Foreign companies help Russia maintain stability despite sanctions

Today’s top stories

Israel significantly softened its stance on the conditions for a hostage deal with Hamas, raising hopes of a breakthrough in diplomatic efforts to end the war in Gaza.

Humza Yousaf quit as Scotland’s first minister, forcing his Scottish National party into a leadership contest ahead of the UK general election expected this year. UK chief political commentator Robert Shrimsley said a reckoning for the party was inevitable but its goal of Scottish independence remained popular.

Pedro Sánchez said he would stay on as Spain’s prime minister after a pause in which he announced he was considering quitting amid a corruption probe into his wife.

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Good evening.

While Brussels attempts to close loopholes in its sanctions against Moscow and restrict its ability to wage war in Ukraine, western banks remaining in Russia are helping the Kremlin maintain financial stability.

Financial Times analysis shows the largest banks still in the country paid more than €800mn in Russian taxes, a fourfold increase on prewar levels, despite promises to minimise their Russian exposure after the full-scale invasion of Ukraine. Combined profits of the seven top European institutions were more than €3bn — three times higher than in 2021, partly generated by funds that the banks cannot withdraw from the country.  

Further evidence of the difficulties western leaders are coming up against when trying to follow through on pledges to close their operations came last week when a Russian court ordered the seizure of JPMorgan funds totalling $439.5mn a week after Kremlin-run lender VTB launched legal action against the US bank to recoup money stuck under Washington’s sanctions regime. 

Russia’s own banking sector appears to have recovered from the first wave of western sanctions, remaining one of the most important sources of the country’s non-energy revenues. State-controlled lender Sberbank last week announced its largest ever profit and a dividend payout of Rbs752bn ($8bn).

Russian president Vladimir Putin has also been adept at strengthening relationships with allies as western sanctions tighten.

Although foreign travel has become rare after the International Criminal Court issued an arrest warrant accusing him of war crimes, Putin plans to visit China next month. Trade between the two countries has shot up but there are signs that Chinese financial institutions are becoming increasingly wary of doing business with Russian companies for fear of falling foul of US secondary sanctions. US secretary of state Antony Blinken has also weighed in, warning that the US will take action unless China stops sending weapons-related technology to Russia.

Putin has also revitalised links with North Korea, allowing Russian ports to be used by sanctioned North Korean tankers to collect oil and petroleum products in apparent payment for artillery shells for use in Ukraine.

The west has been more successful in punishing Moscow when it comes to energy. As today’s Big Read details, Europe has been successful in weaning itself off Russian gas, albeit by creating potential new problems such as a heavy reliance on volatile markets for liquefied natural gas or LNG.

Sanctions have also been able to limit Moscow’s ambitions on the battlefield. 

As our latest military briefing explains, restrictions have made it harder for Russia to obtain the components needed for high-tech weapons, forcing it to rely on the lower-tech munitions it can mass-produce more easily. And with US aid finally on the way, Ukraine could expose the flaws in Russia’s attempts to overwhelm it with these low-quality weapons and a large but poorly trained army, albeit it with a massive superiority in numbers. 

Brussels meanwhile is turning the screw on European companies still operating in Russia with a new sanctions provision that could significantly affect they way they do business in the country. Multinationals are set to lose a carve-out that allowed them to provide their Russian subsidiaries with professional services like accounting, management consulting and legal advice.

Still, concern remains that Russia is weathering most of what the west is throwing at it. The head of a UK parliamentary committee told the FT today that there’s a “general consensus that sanctions are not working in terms of their stated intent — causing real trouble for the Russian economy”.

Dame Harriett Baldwin singled out the failure of items such as the US-led price cap on Russia’s oil sales and identified measures where the UK, in tandem with the US, EU and other allies, could do more, especially as some of the original batch of sanctions were more than two years old.

“The longer sanctions are in place, the more ways people find to get around them, and it’s pretty obvious that patterns of trade are changing to allow exactly that,” she said.

Need to know: UK and Europe economy

UK ministers announced plans to squeeze benefits claimed by millions of people with long-term disabilities and health conditions, as part of a drive to cut a soaring welfare bill.

Britons are spending less money boozing in pubs and bars than at any time since lockdown ended, according to new research that highlights continuing pressures from the cost of living crisis. Chief economics commentator Martin Wolf says UK policymakers should ask more searching questions about the causes and impact of the surge in prices.

Corporate legal investigations have been thrust into the spotlight after a rash of high-profile cases of alleged misconduct or company failings and accusations of whitewashing.

German inflation picked up unexpectedly from 2.3 per cent to 2.4 per cent in April, although core inflation, which excludes volatile energy and food prices, slowed from 3.3 per cent to 3 per cent.

Eleven EU members including France and Italy are set to breach Brussels’ rules on government spending which only allow budget deficits up to 3 per cent of GDP.

Need to know: global economy

A sharp rebound in the yen triggered speculation that Japanese authorities had intervened to support the currency after weeks of warnings.

Chris Dodd, former US senator and current adviser to President Joe Biden, said Washington could pass legislation this year for more free trade deals with Latin American countries to counter China’s success in the region.

Admiral John “Lung” Aquilino, commander of US forces in the Indo-Pacific, accused China of pursuing a “boiling frog” strategy, raising tensions in the region with increasingly dangerous military activity.

Need to know: business

Shares in Dutch health technology group Philips surged more than 30 per cent after it said it had reached a $1.1bn settlement over personal injury litigation claims filed in the US relating to its sleep apnoea devices.

Tesla chief Elon Musk met Chinese Premier Li Qiang and struck a deal with China’s Baidu search giant to deploy mapping and navigation in the world’s biggest auto market. Leading Japanese and Korean carmakers have also announced tie-ups with Chinese tech groups.

A new analysis suggests the EU would need to impose huge tariffs of about 50 per cent to stem imports of cheap Chinese electric vehicles.

Global airlines have been privately lobbying the EU to weaken plans to monitor non-CO₂ emissions including vapour trails, nitrogen oxides and sulphur.

Vinted, Europe’s largest online marketplace for used clothes, reported an annual profit for the first time. Founded in 2008, the Lithuanian start-up was last valued at €3.5bn in May 2021 and has been looking at finance options including a secondary share sale ahead of a potential stock market listing.

The World of Work

Average US executive pay has jumped 9 per cent to $15.7mn in the past year, widening the gulf with rewards in the UK. Several British bosses have warned of a talent exodus unless their pay is more competitive.

Do women in financial services have the same chance of getting ahead as men? An FT analysis finds little improvement in recent years, but there are some bright spots including childcare and workplace flexibility.

AI tools used by recruiters may be doing more harm than good. CV screening systems for potential bias, for example, are liable to filter out candidates from certain postcodes, a recipe for racial discrimination.

Columnist Emma Jacobs speaks to advocates of active commuting — combining a journey to work with physical activity — about its benefits, not just to fitness but mental health.

Some good news

A major study reveals that global immunisation efforts have saved at least 154mn lives over the past 50 years or six lives every minute of every year. The vast majority of lives saved were those of infants.