TheChek News Flow

Move against western lenders follows dispute with a subsidiary of Gazprom

A St Petersburg court has seized over €700mn-worth of assets belonging to three western banks — UniCredit, Deutsche Bank and Commerzbank — according to court documents.

The seizure marks one of the biggest moves against western lenders since Moscow’s full-scale invasion of Ukraine prompted most international lenders to withdraw or wind down their businesses in Russia. It comes after the European Central Bank told Eurozone lenders with operations in the country to speed up their exit plans.

The moves follow a claim from Ruskhimalliance, a subsidiary of Gazprom, the Russian oil and gas giant that holds a monopoly on pipeline gas exports.

The court seized €463mn-worth of assets belonging to Italy’s UniCredit, equivalent to about 4.5 per cent of its assets in the country, according to the latest financial statement from the bank’s main Russian subsidiary.

Frozen assets include shares in subsidiaries of UniCredit in Russia as well as stocks and funds it owned, according to the court decision that was dated May 16 and was published in the Russian registrar on Friday.

According to another decision on the same date, the court seized €238.6mn-worth of Deutsche Bank’s assets, including property and holdings in its accounts in Russia.

The court also ruled that the bank cannot sell its business in Russia; it would already require the approval of Vladimir Putin to do so. The court agreed with Rukhimallians that the measures were necessary because the bank was “taking measures aimed at alienating its property in Russia”.

On Friday, the court decided to seize Commerzbank assets, but the details of the decision have not yet been made public so the value of the seizure is not known. Ruskhimalliance asked the court to freeze up to €94.9mn-worth of the lender’s assets.

The dispute with the western banks began in August 2023 when Ruskhimalliance went to an arbitration court in St Petersburg demanding they pay bank guarantees under a contract with the German engineering company Linde.

Ruskhimalliance is the operator of a gas processing plant and production facilities for liquefied natural gas in Ust-Luga near St Petersburg. In July 2021, it signed a contract with Linde for the design, supply of equipment and construction of the complex. A year later, Linde suspended work owing to EU sanctions.

Ruskhimalliance then turned to the guarantor banks, which refused to fulfil their obligations because “the payment to the Russian company could violate European sanctions”, the company said in the court filing.

The list of guarantors also includes Bayerische Landesbank and Landesbank Baden-Württemberg, against which Ruskhimalliance has also filed lawsuits in the St Petersburg court.

UniCredit said it had been made aware of the filing and “only assets commensurate with the case would be in scope of the interim measure”.

Deutsche Bank said it was “fully protected by an indemnification from a client” and had taken a provision of about €260mn alongside a “corresponding reimbursement asset” in its accounts to cover the Russian lawsuit.

“We will need to see how this claim is implemented by the Russian courts and assess the immediate operational impact in Russia,” it added.

Commerzbank did not immediately respond to a request for comment.

Italy’s foreign minister has called a meeting on Monday to discuss the seizures affecting UniCredit, two people with knowledge of the plans told the Financial Times.

UniCredit is one of the largest European lenders in Russia, employing more than 3,000 people through its subsidiary there. This month the Italian bank reported that its Russian business had made a net profit of €213mn in the first quarter, up from €99mn a year earlier.

It has set aside more than €800mn in provisions and has significantly cut back its loan portfolio. Chief executive Andrea Orcel said this month that while the lender was “continuing to de-risk” its Russian operation, a full exit from the country would be complicated.

The FT reported on Friday that the European Central Bank had asked Eurozone lenders with operations in the country for detailed plans on their exit strategies as tensions between Moscow and the west grow.

Legal challenges over assets held by western banks have complicated their efforts to extricate themselves. Last month, a Russian court ordered the seizure of more than $400mn of funds from JPMorgan Chase following a legal challenge by Kremlin-run lender VTB. A court subsequently cancelled part of the planned seizure, Reuters reported.

The first outsider to run Vanguard needs to win over the Bogleheads. Colleagues say he can.

The first outsider to take the helm of investing giant Vanguard Group is the son of Tanzanian immigrants who didn’t attend college but wanted to ensure their three children did. Salim Ramji grew up in British Columbia and spent summers working in the grocery store his father ran. During the school year, he debated.

“Salim, who has won every debate he has entered in four years, is the first Canadian to win the World Student Championship,” a local newspaper reported in 1988 after Ramji advanced all the way from Victoria, B.C., to a global competition in England.

Vanguard on Tuesday named Ramji, 53 years old, its next chief executive. He will succeed Tim Buckley, who is retiring after six years. Ramji will run the $9 trillion asset manager, a behemoth responsible for the retirement assets of tens of millions of Americans.

Analysts say he’ll need to balance any ambitious new business plans with the conservative investing culture instilled by Vanguard’s late founder John C. Bogle. While Vanguard keeps its overall financial performance private, it remains a dominant player in the U.S. funds business, collecting $203 billion of new investor money last year. Ramji said in an interview he will hold off on discussing his mandate and mission for Vanguard until he sets foot in the door.

Ramji’s debate roots keep coming through in professional settings, in how he can win over a crowd, think quickly and communicate feedback both good and bad, former colleagues say.

“He could’ve said, ‘Let’s start a garbage removal practice,’ and he’d probably sign up half the office,” said Dominic Barton, former global managing partner at McKinsey.

Ramji says his mother gave him an early insight into his future customers. She put money away in the equivalent of a 401(k) plan each month, even if it was as little as $100, despite a lack of financial security and “a lot of ups and downs.”

After a stint as a lawyer in London and Hong Kong, Ramji joined McKinsey in 1998, where he rose to senior partner leading the asset management practice. From there he joined BlackRock in 2014, eventually heading up the money manager’s exchange-traded funds and index investing, the business that is Vanguard’s bread and butter.

Vanguard helped popularize low-cost, passive index investing under Bogle, who launched the first index mutual fund in the 1970s. The asset manager drove down fund fees by undercutting competitors over the decades. Its lower fees cascaded across the industry, ultimately lowering the cost of investing for average Americans.

Vanguard is the market leader in the U.S. funds business, though its ultracheap index funds no longer stand out among its peers. Competitors, such as BlackRock and Fidelity, offer identical funds for the same cheap fees.

Ramji will be tasked with growing other, newer revenue streams, such as fee-based financial advice, analysts say.

Unlike many of its competitors, the company is owned by its funds, a setup that it says helps it pass profits onto shareholders in the form of its cheaper fees.

When Ramji left BlackRock in January, he was one of a half dozen potential candidates to succeed founder Larry Fink. He was credited with the rapid expansion of BlackRock’s ETF business, which took in more new money than any other asset manager during his tenure. Ramji also oversaw the recent launch of BlackRock’s popular bitcoin-tracking fund—a product that Vanguard has publicly shunned.

While between jobs, Ramji has spent time back home in the Vancouver area, skiing and snowshoeing with family and high-school friends. He skis at Whistler and some of the smaller, local hills he grew up near.

He plans to relocate from New York to the Philadelphia area with his wife and two teenage sons and now finds himself torn over hockey team allegiance. He’s a Vancouver Canucks fan.

Vanguard maintains an army of loyal customers who call themselves Bogleheads and adhere to a simple investing style that emphasizes following the market over active trading. Ramji, the first Vanguard leader who never worked directly with Bogle, will be under the microscope from skeptics in this group who are concerned that a former management consultant might ramp up fees.

Ramji says Vanguard’s focus on individual investors won’t change under his leadership.

“I view the competition as complexity. I view the competition as high fees and barriers that are getting in the way of individual investors accessing good wealth management and asset management services,” he said. “Bogle wrote a lot of books and gave a lot of speeches. I’ve read them all.”

Ramji will need to navigate national politics at the helm of Vanguard. Congress has recently turned up the heat on the largest asset managers, with critics pointing to their vast size and shareholder voting power. Politicians on both sides of the aisle have criticized asset managers for doing too much or too little when it comes to proxy votes on issues like corporate diversity or climate change.

“Our industry has been dragged into political battles. And I think he’ll do remarkably well in that, because he’s even-keeled, sensible and rational,” said George Walker, CEO of investment firm Neuberger Berman.

Hydrocarbon exploitation in the South Pole is prohibited, but London is concerned about Moscow's hidden goals in the region.

Russia is not only interested in the Arctic, where its historical influence has been growing ever more in recent years, but is also looking towards the South Pole. Moscow has thus discovered gigantic hydrocarbon reserves in the Antarctic, representing no less than 511 billion barrels of oil, says the daily The Telegraph. The British were first alarmed by this news because the black gold in question would be found mainly in British Antarctica, a vast uninhabited area of ​​1.7 million km2 also claimed by Chile and Argentina.

The figures are spectacular: the whole world consumes around 36 billion barrels of oil per year, according to the Energy Institute Statistical Review of World Energy 2023, while the Telegraph recalls that these 511 billion barrels represent “10 times the production total North Sea over 50 years.

“Actor in bad faith”

It is therefore a potential El Dorado, except for one essential detail. The 1961 Antarctic Treaty, to which Russia is a party, strictly prohibits the exploration and exploitation of hydrocarbons in this region of the world. At this stage, Moscow denies violating international law: the research carried out by the vessel Alexander Karpinsky, chartered by Rosgeo, the agency in charge of identifying new geological reserves for commercial purposes, would only be “scientific” . But British MPs are concerned about possible circumvention of the treaty, after the Russians sent evidence of their discovery to the House of Commons Environmental Audit Committee (EAC) last week.

To date, British Deputy Foreign Minister David Rutley has nevertheless chosen to trust Russian promises, declaring to the said parliamentary committee that “Russia has recently reaffirmed its commitment to the key elements of the treaty” . A blank check that does not convince all the experts. “The Antarctic Treaty faces new challenges, notably from bad faith actor Russia and increasingly assertive China,” Klaus Dodds, professor of geopolitics at Royal Holloway College. Rosgeo has engaged in seismic studies and other related survey work. "Russia's activities must be understood as a move to undermine the norms associated with seismic research and, ultimately, as a precursor to further resource extraction."

Following the revelation of the activities of the Russian ship in the British Antarctic by a South African media – the Alexander Karpinsky having docked in Cape Town a month ago – the EAC therefore decided to challenge the management of the Foreign Office in the matter, learned the Telegraph, which recalls that the annual meeting of the signatory states of the Antarctic treaty will be held in India in May.

Behind this discovery ultimately lies the future of this decisive text for the South Pole. If it must be revised in 2048, any State party can also withdraw its signature and no longer be subject to the commitments of the treaty. “There will never be a reasonable time to extract hydrocarbons from Antarctica. Any attempt to exploit [them] will sink us all,” warns Professor Alan Hemmings, commander of the British Antarctic Survey station during the Falklands War between Argentina and the United Kingdom in 1982, who fears that the activities Russians, but also Chinese, ended up making the treaty obsolete.

North Pole and South Pole

The tensions that we are already observing in the Arctic could therefore find their counterparts on the other side of the globe. “Despite having no territorial claims in Antarctica, Russia, alongside the United States and China, has gradually strengthened its presence in the region in recent years through various scientific campaigns, establishing five research stations in the territory since 1957,” reports Newsweek magazine.

In February 2024, the Russians suspended their financial participation in the Arctic Council, which brings together all the states bordering the region, while Moscow increases the militarization of this region and develops its northern trade route along the Siberian coast , made more easily navigable with global warming and which allows the Russians to bypass Europe to find maritime commercial outlets to Asia.

L’exploitation d’hydrocarbures au pôle Sud est interdite, mais Londres s’inquiète des buts cachés de Moscou dans la région.

La Russie ne s’intéresse seulement à l’Arctique, où son influence historique s’accroît toujours plus ces dernières années, mais regarde aussi du côté du pôle Sud. Moscou aurait ainsi découvert dans l’Antarctique de gigantesques réserves d’hydrocarbures, représentant pas moins de 511 milliards de barils de pétrole, affirme le quotidien The Telegraph . Les Britanniques s’alarment en premier de cette nouvelle car l’or noir en question se trouverait principalement dans l’Antarctique britannique, une vaste zone inhabitée d’1,7 million de km2 également revendiquée par le Chili et l’Argentine.

Les chiffres sont spectaculaires: le monde entier consomme environ 36 milliards de barils de pétrole par an, d’après l’Energy Institute Statistical Review of World Energy 2023, tandis que le Telegraph rappelle que ces 511 milliards de barils représentent «10 fois la production totale de la mer du Nord sur 50 ans».

«Acteur de mauvaise foi»

Il s’agit donc d’un potentiel eldorado, à un détail près, essentiel. Le traité sur l’Antarctique de 1961, auquel la Russie est partie, interdit strictement l’exploration et l’exploitation d’hydrocarbures dans cette région du monde. À ce stade, Moscou se défend d’enfreindre le droit international: les recherches conduites par le navire Alexander Karpinsky, affrété par Rosgeo, l’agence pourtant en charge d’identifier de nouvelles réserves géologiques à des fins commerciales, seraient seulement «scientifiques». Mais les députés britanniques s’inquiètent d’un possible contournement du traité, alors que les Russes ont envoyé la semaine dernière des preuves de leur découverte au comité d’audit de l’environnement (EAC) de la Chambre des communes.

À ce jour, le ministre-adjoint des Affaires étrangères britannique, David Rutley, a pourtant choisi de faire confiance aux promesses russes, déclarant auprès dudit comité parlementaire que «la Russie a[vait] récemment réaffirmé son engagement envers les éléments clés du traité». Un blanc-seing qui ne convainc pas tous les experts. «Le Traité sur l'Antarctique est confronté à de nouveaux défis, notamment de la part de la Russie, acteur de mauvaise foi, et de la Chine, de plus en plus affirmée , a déclaré auprès de l’EAC Klaus Dodds, professeur de géopolitique au Royal Holloway College. Rosgeo s'est engagé dans des études sismiques et d'autres travaux d'enquête connexes. Les activités de la Russie doivent être comprises comme une décision visant à saper les normes associées à la recherche sismique et, en fin de compte, comme un précurseur d'une prochaine extraction de ressources».

À la suite de la révélation des activités du navire russe dans l’Antarctique britannique par un média sud-africain – l’Alexander Karpinsky ayant accosté au Cap il y a un mois –, l’EAC a donc décidé de contester la gestion du Foreign Office en la matière, a appris le Telegraph, qui rappelle que se tiendra en Inde en mai la réunion annuelle des États signataires du traité sur l’Antarctique.

Derrière cette découverte se joue finalement l’avenir de ce texte décisif pour le pôle Sud. S’il doit être révisé en 2048, tout État partie peut par ailleurs retirer sa signature et ne plus être soumis aux engagements du traité. «Il n'y aura jamais de moment raisonnable pour extraire des hydrocarbures de l'Antarctique. Toute tentative de [les] exploiter nous fera tous couler», met en garde le professeur Alan Hemmings, commandant de la station British Antarctic Survey pendant la guerre des Malouines entre l'Argentine et le Royaume-Uni en 1982, qui craint que les activités russes, mais aussi chinoises, finissent par rendre le traité caduc.

Pôle Nord et pôle Sud

Les tensions que l’on observe déjà dans l’Arctique pourraient donc trouver leurs pendants de l’autre côté du globe. «Bien qu'elle n'ait aucune revendication territoriale en Antarctique, la Russie, aux côtés des États-Unis et de la Chine, a progressivement renforcé sa présence dans la région ces dernières années à travers diverses campagnes scientifiques, établissant cinq stations de recherche sur le territoire depuis 1957», rapporte ainsi le magazine Newsweek .

En février 2024, les Russes ont suspendu leur participation financière au Conseil de l’Arctique, qui réunit tous les États riverains de la région, tandis que Moscou accroît la militarisation de cette région et développe sa route commerciale du Nord le long de la côte sibérienne, rendue plus facilement navigable avec le réchauffement climatique et qui permet aux Russes de contourner l’Europe pour trouver des débouchés maritimes commerciaux vers l’Asie.

The new tariffs on Chinese goods are the latest salvo in what analysts see as a trade war that could last for years. That could mean higher prices on a range of goods.

As questions over interest rates dominate the headlines, one risk to the economy is already here: the latest escalation in the global trade war.

China fired up its export machine in recent years, and that’s beginning to send a wave of cheap solar panels, electric-vehicle batteries, semiconductors, and other products to foreign shores.

This week, the U.S. fought back.

The Biden administration raised tariffs on $18 billion of goods from China as part of its long-awaited review of the tariffs levied by the Trump administration. The Biden administration said China’s control of production of critical inputs in key sectors such as energy, technology, and healthcare led to a surge in exports that threatens American businesses and workers.

The higher tariffs were largely targeted at areas President Biden has been aggressively investing in to bolster domestic production, such as electric vehicles, clean energy, and semiconductors.

The administration tripled tariffs on aluminum and steel to 25%, doubled them on semiconductors by 2025, quadrupled the tariff on electric vehicles to 100%, and doubled the rate on solar cells. Tariffs—essentially a tax on foreign goods—were also raised on ship-to-shore cranes and certain medical products. Tariffs on non-electric vehicle batteries and critical minerals like graphite will be boosted starting in 2026. The delay was aimed at helping companies transition as they rejigger supply chains, and domestic production in the U.S. gears up.

The tariffs are the latest salvo in what analysts see as a trade war that could last for years. Though administration officials said the new measures wouldn’t contribute to inflation, economists are worried that this is confirmation of a shift in global trade that could indeed lead to price increases—raising uncomfortable questions for markets and investors.

Chinese officials responded by urging the U.S. to “immediately cancel the additional tariffs on China,” and warning that “China would take all measures necessary to defend our rights and interests.”

Even before this week’s moves, rising U.S.-China tensions, the pandemic, and Russia’s attack on Ukraine forced a rethinking of globalization. Companies now prioritize resiliency over efficiency in their supply chains. Governments are leaning on industrial policy and trade restrictions to bolster domestic production of critical goods and protect domestic manufacturers.

“Our long-term inflation expectations have to be adjusted higher,” says Marko Papic, chief strategist at Clocktower Group, an alternatives asset manager. “And they haven’t been: Long-term inflation expectations remain well anchored at 2.5%. That matters for the assumptions you are making in your asset allocations and in valuations.”

Richard Bernstein, chief investment officer of macro investment firm RBA, says investors should pivot away from the so-called Magnificent Seven megacap stocks to what he sees as the next big investment trend: the reshuffling of trade.

Bernstein says small- and mid-cap U.S. industrial companies are poised to benefit from less competition from the trade restrictions, while many of the leaders of the recent bull market could be vulnerable. “Anything that causes secular inflation to become more of a reality—as tariffs would do—is likely to upset the market.”

A Global Battle

The U.S. is hardly alone in pushing back against China’s export machine. The European Union is expected to impose its own tariffs on Chinese electric vehicles in the coming months. Brazil is restoring tariffs on electric vehicle imports. India has levied tariffs on Chinese steel. Others are considering measures as China’s aggressive investment in critical areas like clean energy and advanced manufacturing has created overcapacity at home and a surplus of goods it is now trying to sell abroad.

When the trade war started during the Trump administration in 2018, markets whipsawed on every tit for tat between the U.S. and China. Trade frictions are broader-based this time, and come as the Federal Reserve is already grappling with inflation.

“There’s not much appreciation of the bigger 800-pound gorilla in the room: significant tailwinds to inflation coming not just from goods but also services,” says Torsten Sløk, chief economist at Apollo Group Management. “Trade has tentacles, indirectly or directly, into almost all the major factors of the consumer price index basket other than housing.”

Sløk says the protectionist policies will also feed into services through rising wages, a byproduct of producing closer to home at higher labor costs than in China.

The trade tensions could last awhile, says Claire Reade, senior counsel at Arnold & Porter, who formerly was focused on China at the Office of the United States Trade Representative in the Obama administration. “It’s going to be restrictions by a thousand cuts. The question: Is everyone going to remain conscious of the fact that they don’t want to cut so deeply that they are fundamentally wounding their economy?”

One reason for concern is that China shows scant signs of changing its approach. While Chinese leader Xi Jinping has denied any excess-capacity issues lately, he has prioritized investing in key strategic advanced manufacturing sectors, redirecting money that previously had made the property market a major engine of growth.

Selling higher-valued goods abroad—solar panels, batteries, electric machinery, semiconductors—is part of Xi’s playbook to help revive the world’s second-largest economy and position it for rising conflict with the U.S. and others.

China’s aggressive investment and subsidies contribute to Chinese companies’ cost advantage. But it goes beyond that. The heavy investment created intense competition that forced companies to constantly innovate to come out on top. The result: China has widened its cost advantage and closed the quality gap with foreign rivals. While U.S. export prices have risen 20% from 2019 levels and European and Mexican export prices are 15% higher, China’s export prices are flat.

Still stinging from the last time China fueled up its export machine in 2015 and flooded the world with cheap goods, policymakers are gearing up to protect their own players. The last surge in exports from China after it entered the World Trade Organization reshaped the U.S. and European labor forces. And this time, the Chinese economy is 10 times as large as it was two decades ago—and the threat is hitting higher-technology goods that are critical to countries’ economic prospects.

The speed of China’s ability to transform—from being the biggest customer of steel to its largest producer, and becoming a clean energy powerhouse—has created an urgency in global policy circles. While electric vehicles saw the biggest tariff increases from the U.S. and are at the center of the debate in Europe, the direction of China’s economic policy could mean increased output in other areas, from car parts to refined petroleum products, setting up trade battles to come.

China is producing far more than it can absorb domestically. The number of electric vehicle exports in 2023 is seven times greater than what China exported in 2019, and exports of solar cells are up fivefold from 2018 to 2023, according to Rhodium Group. China’s lithium-ion battery production is almost twice the volume of domestically installed batteries in 2022.

China’s share of global exports has risen to 14% but its exports to G-7 countries is down to 29%, from 48% in 2000. The first batch of tariffs and the push to make supply chains resilient is already changing the mix, with China selling less to the U.S. and Europe but more to emerging markets. But as China’s overcapacity in sectors critical to U.S. and Europe’s industrial bases and national security grow, policymakers are trying to act pre-emptively to protect their industries.

“We are seeing a sea change in the thinking about a trade war,” says Clete Willems, a partner for international trade policy at Akin Gump and former deputy assistant to the president for International Economics in the Trump administration. Both political parties are willing to use a much wider toolbox of trade restrictions to push back against China.

Eye on November

With the parties toughening their stance against China, trade rhetoric will likely heat up into the November U.S. election. More restrictions on technology, medical devices, and biotechs are expected in coming months from the Biden administration.

Another Trump administration would likely focus more on tariffs; outbound investment restrictions; and increased scrutiny of Chinese electric vehicles and parts, cloud computing, and biotechs on national-security grounds. Trump could also try to revoke China’s Permanent Normal Trade Relations designation, which had normalized trade relations between the countries. Revoking it would impose more tariffs on a range of goods from China, risk a greater retaliation from China, and impose greater costs on consumers and businesses. That could shave an estimated $1.9 trillion from gross domestic product over four years, according to a client note from J.P. Morgan’s global head of research, Joyce Chang.

While political analysts see potential for deal making and more willingness to consider Chinese firms investing in the U.S. in a Trump administration, they also think it could be more volatile for markets.

Trump has floated a 60% tariff on Chinese products and an across-the-board 10% tariff. At a campaign event last weekend, Trump said he would put a 200% tariff on every Chinese-made car coming from plants in Mexico.

“Just the proposition [of 60% tariffs] is so extreme that even if it doesn’t end up a policy in its own right, it could still rattle markets as investors examine what that means as the opening salvo on trade discussions with China,” says Sarah Bianchi, chief strategist of international political affairs and public policy for Evercore ISI who served as deputy U.S. Trade Representative from 2021 to 2024.

Over the next five years, Willems also expects a redefinition of where products come from, potentially linked to who owns a factory versus where it is based, as Chinese companies set up factories in Mexico and Vietnam.

China’s Response

At least for now, analysts expect China to retaliate in a measured way as it struggles with reviving its economy and waits to see what happens in the U.S. elections. Responses could include increasing scrutiny or pressuring the Chinese operations of U.S. and European auto makers and other industrial companies. China could also restrict access to critical minerals that it dominates.

Global business leaders in the auto industry estimated that almost a quarter of their profits could be at risk from policies and other sources of disruption in supply chains within a decade if these trends hold; electronics manufacturers and pharmaceuticals and medical-equipment makers each estimated that more than a fifth of profits could be at risk within a decade, according to a report from PwC Singapore commissioned by global asset manager Eastspring Investments.

The disinflation that came as companies sought the cheapest location is now giving way to a different phase of globalization. The potential costs to company profits, consumer pocketbooks, and entire economies aren’t adequately factored into investors’ longer-term assumptions, some economists believe. One snapshot of that increased cost: Taiwan Semiconductor Manufacturing’s plans to build a multibillion-dollar fabrication plant in the Arizona desert has been stymied by costly delays and labor shortages.

Higher costs could mean trouble for private equity, where investments are locked up for as much as a decade and valued using lower rates of inflation, says Papic, the Clocktower Group strategist. Unprofitable technology companies where valuations still don’t reflect a world of higher inflation are also at risk. For those looking for hedges, Papic favors commodities, industrials and metals, as well as emerging markets that are better positioned for inflation, shifting trade flows, or both.

Vietnam isn’t pulling a China. But political infighting will add to its growing pains.

The country of 99 million that emerged as an economic tiger and manufacturing rival to China has rested on placid, if opaque, relations within its Communist-pragmatic power elite. Not so much lately. Vietnam’s president and parliamentary speaker have both abruptly resigned over the past two months amid whiffs of impropriety.

President Vo Van Thuong exhibited “shortcomings that negatively affected the reputation of the party and state,” an official statement noted after his late-March exit. The VanEck Vietnam exchange-traded fund dropped 15% over the following three weeks.

Investors are wary that Nguyen Phu Trong, head of Vietnam’s Communist Party, could follow the example of China’s President Xi Jinping, purging rivals to forge a quasi-dictatorship. That’s a misread, says Gregory Poling, director of the Southeast Asia program at the Center for Strategic and International Studies, or CSIS. Trong, 80 and reputedly ill, will at best limp to the next Party Congress in 2026, Poling says. The next-generation apparatchiks vying for succession are divided by interest, not ideology. “The issue of communism versus capitalism was settled 15 years ago,” he asserts.

Economic growth should return to 6%-plus this year after a dip to 5% in 2023 on slackening global trade. President Joe Biden’s visit to Vietnam last autumn, followed by a $250 million investment from U.S. chip champion Nvidia, don’t hurt. “Vietnamese talent is exceptionally well suited to the semiconductor and AI sectors,” Nvidia CEO Jensen Huang enthused on a Hanoi stopover.

All of that spells bargains in underappreciated Vietnamese stocks, says Vlad Byalik, emerging markets equities portfolio manager at Ariel Investments. “Vietnam’s key growth engines are very robust and valuations quite reasonable for select companies,” he says.

One top pick is FPT, an information-technology services pioneer that is starting to compete globally with the Indian outsourcers. Its engineers and shares are both cheaper than better-known Bengaluru [India] rivals, Byalik argues. “FPT trades at a 30% to 50% discount to India with much better growth,” he says. He is also bullish on Mobile World Investment, a retail chain that is expanding from its base in electronics to groceries. Shares in both companies are up about 40% this year.

Andrew Brudenell, lead frontier markets portfolio manager at Ashmore Group, sees two Vietnams. He is staying away from consumer-facing companies, which are still struggling after last year’s slowdown, and focusing on names linked to unabated foreign investment. That means hunting for niche stocks connected to ports or industrial parks. Shares in leading port operator Gemadept have climbed by half over the past year.

Corruption-linked purges at the top do have a “chilling effect” on lower-level Vietnamese officials, which is delaying vital infrastructure improvements, says CSIS’ Poling. “Nobody wants to sign a paper to approve a project,” he adds.

The political stalemate, which may well last until the Party Congress two years from now, could also delay important regulatory upgrades for banking and real estate—sectors highly prone to crisis and scandal. Fallen property tycoon Truong My Lan was sentenced to death last month after bilking a bank she controlled.

“My primary concern on Vietnam remains lack of visibility into the banks and real estate developers,” says Alison Graham, chief investment officer of Voltan Capital Management.

Still, Vietnam’s economic miracle remains largely intact for now. “You would rather be Vietnam than any competing economy,” Poling says.