Russia’s war on Ukraine boosts China’s financial ambitions

This is an audio transcript of the FT News Briefing podcast episode: Russia’s war on Ukraine boosts China’s financial ambitions

Jess Smith
Good morning from the Financial Times. Today is Tuesday, March 8th, and this is your FT News Briefing.

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Stocks were hammered on Monday and oil prices whipsawed on fears of a potential Russian oil ban. The US Treasury has put US banks on alert for Russian sanctions busters. And Beijing reconfirmed its loyalty to Moscow and western sanctions could make their friendship even tighter.

Tabby Kinder
Total bilateral trade between Russia and China is huge. I mean, it’s worth over $100mn, and this relationship will become even more concentrated now.

Jess Smith
I’m Jess Smith, in for Marc Filippino, and here’s the news you need to start your day.

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In financial markets yesterday, it was all about oil. More news about a potential ban on Russian crude sent oil prices spiking as high as $139 a barrel, then they tumbled down to $120. Jittery investors sold off stocks and the S&P 500 ended the day down nearly 3 per cent. To find out more, I caught up with our US energy editor Derek Brower. He’s at a Big Oil industry conference in Houston right now.

Derek Brower
So oil prices spiked when the market opened and went almost up to the record high. Actually, Brent was only about $6 away from the record high. And then they fell back through the day as it became clear that it isn’t kind of an open-shut case yet. There isn’t a blanket ban that’s going to affect Russian oil exports. If anything happens, it’s likely to be an import ban, which is a bit different. So traders kind of digested the news that, yes, the US was kind of changing its position but some other countries were saying, no, we still need to keep these supplies intact. And markets kind of fell back a bit. But don’t get me wrong, oil prices are really, really elevated right now, and we’re on the cusp potentially of a very damaging price spike.

Jess Smith
Derek, what kind of damage are people talking about?

Derek Brower
Yeah, this could be a really damaging price spike for the broader global economy. I’ve been speaking to analysts who said that, you know, if prices continue to rise, it could shave one or two percentage points off global GDP this year. This could be the start of a lost decade of oil demand that would affect the oil industry. But more importantly, for the rest of us, this could be the start of a very severe recession.

Jess Smith
Is there a perception that oil prices are going to stay elevated for a long time? And how is that affecting the decisions of people in the industry, you know, oil companies, whether it’s the big oil majors or smaller companies?

Derek Brower
Well, this is the really big problem that the oil market and the global economy are facing right now. It isn’t just the possibility of sanctions on Russian oil that are making oil prices go up. It’s that there have been years of underinvestment in new supply, combined with soaring demand. The world is on an absolute fossil fuel binge right now, and there aren’t enough fossil fuel supplies to keep up. And the timing is terrible because oil producers have been underinvesting. Wall Street hasn’t been letting them invest. But whatever the reason is, oil production hasn’t been growing as quickly as oil demand has been.

Jess Smith
So are we seeing more investment in oil production, especially now that prices are so high?

Derek Brower
I don’t think so. In fact, I’ve spoken to investors and I’ve spoken to chief executives of Big Oil producers, and they say the same thing, we don’t want the oil producers to change anything right now because the oil producers are making a lot of money and we like the huge, juicy dividends that they’re paying us. So it’s a real dilemma. There is a national, maybe even a security interest in some countries for oil production to increase, to cope with this sudden surge in oil prices. But the corporate interests on Wall Street, in corporate boardrooms are the opposite. They are to keep profits high and only to grow production very modestly.

Jess Smith
So Derek, I gotta ask what the mood is like there. You’re at this huge oil industry conference, we’ve got this war going on, a lot of fear in the oil markets. What’s the feeling you’re getting?

Derek Brower
Well, it’s really funny because the mood is really good. You’d think that in the middle of a geopolitical crisis, huge tragedy unfolding on our screens every night, and of course in Ukraine itself, that there would be something of a, you know, a downbeat mood among people, frankly, who’ve spent a lot of time in Russia because oil industry executives in the US have been shuttling back and forth between Houston and Moscow for the past 20 years. But actually, what you get here is almost a sense of relief and euphoria just because the oil price is so high, they’re making so much money. And their role in the global economy as suppliers of this lifeblood of the global economy, oil, they feel like they’re being, you know, being recognised again.

Jess Smith
Derek Brower is the FT’s US energy editor.

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The US Treasury department is warning US banks and financial institutions to be on alert for Russian attempts to evade sanctions. Treasury officials fear that Russian state actors and oligarchs may use cryptocurrency to skirt sanctions. They sent a note on Monday offering bank guidance on red flags like the use of shell companies to hide ownership or third parties to buy real estate. Treasury officials also encouraged crypto exchanges to identify and report any suspicious activity.

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Beijing has been under pressure to condemn Russian president Vladimir Putin for his invasion of Ukraine. But yesterday, Beijing defended what it called its everlasting friendship with Moscow. Beijing’s also criticised western sanctions, but sanctions could actually boost Beijing’s own ambitions for its currency. For years, it’s wanted the renminbi to be more of a global currency, as our Asia financial correspondent Tabby Kinder explains.

Tabby Kinder
China’s intent on establishing itself as one of the world’s leading powers, so having a currency that is used outside of its borders is crucial for that to happen. So globalising its currency means boosting its use in foreign trades, also turning it into a kind of store of value in international finance. And all of this would better protect China from fluctuations in exchange rates, protect its economy from market volatility in other countries in the west, and basically just help this ambition of China to become a larger player in international affairs.

Jess Smith
So Tabby, how is the war in Ukraine affecting China?

Tabby Kinder
We saw Russia invade Ukraine and the west united in a kind of unprecedented levels to cut Russia off from its global financial systems and financing. China, which doesn’t believe in supporting western sanctions, stands to benefit, right? Because Russia will be increasingly reliant on China as a major trading partner and the largest buyer of Russia oil and gas. So total bilateral trade between Russia and China is huge. I mean, it’s worth over $100bn, and this relationship will become even more concentrated now. China and Russia already have this agreement to de-dollarize, which means that they, in international settlements on oil and gas, for example, they deal in their own national currencies now, not the US dollar. Now those opportunities look to be larger. We might see Moscow use its foreign reserves in China to finance imports from the country and this is good for the renminbi. But basically, you still need to remember that there just aren’t many governments who would find it convenient to take payment in renminbi.

Jess Smith
OK, so still a long way to go for the renminbi. But do you see any risks to Beijing for maintaining such a close relationship with Moscow?

Tabby Kinder
Yes, China and Russia have forged close ties over the last few years and mostly on the basis of shared opposition to the dominance of the west, the dominance of the US dollar. But amidst the Ukraine situation, China has emerged as the only major economy that still has a direct line to a kind of isolated Russia. But yeah, there’s pressure on Beijing to change that. The question for China is does it want to be seen as funding a war and the invasion of a sovereign nation? China’s benefited hugely from globalisation and global trade, so it certainly doesn’t want to cut off all of its ties with, you know, what is increasingly becoming the rest of the world versus Russia.

Jess Smith
I want to ask about the Swift system. Russia was kicked out of this global interbank communication system after it attacked Ukraine. But China now has this alternative system. It launched it after Russia invaded Crimea. So this rival to Swift is called Cips. How much of a competitor do you think Cips can be?

Tabby Kinder
So China launched Cips in 2015. You’re right, it’s China’s answer to Swift. And I mean, it really does have a potential to be a game changer here because it has the ability to have more direct payments between the currencies of China and its trading partners, and that includes Russia. And this also has these messaging capabilities that allow it to bypass the Swift system entirely. And the Ukraine situation means there will likely be a broader adoption of Cips, especially by Russian banks. It’s likely that more transactions will be done in renminbi, so it’s gonna be really interesting to watch how Cips unfolds in all of this. But just to be clear, I mean, Cips is still tiny. Cips has 75 participating banks, which are mostly Chinese lenders, and Swift has 11,000 all over the world. And on Swift, renminbi only accounts for about 3 per cent of payments, so it’s certainly underutilised. But what we’re seeing now in Ukraine will encourage China to expand its audience for Cips.

Jess Smith
Tabby Kinder is the FT’s Asia financial correspondent.

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Western brands continue to leave Russia or suspend operations there. And there’s one in particular we want to mention before we go — it’s the denim jeans brand, Levi Strauss. This company has been a symbol of American appeal in western culture ever since the Soviet era. Back then, people would buy Levi’s on the black market. Yesterday, Levi Strauss said it was suspending operations and halting new investments in Russia. It cited disruptions in the region that made normal business untenable.

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You can read more about all these stories at FT.com. If you aren’t a subscriber yet, you can read our key Ukraine coverage for free. We’ve taken down part of the paywall. Just visit FT.com/freetoread. Again, that’s FT.com/freetoread. We also have a link to that in the show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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