TheChek News Flow

Getir in talks to take over German grocery app rival Flink

Discussions come as consolidation accelerates in one of the pandemic’s hottest tech sectors

Grocery delivery app pioneer Getir is in talks to take over its lossmaking German rival Flink, according to people familiar with the deal, as consolidation accelerates in one of the pandemic’s hottest tech sectors.

The discussions between the two European groups are continuing and there is no guarantee of an agreement being reached, the people said.

The talks come almost five months after Getir, the Istanbul-based online grocery start-up, closed its acquisition of Berlin-based rival Gorillas in a $1.2bn deal that valued the combined group at $10bn.

Flink is one of Europe’s last remaining independent grocery delivery groups after a wave of consolidation over the past year, as capital-intensive businesses have fallen out of favour with investors given rising interest rates and the risk of a looming recession.

Founded in Berlin in 2020, Flink in January said it expects its core German business to be profitable by the end of 2023, after hitting €400mn in sales in 2022. The entire business, including subsidiaries in France and the Netherlands that launched last year, would be profitable by the fourth quarter of 2024, it added.

Both Getir and Flink share a common investor in Abu Dhabi sovereign wealth fund Mubadala Investment Company.

Flink is also in talks to raise around $100mn of funding from its existing investors at a valuation of more than $1bn, according to people familiar with the effort.

That would mark a comedown from late 2021, when the firm raised $750mn of financing at a $2.1bn valuation, before taking the new funding into account.

Getir and Flink declined to comment.

After more than a dozen rapid grocery apps — which promised to deliver groceries and convenience-store items in as little as 10 minutes — launched in the US and Europe by mid-2021, only a handful of players now remain.

Several smaller rapid delivery apps have either sold or pivoted their business models. In 2021, Getir acquired UK-based Weezy while US-based Gopuff bought Dija and Fancy and DoorDash invested in Germany’s Flink.

Getir’s acquisition of Gorillas in December brought together two of the most prominent start-ups to expand across Europe over the past two years. A merger between Getir and Flink would leave US-based Gopuff as one of the last big players in the sector.

As competition lessens, investors in the surviving players remain optimistic that cash-rich, time-poor consumers will still be prepared to pay a premium for the convenience of fast delivery of daily essentials, even at a time of high inflation.

Japanese companies seek growth beyond their shrinking domestic market

Astellas Pharma agreed to buy US biotech group Iveric Bio for roughly $5.9bn, marking the Japanese drugmaker’s largest-ever acquisition and giving it access to the rapidly expanding market for age-related eye diseases.

Astellas said on Monday that it would use cash and loans to buy the New Jersey-based company, formerly known as Ophthotech, for $40 per share, representing a premium of 22 per cent to the US company’s closing price on Friday.

The deal marks the latest acquisition by Japanese companies — including beer maker Kirin and IT specialist Fujitsu — seeking growth outside their shrinking home market, even as a weaker yen makes takeovers more expensive.

Astellas, Japan’s second-largest pharmaceutical company by revenue, has spent more than ¥1tn ($7.3bn) in overseas acquisitions and partnerships since 2007, including its $3bn purchase of US drugmaker Audentes Therapeutics in 2020 and its $3.8bn takeover of US-based oncology specialist OSI Pharmaceuticals in 2010.

The latest acquisition will add Iveric’s ACP to Astellas’ portfolio. ACP is a treatment currently in trials for geographic atrophy, an eye disease that affects 1.6mn patients in the US. Shares in Astellas briefly rose 2 per cent following the deal’s announcement.

“We hope that ACP will become our third pillar” alongside menopause drug candidate fezolinetant and bladder cancer treatment padcev, said Naoki Okamura, who took over as chief executive in April, during an online news conference.

Astellas is searching for new blockbuster medicines with sales of $1bn and more a year. It is under pressure because its US patent for Xtandi, a popular prostate cancer drug whose sales are shared with Pfizer, is expiring in 2027. For the current fiscal year until March 2024, Astellas expects sales of ¥670bn from Xtandi.

TURIN - Exor, the investment company of Italy’s Agnelli family, is on the lookout for further acquisitions in luxury. It’s already the biggest shareholder of the automaker Ferrari, one of the world’s most desirable cars. Now the Milan-listed company is in exploratory talks with a few other high-end brands, a senior industry source close to the company said. No concrete deal is afoot yet.

Exor is competing against the deep pockets and full Rolodexes of LVMH, Kering and the Qatari investment company Mayhoola, which owns the Italian fashion house Valentino. All three are keen to buy brands and suppliers.

To date, Exor has only made a few minor forays into luxury. It bought 80 percent of the lossmaking Hermès-backed Chinese luxury brand Shang Xia in December 2020. Five months later, it bought 24 percent of the French shoemaker Christian Louboutin.

Its results statement earlier this month said it had €5 billion in cash for acquisitions after completing the sale of its reinsurer PartnerRE.Some patriotic Italians say the Agnellis are the only ones with the financial firepower and national support to build a luxury group to rival French ones like LVMH and Kering. But this does not look likely anytime soon.

In an April 17 letter to Exor’s shareholders the word luxury only appears briefly and at the very end. “At Exor, we are focusing on deploying our capital within the healthcare, luxury and technology sectors, although we remain open to opportunities outside those industries where we can build great companies with great people,” said John Elkann, scion of the Agnelli family industrial empire and CEO of Exor.In its results statement,Elkann gives a deep-dive analysis of many of Exor’s investments in these areas but makes no mention of Louboutin or Shang Xia. Miss Tweed tried to find out more about the performance of these businesses and what their strategy might be.

But first who are the Agnellis and what are their ambitions in luxury? Historically, Fiat was the biggest private employer in Italy, making the Agnellis Italy's most powerful and influential family. As a result, they are often described as the de facto royal family of la Repubblica Italiana. However, their influence in Italy has dwindled. Elkann, the chosen heir of his grandfather Gianni Agnelli, has moved many parts of the family business out of Italy over the past decade. Fiat merged with Peugeot two years ago to become Stellantis, which is based in the Netherlands.

Elkann, through Exor, is the largest shareholder in Stellantis, controls the Turin football club Juventus and owns the Turin newspaperLa Stampa.Exor is alsothe biggest shareholder of The Economist Group. The Agnelli family is now considered part of the global plutocratic elite, rather than anything specifically Italian nowadays.

Elkann thinks he understands luxury because he has led Ferrari successfully over several decades, sources close to the company say. Cars and fashion are two different animals, but there are some common denominators. There are waiting lists for the bright red sports cars with the prancing horse just like there are for Hermès’ Kelly handbags.

It may be no coincidence that Hermès CEO Axel Dumas sits on Exor’s board since last year. His relationship with Elkann goes back a while. Although it was making losses, he convinced Elkann to take over Shang Xia and tap into Chinese consumers’ growing appetite for homegrown brands. That experiment has yet to yield profits.

Since then, Exor has tried to buy into other other luxury houses as well. In 2021, Elkann approached Italian designer Giorgio Armani about a cash and shares deal for his brand, offering Armani a significant share in the combined entity. Armani turned him down, several industry sources said. Armani is now 88 years old and his heirs may take a different view. Elkann will probably make another approach to the heirs when the time comes, the sources said. For the moment, the jury is still out on Elkann’s ability to run and grow luxury brands.

The person who oversees Elkann’s investments in Louboutin and Shang Xia is Suzanne Heywood, Exor’s Chief Operating Officer, a former British civil servant and McKinsey & Company partner. Prior to Exor’s investment in Shang Xia, Heywood sat on the board of Chanel for four years starting in 2017. It was part of Elkann’s plan to give her an opportunity to find out more about luxury. Heywood explored many of the brand’s different businesses, from fashion to make-up and high jewelry, the source close to the company said. In 2017, the French luxury powerhouse started the multi-year process of moving its headquarters from Paris to London. Heywood helped Chanel set up a board structure and an audit committee. “The relationship was mutually beneficial,” the industry source close to Exor told Miss Tweed on condition of anonymity.

Heywood now sits on the board of Louboutin and chairs Shang Xia. She is in talks with various brands Exor could invest in, and also in regular contact with head-hunters to find potential recruits in the luxury industry, the senior industry source said.

CRITICAL FRIEND

Exor believes it can compete against big groups because it is not bent on buying control. It is happy to remain the biggest minority shareholder and act a “critical friend” alongside the CEO-designer duo, the senior industry source said. That’s what convinced Louboutin’s shareholders to choose it over Gucci owner Kering in April 2021. Kering wanted control, Exor didn’t. It paid €541 million for a 24 percent stake in a deal that valued the luxury shoemaker at €2.2 billion – a pretty high price industry analysts said back then. Louboutin today makes under €1 billion in annual sales.

In its 2022 results published earlier this month, Exor reported that between 2021 and 2022, Louboutin’s net profit rose to €119 million up from €90 million and Shang Xia’s losses widened to €25 million from €10 million. The group injected €5 million into the Chinese brand.

Exor did not provide many figures regarding Louboutin. However, a source close to the company said the shoemaker’s organic sales growth in 2022 was in “double digits.” Louboutin is quite different from other rival luxury shoe brands in that every shop in the world has a different assortment and concept. Its boutique in Miami will have shoes with feathers and in bright, exotic colors, for example, while in New York it will carry mainly shoes for the office.

Some industry sources said Christian Louboutin and his investment partner Bruno Chambelland pocketed several hundreds of millions of euros each when they sold to Exor two years ago. They are no longer as hungry to make Louboutin grow as they were before the deal. But the industry source close to Exor say the Italian company is happy to be patient, though it would like to see the French shoemaker increase its presence in China where demand is growing. Louboutin also needs to address sustainability, a topic on which it is quite late compared to rivals, industry insiders say.

Louboutin is a very creative brand, but customers don’t always get what they want. When you go to a Louboutin boutique, you cannot just ask for the model you want. You need to give your size and the sales assistant will tell you what you can buy. Unsurprisingly, the brand needs to get rid of important amounts of unsold stock every year.

Marco Tosi, Louboutin’s Chief Operating Officer, gave more interesting details at Miss Tweed’s Luxury at the Summit conference in Val d’Isère in early April. The company makes around 1,000 shoe prototypes a year and puts into production only 200 of them. Around 75 percent of Louboutin’s products were renewed every three months, he said. That involved a complex logistical organization of more than 1,000 different suppliers. “Did you know that every stiletto required 240 different operations?” Tosi asked. “And some 100 people manipulated the product before it arrives in a store.” Louboutin’s best-selling Kate stilettos cost €745, or half the minimum monthly salary in France. The brand has diversified into bags and make-up in recent years, but they represent a small proportion of its total sales.

Around one quarter of Louboutin’s production is internalized, Tosi explained. That allows the company to cut production when demand is down and produce in very small quantities if it so wishes. Louboutin puts out 4,000 new products every year, he said. With so many different product references, the brand faces stock management problems. Around two years ago, it started opening outlets in its main markets in Europe, Asia and North American to turn some of that stock into cash. It now has around seven of them, the senior industry source close to Exor said.

Adding to the company’s supply chain complexity, big groups such as LVMH, Kering and Chanel have been taking away production capacity in the past decade, buying up the best shoemakers in Italy.

That said, Louboutin is an easy business for Exor to manage compared to Shang Xia. The brand has been in soul-searching mode since it parted ways with its Chinese founder Jiang Qiong Er last year. Er is still advising Exor on luxury matters, as Miss Tweed reported, but is no longer involved in the day-to-day running of the business. When Hermès launched Shang Xia in 2010, the brand’s story was about China’s ancestral savoir faire such as bamboo weaving, “eggshell” porcelain and hand-washed cashmere. It was meant to be the Hermès of China.

But Shang Xia turned out to be a money pit. After 10 years of losses, Hermès got it off its balance sheet. After Exor bought control in 2020, the Italian company realized that the market for its artisanal products was in fact quite small and its customer base quite old. “What Exor had was a brand that made beautiful pieces, some of them went into museums, but it was not a commercial brand, so it needed to be re-oriented,” the senior industry source close to Exor said.

In 2021, Exor hired Chinese designer Yang Li to develop a new line of clothing that would be quintessentially Chinese and of high quality. But an original, desirable and relevant Chinese fashion identity is not easy to pin down, Heywood and Elkann now understand. What does Chinese fashion stand for? If you live in a country with no freedom of expression, how is fashion supposed to thrive and reflect the Zeitgeist? Plus, the Chinese have been wearing Western-style clothes for centuries. Cutting-edge fashion was naturally European, they’ve long thought. That is currently changing with China’s rising cultural self-esteem known as guochao, or “national trend.”Chinese brands like Guo Pei and Masha Ma may be poetic and growing. But they steer clear of making any bold statements, as Miss Tweed reported in 2020.

Shang Xia’s core business in the past few years has been furniture. How do you build a fashion brand when your best-selling product is a carbon fiber chair? Li has produced three collections presented during Paris Fashion Week. None got very positive reviews. “There was a strong streetwear undercurrent that came through in leggings, shirt jackets, bombers and puffers with aerial mountain prints, some pinned with sculpted leather swallows,” WWD wrote about the last collection presented in March. “But all in all, the collection didn’t project a lot of luxury, and it’s unclear where Shang Xia is going in terms of landing on a set of recognizable brand codes.”

The rival Chinese luxury brand Icicle has the same problem. It uses beautiful and expensive fabrics but it does not have a particularly identifiable style or cachet. Icicle has several boutiques in Paris but none of them are profitable, industry sources say. They serve as marketing to show Chinese tourists that the brand has an international presence.

Elkann and Heywood are aware that the Chinese brand needs to find its footing and fine-tune its storytelling. There is no point investing too much in expanding its retail network in China and abroad until it’s got its strategy right, people close to the brand say. One of designer Li’s recurring themes is the Ming dynasty (1368-1644), one of China’s richest periods known for its exceptional porcelains, paintings, lacquers and textiles. So he added to the back of a coat the same large stripe found on the brand’s so-called Ming carbon fiber chair. But that is not enough to make people rave about Shang Xia.

Since 2019, Exor has also been trying to develop a clothing line around Ferrari but that business remains small, industry sources say. Exor has been staging runway shows in Maranello, the northern Italian town where Ferrari is headquartered, and invited fashion journalists to cover the event. But these clothes are sold only in a few stores and outlets in Italy and in the United States. Since September 2022, the Ferrari fashion brand is led by Carla Luini, who has never run a fashion business before. Luini worked for jewelers Pandora, Bulgari and the consumer goods group Procter & Gamble prior to joining Ferrari last year. Ferrari’s designer Rocco Iannone previously worked as creative director for Italian menswear brand Pal Zileri, one of Mayhoola’s most unsuccessful fashion ventures.

Now we understand why Exor remains so quiet about fashion and luxury. There’s not that much to trumpet about. However, that may change if Elkann manages to turn Shang Xia into a success story and invests in promising up and coming fashion and luxury brands.

Billionaire hedge fund titan Steve Cohen is pursuing the rights to build a casino in Queens with the same zeal with which he has stockpiled the high-priced roster of his Mets, according to a report.

Cohen, whose net worth is valued by Bloomberg at $13.1 billion through his ownership of the Point72 Asset Management hedge fund, has hired an army of lobbyists to persuade local officials to grant him a license to operate one of three casinos planned for the New York City area.

“He has hired the best team that money can buy,” Warren Schreiber, who heads a Queens civic organization opposed to the casino, told Bloomberg News.

Cohen was the largest single donor to Mayor Eric Adams’s 2021 election campaign, pumping $2 million into outside PACs to support Adams in the Democratic primary, Bloomberg reported.

HIs chief of staff at Point72, Michael Sullivan, has contributed to the political campaigns of elected officials who will grant approval for a casino license, including Gov. Kathy Hochul and state lawmakers from Queens, according to Bloomberg News.

The Mets owner, who is vying for the prized license against heavyweight competitors such as the Adelson family-owned Las Vegas Sands, Resorts World, Related Cos. and Wynn Resorts, is reportedly partnering with Seminole Hard Rock on a bid to build a gaming site on land adjacent to Citi Field in Flushing, Queens.

The Seminole Tribe of Florida acquired the Hard Rock brand in 2007.

The company operates dozens of casinos and resorts throughout North America, including the Mirage in Las Vegas.

Cohen and Seminole Hard Rock would build the casino on a parking lot just west of Citi Field.

To win a license, Cohen must first pay a $1 million application fee. If he is chosen, he must then fork over $500 million for the license itself.

Anyone who snags a casino license must then commit to spending an additional $500 million as a minimal investment in the project, according to Bloomberg News.

Judging by his ownership of the Mets, money is no obstacle to Cohen, who has reportedly retained the services of eight lobbying firms who are pressing elected officials in both city and state government.

The Mets this year have the highest payroll in major league history at $353 million.

Last year, a Cohen ally, Vincent Tortorella, formed New Green Willets, a limited liability company that is planning to spend at least $729,000 this year in lobbying fees for licensing, gaming, and land use issues.

Cohen’s wife, Alexandra, donated $117,300 to New York State’s Democratic Committee last year, according to The City.

Sullivan gave some $35,000 total to several state lawmakers who represent the areas in and around Citi Field.

Last month, Queens Assemblyman Jeffrion Aubry introduced legislation that would allow Cohen to redevelop the overflow parking lots around the baseball team’s Citi Field into a casino and entertainment complex.

In addition, Cohen has spent more than $1 million on a public relations blitz including “visioning” sessions with Queens residents as well as social media campaigns and a web site called “Queens Future.”

The “Queens Future” website makes no explicit mention of a casino. Instead, it speaks about an “opportunity” to “re-imagine this space and transform our future.”

A casino in the five boroughs would be a cash cow for whoever owns it as well as for the state, which would get a cut of the profits

An analysis commissioned by the state found that a casino in Queens could potentially generate $1.9 billion per year by 2025.

A casino in Flushing would be particularly advantageous for Cohen given the large Asian immigrant population in Queens — a coveted demographic..

One possible stumbling block to a Cohen-owned casino is the state’s requirement of a background disclosure form where applicants attest to their “integrity, honesty, good character and reputation.”

In 2014, Cohen’s hedge fund SAC Capital was forced to pay a $1.8 billion penalty to the federal government after pleading guilty to wire fraud and securities fraud.

Cohen, who was never charged criminally, was accused of failing to prevent insider trading at the company, which he founded in 1992 and which bears his initials.

The Post has sought comment from Cohen.

• The company has been under investigation by the Securities and Exchange Commission following The Information’s report last year about employee concerns

Abraham Shafi has stepped down as CEO of messaging app IRL following allegations that the company used bots to inflate the users it reported publicly and to investors, according to a person with direct knowledge.

The abrupt change happened after The Information reported a former employee alleged he was fired after expressing concern that a high percentage of IRL’s 20 million claimed users were bots. He researched the matter inside the company, which raised around $200 million from investors including SoftBank Vision Fund and Founders Fund, after The Information’s May 2022 report that other employees had expressed similar concerns. The Securities and Exchange Commission has been investigating whether the company violated securities laws, including in the way the startup described its business performance during talks with investors.

Shafi told The Information at the time of the May 2022 report that external measures of the app’s popularity, which showed much lower usage compared to the company’s user claims, didn’t account for teenagers and web visitors. Shafi couldn't immediately be reached for comment on Friday.

IRL’s app—whose name stands for “in real life”—allows users to chat about shared interests and plan real-world events. The seven-year-old startup raised capital from investors including SoftBank, Floodgate Fund, Goodwater Capital and Founders Fund, most recently in 2021, when it was valued at $1.2 billion after an investment. Kleiner Perkins and Dragoneer Investment Group also invested in the company, according to PitchBook

Schedules and emails detail meetings in the years after he was a convicted sex offender; visitors cite his wealth and connections

Training exercise points to larger difficulties as U.S. pivots toward China

The 31st Marine Expeditionary Unit is meant to be a rapid-response force, designed for quick deployment to handle crises anywhere in the Asia-Pacific region.

At times, it doesn’t have the ships to leave its bases in Japan.

The unit was supposed to be on board the amphibious warship USS Rushmore earlier this year for a training exercise intended to help maintain readiness. Then the Rushmore had maintenance problems, and the mission was scrubbed, defense officials said.

While the immediate impact was limited to a training exercise and temporary after another ship was brought in weeks later, the Marine unit’s grounded status illustrates the larger obstacles the U.S. is facing as it tries to pivot its military to handle challenges from China.

The Rushmore is large enough for helicopters to land and take off, and the lack of such warships, defense officials said, might prevent Marine units from deploying on time. In a crisis, the officials said, the Marines could make do with other types of ships, but going without the aircraft supported by the larger amphibious assault ships means no air cover, hampering troop landings and limiting operations.

Overall, the defense officials said, the Navy doesn’t have enough amphibious ships to transport troops—a central part of the Marines’ strategy to hop from island to island in the Asia-Pacific and harry Chinese forces in the event of conflict.

The bigger amphibious assault ships, known as big-deck ships, are in particularly short supply. Of the 31 such ships in service, roughly a third have undergone sufficient maintenance and training to deploy, according to Marines statistics. If one of those amphibious assault ships has maintenance issues, it can delay a mission, defense officials said.

“We are at the point where any little problem with one of the amphibious ships throws the schedule for the whole fleet and affects the Marines’ ability to deploy,” said Bryan Clark, a senior fellow at the Washington-based Hudson Institute. “If the pivot toward Asia really was a priority, we would ensure that the Pacific-facing amphibious ships were maintained ready.”

A Pentagon spokesman, asked for comment, referred to Defense Secretary Lloyd Austin’s remarks in March pointing to increased investment in forces and training exercises in the Indo-Pacific region. The spokesman declined to address the Marine unit’s deployment.

The Navy and Marine Corps referred requests for comment to the U.S. Pacific Fleet, which said in a statement that the Marine unit will soon deploy with other amphibious ships, though it didn’t say when.

Defense strategy documents, starting five years ago, identified China as a primary competitor for the U.S., setting in motion a shift of resources and plans to counter the Chinese military. Adjusting to the new priorities is running into difficulties after decades of fighting insurgents and dealing with threats from countries such as Iran.

The U.S. Air Force is reducing the number of F-15 jet fighters stationed in the Asia-Pacific region, though new replacements won’t be fully in place for two years, leaving what some military specialists say is a vulnerable gap. The Army has set up task forces to study its role in any future conflict in the Asia-Pacific but remains centered on Europe and other parts of the world. Other than adding a submarine in Guam, a front-line base, the Navy has yet to increase its presence, defense officials have said.

The limited number of amphibious ships affects a range of operations, defense officials and military specialists said. Gen. David Berger, the Marine Corps commandant, said earlier this year that the Marines couldn’t support earthquake relief in Turkey because there were no ships to transport the troops.

That shortage could become critical if China were to move against Taiwan, a longtime U.S. partner that Beijing has vowed to take control of, by force if necessary. If Taiwan faces a China threat, “time matters,” Gen. Berger said in recent congressional testimony.

“Most of the cases, you need a seaborne force,” Gen. Berger told the Senate Armed Services Committee. “And you need Marines that can project power ashore.”

Based in Okinawa, the 31st Marine Expeditionary Unit is made of roughly 2,200 Marines. On its website, the unit describes itself as “positioned to respond to crisis anywhere in the world.”

Units such as the 31st are likely to take a leading role if China moves against Taiwan or tries to seize other islands it claims, from the South China Sea to Japan’s outlying islands.

To deploy, those expeditionary units rely on a group of three ships known as an amphibious ready group, led by an amphibious assault ship, with a deck from which aircraft can take off. The ships are known as the Marines’ “ship-to-shore connector.”

After the Rushmore broke down, the Navy sent the USS Ashland, which also can launch helicopters, as a replacement, according to the Pacific Fleet, which is responsible for U.S. naval operations in the Asia Pacific region. It wouldn’t say how long the 31st waited for the replacement and how long the Ashland stayed in the region.

The 31st’s deployment problem is part of a debate over the size and shape of the future Navy. The Navy has said that it is meeting a congressionally mandated number of 31 amphibious assault ships and that it doesn’t have the funds to build more of the vessels, which cost as much as $2 billion a piece.

The Navy’s $255.8 billion budget request for fiscal year 2024 proposes decommissioning several amphibious warfare ships to save money and determine which kinds of ships are needed to deter China, Adm. Mike Gilday, the chief of naval operations, said at a recent congressional hearing.

Earlier this year Navy Secretary Carlos Del Toro said that there was a “strategic pause” on buying amphibious ships while the Pentagon conducts a classified study on the cost- effectiveness of building future ships.

While testifying before the Senate Armed Services Committee recently, Mr. Del Toro faced criticism from legislators who said the budget doesn’t address short-term needs.

“Let me be clear: this budget request has failed—yet again—to build a U.S. Navy fleet that is capable of meeting even basic tasks, to say nothing of growing strong enough to deter near-term threats,” Sen. Roger Wicker (R., Miss.) told Mr. Del Toro.

The sanctions net around Russia is tightening — but there is scope to do more

Too many countries are at best ambivalent and at worst profiting from helping the Kremlin evade sanctions

In February 2022, I compared the UK’s first round of sanctions against Russia and the Putin regime to taking a peashooter to a gunfight. The threat of sanctions failed to deter Vladimir Putin’s full-scale invasion of Ukraine and their early imposition was slow and lacked bite. Western leaders were initially poor at articulating their ambitions — which ranged from “degrading and disrupting” Russia’s supply chains to “shaking” the foundations of its economy. But they are now restricting Moscow’s access to the international financial system and applying ever-greater trade restrictions. 

While the tempo of sanctions designations has remained high, and the targets have broadened, the coalition of countries implementing sanctions has not. The holes in the net are significant and manifold. Too many countries are at best ambivalent and at worst profiting from providing sanctions circumvention opportunities for the Kremlin and its proxies. 

The recent US warning that Russia is trying to repair its degraded military industrial supply chains by getting around western export controls was a welcome one. The Financial Action Task Force (FATF), the global watchdog on financial crime, has also drawn attention to the risks posed to the financial system by Russia’s activity, such as its reported arms trades with other sanctioned jurisdictions. But this signalling presupposes that countries ignoring allied sanctions are inclined to agree with the view of the FATF (or the US). The UK and the EU do, but those countries providing circumvention opportunities for Russia are far less diligent, and indeed some rail against the FATF, seeing it as hypocritical.

Far better than relying on uninterested states to react to a process or guidance they already disregard, is to pressure their companies. While the UAE, Turkey and South Africa may choose to ignore sanctions decisions made in Washington, London and Brussels, the interconnected nature of global trade means their companies and financial institutions cannot: they need connections to international partners and are thus sensitive to the signals they receive.

For example, a bank in a non-compliant country that continues to offer financial services to designated companies or individuals will almost certainly require access to the international financial system. This access is most often provided by large, globally-operating banks located in the US, Europe or the UK that are required to implement sanctions to the letter. These correspondent banks must at the very least increase their scrutiny of these client banks, and if necessary sever their relationships altogether to avoid facilitating circumvention. Harnessing influence to coerce sanctions compliance in this way may seem distasteful, but so too is facilitating the funding and resourcing of Moscow’s war machine.

Beyond their direct connections with third country financial institutions, these global banks also facilitate trade finance payments and should be alert to changes in their corporate clients’ activities since the Ukraine invasion. In particular, they should interrogate companies which have increased business with the countries — such as Armenia, Kazakhstan and Turkey — that are acting as trade “cut-outs”, in effect helping Russia to evade sanctions.

Finally, those companies in countries that facilitate sanctions circumvention — such as the Iranian provision of drones to Russia — must themselves be added to the designation lists, to restrict their access to western markets. This has the added benefit of signalling to companies in compliant countries that dealing with these less scrupulous actors poses significant risks.

It was encouraging to see some efforts in this direction as part of the renewed western sanctions imposed on the first anniversary of Russia’s invasion. But there is still more that could be done — starting with better domestic implementation of sanctions in allied countries and more robust diplomatic engagement to reverse the progress Russia has made in blunting international support for sanctions.

There is no doubt that Ukraine’s allies have learnt lessons from their lacklustre sanctions response to Russia’s annexation of Crimea in 2014 and have come a long way from their tentative start last year. But as the Kremlin adapts and disguises its supply chains and financial connections, the west will need to assess and adjust its activities accordingly. On second thoughts, maybe there is no shame in taking a peashooter to a gunfight — as long as it is suitably nimble.

The writer is head of the centre for financial crime and security studies at the Royal United Services Institute think-tank

Berkshire Hathaway vice-chair foresees pain in FT interview — but it will not be as severe as 2008

Charlie Munger has warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall.

The comments from the 99-year-old investor and sidekick to billionaire Warren Buffett come as turmoil ripples through the country’s financial system, which is reckoning with a potential commercial property crash following a handful of bank failures.

“It’s not nearly as bad as it was in 2008,” the Berkshire Hathaway vice-chair told the Financial Times in an interview. “But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits . . . When bad times come they lose too much.”

Munger was speaking on the veranda of his home in Greater Wilshire, a leafy neighbourhood of Los Angeles where he has lived for 60 years since he designed the property himself.

Dressed in a plaid shirt, Munger held court from his wheelchair as the travails of ailing California-based bank First Republic were playing out in real time on a television screen airing CNBC in the background.

Berkshire has a long history of supporting US banks through periods of financial instability. The sprawling industrials-to-insurance behemoth invested $5bn in Goldman Sachs during the 2007-08 financial crisis and a similar sum in Bank of America in 2011.

But the company has so far stayed on the sidelines of the current bout of turmoil, during which Silicon Valley Bank and Signature Bank collapsed. “Berkshire has made some bank investments that worked out very well for us,” said Munger. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing.”

Their reticence stems in part from lurking risks in banks’ vast portfolios of commercial property loans. “A lot of real estate isn’t so good any more,” Munger said. “We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties. There’s a lot of agony out there.”

He noted that banks were already pulling back from lending to commercial developers. “Every bank in the country is way tighter on real estate loans today than they were six months ago,” he said. “They all seem [to be] too much trouble.”

Munger grew up in Omaha, Nebraska, a few hundred feet from where Buffett now lives. The two met in 1959, when Buffett was 28 and Munger 35. Munger, who at one point worked in a grocery store owned by Buffett’s grandfather, trained as a lawyer before being coaxed into investment by his soon-to-be partner.

Berkshire Hathaway chair Warren Buffett, left, and vice-chair Charlie Munger have known each other since 1959 © Scott Morgan/Reuters

Buffett has credited Munger with encouraging him to move on from the “cigar-butt strategy” espoused by his mentor Benjamin Graham, which involved buying cheap stocks akin to a discarded cigar where just a single puff of value remained.

In 2015, Buffett wrote in the conglomerate’s 50th annual letter: “The blueprint he [Munger] gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

This approach has served them well. Berkshire has generated compounded annual returns of nearly 20 per cent, twice the rate of the benchmark S&P 500 stock index, since 1965.

“We were a creature of a particular time and a perfect set of opportunities,” said Munger, adding he had lived during “a perfect period to be a common stock investor”.

He and Buffett had benefited “by and large [from] low interest rates, low equity values, ample opportunities”, he said.

Munger said he had made most of his money from just four investments: Berkshire, retailer Costco, his investment in a fund managed by Li Lu’s Himalaya Capital and Afton Properties, a real estate venture that owns apartment buildings in California and New Jersey. Forbes estimates his wealth at $2.4bn.

“It’s the nature of things that a very intelligent man working hard maybe gets three, four, five really good long-term opportunities of buying great companies at a cheap price,” he said. “It happens rarely.”

Ahead of the company’s annual meeting on Saturday, tens of thousands of Berkshire shareholders will descend on Omaha to hear from the two nonagenarian investors as they attend something akin to a festival of capitalism.

But Munger warned that the golden age for investing was over and investors would need to contend with a period of lower returns.

“It’s gotten very tough to have anything like the returns that were obtained in the past,” he said, pointing to higher interest rates and a crowded field of investors chasing bargains and looking for companies with inefficiencies.

“[At] the exact time that the game is getting tougher we’ve got more and more people trying to play it,” he said.

Berkshire has struggled to find worthwhile investments at times over the past decade, a fact epitomised by a cash balance that often sits in excess of $100bn and the choice by the company to buy back tens of billions of dollars of its own shares.

Munger also took aim at his own industry, hitting out at a “glut of investment managers that’s bad for the country”. Many of them are little more than “fortune tellers or astrologers who are dragging money out of their clients’ accounts, which [is] not being earned by any useful service”.

He had harsh words for buyout groups as well. “There’s too much private equity, too many buyers of all kinds . . it’s making it a very tough game for everybody.”

“The people getting the fees are still doing well,” he said of private equity fund managers. But he warned: “People that aren’t being served very well by paying all those fees may eventually be unwilling to pay them.”

Where Buffett has emphatically told Berkshire shareholders to “never bet against America”, Munger is more cautious. “I do not think that we can take it as a given that American democracy will prosper and flourish forever,” he said. “But I think we’ll stumble through pretty well for quite a while yet.”

On his own imprint on the world, Munger said: “I would like my legacy to be a more relentless determination to develop and use what I call an uncommon sense.”