Finance

Selling more oil at higher prices ought to be the stuff of dreams for a petrostate. But for Russia it is a sign of a new, punishing phase in its war with Ukraine. Months of Ukrainian drone strikes on refineries have crimped Russia’s ability to produce refined fuels, such as diesel and petrol, and turned the world’s third-largest oil producer into an importer of petrol. Energy firms have tried to pare their losses by selling unrefined oil overseas, pushing exports to a ten-month high in March.In Ukraine’s most recent attack on April 2nd, its planners extended their reach. They managed to land explosives on a refinery 1,115km from the border. Their attack set fire to a unit responsible for 3% of Russia’s refining capacity. Although it left no lasting damage, others have been more successful. All told, Ukraine’s barrage has knocked out a seventh of Russian refining capacity, according to S&P Global, a data firm. Maintenance work and flooding in the city of Orsk on April 8th has taken more capacity offline. Wholesale prices on the St Petersburg International Mercantile Exchange have spiked. Ukraine, which has itself been the target of strikes on energy infrastructure, hopes the assaults will slow the flow of dollars into its enemy’s war machine and dent support for the war.Russia’s oil giants are suffering the most. Refineries that normally produce petrol and diesel for overseas clients at a premium have been diverted to domestic production. The volume of diesel due to pass out of Russian ports has hit a five-month low. At the same time, oil barons are seeking new customers for their excess crude, on which they will stomach losses of $15 or so for every barrel that could have been exported as a refined product, says Sergey Vakulenko, a former oil executive.Although Ukraine’s attacks have slowed since Vladimir Putin’s re-election in March, Ukraine has given no indication that they will stop. It can lob drones faster and more cheaply than Russia can repair its refineries. Some facilities, like the NORSI refinery in the city of Nizhny Novgorod, have been particularly slow and expensive to fix, in part because access to equipment is stymied by Western sanctions. As of this month, Russian oil producers must also reduce the amount they pump from the ground by about 5% as part of a production cap agreed with OPEC+, an oil cartel.Motorists have so far been shielded from Ukraine-inflicted “unplanned maintenance” (as Russia’s energy ministry puts it). The government has kept a lid on prices by banning petrol exports for six months from March 1st, and striking a deal with Belarus, its client state. Russia imported 3,000 tonnes of fuel from Belarus in the first half of March, up from zero in January. Fearing that may not be enough, officials have also asked neighbouring Kazakhstan to set aside a third of its reserves, equivalent to 100,000 tonnes, should Russia need them, according to Reuters. If attacks continue, they could start to push up prices.The consequences for Russia’s public finances should be limited, even though oil revenues represent 34% of its budget. Rosneft, the state oil company, will dispense a smaller dividend if it cannot make up its lost revenues, but many doubt these dividends make it to state coffers at all. The government will even save some cash by paying out fewer per-barrel subsidies to refineries. Russia’s biggest money-earners are resource taxes. And because these are levied as royalties at the well-head, the government is indifferent between oil exported as crude or as refined fuel, says Mr Vakulenko. As long as Russia is able to export crude, it can collect royalties.Observers outside Russia are watching to see if Ukraine’s attacks will affect the global oil market. They have yet to have much impact, but the price of Brent crude has risen by 19% this year to just under $90 a barrel, owing to OPEC+ supply curbs, better-than-expected global economic conditions and disruptions in the Red Sea. Few observers have more at stake than Joe Biden, who faces an election in November. His administration has urged Ukraine to halt its attacks, fearing they will provoke tough retaliation from Russia and drive petrol prices higher. Ukraine’s leaders are willing to take the risk. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

At an upmarket housing development in Wuhan, sales agents want to make clear that their state-owned firm has severed all its ties to the private sector. The firm had at first partnered with Sunac, a private developer, until it defaulted in 2022. A saleswoman explains that the firm’s owner also controls the city’s waterworks and electricity provider. If this type of firm collapses, she says with a grin, “then the whole country has no hope”.More than three years into China’s property crisis, the biggest private builders are folding under the strain of enormous debts. New-home sales in 30 large cities fell by 47% in March, year on year. Revenues for the 100 biggest developers were down 46% in the same month. Housing investment dropped to 8.4trn yuan ($1.2trn), a quarter below its peak in 2021. Although millions of families are waiting for developers to finish building their flats, it would take 3.6 years to sell China’s glut of inventory, including homes still under construction, reckon analysts at ANZ, a bank.All this presents an opportunity for state-owned firms. Only by securing access to funding can developers survive. Some private companies have found help via a government programme that approves housing projects for state funding, but it has been slow to deploy capital. State firms, on the other hand, have long enjoyed tight links with banks. This means they are buying more land, building more homes and selling more of them than their private counterparts. At a time when most private companies face some form of restructuring, a few state-owned firms are miraculously eking out profits. Moreover, their actions provide hints as to the plans of Xi Jinping, China’s leader, for the next decade of the country’s property industry.Chart: The EconomistAs part of those plans, the state is set to become China’s biggest home-builder. The country’s leaders want to construct millions of “social housing” units for low-income households, which cannot be resold like normal commercial units. Such is the scale of the planned construction, social homes will come to dominate overall housing supply by 2030. As much as 4trn yuan will be spent on social housing and other state building this year and next, estimates S&P Global, a credit-rating agency. According to Capital Economics, a research firm, just as construction by developers began to plummet year on year in late 2021, building by other types of companies, mainly local-government firms, soared (see chart). As a result, 30-40% of new housing supply will be social homes by next year, up from just 10% currently.Local governments may also become the largest buyers of the country’s housing stock. The city of Zhengzhou recently announced that it would purchase 10,000 homes to make them social units. Many will be rented out. Although there is no estimate of how big a landlord local governments will become, several other cities have announced similar plans.A few powerful state-owned firms are on the rise. CR Land, owned by the central government, notched a 3% year-on-year increase in its core profits—an astonishing accomplishment when most of its peers have lost money or collapsed. COLI, another centrally controlled giant, saw profits fall by a very respectable 3%. As the crisis has played out, home sales by the largest state firms fell by only 25% between mid-2021 and mid-2023, while those at the largest private ones tumbled 90%.This reflects official preferences. On April 8th a state bank called for the liquidation of Shimao, a private developer that defaulted in 2022, over a $200m unpaid loan. Needless to say, this would hinder Shimao’s attempts to restructure its debts and continue building unfinished homes. By contrast, in March regulators asked banks and bondholders to help save Vanke, a developer with a powerful state-backed shareholder. Chinese policymakers are much happier to offer bail-outs to institutions over which they have influence.With the state set to consume China’s property industry, what could go wrong? For a start, state firms face dangerous debts. Local-government firms sit on estimated collective debt of 75trn yuan, or about 60% of GDP. When such firms buy land from local governments they merely shift money from one pocket to another. These transactions have kept money flowing into local coffers, but are building up unsustainable burdens. Some local-government firms have started to issue bonds for the sole purpose of paying off other companies’ debts. Analysts fear that this level of spending cannot continue much longer, especially in poorer provinces.Additional debts might appear to policymakers to be a price worth paying for control over China’s most important asset. The future of the housing market, the thinking goes, would include fewer boom-and-bust cycles if sober state firms were in charge. Cheaper accommodation should also help Mr Xi fight China’s widening wealth gap. Yet state dominance will also mean a less efficient market. China’s private homebuilders are masters of supply chains. Their ability to organise labour for construction is unparalleled. The state, in contrast, is a lousy builder. As state firms take on a bigger and bigger role, the quality of new homes is likely to fall.The intervention will also shake the foundations of the market. Homebuyers will probably become reluctant to buy a home at commercial rates when the same unit may later be available at subsidised ones. Market-watchers suspect officials want to conserve funds to buy up homes on the cheap, taking advantage of the struggles of private firms. As a consequence, the rapid growth of social housing will probably cause an even deeper crisis among private companies. That may not be quite what Mr Xi has in mind. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

In a 209-page plan published Wednesday, the Swiss government proposed 22 measures aimed at tightening its policing of banks deemed “too big to fail,” a year after authorities were forced to broker the emergency rescue of Credit Suisse by UBS.
The UBS balance sheet of around $1.7 trillion is now double Switzerland’s annual GDP, prompting enhanced scrutiny of the protections around the Swiss banking sector and the broader economy.

Sergio Ermotti, CEO of Swiss banking giant UBS, during the group’s annual shareholders meeting in Zurich on May 2, 2013. 
Fabrice Coffrini | Afp | Getty Images

Switzerland’s tough new banking regulations create a “lose-lose situation” for UBS and may limit its potential to challenge Wall Street giants, according to Beat Wittmann, partner at Zurich-based Porta Advisors.
In a 209-page plan published Wednesday, the Swiss government proposed 22 measures aimed at tightening its policing of banks deemed “too big to fail,” a year after authorities were forced to broker the emergency rescue of Credit Suisse by UBS.

The government-backed takeover was the biggest merger of two systemically important banks since the Global Financial Crisis.
At $1.7 trillion, the UBS balance sheet is now double the country’s annual GDP, prompting enhanced scrutiny of the protections surrounding the Swiss banking sector and the broader economy in the wake of the Credit Suisse collapse.

Speaking to CNBC’s “Squawk Box Europe” on Thursday, Wittmann said that the fall of Credit Suisse was “an entirely self-inflicted and predictable failure of government policy, central bank, regulator, and above all [of the] finance minister.”
“Then of course Credit Suisse had a failed, unsustainable business model and an incompetent leadership, and it was all indicated by an ever-falling share price and by the credit spreads throughout [20]22, [which was] completely ignored because there is no institutionalized know-how at the policymaker levels, really, to watch capital markets, which is essential in the case of the banking sector,” he added.
The Wednesday report floated giving additional powers to the Swiss Financial Market Supervisory Authority, applying capital surcharges and fortifying the financial position of subsidiaries — but stopped short of recommending a “blanket increase” in capital requirements.

Wittman suggested the report does nothing to assuage concerns about the ability of politicians and regulators to oversee banks while ensuring their global competitiveness, saying it “creates a lose-lose situation for Switzerland as a financial center and for UBS not to be able to develop its potential.”
He argued that regulatory reform should be prioritized over tightening the screws on the country’s largest banks, if UBS is to capitalize on its newfound scale and finally challenge the likes of Goldman Sachs, JPMorgan, Citigroup and Morgan Stanley — which have similarly sized balance sheets, but trade at s much higher valuation.
“It comes down to the regulatory level playing field. It’s about competences of course and then about the incentives and the regulatory framework, and the regulatory framework like capital requirements is a global level exercise,” Wittmann said.

“It cannot be that Switzerland or any other jurisdiction is imposing very, very different rules and levels there — that doesn’t make any sense, then you cannot really compete.”
In order for UBS to optimize its potential, Wittmann argued that the Swiss regulatory regime should come into line with that in Frankfurt, London and New York, but said that the Wednesday report showed “no will to engage in any relevant reforms” that would protect the Swiss economy and taxpayers, but enable UBS to “catch up to global players and U.S. valuations.”
“The track record of the policymakers in Switzerland is that we had three global systemically relevant banks, and we have now one left, and these cases were the direct result of insufficient regulation and the enforcement of the regulation,” he said.
“FINMA had all the legal backdrop, the instruments in place to address the situation but they didn’t apply it — that’s the point — and now we talk about fines, and that sounds like pennywise and pound foolish to me.” More

The capital city of Beijing saw rents for prime retail locations in the first quarter rise at their fastest pace since 2019, according to property consultancy JLL.
The firm expects the demand to persist throughout the year, helping boost rents, which remain well below pre-pandemic levels.
Prices in China’s commercial real estate market are getting close to an attractive buying point, Joe Kwan, Singapore-based managing partner at Raffles Family Office, said in an interview last week.

Illuminated skyscrapers stand at the central business district at sunset on November 13, 2023 in Beijing, China.
Vcg | Visual China Group | Getty Images

BEIJING — China’s commercial property sector is seeing pockets of demand amid an overall real estate slump.
The capital city of Beijing is seeing rents for prime retail locations rise at their fastest pace since 2019, property consultancy JLL said in a report Tuesday. Rents increased by 1.3% during the first three months of this year compared with the fourth quarter of 2023, the report said.

Demand from new food and beverage brands, niche foreign fashion offerings and electric car companies has helped drive the interest in shopping mall storefronts, according to JLL.
The firm expects the demand to persist throughout the year, helping boost rents, which remain well below pre-pandemic levels.
Commercial real estate, which includes office buildings and shopping malls, makes up just a fraction of China’s overall property market.

Sales of offices and commercial-use properties rose 15% and 17%, respectively, by floor area, in January and February from a year earlier, according to Wind Information.
In contrast, floor space of residential properties sold dropped by nearly 25% during that time, the data showed. Sales for both commercial and residential properties had fallen for much of last year, according to Wind.

Covid-19 restrictions on movement had also cut demand for China’s commercial property, in line with global trends. China’s economy, however, took longer than expected to rebound from the pandemic, amid a broader slump in the property market.

Getting cheap enough to buy

China’s commercial real estate prices are nearing an attractive buying point, Joe Kwan, Singapore-based managing partner at Raffles Family Office, said in an interview last week.
“We do have an internal timeline or projection of how far valuation has to fall before it makes it attractive for us,” he said. “I think the opportunity is about to open up for us right now.”
Kwan said he expects to start making deals in the second half of this year, through next year. The firm is primarily looking at commercial properties in Shanghai and Beijing.
Such bargain-hunting is not necessarily a sign that the market is on its way to a full recovery.
“What we have been observing is that owners [have] been throwing us the same opportunities, some of the same portfolios, but at a much discounted price on a quarterly basis,” he said. “So from that it gives us the general sense that it’s still going to be some way down the road before we can see the bottoming.”
“We do have still a very positive outlook on the longer term a prospect of China, given its size of population, given its demographics, given its consumption numbers,” Kwan said. “I think that right now it is going through a territory whereby it may overcorrect and people might miss out on the opportunity to acquire some really, really well-located, good-quality assets that will prove to be a winner, maybe not in the next two to three years, but at least in the mid-term.”
Hong Kong-based Swire Properties said in its report last month that it intends to double its gross floor area in mainland China by 2032. The company currently operates high-end shopping complexes branded “Taikoo Li” in Beijing, Shanghai and other major cities in China.
“In the Chinese Mainland, foot traffic has improved significantly and retail sales have exceeded pre-pandemic levels for most of our malls since pandemic-related restrictions were lifted. Our office portfolio has proven to be resilient despite a weak office market,” Tim Blackburn, Swire’s chief executive, said in the report.
Looking ahead, the company expects 2024 will be a “year of stabilization” in retail demand. More

Perhaps it was always too good to be true. The big economic story of 2023 was the seemingly painless disinflation in America, with consumer price pressures receding even as growth remained resilient, which underpinned surging stock prices. Alas, the story thus far in 2024 is not quite so cheerful. Growth has remained robust but, partly as a result, inflation is looking stickier. The Federal Reserve faces a dilemma about whether to start cutting interest rates; investors must grapple with the reality that monetary policy will almost certainly remain tighter for longer than they had anticipated a few months ago.Chart: The EconomistThe latest troublesome data came from higher-than-expected inflation for March, which was released on April 10th. Analysts had thought that the core consumer price index (CPI), which strips out food and energy costs, would rise by 0.3% month on month. Instead, it rose by 0.4%. Although that may not sound like much of an overshoot, it was the third straight month of CPI readings exceeding forecasts. If continued, the current pace would entrench inflation at over 4% year on year, double the Fed’s target—based on a slightly different inflation gauge—of 2% (see chart 1).Back in December, at the peak of optimism, most investors had priced in six or seven rate cuts this year. They have since dialled back those expectations. Within minutes of the latest inflation figures, market pricing shifted to implying just one or two cuts this year—a dramatic change (see chart 2). It is now possible that the Fed may not cut rates before the presidential election in November, which would be a blow to the incumbent, Joe Biden.Jerome Powell, the Fed’s chairman, has remained consistent. He has always insisted that the central bank will take a data-dependent approach to setting monetary policy. But rather than bouncing up and down in reaction to fresh figures, he has also counselled patience. At the start of this year, even after six straight months of largely benign price movements, he said the Fed wanted more confidence that inflation was going lower before starting to cut rates. Such caution risked seeming excessive. Today it looks utterly appropriate.The volatility of market pricing has also changed the Fed’s positioning relative to the market. At the end of last year, when investors foresaw as many as seven rate cuts this year, officials had pencilled in just three, appearing hawkish. In their more recent projections, published less than a month ago, officials still pencilled in three cuts, which now appears doveish. The Fed will next update its projections in June.In the meantime the Fed will be watching more than the CPI. Its preferred measure for inflation, the core personal consumption expenditures price index (PCE), will be released in a few weeks, and is expected to come closer to 0.3% month on month in March. Several of the items that drove up CPI, particularly motor-vehicle insurance and medical services, are defined differently in PCE calculations. The Fed may also be comforted by data showing wage growth has continued to moderate.Nevertheless, trying to explain away uncomfortable numbers by pointing to this or that data quirk is redolent of 2021, when inflation denialists thought that fast-rising prices were merely a transitory phenomenon. The general conclusion today is that although growth has remained impressively strong, it now appears to be bumping up against the economy’s supply limits, and is therefore translating into persistent inflationary pressure. That calls for tight, not loose, monetary policy. The Fed, already cautious about cutting rates when inflation figures were more co-operative, is likely to be even more wary now. ■ More

Markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading.
The gauge measures services inflation excluding food, energy and housing and has been roaring higher lately, up 4.8% year over year in March and more than 8% at a 3-month annualized pace.
The picture is more complicated because some of the most stubborn components of services inflation are household necessities like car and housing insurance as well as property taxes.

US Federal Reserve Chair Jerome Powell attends a “Fed Listens” event in Washington, DC, on October 4, 2019.
Eric Baradat | AFP | Getty Images

A hotter-than-expected consumer price index reading rattled markets Wednesday, but markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading.
Along with the overall inflation measure, economists also look at the core CPI, which excludes volatile food and energy prices, to find the true trend. The supercore gauge, which also excludes shelter and rent costs from its services reading, takes it even a step further. Fed officials say it is useful in the current climate as they see elevated housing inflation as a temporary problem and not as good a gauge of underlying prices.

Supercore accelerated to a 4.8% pace year over year in March, the highest in 11 months.
Tom Fitzpatrick, managing director of global market insights at R.J. O’Brien & Associates, said if you take the readings of the last three months and annualize them, you’re looking at a supercore inflation rate of more than 8%, far from the Federal Reserve’s 2% goal.
“As we sit here today, I think they’re probably pulling their hair out,” Fitzpatrick said.

An ongoing problem

CPI increased 3.5% year over year last month, above the Dow Jones estimate that called for 3.4%. The data pressured equities and sent Treasury yields higher on Wednesday, and pushed futures market traders to extend out expectations for the central bank’s first rate cut to September from June, according to the CME Group’s FedWatch tool.
“At the end of the day, they don’t really care as long as they get to 2%, but the reality is you’re not going to get to a sustained 2% if you don’t get a key cooling in services prices, [and] at this point we’re not seeing it,” said Stephen Stanley, chief economist at Santander U.S.

Wall Street has been keenly aware of the trend coming from supercore inflation from the beginning of the year. A move higher in the metric from January’s CPI print was enough to hinder the market’s “perception the Fed was winning the battle with inflation [and] this will remain an open question for months to come,” according to BMO Capital Markets head of U.S. rates strategy Ian Lyngen.
Another problem for the Fed, Fitzpatrick says, lies in the differing macroeconomic backdrop of demand-driven inflation and robust stimulus payments that equipped consumers to beef up discretionary spending in 2021 and 2022 while also stoking record inflation levels.
Today, he added, the picture is more complicated because some of the most stubborn components of services inflation are household necessities like car and housing insurance as well as property taxes.
“They are so scared by what happened in 2021 and 2022 that we’re not starting from the same point as we have on other occasions,” Fitzpatrick added. “The problem is, if you look at all of this [together] these are not discretionary spending items, [and] it puts them between a rock and a hard place.”

Sticky inflation problem

Further complicating the backdrop is a dwindling consumer savings rate and higher borrowing costs which make the central bank more likely to keep monetary policy restrictive “until something breaks,” Fitzpatrick said.
The Fed will have a hard time bringing down inflation with more rate hikes because the current drivers are stickier and not as sensitive to tighter monetary policy, he cautioned. Fitzpatrick said the recent upward moves in inflation are more closely analogous to tax increases.
While Stanley opines that the Fed is still far removed from hiking interest rates further, doing so will remain a possibility so long as inflation remains elevated above the 2% target.
“I think by and large inflation will come down and they’ll cut rates later than we thought,” Stanley said. “The question becomes are we looking at something that’s become entrenched here? At some point, I imagine the possibility of rate hikes comes back into focus.”

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Federal Reserve officials at their March meeting expressed concern that inflation wasn’t moving lower quickly enough, though they still expected to cut interest rates at some point this year.
At a meeting in which the Federal Open Market Committee again voted to hold short-term borrowing rates steady, policymakers also showed misgivings that inflation, while easing, wasn’t doing so in a convincing enough fashion. The Fed currently targets its benchmark rate between 5.25%-5.5%

As such, FOMC members voted to keep language in the post-meeting statement that they wouldn’t be cutting rates until they “gained greater confidence” that inflation was on a steady path back to the central bank’s 2% annual target.
“Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent,” the minutes said.
In what apparently was a lengthy discussion about inflation at the meeting, officials said geopolitical turmoil and rising energy prices remain risks that could push inflation higher. They also cited the potential that looser policy could add to price pressures.
On the downside, they cited a more balanced labor market, enhanced technology along with economic weakness in China and a deteriorating commercial real estate market.

U.S. Federal Reserve Chair Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., March 20, 2024.
Elizabeth Frantz | Reuters

They also discussed higher-than-expected inflation readings in January and February. Chair Jerome Powell said it’s possible the two months’ readings were caused by seasonal issues, though he added it’s hard to tell at this point. There were members at the meeting who disagreed.

“Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations,” the minutes stated.
That part of the discussion was partly relevant considering the release came the same day that the Fed received more bad news on inflation.

CNBC news on inflation

CPI validates their concern

The consumer price index, a popular inflation gauge though not the one the Fed most closely focuses on, showed a 12-month rate of 3.5% in March. That was both above market expectations and represented an increase of 0.3 percentage point from February, giving rise to the idea that hot readings to start the year may not have been an aberration.
Following the CPI release, traders in the fed funds futures market recalibrated their expectations. Market pricing now implies the first rate cut to come in September, for a total of just two this year. Previous to the release, the odds were in favor of the first reduction coming in June, with three total, in line with the “dot plot” projections released after the March meeting.
The discussion at the meeting indicated that “almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected,” the minutes said. “In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven.”
In other action at the meeting, officials discussed the possibility of ending the balance sheet reduction. The Fed has shaved about $1.5 trillion off its holdings of Treasurys and mortgage-backed securities by allowing up to $95 billion in proceeds from maturing bonds to roll off each month rather than reinvesting them.
There were no decisions made or indications about how the easing of what has become known as “quantitative tightening” will happen, though the minutes said the roll-off would be cut by “roughly half” from its current pace and the process should start “fairly soon.” Most market economists expect the process to begin in the next month or two.
The minutes noted that members believe a “cautious” approach should be taken.

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If any politician has the demeanour to ease tensions with Beijing, it is Janet Yellen. America’s treasury secretary comes across as a twinkly eyed professor, rather than a foreign-policy hawk. Sure enough, she used a recent trip to China, which ended on April 9th, to praise the “stronger footing” that Sino-American relations are now on compared with a year ago. Ms Yellen was not merely there to extend an olive branch, however. She also carried a warning for China’s banks: those that help “channel military or dual-use goods to Russia’s defence-industrial base expose themselves to the risk of US sanctions”.Ms Yellen’s warning marks the latest escalation in America’s financial war with Russia. Since Vladimir Putin’s invasion of Ukraine in February 2022, lawmakers in Washington have issued sanctions on nearly 3,600 Russian targets, according to Castellum.AI, a compliance firm. Allies, especially in Europe, have issued many more. Central-bank reserves have been frozen and exports of military goods banned. SWIFT, a messaging service used by 11,500 banks to make around $35trn-worth of cross-border payments a day, has banned some of Russia’s biggest banks. Yet none of this has stopped Russia from outproducing the West in artillery shells, holding its frontline and gearing up for a big push.One reason Russia’s defence industry has held firm is that, although America and allies have tried to cripple it, others have not. Many countries, including big ones, such as China and India, and financial hubs, such as the United Arab Emirates, want to stay out of the fight. Hence the weapon Ms Yellen is now brandishing: sanctions on not just Russian firms, but banks anywhere in the world that aid them.Such measures can be devastatingly effective. In 2018 America’s Treasury announced it was considering designating ABLV Bank in Latvia a money-laundering concern for helping North Korea to dodge sanctions. Out of fear of being designated similarly, other institutions began withdrawing funds from ABLV en masse, and the bank collapsed within days. Milder secondary sanctions have been used to cut Iranian firms out of the global financial system, by levelling huge fines against foreign banks that deal with them.America owes this extraterritorial reach to the role its currency, and hence its banking system, plays in international finance. The ultimate threat against foreign banks that refuse to comply is that they lose the ability to clear dollar transactions, which must eventually be processed by those with accounts at the Federal Reserve. Such is the dollar’s dominance in trade, cross-border payments and capital markets, this in effect banishes the victim from the global financial system.And so America can get foreign banks to enforce its sanctions, even if their own governments do not. Its efforts to do so are far from perfect: private outfits that are friendly to Iran, for instance, might be happy to risk losing access to dollars in return for the chance to carry on doing business there. But even they—or, say, a small Chinese bank—might think twice about risking the same treatment as ABLV. Since the White House issued an executive order in December authorizing the Treasury to go after those aiding Russian defence firms, Chinese banks have reportedly been pruning their relationships with such clients.The trouble is that America’s allies loathe this sort of behaviour. Its reimposition of secondary sanctions on Iran in 2018 annoyed European Union officials so much they started searching for ways to keep financial channels open without recourse to the dollar. For the Treasury to throw its weight around similarly in Beijing, where politicians are rather less friendly, is a much greater provocation—especially given the “no limits” partnership China declared with Russia in February 2022.Europe’s response in 2018 highlights the graver problem with secondary sanctions: they prompt other countries to devise workarounds that ultimately erode America’s influence. The eu’s attempt was a damp squib, but since 2015 China has been promoting CIPS, an alternative payment network to SWIFT that lies beyond the Treasury’s reach and now has more than 1,500 members. That figure has doubled since 2018 and, according to LeaveRussia, a Ukrainian campaign group, includes around 30 Russian banks.Banishment from the dollar clearing system, in other words, is less of a punishment than it once was. And it seems Ms Yellen’s emollient tone in Beijing could only do so much. As she prepared to leave, another visitor was arriving. It was Sergei Lavrov, Russia’s foreign minister—to discuss, among other things, Eurasian security and how to oppose hegemonism. ■ More