This is an audio transcript of the FT News Briefing podcast episode: The next phase of Putin’s invasion

Sonja Hutson
Good morning from the Financial Times. Today is Friday, September 30th, and this is your FT News Briefing.

Russia’s president is raising the stakes again by saying he’s annexing a large part of Ukraine. Germany is capping gas and electricity prices and Katie Martin will wrap up a chaotic week for UK financial markets. I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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Today, Russian President Vladimir Putin will announce he’s annexing four regions in south-east Ukraine. This move escalates tensions not just between Russia and Ukraine, but also with western powers. To find out more, I’m joined by the FT’s Henry Foy. Hi, Henry.

Henry Foy
Hey.

Sonja Hutson
So why is Putin announcing that Russia is annexing these areas, especially when Russian troops don’t fully control them?

Henry Foy
This is the first and most important issue here. This is the largest forcible takeover of territory in Europe since the second world war. So effectively what he’s saying is escalating the war in Ukraine to a level where the territories that Ukraine are trying to recapture are no longer Ukrainian territories, they are Russian territory, and thus therefore Moscow can use whatever means it likes to defend them. It’s a serious escalation, and it’s one that really turns the war into a very different phase, one where Putin can declare it to be a defensive war, at least in his view. Of course, the west will not recognise these. And so the difference in the way in which we see the war could well shape the way it goes forward.

Sonja Hutson
So Henry, I know we had these referendum votes over the weekend. How did those factor into the annexations?

Henry Foy
Right. And it’s important to make clear here these referendums were completely shambolic. I mean, most of them are claiming that there was a 99 per cent vote in favour of joining Russia, these areas with Russian speakers but not historically majority pro-Russian views. There were reports of locals being forced to vote at gunpoint, of people bringing ballot boxes to people’s homes and forcing them to vote in favour. So it’s important to say that these are not true referenda. They do not reflect the true views of people living in that area. What it does for Putin, and there’s two ways of looking at it. The first is that it traps him in this war. He’s been forced here to double down, as these are now territories that he must continue to fight for this. There’s no negotiation where he gives these away now. These are now part of Russia. And so therefore, we can defend it with whatever weapons we would like. And of course, in recent weeks, Putin and other senior Russian officials have suggested that could even extend to using nuclear weapons, something that would almost certainly drag the west, Nato powers, the US and the UK and other European military powers into this war, which is something that they have steadfastly refused to do since February 24th.

Sonja Hutson
Henry Foy is the FT’s European diplomatic correspondent. Thanks, Henry.

Henry Foy
Thanks so much.

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Sonja Hutson
Germany yesterday announced a €200bn package to help consumers and businesses cope with high energy costs. And it’s the largest aid package any European government has adopted since the start of the energy crisis caused by the war in Ukraine. Germany’s plan will cap gas and electricity prices. Berlin will borrow money to fund the plan, but officials insist that they’re going to keep debt levels in check.

Now, I don’t mean to insult our British colleagues, but UK financial markets don’t usually move global markets. It would have to be something really, really just shockingly huge. And this week, British friends, well, you got it. The chaos across UK markets, currency, gilt, mortgages, you name it, actually rattled the rest of the world. It started last week when the UK’s chancellor announced an ambitious economic plan, which he called a “mini” Budget. It would cut taxes and take on a ton of debt. Markets feared this would add to inflation, which is already super high, and the markets just went bonkers, which is a word that our markets editor Katie Martin might use.

Katie Martin
Oh, just, just total chaos. I mean, in the immediate aftermath of the “mini” Budget, which is the stupidest name for the most maxi budget you can ever imagine

Sonja Hutson
A “mini” Budget with a big impact. (laughter)

Katie Martin
(laughter) That’s right. Sterling hit its lowest point since 1985. It got worse from there. Monday was a bad day in the office for the pound. It later fell to a record low.

Sonja Hutson
Katie’s here to help me unpack as much of the past week’s havoc as we can fit in 5 minutes. Hey, Katie.

Katie Martin
Hey. How you doing?

Sonja Hutson
So Katie, we shouldn’t forget about the Bank of England. It put out an emergency plan to prop up the gilt this week, but that was just part of the drama. How did this play out for ordinary Brits? How does it impact them?

Katie Martin
A lot of people’s home buying loans just got pulled or disappeared from the screens. And financial advisers are getting lots of phone calls from people who are trying to buy houses or trying to roll over their mortgages, who are in tears and saying, I can’t afford these new rates because borrowing costs that are expressed through the secondary market for trading in these bonds have gone completely gaga. So people’s mortgage rates are going to go from something, you know, around about 2 per cent to something around about 6 per cent in one fell swoop. And that’s going to cause serious problems for ordinary Brits that own houses. It’s the number one topic of discussion. Everybody you talk to in the UK at the moment is talking about rolling over their mortgage.

Sonja Hutson
Now, pensions also got dragged into this because of these things pension funds use called LDIs or liability driven investments, and it helps them make payouts to retirees. Why are those important?

Katie Martin
The thing is that these products have never been stress tested to the point of the extreme stress that we saw at the start of this week. No one had ever seen this coming. It’s like being hit by an asteroid and these products backfired. All of a sudden, the investment firms that sell these products into pension schemes were saying, we need you to send us more money to keep this product alive. Otherwise, the contract is basically cancelled. And pension schemes didn’t always necessarily have that money to hand. And so they were having to sell the most liquid stuff they’ve got on their books to meet these cash requirements. And a lot of times that meant selling gilts, and so gilts were falling really fast. That meant they had to sell more gilts, so gilts fell even faster, and that meant they had to sell more gilts. And this was particularly what we call the long end of the market, like gilts that are, the have maturities of sort of 20, 30 years.

Sonja Hutson
So this was just kind of a snowball effect.

Katie Martin
It was totally a snowball effect. You know, we’re told that at certain points there simply were no buyers in the market. We were getting to the point where some of these pension funds didn’t have cash to hand to meet these requirements to keep these contracts whole. So it was a giant mess and various members of the pensions industry were going to the Bank of England and saying, no, but seriously, you’re going to have to do something about this. So what the Bank of England did was say, OK, we’re going to buy up to £5bn worth a day of long-term UK government bonds for 13 days to try and stabilise the system. Now that looks and smells a lot like quantitative easing.

Sonja Hutson
Is that a problem?

Katie Martin
Only to the extent that the Bank of England had only just a few days beforehand said it was going to stop its quantitative easing programme and in fact start selling down some of the bonds that it’s got on its books. So it had to perform a U-turn on that.

Sonja Hutson
What’s been the impact on global bond markets?

Katie Martin
Generally speaking, what happens in the UK stays in the UK. You know, a lot of people can’t point to us on a map. We don’t really matter that much. Generally speaking, it’s the US government bond market that really matters for everybody. But the moves that we’ve seen in UK markets have been so unbelievably enormous that it’s been shaking up other bits of the market too. So US ten-year debt had its biggest one-day rally since March 2020. So, you know, no pressure on the UK authorities or anything, but this is really starting to shake things up for everybody.

Sonja Hutson
Katie, we also saw a drop off in the S&P 500 yesterday. What was going on there?

Katie Martin
You know, I do not have the emotional space in my brain to think about US markets. A lot of things are a bit of a mess out there, but the UK is clearly the biggest mess of them all. Cut me some slack. (laughter)

Sonja Hutson
(laughter) Fair enough. Fair enough. You would. You deserve to not have to think about the S&P 500. That’s the FT’s markets editor, Katie Martin. Thanks, Katie.

Katie Martin
Pleasure.

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Sonja Hutson
You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Fiona Symon, Marc Filippino and me, Sonja Hutson. Our editor is Jess Smith. We had help this week from David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. And our theme song is by Metaphor Music.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.

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