proper channels, then we’ll answer the authorities.”Free ports are not new. Ports Francs et Entrepôts de Genève, known both as Geneva Freeport and Free Port, is the world’s biggest; it capitalized on Switzerland’s neutrality to distribute Red Cross parcels to prisoners of war across Europe during World War II.Such warehouses, often adjacent to rail lines or airports where goods are treated as not yet having been imported into the host country, really came into their own with the emergence of a globe-trotting elite in the jet age. Their numbers began to proliferate in the past decade as the art market boomed and wealthy collectors sought to cut the tax bills they pay to move their masterpieces around the globe. But for years, mentioning free ports in a conversation conjured up images of havens where shady transactions might occur away from the prying eyes of customs police. In reality, free ports are entirely legal ways to offer wealthy collectors a legitimate way to avoid paying duplicate import duties. “Most of our clients use free ports,” says Philip Hoffman, chief executive officer of Fine Art Group, an art advisory and investment company. “After they purchase something, they’ll send it to the free port in whichever jurisdiction suits them.”A classic example might be a globe-trotting American art collector who bought a $20 million Picasso at Art Basel in Switzerland. The canvas might then be shipped to Geneva’s cavernous free port to save hundreds of thousands of dollars in import duties; once the collector has set up an appropriately attractive tax environment (that pied-à-terre in Rome might be a cheaper place to hang the painting than the apartment in New York), transport will be arranged to its final destination.“Many of my clients have five houses,” Hoffman says, “so they’re thinking, ‘Where do I put this?’ There can be huge tax advantages of moving it out of New York or London, and you have to take it somewhere.”Tarnished ReputationA series of scandals involving stolen art—and even looted antiquities from the war in Syria—that turned up in Geneva’s free port has dented these warehouses’ reputations. The Swiss government, under pressure to strengthen governing rules, has tightened some, but significant loopholes remain. Swiss citizens can store art or other valuables for no more than 12 months inside, but foreigners face no time limit.When asked if they’d been contacted by law enforcement, a receptionist at Geneva’s free port relayed the question to its director, who didn’t have an immediate response.Philippe Dauvergne, chief executive officer at the Luxembourg High Security Hub (until 2020 known as Le Freeport) says that anti-money laundering laws prohibit him from saying whether he’s been contacted by law enforcement.“I am convinced there will be checks,” he says, “and that’s very good.”In Luxembourg, “all the objects that arrive here have to comply with anti-money laundering rules, regardless of their value,” says Dauvergne. Space is rented to a small number of licensed tenants, all previously checked by Luxembourg customs; they, in turn, rent out their space to private clients.“The economic beneficiary is automatically known by these tenants,” Dauvergne continues, “and they, in turn, are in direct contact with the financial intelligence unit” of Luxembourg.In Switzerland and the U.S., disclosure of beneficial ownership (the name of the ultimate, physical owner), is not required. An owner can be a holding company or other legal entity, providing opportunity for a sanctioned individual to hide behind a shell company. So, while many shippers and free ports say they require a driver’s license or passport on file for whoever is authorized to move the artwork, that identification could, in theory, be that of a U.S. representative for an offshore corporation that is ultimately controlled by a sanctioned individual.“An authorized signatory for a closely held company is exactly that: a shadow director who’s just paid to sign documents,” says Rena Neville, a founder of the art market anti-money laundering consultant Corinth Consulting. “Free ports know who signed for the storage, but they don’t know who’s owning or controlling the entity.”It’s a concern raised by the U.S. Treasury Department in a study published last month on money laundering and terror financing through the art world.“Shell companies can be used as financial conduits for the transfer and holding of funds and assets, allowing the ultimate natural person owner(s) to avoid giving their names to dealers who may screen for sanctions risk,” the report reads.Nowhere to GoSeveral experts say Russians sanctioned in response to the invasion of Ukraine are unlikely to take fresh advantage of free ports.“Presumably, a person who’s hit the sanctions list would want to move their art out of harm’s way,” says Thomas Danziger, a New York-based art lawyer who’s also a financial partner in Delaware Freeport. “But anyone who helps that kind of move, if it’s prohibited, would be crazy to be involved in it. You’re not going to get a shipper to help move the work, you’re not going to get a lawyer to help with the transaction; no insurance company will engage.” So, he continues, “you can probably take a minivan yourself and drive the art into the countryside, but that’s about it.”Free ports, he adds, don’t make princely sums from storing priceless artworks. “They’re not getting millions to store a Monet, they’re getting paid a couple hundred bucks a month,” he says. “Why would they possibly risk criminal and civil penalties?”There is, however, a high likelihood that Russians who already have work in storage will leave it, rather than attempt to move or sell it. “If you’re in a Swiss free port at the moment, I would absolutely not go anywhere near it,” says Neville. “Because it’s unlikely in your name. It’s a Secret Company LLC, owned by another Secret Company LLC, so no one’s going to know who it is.”And unless an artwork is highly discounted, there aren’t usually collectors lining up to buy it from a sanctioned individual. “It’s not that easy to sell art in a week,” says Hoffman. “I know you can discount it very quickly and so on—and no doubt there will be one or two people thinking along those lines—but we haven’t seen anything like that or been made aware of it.”Likely TargetsInstead, movement into free ports might appeal to individuals not yet on the sanctions list but who consider themselves likely targets. Their art, safely inside a tax-free warehouse in a country they’re not associated with, has a much higher likelihood of staying untouched. “The logical instinct—and self-preservation instinct—is to take anything that’s not stuck in an EU or U.K. jurisdiction and get it inside of a free port or a home” says Neville. Swiss customs said it cannot say “for tactical reasons” if it’s noticed an uptick in customs filings of valuables since Russia invaded Ukraine. Dietl, of Delaware Freeport, says he has no clients on the sanctions list and “less than a handful of clients with Russian-sounding names.”Insiders are girding themselves for change. “I think it’s about to emerge from being a theoretical to a tangible problem,” says Nicholas O’Donnell, editor of the Art Law Report and a partner at Sullivan & Worcester LLP in Boston. This means that lawyers will have to be increasingly vigilant when representing clients in art deals.“We’d be foolish not to have our guard up about the counterparty and who it might be,” says O’Donnell. “With the landscape of sanctions changing so rapidly, that person you do a deal with now may be on a sanctions list two weeks from now.”©2022 Bloomberg L.P. More

More than half of Ukraine’s economy has shut down and infrastructure assets worth $100bn have been destroyed since Russia launched its invasion of the country, according to the chief economic adviser to President Volodymyr Zelensky.As economists revealed dire predictions for the hit on Ukraine’s economy, Oleg Ustenko said the humanitarian situation was “much worse than anyone can imagine” and urged western nations to tighten sanctions on Russia, including an immediate and complete ban on energy imports. Speaking from Kyiv to the Peterson Institute for International Economics on Thursday, Ustenko said Ukraine’s economy was “very depressed”, adding: “Currently around 50 per cent of businesses are not operating and the rest are not operating at full capacity.” Ustenko also described EU gas imports from Russia as providing “blood money” to its president Vladimir Putin. “I understand that Europeans do not want to be cold . . . it is cold in Berlin and Paris, but much colder [for people] underground in Ukraine with no heating.” Ustenko’s words followed announcements of measures to support Ukraine’s economy. The IMF agreed $1.4bn of “rapid financing” on Wednesday, with the fund acknowledging “additional large support is likely to be needed to support reconstruction efforts” once the war ends. The US Congress agreed $13.6bn in military and humanitarian assistance to support US troop deployment in eastern Europe, support for refugees and emergency food and health support for Ukraine. The aid would not stop a devastating hit to Ukraine’s economy this year as Russia destroys infrastructure, prevents businesses ranging from steelmakers to wheat producers operating as normal and forces citizens to take shelter or flee the country. In a briefing with reporters on Thursday, Kristalina Georgieva, the fund’s managing director, acknowledged the “horrific toll” of the war on Ukraine and pledged to work with the country on “crisis management measures” to ensure the functioning of its economy — something she said was the fund’s “most critical task”.“Even if hostilities were to end right now, the recovery and reconstruction costs are already massive,” she said. While Georgieva noted it was too early to give an exact estimate of those costs, she said “the order of magnitude is going to be quite large”.“We are talking about a large country — 44mn people population — with massive destruction in the key cities . . . as well as massive destruction of transport infrastructure,” she added.An initial survey of forecasts undertaken by FocusEconomics suggested the consensus estimate was for Ukraine’s gross domestic product to contract by 8 per cent in 2022. Its previous survey published in January forecast growth of almost 4 per cent for the year. Many of the economists surveyed expected drops in GDP of between 40 and 60 per cent, FocusEconomics said. The key question, economists said, was how long the fighting would continue.Evghenia Sleptsova, a senior economist at Oxford Economics, said heavy fighting is disrupting activity in 10 of the country’s 24 oblasts (its provinces). Those areas are typically responsible for 60 per cent of Ukraine’s GDP and 59 per cent of its exports, the group said. Exports, she added, have come almost to a halt. Ports on the Black Sea and the Sea of Azov, which previously handled 77 per cent of Ukraine’s exports, have shut down, either because they have been overwhelmed by the fighting or for fear of mines and piracy by Russia’s Black Sea Fleet, according to GMK Center, a Ukrainian industry research and consultancy firm. Most road routes out of the country are swamped with refugees.But some activity continues, especially in western and central regions where there has been little fighting so far, analysts said. “Agricultural producers are saying they will go into the fields and start sowing where possible,” Sleptsova said. The extent of the damage to this year’s grain harvest, and to grains in silos awaiting export, will be critical in determining the damage to Ukraine’s economy and to food supplies globally. Ukraine supplies 12 per cent of the world’s wheat exports, 16 per cent of maize and 40 per cent of sunflower oil, according to the US agriculture department.

The harbour of Mariupol: Black Sea ports are major hubs for wheat and corn, but traffic in and out has ground to a halt © Sergei Grits/AP

If Ukraine were to permanently lose seaports such as Odesa and Kherson, it would have to undergo a far-reaching restructuring of its economy such as opening new trade routes through Poland, said Liam Peach, Capital Economics’ emerging Europe economist.“We don’t know what to put into GDP,” he said. “There may not even be a country any more.” Oxford Economics would also not make any estimate of the hit to Ukraine’s economy until there is some indication of the war’s outcome.Any changes to Ukraine’s territory after the war would determine the size and shape of its economy, said Timothy Ash of BlueBay Asset Management. He envisaged a scenario of a Free Ukraine holding western and central Ukraine, with or without Kyiv, and a Soviet-style Democratic Republic of Ukraine under Moscow’s yoke.As well as the real assets to be carved up between them, he said, a decision would have to be taken, most likely by the IMF, about Ukraine’s financial assets, including its foreign exchange reserves, and its liabilities, including sovereign debt.“There is a huge challenge coming up for the IMF on this,” he said. “How can Free Ukraine service its debts out of only a third or so of its former GDP?” More

WASHINGTON/FRANKFURT (Reuters) – The Russian attack on Ukraine may slow global growth and raise new economic risks, but top central banks are keeping their focus trained on an inflation fight that looks set to intensify.Europe may be the most vulnerable to a broader economic shock from the war, but the European Central Bank made clear Thursday the region could absorb the expected hit to economic growth but couldn’t afford for policymakers to turn their backs on rising prices at a record rate across the euro zone.The ECB, calling the war a “watershed moment,” in a surprise move sped the end of one of its key pandemic bond purchase programs and cleared the way for possible interest rate increases later this year.ECB President Christine Lagarde in a press conference said the economy could weather the shock from war and tighter policy and “still grow robustly in 2022…Supply disruptions show some signs of easing. The impact of the massive energy price shock on people may be partly cushioned by drawing on savings accumulated during the pandemic.””You can slice inflation any way you want and look at any core measure, it’s above target and rising. We have a 2% mandate and we’re failing it,” said one ECB policymaker, who asked not to be named.A similar narrative was emerging in the United States and elsewhere as officials weighed the economic risks suddenly facing the world against the unexpectedly large and persistent rise in inflation seen as major economies reopened from the pandemic.Russia’s Feb. 24 invasion of Ukraine has prompted a sell-off in global equity markets, increased some measures of financial market stress, and most notably pushed up the price of oil. But none of that has pointed to a systemic problem, at least not yet. The Fed and other central bank officials have said they are confident that adequate market backstops are in place; the stress metrics have not increased that much in comparison to prior financial shocks; and the price of oil has moderated, with West Texas Intermediate crude trading Thursday afternoon for about $107 a barrel, down from as much as $130 earlier this week.More central to policymakers is that in major parts of the world economic growth is expected to continue above trend, allowing them to focus on inflation running far faster than their common 2% percent benchmark.The Bank of Canada raised interest rates earlier this month. The Bank of England and the Fed are expected to do so next week. Each is expected to follow with more increases in coming months.Even fiscal policy officials – more sensitive to the politics of economic developments and often cheerleaders of looser central bank policies – are keenly aware of the corrosive power of run-away price increases.Inflation “is of tremendous concern,” Treasury Secretary Janet Yellen said in a Washington Post Live interview Thursday. “It hits Americans hard. It makes them worry about basic pocketbook issues.”New U.S. data released Thursday showed consumer prices rose at a 7.9% annual rate in February, the highest in 40 years. Investors now expect the Fed to raise the target federal funds rate to a level between 1.75% and 2% by year’s end, a quarter point higher than they expected as of last week.The outlier among major central banks is the Bank of Japan. The war is expected to boost inflation pressures there as well. But the recovery from the pandemic is less advanced, and policy tightening not imminent. More

NEW YORK (Reuters) – Fallout from Russia’s invasion of Ukraine may be setting the stage for more gains in the dollar, upending investor expectations for a weaker greenback as geopolitical uncertainty and worries over European growth raise the U.S. currency’s appeal. The U.S. Dollar Currency Index, has surged 3% year-to-date to its highest level in 21 months, buoyed in part by investors seeking shelter from market volatility that has hammered stocks across the globe and fueled wild swings in commodity prices. Russia calls its actions in Ukraine a “special operation.”How much further it runs may depend on the paths taken by the Federal Reserve and European Central Bank in their efforts to normalize monetary policy. While investors are betting the Fed will likely push through several rate increases this year to fight surging inflation, many believe the ECB faces a tougher slog, with soaring raw materials prices posing a greater threat to Europe’s energy-dependent economy. Bets on a widening gap in yields between the U.S. and euro zone have helped drag the euro near its lowest level against the dollar in more than two years. The currency was down 0.8% against the dollar Thursday afternoon despite a surprisingly hawkish shift from the ECB at its monetary policy meeting.”The view at the start of the year that the euro would appreciate after a couple of months of dollar strength has taken a bit of a setback,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.The recent price action in the two currencies runs counter to what many investors had expected earlier this year, after a hawkish pivot Fed rhetoric helped the dollar rise 6.3% in 2021. Strategists polled by Reuters at the end of January broadly expected the dollar to tread water, while forecasting that the euro would rise by 1.5% over the next 12 months. “Everything that created that bullish case for the euro earlier this year now creates a very bearish case,” said Eric Leve, chief investment officer at wealth and investment management firm Bailard. While Leve had started the year expecting the euro to strengthen at the dollar’s expense, he has now trimmed exposure to European equities and is looking to hedge euro currency risk.A sustained rise in the dollar could have broad implications for markets and the U.S. economy. Though a strong currency tends to weigh on the profits of domestic exporters, it could also help the Fed tame inflation, which recently logged its largest annual increase in 40 years. Conversely, a weaker euro could exacerbate already high consumer prices in the euro zone. Markets are pricing the fed funds rate to rise by more than 165 basis points in the U.S. this year, starting with a widely anticipated increase at next week’s Fed meeting. ECB rate hike expectations firmed on Thursday, with markets pricing around 43 basis points’ worth of interest rate hikes this year. The ECB on Thursday said it would end asset purchases in the third quarter and ramped up inflation forecasts, but also pared its growth outlook. Analysts at Nuveen said earlier this month that a Brent crude price of $120 per barrel would sap two percentage points from growth off the euro zone, compared to one percentage point from the United States, due in part to the country’s greater domestic energy supply and lower taxes. “There is much more fear on this side of the pond, and I think that’s going to reflect itself in the ECB,” Aashish Vyas, investment director at Resonanz Capital, a Frankfurt-based hedge fund investment advisor. Robin Brooks, chief economist at Institute of International Finance, wrote earlier this week that the euro can fall below $1.00 as markets adjust to “a major adverse shock to the euro zone.” The currency recently traded at $1.0987. Some believe dollar strength will moderate later this year.Steve Englander, head of global G10 FX research at Standard Chartered (OTC:SCBFF), believes the Fed will deliver less rate hikes than expected and the war in Ukraine will ebb, leaving the euro at $1.14 by year-end.But in the near term, there may be a little bit more pain for the euro, said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US. “Just north of parity is probably the trough in the euro,” said Upadhyaya, who is maintaining a short euro position for now. More

Household net worth increased by $5.3 trillion, or 3.7%, after a more moderate gain in the third quarter, a Federal Reserve report showed Thursday. The fourth-quarter advance pushed net worth to more than $150 trillion.The value of real estate held by households rose by $1.5 trillion and the value of equity holdings climbed $2.5 trillion.While the omicron variant and related surge in Covid-19 infections dented economic activity in the final weeks of 2021, there was little effect on wealth in the quarter as the S&P 500 rose to new highs. More recently, stocks have slid on concerns about the economic impact from Russia’s invasion of Ukraine.Meantime, mortgage rates have risen to levels not seen since 2019, which could eventually lead to a cooling in the rapid price gains seen in the housing market. In an effort to tame inflation, the Fed next week is expected to raise interest rates for the first time since 2018.Not everyone has benefited from the surge in home and equity prices. Survey data indicate just a little more than half of Americans own stocks, and millions of Americans rent. Separate data out Thursday showed rent of primary residence climbed in February by the most since 1987.While pandemic aid programs like the advance child tax credit payments have since ended, elevated savings remain a key source of support for household spending. Net private savings grew at an annualized pace of $2.4 trillion in the fourth quarter, though the pace has been settling back since the start of 2021. Business debt outstanding increased at an annualized rate of $1.2 trillion from the prior quarter in the October-December period to a total of $18.5 trillion.Federal debt rose at an annualized rate of 10.8% to $25.3 trillion. Government debt has surged over the past two years amid trillions of dollars in federal aid to workers, businesses and local governments during the pandemic.Consumer credit outstanding not including mortgage debt rose an annualized $302 billion in the fourth quarter.©2022 Bloomberg L.P. More

The war in Ukraine puts all aspects of life into perspective, including the post-Brexit chill in relations between London and Brussels.The sapping disagreement over the treaty on post-Brexit trade in Northern Ireland has meant that areas of obvious common interest to both sides, like UK participation in the €95bn Horizon Europe science programme, have been stalled.The disputes are both technical (how to operate the Irish Sea border with minimum impact) but also fundamentally political, both locally in Northern Ireland and at an EU-UK level where trust has been destroyed by UK threats to renege on legal Treaty commitments.The Ukraine crisis doesn’t suddenly make that problem go away, but it does surely put into perspective a disagreement that has consumed far too much time and space in trying to reach a post-divorce modus vivendi between the EU and UK.The good news is that Liz Truss, the UK foreign secretary who took over the Northern Ireland file from Lord David Frost, had dropped the deliberate diplomatic boorishness consistently deployed by her predecessor to such damaging effect. Truss, to her credit, has managed to lower the temperature of the debate.The bad news, as became very clear when I went to Belfast last week with the cross-party UK Trade and Business Commission, is that when it comes to technical issues, the two sides are still a long way from finding mutually agreed solutions.The independent commission is co-chaired by Hilary Benn and the Virgin Group chair Peter Norris, and was set up to try to find pragmatic solutions to post-Brexit challenges after the government decided to disband the Brexit select committee that Benn had chaired.During a full day of meetings which drilled down into the technical rather than political aspects of the Northern Ireland protocol, the Commission met small business owners, large food retailers and a broad range of business groups that are all wrestling daily with the protocol.While there were gripes and grumbles — of which more later — at the same time the business groups that spoke to the commission were consistently far less apocalyptic about the protocol than some of the Unionist and Conservative backbench political rhetoric on this issue.Yes, there are problems, but from milk processors to manufacturers, the emphasis was overwhelmingly on getting closer to that ‘best of both worlds’ situation, with access to both UK and EU single markets. No one was talking about scrapping the protocol.As Victor Chestnutt, the President of the Ulster Farmers’ Union, put it. “We can’t be left as second class UK citizens and second class EU citizens . . . we want to land in a sweet spot where we have the best of both worlds. What we need is a softening of actions to land in that spot.”As with GB businesses trading directly with the EU, it is small businesses that are clearly hardest hit, having less time, people and cash flow to deal with the new bureaucracy, which they clearly resent, but equally they are ultimately managing, painful though it be.More needs to be done to help them, but there are no magic wands. The protocol leaves Northern Ireland in the EU single market for goods, and that means border and customs controls.There was still some wishful thinking on show. One small business owner suggested using VAT returns and Intrastat declarations that monitors intra-EU goods trade to separate out goods remaining in NI and those going into the EU.But this misses the basic point of a border — you need to know what is crossing it, in real time. Still, there should be ways to reduce burdens, including more digitisation of customs processes.Overwhelmingly the biggest fears about the protocol stemmed from a concern about what might happen if the EU demanded the introduction of full export processes on goods travelling from Great Britain to Northern Ireland.It’s easy to forget that the protocol is currently operating on so-called ‘grace periods’ which were initially designed to give businesses six to nine months to adapt to the new Irish Sea Border but are now effectively operating on a “until further notice” basis.One big UK supermarket chain has estimated that imposing full controls on mixed loads of products heading to Northern Ireland, could mean 7mn additional documents a year to maintain its current delivery levels. That is clearly not sustainable.Even with the current ‘easements’, as Stuart Lendrum, of the Iceland chain told the commission, there is additional costs and paperwork, but as supermarkets are demonstrating, this is ultimately manageable with the current arrangements.It’s the future that worries them. Particularly the issue of handling the divergence of UK food and product standards from EU ones, which is inevitable over time. If UK goods heading to NI have to comply with divergent EU standards, that creates a world of pain.For example, the EU is phasing out a food whitening compound called titanium dioxide. That begs the question: will products heading from GB into NI need to comply with that new standard? You can see how quickly that would scramble a supply chain set up to deliver food to a UK network of supermarkets.Disaggregating GB products for the NI market alone, making sure they comply with all EU rules, becomes as bureaucratic as exporting to the EU. UK businesses might choose to follow the EU standard on titanium dioxide, but that won’t apply to all areas of divergence. Over time, the businesses warned, this is only going to get harder and harder to manage.For example, last month the UK authorised the emergency use of neonicotinoid pesticide treatment to protect sugar beet crops. The EU has different rules. Which begs another question: will products made with sugar beet that potentially has higher neonicotinoid residue levels than are allowable in the EU legally be able to be sold in NI, which is part of the EU single market for goods? Last week, there was not a clear answer to this.In short, managing diverging EU-UK standards is going to be a huge and complex challenge.One suggestion from the food industry is that the EU should agree to recognise UK standards as “equivalent” for goods destined for sale in NI only, but given those standards are diverging (and the UK is on record saying it will have fewer border controls than the EU) the consensus was that it’s deeply unlikely Brussels will agree to that.Privately, it was clear from conversations with industry groups there is little confidence that an overarching technical agreement can be reached on this, so the solution will have to be both political and piecemeal, addressing individual issues of particular concern to the EU, as they arise.Because the reality is that the UK government will not crystallise a full blown trade border in the Irish Sea, and Brussels will not formally accept a free-for-all, or reimpose a North-South border — and yet, as the fundamental stand-off continues, the system of easements is basically working.As Benn and Norris write in a post-trip letter to Truss and her EU counterpart Maros Sefcovic, one important way of removing some of the politics from this is to hold “formalised, regular, tripartite meetings between EU, UK, and Northern Ireland business to address and resolve operational issues”.That way issues around products of particular concern — say, the biosecurity issues on citrus products — can be addressed directly while avoiding creating blanket structures that are unworkable for existing supply chains.In summary, the ultimate solution might, in practice, be found by not pressing too hard for a definitive solution: maintain current easements; iron out specific issues; and keep muddling on until the political weather changes a bit.Do you work in an industry that has been affected by the UK’s departure from the EU single market and customs union? If so, how is the change hurting — or even benefiting — you and your business? Please keep your feedback coming to [email protected] in numbersOne of the things that has been perplexing trade specialists and economists is data showing that, by the end of last year, UK exports to the EU had returned to 2019 levels — while imports from the EU had fallen by 30 per cent.That would, on the face of it, seem to be highly counterintuitive, given the raft of business sentiment surveys in 2021 consistently showing companies reporting that Brexit ‘red tape’ is hitting their businesses.There are a number of possible reasons being mooted — for example, that the concerns of small businesses are given too much weight in the public discussion on Brexit impacts, while big businesses are getting on with it.At the same time, post-Brexit supply chains are reorienting, which means that fewer goods from Asia and the rest of the world are being imported into the UK via the EU, to avoid facing two sets of paperwork. This might help partly explain the drop in imports from the EU.But John Springford at the Centre for European Reform, a think-tank, has a different answer. He says that comparing UK exports to the EU in 2019 and 2021 gives a false impression that things are somehow back to normal. They are not.In a new paper for the CER, Springford compares the UK performance with our peers in the global trade arena and finds that the UK is underperforming badly when compared to these countries that have experienced a post-Covid export boom in 2021.Springford uses a basket of these similar, advanced economies (that haven’t endured Brexit upheaval) to create a “doppelgänger UK” that models how the UK would have performed had it remained in the EU.The model, which was cited by the Office for Budget Responsibility in its October 2021 Brexit update, finds that UK exports are 15.7 per cent smaller than the exports of the alternative UK. Looking at UK exports to the EU and to the rest of the world, Springford also finds that both have underperformed relative to other advanced economies.Overall, Springford calculates that the trade “loss” for the real UK, when compared to the doppelgänger, is £12.9bn for the month of December 2021.Given that 65 per cent of UK exports are used as “intermediate” inputs into the production process in the EU and other countries, it would seem logical that erecting such high non-tariff barriers to the trade of those inputs would have an impact.Springford also argues that these figures challenge the Brexiter assumption that the UK would be better equipped to tap faster-growing Asian and US export markets when ‘set free’ from EU membership.“But leaving the single market and customs union appears to have reduced goods exports to the rest of the world as well as the EU,” he says. “This isn’t entirely surprising, since many multinationals used the UK as a base for exporting to both the EU and countries around the world. Now that the UK has left the EU, it’s more costly to do that.”In manufacturing, at least, concludes Springford “Brexit has made ‘Global Britain’ harder to achieve.”And, finally, three unmissable Brexit storiesRobert Shrimsley returns to the war in Ukraine in his column this week by looking at what it means for Boris Johnson’s leadership of the Conservative party. The UK prime minister’s chances at the next election have much improved, he says, but points to the government’s failings on sanctions and refugees as highlighting “his continuing inability to get a grip”.Since the UK voted to leave the EU in 2016, its stock market returns have lagged behind those of international peers. Valuations are cheap on almost every measure, writes our Lex team. But by crunching the numbers they have discovered there is more to the story than just heightened political and economic risks.In October 2018 Theresa May danced on to the stage at the Conservative party conference and promised “a year-long festival of Great Britain and Northern Ireland”. The assumption was that May’s Brexit festival would be jingoistic propaganda but four years later ‘Unboxed’ has become something much weirder as Henry Mance explains. More

During the Crimean War, from 1854-56, Britain, France and Russia fought savage battles on the territory of modern-day Ukraine. Hundreds of thousands died from injury or disease. Yet throughout it all, the British Treasury kept paying its debts to the Tsarist government, and Russia kept paying interest to British owners of its sovereign debt. According to Nicholas Mulder’s new history of sanctions, The Economic Weapon, one British minister declared it obvious for “civilised nations” that public debts should be paid to an enemy during war.Times have changed. In response to Vladimir Putin’s invasion of Ukraine, the US and its allies banned dealings with the Russian government, kicked selected Russian banks out of the Swift payments system and froze the assets of Russia’s central bank. Rather than paying debts to the enemy, today’s standard response is to paralyse the aggressor’s economy — even if you are not involved in the fighting.Freezing the Central Bank of Russia’s reserves was a particularly unexpected, ruthless and effective act. It stripped away Moscow’s means to stabilise its currency. The rouble duly collapsed. But the use of so powerful a sanction has raised fears of unintended consequences for the international financial system. If your dollar-based central bank reserves can be frozen when you need them most, then what is the use in holding them?That has in turn reignited an old debate: whether the US dollar is at risk of losing its place as the world’s reserve currency. But while the freeze on Russia will spur on those who would like to supply an alternative — most notably China, via internationalisation of its currency, the renminbi — they are unlikely to supplant the dollar. The greater threat is of fragmentation in a financial system that, while imperfect, allows all to prosper together.Zoltan Pozsar of Credit Suisse argues that the central bank freeze marks the death of the post-Bretton Woods system, born after Richard Nixon took the US off the gold standard in 1971, and the start of a new monetary order “centred around commodity-based currencies in the east”. If your dollars can vanish at the whim of the issuer, the logic runs, then a reserve must exist outside the dollar-based financial system.China’s $3.2tn in foreign currency reserves, the largest stockpile in the world, suddenly look more like a weakness than a strength. Only by becoming an issuer rather than a holder of reserves can Beijing wrest some of America’s financial power for itself. The way to do that is to persuade others to hold the renminbi.The dollar, however, will be hard to overcome. The might of the world’s pre-eminent economic and military power ensures that US Treasury bonds are stable in a crisis; the US Federal Reserve ensures they are liquid. During any kind of economic turmoil, they are the asset a central bank wants to hold. Indeed, if Russia was suffering a natural disaster or an unexpected collapse in exports, dollar reserves would be exactly what it wanted too.Other alternatives have defects of their own. Russia has a lot of gold. The problem is liquidity: what bank today will lend foreign currency against the security of bullion in a Moscow bank vault? In time, Russia may be able to sell some gold to friendly countries, but in effect the market has already passed its judgment: it does not think Russia’s gold reserves can support the rouble.Cryptocurrency might be valuable to individual Russians right now. As a way to get money out of the country it is anonymous and portable. But for reserves, crypto is of little use: it trades like a risky asset, falling in times of stress, and almost all of the liquidity is on exchanges, where sanctions will bite just as hard as they do with dollars.That leaves the possibility of a rival currency, most obviously the renminbi — which would be attractive to countries that are friendly with China, such as Russia, or for those that fear American censure. But Beijing could use sanctions just as easily as Washington. For many other nations, including big holders of reserves in Asia, being at China’s financial mercy would appeal even less than that of the US.The risk, then, is of fragmentation. In his book, Mulder charts how the rise of economic sanctions and blockade during the interwar years, as a tool to enforce peace, drove the autarkic policies of Nazi Germany and Imperial Japan, ultimately destabilising the international system rather than fortifying it. The world has been drifting for several years towards the formation of rival economic blocs. One way to prevent that is to keep the dollar at the heart of the international financial [email protected] More

The European Central Bank has scaled back its bond-buying stimulus plan in response to inflation being driven up by the war in Ukraine, while giving itself more flexibility on the timing of a potential interest rate rise this year.“The Russian invasion of Ukraine is a watershed for Europe,” the ECB said in a statement after its governing council’s meeting in Frankfurt on Thursday, adding that it would “take whatever action is needed . . . to pursue price stability and to safeguard financial stability”.Analysts interpreted the move to speed up the ECB’s exit from buying more bonds as a signal that it could raise interest rates in the fourth quarter in an effort to contain soaring inflation — which would be the first such move for more than a decade.However, the ECB also gave itself more leeway to wait longer before raising interest rates after its bond-buying ends. “It is a bit of a mixed message, even though the market has interpreted it as hawkish overall,” said Dirk Schumacher, head of European macro research at Natixis. Investors responded by selling eurozone bonds, pushing Germany’s 10-year yield to 0.27 per cent, the highest in more than three weeks. Riskier eurozone debt was also hit, with Italian 10-year yields climbing 0.2 percentage points to 1.89 per cent. Bond prices fall when yields rise.“A faster winding down of the asset purchase programme will perhaps come as a surprise to market participants who expected an ECB capitulation in the face of weaker growth forecasts,” said Seema Shah, chief strategist at Principal Global Investors.The euro briefly rose after the ECB announcement, before falling 0.6 per cent to $1.1013 against the US dollar.Christine Lagarde, ECB president, said Russia’s invasion of Ukraine had created “a major shock” for the eurozone economy, adding that the central bank was forecasting higher inflation and lower growth over the next three years.Setting out a quicker reduction in its bond-buying plans this year, the ECB said it would reduce asset purchases to €40bn in April, €30bn in May and €20bn in June. Its earlier plan was to steadily reduce net purchases from €40bn a month in April to €20bn a month from October.It could stop adding to its existing €4.6tn bond portfolio in the third quarter “if the incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases”.The separate €1.85tn emergency bond-buying scheme launched in response to the coronavirus pandemic would stop net purchases as planned at the end of March, it said. However, the central bank dropped a commitment to end asset purchases “shortly before” it raises interest rates, saying instead that any change to rates would be “gradual” and come “some time” after asset purchases end, which Lagarde said could mean months, or a week later. The war in Ukraine has prompted some economists to warn about the risk of stagflation, in which a supply-side inflationary shock is combined with stagnant growth. This leaves the ECB in a difficult position, torn between the desire to tackle inflation that is expected to stay well above its 2 per cent target until at least next year and wanting to support the economy.The ECB cut its growth forecast for this year to 3.7 per cent, down from 4.2 per cent, and Lagarde said high inflation could put more downward pressure on demand. It raised its forecast for inflation this year from 3.2 per cent to 5.1 per cent. But crucially it predicted inflation would fade to 2.1 per cent next year and 1.9 per cent in 2024 — meaning it still has not fulfilled a key condition to raise interest rates.“Inflation could be considerably higher in the near term,” Lagarde said. “However, in all scenarios, inflation is expected to stabilise around our target by 2024.”Only last month, the ECB governing council agreed it could speed up a “gradual normalisation” of its ultra-loose monetary policy. But the invasion of Ukraine and the sanctions imposed on Russia threw this plan into doubt after economists slashed their growth forecasts and predicted inflation would surge from the record level of 5.8 per cent reached in February.Lagarde said the ECB was working with the European Commission to “provide tools and the means to provide support” for Ukraine and its population, including the more than 2.1mn who have fled the country. EU politicians have called on the ECB to open a swap line with the central bank of Ukraine and those of other countries receiving refugees to help them access euros, but its rules make this difficult.The Eurosystem repo facility that allows the ECB to provide euro liquidity to central banks outside the single currency zone has also been extended until January 15 2023. More