Moscow’s ‘Fortress Russia’ strategy

This is an audio transcript of the FT News Briefing podcast episode: Moscow’s ‘Fortress Russia’ strategy

Marc Filippino
Good morning from the Financial Times. Today is Thursday, January 20th. And this is your FT News Briefing.

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The US Senate is going after Big Tech today, and US banks are excited for interest rate rises in 2022. Plus, Western powers are threatening Russia with further sanctions if it attacks Ukraine. But one problem is that so far they haven’t really worked well.

Max Seddon
What is the actual goal of the sanctions? If it’s inflicting pain on the Russian economy, then yes, they can be pretty effective. But in terms of actually getting Russia to change its policy, to stop the war against Ukraine, then that hasn’t been successful.

Marc Filippino
We’ll talk with our Moscow bureau chief, Max Seddon, about what Russia’s been doing to sanction-proof its economy. I’m Marc Filippino and here’s the news you need to start your day.

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Today, US senators will debate legislation aimed at constraining the power of Big Tech. It’s one of the few things lawmakers from both parties agree on. Two bills are on the table. The central goal is to ban misuse of data for competitive advantage and to prevent bias and search results to favour a search engine’s own products. The proposals will also prevent platforms from charging third party merchants for services in return for more prominent placement. As you might expect, the Big Tech companies have lined up in opposition. They’ve warned of dire consequences if the bills are passed into laws. And Amazon says it’s being unfairly singled out. But smaller companies like audio hardware maker Sonos support the bill. They say Big Tech companies have abused their gatekeeper status and made it difficult for other businesses to compete in the digital marketplace.

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US banks have been reporting fourth quarter earnings, and bottom line: 2021 was another banner year of record profits. 2022 is looking good, too. Banks are looking forward to a new normal and higher interest rates. Here’s our US banking correspondent, Imani Moise.

Imani Moise
Banks are definitely excited because it’s better than avoiding losses. What higher interest rates does is allows them to charge more for their loans. So it’s actually a revenue item instead of just a lower cost item, which is really how you drive your business and that’s how you drive growth. So, for example, Bank of America reported earnings on Wednesday, and they’re one of the more asset-sensitive banks. So their earnings are more closely tied to what the Federal Reserve does and how they move up and down. And when we’d go higher, they could earn more on what they do loan out.

Marc Filippino
So, Imani, I gotta ask about Goldman Sachs. The bank reported lower-than-expected earnings because of pay. Goldman CEO David Solomon told the FT his bank had to contend with higher wage demands from its employees.

Imani Moise
Yeah, I think what you’re hearing from a lot of banks is that they are willing to pay whatever is necessary to kind of keep the top talent coming into their industry and retain them and keep them from going into rival banks, but also different industries like tech or consulting that also pay pretty well but maybe aren’t associated with the hours. So I think what they’re trying to do is pay for street cred a lot of ways, but really just stay competitive on talent in a way that they haven’t necessarily had to do in years before.

Marc Filippino
Another thing and, you know, this is something that you and I have talked about before is that, you know, banks are planning to spend heavily on tech, right?

Imani Moise
A lot of the banks are talking about spending more, increasing their technology budgets to kind of fend off fintech competitors or just shore up their infrastructure. That’s kind of been around for decades and decades. But I think that the pandemic and 2021 especially, it was just kind of this wake up moment for a lot of banks, and now they’re ready to look more like technology companies.

Marc Filippino
Imani Moise is the FT’s US banking correspondent.

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As Russia maintains its threatening stance towards Ukraine, Western powers have been warning of more economic sanctions, but it’s not clear if they would work. Our Moscow bureau chief Max Seddon spoke to us about how Russia’s been working to insulate itself against more prohibitive Western sanctions.

Max Seddon
Russia is nowhere near as entwined in the global financial system as it was before 2014. They’ve done a lot of work to reduce that, and inasmuch as it is possible to be ready for something like this, they have spent the last seven, eight years stress-testing every scenario, the Iran scenario, the North Korea scenario. And when you speak to people in and around the regime, they acknowledge that it could be painful, but they feel like they’re pretty much ready for it.

Marc Filippino
If Russia were to invade Ukraine, the West has threatened Russia with sanctions. How effective would those sanctions be?

Max Seddon
I think you have to look at what is the actual goal of the sanctions. If it’s inflicting pain on the Russian economy and making it so that various daughters of Putin’s friends, bankers can’t go skiing (inaudible), then yes, they can be pretty effective. But in terms of actually getting Russia to change its policy to give back Crimea, to stop the war against Ukraine, then that hasn’t been successful. And that is the problem that Western policymakers really have to reckon with is that the effect of the sanctions politically in Russia has been that it’s made everyone rally around the flag. The hope was that the oligarchs would go to Putin and say, Hey, I really this. I really miss visiting my my Swiss chalet. Can you please give give Crimea back where the Russian people would be upset that they can’t get any more parmesan cheese and there would be people rioting in the streets. And that hasn’t happened. People, if people are missing something, they they blame the West for passing the sanctions and at the political level, it’s just become a kind of patriotic test.

Marc Filippino
Wow. So is there anything the West can do in order to sway Russia?

Max Seddon
If there is, we haven’t seen it. And part of the problem is that after the end of the Cold War, there was this thinking in the West that the more globalisation happened, the more integrated countries like like Russia became with the global financial system. Then that would make it more more difficult for wars to happen, and these countries will come closer together. But something we’ve seen both with the Chinese trade war and now with the sanctions issue with Russia is actually it makes it more difficult to stop these geopolitical flare-ups because the West is just as dependent on Russia because Russia sells so much oil and gas. You know, European leaders have admitted this that you just can’t turn off over overnight. There’s already an energy crisis. So that is something that there really isn’t a good answer for. On the western side is how they reduce Europe, in particular in Germany, its own interdependence on the Russian economy.

Marc Filippino
Yeah. So sanctions would kind of be shooting itself in the foot. Speaking of sort of the same concept here. Russia’s war chest comes at a cost to the Russian economy and to Russians, doesn’t it?

Max Seddon
It does. You could argue that the greatest cost from the sanctions isn’t actually what they do to the Russian economy, but what Russia has has done to be prepared to defend against them. Because when you have such a conservative fiscal policy, obviously it limits growth and investment. And you saw that during the coronavirus pandemic, where a group of economists wrote an open letter to Putin saying: This is the rainy day. It is here. This is time to spend the money and get out of the pandemic and Russia didn’t spend a cent. And now Russia has one of the world’s highest death rates from the pandemic. It’s also, obviously when you don’t have a lot of investment, it’s a barrier to growth. One of the big problems for for Putin domestically right now is inflation, which is skyrocketing. And at the same time, Russians’ incomes have been going down. They’re down more than 10 per cent since the annexation of Crimea. So obviously, when you’re prepared for sanctions, that limits your ability to invest at home. But at the same time, if you’re Putin, you look at a country like Iran or even North Korea, the regimes are still looking pretty secure, and they’ve been able to stand up to the West and challenge the United States in quite a lot of ways very effectively.

Marc Filippino
Super interesting. Max Seddon is the FT’s Moscow bureau chief. Thanks, Max.

Max Seddon
Thanks, Marc.

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Marc Filippino
Before we go. Hong Kong authorities are worried about people catching Covid from animals. They’ve culled more than a thousand hamsters in the process. Now, residents are nervous that their own pets will be targeted, so they’re trying to get their pups and their kitties and their rabbits out. But that’s been hard. Hong Kong’s super tough anti-Covid border restrictions have led to flight cancellations and driven up cargo rates. Pet owners remain undeterred. The FT reports that many are grouping together and chartering jets to escape with their pets. As for the cost, one consultant says it’s about a 150,000 Hong Kong dollars — that’s 20,000 US dollars — to transport a Labrador retriever and its owner to the UK.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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