The Lex Newsletter: stress tests, sanctions and strikes

Dear reader,

While Lex editor Jonathan Guthrie takes a well-deserved break and continues to rewild Britain, I’ve swapped San Francisco’s fog for London to give you Lex’s take on the news.

The theme this week was symbolic action. See Russia’s failure to pay interest on debt. The first time since the 1917 Bolshevik Revolution? Not quite. As the FT pointed out, Russia restructured Soviet-era, dollar-denominated bonds in 1998.

The latest non-payment was not a symptom of Russia’s inability to repay its debts, either. Instead, it was the result of measures designed to shut Russia out of the international financial system.

Lex spotted an opportunity to take the temperature of Russian sanctions. We maintain that little will wound the country’s economy until the price of oil falls. Even new sanctions on gold exports — Russia’s second-biggest after energy — will have a relatively small impact.

What would hurt Russia’s ability to fund its war in Ukraine? G7 leaders are considering a cap on energy prices. The important question is where that cap should be. Anything over $44 per barrel of oil suits the country’s budget. Even with a discount, Russia’s Ural blend prices are nowhere near that low. We are not optimistic that a successful plan will be put in place to lower them.

The knock-on effect of sanctions is being felt elsewhere, however. Russian coal may be unpopular with western buyers but China has taken full advantage of price reductions. The country’s recent pledge to become carbon neutral by 2060 has been quietly ignored as power consumption ramps up. Blame a record heatwave and high, post-lockdown demand for electricity. Of course, the connection between record temperatures and the use of fossil fuels may lead to renewed efforts towards sustainable energy. But for now, coal is back in the black.

Utility vehicles

China is not alone in experiencing unprecedented temperatures. Japan has not been this hot for over a century. Unfortunately, the country’s utility companies cannot raise prices to deal with higher fuel prices. Politicians have their eye on an upper house election on July 10. The government knows that allowing consumer energy prices to rise will make it even less popular than it is now.

A similar battle is being played out in UK water. Major investment — up to £80bn according to one analyst — is needed to stop the revolting discharge of sewage into rivers. That could increase consumer bills by up to a third. Water companies such as Thames Water know such increases will not be tolerated. Instead, it must keep tapping investors for additional capital. The latest £1.5bn raise will not be the last.

Strike up

Even without additional charges for water, pressure on households is rising. The difference between US and UK cost increases is noticeable. UK inflation is expected to exceed other major economies this year. Demands for higher wages will continue. So will strikes.

This week, criminal defence barristers in Britain took part in a walkout to protest against legal aid rates. The model for their pay is a broken one, said Lex. A bizarre mix of rates does not help.

Staff working for Royal Mail also voted to strike this week — rejecting the offer of a 2 per cent pay rise. Lex is not sure the delivery company can afford much more. The pandemic boom is winding down and costs are high. Still, Lex expects public sympathy to side with the posties.

Will the US go the same way? Those of you who use social media may have seen the way in which video clips of UK rail union boss Mick Lynch’s pithy replies to opponents have helped to increase support for rail workers on strike. For now, the US lacks a similar figurehead. But a new generation of union leaders is emerging. Union membership is still low — 10 per cent last year — but support is climbing.

Crypto crash

That may all change in a recession. For now, however, the US job market remains tight. As the FT reported a few weeks ago, salaries and signing bonuses in tech are still riding high. But Lex sees a gap opening between cash flow-rich big tech companies that spent the pandemic significantly increasing the size of their workforces and smaller companies forced to lay off staff.

One of those is crypto exchange Coinbase, which has announced plans to lay off nearly a fifth of employees. Will the crypto crash infect mainstream finance? Lex says the results of a US bank stress test look good. Strict oversight appears to have done its job. Stress tests have been dismissed as a hollow compliance exercise. But at moments like this, such reassurance is welcome.

If you have any thoughts on topics you’d like us to take a closer look at in the coming weeks then please do email us at lexfeedback@ft.com. We read all of your online comments and emails. One Lex reader I met this week said he considered part of his subscription worth the money for the reader comments alone.

Enjoy your weekend,

Elaine Moore
Deputy Head of Lex