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Moscow’s sanction-proofing efforts weaken western threats



Russia’s efforts to reduce its reliance on the global financial system have made it better prepared to weather the sanctions that the US and Europe have warned would follow a new attack on Ukraine.

The relative success of what investors have called Moscow’s “Fortress Russia” strategy is likely to make western threats less of a deterrent, analysts say. Meanwhile, the EU has not weaned itself off Russian gas, making any restrictions on Russian energy exports potentially self-damaging — and leaving the possibility for Moscow to retaliate by limiting supplies.

The western sanctions under discussion could go far beyond those passed following Russia’s annexation of the Ukrainian peninsula of Crimea in 2014. They could ape punitive measures used against Iran and North Korea that all but cut the countries off from the global economy.

But Russia’s finance ministry, which has stress-tested worst-case scenarios for years and set up a unit working to counter possible measures from the US Treasury’s Office of Foreign Assets Control, says Russia’s economy could withstand even those types of measures.

“Obviously, it’s unpleasant, but it’s do-able. I think our financial institutions can handle it [if] these risks emerge,” finance minister Anton Siluanov said last week.

The possibility of Russian aggression against Ukraine and subsequent financial retaliation from the US and Europe has increased after talks in Geneva and Brussels to defuse tensions were deemed “unsuccessful” by the Kremlin last week.

Russian president Vladimir Putin has deployed more than 100,000 troops along the Ukrainian border and threatened military action unless the west meets a series of security demands.

“When Putin asks what do we do if we get punished with sanctions for military actions, his officials can salute and say, ‘Yes, Vladimir Vladimirovich, we know exactly what to do’. And that gives them a sense of confidence that sanctions aren’t anything to worry about,” said Alexander Gabuev, a senior fellow at the Carnegie Moscow Center.

Since 2014, Russia has ramped up its foreign currency reserves and sought to start “de-dollarising” its economy.

Central bank reserves have soared more than 70 per cent since late 2015 and now surpass $620bn. Dollar reserves made up about 16.4 per cent of total reserves last year, from 22.2 per cent in June 2020, according to data published last week. About a third of the reserves are in euros, 21.7 per cent are in gold and 13.1 per cent are in renminbi.

In 2017, Russia gave its coffers another boost by merging its reserve fund with a newly created National Wealth Fund that accumulates surplus oil and gas revenue.

Surging oil prices, which have climbed beyond Russia’s budgetary break-even price of $43 per barrel, have boosted the fund to $190bn as of the third quarter of 2021. Russia expects it to grow to $300bn by 2024. Meanwhile, government debt is equivalent to about 20 per cent of GDP and is forecast to fall to 18.5 per cent by the end of 2023, according to credit agency Fitch Ratings.

Russia has also learned to lean less on foreign investors. Foreign ownership of Russian government bonds has dropped to 20 per cent after Washington barred US investors from trading in newly issued state debt last year. The measures have reduced foreign investment but also made the country less vulnerable to future external shocks or a sudden sell-off. The finance ministry sold most subsequent issuances following the ban to state-owned banks.

Russian companies have learned the lesson of the first sanctions, when many struggled to raise funds to pay off loans from western banks: corporate loans from foreign lenders have slumped from $150bn in March 2014 to $80bn last year.

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The 2014 sanctions and those sanction-proofing efforts have had a cost: The Russian economy has grown 0.8 per cent annually on average since 2013, compared with 3 per cent for the global economy. The conservative fiscal policy has restricted social spending and infrastructure investment. Real incomes have plummeted in the same time period.

Putin declined to spend the National Wealth Fund on pandemic relief, favouring a more limited stimulus than most western countries and a faster easing of Covid-19 restrictions, which epidemiologists say contributed to one of the world’s highest death tolls per capita.

The stability of Fortress Russia “is a sort of post-Soviet style stability, where you sacrifice economic growth for the sake of stability”, said Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs.

While Russia worked at reducing its dependence on foreign financing, the EU did little to reduce its reliance on Moscow’s energy exports — running the risk that sanctions could backfire.

The bloc imports more than 40 per cent of its gas and a quarter of its oil from Russia — leaving it exposed to shocks.

“The EU hasn’t learnt from its mistakes since 2014,” said Shagina. “It aimed to diversify from Russia in terms of gas, it aimed to become more resilient and more geopolitical. But we don’t see it.”

The west also relies on Russia for other important natural resources such as titanium. This could deter any sanctions against VSMPO-Avisma, the largest supplier of titanium for Boeing’s aircraft.

That interdependence may even make it more difficult for the west to pass broader sanctions against Russia’s financial sector. The US and EU are discussing a ban on transacting with major Russian state banks or cutting the country off from the SWIFT global payments system — but could only do so effectively if they stopped buying its exports, Gabuev said.

“You have to leave a channel open to pay Russia for oil and gas. [Sanctions] won’t make Putin change his mind, because any damage will be acceptable and the Kremlin thinks it has an answer,” Gabuev said.

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Beware the promise of salary advance schemes



High energy and food prices are particularly bad news for people who live from one payday to the next. In the UK, about 22 per cent of adults have less than £100 in savings, according to a government-backed survey. In the US, about 20 per cent of households say they could only cover their expenses for two weeks or less if they lost their income, according to the consumer protection regulator.

In this context, many employers are keen to do something to help their staff become more “financially resilient”. One increasingly popular idea is to partner with companies which provide “earned wage access” or “early salary advance scheme” products. These companies connect with an employer’s payroll to let employees draw down some of their forthcoming pay packet in advance.

The companies usually charge a fee per transaction (generally between £1 and £2 in the UK) which is paid by the employee or the employer. The products are largely unregulated because they are not seen as loans. They are proliferating in the UK, the US and a number of countries in Asia such as Singapore and Indonesia.

Revolut, the UK-based banking app, has also entered the market, telling employers it is a way to “empower employee financial wellbeing, at no cost to you”. Data is scarce, but research company Aite-Novarica estimates that $9.5bn in wages were accessed early in the US in 2020, up from $3.2bn in 2018.

In a world where many employers don’t offer ad hoc advances to employees any more, these products can help staff cope with unexpected financial emergencies without having to resort to expensive payday loans. Some of the apps like UK-based Wagestream, whose financial backers include some charities, combine it with a suite of other services like financial coaching and savings. There is also value in the clear information some of these apps supply to workers about how much they are earning, especially for shift workers.

But for companies which don’t offer these wider services, there is a question about whether payday advances really promote financial resilience. If you take from the next pay cheque, there is a risk you will come up short again the following month.

Data from the Financial Conduct Authority, a UK regulator, suggests users take advances between one and three times per month on average. While data shared by Wagestream shows 62 per cent of its users don’t make use of the salary advance option at all, 20 per cent tap it one to two times per month, 9 per cent tap it four to six times and 9 per cent tap it seven or more times.

As well as the risk of becoming trapped in a cycle, if you are paying a flat fee per transaction the cost can soon add up. The FCA has warned there is a “risk that employees might not appreciate the true cost” compared to credit products with interest rates.

Against that, Wagestream told me frequent users weren’t necessarily in financial distress. Some users are part-time shift workers who simply want to be paid after every shift, for example. Others seem to want to create a weekly pay cycle for themselves.

Wagestream users on average transfer lower amounts less often after a year. The company’s “end goal” is that all fees are covered by employers rather than workers. Some employers do this already; others are planning to as the cost of living rises.

Regulators have noticed the market but haven’t got involved yet. In the UK, the FCA’s Woolard review last year “identified a number of risks of harm associated with use of these products”, but didn’t find evidence of “crystallisation or widespread consumer detriment”. In the US, the Consumer Financial Protection Bureau is expected to look again at the question of whether any of these products should be treated as loans.

A good place to start for regulators would be to gather better data on the scale of the market and the ways in which people are using it.

Employers, meanwhile, should be wary of the idea they can deliver “financial wellbeing” on the cheap. Companies that believe in the value of these products should cover the fees and keep an eye on the way staff are using them. They could also offer payroll savings schemes to help people develop a financial cushion for the future. Nest, the UK state-backed pension fund, has just concluded an encouraging trial of an “opt out” approach to employee savings funds.

If employers don’t want to go down that road, there is a perfectly good alternative: pay staff a decent living wage and leave them to it.

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Jeff Bezos turns up heat on Joe Biden over US inflation



Jeff Bezos lashed out at Joe Biden’s White House on Monday over policies he claimed risked stoking inflation, escalating a war of words over the cause of sharply rising prices that are dominating US politics in an election year.

The Amazon founder and world’s third-richest person took aim at the Biden administration’s failed Build Back Better bill, which would have increased taxes on the wealthy and large companies to pay for spending on childcare, education and programmes to curb climate change.

“Administration tried their best to add another $3.5tn to federal spending,” Bezos wrote on Twitter. “They failed, but if they had succeeded, inflation would be even higher than it is today, and inflation today is at a 40-year high.”

Bezos’s attack was an uncharacteristic outburst for one of the world’s best-known businesspeople, who has not previously used Twitter to wade into contentious political disputes.

It followed a back-and-forth with the White House that began on Friday, when Bezos criticised a tweet from Biden that suggested one reason inflation had taken off was that wealthy companies did not pay enough in tax. Bezos retorted that while high inflation and the level of taxes paid by companies were issues that deserved to be discussed, linking the two was a “non sequitur” that should be put before “the newly created Disinformation Board”.

The White House reacted scathingly to the Bezos tweets. “It doesn’t require a huge leap to figure out why one of the wealthiest individuals on Earth opposes an economic agenda for the middle class that cuts some of the biggest costs families face, fights inflation for the long haul and adds to the historic deficit reduction the President is achieving by asking the richest taxpayers and corporations to pay their fair share,” a spokesperson said.

Bezos also came under fire on Monday from Lawrence Summers, the former US Treasury secretary, who broke with most economists early last year to start warning about the rising risk of inflation. Summers called the tech entrepreneur “mostly wrong”, adding that it was “perfectly reasonable to believe . . . that we should raise taxes to reduce demand to contain inflation and that the increases should be as progressive as possible”.

Tensions between Bezos and the White House have been exacerbated by the president’s support for organised labour, including unionisation efforts at Amazon that have been building since Biden took office 18 months ago. “It’s also unsurprising that this tweet comes after the President met with labour organisers, including Amazon employees,” the White House spokesperson said.

Since stepping down as chief executive of Amazon last year, Bezos has become increasingly active on Twitter and used it to make occasional barbed asides related to his personal views, though not with the frequency or vehemence of rival tech billionaire Elon Musk.

Last month, Bezos suggested that Tesla’s heavy dependence on sales to China could give the Chinese government leverage to force Musk to bow to censorship after his planned purchase of Twitter.

As with Musk, Bezos has shown libertarian political instincts and once waged a bitter fight with Amazon’s home city of Seattle over a proposed tax increase. Amazon has also long resisted unionisation by its employees, putting it at odds with the Biden administration.

However, Bezos has also at times backed liberal causes, including donating heavily to defend same-sex marriage in Washington state and hiring Jay Carney, a former press secretary in the Obama White House, to head public policy and communications at Amazon.

The public spat between Bezos and the White House was symptomatic of broader frictions between business and the Biden administration and Democratic lawmakers over inflation, with some officials blaming corporate America for price-gouging and taking advantage of rising prices at the expense of ordinary consumers.

However, most economists said inflationary pressures were due to a combination of factors including high demand driven by government stimulus and the rebound from the coronavirus pandemic downturn, as well as the oil price shock exacerbated by the war in Ukraine and supply chain bottlenecks that have been more persistent than expected.

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China’s extreme Covid lockdowns drag down economic activity



This article is an onsite version of our Disrupted Times newsletter. Sign up here to get the newsletter sent straight to your inbox three times a week

Good evening,

Could Covid be the undoing of the Chinese economic miracle? Figures released today show that lockdowns to enable President Xi Jinping’s zero-Covid strategy are enacting a significant toll on economic activity.

Industrial production, the motor that drove China out of the initial Covid shock in early 2020, dropped 2.9 per cent in April. This ran counter to expectations of a slight increase.

Meanwhile, retail sales, the country’s main gauge of consumer activity, slumped 11.1 per cent year on year, compared with forecasts of a 6.6 per cent fall from economists polled by Bloomberg.

Today’s data are a stark reminder of the economic damage being done by China’s zero tolerance approach to coronavirus, enacted through citywide lockdowns, mass testing and quarantine centres. Xi has reaffirmed his commitment to the policy as the tool to eradicate Covid ahead of his bid for a third term in power later this year, but it is expected to have deep ramifications, not just for China but for global supply chains.

The immediate future looks equally difficult for the world’s second-largest economy and its neighbours. The benchmark coal price for the Asian market was pushed to a record high today because of weak supplies from Australia.

High-energy coal shipped from the Australian port of Newcastle was assessed at almost $400 a tonne by Argus, a price reporting agency. That topped the previous high set in March after the invasion of Ukraine raised gas prices, pushing power stations to burn coal to generate electricity instead.

Latest news

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Need to know: the economy

The economic gloom has spread to the EU. Today, Brussels cut its growth forecasts further and lifted its inflation outlook, blaming the energy crisis triggered by Russia’s invasion of Ukraine.

Both the EU and euro area are set to expand by 2.7 per cent this year, significantly lower than the previous forecast of 4 per cent. Inflation is now expected to surpass 6 per cent, with some central and eastern European countries likely to see double-digit price rises in 2022.

Latest for the UK and Europe

British manufacturers are bringing production back to the UK, reversing the “offshoring” trend of recent years because of concerns about how the pandemic and Brexit have disrupted supply chains. Three-quarters of companies have increased the number of their British suppliers in the past two years, according to a survey by Make UK, the manufacturers’ trade group.

A key part of the problem for Europe in its effort to wean itself off Russian oil and gas is the existence of infrastructure “pinch points” across the continent. Jonathan Stern, research fellow at the Oxford Institute for Energy Studies, said many projects being reconsidered have been planned for years but rejected as not commercially viable when assessed against cheap Russian gas supplies. That assessment has now changed.

Global latest

G7 foreign ministers have warned of a global hunger crisis unless Russia lifts its Ukraine blockade. Speaking at the conclusion of a three-day meeting in Germany on Saturday, German foreign minister Annalena Baerbock said some 25mn tonnes of grain were stuck in Ukrainian ports that were being blockaded by Russian forces — “grain that the world urgently needs”.

Inflation has returned to haunt Brazilians, triggered by the surge in global food and fuel costs. At 12 per cent, it is now at an almost two-decade high and officials are increasingly concerned that price pressures are becoming entrenched across the economy.

Need to know: business

America’s shale oil companies are enjoying a cash bonanza, following months of capital restraint by a sector that suddenly finds itself in demand thanks to the global energy crisis. Operators will generate about $180bn of free cash flow — operating income minus capital and maintenance outflows — this year at current crude prices, according to research company Rystad Energy.

Column chart of $bn  showing US shale free cash flows are soaring

McDonald’s has announced that the invasion of Ukraine means it can no longer run outlets in Russia. The Chicago-based company, which operated 850 restaurants in Russia and employed 62,000 people, is looking for a Russian buyer that would retain these staff. It said it expected to book a non-cash charge of $1.2bn to $1.4bn for the exit.

Renault has sold its Russian business Avtovaz, which made the Lada, to a state-backed car institute for two roubles. The French company’s exit highlights the meagre options facing businesses trying to leave Russia without huge losses on their investments.

Ryanair chief executive Michael O’Leary has warned that the outlook for flying remained fragile and vulnerable to new shocks, as the carrier reported a loss of €355mn for the 12 months to the end of March, down from €1.015bn the year before. O’Leary added the airline would “do very well” over the summer if travel was not disrupted by a new coronavirus variant or the war in Ukraine spreading.

City centre shopping malls may at last be evolving into multipurpose hubs for business and leisure as well as shopping, as envisaged by their 20th century creator, Vienna-born architect Victor Gruen. But reinvigorating older centres will require investment, a challenge in a cash-strapped sector that has suffered from brutal value destruction, according to an FT analysis of the property sector.

The World of Work

Anger about high bonus payments for executives, often paid on top of hefty salaries, is easy to understand. But now studies have found that the whole system of paying people to hit targets is flawed. This is in large part because a lot of bonus systems are outdated in an age of knowledge work, writes FT columnist Pilita Clark.

Male managers in the UK are blocking efforts to improve the gender balance at British companies, according to research by the Chartered Management Institute. Two-thirds of the male respondents in the survey of 1,149 managers said they believed their organisation could successfully manage future challenges without gender-balanced leadership. The survey follows widespread condemnation of sexist remarks directed at Aviva chief executive Amanda Blanc at the company’s AGM last week.

Packing up a workspace is a huge task, but one Oxford scientist did just that and moved his team to the Netherlands, in part to be closer to his family after 14 years of working in the UK and partly to avoid the adverse consequences of Brexit for British science.

Covid cases and vaccinations

Total global cases: 515.2mn

Total doses given: 11.7bn

Get the latest worldwide picture with our vaccine tracker

And finally . . . 

Illustration of ‘Rutherford Hall’
© Eliot Wyatt

The FT has a new columnist, critical communications strategist Rutherford Hall. He kicks off this week by offering some (rather suspect) advice to London-based Russian businessman (don’t on any account say oligarch) Oleg on why building a new swimming pool in the upstairs of his South Kensington mansion might not be the best way to improve his image. Hat tip to the FT’s UK editor-at-large Robert Shrimsley for “recovering” these emails.

Working it — Discover the big ideas shaping today’s workplaces with a weekly newsletter from work & careers editor Isabel Berwick. Sign up here

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