Economy

The rapid imposition of economic sanctions on Russia has been impressive in its scale and the unity of action. In time, they will offer the carrot of a path towards normalisation if Moscow credibly ends its aggression against neighbours. Europe must now find ways to minimise its reliance on Russian energy. The sting of economic condemnation is significantly weakened so long as countries need carve outs to ensure the lights stay on and citizens are warm in winter. The wider economic response is also crucial. Russia’s war and the economic response combine to impart a sizeable stagflationary shock on advanced economies, which were previously recovering strongly from the pandemic. Finance ministries and central banks have an extraordinarily difficult task in managing policy in economies already struggling to control inflation.The shock is inflationary because already elevated oil, gas and food prices have jumped, pushing commodity prices to their highest since 2008. It is directly contractionary for industries having to restrict business that is under sanctions. It also indirectly slows growth by squeezing incomes as prices rise, adding reasons for households and companies to be cautious with spending. A stagflationary shock is a nasty dilemma for policymakers. Too little response to inflation will embed rapidly rising prices into corporate expectations of what consumers will tolerate and the pay increases they need to offer. No one benefits from any sort of wage price spiral. But being too concerned about inflation will weaken growth, could cause recessions and, at worst, offer Russia a propaganda victory. The shock to growth seems likely to be more powerful than that to inflation, so whatever monetary or fiscal tightening was planned, the authorities in the US, eurozone and the UK could do a little less now. But everyone has to be nimble because this assessment is tentative and might easily be wrong. Practically, this means the US would make minimal changes to its plans to tighten policy because it has the most intense inflationary pressures and will not be hit as hard by higher energy prices. Indeed, high oil prices tend to encourage US private sector investment. Eurozone central bankers would need to be much more cautious, given this economy is a huge net energy importer and underlying inflationary trends were weaker. The policy dilemma is perhaps most acute in the UK, which has inflation set to rise to over 7 per cent, unemployment at pre-pandemic levels, shortages of labour and still loose monetary and fiscal policies. Just before Russia invaded, the IMF proposed a minor revolution in economics to deal with the UK’s economic circumstances. Raise taxes now rather than later, the fund recommended. It said the action would cool inflation faster than higher interest rates, which have their maximum effect about a year after implementation, and poorer households could be protected by exempting them from tighter fiscal policy. Using fiscal policy as the active tool for damping demand is not something many have suggested since crude Keynesianism went out of fashion. A lively debate about the tools of macroeconomic management has been cut short by Russia’s actions. Now is not a time for economic experiments and tax increases that would intensify the horrible squeeze on incomes faced by UK households. For now, the job of managing the cycle and the trade-off between the inflationary and contractionary effects of this crisis in the UK and elsewhere should fall to central banks.The populations of advanced economies should cut the central bankers some slack as they go about this miserable task. They will do their best to balance inflation and growth, but stagflationary shocks are circumstances where mistakes are highly likely. [email protected] More

With so many mouths to feed, understandably China eyes self-sufficiency of food supply as important. It has successfully stepped up domestic grain production in recent years. But the country has some way to go. Russia’s invasion of Ukraine must worry Beijing given the primacy of Ukrainian exports to Chinese food security.China is the world’s largest agricultural importer. Local production falls short of its needs and Ukraine’s crops help fill the gap. Last year, China imported a record 28mn metric tonnes of Ukrainian corn, more than double from the previous year’s 11mn. Ukraine is blessed with highly fertile black soil — more than a quarter of the global share — enabling it to produce more than 80 per cent of Chinese corn imports. China has little leeway. Its grain supply shortfall should reach about 130mn tonnes in the next three years. Any resulting scarcity of animal feed would cause even more problems for local food inflation. Shortages have already been a problem as extreme weather last year affected local harvests. China’s strict zero-Covid policy has amplified supply chain bottlenecks for imported food products. Last month, before the war began, Beijing had decided to release some edible oils from the country’s central reserves. While prices of imported wheat and corn have already surged to near record levels, soyabeans are the key weakness for China. It relies heavily on imports for more than 80 per cent of its consumption. Higher input costs for fertilisers and energy only exacerbate a tricky situation, putting downward pressure on economic growth. That should mean local food and meat companies face a grim outlook. Yet share prices of these companies, such as Cofco Joycome Foods, Zhengbang Tech and Tingyi Holding, have outrun the broader market indices. They have been perceived as havens during Beijing’s recent tech crackdown. However, soaring raw material prices and disrupted imports should squeeze foodmakers’ profitability. Food security and keeping a lid on inflation is critical this year. President Xi Jinping now prepares to transition into his third term as leader at the National Congress of the Chinese Communist party in the autumn. Thus expect local food companies to take some pain to keep prices down. More

TOKYO (Reuters) – A Tokyo court on Thursday handed former Nissan (OTC:NSANY) Motor executive Greg Kelly a six-month suspended sentence for helping Carlos Ghosn hide pay from regulators, paving the way for the American lawyer to return home after more than three years in Japan.The verdict draws a line under a case that threatened to strain relations between Japan and the United States, its closest ally, over the Japanese justice system’s treatment of Kelly who was arrested alongside the former Nissan boss.”The court finds the existence of unpaid remuneration” and the failure to disclose amounted to “false” reporting, the chief judge Kenji Shimotsu said, telling Kelly he was responsible for one of the eight years included in the charges.”I was shocked by the judgment,” Kelly said in a statement after the ruling. “The court found me mostly innocent, but I do not understand why it said I was guilty for one of the years,” he added.His lawyers said they will appeal the conviction, which Kelly should be able to do from the United States. Both Kelly and Ghosn – who fled to Lebanon in 2019 hidden in a box on a private jet – allege they are victims of a boardroom coup by former colleagues worried that Ghosn wanted to merge Nissan with alliance partner and largest shareholder Renault SA (OTC:RNLSY).In pointed criticism of the prosecutors, the ruling also pinned blame for Ghosn’s alleged failure to disclose $80 million of income over eight years on Toshiaki Ohnuma, a Nissan official overseeing compensation, who was given legal immunity in return for testimony implicating Kelly. “Ohnuma’s statement is fraught with danger that he was making statements that conformed to the prosecutors’ wishes,” Shimotsu said. “There was a danger as an accomplice that he would seek to shift responsibility to Ghosn,” he added.The court also fined Nissan, which pleaded guilty at the start of the trial 18 months ago, 200 million yen ($1.73 million) for its part in the financial wrongdoing and took aim at corporate governance failings. “The dysfunctional governance of the company allowed Ghosn to act in his own self interest. The severe damage to the company’s social reputation can only be described as it suffering the consequences,” Shimotsu said, describing Ghosn’s tenure there as a “dictatorship”. In Beirut, Ghosn described Nissan’s fine as “laughable” and said of Shimotsu’s comment: “It’s like a cartoon comment. I am trying to understand what makes him make this kind of comment when I am not there”He added that Renault (PA:RENA) was struggling because of Nissan’s lack of vision. ‘LONG THREE YEARS’Some Western observers criticised the Japanese justice system’s treatment of Kelly.Suspects in Japan are not allowed to have a lawyer present during interrogations and can be detained for up to three weeks without charge and often in solitary confinement. And 99% of cases that go to trial end with a conviction. “While this has been a long three years for the Kelly family, this chapter has come to an end. He and Dee (his wife) can begin their next chapter in Tennessee,” U.S. ambassador in Japan Rahm Emanuel said in a statement.Kelly testified that his only intent was to give Ghosn, who was also the chief executive at Renault, a compensation package that would dissuade him from defecting to a rival automaker.Bill Hagerty, a U.S. Senator from Kelly’s home state Tennessee, said he planned to welcome his constituent at the airport.”Greg has been subjected to circumstances corporate America could never contemplate,” Hagerty said. “Greg is innocent of the charges levied against him,” he added.The court ruling, however, does not mean an end to legal troubles faced by the former head of Nissan and alliance partner Renault, but it may be the closest the Tokyo court gets to ruling on Ghosn’s culpability. Ghosn is beyond the reach of Japanese prosecutors after while in Lebanon. He is unable to leave without risking arrest. In addition to the charge of hiding his earnings, Ghosn is also accused of enriching himself at his employer’s expense through $5 million of payments to a Middle East car dealership, and for temporarily transferring personal investment losses to his former employer’s books. Ghosn has denied all the accusations against him.($1 = 115.5900 yen) More

The White House is seeking $10 billion in emergency military and humanitarian aid to assist Ukraine after Russia invaded last week, the Washington Post reported. Those funds would help train Ukraine’s military, protect its electrical grid, boost its cyberdefenses and enforce sanctions, it said, citing two people familiar with the matter.That is $3.6 billion more that the White House sought on Feb. 25, a day after Russian President Vladimir Putin’s forces invaded neighboring Ukraine.Another $22.5 billion would go toward shoring up the nation’s pandemic response as part of the shift toward managing COVID-19 long-term and preparing for any potential new variants and spikes in cases, the Post said, also citing a letter from the U.S. Office of Management and Budget sent to U.S. lawmakers it had obtained.The White House will officially ask Congress for the additional funding later on Thursday, it added. The Punchbowl News media outlet also reported on the planned funding request.Representatives for the White House did not respond to a request for comment on the reports.OMB Acting Director Shalanda Young cited “an immediate need” for the aid to assist Ukraine and other Central European allies, and asked that the total $32.5 billion request be included in Congress’ larger spending bill to fund the U.S. government expected to come by March 11, the letter posted online by Punchbowl showed. Lawmakers had passed a so-called stopgap spending bill to fund federal agencies through next Friday and must pass another measure by then to avert to government shutdown. Biden’s fellow Democrats control both chamber of Congress.While there has been large bipartisan support for the Ukrainian aid, Republicans have balked at additional funds to fight the novel coronavirus, with 36 conservative U.S. senators on Wednesday demanding a full accounting of the money authorized so far before considering any more federal funds. More

HONG KONG (Reuters) – Casino companies in Macau will have their licences extended by six months, the city’s Economy and Finance Secretary said on Thursday, allowing more time for a highly anticipated rebidding process in the world’s biggest casino hub.Lei Wai Nong said Macau’s casino licences that were due to expire on June 26 will be extended to Dec. 31, according to a government statement.Authorities would start the rebidding process once the city’s legislature had passed a revised law, he said.Macau’s six operators, Wynn Macau (OTC:WYNMF), Sands China (OTC:SCHYY), MGM China (OTC:MCHVY), SJM Holdings (OTC:SJMHF), Galaxy Entertainment and Melco Resorts, all have to reapply to maintain operations in the Chinese-ruled former Portuguese colony.Legislators in the Chinese special administrative region need to first approve changes to the city’s gaming law which are the biggest reforms in two decades.The law will lay the groundwork for what is required from the multibillion dollar casino operators ahead of their license expiration.In 2019, Macau raked in $36.5 billion from its casinos, more than six times that of the Las Vegas strip. Since 2020, however, Macau’s casinos have been slammed by coronavirus travel restrictions, which have curbed visitors, and crackdowns on the opaque junket industry.Beijing, increasingly wary of Macau’s acute reliance on gambling, has not yet indicated how the licence rebidding process will be conducted.It is clear, however, that authorities want far greater control over the casino operators’ activities. Beijing and Macau massively tightened scrutiny of casinos in recent years, with authorities clamping down on illicit capital flows from the mainland and targeting underground lending and illegal cash transfers. More

Investing.com — Commodity prices surged again and the ruble hit new lows as Western sanctions made it ever harder to deal with Russia. The Kremlin’s forces continue to make battlefield gains. Jobless claims and factory orders data are due, while Eurozone producer price inflation hits a massive 30.6%. Snowflake stock tanks after weak guidance, while Broadcom (NASDAQ:AVGO) and Costco (NASDAQ:COST) report after the bell. Here’s what you need to know in financial markets on Thursday, 3rd March.1. Commodity prices surge againCommodity prices surged again as the threat to Russian supplies of oil, gas, wheat and industrial metals continued to stoke panic buying of alternatives.  U.S. crude futures surged to as high as $116.50 a barrel, their highest since 2008, before retreating to $113.31 by 6:15 AM ET (1115 GMT), a gain of 2.5% on the day. Brent rose 1.9%% to $115.08 a barrel.In a stark illustration of what is a de facto tightening of the global market, Russian oil major Surgutneftegaz found no buyers for April exports averaging over 200,000 barrels a day at a tender on Wednesday. At the same time, U.S. inventory data showed that stockpiles at the Cushing hub fell to their lowest since 2018, while the Strategic Petroleum Reserve fell to its lowest level since 2002 – even before the measures announced earlier this week to release more oil in the coming days.Elsewhere, Asian coal and European natural gas futures hit fresh highs, while U.S. wheat futures rose another 4.2%. They’ve now risen over 90% since July. Russia and Ukraine account for some 28% of world wheat exports, an even greater weight than Russia has in world energy markets.2. Ruble hits new lows; Russian debt cut to junk; battlefield gains continueThe Russian ruble plumbed new depths after the central bank asked foreign exchange brokerages to charge a 30% commission on any sales of dollars, the latest in an increasingly desperate suite of measures to stabilize the local economy. On Wednesday, it had forbidden the payment of interest on domestic government debt held by foreigners.Overnight, ratings agencies Moody’s and Fitch cut their Russian sovereign debt rating to junk status, while MSCI and Russell said they will cut Russian equities from all of their indices.EU Commission President Ursula von der Leyen said the EU is willing to consider tighter sanctions if the situation deteriorates. That reflects a growing awareness that the loopholes left by the first round of sanctions last week still allows massive hard currency flows to Russia on a daily basis.In Ukraine, Russian forces appear to have captured the southern city of Kherson and continue to pound Kharkiv, the country’s second city, with indiscriminate rocket attacks. Russia’s Foreign Ministry talked up the possibility of peace talks with Ukraine later today.3. Stocks set to open a little lower; Powell to continue testimonyU.S. stock markets are set to open lower later, giving up some of the gains they made on Wednesday on hints from Federal Reserve chairman Jerome Powell that the central bank may not raise interest rates as far as previously thought, given the likely hit to global growth from Russia’s invasion of Ukraine.Powell continues his semiannual Congressional testimony in the Senate from 10 AM ET.By 6:15 AM ET, Dow Jones futures were down 39 points, or 0.1%, while S&P 500 futures were down 0.2% and Nasdaq 100 futures were down 0.4%. The three cash indices had gained between 1.6% and 1.9% each on Wednesday.Stocks likely to be in focus later include software company Snowflake, which fell over 20% after hours on Wednesday after predicting a slowdown in growth this year, and Splunk (NASDAQ:SPLK), which announced a new CEO late Wednesday.4. Flight from Russia continues; VW, H&M stop operations; Yachts seizedInternational companies continue to distance themselves from Russia in the wake of the invasion, which was condemned by a large majority in a non-binding motion by the UN General Assembly on Wednesday (albeit China and India abstained).Volkswagen (DE:VOWG_p) became the latest to say it will stop production in Russia, while fast-fashion giant H&M and IKEA also said they would suspend operations there. Toyota and GM, which don’t produce in Russia, have said they will stop exports there, as has Mercedes-Benz.Moves to seize the assets of oligarchs linked to the Russian regime are also gathering pace: French authorities seized a yacht belonging to Igor Sechin, the CEO of oil giant Rosneft, while their German counterparts seized a yacht belonging to metals and telecoms billionaire Alisher Usmanov. The U.K. government instructed one of its senior ministers, Michael Gove, to accelerate efforts to freeze Russian assets in Britain.5. Jobless claims, Challenger job cuts due; euro sinks as PPI rips higherAway from the war, the regular rhythms of the economic calendar throw up the weekly U.S. jobless claims numbers and the monthly Challenger Job Cuts survey. There are also data due on factory orders and the final version of the ISM’s non-manufacturing survey for February.Parallel surveys in the Eurozone led to a slight downward revision of flash estimates earlier. Meanwhile, the Eurozone’s annual rate of producer price inflation soared even more than expected to 30.6% after a 5.2% rise in prices in February. That sits ill with ECB comments about the possible need to normalize policy more slowly due to the invasion of Ukraine. The euro fell to a 22-month low of $1.1071. More

Russia has pledged to stand its ground against what it calls “hostile actions” but has accepted that its economy will take a significant hit from the extensive sanctions imposed by the west in response to its invasion of Ukraine. Economists expect the sanctions to push Russia into a deep recession while driving inflation even higher this year, but do not think the economy will fail to function as long as the political will in the Kremlin exists to soften the impact of the measures. Danny Glaser, former assistant secretary at the US Treasury overseeing sanctions and now at risk advisory company K2 Integrity, told a podcast for the think-tank OMFIF that the speed of the west’s response was a “revolution” that aimed to “tank the Russian economy”.But he warned that US, UK and EU sanctions may not change President Vladimir Putin’s military aims and the question would be “how much pain is Russia willing to endure”. Kremlin spokesman Dmitry Peskov said on Wednesday the Russian economy was facing “serious pressures and a serious blow”.Authorities are trying to minimise opportunities for capital to flee Russia, with restrictions imposed on foreigners selling assets and locals transferring money abroad. Once the initial crisis period of adjustment is over, the sanctions are expected to have a chronic impact on Russia, by limiting growth, imports and the opportunity to spend oil and gas revenues. Russia’s economy will become much more insular but energy exports will still generate a trade surplus. Western policymakers intend the measures against Russia to have a similar impact to sanctions imposed on Iran by then-president Donald Trump in 2018 after the US withdrawal from the 2015 nuclear agreement, although they are not on the same scale or cover the same breadth of sectors. Those measures were focused on reducing Iran’s revenue from oil exports, the country’s economic lifeline, to zero. Iran is still completely cut off from the world’s financial system, including the Swift payments network that now excludes some Russian lenders. Its economy has suffered significantly. IMF figures suggest that gross domestic product per capita sank 15 per cent across 2018 and 2019 and that Iranians will not regain 2016 levels of living standards until at least a decade later. Inflation, which hit 48 per cent at the end of 2018, is forecast to remain well above 25 per cent. But in a sign of the potential impact on Russia, Iran’s oil exports to friendly countries continue and the economy has not collapsed. Supermarket shelves are usually full, and petrol stations rarely suffer fuel shortages. Wealthier Iranians, many of whom have political ties to the leadership in Tehran, have maintained their luxurious lifestyles.“With a nuclear agreement, Iran can have 15 per cent economic growth,” said Saeed Laylaz, an Iranian analyst. “Without an agreement, if oil prices remain high and Iran can continue to sell 1mn barrels a day [of oil] or so, and with rises in taxation, it can run the economy and have [modest] growth.”

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Iran’s diversification of its economy and its reliance on trade with its neighbours as well as China have allowed officials in Tehran to claim that it has survived and won what it terms “the economic war”. Even if it must accept lower prices for its oil as the markets begin to shun its crude, economists expect Moscow to be able to run a similar siege economy, using hard currency from oil and gas sales to buy imports from countries and companies willing to supply Russia. The Institute of International Finance said the sanctions would have a “dramatic effect” on Russia’s financial system, and the decline in the rouble, even with capital controls in place aimed at stopping money fleeing the country, will raise inflation and lead “to a sizeable contraction of output this year”.Goldman Sachs said sanctions on the central bank, hampering its defence of the rouble, would raise inflation to 17 per cent by the end of the year. That figure is consistent with the central bank’s more than doubling of its interest rate to 20 per cent, a rise necessary to attract deposits to Russian banks. It cut Russia’s growth forecast for 2022 from 2 per cent before the sanctions to -7 per cent, with public and private domestic spending expected to fall 10 per cent or more. But Clemens Grafe, central and eastern Europe economist at Goldman Sachs, said the immediate crisis for Russia would dissipate in six to nine months when it had earned enough from oil and gas sales to offset the sanctions placed on the central bank’s foreign exchange reserves. Then it could operate a much more domestically focused economy, using income from energy to buy imports, most probably from China, with economic life for Russians surviving amid a weakened state.

Grafe lowered his long-term trend growth forecast for Russia from 2.75 per cent a year to 1 per cent. “The import restrictions will make it increasingly difficult to keep productivity growth at past levels,” he said, predicting a “similar reduction to that we observed given the reduction of foreign direct investment post 2014”.With imports sharply reduced and foreign currency gains from trade used to shore up the rouble, Russia’s trade surplus will be its lifeline to run a siege economy. Putin’s ministers have recognised the public will have to endure pain as sanctions drive down living standards, but they are sending the message that they are determined to tough it out. Additional reporting by Najmeh Bozorgmehr in Tehran More