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    As Fed Prepares to Raise Rates, Global Economy Sinks Deeper Into Turmoil 

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    Federal Reserve officials are set to raise interest rates to control inflation, but the return to normal they had hoped to see remains painfully elusive.WASHINGTON — When Federal Reserve officials raise interest rates on Wednesday, they will do so amid an unfortunate economic reality: Many of the inflationary pressures they had long assumed would dissipate have instead lingered, and some are getting worse.Central bankers have consistently underestimated how high inflation would rise, and how long it would last, as the economy has surged back from pandemic shutdowns. They will release a fresh set of quarterly economic projections Wednesday, in which they are likely to raise their inflation forecasts for the fifth time in a row.Like many private sector forecasters, the Fed misjudged how strong American demand would be for goods and how long that demand would help to keep global supply chains running behind schedule, forces that have combined to push up consumer prices.Officials spent much of the past year expecting a relatively quick return to some pandemic-infused version of normality, but backlogged factories, crowded ports and overburdened trucking companies are still failing to catch up. Repeated waves of the virus have exacerbated the problems, which along with rising wages and services prices have sent inflation higher. Consumer price gains hit a new 40-year high in February, pushed up by rising prices for food, rent and gas.Now, as Fed officials prepare to begin a series of interest rate increases to try to bring inflation under control, they again appear to be aiming at a moving target. Supply chains that showed signs of improvement in January and February are being thrown further into disarray by the Russian invasion of Ukraine and sweeping lockdowns in China, developments that promise to lengthen delivery times and add to prices.The war, at the nexus of Europe and Asia, has scrambled flights and ocean shipments; threatened supplies of palladium, nickel and wheat; and sent energy prices soaring, further fueling inflation. Automakers have shuttered factories because of a shortage of parts, and Russia has answered back to sweeping sanctions imposed by the West by announcing its own plans for export controls.In recent days, Chinese cities and provinces have imposed extensive lockdowns to try to stop the spread of the Omicron variant. Shenzhen, a hub of electronics manufacturing and a vital port that is home to 17 million people, announced a lockdown on Sunday night for seven days. Foxconn, a Taiwanese electronics firm that supplies Apple from factories there, said it would suspend operations. Further restrictions in China, home to more than a quarter of global manufacturing, are likely to reverberate through already-tangled supply chains and exacerbate inflation.“The question is whether this is going to be bad or very bad,” Phil Levy, chief economist at the logistics company FlexPort, said of the Chinese shutdowns in particular. He noted that this disruption came when shipping delays were already extreme.“If things get gummed up there, it will reverberate through the whole system,” he said, adding that it matters how long and how sweeping the shutdown proves. “These problems just build.”Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said it was “hard to overstate” the importance of Shenzhen and its surrounding area for electronics, as well as for other industries, like metals, furniture and paper products.“I think it’s definitely going to have effect on supply chains,” she said. She added that she expected those pressures to translate more readily into increased prices than they did earlier in the pandemic.“Now we’re in a period with higher inflation, I think that suppliers may find it easier to pass those costs along, or take this opportunity to raise prices,” Ms. Lovely said.Fed officials have held interest rates near zero since March 2020 and are expected to raise them for the first time since 2018 on Wednesday. By making money more expensive to borrow and spend, the Fed is hoping to cool down demand and beat back inflation — helping conditions to even out when a return to “normal” has been painfully, and consistently, elusive.Quarantine workers in Shanghai on Monday. Further restrictions in China, home to more than a quarter of global manufacturing, are likely to exacerbate inflation and tangled supply chains.Qilai Shen for The New York TimesFed policymakers and Wall Street researchers alike thought that prices would fade as consumers began shifting their spending from imported goods back to movies, vacations and restaurants. That shift would help factories and shipping routes catch up with surging demand, as used car prices — which spiked last year — moderated. Those trends either haven’t happened, or they have been canceled out by increases in the prices of other products and services.Jason Furman, an economist at Harvard University, said many forecasters had been doing what investors sometimes refer to as “pricing to perfection”: assuming that everything is going to go well, even if that is not the most likely outcome.“You can look at the individual items: There’s been a lot of: What if inflation in X, Y, Z goes down?” he said. “And not: What if inflation in A, B, C goes up?”Many of the factors prompting economists to mark up their inflation forecasts now are not even tied to supply chains.Matthew Luzzetti, chief U.S. economist at Deutsche Bank, recently revised up his inflation projections because rent costs are rising so rapidly in the Consumer Price Index. Between that and wage growth, he thinks, high inflation will last unless the Fed intervenes.“For a while, inflation forecasters had been anticipating that the goods side of things would return to more normal dynamics” just as service prices, like rent, began to increase, he said. Services prices have indeed picked up, but normalization in good prices keeps getting “pushed out.”Consumers continue to spend a bigger share of their budgets on goods instead of services — purchases like travel and manicures — compared with before the pandemic. That has meant global producers are still struggling to keep up with demand. Even potentially short-lived disruptions, like the ones taking place in China, can add to a snowball of delays and shortages.Data released this month showed that the U.S. trade deficit hit a record in January, the height of the Omicron wave, in part because of surging imports of cars and energy. The average time to ship a container from a Chinese factory to a U.S. warehouse had stretched to 82 days in February, according to Freightos, a logistics platform, up from 45 days two years before.In many ways, the events of the past few years have been so unusual that few if any forecasters correctly predicted all of them. And Fed officials have acknowledged that they misjudged inflation last year, partly because they expected supply chains to recover more quickly.They are now striking a more wary tone.Jerome H. Powell, the Fed chair, told Congress this month that the war in Ukraine was “not going to help at all with supply chains.”“We haven’t seen much relief on the supply side,” he noted, explaining that he and his colleagues had been waiting for the strains to ease.Mr. Powell predicted that as the Fed raised interest rates this year, it would help cool off demand for car loans and mortgages, weakening spending in the economy and giving companies some room to catch up with demand. Central bankers are hoping that at the same time, the economy is “going back to normal” in terms of supply chains and the breakdown between goods and services, he said.Even so, he acknowledged that the Fed stood ready to act more aggressively if that didn’t happen.“We hope we’re getting help on the inflation front from a bunch of things,” Mr. Powell said. “In any case, we do have the responsibility to generate price stability, and we will use our tools to do that, over time.” More

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    Dollars or Rubles? Russian Debt Payments Are Due, and Uncertain.

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    Citing sanctions, the Russian government warned it might pay foreign debt obligations in rubles. Credit rating agencies say a default is imminent. Russia is teetering on the edge of a possible sovereign debt default, and the first sign could come as soon as Wednesday.The Russian government owes about $40 billion in debt denominated in U.S. dollars and euros, and half of those bonds are owned by foreign investors. And Russian corporations have racked up approximately $100 billion in foreign currency debt, JPMorgan estimates.On Wednesday, $117 million in interest payments on dollar-denominated government debt are due.But Russia is increasingly isolated from global financial markets, and investors are losing hope that they will see their money. As the government strives to protect what’s left of its access to foreign currency, it has suggested it would pay its dollar- or euro-denominated debt obligations in rubles instead. That has prompted credit rating agencies to warn of an imminent default.The Russian currency has lost nearly 40 percent of its value against the U.S. dollar in the past month. Even if the payments were made, economic sanctions would make it difficult for Western lenders to access the rubles if they are in Russian bank accounts.“It is not that Russia doesn’t have money,” Kristalina Georgieva, managing director of the International Monetary Fund, told reporters last week. The problem is, Russia can’t use a lot of its international currency reserves, she said, because they have been frozen by sanctions. “I’m not going to speculate what may or may not happen, but just to say that no more we talk about Russian default as an improbable event.”Last week, the chief economist of the World Bank said Russia and Belarus were squarely in “default territory,” and Fitch Ratings said a default was imminent because sanctions had diminished Russia’s willingness to repay its foreign debts.Russia last defaulted on its debt in 1998, when a currency crisis led it to default on ruble-denominated debt and temporarily ban foreign debt payments. The crisis shocked the financial world, leading to the collapse of the U.S. hedge fund Long-Term Capital Management, which required Federal Reserve intervention and a multibillion-dollar bailout. If Russia failed to make payments on its foreign currency debt, it would be its first such default since the 1917 Russian Revolution.Foreign investor interest in Russian assets fell in 2014 when sanctions were imposed after the country annexed Crimea, and never fully recovered before more sanctions were imposed by Washington in 2019. But holdings aren’t negligible. Russian government bonds were considered investment grade as recently as a few weeks ago, and were included in indexes used to benchmark other funds. JPMorgan estimates that international investors own 22 percent of Russian companies’ foreign currency debt.BlackRock, the world’s largest asset manager, has already incurred losses on Russian assets and equities.Jeenah Moon/BloombergFunds managed by BlackRock, the world’s largest asset manager, have incurred $17 billion in losses on Russian assets, including equities, in recent weeks, according to the firm. The loss in value has a number of causes, including investors selling their holdings.But so far, regulators have said the risk to global banking systems from a Russian default wouldn’t be systemic because of the limited direct exposure to Russian assets. The larger ramifications from the war in Ukraine and Russia’s economic isolation are from higher energy and food prices.Still, financial companies have been scrambling to assess their exposure, according to Daniel Tannebaum, a partner at Oliver Wyman who advises banks on sanctions.“I’m seeing a lot of clients that had exposure to the Russian market wondering what type of default scenarios might be coming up,” said Mr. Tannebaum, who is also a former Treasury Department official. In the case of a default, “those bonds become worthless, for lack of a better term,” he said.On Monday, Russia’s finance minister, Anton Siluanov, accused the countries that have frozen the country’s internationally held currency reserves of trying to create an “artificial default.” The government has the money to meet its debt obligations, he said, but sanctions were hampering its ability to pay. Mr. Siluanov had also said over the weekend that the country had lost access to about $300 billion of its $640 billion currency reserves.The government insists investors will be paid. The finance ministry said on Monday it would send instructions to banks to issue the payment due on dollar- or euro-denominated bonds in dollars or euros, but if the banks don’t execute the order then it will be recalled and payment will be made in rubles instead. The statement also said that the payments could be made in rubles and then converted to another currency only when the country’s gold and foreign exchange reserves are unfrozen.Russia’s finance minister, Anton Siluanov, accused the countries that have frozen the country’s internationally held currency reserves of trying to create an “artificial default.”Alberto Pizzoli/Agence France-Presse — Getty Images“In any case, obligations to our investors will be met. And the ability to receive the funds in foreign currency will depend on the imposed restrictions,” Mr. Siluanov said.But the statement doesn’t provide a clear vision of what might happen on Wednesday. American sanctions allow for the receipt of payments of debt obligations until late May, and so the reasoning behind the Russian finance ministry’s claim that banks might refuse the payments is unclear. The payments due on Wednesday also have a 30-day grace period, so a default wouldn’t technically happen until mid-April. But Russia has already blocked interest payments on ruble-denominated bonds to nonresidents, a sign of its hesitancy to transfer funds abroad.While the Russian finance ministry said it could meet its obligations by paying in rubles, others disagreed.“In order to avoid a default, the only way that Russia can really navigate this is to send the full payment in dollars,” said Trang Nguyen, an emerging markets strategist at JPMorgan.Some Russian bonds issued in recent years do have provisions that allow for repayment in other currencies, including the ruble, if Russia can’t make payments in dollars for reasons “beyond its control.” The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More

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    Could Inflation Prompt Powell to Act Like Volcker?

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    The Federal Reserve is facing the fastest inflation most Americans have ever seen. Its chair says policymakers will do what it takes to tame prices.To Jerome H. Powell, the chair of the Federal Reserve, Paul Volcker is more than a predecessor. He is one of his professional heroes.“I knew Paul Volcker,” Mr. Powell said during congressional testimony this month. “I think he was one of the great public servants of the era — the greatest economic public servant of the era.”Now, if rapid inflation proves more stubborn than policymakers expect, Mr. Powell could find himself in a situation in which he must follow Mr. Volcker’s lead. The towering former Fed chair is best remembered for waging an aggressive — and painful — assault on the swift price increases that plagued America in the early 1980s.Mr. Volcker’s Fed rolled out policies that pushed a key short-term interest rate to nearly 20 percent and sent unemployment soaring to nearly 11 percent in 1981. Car dealers mailed the Fed keys from unsold vehicles, builders sent two-by-fours from unbuilt houses and farmers drove tractors around the Fed building in Washington in protest. But the approach worked, killing off the rapid price inflation that had festered throughout the 1970s.Mr. Powell was asked this month if the Fed was prepared to do whatever it took to control inflation — even if it meant harming growth, as Mr. Volcker did.“I hope that history will record that the answer to your question is yes,” the Fed chair replied.Few, if any, economists think that the 2022 Fed will need to repeat Mr. Volcker’s policies to the same degree, in part because the central bank is taking action much more quickly. The Fed is expected to begin raising interest rates from near zero at its meeting this week, and is likely to signal that it expects to make a series of moves this year as it tries to cool down the economy and control inflation.Price increases had run high for more than a decade by the time Mr. Volcker became chair in 1979, making them a part of everyday lives. Shoppers expected prices to go up, businesses knew that, and both acted accordingly.This time, inflation has been anemic for years (until recently), and most consumers and investors still expect costs to return to lower levels before long, survey and market data show. While inflation has been rapid for the past year, that is a comparatively short period and one that may not fuel the same kind of expectations for higher prices that bedeviled Mr. Volcker’s era.And while today’s inflation is taking a bite out of household budgets, it is slower than in previous periods: While it rose to 7.9 percent in February, the fastest pace since 1982, it is still well below a peak of 14.6 percent in 1980. Economists expect price gains to begin moderating this year, rather than climbing to such high levels.But in other ways, the backdrop Mr. Powell faces is beginning to look eerily similar to the one Mr. Volcker confronted.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.Wages are increasing rapidly, and employers report raising prices to cover their bigger labor bills, posing the possibility of a more muted version of the wage-price spiral that helped keep inflation high during Mr. Volcker’s years.President Ronald Reagan with Paul A. Volcker, the Fed chair, in 1981.Scott Applewhite/Associated PressOil prices are climbing as Russia wages war on Ukraine, mirroring oil price shocks that rocked the economy in the years before Mr. Volcker’s ascent to the chair. The Arab oil embargo of 1973-74 and the Iranian revolution of 1979 both curtailed supply and sharply pushed up pump prices.And geopolitical instability is fueling uncertainty about what will happen next, much as it did in the 1970s, when war raged in Vietnam.“That’s the proper historical reference for what we’re trying not to replicate,” Mr. Powell said of the 1970s during separate remarks to Congress this month. “One of the things that is different now is that central banks — including the Fed — very squarely take responsibility for inflation.”When inflation was taking off in the 1960s and 1970s, Fed officials bickered about how high to raise rates as they worried about hurting the labor market too much. Many economic historians now think that their reluctance to act more quickly allowed those price gains to become locked in until they required a more draconian response.“The one really big difference — huge difference, consequential difference — is that the Fed, and the country, lived through the 1970s,” Donald Kohn, a former Fed vice chair, said in an interview. “I think the Fed is determined not to let us get there.”The inflation challenge facing Mr. Powell, who was renominated by President Biden for a second term as chair and is awaiting Senate confirmation, is the latest economic test that he has had to contend with during his tenure.Mr. Powell, 69, began his first four years as Fed chair in early 2018. By that Christmas, the central bank’s campaign of steady rate increases intended to fend off inflation had collided with President Donald J. Trump’s trade war to send markets plummeting.In 2019, Mr. Trump publicly pushed for lower rates and accosted Mr. Powell — whom the president had chosen to lead the central bank — in interviews and on Twitter, calling him a “bonehead,” an “enemy” and a golfer who could not putt.Then came the onset of the pandemic in 2020, and Mr. Powell and his colleagues crossed red lines and upended norms to rescue markets and the economy. They averted a financial crisis, but 2021 brought with it a new challenge: rapid inflation.Now, critics are questioning whether the monetary help that Mr. Powell’s Fed unleashed to protect the pandemic-stricken economy — lowering rates to near zero and buying trillions of dollars in government bonds — combined with huge fiscal stimulus to supercharge demand and release an inflationary genie that could prove hard to trap.The Fed has already begun removing some of that support, stopping bond purchases and communicating plans to raise interest rates by a quarter-point this month and steadily throughout the rest of the year. Mortgage rates have already begun climbing in anticipation of those actions.But some are asking whether the Fed, which wanted to see full employment return before paring back its support, has been too slow to react to changing conditions.This moment “represents a decade of economic experience in the late 1960s and 1970s, compressed into a year,” said Lawrence H. Summers, a former Treasury secretary who spent last year warning that inflation was going to take off as the government overstimulated the economy.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Economic Ties Among Nations Spur Peace. Or Do They?

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    The Russian invasion of Ukraine strains the long-held idea that shared interests around business and commerce can deflect military conflict.Russia’s war in Ukraine is not only reshaping the strategic and political order in Europe, it is also upending long-held assumptions about the intricate connections that are a signature of the global economy.Millions of times a day, far-flung exchanges of money and goods crisscross land borders and oceans, creating enormous wealth, however unequally distributed. But those connections have also exposed economies to financial upheaval and crippling shortages when the flows are interrupted.The snarled supply lines and shortfalls caused by the pandemic created a wide awareness of these vulnerabilities. Now, the invasion has delivered a bracing new spur to governments in Europe and elsewhere to reassess how to balance the desire for efficiency and growth with the need for self-sufficiency and national security.And it is calling into question a tenet of liberal capitalism — that shared economic interests help prevent military conflicts.It is an idea that stretches back over the centuries and has been endorsed by romantic idealists and steely realists. The philosophers John Stuart Mill and Immanuel Kant wrote about it in treatises. The British politicians Richard Cobden and John Bright invoked it in the 19th century to repeal the protectionist Corn Laws, the tariffs and restrictions imposed on imported grains that shielded landowners from competition and stifled free trade.Later, Norman Angell was awarded the Nobel Peace Prize for writing that world leaders were under “A Great Illusion” that armed conflict and conquest would bring greater wealth. During the Cold War, it was an element of the rationale for détente with the Soviet Union — to, as Henry Kissinger said, “create links that will provide incentive for moderation.”German Chancellor Olaf Scholz in Moscow last month. Since the fall of the Soviet Union, policies by Germany and other European countries have been partly shaped by the idea that economic ties with Russia could deflect conflict.Pool photo by Maxim ShemetovSince the disintegration of the Soviet Union three decades ago, the idea that economic ties can help prevent conflict has partly guided the policies toward Russia by Germany, Italy and several other European nations.Today, Russia is the world’s largest exporter of oil and wheat. The European Union was its biggest trading partner, receiving 40 percent of its natural gas, 25 percent of its oil and a hefty portion of its coal from Russia. Russia also supplies other countries with raw materials like palladium, titanium, neon and aluminum that are used in everything from semiconductors to car manufacturing.Just last summer, Russian, British, French and German gas companies completed a decade-long, $11 billion project to build a direct pipeline, Nord Stream 2, that was awaiting approval from a German regulator. But Germany halted certification of the pipeline after Russia recognized two separatist regions in Ukraine.From the start, part of Germany’s argument for the pipeline — the second to connect Russia and Germany — was that it would more closely align Russia’s interests with Europe’s. Germany also built its climate policy around Russian oil and gas, assuming it would provide energy as Germany developed more renewable sources and closed its nuclear power plants.Benefits ran both ways. Globalization rescued Russia from a financial meltdown and staggering inflation in 1998 — and ultimately smoothed the way for the rise to power of Vladimir V. Putin, Russia’s president. Money earned from energy exports accounted for a quarter of Russia’s gross domestic product last year.The Nord Stream 2 plant in Germany. The pipeline had been seen as a way to align Russia’s interests with those of Germany. Now it has been shelved.Michael Sohn/Associated PressCritics of Nord Stream 2, particularly in the United States and Eastern Europe, warned that increasing reliance on Russian energy would give it too much leverage, a point that President Ronald Reagan made 40 years earlier to block a previous pipeline. Europeans were still under an illusion, the argument went, only this time it was that economic ties would prevent baldfaced aggression.Still, more recently, those economic ties contributed to skepticism that Russia would launch an all-out attack on Ukraine in defiance of its major trading partners.In the weeks leading up to the invasion, many European leaders demurred from joining what they viewed as the United States’ overhyped warnings. One by one, French President Emmanuel Macron, German Chancellor Olaf Scholz and Italian Prime Minister Mario Draghi talked or met with Mr. Putin, hopeful that a diplomatic settlement would prevail.There are good reasons for the European Union to believe that economic ties would bind potential combatants more closely together, said Richard Haass, president of the Council on Foreign Relations. The proof was the European Union itself. The organization’s roots go back to the creation after World War II of the European Coal and Steel Community, a pact among six nations meant to avert conflict by pooling control of these two essential commodities.“The idea was that if you knit together the French and German economies, they wouldn’t be able to go to war,” Mr. Haass said. The aim was to prevent World War III.Scholars have attempted to prove that the theory worked in the real world — studying tens of thousands of trade relations and military conflicts over several decades — and have come to different conclusions.The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More

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    Western Sanctions Show Russian Vulnerability in Global Economy

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    Even countries with limited trade relationships are intertwined in capital markets in today’s world. Could the Russia sanctions change that?The United States, Europe and their allies are not launching missiles or sending troops to push back against Russia’s invasion of Ukraine, so they have weaponized the most powerful nonmilitary tool they have available: the global financial system.Over the past few days, they have frozen hundreds of billions of dollars of Russian assets that are held by their own financial institutions; removed Russian banks from SWIFT, the messaging system that enables international payments; and made many types of foreign investment in the country exceedingly difficult, if not impossible.The impact of this brand of supercharged economic warfare was immediate. By Thursday, the value of the Russian ruble had reached a record low, despite efforts by the Bank of Russia to prop up its value. Trading on the Moscow stock market was suspended for a fourth day, and financial behemoths stumbled. Sberbank, Russia’s largest lender, was forced to close its European subsidiaries after running out of cash. At one point, its shares on the London Stock Exchange dropped to a single penny.There’s more to come. Inflation, which is already high in Russia, is likely to accelerate along with shortages, especially of imported goods like cars, cellphones, laptops and packaged medicines. Companies around the world are pulling investments and operations out of Russia.The sanctions “are severe enough to dismantle Russia’s economy and financial system, something we have never seen in history,” Carl B. Weinberg, chief economist at High Frequency Economics, wrote this week.Russia had been working to “sanction proof” itself in recent years by further paring down its financial ties to the West, including reducing its dependence on the U.S. dollar and other common reserve currencies. It built a fat reservoir of foreign exchange reserves as a bulwark against hard times, trying to protect the value of its currency. It also shifted its holdings sharply away from French, American and German assets and toward Chinese and Japanese ones, as well as toward gold. Its banks, too, tried to “reduce the exposure to risks related to a loss of U.S. dollar access,” the Institute of International Finance said in a February report.But the disaster now rippling through the nation’s banks, markets and streets is evidence that autonomy is a myth in a modern globalized world.The United Nations recognizes roughly 180 currencies, but “the reality is most global payments are still intermediated through a Western currency-dominated financial system,” said Eswar Prasad, a professor of international trade policy at Cornell University.Most of global commerce is carried out in dollars and euros, making it hard for Russia to avoid the currencies. And as much as half of the $643 billion in foreign exchange reserves owned by the Russian central bank is under the digital thumb of central and commercial banks in the United States, Europe and their allies.“They control the wealth of the world,” even the parts that they don’t own, said Michael S. Bernstam, a research fellow at the Hoover Institution at Stanford University.While there has been speculation that Russia could mute the fallout of the sanctions by using its gold reserves, turning to Chinese yuan or transacting in cryptocurrency, so far those alternatives seem unlikely to be enough to forestall financial pain.“When the world’s biggest economies and deepest and most liquid financial markets band together and put this level of restrictions on the largest Russian banks, including the Russian central bank, it is very difficult to find a way to significantly offset large parts of that,” Janet L. Yellen, the Treasury secretary, told reporters on Wednesday. “I believe these will continue to bite.”The sanctions may come with a longer-term cost. The West’s overwhelming control could, in the long run, encourage other nations to create alternative financial systems, perhaps by setting up their own banking networks or even backing away from reliance on the dollar to conduct international transactions.A market in Moscow this week. Inflation, already high, is likely to accelerate from shortages created by sanctions.Sergey Ponomarev for The New York Times“I would liken them to very powerful antibiotics,” said Benn Steil, a senior fellow at the Council on Foreign Relations. “If they’re overprescribed, eventually the bacteria become resistant.”Other countries, like Iran, North Korea and Venezuela, have experienced these sorts of financial penalties before, losing their access to SWIFT or to some of their foreign exchange reserves. But the array of restrictions has never been slapped on a country as large as Russia.During congressional testimony this week, Jerome H. Powell, the Federal Reserve chair, was asked how easily he thought China and Russia could create an alternative service that could undermine the effectiveness of SWIFT sanctions in the future.The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More

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    Before Ukraine Invasion, Russia and China Cemented Economic Ties

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    Facing a wary United States and worried about depending on imports by sea, China is buying more energy and food from its northern neighbor.BEIJING — As Russia wreaks havoc in Ukraine, Moscow has a powerful economic ally to help it resist Western sanctions: China.Chinese purchases of oil from Russia in December surpassed its purchases from Saudi Arabia. Six days before the military campaign began, Russia announced a yearslong deal to sell 100 million tons of coal to China — a contract worth more than $20 billion. And hours before Russia began bombing Ukraine, China agreed to buy Russian wheat despite concerns about plant diseases.In a throwback to the 1950s, when Mao Zedong worked closely with Joseph Stalin and then Nikita Khrushchev, China is again drawing close to Russia. As the United States and the European Union have become wary of China, Beijing’s leaders have decided that their best geopolitical prospects lie in marrying their vast industrial might with Russia’s formidable natural resources.Recent food and energy deals are just the latest signals of China’s economic alignment with Russia.“What happened up to now is only a beginning for both the Russian expansionism by force and the Chinese economic and financial support to Russia,” Shi Yinhong, a professor of international relations at Renmin University in Beijing, said in a text message. “This does not mean that China directly supports in any degree that expansionism — this only means that Beijing strongly feels the necessity to maintain and boost strategic partnership with Moscow.”The United States and the European Union are hoping that sanctions force Russia to reconsider its policies. But Wang Wenbin, the Chinese foreign ministry’s spokesman, said at a briefing on Friday that China opposed the use of sanctions.“Sanctions are never an effective way to solve the problems,” he said. “I hope relevant parties will still try to solve the problem through dialogue and consultation.”At the same time, Russia’s invasion of Ukraine has imposed an awkward diplomatic quandary on China by violating the principle of national sovereignty that the Chinese leaders regard as sacrosanct. While President Xi Jinping of China has not criticized Russia publicly, he could use his country’s economic relationship with its northern neighbor as leverage to persuade the Russians to resolve the crisis quickly.Mr. Xi and President Vladimir V. Putin of Russia spoke by phone on Friday. An official Chinese statement said afterward that Mr. Xi had expressed support for Russia in negotiating an agreement with Ukraine — a stance that Mr. Putin has also favored, provided that Ukraine accepts his terms.Until now, much of China’s energy and food imports came across seas patrolled by the U.S. or Indian navies. As China’s leaders have focused lately on the possibility of conflict, with military spending last year growing four times as fast as other government spending, they have emphasized greater reliance on Russia for crucial supplies.China and Russia share a nearly 2,700-mile border, and in recent years China has become Russia’s largest source of imports and the biggest destination for its exports.“Given the geopolitical tensions, Russia is a very natural geopolitical partner,” said Andy Mok, a senior research fellow at the Center for China and Globalization in Beijing.Initial Western sanctions on Russia have focused on limiting technology exports and imposing financial penalties. For now, U.S. officials have avoided targeting consumer goods, agricultural products and energy, to try to avoid harming ordinary people and further fueling inflation.China is the world’s dominant manufacturer of electronics, machinery and other manufactured goods, and has been supplying them to Russia in exchange for food and energy.A train carrying coal in Yekaterinburg, Russia, in 2020. China’s imports of Russian coal have more than doubled in the past three years.Maxim Babenko for The New York TimesThe new cornerstone of relations between China and Russia is the Sino-Russian nonaggression pact concluded in Beijing on Feb. 4. Mr. Xi and Mr. Putin reached the deal hours before the opening ceremony of the Beijing Winter Olympics and issued a statement saying the countries’ friendship “has no bounds.”The pact freed Mr. Putin to move troops and military equipment from Russia’s border with China to its border with Ukraine while ushering in closer economic cooperation.“The joint statement is strong and has lasting consequences for the new world order,” said Jean-Pierre Cabestan, a research professor of political science at Hong Kong Baptist University.The Chinese and Russian governments share many values, particularly their antipathy to sanctions the West imposes on human-rights grounds. “The two sides firmly believe that defending democracy and human rights should not be used as a tool to exert pressure on other countries,” their pact on Feb. 4 said.When the Obama administration imposed sanctions on Russia after its invasion of Ukraine’s Crimea region in 2014, China helped Russia evade them.It is not clear if China will help Russia evade sanctions put in place this week. On Tuesday, the Biden administration added to previous measures by announcing sanctions against Russia’s two largest financial institutions and sweeping restrictions on advanced technologies that can be exported to Russia. The technological curbs, when taken in concert with allies, would block roughly a fifth of Russian imports, the administration said.Chinese companies that circumvent those rules could face escalating punishment by the United States, including criminal and civil penalties, said Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics. Those businesses could also be cut off from American technology and the financial system.ZTE and Huawei, two Chinese firms that were barred from receiving American technological exports, attracted the attention of the U.S. government in part for evading sanctions on Iran.“The interesting question is: Is China going to comply with this?” Mr. Chorzempa said. China also has a law designed to penalize companies for following extraterritorial sanctions by countries like the United States, he said, all factors that “could put companies in a real bind.”“If they don’t comply with the U.S., they’re in trouble with the U.S., but if they don’t comply with China, they could also face penalties in China,” he said.Of course, collecting fines from companies that are unwilling to pay and monitoring whether businesses comply with the rules could be difficult, Mr. Chorzempa added. “It’s already proving difficult to monitor the things that are already controlled, and if you expand that list, that’s going to be a real challenge to verify what’s going to Russia,” he said.Russia’s Attack on Ukraine and the Global EconomyCard 1 of 6A rising concern. More

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    U.S. Eases Sanctions to Allow Routine Transactions With Afghan Government

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    The move allows financial dealings with civil servants at government institutions, even if those ministries are now overseen by Taliban members.WASHINGTON — The Biden administration moved on Friday to relax sanctions that have contributed to the collapse of Afghanistan’s economy since the Taliban takeover in August, issuing a measure that makes clear that people can lawfully engage in transactions with the Afghan government in most circumstances.The measure, known as a general license and announced by the Treasury Department’s Office of Foreign Assets Control, says that people can lawfully transfer money to civil servants in government agencies — including ministries now led by Taliban officials. The move covers transactions like taxes, fees, import duties and the purchase or receipt of permits, licenses or public utility services.In a statement, Wally Adeyemo, the deputy Treasury secretary, portrayed the move as part of a larger effort by the United States to not just support the flow of humanitarian aid to Afghanistan, but also to facilitate commercial and financial activity there that could allow the economy to function — without directly benefiting Islamist extremists.“In light of this dire crisis, it is essential that we address concerns that sanctions inhibit commercial and financial activity while we continue to deny financial resources to the Taliban, the Haqqani network and other malign actors,” he said.The measure appeared aimed at making it harder to blame the United States government’s sanctions for the unfolding economic disaster in Afghanistan. The economic situation is creating a humanitarian crisis, including widespread starvation, that is spurring a huge wave of migrants to leave the country.The malnutrition ward of the Indira Gandhi Children’s Hospital in Kabul last month.Jim Huylebroek for The New York TimesA senior Biden administration official, speaking on the condition of anonymity in a background briefing for reporters, cautioned that many other factors were contributing to the economic collapse in Afghanistan. Those include the abrupt cutoff of huge amounts of Western foreign aid that had paid for government salaries and infrastructure projects, as well as the exodus of technocrats and others with special expertise after the Taliban swept into control.In a statement describing the move, the Treasury Department also emphasized that theme.“While sanctions relief alone cannot reverse longstanding structural challenges and the flight of technocratic and government experts due to the Taliban’s mismanagement, it can ensure that sanctions do not prevent economic activity that the people of Afghanistan rely on to meet their most fundamental needs,” it said.The general license excludes doing business with any entity in which the Taliban or the Haqqani network owns a majority interest. It also does not permit payments related to luxury items or services.The Afghan central bank, known as Da Afghanistan Bank or D.A.B., is among the governing institutions that will face fewer obstacles under the measure. The central bank had formerly propped up the value of the Afghan currency by regularly auctioning United States dollars.That activity has ceased, and the value of the Afghan currency has plunged — making food too expensive for many poor Afghans to buy. At the same time, a currency shortage has led to limits on how much those Afghans who have bank accounts may withdraw from them.Many officials from the bank fled in August, and the Taliban has installed its own leaders to oversee it. But in the briefing, a senior administration official said the U.S. government had been exploring ideas for restarting some normal central bank activities if it can be made truly independent, with controls to prevent money laundering and third-party monitoring. The official said much of whether that could be done was in the hands of the Taliban.The notion of potentially trying to resuscitate Afghanistan’s central bank is in some tension with a move this month by the Biden administration regarding about $7 billion the central bank has deposited at the Federal Reserve Bank in New York, money whose fate has been a major focus since the Taliban takeover.When the government of Afghanistan dissolved, the bank made those funds unavailable for withdrawal. The Taliban have since claimed a right to them, while relatives of people killed in the Sept. 11 attacks are trying to seize the funds to pay off the Taliban’s default judgment debts to them from lawsuits they had brought against the Taliban, Al Qaeda and others.On Feb. 11, the Biden administration moved to split those funds in half — in a way that would potentially leave the bank decapitalized. Mr. Biden invoked emergency powers to try to move $3.5 billion into a fund that will be used for the benefit of the Afghan people. The administration left the remaining money for the Sept. 11 plaintiffs to continue pursuing in court.It will be up to a judge to decide whether those funds can be lawfully used to pay off the Taliban’s judgment debts, a question that raises several thorny and unresolved legal issues.The Treasury Department noted that nothing in the new general license “affects the property or interests in property of Da Afghanistan Bank that are protectively blocked” pursuant to Mr. Biden’s recent action. More

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    Ukraine War Strains North Africa Economies

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    Egypt imports most of its wheat from Russia and Ukraine, and is looking for alternative suppliers. And Tunisia was struggling to pay for grain imports even before the conflict.CAIRO — On the way to the bakery, Mona Mohammed realized Russia’s war on Ukraine might have something to do with her.Ms. Mohammed, 43, said she rarely pays attention to the news, but as she walked through her working-class Cairo neighborhood of Sayyida Zeinab on Friday morning, she overheard a few people fretting about the fact that Egypt imports most of its wheat from Russia and Ukraine.War meant less wheat; war meant more expensive wheat. War meant that Egyptians whose budgets were already crimped from months of rising prices might soon have to pay more for the round loaves of aish baladi, or country bread, that contribute more calories and protein to the Egyptian diet than anything else.“How much more expensive can things get?” Ms. Mohammed said as she waited to collect her government-subsidized loaves from the bakeryRussia’s invasion of Ukraine this week threatens to further strain economies across the Middle East already burdened by the pandemic, drought and conflict. As usual, the poorest have had it the worst, reckoning with inflated food costs and scarcer jobs — a state of affairs that recalled the lead-up to 2011, when soaring bread prices helped propel anti-government protesters into the streets in what came to be known as the Arab Spring.In a region where bread keeps hundreds of millions of people from hunger, anxiety at the bakeries spells trouble.In Egypt, the world’s top importer of wheat, the government was moving in the wake of the Russian invasion to find alternative grain suppliers. In Morocco, where the worst drought in three decades was pushing up food prices, the Ukraine crisis was set to exacerbate the inflation that has caused protests to break out. Tunisia was already struggling to pay for grain shipments before the conflict broke out; the war seemed likely to complicate the cash-strapped government’s efforts to avert a looming economic collapse.Harvesting wheat in Luxor, Egypt.Khaled Elfiqi/EPA, via ShutterstockBetween April 2020 and December 2021, the price of wheat increased 80 percent, according to data from the International Monetary Fund. North Africa and the Middle East, the largest buyers of Russian and Ukrainian wheat, were experiencing their worst droughts in over 20 years, said Sara Menker, the chief executive of Gro Intelligence, an artificial intelligence platform that analyzes global climate and crops.“This has the potential to upend global trade flows, further fuel inflation, and create even more geopolitical tensions around the world,” she said.After years of mismanaging their water supplies and agricultural industries, countries like Egypt, Algeria, Tunisia and Morocco cannot afford to feed their own populations without importing food — and heavily subsidizing it. In recent years, the number of undernourished people in the Arab world has increased because of the overreliance on food imports, as well as a scarcity of arable land and rapid population growth.Beyond its effect on the price of bread, the uncertainty and turmoil brought on by the war will push up interest rates and lower access to credit, which, in turn, would quickly force governments to spend more to service their high debts and squeeze essential spending on health care, education, wages and public investments, said Ishac Diwan, an economist specializing in the Arab world at Paris Sciences et Lettres university.He predicted a rise in economic pressure on Egypt, Tunisia, Jordan and Morocco, warning that Egypt and Tunisia in particular could see peril to their banking sectors, which hold a large share of the public debt.Egypt is also heavily dependent on tourism from Russia, which has helped its tourism industry recover from the Covid-19 pandemic, giving the country extra cause for alarm.Global inflation and supply chain issues stemming from the pandemic have also raised the price of pasta in Egypt by a third over the last month. Cooking oil was up. Meat was up. Nearly everything was up.But most important, bread, the cost of which had already risen by about 50 percent at non-subsidized bakeries over the last four months; a five-pound note (about 30 cents) now buys only about seven loaves of bread, down from 10, bakery employees said.Egyptians, about a third of whom live on less than $1.50 a day, rely on bread for a third of their calories and 45 percent of their protein, according to the Food and Agriculture Organization, a United Nations agency.Mona Fathy, 36, serving food to her children in her home, in the impoverished neighborhood of El-Ayyat in Giza, Egypt.Mohamed Abd El Ghany/ReutersGovernment officials said on Thursday that Egypt had enough grain reserves and domestically produced wheat to last the country until November. But because of rising import prices President Abdel Fatteh el-Sisi last year announced that Egypt would raise subsidized bread prices this year, risking public fury.“Of course I’m worried,” said Karim Khalaf, 23, who was collecting and stacking baladi loaves as they slipped out of the oven, steaming slightly, in a bakery in Sayyida Zeinab on Friday morning. “My salary hasn’t changed, but now I’m spending more than I’m making.”Morocco, where the all-important agriculture sector employs about 45 percent of the work force, is facing an economic crisis precipitated by global inflation, a surge of food and oil prices, and the worst drought in three decades.Anti-government protests that erupted on Sunday suggested that many Moroccans have lost patience with their six-month-old government as they struggle to make ends meet two years into a pandemic that annihilated the once-lucrative tourism industry.Understand Russia’s Attack on UkraineCard 1 of 7What is at the root of this invasion? More