Economy

Nobody knows how this will end. But we do know how it began. Vladimir Putin has mounted an unprovoked assault on an innocent country. He has committed the worst act of aggression on European soil since 1945 and has justified this vile act with outrageous lies. He has also, for the moment, united the west against him. Putin is not the first tyrant to confuse a wish for peace with cowardice. He has instead roused the anger of western peoples. The result is a range of sanctions on Russia as impressive as it is justified.Putin may be the most dangerous man who has ever lived. He is dedicated to restoring Russia’s lost empire, indifferent to the fate of his own people and, above all, master of a vast nuclear force. Yet resistance, however risky, is imperative. Some will insist that Putin’s actions are the west’s fault and above all the result of its decision to extend Nato. The reverse is the case. Putin has reminded us why the countries that knew Russian rule best were desperate for Nato’s expansion. He has also demonstrated why it was necessary. Europe needed a defended border between Russia and its former possessions. Ukraine’s tragedy is to be on the wrong side of that line. It did not pose a threat to Russia, other than by wanting to be free; Russia posed a threat to it.Sanctions are often ineffective. Those imposed this time will not be. The US imposed sanctions on the secondary market in sovereign debt on February 22. Germany suspended the certification of the controversial Nord Stream 2 gas pipeline on the same day. On February 24, the US, EU and other members of the G7 limited Russia’s ability to transact in foreign currencies. And two days later, a number of Russian banks were removed from the Swift payments network, a freeze was imposed on the Bank of Russia’s assets and transactions with the central bank were prohibited.A thorough analysis by the Institute for International Finance sums all this up: “We expect sanctions imposed in recent days to have a dramatic effect on Russia’s financial system as well as the country as a whole.” A big share of the country’s $630bn in liquid reserves will be rendered useless. The central bank has already had to double interest rates. There are runs on banks. With the exception of energy, the economy will be substantially isolated. (See charts.)The pain will not all fall on Russia. Costs of oil and gas will be high for longer, exacerbating global inflationary pressure. Food prices will also rise. Should Russia cut off its energy exports (at great cost to itself), the disruption would be even more severe. Russian natural gas generates 9 per cent of gross available energy in the eurozone and the EU as a whole. But winter, the season of greatest need, is at least passing.Beyond these relatively specific effects, the combination of war, nuclear threats and economic sanctions hugely increases uncertainty. Central banks will find deciding how to tighten monetary policy even more difficult. The same will be true for governments trying to cushion the blow of energy shocks.In the long term, the economic effects will follow geopolitics. If the outcome is a deep and prolonged division between the west and a bloc centred on China and Russia, economic divisions will follow. Everybody would try to reduce their dependence on contentious and unreliable partners. Politics trumps economics in such a world. At a global level, the economy would be reconfigured. But in times of war, politics always trumps economics. We do not yet know how. Europe will surely change most. A huge step has been taken by Germany, with its recognition that its post-cold war stance is now untenable. It has to become the heart of a powerful European security structure able to protect itself against a revanchist Russia. This must include a huge effort to reduce energy dependency. Tragically, Europe needs to recognise that the US will not be a reliable ally so long as Donald Trump, who views Putin as a “genius”, commands the Republican party. Britain, for its part, has to recognise that it will always be a European power. It must commit itself more deeply to the defence of the continent, above all of its eastern European allies. All this will need resolve and cost money.In this new world, the position of China will be a central concern. Its leadership needs to understand that supporting Russia is now incompatible with friendly relations with western countries. On the contrary, the latter will have to make strategic security an overriding imperative of their economic policy. If China decides to rely on a new axis of irredentist authoritarians against the west, global economic division must follow. Businesses have to take note of this.A war of choice on the children of a peaceful democracy is not an action we in the west can allow ourselves to forget. Nor can we forgive those who started it or those who support it. The memories of our own past must forbid it. We are in a new ideological conflict, not one between communists and capitalists, but one between irredentist tyranny and liberal democracy. In many ways, this will be more dangerous than the cold war. Putin holds unchecked and arbitrary power. So long as he is in the Kremlin, the world will be perilous. It is not clear whether the same is true of China’s Xi Jinping. But we may yet learn that it is.

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This is not a conflict with the Russian people. We should still hope for them a political regime worthy of their contribution to our civilisation. It is a conflict with their regime. Russia has emerged as a pariah ruled by a gangster. We cannot live in peace and security with such a neighbour. This invasion must not stand, since its success would threaten us all. We are in a new world. We must understand that and act [email protected] Martin Wolf with myFT and on Twitter

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The world’s two largest container shipping groups MSC and Maersk suspended cargo bookings to and from Russia on Tuesday as sanctions unleashed a renewed wave of disruption for strained global supply chains.The suspension, which excluded food and medicines, followed similar moves by rival groups Ocean Network Express and Hapag-Lloyd as the container companies sought to avoid the risk of carrying cargo placed under western sanctions.Maersk said sanctions on Russia were starting to have an impact on trade, causing delays and leading to the detention of cargo by customs authorities.This is likely to create further supply bottlenecks as ports across the world remain severely clogged because of an unexpected rebound in demand for goods during coronavirus lockdowns.On Monday, the UK banned the entry of all Russian vessels to its ports.“It’s making a tough time for global logistics even worse now,” said Peter Sand, an analyst at Xeneta, an Oslo-based shipping research group.

The disruption has also spread to the air cargo market, where industry executives expect prices to rise as aircraft are forced to reroute.An already existing shortage of planes is likely to be worsened by the loss of Russian and Ukrainian specialist cargo aircraft for large goods.“If they are sidelined now, you are taking some real capacity out of the market. We will in all likelihood begin to see rates [to transport goods] rise,” said Neel Jones Shah, global head of air freight at brokerage Flexport. Russian and European airlines are nearly completely banned from each other’s skies, complicating flight paths for planes delivering goods and materials from Asia to Europe. The shipping industry also faces further problems because of difficulties switching Russian and Ukrainian crews that supply 14.5 per cent of the world’s seafarers, according to the International Chamber of Shipping.Last week, Russia halted commercial shipping in the Sea of Azov, while Ukraine ceased operations at all of its ports, including those on the Black Sea on its southern coast. The invasion of Ukraine has also led insurers to quote additional premiums equivalent to hundreds of thousands of dollars to cover ships travelling to the Black Sea against getting caught in the crossfire. Three non-military ships have been struck by missiles since the conflict began.Elsewhere, the suspension of shipping services is pushing up prices for several industrial metals.Aluminium, used in electric vehicles and aeroplanes, rose 1.8 per cent to a record high of $3,457 a tonne on Tuesday. Russia accounts for about 6 per cent of global aluminium supply.In addition, freight rates for oil tankers have surged as traders bet that more crude will be exported out of west Africa, the Middle East and the US to replace Russian supplies. Svein Moxnes Harfjeld, co-chief executive of DHT Holdings, a tanker company, said rates for supertankers running between the Middle East and Asia — one of the most used routes — have more than doubled to $25,000-$35,000 a day in the past week. More

By David LawderWASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen must block Russia from exchanging the $17 billion in International Monetary Fund reserves it received last year and oppose any further such IMF allocations, U.S. Republican lawmakers said.The 41 lawmakers said in a letter to Yellen that the $650 billion allocation of Special Drawing Rights to IMF members that she backed was a mistake that had undermined sanctions on Russia even before it invaded Ukraine. “The hostile invasion of Ukraine this week demonstrates why the IMF should never have approved its latest $650 billion general allocation of SDRs in August 2021,” the lawmakers said in the letter dated Feb. 28.All IMF members received SDRs – backed by dollars, euros, yen, sterling and yuan – in proportion to their shareholding in the Fund in the distribution aimed at helping poorer countries fight the COVID-19 pandemic. But to spend the $17 billion in SDRs it received, Russia would need to find a partner country willing to exchange them for the underlying currencies in the form of an interest-bearing loan. The United States and Western allies have imposed sanctions on Russia’s central bank aimed at neutralizing Moscow’s $640 billion reserves, which would make such a transaction difficult and subject the counterparty to sanctions as well. But the lawmakers used the invasion to repeat their longstanding criticism of the SDR allocation, which also provided SDRs to China and Iran. They said Yellen should press IMF members to formally agree not to exchange Russia’s SDRs, and should oppose further allocations because they would grant more assets to Moscow.”We cannot allow these reserve assets to help the regime withstand the latest sanctions announced by the President, let alone offer additional billions through further allocations,” wrote the lawmakers, led by Representative French Hill of Arkansas and Senator Bill Hagerty of Tennessee.The lawmakers also said that Yellen and U.S. allies must plan for contingencies to block a bailout if an economically weakened Russia is forced to turn to the IMF for future loans.”As the largest shareholder of the IMF, the United States has a responsibility to ensure that the Fund is not misused to support Russia’s warmongering in Ukraine,” the lawmakers wrote.A U.S. Treasury spokesperson could not immediately be reached for comment. More

Total trade between China and Russia jumped 35.9% last year to a record $146.9 billion, according to Chinese customs data, with Russia serving as a major source of oil, gas, coal and agriculture commodities, running a trade surplus with China. Since sanctions were imposed in 2014 after Russia annexed Ukraine’s Crimea, bilateral trade has expanded by more than 50% and China has become Russia’s biggest export destination. A related graphic: China’s trade with Russia: https://graphics.reuters.com/UKRAINE-CRISIS/xmvjoerqapr/chart.png The two were aiming to boost total trade to $200 billion by 2024, but according to a new target unveiled last month during Russian President Vladimir Putin’s visit to Beijing for the Winter Olympics, the two sides want bilateral trade to grow to $250 billion.As sanctions against Russia mount, China could offset some of its neighbour’s pain by buying more, but would also be wary of running foul itself of potential sanctions.Below are key areas of trade cooperation between China and Russia. OIL AND GAS Exports of Russian oil and gas to China have steadily increased. Russia is China’s second-biggest oil supplier after Saudi Arabia, with volumes averaging 1.59 million barrels per day last year, or 15.5% of Chinese imports. About 40% of supplies flow via the 4,070-km (2,540-mile) East Siberia Pacific Ocean (ESPO) pipeline that was financed by $50 billion in Chinese loans.Russia is also Beijing’s No. 3 gas supplier, exporting 16.5 billion cubic metres (bcm) of the fuel to China in 2021, meeting about 5% of Chinese demand. Supplies via the Power of Siberia pipeline, which is not connected to the network of westbound Russian gas pipelines, began in late 2019 and are due to rise to 38 bcm a year by 2025, up from 10.5 bcm in 2021, under a 30-year contract worth more than $400 billion. Russia aims to build a second gas pipeline, Power of Siberia 2, with capacity for 50 bcm a year to run via Mongolia to China.Russia was also China’s No. 2 coal supplier in 2021. Last month, Putin unveiled new Russian oil and gas deals with China worth an estimated $117.5 billion.FOOD TRADE Russia’s food trade with China is small but expanding.In 2019, China allowed the import of soybeans from all regions of Russia, and the two countries signed a deal to deepen cooperation in soybean supply chains, which saw more Chinese firms growing the beans in Russia.Soybean exports to China stood at 543,058 tonnes last year and are expected to reach 3.7 million tonnes by 2024.In 2021, China approved beef imports from Russia, while last Friday, it allowed imports of wheat from all regions of Russia. Other food exports from Russia to China include fish, sunflower oil, rapeseed oil, poultry, wheat flour and chocolate. China is also a huge buyer of timber from Russia’s Far East, with imports of timber and related products worth $4.1 billion last year. In the other direction, China sells mechanical products, machinery and transport equipment, mobile phones, cars and consumer products to Russia. Chinese exports to Russia stood at $67.6 billion last year, up 34%. INVESTMENT Western sanctions have forced Russia to look toward China for investment opportunities in recent years, and Chinese state banks have helped Russia finance everything from infrastructure to oil and gas projects under China’s Belt and Road Initiative. Russia is by far Beijing’s largest recipient of state sector financing, securing 107 loans and export credits worth $125 billion from Chinese state institutions between 2000 and 2017, data from the College of William and Mary’s AidData research lab showed. China and Russia began using their own currencies to settle bilateral trade in 2010 and opened their first currency swap line in 2014, which they renewed in 2020 for 150 billion yuan over three years. Yuan settlements accounted for 28% of Chinese exports to Russia in the first half of 2021, compared with just 2% in 2013, as both countries seek to ease reliance on the dollar while developing their own respective cross-border payment systems.The Chinese currency accounted for 13.1% of the Russian central bank’s foreign currency reserves in June 2021, compared with just 0.1% in June 2017, with Moscow’s dollar holdings dropping to 16.4% from 46.3% in the same period. More

Russia’s huge sovereign wealth fund will also be pressed into action, spending up to 1 trillion roubles ($10.3 billion) to buy shares in Russian companies, a government decree showed, confirming an earlier report by Reuters. “In the current sanction situation foreign entrepreneurs are forced to be guided, not by economic factors, but to make decisions under political pressure,” Prime Minister Mikhail Mishustin told a governmental meeting.”In order to give business a chance to make a considered decision, a presidential order was prepared to impose temporary curbs on exit from Russian assets,” he said, without giving details. Russian authorities are hurrying to respond to increasingly harsh sanctions imposed by Western nations since Moscow invaded Ukraine last Thursday.The measures range from curbs on the central bank’s ability to use its gold and foreign exchange reserves to the exclusion of big Russian banks from the international financial system. On Monday, a plunge in the rouble to all-time lows forced the central bank to hike its key interest rate to 20% and ask exporting companies to sell forex to support the currency.Global companies which have operated in Russia for decades have said they will halt investments, including BP (NYSE:BP) and Shell (LON:RDSa), shareholders respectively in Russia’s top energy company Rosneft and Sakhalin 2 LNG plant.Mishustin said Russia was “open to dialogue with constructively-minded investors” and that: “We expect that whose who invested into our country will be able to work here further on.” On Tuesday, Connecticut Treasurer Shawn Wooden said he would direct the U.S. state’s pension funds to sell Russian assets, for moral reasons and to reduce investment risk in the state retirement funds, worth more than $47 billion in all.Russia calls its actions in Ukraine a “special operation” designed not to occupy territory but to destroy its southern neighbour’s military capabilities and capture what it regards as dangerous nationalists.The Institute of International Finance (IIF), a trade group representing large banks, has warned that Russia is extremely likely to default on its external debts.With Moscow’s battered stock market closed for a second day on Tuesday, Russian billionaire Mikhail Fridman, who has been sanctioned by the European Union, warned that exiting Russian assets might prove difficult even without the temporary ban.”I don’t think we would be able to divest assets in Russia right now because there are no buyers for the time being,” Fridman told reporters in London. More

(Reuters) – The Russian government has ordered the finance ministry to channel up to 1 trillion roubles ($10.3 billion) from the National Wealth Fund to buy shares in Russian companies, a source close to the government told Reuters on Tuesday.($1 = 96.8050 roubles) More

Geneva-headquartered MSC said in a customer advisory that it was implementing with immediate effect from March 1 “a temporary stoppage on all cargo bookings to/from Russia, covering all access areas including Baltics, Black Sea and Far East Russia.””MSC will continue to accept and screen bookings for delivery of essential goods such as food, medical equipment and humanitarian goods,” it said. More

Swaps linked to the Fed’s March 16 meeting priced in just 24.5 basis points of tightening on Tuesday, suggesting traders see a quarter-point increase as all but certain but a half-point hike is off the table. The market had at one point in February indicated around 48 basis points of tightening for that meeting, suggesting that the bigger boost was more likely than not amid growing inflation pressures.The re-pricing of the Fed outlook accompanied a wave of flight-to-quality demand for Treasuries as well as short-covering that lowered yields across the curve, with rates at the front end falling more than yields on longer-dated securities.©2022 Bloomberg L.P. More