Friday 11/03/22

1. In ACTIONS & CONSEQUENCES, the exodus continues and Abramovich gets caught up but Putin strikes back with more threats while Russia faces debt default and a nightmare for Aeroflot
2. In CONSUMER & RETAIL NEWS, food inflation continues, Netflix raises subscription prices, M&S’s chief is to step down and the bonus returns for John Lewis staff
3. In AUTOMOTIVE NEWS, BMW announces its best ever profits but Rivian has supply chain problems
4. In MISCELLANEOUS NEWS, US inflation hits new highs, the SEC starts to crack down on Chinese companies and jet leasing faces a massive nightmare
5. AND FINALLY, I bring you a Cadbury’s Creme Egg warning…

So sanctions continue to broaden and consequences grow…

The crisis in Ukraine is beyond words. Many stories that we see now of tragedy, sacrifice and loss make everything else pale into insignificance. However, I will continue to bring you news on this and everything else in the business and financial markets news because it may well have repercussions that have major consequences for us all and that we still need to understand better.

From miners to hoteliers, the exodus continues (The Times, Emily Gosden and Alex Ralph) highlights the growing exodus of companies from Russia that now include Rio Tinto (mining), InterContinental Hotels (hotels, funnily enough), GlaxoSmithKline (pharmaceuticals – although it will continue to supply medicines), Mondelez (choccies, biccies and stuff) and Walt Disney. U-turn for Uniqlo as it closes stores (The Times) shows that the owner of Uniqlo, Fast Retailing, which had been dragging its feet on the issue of withdrawal has changed its mind and said its stores will close immediately and Last of the City’s big law firms leave Russia (The Times, Jonathan Ames) shows that now all four of the City’s “magic circle” law firms that have offices in Russia have ditched their operations there as A&O and Clifford Chance are now out. I was mildly surprised to see Goldman Sachs and JPMorgan withdraw from Russia as Wall Street joins exodus (Financial Times, Joshua Franklin) given that they aren’t averse to operating in tricky circumstances but the Russian operation for Goldman, for instance, is pretty small in the scheme of things and Bloomberg told to pull the plug on data feeds to Russia (Daily Telegraph, Simon Foy) shows that data providers Bloomberg and Refinitiv have been pressured to cut off their financial feeds into Russia and Belarus by the governor of Ukraine’s central bank to curtail Russia’s access to international financial markets. Given that, between them, they account for over half of the global financial data market this could be a big deal. Although it won’t stop things completely, it will make life much more difficult.

The net continues to close in Roman Abramovich hit with sanctions by UK (Financial Times, Arash Massoudi, Laura Hughes and Samuel Agini) as the well-known oligarch saw a full freeze of his assets and a travel ban while Abramovich/sanctions: west must move quicker to block asset sales (Financial Times, Lex) appeals for swifter action in order to ensure that there are still assets left to seize. Wealthy Russians flock to Dubai as west tightens sanctions (Financial Times, Simeon Kerr) shows what

moneyed Russians are doing in response in order to get around increasingly tight sanctions being imposed by the US, EU and UK. There are already thought to be around 40,000 Russians and 15,000 Ukrainians in the UAE – and it looks like those numbers will swell. A company called Virtuzone, which helps companies set up in the UAE, has been seeing rising interest from Russians, Ukrainians and Belarussians in recent weeks.

How Putin could strike back against West’s sanctions (Daily Telegraph, Tim Wallace) shows what Russia could do in response to all this – namely, it could cut off gas supplies to Europe (this would hurt Germany and Italy particularly badly), block fertiliser exports and commodity exports (like palladium etc.), launch a full-scale cyber war and fully default on debt repayment to foreigners and/or seize assets. International impact: What would a debt default mean for the global economy (Daily Telegraph, Louis Ashworth) looks at what would happen if Russia defaulted on its debt (which it could do soon as it is due to pay out a $117m coupon on a Eurobond on Wednesday). If it doesn’t pay, it gets a further 30 days to do so but markets are preparing for a Russia default (which has only ever happened twice – once in 1917 and once in 1998). Banks, pension funds, asset managers and hedge funds own most of the $39.7bn of outstanding external debt and if Russia did default, recovery could be glacial because hardly anyone would  want to lend it money in the future (especially if they got burned this time around). As things stand, Putin seeks ‘legal solutions ‘ to seize assets of companies exiting Russia (Financial Times, Polina Ivanova) and Europe gas supplies at risk after Ukraine plants seized (Daily Telegraph, Giulia Bottaro) shows that Russia’s president is looking into drastic actions to retaliate against current foreign sanctions and stem the exodus.

In terms of other impact, Aeroflot’s decadeslong turnaround faces undoing (Wall Street Journal, Benjamin Katz) shows that recent sanctions by the West have, at a stroke, brought Russia’s flag carrier to its knees after years spent improving its reputation and efficiency. The airline is due to celebrate its 100th anniversary next year and although restrictions on airspace mean that it will have great difficulty doing long-haul, its domestic business is looking pretty shaky as well, particularly as parts are increasingly difficult to come by for maintenance. * SO WHAT? * As I keep saying, there aren’t really many sanctions that ONLY affect Russia – there is a whole load of collateral damage involved. How deep the damage goes and how long it lasts for will be determined by things such as the duration of the war, whether Putin is still in power and how he reacts to current sanctions. It continues to be a fluid situation.

Consumers face more rising costs and there are some interesting developments in retail…

Being a consumer is no fun at the moment and Food inflation: taking away the bread basket adds to higher bills (Financial Times, Lex) highlights what we already know – that the Russian invasion of Ukraine is going to affect agriculture enormously and, as a result, supply and prices. Combined exports from both countries account for 12% of total calories traded in the world, according to the International Food Policy Research Institute! The impact will be felt particularly acutely in North Africa and the Middle East which rely on Russia and Ukraine for 50% of their cereal needs. * SO WHAT? * As with energy, you would have thought that the obvious knee-jerk reaction to this would be for all countries to become more self-sufficient in the longer term. The UK currently produces about 60% of domestic food consumption by economic value, although obviously we do export as well. Good news for farmers, perhaps? Not great for consumers in the short-term though – higher food prices will just add to the misery. It looks like we’ll be paying more for escapism as well as Netflix raises price of subscriptions (Daily Telegraph, James Titcomb) shows that the streaming giant has raised prices for the second time in just over a year with basic and standard plans rising by £1 a month to £6.99 and £10.99 respectively while premium will increase by £2 to £15.99 a month. It is the first time that Netflix has raised the price of its cheapest package since 2012, so I guess fair enough really. I really think that people will start to rotate their

subscriptions now – so that rather than have Disney+, Netflix and Amazon Prime at the same time, people will rotate on a monthly basis between them as this is an easy thing to do IMO. If this does happen, it won’t be good for subscriber numbers for the streamers.

Meanwhile, in retailers, Boss Steve Rowe to step down after close to 40 years with retailer (The Guardian, Sarah Butler) shows that M&S’s big cheese is going to step down in May after six years as CEO. The man who started at the company straight from school is to be replaced by two co-chief execs (what’s that all about??!) – Katie Bickerstaffe and Stuart Machin (although the latter is going to be the more senior of the two). * SO WHAT? * The last 6 years has been a very rough ride but I think that things have really taken a major turn for the better in the last 12 months or so as it got Ocado on board to sort out its food offering and broadened its apparel business by getting joint ventures together and buying up other brands (e.g. Jaeger), which have all together made the company a more attractive proposition. I think this is a good time for the two new CEOs to take charge as Rowe has done a lot of the spade work, although there’s a chance that the Russia/Ukraine impact and overall economic backdrop is likely to blunt momentum somewhat as pressures on household budgets increase.

Elsewhere in the world of retail, John Lewis restores staff bonus as losses narrow (The Guardian, Sarah Butler) shows that optimism is starting to return to the department store/posh supermarket as it promised to pay a 3% bonus to employees. Hurrah! After a long period of cuts, disposals and closures there’s something for its staff to cheer about!

BMW does well but Rivian is being held back…

BMW shares fall despite largest profit in company’s 106-year history (Financial Times, Joe Miller and Peter Campbell) highlights BMW’s success, although its share price actually fell by 6% by late afternoon trading as euphoria was replaced by concerns that war in Ukraine would worsen supply chain problems.

There was bad news in Rivian Automotive curtails production in 2022 due to supply-chain disruptions (Wall Street Journal, Mike Colias) as flavour-of-the-month electric pickup truck maker Rivian announced deepening losses in Q4 and that supply chain problems would severely limit production this year. It reckons it will only be able to make 25,000 vehicles this year, but the market was looking for 40,000, hence the disappointment. Ouch.

US inflation continues to heat up, the SEC clamps down and Jet leasing faces nightmares…

In other news, US inflation reached 7.9% in February hitting new 40-year high (Financial Times, Colby Smith and Kate Duguid) puts even more pressure on the Fed to raise interest rates while SEC sets clock for delisting Chinese companies over US audit demand (Financial Times, Tabby Kinder, Eleanor Alcott, Stefania Palma and Jamie Smyth) shows that the SEC is limbering up for its own Great China Clampdown by following through on its threats to eject Chinese companies from their New York listings if they don’t provide the necessary disclosure. This could affect up to 270 companies and BeiGene, Zai Lab, HutchMed and ACM Research could be first on the chopping block. * SO WHAT? * US companies have been complaining for years about the way that Chinese companies have been getting away with being way less transparent in terms of

disclosure – and now that the US economy is a relatively decent place, it seems that the SEC is confident enough to wield the axe. It may well be, though, that they are going to be pushing on open doors because there is increasing pressure from China for such companies to repatriate anyway. 

There is an absolute nightmare in the making in Jet leasing firms face $10bn hit (The Times, Dominic O’Connell) as it turns out that Western aircraft finance companies could be facing a massive $10bn hit as they aren’t able to get planes leased in Russia out of there fast enough. Lessors have been trying their darndest to get their planes out before the March 28th deadline, but the Russians aren’t having any of it. Russia is making new laws that would make the handing back of any aircraft illegal if it was not first approved by a state commission and that any lease repayments would have to be made in roubles. * SO WHAT? * The company with the biggest exposure here is Aercap, the world’s biggest aircraft leasing group, but SMBC, Avalon Aerospace and Carlyle Aviation are also exposed. This could spark almighty insurance claims from lessors but they could drag on for years.

…in other news…

I thought I’d alert you to this in case you didn’t know about the hunt: Man ‘defeated’ after unknowingly scoffing Cadbury Creme Egg worth up to £10k (The Mirror, Zahna Eklund). Oh the anguish! Apparently you’ve still got until March 17th to hunt down the other eggs!