Debate intensifies over proposals for Russian oil ban

Good evening,

Oil prices surged again today after the US appeared to be considering a ban on imports of Russian crude, as Europe desperately seeks new sources of energy amid the threat of a potential recession.

US energy editor Derek Brower looks at the current crisis in the context of the great oil shocks of the past. The closest parallel is in 2008, he writes, when Russian troops were preparing to invade another former Soviet republic (Georgia), crude prices were soaring and western countries were pleading with Saudi Arabia to open the taps.

The US oil price eventually hit an all-time high of nearly $150 a barrel, but — with the price of benchmark crude briefly topping $139 a barrel today — that record may not stay for long, he argues.

Yesterday, US secretary of state Antony Blinken said a ban on Russian oil was under “very active discussion” with European allies, resulting in the latest price spiral. This would be a serious escalation of the sanctions programme, with important implications for the world economy, especially in Europe.

As one head of research puts it: “Oil’s rally will accelerate inflation, rates will go much higher, financial conditions will tighten significantly, consumers will be squeezed and corporate activity will be jolted. Recessionary territory is on the horizon.” Oil intensive industries such as aviation will also be hit hard.

The White House had previously rejected the idea of an embargo, saying that it would limit global supply and raise prices for consumers. The FT’s Lex column says it would also require the west to cut back on consumption.

A longer-term solution involves increased investment in renewables, nuclear and liquefied natural gas, but history shows it takes years to reduce demand for crude, Lex notes. The US in the meantime has even sat down with erstwhile foes in Venezuela as it seeks alternative suppliers.

Some argue that unlike gas, on which the EU is heavily dependent, an oil boycott would be easier for Europe to bear, as well as hurting the Russian economy more, as Moscow’s oil revenues are more significant than those from gas.

Agreement may yet be too difficult to reach. This afternoon, Germany, which is dependent on Russia for imports of more than 55 per cent of its gas, half of its coal and 35 per cent of its oil, rejected the idea of an embargo. UK prime minister Boris Johnson separately conceded that western countries would have to move at different speeds, but denied there was a split with the US on the issue.

In the meantime, Russian tankers carrying oil and gas are criss-crossing the seas, unsure whether their intended customers will accept their deliveries.

The main difference between now and 2008, says Brower, is that the crisis comes against a bullish economic backdrop, rather than “the mother of all credit crises”.

“We’re continuing to underestimate the oil price that the world can cope with,” an executive at JPMorgan tells him. “If this is your first oil shock and you’re already wincing at the petrol pump, brace yourself. The market thinks you can probably take more price pain.”

For those wondering how to contribute to aid efforts for Ukraine, here’s our list of charities and the fundraisers supporting them, from art and jewellery sales to supper clubs.

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Need to know: the economy

Another of the most serious consequences of the commodities crisis is the impact on global food supply. As the FT Editorial Board reminds us, Ukraine has long been known as Europe’s breadbasket, but the Russian invasion — just ahead of sowing season — could extend the catastrophe to the rest of the world and push millions of people towards poverty and hunger.

Oleg Ustenko, economic adviser to Ukraine’s president, writes in the Financial Times that if the war is not stopped immediately “the world will experience a drop of global supply between 10 per cent to 50 per cent of major agrarian products, including wheat, barley, corn, rapeseed and sunflower oil”. Wheat prices today jumped 14 per cent to hit a fresh record.

Meanwhile, the price of gold has topped $2,000, while palladium — a key component of catalytic converters in cars — has shot up, as has iron ore, steel and nickel futures.

Join senior industry executives, traders and financiers on March 21-23 at the FT Commodities Global Summit to discuss the current crisis and trends that matter most in natural resources, including decarbonisation. Register here

Latest for the UK and Europe

UK chancellor Rishi Sunak is offering little more than reheated Thatcherism in response to stagnant productivity and a squeeze on living standards, says chief economics commentator Martin Wolf. The situation has been made worse by substantially increasing barriers to trade with the country’s important partners — put in place with Sunak’s enthusiastic support, Wolf notes. The head of Caxton, one of world’s oldest macro funds, said the government needed to borrow to improve its depressing growth outlook.

An EU summit this week was meant to discuss fiscal guidelines but is now likely to be dominated by the response to the Ukraine crisis. Options include a further relaxation of state aid rules and possibly the reallocation of some of the EU post-pandemic recovery fund, reports our Europe Express newsletter. Dutch finance minister Sigrid Kaag has warned against any watering down of EU borrowing rules.

Global latest

India has bounced back strongly from pandemic depths and is now the fastest-growing large economy in the world, but many of its 1.4bn people are failing to see the rewards, explains our latest Big Read. “The rich have been the beneficiaries of all the tax and monetary stimulus,” says a former central bank official, highlighting a potential backlash against prime minister Narendra Modi when key state election results are announced this week.

China’s new 2022 growth target of 5.5 per cent, unveiled at the weekend, is its lowest in three decades, as Beijing faces up to a loss of momentum in its recovery and the fallout from the Ukraine crisis. It follows year-on-year growth of just 4 per cent in the fourth quarter of 2021.

Need to know: business

The proposed takeover of Oxford Instruments by UK precision equipment maker Spectris has become one of the first big deals in London to collapse because of market uncertainty caused by the Russia-Ukraine conflict. The takeover would have created a FTSE 100 group worth about £4.5bn.

UBS, the world’s biggest wealth manager, said it had $10mn of loans outstanding to clients hit by Ukraine-related sanctions. The bank’s direct risk exposure to Russia was $634mn at the end of last year, out of an emerging markets total of $20.9bn.

EY has followed PwC and KPMG in dumping its business in Russia. However, the Big Four consulting firms (Deloitte is still mulling its options) are set up as networks of locally-owned partnerships, meaning these operations can continue as standalone firms under new names.

Visa, Mastercard, American Express and PayPal have now all suspended operations in Russia, tightening the country’s financial isolation. Our Moral Money newsletter examines corporate responsibility and how to judge businesses’ reaction to the crisis. You can sign up to that newsletter here

A combination of soaring energy prices and “chaotic” EU environmental policies mean construction companies face shortages of building materials, according to the head of Austria’s Wienerberger, the world’s biggest brickmaker. One ceramics company says EU emissions targets could devastate the industry in Spain, Italy and Poland, as expensive gas and carbon prices drain money needed to decarbonise kilns.

The expected decline in business travel after the pandemic is leading US airlines to redraw the flight map of America and focus more on holiday destinations and popular cities. Business travel is running at about 60 per cent of pre-pandemic levels for United and Delta and just 40 per cent for American Airlines.

Russia’s aviation industry, however, is in the middle of an entirely different type of crisis as it is denied access to air space, spare parts and insurance because of sanctions over the war in Ukraine. “The Russian aviation sector is now on a footing that is similar to North Korea and Iran — and similar to where it was under Soviet rule,” said one analyst.

The World of Work

Labour shortages mean businesses are not only upping wages and perks, they are also considering previous employees, or in recruitment jargon: boomerang workers. According to a study by Cornell University, boomerangs outperformed new hires, as well as reducing recruitment and training costs.

Companies are rolling out the attractions to get workers back on site, but for many the problem is not the office, it’s the commute, writes columnist Pilita Clark. “I suspect it is going to take a lot of free doughnuts to ease the pain,” she says.

Get the latest worldwide picture with our vaccine tracker

And finally . . . 

Visiting London and fancy catching some live music? Here’s our guide to the capital’s best venues, from intimate spaces to stadiums and everything in between.