Economy

LONDON/NEW YORK (Reuters) – Beaten-down Russian assets are looking attractive to some, with JPMorgan (NYSE:JPM) strategists touting the bonds of Russian companies with significant international operations as the best way to profit from distressed pricing, while two banking sources said that loans of Russian corporates had been offered at a steep discount.Russian bond prices have fallen to record lows since Moscow invaded Ukraine as investors fret over their ability to pay as a result of coordinated Western sanctions. The United States has led the sanctions to limit the flow of Western money and to damage Russia’s economy, while Ukraine has called for the boycott of Russian energy exports. Russia’s hard-currency sovereign bonds mostly traded well above par until mid-February, as investors shrugged off Moscow’s troop build-up on Ukraine’s border and U.S. warnings that an invasion was imminent. The decline since has been rapid, with longer-dated issues now indicated at around 20 cents in the dollar, although trading has all but ground to a halt.The Ukraine crisis has raised the spectre of Russia’s first major default on foreign-owned sovereign bonds since the years after the 1917 Bolshevik revolution. Russia said on Sunday that payments would depend on Western sanctions.But in a March 4 note to clients a team of JPMorgan’s strategists led by Zafar Nazim said their top pick was Lukoil bonds, because the energy giant had substantial standalone international operations, which generated $3.5 billion in earnings in 2021, and relatively low foreign debts. In the note, titled “If Ifs-And-Buts-Were-Candy-And-Nuts Recovery Analysis”, the JP Morgan strategists said investors could make huge returns should the company repay its debts.Two banking sources said there was some activity in the secondary market for some distressed Russian corporate loans last week, with some market participants trying to trade the paper at a discount. While sanctions make it virtually impossible to trade in any sanctioned Russian entity and in rouble-denominated assets, Western investors can still trade in the bonds of Russian companies not on the sanction list and which have dollar bonds.Lukoil bonds were quoted at a mid-price of 32 cents in the dollar on Friday, with bid/ask spreads of around 10 cents pointing to a highly illiquid market. JPMorgan strategist said they could recover to 100 cents on the dollar.They also upgraded bonds issued by Novolipetsk Steel, saying current prices did not reflect the recovery potential, as well as steel giant MMK’s 2024 bond.”Our analysis is based on recovery from international operations, supplemented by potential claim on international receivables,” the strategists wrote.Russian companies are not currently prohibited from making payments to overseas owners of their debt, and many earn sizeable foreign exchange from export sales. But that could change if Russia’s government imposes restrictions, or if the companies’ financial conditions worsen or if they become unwilling to pay, potentially leading to an “event of default (EoD)”.”An EoD by Russian issuers is a high risk though some issuers with substantial international operations (e.g. Lukoil) could continue servicing debt,” the strategists said.JPMorgan’s strategists added that repayment of bonds currently due, including one from gas giant Gazprom (MCX:GAZP), would not necessarily mean other borrowers would repay too.An investment firm, which held some of Gazprom’s $1.3 billion bond maturing on Monday, has received its full payment due in U.S. dollars, a person at the firm said. More

HOUSTON (Reuters) -Russia’s invasion of Ukraine is a “big wake up call” for European governments hoping to balance the need for fossil fuels with environmental concerns, the head of French energy giant TotalEnergies said on Monday.Europe depends on Russian natural gas, which supplies around 40% of its needs. On Monday, benchmark gas prices shot to their highest on record, as traders worried Russia could curtail supplies.”What is happening today in Europe is a big wake up call to a lot of policy makers if they are serious about security of supply, affordability and of course climate change compatibility,” TotalEnergies Chief Executive Patrick Pouyanne said at the CERAWeek energy conference in Houston. “We must think about the three parts of this triangle and not think that only one part is important.”Europe aims to sharply reduce its reliance on fossil fuels in the coming decades to battle climate change, with governments restricting oil and gas production and financing of fossil fuel projects. While Europe’s solar and wind power generation capacity has grown sharply in recent years, its power and energy systems remain heavily reliant on natural gas and coal.Pouyanne said Europe needs to build more infrastructure to import additional LNG if it wants an alternative to Russian gas.”The reality in Europe is that we don’t have enough re-gas terminals today to replace the volume of piped gas from Russia by LNG.”NO PRESSUREPouyanne said TotalEnergies did not come under government pressure to fully exit Russia following the Ukraine invasion.TotalEnergies is the only major Western energy company that does not plan to fully exit Russia; BP (NYSE:BP), Shell (LON:RDSa) and Exxon (NYSE:XOM) all announced their intentions to withdraw. TotalEnergies has said it will halt all new spending in Russia.The French oil major holds a 19.4% stake in Novatek, Russia’s largest producer of liquefied natural gas (LNG), as well as a stake in the Novatek-led Arctic LNG project.”I had discussions obviously with the highest authority in my country and there is no push from them for us to exit Russia,” Pouyanne told a gathering of energy executives. Pouyanne said that Western sanctions on Russia exclude natural gas and that it would therefore be inconsistent for companies that produce the gas to exit the country. TotalEnergies nevertheless has stopped buying oil from Russia, Pouyanne added, although one its landlocked refineries in Germany continues to receive Russian crude by pipeline. More

(Reuters) – Global financial conditions, perceived as strongly correlated with future growth, are at the tightest in two years, driven by soaring energy prices, sliding stocks and the market fallout from the Ukraine-Russia conflict.Financial conditions is the umbrella phrase for how metrics such as exchange rates, equity swings and borrowing costs affect the availability of funding in the economy. How loose or tight conditions are dictate spending, saving and investment plans of businesses and households. Goldman Sachs (NYSE:GS), which compiles the most widely used financial conditions indexes, has in the past shown a 100-basis-point tightening crimps growth by one percentage point in the coming year, with an equivalent loosening giving a corresponding boost.The tightening is an unwelcome development for a world economy already threatened by the fallout from $120-a-barrel oil prices and supply chain setbacks caused by sanctions on Russia. (Graphic: GS global financial conditions, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwaqwwvo/KNQdg-global-financial-conditions-tighten-to-pandemic-levels.png) If these drive inflation steadily higher, and “if the central banks take their mandates seriously, you will see a further (tightening) in financial conditions,” said Rene Albrecht, strategist at DZ Bank. “Economic dynamics will slow down further, inflation will be high nonetheless and you will see second round effects and then you get a stagflation scenario,” he added, referring to a combination of rising inflation and slower economic growth. Goldman Sachs’ global financial conditions index (FCI) is at 100.2, 60 basis points (bps) tighter than prior to Russia’s invasion of Ukraine and a level last seen in March 2020, when the pandemic first hit. The rise was led by its Russian FCI, which rose as high as 114.8 from around 98 at the start of February to the tightest since the 2008 crisis, driven by a doubling of interest rates and a market implosion. The Russian move has taken an emerging markets FCI to the tightest since 2016. (Graphic: GS Russia financial conditions, https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrlqrevm/aWMrB-russian-financial-conditions-tighten-to-gfc-levels-nbsp-.png) Euro zone moves are sizeable too. Conditions in the bloc, heavily reliant on Russian energy, are at the tightest since November 2020, having moved 50 bps in February, driven also by the European Central Bank (ECB) opening the door to rate hikes this year. Viraj Patel, global macro strategist at Vanda (NASDAQ:VNDA) Research, said financial conditions would take on even more importance for the ECB, which meets on Thursday.Should it proceed with the unwinding of bond purchases followed by rate hikes as expected before the invasion, financial conditions could tighten to levels seen at the height of the pandemic or even the bloc’s sovereign debt crisis a decade ago, he added. U.S. conditions have tightened to a lesser extent. But the indicators Goldman uses to calculate its indexes signal no relief; safe-haven flows are boosting the U.S. dollar, which is near two-year highs, and world stocks have fallen 11% this year, led by a near-20% fall in euro zone equities. U.S. investment-grade corporate bond risk premia have widened 40 bps year-to-date as investors assess the hit to companies’ profits. With conditions historically loose in developed markets, policymakers may not be too perturbed yet. On an inflation-adjusted basis, borrowing costs have fallen sharply, hitting a record low -2.5% in Germany on Monday. Peter Chatwell, head of multi-asset strategy at Mizuho, said that gives central banks “more room to speak hawkishly and for those that are on the brink of acting hawkishly, acting hawkishly.” (Graphic: GS euro area financial conditions, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxokjogpx/xoJke-euro-are-financial-conditions-at-tightest-since-late-2020-nbsp-.png) More

A Biden administration report says collusion and other constraints on competition hold down pay and prospects in the labor market.The recent narrative is that there is a tight labor market that gives workers leverage. But a new report from the Biden administration argues that the deck is still stacked against workers, reducing their ability to move from one employer to another and hurting their pay.The report, released Monday by the Treasury Department, contends that employers often face little competition for their workers, allowing them to pay substantially less than they would otherwise.“There is a recognition that the idea of a competitive labor market is a fiction,” said Ben Harris, assistant Treasury secretary in the office of economic policy, which prepared the report. “This is a sea change in economics.”The report follows up on a promise made by President Biden last summer when he issued an executive order directing his administration to address excessive concentration in the market for work.Drawing from recent economic research, the report concludes that lack of competition in the job market costs workers, on average, 15 to 25 percent of what they might otherwise make. And it emphasizes that the administration will deploy the tools at its disposal to restore competition in the market for work.“This is the administration declaring where it is on the enforcement of antitrust in labor markets,” Tim Wu, a special assistant to the president for technology and competition policy on the National Economic Council, said in an interview in which he laid out the report’s findings. “It is sending a strong signal about the direction in which antitrust enforcement and policy is going.”Across the economy, wage gains generally come about when a worker changes jobs or has a credible offer from outside that will encourage the current employer to provide an increase, argues Betsey Stevenson, a professor of economics at the University of Michigan who was on President Barack Obama’s Council of Economic Advisers.The State of Jobs in the United StatesEmployment growth accelerated in February, as falling coronavirus cases brought customers back to businesses and workers back to the office.February Jobs Report: U.S. employers added 678,000 jobs and the unemployment rate fell to 3.8 percent ​​in the second month of 2022.Wages and Prices: A labor shortage is helping to push up workers’ pay. With inflation running hot, that could be a problem for the Federal Reserve.Service Workers:  Even as employers scramble to fill vacancies, service workers are seeing few gains. Part-time work is partly to blame.Unionization Efforts: The pandemic has fueled enthusiasm for organized labor. But the pushback has been brutal, especially in the private sector.New to the Work Force: Graduating college seniors will start their career without the memory of prepandemic work life. Here is what they expect.“Companies are well aware of this,” she said in an interview, so they rally around a simple solution: “If we just stop competing, it will be better for everybody.”The Treasury report lays out the many ways in which employers do this. There are noncompete agreements that bar workers from moving to a competitor, and nondisclosure agreements that keep them from sharing information about wages and working conditions — critical information for workers to understand their options. Some companies make no-poaching deals.“There is a long list of insidious efforts to take power out of the hands of workers and seize it for employers’ gain,” said Seth Harris, deputy director at the National Economic Council and deputy assistant to the president for labor and the economy.This is happening against a backdrop of broad economic changes that are hemming in the options of many workers, especially at the bottom end of the job market.The outsourcing of work to contractors — think of the janitors, cafeteria workers and security guards employed by enormous specialist companies, not by the companies they clean, feed and protect — reduces the options for low-wage workers, the report argues.The mergers and acquisitions that have consolidated hospitals, nursing homes, food processing companies and other industries have also reduced competition for workers, the study says, curtailing their ability to seek better jobs.The report notes, for instance, that mergers trimmed the number of hospitals in the United States to 6,093 in 2021, from 7,156 in 1975. It cites research into how some of these mergers have depressed the wage growth for nurses, pharmacy employees and other health workers.The Treasury’s document is drawn from a body of research that has been growing since the 1990s, when a seminal paper by David Card and Alan B. Krueger found that raising the minimum wage did not necessarily reduce employment and could even produce more jobs.The conclusion by Mr. Card and Mr. Krueger, which economists would consider impossible in a competitive labor market in which rising labor costs would reduce employer demand, started the discipline down a path to investigate the extent to which employers competed for workers. If a few employers had the power to hold wages below the competitive equilibrium, raising the wage floor might draw more workers in.Lack of competition, the Biden administration argues, goes a long way to explain why pay for a large share of the American work force is barely higher, after accounting for inflation, than it was a half-century ago. “The fact that workers are getting less than they used to is a longstanding problem,” Ms. Stevenson, who was not involved in the Treasury report, noted.Anticompetitive practices thrive when there are fewer competitors. If workers have many potential employers, they might still agree to sign a noncompete clause, but they could demand a pay increase to compensate.Even if there is no conclusive evidence that the labor market is less competitive than it used to be, the report says, researchers have concluded that there is, in fact, very little competition.Suresh Naidu, a professor of economics at Columbia University, argues, moreover, that institutions like the minimum wage and unions, which limited employers from fully exercising their market power, have weakened substantially over time. “The previously existing checks have fallen away,” Mr. Naidu said.Unions are virtually irrelevant across much of the labor market. Only 6 percent of workers in the private sector belong to one. The federal minimum wage of $7.25 an hour is so low that it matters little even for many low-wage workers. The Treasury report argues that an uncompetitive labor market is reducing the share of the nation’s income that goes to workers while increasing the slice that accrues to the owners of capital. Moreover, employers facing little competition for workers, it argues, are more likely to offer few benefits and impose dismal working conditions: unpredictable just-in-time schedules, intrusive on-the-job monitoring, poor safety, no breaks.The damage runs deeper, the report says, arguing that uncompetitive labor markets reduce overall employment. Productivity also suffers when workers have a hard time moving to new jobs that could offer a better fit for their skills. Noncompete clauses discourage business formation when they limit entrepreneurs’ ability to find workers for their ventures.Addressing the issues that the report singles out is likely to be an uphill task. The administration’s push to increase the federal minimum wage to $15 has been unsuccessful. In Congress, bills that would ease the path for workers to join a union face long odds. Going after noncompete clauses, no-poaching deals and other forms of anticompetitive behavior would be an easier task.Last year, the Justice Department’s antitrust division brought several cases challenging no-poaching and wage-setting agreements. In January, four managers of home health care agencies in Maine were indicted on federal charges of conspiring to suppress the wages and restrict the job mobility of essential workers during the pandemic.Still, deploying antitrust enforcement in the job market is somewhat new. It has been used mostly to ward off anticompetitive behavior that raises prices for consumers in product and service markets. Persuading courts to, say, prevent a merger because of its impact on wages might be tougher.A note by the law firm White & Case, for instance, complained that the move to block Penguin Random House’s attempt to buy Simon & Schuster on the grounds that it would reduce royalties to authors is “emblematic of the Biden administration’s and the new populist antitrust movement’s push to direct the purpose of antitrust away from consumer welfare price effects and towards other social harms.” More

Just as aviation was soaring away from the pandemic, it has flown into a fresh storm. On Monday, the cost of crude leapt on the prospect of a US-led embargo on Russian oil exports. Global oil prices have risen nearly two-thirds since the start of the year. Shares in airlines nosedived on Monday.No wonder. Aviation is the most oil-intensive sector of all, according to ING. For every €1mn of value added output, Europe’s aviation industry uses 60 terra joules of energy. Shipping is close behind, followed by the chemicals industry.Fuel accounts for 25-40 per cent of airline operating costs. Many airlines have hedges in place. London-listed Wizz Air, normally a holdout, said on Monday it too would cap its fuel cost exposure. But pricier fuel and the need to fly longer routes to avoid Russian and Ukrainian airspace, will still hurt airlines. Commercial aviation cannot usually rely on passing extra costs on to customers. Northern Europeans are desperate to travel but also constrained by a broader jump in their cost of living. European nations have meanwhile given some flag carriers financing to hold prices down in the form of pandemic bailouts.Other transport companies will be hit too. Fuel is about a tenth of bus companies’ costs, though demand for public transport should increase as travellers are priced out of their cars. Shares in London-listed public transport companies Go-Ahead and FirstGroup fell by 6 per cent on Monday morning. Logistics companies will also be in the spotlight, though the typical “costs plus margin” contracts should allow them to pass on higher fuel expenses.For many developed economies, the situation is less bleak than during previous oil price spikes. A shift to services and greater energy efficiency has reduced intensity — total energy consumption per unit of GDP — by over a third globally since 1990.Yet higher transport costs will ensure the effect of more expensive crude will be felt across the economy. Household budgets will be stretched and business profits will be squeezed. If the oil price rise is sustained, the pain will be widely shared. More

The writer is economic adviser to the president of UkraineThe brutal Russian invasion of Ukraine is destroying a country, displacing millions of people and ruining lives. Vladimir Putin has already come close to causing a major nuclear disaster and appears to have plans for more. In addition, Russian violence is creating a global food security crisis. Ukraine is the world’s fifth-largest exporter of wheat, but farmers cannot now start what is called their spring sowing campaign. The regular window for starting field work is the first 10 days of March, and planting needs to be fully completed in the last week of April. We have highly productive soil, but also a climate that sets the rules. There is already no way that Ukrainians will be able to sow this year based on a normal schedule. Those parts of Ukraine which are most productive in terms of agricultural production are now consistently under aerial attack and artillery bombardment. Working the fields in regions such as Chernihiv, Poltava, Kharkiv, Sumy, and Zhitomir has become practically impossible.According to regional administrators, some of these fields are likely to be mined or contain unexploded ordnance. Even when we are ready to start ploughing and planting, anti-mining and ordnance measures will be essential — and we urgently request help from all civilised countries in that task.Ukrainian farmers are resilient. But they also have other important tasks at hand. These currently include capturing Russian military equipment, blowing up fuel convoys, and allowing demoralised Russian soldiers to talk with their mothers. We are a humane and innovative people, but we also know what our priorities must now be. Our tractors should be ploughing fields and feeding the world, but instead too many of them spend time towing broken down and captured Russian equipment. All that deadly junk will be recycled, of course, but we would much rather be busy growing the food that people everywhere need to survive.If this war is not stopped immediately, the world will experience a drop of global supply between 10 per cent to 50 per cent of major agrarian products including wheat, barley, corn, rapeseed, and sunflower oil. In recent decades, because of smart investments, increased productivity, and overall efficiency, Ukrainian agriculture provided a major buffer for the food security of billions of people around the world. Western companies that have worked with us on this vital endeavour are a vital part of our on-ground team.But agricultural commodity prices have already increased and, once markets realise the full depth of Putin’s madness, we should expect them to spike further. Rich western countries may think they are less exposed, due to the nature of their food consumption, with more meat and less bread in their diet than poorer ones. But higher commodity prices increase the cost of livestock feed and will provide a further boost to inflation pressure in the US, the EU, the UK and all developed countries.The price tag for supporting poor people worldwide will increase substantially. On the Chicago Commodity Exchange prices for wheat already demonstrate substantial growth. To avert widespread hunger, massive budget pressures and further inflation shocks, the world needs to act very quickly. All possible measures to stop Putin’s troops must be on the table — including steps that would have been unimaginable 10 days ago. The food production clock is ticking. Each extra day of the Russian war against Ukraine threatens to push the world into a new Dark Age. We will emerge victorious and every Russian tank and armoured vehicle will be destroyed or sent back home. But the human cost will be enormous. This cost will mostly fall on Ukrainians and the unfortunate Russian conscripts sent to fight us. But it will also fall on people around the world who worry about how much food they can afford to buy for their families.To stop Russia, it is essential to impose a full set of sanctions on Russian energy exports immediately — this will reduce the finance available for Putin’s war machine. We are calling on all energy producers to step up and help ensure that effective sanctions do not push up fuel prices. Russian oil and gas are already the equivalent of blood diamonds. If you buy Russian energy products, you are directly financing the killing of Ukrainian children, the forced displacement of millions of people and the disruption of global food supply chains. Putin’s war threatens famine and global famine always brings disease.The Russian bell tolls for people who consume food everywhere. More

BRUSSELS (Reuters) – The European Union is considering loosening state aid rules for companies affected by EU sanctions against Russia over Ukraine and the bloc’s competition regulators are looking at various support measures, the European Commission said on Monday.The EU executive set a precedent two years ago by relaxing some state aid rules for businesses hit by the coronavirus pandemic, allowing individual member states to pump billions of euros into their companies.”The Commission is closely monitoring the situation and is ready to use the full flexibility of its state aid toolbox in order to enable member states to support companies and sectors severely impacted by the current geopolitical developments,” Commission spokeswoman Arianna Podesta said in an email.”We are looking at all tools at our disposal – permanent and temporary,” she said.The Commission will seek feedback from EU countries before implementing any measures.From airlines to banks to automakers, thousands of European companies are expected to be hit hard by the sanctions as they close their Russian businesses and cut dealings with Russian counterparts.The European Central Bank’s chief economist Philip Lane has told fellow policymakers that the Ukraine conflict may reduce the euro zone’s economic output this year. More

The head of Wincanton, the UK’s last large warehousing group, is defiant that his company retain its London listing and avoid the same fate as rival Clipper Logistics, which is being taken over by US-based GXO.James Wroath, chief executive of Wincanton, which runs the British supply chains of retailers J Sainsbury and Primark, and brewer Heineken, said that he wanted to expand the company as a publicly traded entity in the UK amid a flurry of buyouts in the logistics sector.“My intention is not for Wincanton to get bought,” he told the Financial Times. “It’s really important that the UK has a British-owned logistics company of size and scale.”The huge growth in ecommerce sales for retailers and the maelstrom of supply chain problems, including lorry driver shortages caused by the pandemic, has raised the profile of the logistics sector, helping to drive acquisition activity.Last week, Clipper received a near £1bn formal takeover bid from GXO, which was spun out of a large US trucking company last year, valuing the Leeds-based group at 13.6 times its forecasted 2022 earnings before interest and tax factoring in cost cuts. By contrast, Wincanton, which generated £1.2bn of revenues in its previous financial year, trades at 6.2 times of 2022 forecasted ebit. “There is always a possibility [of a takeover bid] with the rating so undervaluing the company,” said Gerald Khoo, an analyst at Liberum.While Wroath cannot rule out the acceptance of a takeover offer for Wincanton given that the board would decide on the basis of maximising value for its shareholders, he sees its near-term future as better suited to the London market.The UK and Ireland logistics sector had a record year for dealmaking in 2021 with 66 transactions completed for a disclosed value of £2.7bn, according to BDO, an accountancy and M&A advisory which began tracking activity in 2016.Jason Whitworth, a partner at BDO, said that the strong balance sheets of international logistics companies meant that they were on the hunt for acquisitions to build “pan-European” operations as the pandemic boom in online shopping cools off.The need to invest in automation and the restricted availability of industrial properties are also driving takeover activity. The number of big names in the UK logistics outsourcing market has been whittled down over the years and the takeover of Clipper will reduce it further to three main players: GXO, DHL Supply Chain and Wincanton.Clipper generated most of its £696mn annual revenues from retail customers including handling their online returns. While Wincanton is expanding operations in this area, it is more diversified, such as providing the logistics for the construction of EDF’s Hinkley Point nuclear power plant and fuel distribution.But analysts said that British retailers would bristle at a reduction of the market to two big companies and outsourcing their supply chain operations to a provider that also services their rivals. More