Russia Allows Chinese Banks To Buy Oil Without Letters Of Credit To Bypass Western Sanctions
One week ago, Shell quietly purchased Russian seaborne crude (at a record discount of $28.50) amid a self-imposed boycott by most other Western purchasers of Russian energy products, only to spark widespread populist outrage over its indirect funding of the Putin regime and prompting a vow from the largest European energy company to not purchase Russian crude any more. As a result, Moscow has found itself in the crippling position where despite carve outs for its oil exports (Europe has vocally refused to join the US ban of Russian energy exports), not a single western major is willing to buy Russian oil over fears of public backlash, while Chinese banks are reportedly on the fence when it comes to providing letters of credit to shippers seeking to purchase Russian oil, in the process freezing Russia's entire seaborne oil exporting industry.
So fast forward to today, when in hopes of short circuiting the Chinese quasi-ban, Russian oil giant Surgutneftegaz (Surgut) has allowed Chinese buyers to receive oil without providing guarantees known as letters of credit (LC) in order to bypass Western sanctions, Reuters reported citing three people with knowledge of the matter said.
A letter of credit, which allows 30 days for payment and is backed by a bank, is seen as the strongest guarantee for both sides.
The change in terms will allow Surgutneftegaz - which will now face a direct monetary risk that "something might happen" to the uninsured cargo but since it has no other choices it will gladly take it - to continue to sell ESPO Blend crude from the port of Kozmino in Russia's Far East to China, the world's top oil importer. As a reminder, Russian ESPO crude exports - of around 750,000 barrels per day in normal times - provide China's biggest source of spot crude.
While China has repeatedly voiced opposition to the sanctions, calling them ineffective and insisting it will maintain normal economic and trade exchanges with Russia, Bloomberg recently reported that Chinese state banks had restricted purchases of Russian commodities and stopped issuing U.S. dollar-denominated letters of credit for purchases of physical Russian commodities ready for export, perhaps out of fear of being seen as violating western sanctions.
To get round the restrictions, Chinese companies are using open accounts that allow the customer to buy goods on a deferred payment basis, with a requirement to pay in full up to three days after the cargo is loaded. It was not immediately clear which banks were involved.
Reuters also noted that payment in U.S. dollars was still possible during a grace period until June for the implementation of U.S. sanctions on Russia's access to the SWIFT international payment system. It added that arrangements were also being worked out with buyers of Russian Urals crude.
Since late February, Surgutneftegaz has failed to award most of the spot tenders for March-loading Urals as potential buyers did not bid after banks halted the issuance of LCs for Russian oil.
An energy shock and high inflation: are the 1970s reborn?
One thing is for sure. We won’t be going back to the 2010s
Those of us who remember the 1970s, even as children, are getting nervous. No decade is all bad. But very few of us would like a repeat of the inflation, the endless financial stress, the poverty — and in the case of many families (mine included) the migration in search of work.
Unfortunately, so far the 2020s are feeling rather too much like the 1970s for comfort. Dario Perkins of research group TS Lombard lists the ways. The 1960s saw one of the longest expansions on record. It also saw a flattening of the Phillips curve — that is, falling unemployment was not correlating with rising inflation in the way one might expect.
That emboldened policymakers to both prioritise full employment over low inflation (inflation did not appear to be the relevant risk) and to develop more activist fiscal policy.
This was the backdrop to a fabulous bull market. The FTSE All-Share index doubled in the two years to January 1969, when it peaked on a record price/earnings ratio of 23 times.
Then came a huge energy shock which built on previous inflationary rumblings. The Phillips curve normalised, wages started rising and the money supply surged. Policymakers blamed temporary factors — and stripped them out of the inflation numbers they used as their reference point. It was “transitory”, you see.
It sounds horribly familiar, doesn’t it? Particularly now that, notwithstanding Thursday’s sharp fall in the oil price, the energy price shock of the past few weeks is of 1970s-style magnitude.
Perkins is not convinced that we need to get as tense as I am beginning to feel. There is, he says, a huge and crucial difference between now and then, in the UK at least. Then, labour had power. Now it does not. Our population is not so young and “militant”, our trade unions are weak, our markets are much more open (companies can’t get away with price rises in the same way) and pretty much no one — pensioners and MPs aside — has their income in any way indexed to inflation. All that means that a wage price spiral can’t get going in quite the same way.
He might be right. I’d argue that workers will rebuild their bargaining power pretty quickly in the face of CPI inflation hitting 10 per cent. It is worth remembering that in the 1960s pay lagged behind inflation for some time before pressures appeared. There were murmurs in 1966 from the railways and the coal mines and things then took a turn for the seriously worse in late 1969 when Ford Motor workers went out on strike.
Still, whichever of us is more right — forecasters are rarely completely right — one thing is for sure. We won’t be going back to the 2010s.
The deflation machine that has been the driving force of the past few decades is properly broken, something that is fast turning out to be a terrible shock to fund managers who have only ever worked inside said machine, and so have hard-wired into their behaviour an assumption that moderate inflation and low interest rates would last for ever.
With globalisation reversing, labour costs at best no longer falling and the structural supply problem with materials and energy increasingly obvious, prices of pretty much everything must now rise. A reminder for those who think there is an easy way out: you need fossil fuels to make wind turbine blades and solar panels and you need a lot of nickel — up 90 per cent in two weeks — to make electric car batteries.
The question is just how much prices must rise, how fast and with how much volatility. That we can’t know. The war in Ukraine gives us some unpleasant clues about the short term (up a lot, very fast and with a lot of volatility) but the overlay of uncertainty means we can’t guess much more than that. Who knows, for example, what might result from attempts by money-printing governments to protect households from the sharply rising food prices caused by the horrors in one of the world’s most reliable producers of grain?
So where are the financial safe havens? You might think that as long as inflation stays in the 1 to 4 per cent region (Perkins’ guess) you’ll be safe in equities. That’s what we are often told. But it isn’t always so.
UK inflation only tipped over 5 per cent in 1969 but investors still lost out hugely in the 1960s: the market went up 20 per cent and prices went up 43 per cent. Extend it into the stagflationary 1970s and things look pretty bad too. From October 1964 to May 1979, a period which encompasses two Labour governments and one Conservative, UK stock market investors lost 31.7 per cent of their money in inflation-adjusted terms.
So much for the idea that an equity index can protect you from inflation, stagflation — or indeed anything else. The good news is that the one way an equity market can protect you is if you buy it at the bottom — the best long-term returns come from buying cheap markets.
It would be nice to think some markets are nearly there, particularly the US, which is at less risk of war-related recession than Europe. They aren’t. For that, we would need to be sure there was another wave of central bank money on the way, to know that energy prices are on the way down and to be sure that valuations are compelling. None of these things are true, or anywhere near to being true. For example, the Shiller price/earnings ratio for the US is still over 30 times against a long-term average of more like 16 times.
Waiting for them to be true is a slow process. Russell Napier, a market historian, likes to point out that the four great bear markets in the US lasted on average nine years each. In the intervening period, you should get some protection from commodities and from gold — you did in the 1970s.
But you would also be wise to look at multi-asset funds run by managers who have long known that the deflationary machine would break and who are invested accordingly. Look at Ruffer Investment Company, which is up a little in the year to date, Personal Assets Trust and Capital Gearing Trust. They are more ready than most.
Apollo considers cash takeover bid for UK publisher Pearson
US private equity group provides no details but education company’s shares surge after interest made public
Apollo Global Management is in the “preliminary stages” of evaluating a possible cash offer for UK education publishing group Pearson.
The US private equity group provided no financial details of a potential bid but expressed its interest in a statement on Friday. “Apollo . . . notes the recent market speculation in relation to Pearson and confirms that Apollo is in the preliminary stages of evaluating a possible cash offer,” it said.
Shares in Pearson soared 17 per cent in midday London trading.
Apollo must either announce a firm intention to make an offer for Pearson or withdraw by April 8. Barclays is acting on behalf of Apollo.
Pearson chief executive Andy Bird, a former senior Disney executive brought in to lead the FTSE 100 group in 2020, is under pressure to return the company to growth after years of disappointing returns. He has put a digital-led subscription model, sometimes likened to Netflix, at the heart of his plan.
Early premarket gappers
- Gapping up:
- PSO +21.7%, LAZY +14.2%, ALTO +13.9%, FUTU +7.9%, LOCO +7.3%, ANGI +4.2%, GORO +3.9%, MAPS +3.3%, SEAS +3.3%, PTON +1.9%, ULTA +1.7%, DADA +1.4%, RILY +1.3%, NAPA +1.3%, WPC +0.7%
- Gapping down:
- TLYS -25.2%, DOCU -18.2%, ZUMZ -14.3%, AVO -12.5%, RIVN -10.7%, AOUT -9%, CMTL -8.9%, SQNS -8.5%, LZ -7.2%, RRGB -6.6%, ISPO -5.4%, BLNK -5.3%, SHLS -5.2%, CCRN -3.4%, ORCL -3.2%, IRNT -2.7%, HCM -2.7%, FIZZ -1.8%, WPM -1.2%, VCTR -0.8%, YUMC -0.8%
BlackRock hit by $17bn of losses on Russian exposure
Sharp markdowns at world’s largest asset manager show broad impact of sanctions and shuttered markets
BlackRock, the world’s largest asset manager, has taken about $17bn in losses on its Russian securities holdings because of the attack on Ukraine.
Clients held more than $18.2bn in Russian assets at the end of January, the firm said, but shuttered markets and worldwide sanctions imposed after Russian president Vladimir Putin invaded Ukraine have made the vast majority unsaleable, leading BlackRock to mark them down sharply.
The firm suspended all purchases of Russian assets on February 28 and disclosed at that time that its holdings related to the country had fallen to less than 0.01 per cent of assets under management. A BlackRock spokesperson said the total value was around $1bn on February 28, when markets were effectively frozen, and the change was because of markdowns rather than asset sales.
The enormous value destruction reflects both BlackRock’s scale — it has more than $10tn in assets under management — and the damage that the Russian invasion of Ukraine has wreaked on the wider financial system.
Other large asset managers are also having to write down billions of dollars in exposure. Pimco, for example, held at least $1.5bn of sovereign debt and about $1.1bn of bets on Russia via the credit-default swap market before the war. Janus Henderson, Ashmore and Western Assets also have exposure to Russian debt, according to Morningstar.
US banks Goldman Sachs and JPMorgan announced plans on Thursday to pull their businesses out of Russia, saying they were acting in compliance with government instructions.
Larry Fink, BlackRock’s chief executive, said in a LinkedIn post after the markdowns that “this has been a highly complex and fluid situation, and BlackRock will continue actively consulting with regulators, index providers and other market participants to help ensure our clients can exit their positions in Russian securities, whenever and wherever regulatory and market conditions allow”.
BlackRock declined to give a breakdown of its Russian securities or detail exactly which funds have taken what losses.
But the asset manager has marked down the value of its largest Russian exchange traded fund, ERUS, from about $600mn at the end of last year to a total value of less than $1mn. It has suspended trading and waived the management fees on all of its Russian ETFs as well as an emerging Europe fund that was heavily exposed to Russia. That fund had a net asset value of €622mn at the end of January, but has been marked down to €269mn.
If tensions and sanctions ease, Russian securities could start trading more freely again and recover some of their value. In that scenario, BlackRock’s funds and clients could benefit as prices recover.
Google-Facebook Ad Deal Is Investigated by EU, U.K.
Antitrust authorities open probes into a once-secret 2018 deal known as Jedi Blue
The European Union and the U.K. opened formal antitrust investigations into whether Alphabet Inc.’s GOOG -0.88% Google and Facebook FB -1.66% owner Meta Platforms Inc. sought to illegally cooperate in digital advertising, one of the few instances in which major regulatory bodies are exploring whether two Silicon Valley giants acted together to thwart competitors.
Regulators around the world have heightened scrutiny of America’s biggest tech giants, probing a range of issues, including how much they pay in tax, how they handle data and privacy issues and whether they have engaged in anticompetitive behavior. With a few exceptions, the probes have mostly focused on individual players’ actions, not allegations that the big tech companies may have acted together.
The European Commission, the EU’s top antitrust enforcer, and the U.K.’s Competition and Markets Authority said Friday they are each investigating a once-secret 2018 deal, known as Jedi Blue, that emerged as part of a lawsuit brought a year and a half ago by a group of U.S. states led by Texas.
The Texas lawsuit argues that Google gave Meta special terms and access to its ad server, a ubiquitous tool for allocating advertising space across the web, in return for its abandoning a rival advertising technology that could have undermined Google’s control over online ads.
Both Google and Meta disputed the characterization of their deal as potentially anticompetitive. They both said it wasn’t an exclusive deal, and Google said Meta didn’t receive special treatment compared with other partners.
The opening of a case is a key procedural step in European competition probes. If the commission or the U.K.’s CMA find evidence of wrongdoing, they can file formal charges; if not, they say they could drop their cases. The two authorities said they plan to cooperate in their investigations.
The two new cases are part of a big wave of antitrust enforcement in Europe. In recent years, the commission has filed formal charges against Apple Inc. for allegedly abusing its control over the distribution of music-streaming apps, including Spotify, and against Amazon.com Inc. for allegedly using nonpublic data it gathers from third-party sellers to unfairly compete against them. Both companies have denied wrongdoing.
Google and Meta have been major targets. The EU opened a probe last year looking at whether Google abuses its leading role in the advertising-technology sector, while the U.K. has agreed to a settlement with Google giving the CMA oversight of the company’s plan to stop supporting an advertising technology called third-party cookies in its Chrome browser.
Google denies its ad-tech business is anticompetitive and says it will work with EU regulators in their probe. The company also points to its settlement with the U.K. as an example of how it works with regulators to promote competition.
The enforcement of existing laws also comes as big tech companies brace for the broadest expansion in technology regulation in a generation.
The EU is finalizing the texts of two new tech laws, one that seeks to limit potential abuses of dominance and the other that aims to force them to do more policing of online content, both backed by significant fines.
Friday’s cases will examine the 2018 contract between the two companies, in which Meta agreed for its so-called audience network, which displays ads on third-party websites, to participate in a Google ad program called Open Bidding, the authorities said. That Google program is an alternative to a rival technology that allows websites to circumvent Google’s powerful ad exchange when selling ads.
The Texas lawsuit claims that Google gave Meta preferential terms that effectively lowered its costs to buy ads, with the aim of undercutting the rival bidding technology, which is called Header Bidding. The EU and U.K. said they were investigating whether the Google-Meta deal aimed to exclude or hindered the growth of competing systems such as Header Bidding.
“We’re concerned that Google may have teamed up with Meta to put obstacles in the way of competitors who provide important online display advertising services to publishers,” said Andrea Coscelli, head of the U.K.’s CMA.
A Google spokeswoman said Friday that the company’s Open Bidding program has more than 25 partners and that Meta didn’t get preferential treatment. Google also said that Header Bidding’s popularity has continued to grow. A Meta spokesman said its Google deal is similar to those it has with other bidding platforms.