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EU Should Seize Russian Forex Reserves, Says Bloc’s Top Diplomat

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© Reuters

By Geoffrey Smith 

Investing.com — The European Union should seize Russia’s foreign exchange reserves to pay for the reconstruction of Ukraine, the EU’s top diplomat said in an interview published on Monday.

“I would be very much in favour because it is full of logic,” Josep Borrell, the EU’s High Representative for Foreign Policy, told the Financial Times.

Russia holds over a quarter of its foreign reserves in Germany, France, and Austria. Around another quarter is held by G7 members – the U.S., U.K., and Japan.

Seizing reserves would face significant legal hurdles, and would risk undermining global trust in an international financial system that has run for decades on the assumption that reserves – essential for the smooth processing of global trade – were essentially inviolate, however bad relations between countries became.

However, the bloc faces few more attractive options for rebuilding Ukraine if and when Russian troops withdraw. In addition, there is precedent for such a step, when the U.S. set aside $3.5 billion of Afghanistan’s dollar reserves to pay compensation to the victims of the 9/11 attacks in 2001. The attacks had been planned from Afghan territory by Al Qaeda leader Osama Bin Laden.

Borrell’s warning was published on the 77th anniversary of the end of World War 2. Russian President Vladimir Putin will hold a closely-watched speech in Moscow later at festivities commemorating the event, that may send important signals about how Russia wishes to continue a war in Ukraine that it started 70 days ago.

 

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U.S. considering move to block Russian debt payments -Treasury

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© Reuters. FILE PHOTO: Russian Rouble coins are seen in front of displayed U.S. Dollar banknote in this illustration taken, February 24, 2022. REUTERS/Dado Ruvic/Illustration

By Steve Holland

WASHINGTON (Reuters) -The United States is considering blocking Russia’s ability to pay its U.S. bondholders by allowing a key waiver to expire next week, a U.S. administration official said on Tuesday, which could put Moscow closer to the brink of default.

Russia has so far managed to make its international bond payments despite Western sanctions, which have complicated the process of paying. The country has $40 billion of international bonds and last month made a late U-turn by making overdue bond payments to avoid default.

Russia has not defaulted on its external debt since the aftermath of its 1917 revolution and was rated investment grade up until its Feb. 24 invasion of Ukraine.

Now Russia has a looming May 25 deadline when a U.S. license allowing it to make payments is due to expire.

Bloomberg News reported earlier on Tuesday that the Biden administration is poised to allow the waiver to expire as scheduled.

“It’s under consideration but I don’t have a decision to preview at this time,” the official told Reuters. “We are looking at all options to increase pressure on (Russian President Vladimir) Putin.”

Bloomberg said the administration has decided against extending the waiver as a way to maintain financial pressure on Moscow.

Western sanctions introduced following Russia’s invasion of Ukraine ban transactions with Russia’s finance ministry, central bank or national wealth fund.

The temporary general license 9A, issued by the Treasury Department’s Office of Foreign Assets Control on March 2, had made an exception for the purposes of “the receipt of interest, dividend, or maturity payments in connection with debt or equity.”

That license has allowed Moscow to keep paying investors and avert default on its government debt, and allowed U.S. investors to continue to collect coupon payments.

It expires on May 25, after which Russia will still have almost $2 billion worth of external sovereign bond payments to make before the end of the year.

Some market participants had speculated that the Biden administration may extend the waiver, so as not to punish U.S. bondholders.

The U.S. Treasury Department did not immediately respond to a request for comment.

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Analysis: Food inflation pain puts emerging markets between rock and hard place

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© Reuters. FILE PHOTO: Seref Geyik, a 53-year old seller, waits for customers at his stall at a local market in Fatih district in Istanbul, Turkey January 13, 2021. REUTERS/Murad Sezer

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By Karin Strohecker, Ezgi Erkoyun and Sarah El Safty

LONDON/ISTANBUL/CAIRO (Reuters) – Like for millions of people in developing and emerging market countries around the world, shopping for staple foods has turned from a necessity into a luxury for Selcuk Gemici.

The 49-year-old, who works in an auto repair shop in Turkey’s largest city Istanbul and lives with his wife and two children in his father’s house, says fresh produce is often out of reach with his family living on pasta, bulgur and beans.

“Everything became so expensive, we cannot buy and eat what we want – we only buy what we can afford now,” said Gemici. “My children are not properly nourished.”

Global food prices have climbed for two years, fuelled by COVID-19 disruptions and weather woes. Supply shocks to grains and oils from Russia’s invasion of Ukraine saw them hit an all-time record in February, and again in March.

Inflation rates have soared, with energy price rises adding to pressure. Turkey or Argentina with annual inflation of 70% and around 60% might be outliers, but readings are into double-digits in countries from Brazil to Hungary. It makes U.S. inflation at 8.3% look modest in comparison.

Rising food prices are a hot topic in emerging market, raising the risk of civil unrest with echoes of the Arab spring and putting policy makers in a bind between stepping in with fiscal support to ease the pain on their population or preserve government finances.

Food is the single largest category in inflation baskets – the selection of goods used to calculate the cost of living – in many developing nations, accounting for around half in countries like India or Pakistan and on average for some 40% in low-income countries, International Monetary Fund data shows.

Food producers have become more protective: India on the weekend announcing a ban on wheat exports while Indonesia halted exports of palm oil to control soaring prices at home in late April.

Soaring wheat and rising food prices fuel inflation https://fingfx.thomsonreuters.com/gfx/mkt/klvykoeqwvg/Soaring%20wheat%20and%20rising%20food%20prices%20fuel%20inflation.PNG

And with the war in Ukraine not only disrupting food but also fertilizer supplies, food inflation could be more longer-lasting, Marcelo Carvalho, head of global emerging markets research at BNP Paribas (OTC:BNPQY) told Reuters.

“This is here to stay,” said Carvalho. “Food is very salient – when there is a change in food prices, the perception about inflation is magnified – that feeds into inflation expectations that are more easily unanchored.”

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For Um Ibrahim, a 60-year-old widow and street vendor selling headscarves in front of a mosque in the middle-class district of Madinet Nasr in Egypt’s capital Cairo, feeding her four children has become much harder.

“All prices rose – clothes, vegetables, poultry, eggs – what am I going do?” she asked, laying out her ware on a cloth.

Egypt, one of the world’s biggest wheat importers, has seen inflation soar more than 13% in April, and is expected to hike interest rates again at a meeting this week after it devalued the currency by 14% in mid-March.

Emerging market policy makers, having jacked up interest rates by hundreds of basis points cumulatively since 2020 to curb price pressures and ensure a bond premium to rising U.S. yields for investors, have to perform a balancing act between taming inflation and keeping fragile growth alive at a time of rising global interest rates.

Emerging economies may expand just 4.6% this year, the World Bank forecasts, compared with an earlier 6.3% prediction.

Emerging market inflation https://fingfx.thomsonreuters.com/gfx/mkt/mopanzmmqva/EM%20inflation%20pressures.PNG

Polina Kurdyavko, head of EM debt at BlueBay Asset Management, says governments have three options: Provide bigger subsidies to consumers or bite the bullet that is to let prices rise and face inflation and social unrest, or do something in between.

“There are no easy solutions,” Kurdyavko said.

A raft of countries have introduced measures: Turkey has raised the minimum wage by 50% in December to address a currency crash and inflation spike. Chile will up minimum pay this year as well.

South Africa’s government is debating whether to increase a social relief grant launched in 2020 and make the scheme permanent.

Economists fear emerging economies are facing a fresh wave of unrest on the back of the latest increases in food prices. North Africa, where food inflation was a contributor to the Arab Spring revolts a decade ago, looked particularly vulnerable, said Beata Javorcic, chief economist at the European Bank for Reconstruction and Development.

“The irony of this war is that while everybody expected Russia to have a crisis, it is actually North African countries that are closer to having an emergency situation due to high food prices,” she said.

But pain is expected to stretch further: Three quarters of nations expected to be at high-risk or extreme risk of civil unrest by the fourth quarter of 2022 were middle-income countries, risk consultancy Verisk (NASDAQ:VRSK) Maplecroft said last week.

Appeasing inflation pressures through spending will come at a fiscal cost that could spell trouble further down the line, said BNP’s Carvalho.

“In emerging markets, fiscal sins are forgiven but not forgotten,” he said. “Over the last couple of years, everybody felt like they have a blank cheque … in part because rates were so low. Now that interest rates are rising, it gets a bit trickier.”

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Dollar Up, but Falls From 20-Year High While Yuan Pauses Tumble

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© Reuters.

By Gina Lee

Investing.com – The dollar was up on Tuesday morning in Asia as it continues its fight for a footing. The Chinese yuan found a floor from its recent drop, however, with investors reducing bets on rising U.S. interest rates leading to further gains for the U.S. currency.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched up 0.02% to 104.04 by 11:29 PM ET (3:29 AM GMT). The index is around 0.8% below Friday’s 20-year peak of 105.100.

The USD/JPY pair edged up 0.13% to 129.32.

The AUD/USD pair was up 0.39% to 0.6997 and the NZD/USD pair was up 0.26% to 0.6323.

The USD/CNY pair was down 0.23% to 6.7709 while the GBP/USD pair edged up 0.13% to 1.2334.

The dollar edged from a two-decade high in the week so far and kept losses small in early Asia trade. U.S. bond yields, on the other hand, have pulled back slightly as traders calculate that aggressive near-term interest rate hikes from the U.S. Federal Reserve will drag on long-term U.S. growth.

Across the Atlantic, the euro rose about 0.1% on the dollar to $1.0446, and the pound jumped around 1.5% from a two-year hold. The yen is holding above a two-decade low, while the riskier Australian and New Zealand dollars inched up around 0.1% and are off multi-year lows.

The Chinese yuan was steady at 6.7953 per dollar in offshore trade and looked like it was finding a base after falling more than 6% in a month. Shanghai reportedly hitting a milestone of three days of zero community transmission and the city could start easing out of its grueling lockdown. This could help offset Monday’s disappointing economic data.

Signs of more policy support are also emerging, with China cutting mortgage rates for first-home buyers over the weekend. Authorities also asked some financially healthy property developers to sell bonds, sources told Reuters on Monday.

Dollar/CNH has been a big driver of G10 currencies,” Pepperstone head of research Chris Weston told Reuters, in reference to the offshore yuan. A pause in its slide, as well as calmer market volatility, generally has paused dollar gains for now, he added.

“A lot has been priced in and we’re not getting any new news from Fed officials,” he said. “I think people are just taking some of that money off the table at the moment.”

Global interest rate expectations are also becoming more hawkish, with the gap between 10-year German and U.S. real yields narrowing by more than 30 basis points in May 2022 to date.

and central banks in the U.K. and Australia have also hiked interest rates.

The Reserve Bank of Australia also released the minutes from its latest policy meeting earlier in the day, with G-7 finance ministers and central bankers due to meet a day later.

Investors now await speeches from Fed Chairman Jerome Powell and other Fed policymakers later in the day, with Philadelphia Fed President Patrick Harker speaking a day later.

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