Economy

The writer is chief economist at the Institute of International Finance Russia’s invasion of Ukraine is a turning point for European politics, as has been widely recognised in the short space of a few days. What is less widely recognised is that we’re also at turning point for markets. Europe is in the early stages of a big adverse shock to its economy, which will upend the debate over monetary policy. Think back to just a week ago when there was still collective hand-wringing about elevated inflation. That is now old news. The interesting thing — and the opportunity — is that markets have not yet recognised or priced this.Take the case of elevated inflation. In a recent analysis by the Institute of International Finance, we warned about the breadth of the inflation rise in Europe, which was being led by genuine overheating in Germany. But Germany is now also on the front line in confronting Russia and one of the most exposed economies to what surely will be deep recession to the east. That changes the inflation debate. Central banks worry about supply shocks because of “second-round effects”, which is when a strong economy emboldens producers to pass on higher energy and other costs to consumers. That happens when there is strong demand, which is what gives companies pricing power. None of this applies any more. Uncertainty has risen massively, which will pull down consumer confidence. And that uncertainty does not just relate to obvious geopolitical risks. It goes much deeper. Countries like Germany and Italy built large parts of their economies around cheap energy from Russia. That must now change, which implies lower growth, wider fiscal deficits and more debt.The debt nexus for Europe is a tricky one. There have been many voices in recent days criticising Germany for its low levels of government debt, with many treating Russia’s invasion of Ukraine as a kind of “told you so” moment. But that’s misguided.If the last couple of years have taught us anything, it is that big negative shocks can come out of nowhere — recently Covid-19, then Covid variants and now Russia’s invasion of Ukraine. If this isn’t an endorsement of keeping powder dry for emergencies, then what is?In the eurozone this argument has a special urgency, because markets were already reluctant to buy Covid debt issuance in the run-up to all this. For a key periphery country like Italy, net new debt issuance was largely funded — indirectly — via the European Central Bank’s quantitative easing programme of asset buying to support markets.With this latest shock, markets’ existing reluctance to fund highly indebted sovereigns will — with bigger fiscal spending needs on the horizon — only grow more acute.If we’re right, the fact that inflation is no longer a concern makes things easy. Now is the wrong time for the ECB to worry about normalising policy. Relative price shifts in the eurozone inflation basket are unlikely to broaden out into generalised inflation, which means the coast is clear for ongoing loose monetary policy and — critically — QE that from a fiscal perspective is badly needed. There will therefore be a fundamental decoupling in monetary policy, with the US Federal Reserve pursuing normalisation, while the ECB — given the much bigger shock that Russia’s war is to Europe — keeps easing. Markets are nowhere near recognising or pricing this. They are pricing the prospect of monetary policy normalisation and rate increases in the eurozone on a par with the US. Speculative positioning in the foreign exchange markets was starting to build a meaningful “long” position on the euro versus the dollar into last week.

In short, decoupling of the eurozone from the US — in terms of growth and policy — isn’t yet remotely built into markets.We’ve seen all this before. Think back to 2014, which was also a watershed for markets. Russia annexed Crimea early in the year. And then the bottom fell out of oil prices, as US shale took the world by storm. Amid all this, markets were slow to price in the massive policy shift that was unfolding at the ECB, which would ultimately lead to QE in 2015. This is because there were genuine mixed signals. Markets thought QE would never be possible given the traditional importance of inflation hawks in the eurozone. It’s the same now. Elevated inflation is the mixed signal that’s holding back markets now. But that is old news, which reflects the world as we knew it a week ago. Big divergence and euro weakness against the dollar is coming.

Video: Russia’s invasion of Ukraine: what next? | FT Live More

It is a long time since investors had to deal with a war in eastern Europe. It is even longer since they had to worry about serious inflation. As individuals, the most we can do is watch in horror and sympathy at what is unfolding in Ukraine — perhaps also with some anxiety. In the modern world the economic impacts of war ripple far and none of us can escape untouched. In my funds we have little tolerance for political risk when choosing stocks globally. Readers may recall that we sold our Chinese holdings when Beijing raised regulatory pressures a year ago and we have never invested in Russia, Turkey and a number of other emerging markets. But this sort of stance can only protect you so far. Safeguarding your wealth from the indirect consequences of war in another country can be harder.Russia and Ukraine play important roles in commodity markets. Ukraine is one of the world’s largest producers of wheat and cooking oil; Russia is the world’s largest producer of nickel, the second-largest producer of natural gas and the third-largest producer of oil. In the shorter term, Vladimir Putin has noted the West’s lack of appetite for military action and the vulnerability of European economies to higher energy prices. Ironically, the more aggressive he is, the richer he becomes through higher energy prices. It is hoped that sanctions will begin to reverse that effect. Two assumptions have been broken in the past fortnight. First, that developed countries no longer engage in land-based tank wars. They do, and the “peace dividend” is suspended as Europe will have to rearm and rely less on US defence.

Second, recent environmental initiatives in Europe to end investment in gas have worrying security implications. Reducing dependence on fossil fuels remains an important aim, but this will take many years — especially for Germany and Italy, which use a lot of gas. For the transition to be secure it seems wise to invest in import facilities for liquefied natural gas to widen the choice of supplier. The extent to which current events are a setback to global trade will depend on China. Early signs that President Xi Jinping would support Russia seem to have reversed; Chinese banks may be cutting back support for financing Russian commodities. Were China to support Putin the likely repercussions could make it harder and more cumbersome to do business with China. Just as Germans may regret their reliance on Russian gas, global equity investors may come to question how dependent the companies they own are on globalised supply chains. How wise is it for Apple to have all of its iPhones made in China? InflationThe big issue for all of us is inflation. All of the above suggest higher commodity prices, less smooth international trade and so more persistent inflationary forces for longer. It is already looking as if central banks have moved too slowly. The invasion of Ukraine may now make rises in interest rates less likely in the short term but also more necessary in the medium term as inflationary pressures grow.Unfortunately, events also make it likely that the post-Covid economic recovery we have been looking forward to will be weaker, especially in Europe. Raising interest rates to control inflation when economies lack resilience can lead to stagflation and unhappy times for equity investors.Historically, equity investors reacting to a crisis fled from areas like technology and turned to safe havens like utilities or consumer staples. But these havens are not working particularly well. Utilities are entangled in changing energy policy. Consumer staples are often finding it hard to pass on inflation. Unilever, Beiersdorf (Nivea) and Henkel (German soap and glue) have had a tough time recently. So have Home Depot, Walmart, Adidas and Inditex (Zara) in consumer cyclicals and Roche, Merck and Pfizer in drug stocks.Many “value” investors also presumed that equities on lower multiples of earnings would perform well when investors wanted to avoid risk. However, last week illustrated that some of these lowly valued shares have weak fundamentals and could prove an unsafe part of the market in a period of rising cost inflation and weak economic growth.Today, established tech stocks have become the new safe havens. But not all of them. Companies such as Google, Microsoft and Amazon are able to pass on price rises. Others may be able to, but their share prices are not well supported by current profits. Technology shares have been at the centre of a sell-off in global markets since last December. This started when Jay Powell, chair of the US Federal Reserve, signalled a rise in interest rates this year. This correction has brought many growth stocks we have held previously but sold on valuation grounds back down to what feel more acceptable levels, as long as they fulfil their growth potential. However, a range of younger technology stocks hyped up in Silicon Valley over recent years have disappointed in their growth outlook recently and their shares have fallen dramatically.Be boringI would restate my recent arguments that this is a time to be boring. My family reassure me that this is my superpower. Seek out cockroaches — the stocks that can survive disasters. For us, that has traditionally been US railroads, healthcare and phone companies. Today it also includes high-quality technology, currently profitable companies that are reasonably valued.Hopefully, for most this means a modest portfolio rebalance. Otherwise, keep calm and carry on. I recently dug out the US Standard & Poor’s index, log scale. It goes back to the 1930s. Looking at it, you would struggle to tell when the second world war was. Equity markets often overreact in the short term to moments of conflict. It was ever thus. Hence Nathan Rothschild’s dictum from 1810 to “buy on the sound of cannons, sell on the sound of the trumpets”. Let’s hope we hear some trumpets soon.Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and the Artemis Global Select Fund More

Like many people, Gary Sharkey has been constantly checking the news for the latest developments on the Russian invasion of Ukraine. But his interest is not just personal: as procurement director of Hovis, one of Britain’s biggest bakers, Sharkey is responsible for buying in everything from grains for bread to steel for machinery.Russia and Ukraine are both important grain exporters, between them accounting for almost a third of the world’s traded wheat. For Hovis, the surge in wheat prices caused by the invasion and the subsequent sanctions on Russia have important cost implications for its business.“Ukraine and Russia — the flow of grains from the Black Sea is so important for the world market,” says Sharkey as exports from both countries have virtually come to a halt.It is not just the grains. Sharkey also points to the jump in the price of aluminium. The price of the lightweight metal, used in everything from cars to beer cans and bread tins, is on course to hit a record high above $3,475 a tonne — partly a reflection of the fact that Russia is the second-largest exporter.“Everything has gone up. There is a political risk premium built into a lot of the products,” says the 55-year-old executive, noting the 51 per cent rise in wheat and the near 600 per cent per cent rise in wholesale European gas prices over the past 12 months.Traders, brokers and clerks on the floor of the open outcry pit at the London Metal Exchange. Commodity traders and purchasing managers are worried about the way many raw materials have the potential to be used as weapons of foreign policy © Chris J Ratcliffe/BloombergThe invasion of Ukraine has cast a pall over the commodities sector because it has also made it impossible to ignore the geopolitical faultlines that run through so many of the markets for key raw materials.The political risks keep mounting. The conflict itself and sanctions on Russia are causing disruption in a number of markets — especially wheat. The rising cost of energy has important ripple effects in other commodity markets, including for the cost of fertiliser used by farmers. On top of that, commodity traders and purchasing managers are growing increasingly worried about the way that many raw materials have the potential to be used as weapons of foreign policy — especially if a new cold war develops that divides Russia, and potentially China, from the west. For most of the past three decades, the commodities industry has been one of the most striking examples of globalisation, which has created vast riches for the trading houses that connect buyers and sellers of raw materials.Although many individual projects in areas such as mining were always wrapped up in politics, the markets themselves have been built around the expectation of open global supply. Procurement executives such as Sharkey at Hovis worried about prices but much less about being able to actually source the raw materials they need.The shift in mindset in the commodities sector has been building for a decade. As tensions between the US and China have grown, Beijing’s control of supplies of rare earths — metals used in many aspects of manufacturing — raised concerns that raw material supplies could become political weapons. But over the past two years, two separate events have concentrated minds even further. The Covid-19 pandemic highlighted the perils of relying on a handful of countries or companies, which had led to severe supply chain disruptions. Now from grains to energy to metals, Russia’s invasion of Ukraine has served as a reminder of how some countries wield considerable influence over raw material supplies thanks to their large market share of vital commodities. As well as being Europe’s main supplier of gas, Russia is also dominant in the markets for a number of other important commodities, such as oil, wheat, aluminium, and palladium.

“Commodities have been weaponised for a long, long time . . . its always a question of when does a state pull the trigger,” says Frank Fannon, former assistant US secretary of state for energy resources. The short-term response to the Ukraine war from some companies and governments has been to increase stockpiles of important raw materials. In the long-run, it is forcing the industry to consider alternative supply chains that can bypass the likely economic and financial conflict that is building between Russia and the west. “Definitely the world is much more concerned about the problem [of geopolitics] than it was 10-15 years ago,” says Jean-Francois Lambert, a former banker and commodities consultant who advises financial institutions and trading firms. “Then it was about globalisation. It was just about efficient supply chains. Now people are worrying, are we going to have supply, are we going to have access?”Weaponising gasMarket shocks from producers controlling a large share of production of certain commodities are not new. The oil shock in the 1970s, when Opec’s oil embargo led to soaring crude oil prices, caused stagflation among oil-importing countries around the globe.Since then, trade has become more globalised and markets interconnected. But as businesses and governments sought to cut costs in their supply chains, they inadvertently became more reliant on certain producers, from grains to computer chips, leaving them vulnerable to sudden disruption in product flows. The prospect of natural resources being used as a weapon has been brought to life by Russia’s use of gas exports to Europe. Russia accounts for about 40 per cent of the EU’s gas consumption. But, in the fourth quarter of last year, Russian exports to north-west Europe fell between 20 and 25 per cent, according to the International Energy Agency, after Russia’s state-backed gas company Gazprom adopted a strategy of only meeting long-term contractual commitments and not offering extra supplies in the spot market. In January, Fatih Birol, head of the IEA, blamed rising gas prices on Russia withholding gas from Europe. “We believe there are strong elements of tightness in the European gas market due to Russia’s behaviour,” he said.Even as Germany last week halted the approval process for Nord Stream 2, a tweet from Dmitry Medvedev, former president and deputy head of Russia’s security council, was considered by some to be veiled threat about the region’s reliance on Russian gas. “Welcome to the brave new world where Europeans will soon be paying €2,000 per 1,000 cubic meters of gas!” Medvedev said.“Any time there is a concentration of supplies, then there is a risk that is hard to avoid,” says Randolph Bell, director of global energy at US international relations think-tank the Atlantic Council. “Clearly [Russia is] using gas as a political tool.”For analysts, the imposition of unprecedented sanctions on Russia’s central bank — which has caused a slump in the rouble and has been accompanied by declarations of “economic war” by European politicians — only increases the risk that Russia could withhold supplies of certain commodities. If that happens, Russia’s dominance in certain metals and rare gases could have repercussions in multiple supply chains. When aluminium company Rusal was blacklisted by financial institutions in 2018 after US sanctions, prices soared by a third, wreaking havoc in the car industry. The country is also a key producer of palladium, which carmakers use to remove toxic emissions from exhaust fumes, as well as platinum, copper and nickel, which are used in the batteries that power electric vehicles. Russia and Ukraine are also the dominant suppliers of neon, an odourless gas that is a byproduct of steel manufacturing and is a critical raw material for chip manufacturing.Neon is sourced and purified by several specialised Ukrainian companies, according to US research firm Techcet. When Russia invaded eastern Ukraine in 2014, the price of neon jumped 600 per cent, almost overnight, causing massive disruption in the semiconductor industry.“We anticipate an extended period of geopolitical tensions and elevated risk premiums across all underlying commodities following Russia’s invasion of Ukraine. Russia has a far-reaching impact across global commodity markets, and the unfolding conflict has vast implications, not least higher prices,” said Natasha Kaneva, analyst at JPMorgan.Perhaps one of the more worrying effects of the war in Ukraine has been the impact on grains and food prices. The conflict comes at a time when food prices are already high, the result of poor harvests around the world. Ukraine still has sizeable inventories to export from last year’s harvest, and the export disruption could “have dire consequences for food insecurity in already-fragile countries dependent on Ukrainian grain,” says Caitlin Welsh, director of the global food security programme at the Center for Strategic and International Studies, a US think-tank. For the 14 countries where Ukrainian wheat is an essential import, almost half already suffer from severe food insecurity, including Lebanon and Yemen, according to CSIS. But the impact would not be limited to these countries. Russia’s invasion has caused energy prices to soar, and risks “pushing food insecurity skyward”, she says. Labourers fill bags with gypsum fertiliser in Dhaka, Bangladesh. An acute shortage of fertilisers gripped rural India — which relies on overseas purchases for about 40% of its key crop nutrients — in the final months of 2021 © Ahmed Salahuddin/NurPhoto/Getty Even before Moscow’s attack on Ukraine, growing geopolitical tensions from Europe had seeped into global food markets. Prices for key fertilisers jumped last year after the EU announced sanctions over human rights abuses against Belarus, a leading potash producer, and China and Russia, also large fertiliser exporters, put in place export curbs to safeguard domestic supply.An acute shortage of fertilisers gripped rural India — which relies on overseas purchases for about 40 per cent of its key crop nutrients — in the final months of 2021, leading to protests and clashes with the police in the central and northern parts of the country. Ganesh Nanote, a farmer whose crops range from cotton to grains in India’s state of Maharashtra, was caught up in the scramble for key plant nutrients ahead of the planting season for the winter crop.“There was a shortage of DAP [diammonium phosphate] as well as potash,” he says, adding that although he managed to get alternative nutrients for a higher price, his chickpea, banana and onion crops were affected. “The rise in fertiliser prices has led to losses.” Analysts expect prices for phosphate to remain high until China lifts its export ban in the middle of the year, while tensions surrounding Belarus are unlikely to recede any time soon. “It’s difficult to see that [potash] premium going down,” says Chris Lawson, head of fertilisers at consultancy CRU.Some analysts believe that growing Russian influence in former Soviet states could eventually create a situation where Moscow has strong influence over the global grains market — especially if it were to prevail in Ukraine. Belarus is now closely allied to Russia, while Moscow recently sent troops to shore up the government in Kazakhstan, another large wheat producer. “We can start to see food becoming a weapon again in some strategic game,” says David Laborde, senior research fellow at International Food Policy Research Institute, the agricultural policy think-tank. A man carries fresh loaves of bread at a bakery in the El Menzah area of Tunis, Egypt. The country has stocked up on wheat, with the government saying it has enough of the staple to last until November © Fethi Belaid/AFP/GettyAware of the heightening anxiety over the concentration in commodity supply, some governments and companies are taking steps to try and mitigate the effects by increasing inventories. “People are now building more buffer inventories compared with 10 or 15 years ago. We saw that coming already from the Covid-era. Everyone is realising that efficient supply chains are for when the world was perfect, for normal times,” says Lambert.Egypt, for example, has stocked up on its wheat, with the government saying it had enough of the staple until November from imports and the expected local harvest. The minister of supply recently said the tensions between Russia and Ukraine made for “a state of uncertainty in the market”, and that Egypt had already diversified its wheat purchases and was in discussions to hedge its buying with investment banks.Alternative supply chainsIf stockpiling is a short-term reaction to the crisis, the long-term response might repeat what has happened over the past decade in rare earths, the minerals used in high-tech products from wind turbines to electric vehicles.China controls about four-fifths of global output, and its readiness to use its dominant position came to the fore in 2010, when it cut limited exports, leading to a surge in prices. “The problem with China is the concentration of supply chain power they have. They have shown [a willingness] to use that concentration of power to realise geopolitical muscle,” says Bell at the Atlantic Council.A selection of rare earth minerals produced by Australia’s Lynas Corp from its Mount Weld operations. Countries such as Australia and South Africa are primed to fill the demand for ‘non-China’ minerals © Melanie Burton/ReutersIn order to reduce dependence on China for rare earths, the US, Japan and Australia have spent the past decade planning ways to develop new supplies. Last week President Joe Biden announced that the government was investing $35mn in MP Materials, currently America’s only rare earth mining and processing operation, in California.The US defence department has backed several projects, including the huge Lynas project in Kalgoorlie, in Western Australia. The state is the home to several other new mines, one of which the Australian government has backed.

At one potential scheme, the Yangibana project in Western Australia, being developed by Hastings Technology Metals, workers are building paved roads around Gascoyne Junction, which sits about 25km to the west of Mount Augustus, an isolated rock hill twice the size of the more famous Uluru, formerly known as Ayers Rock. The first workers on the site are digging the roads and uncovering large stones, which is making their job harder. “They’re complaining they are hitting the foothills of Mount Augustus,” says Matthew Allen, chief financial officer of Hastings, which has secured an A$140mn financing loan backed by the Australian government to develop the Yangibana mine as part of its new critical minerals strategy.Once fully operational in two years’ time, Hastings expects that Yangibana will supply 8 per cent of global demand for neodymium and praseodymium, two of the 17 rare earth minerals and the most in demand. Other mines coming online in Australia could push that figure toward a third of global supply in the coming years, according to industry analysts.In the UK, Sharkey at Hovis says he is falling back on his long standing contacts to secure supplies. “Making sure you are the top of the list, that’s where many years of good supplier relationships come to the fore,” he says. “You’re really engaging with suppliers at different levels now than we probably were a couple of years ago to ensure that we’ve got continuity of supplies throughout our businesses.”Businesses directly reliant on Russia and Ukraine for commodities need to be thinking of what lays ahead, he says. “What does agriculture look like in Ukraine? Those displaced, when will they be coming back? Will they come back?” asks Sharkey. “Heads are now turning to what things will look like in the longer term. There’s a lot of uncertainty for next year and longer.” Additional reporting by Heba Saleh in Cairo More

Ousmène Mandeng is a visiting fellow at the London School of Economics. In this post, he talks about a potential side effect from the decision to cut Russia’s central bank off from a sizeable chunk of its foreign-exchange reserves. The sanctions imposed by Western authorities on the Central Bank of Russia were worth it. Yet they may also make other central banks rethink how and where their foreign exchange reserves are held.Central bank reserves are the ultimate rainy day fund, kept as insurance to fight market turmoil. They are also large. The world’s monetary authorities have together accumulated around $13tn, or 14 per cent of world GDP, of foreign exchange reserves. The largest amounts are estimated to be held by China, Japan, Switzerland, India, Taiwan, Hong Kong, Russia, South Korea, Saudi Arabia and Singapore. This group is thought to have about $9tn on tap to defend their currencies including to meet foreign obligations. Reserves are held predominantly in the form of high-grade securities, typically government debt, denominated in the currencies used the most in international financial transactions. According to the IMF’s latest data, 59 per cent of reserves are held on average in securities denominated in dollars, 20 per cent in euros, 6 per cent in yen, 5 per cent in sterling and the rest in other currencies. US Treasury securities are considered the most held foreign exchange reserve asset. At the end of 2021, based on US Treasury data, foreigners held about $7.7tn of US Treasury debt or one-third of the total held by the public. The biggest holders are Japan and China. As big customers, central banks’ attitudes towards holding dollar denominated government bonds matter. Indeed they matter to the extent that, in 2009, then US secretary of state Hillary Clinton felt obliged to remind the Chinese that US debt continued to be safe to buy. The sanctions levelled against the Bank of Russia could now prompt a rethink. At the moment, the securities central banks hold are usually kept in central securities depositaries (CSDs) often in the country of the issuer or with a large international CSD. Government bonds are normally traded over the counter but are cleared through central counterparties (CCP). Access to the securities depends on the provisions governing the CSD, and often the CCPs, and will normally rest on local conditions.US securities are kept and transferred in the national book entry system (NBES) operated by the Federal Reserve that acts as both the CSD and the fiscal agent for the US Treasury. Most Treasury trades are settled on a delivery-versus-payment basis whereby the securities are electronically deposited in the receiving institution’s account at the NBES and the corresponding payment is deposited in the sending institution’s account at the Federal Reserve. There has been a recent push through the Depository Trust and Clearing Corporation and its subsidiary, the Fixed Income Clearing Corporation, to advance centralised clearing to reduce counterparty and credit risks by netting across CCP members.The small number of institutions governing the market for the assets underlying foreign exchange reserves implies considerable dependencies. On one hand, it brings important advantages in providing an effective market infrastructure for trading. But the high concentration of market actors implies that just a few entities control essential transactions that determine access and transfer of securities.While Russia is believed to hold only a few US Treasury bonds, it still has an estimated $300bn of foreign exchange reserves held in other securities. Sanctions imposed by the US and EU now prevent it from using most of it. If access can be denied to them, central banks the world over may reconsider the utility of foreign exchange reserves and the conditions under which they’re held.The angst among central banks of not being able to access needed resources abroad is not new. From 2013 to 2017, the Bundesbank, not an obvious target of sanctions, repatriated about 300 tonnes of gold from New York and 374 tons of gold from Paris to Frankfurt with the objective to keep more than half of its gold in its own facility to “building trust and confidence at home”. If others do indeed follow the Bundesbank in repatriating reserves, it could trigger a move away from the centralised financial market infrastructure in place today. That brings a risk of market fragmentation and may undermine effective collateral management. Yet it would also give comfort that securities can be accessed at all times. If $300bn can suddenly vanish, some central banks and possibly other large investors may see that as a fair trade-off. More

Rishi Sunak warned that the UK economy and public finances were “vulnerable” to higher inflation and interest rates in comments ahead of the spring statement suggesting that tough decisions could be required in the months ahead. Responding to a Treasury Committee report into last year’s Budget, the chancellor said the government “can absorb some shocks and adjust fiscal policy as needed”.But with the deficit lower than expected so far this financial year, Sunak is not expected to make big changes to taxation or public spending in his spring statement on March 23. In its report, the committee expressed concern that the government had contributed to the UK’s high rate of inflation, which hit 5.5 per cent in January and is expected to top 7 per cent by April. It said Sunak’s decision to increase National Insurance to bolster the health and social care sector had contributed to these inflationary pressures by fuelling high pay claims and encouraging companies to protect margins by raising prices.The chancellor ignored these criticisms in a response published on Wednesday, but expressed concern about the effect of higher inflation on the cost of servicing UK government debt. “The UK’s high level of debt means we are vulnerable to changes in macroeconomic conditions such as interest rates and inflation, which would increase the amount we spend on debt interest rather than public services,” Sunak wrote. He hinted that he did not need to raise taxes again so soon after his tax-raising Budget in October. “Rolling fiscal rules means we can absorb some shocks and adjust fiscal policy as needed, but the government has already made tough decisions which demonstrate our commitment to keep debt under control, such as delivering a long-term, sustainable funding solution for the NHS and reform of the adult social care system”. The forecasts from the Office for Budget Responsibility, the fiscal watchdog, are likely to show improved public finances in the short term and a less certain outlook in subsequent years, with the higher costs of servicing debt balanced by the positive effects of wage inflation on taxes on incomes.In the first 10 months of the 2021-22 financial year, the level of borrowing was £17.7bn lower than the OBR’s estimate for the same period even thought it was still running at a high level.The fiscal watchdog said in October that a rise in inflation is generally bad for the public finances in the short term if it arises from higher costs, such as recent rises in energy prices, but this is mitigated in the medium term by higher wages. However, the OBR said the more inflation is driven by a tight labour market and pay gains, the more it improves the short term public finances, although it also increases pressure to bolster public spending. Mel Stride, who chairs the Treasury Committee, welcomed Sunak’s acknowledgment of the potential threats from rising prices saying the chancellor was “completely alive to the very real risks of rising inflation”. “With financial sanctions rightly being imposed on Russia, the cost of gas is likely to continue to increase, leading to higher inflationary pressures,” Stride added. More

VIENNA/SARAJEVO (Reuters) – The European arm of Sberbank, Russia’s biggest lender, has been closed by order of the European Central Bank, which had warned it faced failure due to a run on deposits after Russia invaded Ukraine, Austria’s Financial Market Authority said.The European Central Bank’s Single Resolution Board (SRB) determined earlier this week that Sberbank Europe, which is based in Vienna, was failing or likely to fail. That prompted Austria’s FMA on Monday to impose a moratorium on the bank’s activities.The FMA’s announcement late on Tuesday that it was ordering the bank to close came just over an hour before that moratorium was due to expire.”By order of the European Central Bank (ECB), the Austrian Financial Market Authority (FMA) issued a decision today banning the licensed credit institution ‘Sberbank Europe AG’ … from continuing business operations in their entirety with immediate effect,” the FMA said in a statement at 10:45 p.m. (2145 GMT). The European Union and United States have responded to Russia’s invasion of Ukraine with a battery of sanctions including moving to ban big Russian banks from SWIFT, the main global payments system.As a result, Sberbank Europe said on Monday that several of its banks had “experienced a significant outflow of customer deposits within a very short period of time”.The SRB ordered the moratorium so that it could determine whether the case should be handled under European bank resolution rules and decided it should not, the FMA said. The FMA said it had appointed an administrator who is tasked with determining whether and when the criteria of an insolvency are met. In the meantime, the closure triggers Austria’s deposit guarantee scheme, which covers deposits up to 100,000 euros ($111,240) per customer, the FMA said.The central banks of Slovenia and Croatia announced that Sberbank’s operations in their countries would be taken over respectively by Slovenia’s biggest banking group NLB and the Croatian Postal Bank (HPB), which is majority owned by the government. Customers will be able to withdraw money as normal from Wednesday after restrictions over the past two days.Sberbank Europe said in November it had reached a deal to sell its subsidiaries in Croatia, Slovenia, Hungary, Serbia and Bosnia and Herzegovina to a group including Serbia’s AIK bank and Slovenia’s Gorenjska bank.Serbian regulators gave their consent on Monday but Gorenjska said it was no longer viable to proceed with the acquisition of the Slovenian subsidiary. Sarajevo-based ASA Banka acquired Sberbank Sarajevo, the banking agency of Bosnia’s Bosniak-Croat Federation said late on Tuesday, while the the Serb Republic government acquired Sberbank Banja Luka on Monday.($1 = 0.8990 euros) More

BERLIN/WASHINGTON (Reuters) -The Group of Seven major economies will convene a task force to focus on freezing and seizing assets of key Russian elites as it aims to put further pressure on Russia after its invasion of Ukraine, U.S. Treasury Secretary Janet Yellen said on Tuesday.The move “will inflict financial pain on the powerful individuals surrounding (Russian President Vladimir) Putin and make clear that no one is beyond our collective reach,” Yellen said in a statement after a virtual G7 meeting of finance chiefs.The G7 will also continue to endorse removing key Russian financial institutions from the SWIFT banking system, she said, adding that the group expects that sanctions imposed so far will “hamstring the Russian government’s ability to fund its invasion.”Russia calls its actions in Ukraine a “special operation.”The sanctions have had an immediate impact on Russia’s economy, with queues forming outside banks as Russians rush to salvage their savings. Oil company Royal Dutch Shell (LON:RDSa) Plc on Tuesday became the latest big Western firm to pull out of the country. The measures limit Moscow’s use of a $640 billion war chest to defend its currency but it remains to be seen whether Russia can find other channels for trade and financing of its economy. Notably, Chinese businesses and banks are looking for ways to limit the impact of sanctions on their relations with Russia, with settlement of transactions in yuan seen rising at the expense of the dollar.Earlier on Tuesday, Germany’s finance minister, Christian Lindner, said the G7 expected an agreement in the coming days on possible further sanctions, though he gave no details about what moves were under discussion.”We want to isolate Russia politically, financially and economically,” Lindner told reporters after the virtual meeting chaired by Germany.”We had an exchange on the implementation of the current sanctions and we also exchanged proposals on what additional measures could be taken,” he said, adding: “And in the coming days there will be an agreement on this.”Lindner said the impact of measures curbing the activities of the Russian central bank and excluding Russian banks from the SWIFT inter-bank messaging system had already exceeded expectations.”The rouble is in free-fall,” he said as the Russian currency weakened to around 112 to the dollar in trade on Tuesday.Japanese Finance Minister Shunichi Suzuki said G7 capitals had stressed the need for tight coordination of their measures against Moscow during the talks, which Ukraine’s finance minister, Sergii Marchenko, also joined.Meanwhile, France’s Bruno Le Maire declared an “all-out economic and financial war” against Russia to bring down its economy before rowing back on language he later said was inappropriate. More

TORONTO (Reuters) -Canada ratcheted up pressure on Russia on Tuesday for its invasion of Ukraine by shutting ports to Russian-owned ships and saying that holdings of all Russian oligarchs and companies in the country are under review.Canada has announced a slew of measures to isolate Russia, including imposing sanctions on Russian President Vladimir Putin, closing Canadian airspace to Russian planes, banning oil imports and forbidding Canadian financial institutions from dealing with the Russian central bank, acting in tandem with other Western countries.Ottawa expanded its crude oil import ban to include refined petroleum products and “other petroleum products from Russia,” the country’s natural resources minister tweeted on Tuesday night.Earlier, Transport Minister Omar Alghabra said that while the number of Russian ships entering Canadian waters and ports is “small,” there will still be an impact, especially with other countries doing the same.Russia represents less than 2% of Port of Montreal’s annual containerized volumes, and the ban will have little commercial impact, a port spokesperson said.Port of Vancouver, Canada’s busiest, said the number of Russian-flagged vessels calling there is minimal. In the past, those have traded in crude oil, canola oil and copper concentrates, a spokesperson said.Canada is tracking three Russian-flagged vessels off the East Coast, one of which is a cargo vessel, a government official told Reuters.Canada is also scrutinizing holdings of all Russian oligarchs and Russian companies in the country, Finance Minister Chrystia Freeland told reporters on Tuesday. “We are reviewing them and everything is on the table,” she added.Canada is sending 1,600 bulletproof vests and almost 400,000 meal rations to Ukraine.Canada imported C$2.14 billion ($1.68 billion) worth of goods from Russia in 2021, Statistics Canada data showed, with metals and minerals among the most valuable categories. It imported C$289 million worth of Russian energy products last year, according to the agency.($1 = 1.2738 Canadian dollars) More