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    Russia Sidesteps Western Punishments, With Help From Friends

    A surge in trade by Russia’s neighbors and allies hints at one reason its economy remains so resilient after sweeping sanctions.WASHINGTON — A strange thing happened with smartphones in Armenia last summer.Shipments from other parts of the world into the tiny former Soviet republic began to balloon to more than 10 times the value of phone imports in previous months. At the same time, Armenia recorded an explosion in its exports of smartphones to a beleaguered ally: Russia.The trend, which was repeated for washing machines, computer chips and other products in a handful of other Asian countries last year, provides evidence of some of the new lifelines that are keeping the Russian economy afloat. Recent data show surges in trade for some of Russia’s neighbors and allies, suggesting that countries like Turkey, China, Belarus, Kazakhstan and Kyrgyzstan are stepping in to provide Russia with many of the products that Western countries have tried to cut off as punishment for Moscow’s invasion of Ukraine.Those sanctions — which include restrictions on Russia’s largest banks along with limits on the sale of technology that its military could use — are blocking access to a variety of products. Reports regularly filter out of Russia about consumers frustrated by high-priced or shoddy goods, ranging from milk and household appliances to computer software and medication, said Maria Snegovaya, a senior fellow for Russia and Eurasia at the Center for Strategic and International Studies, in an event at the think tank this month.Even so, Russian trade appears to have largely bounced back to where it was before the invasion of Ukraine last February. Analysts estimate that Russia’s imports may have already recovered to prewar levels, or will soon do so, depending on their models.In part, that could be because many nations have found Russia hard to quit. Recent research showed that fewer than 9 percent of companies based in the European Union and Group of 7 nations had divested one of their Russian subsidiaries. And maritime tracking firms have seen a surge in activity by shipping fleets that may be helping Russia to export its energy, apparently bypassing Western restrictions on those sales.While Western countries have not banned the shipment of consumer products like cellphones and washing machines to Russia, other sweeping penalties were expected to clamp down on its economy. They include a cap on the price that Russia can charge for its oil as well as restricted access to semiconductors and other critical technology.Companies like H&M halted operations in Russia after the invasion of Ukraine, but the economy has proved resilient.Maxim Shipenkov/EPA, via ShutterstockSome companies, including H&M, IBM, Volkswagen and Maersk, halted operations in Russia after the invasion, citing moral and logistical reasons. But the Russian economy has proved surprisingly resilient, raising questions about the efficacy of the West’s sanctions. Countries have had difficulty reducing their reliance on Russia for energy and other basic commodities, and the Russian central bank has managed to prop up the value of the ruble and keep financial markets stable.On Monday, the International Monetary Fund said it now expected the Russian economy to grow 0.3 percent this year, a sharp improvement from its previous estimate of a 2.3 percent contraction.The I.M.F. also said it expected Russian crude oil export volume to stay relatively strong under the current price cap, and Russian trade to continue being redirected to countries that had not imposed sanctions.Most container ships have stopped ferrying goods like phones, washing machines and car parts into the port of St. Petersburg. Instead, such products are being carried on trucks or trains from Belarus, China and Kazakhstan. Fesco, the Russian transport operator, has added new ships and new ports of call to a route with Turkey that transports Russian industrial goods and foreign appliances and electronics between Novorossiysk and Istanbul.Sergey Aleksashenko, former deputy minister of finance of the Russian Federation, said at an event this month that 2023 would be “a difficult year” for the Russian economy, but that there would be “no catastrophe, no collapse.”Some parts of the Russian economy are struggling, he said, pointing to car factories that shut down after being unable to secure parts from Germany, France, Japan and South Korea. But military expenditures and higher energy prices helped prop it up last year.“We may not say that Russian economy is in tatters, that it is destroyed, that Putin lacks funds to continue his war,” Mr. Aleksashenko said, referring to President Vladimir V. Putin. “No, it’s not true.”Russia stopped publishing trade data after its invasion of Ukraine. But analysts and economists can still draw conclusions about its trade patterns by adding up the commerce that other countries report with Russia.The International Monetary Fund said it expected Russian crude oil exports to stay relatively strong despite a Western price cap. Andrey Rudakov/BloombergMatthew Klein, an economics writer and a co-author of “Trade Wars Are Class Wars,” is one of the people drawing conclusions about this Russia-size hole in the global economy. According to his calculations, the value of global exports to Russia in November was just 15 percent below a monthly preinvasion average.Global exports to Russia most likely fully recovered in December, though many countries have not yet issued their trade data for the month, he said.“Most of that recovery has been driven overall by China and Turkey particularly,” Mr. Klein said.It’s unclear how much of this trade violates sanctions imposed by the United States and Europe, but the patterns are “suspicious,” he said. “It would be consistent with the idea that there are ways of trying to get around some of the sanctions.”Silverado Policy Accelerator, a Washington nonprofit, recently issued a similar analysis, estimating that the value of Russian imports from the rest of the world had exceeded prewar levels by September.One of the case studies in that report was the jump in Armenian smartphone sales. Andrew S. David, the senior director of research and analysis at Silverado, said the trends reflected how supply chains had shifted to continue providing Russia with goods.Samsung and Apple, previously major suppliers of Russian cellphones, pulled out of the Russian market after the invasion. Exports of popular Chinese phone brands, like Xiaomi, Realme and Honor, also initially dipped as companies struggled to understand and cope with new restrictions on sending technology or making international payments to Russia.But after an “adjustment period,” Chinese brands started to take off in Russia, Mr. David said. Overall Chinese exports to Russia reached a record high in December, helping to offset a steep drop in trade with Europe. Apple and Samsung phones also appeared to begin to find their way back to Russia, rerouted through friendly neighboring countries.“Armenia is certainly not the only one,” Mr. David said. “There’s a lot coming through central western Asia, Turkey and the former Soviet republics.”Shipments to Russia of other products, like passenger vehicles, have also rebounded. And China has increased exports of semiconductors to Russia, though Russia’s total chip imports remain below prewar levels.President Vladimir V. Putin at a military training facility in Russia. Military expenditures and higher energy prices helped prop up the Russian economy last year.Pool photo by Mikhail KlimentyevOne major open question is how effectively the Western price cap will hold down Russia’s oil revenue this year.The cap allows Russia to sell its oil globally using Western maritime insurance and financing as long as the price does not exceed $60 per barrel. That limit, which is essentially an exception to Group of 7 sanctions, is designed to keep oil flowing on global markets while limiting the Russian government’s revenue from it.Some analysts have suggested that Russia is finding ways around the effort by using ships that do not rely on Western insurance or financing.Ami Daniel, the chief executive of Windward, a maritime data company, said he had seen hundreds of instances in which people from countries like the United Arab Emirates, India, China, Pakistan, Indonesia and Malaysia bought vessels to try to set up what appeared to be a non-Western trading framework for Russia.“Basically, Russia has been gearing up toward being able to trade outside of the rule of law,” he said.Mr. Daniel said his firm had also seen a sharp uptick in shipping practices that appeared to be Russian efforts to contravene Western sanctions. They include transfers of Russian oil between ships far out at sea, in international waters that are not under the jurisdiction of any country’s navy, and attempts by ships to mask their activities by turning off satellite trackers that log their location or transmitting fake coordinates.Much of this activity had been taking place in the mid-Atlantic Ocean. But after media coverage of suspicious practices in this region, the hub moved south, off the coast of West Africa, Mr. Daniel said.“They’re exploding,” he said of deceptive shipping practices. “It’s happening at an industrial scale.”So far, the oil price cap appears to be accomplishing its goal of reducing the price that Russia can charge while keeping global supplies flowing. But it remains to be seen whether this shadow fleet of ships is big enough to allow Russia to buy and sell oil outside the cap, said Ben Cahill, a senior fellow at the Center for Strategic and International Studies, during a January panel discussion.“If that fleet is big enough for Russia to really operate outside the reach” of the Group of 7 countries, the cap probably “won’t have the kind of leverage that policymakers wanted,” Mr. Cahill said. “I think we should know within a couple of months.”Alan Rappeport More

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    Russia’s War on Ukraine Worsens Global Starvation

    Moscow blocks most shipments from Ukraine, one of the world’s largest wheat producers, and its attacks on the country’s energy grid also disrupt the flow of food.ISTANBUL — Hulking ships carrying Ukrainian wheat and other grains are backed up along the Bosporus here in Istanbul as they await inspections before moving on to ports around the world.The number of ships sailing through this narrow strait, which connects Black Sea ports to wider waters, plummeted when Russia invaded Ukraine 10 months ago and imposed a naval blockade. Under diplomatic pressure, Moscow has begun allowing some vessels to pass, but it continues to restrict most shipments from Ukraine, which together with Russia once exported a quarter of the world’s wheat.And at the few Ukrainian ports that are operational, Russia’s missile and drone attacks on Ukraine’s energy grid periodically cripple the grain terminals where wheat and corn are loaded onto ships.An enduring global food crisis has become one of the farthest-reaching consequences of Russia’s war, contributing to widespread starvation, poverty and premature deaths.The United States and allies are struggling to reduce the damage. American officials are organizing efforts to help Ukrainian farmers get food out of their country through rail and road networks that connect to Eastern Europe and on barges traveling up the Danube River.But as deep winter sets in and Russia presses assaults on Ukraine’s infrastructure, the crisis is worsening. Food shortages are already being exacerbated by a drought in the Horn of Africa and unusually harsh weather in other parts of the world.The United Nations World Food Program estimates that more than 345 million people are suffering from or at risk of acute food insecurity, more than double the number from 2019.“We’re dealing now with a massive food insecurity crisis,” Antony J. Blinken, the U.S. secretary of state, said last month at a summit with African leaders in Washington. “It’s the product of a lot of things, as we all know,” he said, “including Russia’s aggression against Ukraine.”The food shortages and high prices are causing intense pain across Africa, Asia and the Americas. U.S. officials are especially worried about Afghanistan and Yemen, which have been ravaged by war. Egypt, Lebanon and other big food-importing nations are finding it difficult to pay their debts and other expenses because costs have surged. Even in wealthy countries like the United States and Britain, soaring inflation driven in part by the war’s disruptions has left poorer people without enough to eat.A line for food aid in Kabul. An enduring global food crisis has become one of the farthest-reaching consequences of Russia’s war.Agence France-Presse — Getty Images“By attacking Ukraine, the breadbasket of the world, Putin is attacking the world’s poor, spiking global hunger when people are already on the brink of famine,” said Samantha Power, the administrator of the United States Agency for International Development, or USAID.The State of the WarAerial Attacks: A deadly New Year’s Eve assault is the latest strike in Russia’s three-month campaign on Ukraine’s energy infrastructure, which analysts say is an effort to demoralize the Ukrainian population by plunging it into cold and darkness.A New Alliance: The United States is scrambling to stop Iran from producing drones, as officials believe the Middle Eastern nation is building a partnership with Russia.Hopes Dim for Peace Talks: Both Ukrainian and Russian officials say they are willing to discuss making peace, but their terms for sitting down at a negotiating table suggest otherwise.Clergymen or Spies?: To Ukraine’s security services, the Russian Orthodox Church poses a uniquely subversive threat — a trusted institution that is not only an incubator of pro-Russia sentiment but is also infiltrated by priests, monks and nuns who have aided Russia in the war.Ukrainians are likening the events to the Holodomor, when Joseph Stalin engineered a famine in Soviet-ruled Ukraine 90 years ago that killed millions.Mr. Blinken announced on Dec. 20 that the U.S. government would begin granting blanket exceptions to its economic sanctions programs worldwide to ensure that food aid and other assistance kept flowing. The action is intended to ensure that companies and organizations do not withhold assistance for fear of running afoul of U.S. sanctions.State Department officials said it was the most significant change to U.S. sanctions policy in years. The United Nations Security Council adopted a similar resolution on sanctions last month.But Russia’s intentional disruption of global food supplies poses an entirely different problem.Moscow has restricted its own exports, increasing costs elsewhere. Most important, it has stopped sales of fertilizer, needed by the world’s farmers. Before the war, Russia was the biggest exporter of fertilizer.Its hostilities in Ukraine have also had a major impact. From March to November, Ukraine exported an average of 3.5 million metric tons of grains and oilseeds per month, a steep drop from the five million to seven million metric tons per month it exported before the war began in February, according to data from the country’s Ministry of Agrarian Policy and Food.That number would be even lower if not for an agreement forged in July by the United Nations, Turkey, Russia and Ukraine, called the Black Sea Grain Initiative, in which Russia agreed to allow exports from three Ukrainian seaports.Russia continues to block seven of the 13 ports used by Ukraine. (Ukraine has 18 ports, but five are in Crimea, which Russia seized in 2014.) Besides the three on the Black Sea, three on the Danube are operational.The initial deal was only for four months but was extended in November for another four months. When Russia threatened to leave it in October, global food prices surged five to six percent, said Isobel Coleman, a deputy administrator at USAID.“The effects of this war are hugely, hugely disruptive,” she said. “Putin is pushing millions of people into poverty.”While increases in the price of food this past year have been particularly sharp in the Middle East, North Africa and South America, no region has been immune.“You’re looking at price increases of everything from 60 percent in the U.S. to 1900 percent in Sudan,” said Sara Menker, the chief executive of Gro Intelligence, a platform for climate and agriculture data that tracks food prices.Before the war, food prices had already climbed to their highest levels in over a decade because of pandemic disruptions in the supply chain and pervasive drought.The United States, Brazil and Argentina, key grain producers for the world, have experienced three consecutive years of drought. The level of the Mississippi River fell so much that the barges that carry American grain to ports were temporarily grounded.The weakening of many foreign currencies against the U.S. dollar has also forced some countries to buy less food on the international market than in years past.Russia attacked the port of Kherson, on Ukraine’s Black Sea coast, in November. Before the war, farmers shipped out 95 percent of the country’s wheat and grain exports through the Black Sea.Finbarr O’Reilly for The New York Times“There were a lot of structural issues, and then the war just made it that much worse,” Ms. Menker said.U.S. officials say the Russian military has deliberately targeted grain storage facilities in Ukraine, a potential war crime, and has destroyed wheat processing plants.Many farmers in Ukraine have gone to war or fled their land, and the infrastructure that processed and carried wheat and sunflower oil to foreign markets has broken down.At a farm 190 miles south of Kyiv, 40 of the 350 employees have enlisted in the army. And the farm is struggling with other shortages. Kees Huizinga, the Dutch co-owner, said Russia’s attacks on the energy grid have led to the shutdown of a plant that provides his farm and others with nitrogen fertilizer.Other fertilizer plants in Europe were forced to shut down or slow production last year as natural gas prices soared, a result of the war. Natural gas is critical for fertilizer production.“So this year’s harvest has already been reduced,” Mr. Huizinga said in November. “And if Russians continue like this, next year’s harvest might even be worse.”He added that transportation costs have risen sharply for farmers in Ukraine.Before the war, farmers shipped out 95 percent of the country’s wheat and grain exports through the Black Sea. Mr. Huizinga’s farm paid $23 to $24 per ton to transport its products to ports and onto ships. Now, the cost has more than doubled, he said. And an alternative route — by truck to Romania — costs $85 per ton.Mr. Huizinga said Russia’s compromise on Black Sea shipments has helped, but he suspects Moscow is hobbling operations by slowing inspections. Under the arrangement, each vessel leaving one of three Ukrainian ports on the Black Sea has to be inspected by joint teams of Ukrainian, Russian, Turkish and United Nations employees once the ship reaches Istanbul.The teams look for any unauthorized cargo or crew members, and vessels heading to Ukraine need to be empty of cargo, said Ismini Palla, a spokeswoman for the U.N. office overseeing the program.U.N. data shows that the rate of inspections has dropped in recent weeks. The parties agreed to deploy three teams each day, Ms. Palla said, adding that the United Nations has requested more.“We hope that this will change soon, so that the Ukrainian ports can operate again at higher capacity,” she said. “Ukrainian exports remain a vital element in combating global food insecurity.”Ms. Palla said the parties’ decision in November to extend the agreement contributed to a 2.8 percent drop in global wheat prices.Over the last six months, food prices have retreated from highs reached this spring, according to an index compiled by the United Nations. But they remain much higher than in previous years.An uncertainty for farmers this winter is the soaring price of fertilizer, one of their biggest costs.Farmers have passed on the higher cost by increasing the price of food products. And many farmers are using less fertilizer in their fields. That will result in lower crop yields in the coming seasons, pushing food prices higher.Subsistence farms, which produce nearly a third of the world’s food, are being hit even harder, Ms. Coleman said.Food rations were distributed in Sana, Yemen. The war in that country has left its people vulnerable to food insecurity.Yahya Arhab/EPA, via ShutterstockIn a communiqué issued at the close of their meeting in Bali, Indonesia, in November, leaders of the Group of 20 nations said they were deeply concerned by the challenges to global food security and pledged to support the international efforts to keep food supply chains functioning.“We need to strengthen trade cooperation, not weaken it,” Ngozi Okonjo-Iweala, the director general of the World Trade Organization, said at the summit.The U.S. government spends about $2 billion per year on global food security, and it started a program called Feed the Future after the last big food crisis, in 2010, that now encompasses 20 countries.Since the start of the Ukraine war, the United States has provided more than $11 billion to address the food crisis. That includes a $100 million program called AGRI-Ukraine, which has helped about 13,000 farmers in Ukraine — 27 percent of the total — gain access to financing, technology, transportation, seeds, fertilizer, bags and mobile storage units, Ms. Coleman said.The efforts could help rebuild the country while alleviating the global food crisis — one-fifth of Ukraine’s economy is in the agriculture sector, and a fifth of the country’s labor force is connected to it.“It’s hugely important for Ukraine’s economy,” she said, “and for Ukraine’s economic survival.”Edward Wong More

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    Price of Diesel, Which Powers the Economy, Is Still Climbing

    Russia’s invasion of Ukraine is one reason that the fuel is scarce. Another is a series of yearslong, intertwined events that cover the globe.HOUSTON — Gasoline prices have dropped as much as a dollar a gallon since early summer, easing a financial strain on many people. But the price of diesel, the fuel that moves trucks, trains, barges, tractors and construction equipment, has remained stubbornly high, helping to prop up the prices of many goods and services.On Wednesday, a gallon of diesel fuel in the United States cost $5.357 on average, according to AAA. That was down from a record of $5.816 in June but well above the $3.642 it cost a year ago. (A gallon of regular gasoline now averages $3.805.)The surge in diesel costs has not garnered the attention from politicians and the public that the jump in gasoline prices did, because most of the cars in the United States run on gas. But diesel prices are a critical source of pain for the economy because they affect the cost of practically every product.“The economic impact is insidious because everything moves across the country powered by diesel,” said Tom Kloza, the global head of energy analysis at the Oil Price Information Service. “It’s an inflation accelerant, and the consumer ultimately has to pay for it.”Sherri Garner Brumbaugh, the president of Garner Trucking in Findlay, Ohio, said the weekly cost of fueling one of her heavy-duty trucks in September was $1,300, more than double the $600 she paid two years earlier. “A good portion gets passed onto my customers with a fuel surcharge,” she said.Both gasoline and diesel prices are tied to the price of oil, which is set on the global market. The price of each fuel immediately shot up after Russia invaded Ukraine in February. But their paths have diverged sharply. Over the last year, the cost of diesel has ballooned by over 40 percent, compared with 11 percent for gasoline.Diesel prices are high because the fuel is scarce worldwide, including in the United States, which in recent years became a net exporter of oil and petroleum products. Oil analysts said there were simply not enough refineries to meet the demand for diesel, especially after Russia’s energy exports fell when the United States, Britain and some other countries stopped buying them.Diesel inventories are always a bit low in the spring and fall, during agricultural planting and harvesting seasons, but this fall supplies are at their lowest level since 1982, when the government began reporting data on the fuel.The tightest market is in the Northeast, where oil refineries have closed in recent years and where the diesel crunch is complicated by winter demand for heating oil. The two fuels are virtually the same but are taxed differently. An especially cold winter could make the situation worse by increasing the demand for heating oil.In Massachusetts, for example, diesel is selling for more than $5.90 a gallon (about $2.33 more than it did a year earlier). In Texas, it costs $4.73 a gallon.Trucks, trains, barges, tractors and construction equipment all use diesel, and its price affects the cost of practically every product.Jim Watson/Agence France-Presse — Getty ImagesWhile Russia’s war in Ukraine sent diesel prices soaring, the current situation is partly the result of an interconnected, slow-building series of events that extends across the globe. Some analysts trace the roots of the U.S. diesel shortage to a fire at Philadelphia Energy Solutions in 2019, which forced the refinery to shut down, taking out one of the Northeast’s important diesel producers.But refineries have been closing elsewhere. Over the last several years, 5 percent of U.S. refinery capacity, and 6 percent of European refinery capacity, has been shut down. A few refineries closed or scaled back because of the collapse in energy demand in the early months of the coronavirus pandemic. Some older refineries were shut down because they were inefficient and their profits weren’t large enough for Wall Street investors. Other refineries were closed so that their owners could convert them to produce biofuels, which are made from plants, waste and other organic material.“Because we shut those refineries down, we don’t have enough capacity,” said Sarah Emerson, the president of ESAI Energy, a consulting firm.As much of the global economy recovered in 2021 and 2022, demand for diesel climbed quickly. But then, after Russia invaded Ukraine, the Biden administration banned Russian oil and petroleum imports, which amounted to 700,000 barrels of diesel and other fuels a day, much of it intended for the Northeast.Diesel prices have also soared so much higher than the cost of gasoline in part because of a decision by the International Maritime Organization several years ago to require most oceangoing ships to replace their high-sulfur bunker fuel with less polluting fuels starting in 2020. That has slowly increased demand for diesel over the last two years.“A substantial amount of diesel is needed in the new bunker blends, and that is a hidden demand for diesel molecules,” said Richard Joswick, the head of global oil analysis for S&P Global Platts. He estimated that the global shipping fleet was now consuming half a million barrels of diesel a day, or roughly 2 percent of the world’s supplies.At the same time, while American refiners are now making tidy profits, 30 percent of their production is being exported. Latin America has become a particularly profitable market, as American diesel replaces fuel from Venezuela, where the state-controlled oil sector has been hobbled by corruption, mismanagement and U.S. sanctions. Some American diesel also goes to Europe.The impact of exports on domestic prices has led some analysts to speculate that the Biden administration could eventually restrict exports to boost supplies at home. But energy experts said that might not have the desired effect because diesel had become a globally traded commodity. Denying Latin America fuel could also backfire because many countries in the region sell crude oil to the United States.“We have a symbiotic relationship with Latin America on diesel and crude,” said Ms. Emerson of ESAI Energy. “We can disrupt that, but it doesn’t immediately fix the problem.”The global diesel shortage was also exacerbated by labor strikes at French refineries this fall. And utilities in Europe have been stockpiling diesel in case they cannot find enough natural gas to fuel their power plants.Russian diesel has continued to flow to Europe since the war began, but stricter sanctions that the European Union plans to impose on Russia in February could potentially cause havoc to the diesel business of traders, banks, insurance companies and shippers.Still, some energy experts said prices could soon begin to ease.Help may be on the way from an unlikely source: China. In recent months, China has been loosening export controls on diesel. Its exports rose from 200,000 barrels a day in August to 430,000 barrels a day in September, and the country has the capacity to sell even more, according to estimates by ESAI Energy.Nearly a third of Chinese diesel exports went to the Netherlands in recent months, taking some pressure off the European market. And oil refineries being built in Kuwait and China could come online as early as next year, further increasing supply.Demand for diesel and its price could also fall if much of the world slides into a recession next year, as some economists and policymakers are expecting.“A deep recession would certainly cut into diesel demand,” said Mr. Joswick of S&P Global Platts. “We don’t forecast a recession, but that is certainly a possibility.” More

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    Russian Trade Boomed After Invading Ukraine, Providing Ample War Funds

    Russia’s relationship with the world is continuing to evolve rapidly. To assess the global shifts, The Times analyzed years of country-level trade data compiled by the Observatory of Economic Complexity, an online data platform. Because the data is published with a lag, the picture it provides is inherently backward looking. Russia’s ability to trade with […] More

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    How Finnair’s Huge Bet on Faster Flights to Asia Suddenly Came Undone

    Nestled near Europe’s rooftop, Finland spent decades leveraging its location to become a popular gateway for Asian travelers. Its flagship airline, Finnair, offered flights from Tokyo, Seoul and Shanghai to Helsinki that, by crossing over Russia, were hours shorter than flights to any other European capital. Airport chiefs invested nearly $1 billion in a new terminal with streamlined transfers. There were signs in Japanese, Korean and Chinese, and hot water dispensers for the instant noodle packets favored by Chinese tourists.Then Russia sent troops across Ukraine’s border on Feb. 24, and overnight the carefully constructed game table was overturned.Russia closed its airspace to most European carriers in response to bans on Russian planes. What was once a nine-hour flight to Helsinki when routed over Russia’s 3,000-mile expanse would now take 13 hours and as much as 40 percent more fuel because it had to swoop around borders.Finnair’s competitive advantage as the fastest connection from Asia and a travel hub for Europe vanished in a wisp.The sudden disintegration of Finnair’s business model is part of the wide-ranging economic upheaval that the war in Ukraine is causing for businesses around the globe.Companies that invested or traded heavily with Russia were immediately affected, and more than 1,000 have withdrawn operations from Russia, according to a database compiled by the Yale School of Management.Juho Kuva for The New York TimesNearly $1 billion was spent to build a terminal in the Helsinki, Finland, airport to streamline transfers for passengers from outside Europe.When Russia closed its airspace, Finnair could no longer pitch itself as the fastest connection from Asia.“The Asia strategy had been 20 years in the making,” Topi Manner, Finnair’s chief executive, said.High energy prices have blitzed a wider range. The Hungarian Opera House’s Erkel Theater will temporarily close because it cannot pay its energy bill. Hakle, one of the largest manufacturers of toilet paper in Germany, declared insolvency because of soaring energy costs, while ceramic, glass, chemical, fertilizer and other factories across Europe have been forced to scale back or shut down.The snack food industry, unable to get sufficient supplies of sunflower oil from Ukraine, has had to scramble for substitutes like palm oil, forcing manufacturers to rejigger supply chains, production and labeling, since they could no longer boast that their products were “nonallergenic” and “non-G.M.O.”The closed airspace caused Japan Airlines and ANA to cancel flights to Europe. And this month Virgin Atlantic said it was ceasing all traffic to and from Hong Kong because of Russia’s ban. For Finnair, though, the fallout has been extreme.“The Asia strategy had been 20 years in the making,” Topi Manner, Finnair’s chief executive, said from the company’s headquarters, next to the Helsinki terminal in Vantaa. Services were tailored to meet the tastes of its Asian customers. Half of its in-flight movies are dubbed or subtitled in Japanese, Korean and Chinese. Meal offerings include crispy chicken in Chinese garlic and oyster sauce and Korean-style stir-fried pork in spicy sauce with bok choy and steamed rice. The airline’s ground staff in Helsinki are fluent in the region’s native languages.Market Square in central Helsinki.Before the coronavirus pandemic, half of the airline’s revenue was generated by travelers from Asia. Passengers that used Helsinki as a hub to transfer to other destinations accounted for 60 percent of the revenue.But with “no end in sight” to the war, Mr. Manner said, the airline’s management quickly concluded “that Russian airspace will remain closed to European carriers for a long time and we need to adapt to that reality.”This summer, Finnair operated 76 flights between Helsinki and Asia, compared to 198 in the summer of 2019. Overall, the airline is going at 68 percent of its capacity. Operating losses in the first half of this year amounted to 217 million euros.“We really have to regroup,” Mr. Manner said.In some respects, Finnair has been regrouping ever since the pandemic hit in early 2020 and virtually halted world travel. China’s “zero Covid” policy, which continued to lock down Shanghai and other major cities this year, sharply reduced East-West traffic, hampering Finnair’s recovery compared with airlines that have large domestic markets or operate in other regions. Finnair, half of which is owned by the government, fought to survive by furloughing employees, cutting costs and raising 3 billion euros in new financing.Juho Kuva for The New York TimesThe new terminal was expected to draw 30 million passengers by 2030, a projection that has been thrown out by the uncertainty now facing Finnair’s Asia strategy.The project aimed to improve services for the connecting passengers from Asia who would never leave the airport.A 2017 publicity campaign by the state-owned company that runs Finland’s terminals primarily targeted customers from China.“We created a path through the pandemic,” Mr. Manner said, but it always was intended to lead “back to the Asia strategy.”No longer. Last month, the company officially announced an about-face.“We started to pivot our network toward the West,” Mr. Manner said, expanding its partnership with American Airlines, British Airways and other carriers. In the spring, it launched four new weekly flights from Dallas-Fort Worth and three from Seattle. New routes from Helsinki to Stockholm, Copenhagen, Mumbai, India, and Doha, Qatar, have also been unveiled. As jet fuel prices skyrocket, the airline is also renting out planes and crews to other airlines, and it plans to shrink the size of its fleet and staff, and to slash costs.Finnair, which has lost 1.3 billion euros over the past three years, said it hoped to return to profitability in 2024.“It will take some time before the company gets to see if this is the right decision,” said Jaakko Tyrväinen, an airline analyst with SEB, a Nordic financial services group.For the new Helsinki terminal — which opened in June — a strategy shift was also needed.Central Helsinki.An estimated 30 million passengers were expected by 2030, up from the nearly 22 million that the existing terminals handled in 2019. Those projections are now irrelevant, and airport officials say the situation is too uncertain to make any meaningful update to that figure. Next year, 15 million travelers are expected to pass through.Perhaps more pointedly, the project, begun nearly a decade ago, was designed to improve services for transfer passengers from Asia — a majority of whom would never leave the airport.A multimedia publicity campaign that Finavia, the state-owned company that runs the country’s airline terminals, rolled out in 2017 for Helsinki airport — code letters HEL — primarily targeted customers from China. With a nod to the 2004 film “The Terminal,” the campaign, “Life in HEL,” featured Ryan Jhu, a popular Chinese actor and social media influencer, living for a month in the terminal.Now, Helsinki has an expansive new terminal dedicated to non-European transfer traffic but very few travelers.Juho Kuva for The New York TimesThe project to build the new terminal was begun nearly a decade ago.The spacious aukio, or meeting plaza, includes a wraparound video installation depicting Finnish landscapes.The upshot to the changes forced upon Finnair is vastly fewer connecting passengers in a terminal designed for them.On a recent weekday afternoon, the long, snaking lanes created to handle crowds at passport control were deserted. The spacious aukio, or meeting plaza, where passengers could sit and watch a wraparound video installation depicting Finnish landscapes, hosted a lone woman with a backpack. Moomin Shop, which sells merchandise related to the Finnish cartoon characters — particularly popular with Japanese visitors — had no customers. The Moomin cafe, farther down the main hallway, was mostly deserted.“Mornings are normally slow,” said Liccely Del Carpio, who works at the Moomin store, adding that business often picks up later in the afternoon. “All in all, it’s been OK.”The European terminal was bustling, but most of the shops and cafes that stretched along this terminal’s long hall were empty. Several other spaces were unleased or shuttered.Sami Kiiskinen, the vice president of airport development at Finavia, said that the hundreds of millions of euros in loans used to construct the airport would ultimately be repaid, but that “the schedule of paybacks must be reconsidered.” Negotiations are happening, he said.Yet, despite the likelihood that the war in Ukraine will drag on and Russian airspace will remain closed to European traffic, Mr. Kiiskinen is optimistic.“We still believe in our strategy,” he said. Major infrastructure developments like airports are designed on a 50-year horizon, he said. “Putin is not going to be there forever.”Juho Kuva for The New York TimesOn a recent weekday afternoon, a cafe branded for Moomin merchandise, cartoon characters popular with Japanese visitors, was mostly deserted.Sami Kiiskinen of Finavia, which runs the terminal, acknowledged the problems facing the project’s finances but remained optimistic over the long run: “Putin is not going to be there forever.”The new terminal at the Helsinki airport is just one of numerous commercial ventures across Europe that have been affected by Russia’s invasion of Ukraine. More

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    Central Banks Accept Pain Now, Fearing Worse Later

    Federal Reserve officials and their counterparts around the world are trying to defeat inflation by rapidly raising interest rates. They know it will come at a cost.A day after the Federal Reserve lifted interest rates sharply and signaled more to come, central banks across Asia and Europe followed suit on Thursday, waging their own campaigns to crush an outbreak of inflation that is bedeviling consumers and worrying policymakers around the globe.Central bankers typically move slowly. That’s because their policy tools are blunt and work with a lag. The interest rate increases taking place from Washington to Jakarta will need months to filter out across the global economy and take full effect. Jerome H. Powell, the Fed chair, once likened policymaking to walking through a furnished room with the lights off: You go slowly to avoid a painful outcome.Yet officials, learning from a history that has illustrated the perils of taking too long to stamp out price increases, have decided that they no longer have the luxury of patience.Inflation has been relentlessly rapid for a year and a half now. The longer that remains the case, the greater the risk that it is going to become a permanent feature of the economy. Employment contracts might begin to factor in cost-of-living increases, companies might begin to routinely raise prices and inflation might become part of the fabric of society. Many economists think that happened in the 1970s, when the Fed tolerated out-of-control price increases for years — allowing an “inflationary psychology” to take hold that later proved excruciating to crush.But the aggressiveness of the monetary policy action now underway also pushes central banks into new and risky territory. By tightening quickly and simultaneously when growth in China and Europe is already slowing and supply chain pressures are easing, global central banks risk overdoing it, some economists warn. They may plunge economies into recessions that are deeper than necessary to curb inflation, sending unemployment significantly higher.“The margin of error now is very thin,” said Robin Brooks, chief economist at the Institute of International Finance. “A lot of this comes down to judgment, and how much emphasis to put on the 1970s scenario.”In the 1970s, Fed policymakers did lift interest rates in a bid to control inflation, but they backed off when the economy began to slow. That allowed inflation to remain elevated for years, and when oil prices spiked in 1979, it reached untenable levels. The Fed, under Paul A. Volcker, ultimately raised rates to nearly 20 percent — and sent unemployment soaring to more than 10 percent — in an effort to wrestle the price increases down.That example weighs heavily on policymakers’ minds today.“We think that a failure to restore price stability would mean far greater pain later on,” Mr. Powell said at his news conference on Wednesday, after the Fed raised rates three-quarters of a percentage point for a third straight time. The Fed expects to raise borrowing costs to 4.4 percent next year in the fastest tightening campaign since the 1980s.The Bank of England raised interest rates half a point to 2.25 percent on Thursday, even as it said the United Kingdom might already be in a recession. The European Central Bank is similarly expected to continue raising rates at its meeting in October to combat high inflation, even as Russia’s war in Ukraine throws Europe’s economy into turmoil.As the major monetary authorities lift borrowing costs, their trading partners are following suit, in some cases to avoid big moves in their currencies that could push up local import prices or cause financial instability. On Thursday, Indonesia, Taiwan, the Philippines, South Africa and Norway lifted rates, and a large move by Switzerland’s central bank ended the era of below-zero interest rates in Europe. Japan has comparatively low inflation and is keeping rates low, but it intervened in currency markets for the first time in 24 years on Thursday to prop up the yen in light of all of the action by its counterparts.The wave of central bank action is expected to have consequences, working by design to sharply slow both interconnected commerce and national economies. The Fed, for instance, sees its moves pushing U.S. unemployment to 4.4 percent in 2023, up from the current 3.7 percent.A housing development in Phoenix. Climbing interest rates are already making it more expensive to borrow money to buy a car or purchase a house in many nations.Adriana Zehbrauskas for The New York TimesAlready, the moves are beginning to have an impact. Climbing interest rates are making it more expensive to borrow money to buy a car or a house in many nations. Mortgage rates in the United States are back above 6 percent for the first time since 2008, and the housing market is cooling down. Markets have swooned this year in response to the tough talk coming from central banks, reducing the amount of capital available to big companies and cutting into household wealth.Yet the full effect could take months or even years to be felt.Rates are rising from low levels, and the latest moves have not yet had time to fully play out. In continental Europe and Britain, the war in Ukraine rather than monetary tightening is pushing economies toward recession. And in the United States, where the fallout from the war is far less severe, hiring and the job market remain strong, at least for now. Consumer spending, while slowing, is not plummeting.That is why the Fed believes it has more work to do to slow the economy — even if that increases the risk of a downturn.“We have always understood that restoring price stability while achieving a relatively modest increase in unemployment, and a soft landing, would be very challenging,” Mr. Powell said on Wednesday. “No one knows whether this process will lead to a recession, or if so, how significant that recession would be.”Many global central bankers have painted today’s inflation burst as a situation in which their credibility is on the line.“For the first time in four decades, central banks need to prove how determined they are to protect price stability,” Isabel Schnabel, an executive board member of the European Central Bank, said at a Fed conference in Wyoming last month.A FedEx worker making deliveries in Miami Beach. Consumer spending in the United States, while slowing, is not plummeting.Scott McIntyre for The New York TimesBut that does not mean that the policy path the Fed and its counterparts are carving out is unanimously agreed upon — or unambiguously the correct one. This is not the 1970s, some economists have pointed out. Inflation has not been elevated for as long, supply chains appear to be healing and measures of inflation expectations remain under control.Mr. Brooks at the Institute of International Finance sees the pace of tightening in Europe as a mistake, and thinks that the Fed, too, could overdo it at a time when supply shocks are fading and the full effects of recent policy moves have yet to play out.Maurice Obstfeld, an economist at the Peterson Institute for International Economics and a former chief economist of the International Monetary Fund, wrote in a recent analysis that there is a risk that global central banks are not paying enough attention to one another.“Central banks clearly are scrambling to raise interest rates as inflation runs at levels not seen for nearly two generations,” he wrote. “But there can be too much of a good thing. Now is the time for monetary policymakers to put their heads up and look around.”Still, at many central banks around the world — and clearly at Mr. Powell’s Fed — policymakers are treating it as their duty to remain resolute in the fight against price increases. And that is translating into forceful action now, regardless of the imminent and uncertain costs.Mr. Powell may have once warned that moving quickly in a dark room could end painfully. But now, it’s as if the room is on fire: The threat of a stubbed toe still exists, but moving slowly and cautiously risks even greater peril. More

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    What Price Is Right? Why Capping Russian Oil Is Complicated.

    Officials from the Group of 7 are striving to strike a delicate balance that encourages Russia to keep pumping oil but to sell it at a discount.WASHINGTON — As the United States and its Western counterparts race to finalize the mechanics of an oil price cap intended to starve Russia of revenue and stabilize global energy markets, a crucial question remains unresolved: How should the price be set?The Group of 7 countries that formally backed the price cap concept this month are deliberating how much Russia should be allowed to charge for its oil as they prepare to release more details of the plan. It has emerged as a central question that could determine the success of the novel idea, Russia’s response and the trajectory of oil prices as winter approaches. Setting the price will require aligning the complex array of economic and diplomatic forces that govern volatile oil markets.The consequences of getting the oil price cap wrong could be severe for the world economy, and time is running short. The Biden administration fears that if the cap is not in place by early December, oil prices around the world could skyrocket given Russia’s outsize role as an energy producer. That’s because when a European Union oil embargo and a ban on financial insurance services for Russian oil transactions take effect on Dec. 5, the removal of millions of barrels of Russian oil from the market could send prices soaring.European financing and insurance dominate the global oil market, so the looming sanctions could disrupt exports to parts of the world that do not have their own embargoes — by making it harder or more expensive to get Russian oil at a time when energy costs are already high. The price cap will essentially be an exception to Western sanctions, allowing Russian oil to be sold and shipped as long as it remains below a certain price.The idea has won plaudits from economists who see it as an elegant win-win strategy for the West. But many energy analysts and traders have expressed deep skepticism about the concept. They believe that a fear of sanctions could scare financial services companies off Russian oil, and that Russia and its trading partners will circumvent the cap through new forms of insurance or illicit transactions.The impact of the proposed oil price cap and the potential for unintended consequences are two of the biggest quandaries facing the nations that have been enduring soaring inflation prompted by supply chain disruptions and Russia’s war in Ukraine.The leaders of the Group of 7 in June. In a joint statement this month, the group’s finance ministers said the “initial” price cap would be based on a range of “technical inputs.”Kenny Holston for The New York Times“We are looking at a far more complex oil market,” said Paul Sheldon, a geopolitical risk analyst at S&P Global Platts Analytics. “This is an unprecedented dynamic where you have such a large supplier of oil under unprecedented sanctions. We’re in new territory on several levels.”Exactly how the price cap will be set remains unclear.In a joint statement this month, finance ministers from the Group of 7 said the “initial” price cap would be based on a range of “technical inputs” and decided on by the group of countries that join the agreement. The Treasury Department’s Office of Foreign Assets Control said last week that the price cap would be determined by a “range of factors” and that countries that were part of the price cap coalition would make the decision by consensus. The coalition would be headed by a rotating coordinator from among the countries.A Treasury official said the process for setting the level of the oil price cap would constitute the next phase of the agreement, after technical details about enforcement had been decided and more countries had signed on to the coalition.The State of the WarDramatic Gains for Ukraine: After Ukraine’s offensive in the country’s northeast drove Russian forces into a chaotic retreat, Ukrainian leaders face critical choices on how far to press the attack.In Izium: Following Russia’s retreat, Ukrainian investigators have begun documenting the toll of Russian occupation on the northeastern city. They have already found several burial sites, including one that could hold the remains of more than 400 people.Southern Counteroffensive: Military operations in the south have been a painstaking battle of river crossings, with pontoon bridges as prime targets for both sides. So far, it is Ukraine that has advanced.An Inferno in Mykolaiv: The southern Ukrainian city has been a target of near-incessant shelling since the war began. Firefighters are risking their lives to save as much of it as possible.As U.S. officials think about setting the price cap, they are focused on two numbers: Russia’s cost of producing oil and the price that the commodity historically fetched on global markets before the war in Ukraine sent prices higher.The Biden administration realizes that Russia will not have an incentive to keep producing oil if a cap is set so low that Russia cannot sell it for more than it costs to pump it. However, setting the cap too high will allow Russia to benefit from the upheaval it has caused and blunt the cap’s ability to sufficiently curtail Russia’s oil export revenues.Before the war and the pandemic, Russian crude, known as Urals, typically sold for between $55 and $65 a barrel. Determining Russia’s cost of production is more complicated because some of its wells are more expensive to operate than others. Most estimates are around $40 per barrel.The price cap could settle somewhere among those numbers.Officials are also discussing whether shipping costs should be included in the cap or if it should just include the oil itself. Separate caps would be enacted for Russia’s refined oil products, such as gas oil and fuel oil, that are used for operating machinery and heating homes.A tanker with imported crude oil in China. The Biden administration hopes that even if China does not formally participate in the price cap the country will use it as leverage to negotiate lower prices with Russia.Agence France-Presse — Getty ImagesOil prices have hovered around $90 a barrel in recent weeks. Russian oil is currently selling at a discount of about 30 percent. Some analysts believe that designing the cap as a mandated level below global benchmark prices could be more effective since oil prices can swing sharply.“If you fix it at a certain level, that could create some risks because the market can fluctuate,” said Ben Cahill, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies, who noted that oil prices could fall below the cap level if it was set too high.“To increase the economic pain on Russia, you want to make the capped price substantially lower than the global average,” he said.As of now, the Treasury Department does not appear to support such an idea. The United States intends for the cap to be a fixed price — one that would be regularly reviewed and could be changed if the countries in the pact agreed to do so. The frequency of the reviews would depend on market volatility. Setting the cap at a discounted rate would introduce additional complexity and compliance burdens, the Treasury official said, because the cap rate could change hourly.Making sure the price cap is adhered to is another hurdle. Treasury Department officials have been holding discussions with banks and maritime insurers to develop a system in which buyers of Russian oil products would “attest” to the price that they had paid, releasing providers of financial services of the responsibility for violations of the cap.In its guidance last week, the Treasury Department said service providers for seaborne Russian oil would not face sanctions as long as they obtained documentation certifying that the cap was being honored. However, it did warn that buyers who knowingly made oil purchases above the price cap using insurance that was subject to the ban “may be a target for a sanctions enforcement action.”The impact of a price cap on global markets is difficult to predict. Mr. Cahill suggested that it could essentially create three tiers of crude, with some Russian oil being sold at the capped price, other Russian oil being sold illicitly or with alternative forms of financing and non-Russian oil being sold by other oil-producing nations.It is not clear how many countries beyond the Group of 7 will join the agreement. The Biden administration is hopeful that even if countries such as China and India do not formally participate they will use it as leverage to negotiate lower prices with Russia.Besides the oil cap’s price, the other big wild card is Russia’s response to it. Russian officials have said they will not sell oil to countries that are part of the price cap coalition, and analysts expect that the country will do its best to fan the volatility with some form of retaliation.The United States hopes that economic logic will prevail and that oil will keep flowing, albeit at a cheaper price.“Russia may bluster and say they won’t sell below the capped price, but the economics of holding back oil just don’t make sense,” Wally Adeyemo, the deputy Treasury secretary, said at a Brookings Institution event last week. “The price cap creates a clear economic incentive to sell under the cap.”Edward Fishman, a senior research scholar at the Center on Global Energy Policy at Columbia University, argued that the price cap could work because the incentives that it would create aligned most buyers, sellers and facilitators of oil transactions toward compliance. He suggested that global oil prices could end up organically gravitating toward the level of the price cap.However, Mr. Fishman acknowledged that Russia and its president, Vladimir V. Putin, might read the incentives differently.“There’s always a sliver of a doubt in people’s minds about Putin’s rationality and his willingness to set the global economy, and his own economy, ablaze in order to make a point,” Mr. Fishman said. More