WEDNESDAY 19 JULY 2023 EUROPE

The funding crisis at Britain’s universities Populism gives elites more power than ever
BIG READ, PAGE 15 JANAN GANESH, PAGE 17

Fire havoc Briefing

Europe hit by i Morgan Stanley predicts
wealth management jump
extreme heat Chief executive James Gorman
has predicted the bank will triple
assets under management to
A child outside his house as a wildfire $20tn, as weak trading activity
burns in the village of Agios Charalam- dragged on profits.— PAGE 5
pos, near Athens, yesterday.
Fires outside the Greek capital have i Russia targets port cities
been raging since Monday, destroying Odesa and Mykolayiv in Ukraine
homes and cars and forcing thousands have been rattled by air strikes
of residents, as well as children from after Vladimir Putin vowed to
summer camps, to evacuate the area. respond to a sea drone attack on a
The European weather forecasting Crimean bridge.— REPORTS, PAGE 3
agency has warned that the continent
should brace itself for more intense and i India hails G20 progress
longer lasting heatwaves as tempera- New Delhi has said finance chiefs
tures reached near record highs across have made headway on plans to
the Mediterranean. reform global financial structures
Sardinia and Sicily hit the high 40Cs despite differences over Ukraine.
yesterday, while tourist sites in cities — PAGE 2; MARTIN WOLF, PAGE 17
such as Madrid and Rome were closed.
Heatwaves are becoming more com- i US soldier in North Korea
mon in all parts of the world, but Europe A serviceman has been taken
is warming faster than average because into custody after crossing the
of its high percentage of land mass and internal border, as USS Kentucky,
position on the Earth’s surface. a ballistic missile submarine,
Struggling to adapt page 4 arrives in South Korea.— PAGE 2
Aris Messinis/AFP

i Novartis unveils buyback

The Swiss drugmaker sitting on a
cash pile after selling its stake in

Trump says he is target of criminal Roche has unveiled plans to give

$15bn to investors after failing to
find anything to buy.— PAGE 5

i Microsoft charges for AI

investigation into 2020 US election The tech group has unveiled a

monthly $30 charge for artificial
intelligence features in its office
software suite used by hundreds
of millions of workers.— PAGE 6

3 Fresh federal charges loom 3 Vow to continue campaign 3 Republican foes defend ex-president
LAUREN FEDOR AND
STEFANIA PALMA — WASHINGTON
Donald Trump said yesterday he was
the target of a criminal probe into
efforts to overturn the results of the
2020 US presidential election, raising
the possibility he could face fresh fed-
eral charges in coming days.
In a development he called “horrify-
ing”, the former president said he had
received a letter from the Department
of Justice informing him he was a target
of an investigation into the run-up to the
January 6 2021 attack on the US Capitol.
Trump said the letter from special
counsel Jack Smith, who is handling the
investigation, had given him “a very
short four days to report to the grand
jury, which almost always means an
arrest and indictment”.
The DoJ declined to comment.
During federal grand jury investiga-
tions, prosecutors typically notify tar-
gets before they seek an indictment to
give them a chance to testify, according
to DoJ guidelines.
Fresh criminal charges would deepen
the legal risks facing Trump as he cam-
paigns for another term as president.
Federal prosecutors last month
unsealed an indictment charging him
with 37 criminal counts relating to his
January 6 probe is a ‘total
political weaponisation of
law enforcement’
Donald Trump
handling of classified documents. That
indictment, filed days after Trump
announced he had received a letter from
the DoJ, was also brought by Smith.
Trump has vowed to press on with his
campaign despite the mounting legal
challenges.
In a long post on Truth Social, his
social media platform, Trump said the
January 6 probe was a “witch hunt” that
was “a complete and total political
weaponisation of law enforcement”.
He accused Joe Biden of unfairly tar-
geting him because he was the presi-
dent’s “number one political opponent,
who is largely dominating him in the
race for the presidency”.
Trump remains the undisputed front-
runner in an increasingly crowded field
of Republicans vying for the party’s
nomination to challenge Biden in the
2024 presidential election.
According to the FiveThirtyEight
average of national polls, roughly half of
Republican voters say they are support-
ing Trump in the primaries. Florida gov-
ernor Ron DeSantis is running a distant
second, with the support of just over
20 per cent of Republican voters. Other
challengers, including Trump’s former
vice-president Mike Pence, trail in the
single digits.
Several of Trump’s Republican rivals
leapt to his defence yesterday, under-
scoring the former president’s grip on
the party’s grassroots. A big share of
Republicans back Trump’s unfounded
claim that the 2020 election was rigged.
Speaking at a campaign event in
South Carolina, DeSantis said Trump
Datawatch
“should have come out more forcefully” Unicorns hunting
to stop the January 6 attack on the Capi- Global investment ($bn)
tol. But he criticised the prospective 300
criminal charges and accused Demo-
crats of political interference.
Trump could face more legal woes in 200
coming weeks in Georgia, where local
prosecutors are also probing alleged 100
interference in the 2020 elections. If
prosecutors there decide to bring their
own indictment stemming from a sepa- 0
2006 08 10 12 14 16 18 20 22
rate special grand jury, those charges Source: Crunchbase
could be filed this summer.
Trump in April pleaded not guilty to Unicorn companies — start-ups worth
34 felony counts of falsifying business $1bn or more — raised $131.6bn of
records in a case brought by the Man- funding worldwide last year, less than
half the capital they attracted in 2021, as
hattan district attorney. He was accused
of covering up “hush money” payments high interest rates weighed on sentiment.
Unicorns have raised $42.1bn this year
made to silence a porn actress ahead of
the 2016 presidential election.

China deletes deaths data that showed

73% jump when Covid curbs were lifted
RYAN MCMORROW jing reversed its pandemic policy in lic,” Wu Zunyou, chief epidemiologist at
AND NIAN LIU — BEIJING
December, but Chinese officials have the Chinese Center for Disease Control
One of China’s most populous prov- not published detailed and accurate sta- and Prevention, said in late December.
inces has deleted mortality data that tistics that would allow researchers to But seven months later China has not
offered an indication of the heavy better assess the deadly spread of the released any excess death data. Aside
Armenia becomes staging death toll from Beijing’s relaxation of virus through the population. from rough estimates of annual deaths
post on silk road to Russia Covid-19 controls at the end of last year. For nearly two weeks in December the by the state planning agency, the local-
country reported no Covid deaths in level cremation data is China’s only pub-
Analysis i PAGE 3 The statistics reported by Zhejiang daily updates, even though bodies were licly available statistic for tracking the
province last week showed that the piled up in hospitals and crematoriums. number of deaths in the country. Nearly
number of cremations in the wealthy In early January the World Health everyone who dies in urban areas is cre-
Austria €4.50 Morocco Dh50
Bahrain Din1.8 Netherlands €4.30
coastal region during the first quarter of Organization accused China of under- mated because burials are banned.
Belgium €4.50 Norway NKr45 the year jumped 73 per cent from a year representing the severity of its corona- But the number of cremations has
Croatia Kn33.91/€4.50 Oman OR1.60 earlier, to 171,000. virus outbreak and the real number of been systematically left off dozens of
Cyprus €4.20 Pakistan Rupee350
Czech Rep Kc125 Poland Zl 25
The figure was well above the 99,000 deaths. At the time, Chinese health offi- quarterly reports published by local and
Denmark DKr46 Portugal €4.20 and 91,000 deaths reported in the same cials dismissed concerns of under- national civil affairs bureaus.
Egypt E£80 Russia €5.00 period in 2022 and 2021 respectively. By reporting, promising to make public Willy Lam, senior fellow at The
France €4.50 Serbia NewD530
Germany €4.50 Slovenia €4.20
Monday, with the statistics attracting excess death data to “assess any possible Jamestown Foundation, a think-tank,
Greece €4.20 Spain €4.20 attention on Chinese social media, Zhe- underestimation”. said: “On December 8, Xi decided to lift
Hungary Ft1450 Switzerland SFr6.70 jiang had pulled the information offline. “For this Covid-19 wave, we have a all Covid controls with no preparation,
India Rup220 Tunisia Din7.50
Italy €4.20 Turkey TL110
Hospitals and crematoriums were team studying excess deaths, and we one of the main reasons so many people
Luxembourg €4.50 UAE Dh24 inundated with Covid patients after Bei- will provide this information to the pub- died.”
Malta €4.20

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2 ★
India
G20 talks make progress on financial reform US soldier
detained
New Delhi hopeful of deal
on multilateral lending
and debt restructuring
JOHN REED — NEW DELHI
India said yesterday that G20 finance
chiefs and central bankers had made
headway on plans to reform the world’s
financial architecture, despite differ-
ences over the war in Ukraine that sur-
faced during the talks.
“The Indian presidency received wide
support on all the agenda items,” Nir-
mala Sitharaman, the finance minister,
said after the meetings in Gandhinagar.
Ajay Seth, a finance ministry official,
China and Russia hold war games near Japan
Beijing and Moscow step up
attempt to project power in
sensitive maritime zone
KATHRIN HILLE — TAIPEI
China and Russia are deepening mili-
tary co-operation, with their largest
joint naval and air exercise on Japan’s
doorstep.
The “Northern/Interaction-2023”
exercise, which kicked off in the Sea of
Japan on Monday, is technically part of
the Chinese military’s regular annual
training programme, a sequence of
drills that rotate through its military
districts. It is unclear how long the exer-
cises will last.
But by holding the exercise in the
waters that separate Japan from Russia
and the Korean peninsula, Beijing and
Moscow are using their increasingly
close military partnership to project
power against other countries, officials
of other governments and analysts said.
China’s defence ministry said the
exercise would focus on “safeguarding
strategic sea lines of communication”
and “strengthening both sides’ ability to
jointly safeguard regional peace and sta-
bility when dealing with various secu-
rity challenges”.
Officials from Japan and Taiwan said
the framing of the drill and increasingly
frequent Russian military movements
in East Asian waters and airspace raised
concerns that Russian and Chinese air
and naval forces could soon be patrol-
ling the area regularly.
This month Li Shangfu, China’s
defence minister, told Admiral Nikolai
Yevmenov, the visiting head of Russia’s
navy, that the two sides should organise
joint exercises, patrols and competi-
tions on a regular basis.
“Tactically, these are scheduled exer-
cises but politically, they are more than
that,” said Alexander Korolev, an expert
on China-Russia security ties at the Uni-
versity of New South Wales in Sydney.
The two countries have been building
their military ties for decades but their
collaboration has gained pace after Rus-
sia’s assault on Ukraine.
“It cannot be ignored that they are
now getting increasingly provocative as
they are edging towards sensitive and
disputed areas,” said Korolev.
China and Russia have been conduct-
ing exercises together since 2005, ini-
tially as part of broader annual drills
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course forward” after policymakers
from the group of large economies met
to discuss plans to overhaul multilateral
lenders, forge an agreement on interna-
tional taxation, and share the burden of
restructuring poor countries’ debt.
India holds the G20’s rotating presi-
dency and is due to host a summit of its
leaders in New Delhi in September at a
time when the war in Ukraine has split a
group that includes Russia and China,
alongside the US and leading European
economies.
Sitharaman confirmed that Russia’s
exit on Monday from the Black Sea grain
deal that ensured shipping of food from
Ukraine, one of the world’s top agricul-
East Asia. Military exercises
Joint effort: held by the Shanghai Co-operation
the crew of a Organisation, which includes several
Chinese central Asian countries, and since 2012
destroyer take in dedicated bilateral training events.
part in an In 2018, the People’s Liberation Army
exercise with started participating in some of the Rus-
Russian forces sian military’s annual exercises. In 2021,
in 2021 Russian troops were for the first time
Sun Zifa/China News Service/
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part of a regular PLA annual exercise, an
event defence experts said indicated
that the two forces’ relationship had
RUSSIA
M O NG O L I A
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Jul 17 2023
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INTERNATIONAL
tural producers, and subsequent attack
on Ukrainian ports had come up during
yesterday’s talks.
“Several members condemned it,
saying this shouldn’t have happened,”
she said. “Food passing through the
Black Sea shouldn’t have been stopped
or suspended.”
The deal had helped lower global food
inflation in recent months and allayed
concerns that hunger would become
widespread.
However, Sitharaman said there were
signs of progress on deals to provide
more debt relief to some of the world’s
most economically vulnerable coun-
tries, such as Sri Lanka, Zambia and
Ghana.
‘This
exercise
proves that
we are now
faced with a
threat on
two fronts’
1,000 km
Chinese navy ships
Sea of
Japan
N KOR EA
(East Sea) JAPAN
S KOR EA
Tokyo
East Jul 16-17 2023
China One Dongdiao-class
Sea surveillance vessel
(hull number 796)
TAI WAN Source: Japan Self Defence Forces Joint Staff
South Africa
Ramaphosa fears ‘declaration Nicaragua blocks EU-Latin
of war’ if forced to arrest Putin America unity on invasion
JOSEPH COTTERILL — JOHANNESBURG
South Africa has claimed Russia has
threatened to declare war if it tried to
arrest Vladimir Putin on an Interna-
tional Criminal Court warrant should
he attend a Brics summit in Johannes-
burg next month.
President Cyril Ramaphosa said in court
papers released yesterday that “Russia
has made it clear that arresting its sit-
ting president would be a declaration of
war”, as he revealed that Pretoria had
notified the ICC that it might not be able
to arrest Putin.
Putin’s acceptance of a South African
invitation to appear alongside Chinese,
Indian, Brazilian and other leaders of
the so-called Brics nations at the sum-
mit has yet to be confirmed. Ram-
aphosa’s government has grown
increasingly anxious to dissuade him
from coming, given a looming clash with
Pretoria’s global legal obligations.
“South Africa has obvious problems
with executing a request to arrest and
surrender President Putin . . . it would
China, a major bilateral creditor, had
been blamed by western nations,
including the US, for delaying deals to
restructure vulnerable countries’ debts.
Beijing, which is the largest lender to
several developing countries, had been
reluctant to provide debt relief, up until
recent weeks, when it agreed to provide
some support to Zambia.
Sitharaman said she was “very hope-
ful” that Beijing could be brought fully
onboard in other debt restructurings.
“We were able to push this agenda of
debt distress, particularly among the
Global South countries,” Sitharaman
said. “A speedy resolution, an effective
resolution should happen.”
India has hosted G20 ministerial
moved from just friendly exchanges
towards building interoperability.
But while that drill took place in
north-western China, deep inland and
far from disputed borders, and featured
only army units from the Russian side,
this week’s event involves Russian naval
and air forces for the first time and plays
out in an area where Russia has territo-
rial disputes with Japan.
Moreover, the two militaries are
building a constant presence in the
waters and airspace of east Asia where
geopolitical tension runs high.
In June, Chinese and Russian bomb-
ers jointly patrolled the airspace above
the Sea of Japan and the East China Sea,
where Beijing has territorial disputes
with Tokyo.
Japan and South Korea scrambled
fighter jets in response after the Rus-
sian-Chinese formation entered their
air defence identification zones. It was
the sixth time the two countries held
such joint bomber patrols in the area
since 2019.
Later in June and in early July, two
Russian frigates sailed through waters
between the east coast of Taiwan and
the south-westernmost islet of Japan
be inconsistent with our constitution to
risk engaging in war with Russia,” Ram-
aphosa said.
As a member of the ICC, South Africa
would risk breaking its own and inter-
national law if it sought to avoid arrest-
ing Putin, after the court indicted him
on war crimes charges over child abduc-
tions in Russia’s invasion of Ukraine.
The Rome Statute treaty underpin-
ning the ICC does allow states to consult
the court if they encounter problems
executing its warrants, the avenue
South Africa is now using. Ramaphosa
declined to provide details of these con-
sultations in the court papers.
Pretoria used this same route after it
failed to honour an ICC request to arrest
Omar al-Bashir, the former president of
Sudan, on a South African visit in 2015.
South Africa’s arguments at the time
were rebuffed by the court.
The South African leader will again
seek to convince Putin to stay away dur-
ing a Russia-Africa summit in St Peters-
burg this month, Paul Mashatile, deputy
president, has said.
meetings in the run-up to the leaders’
summit in September.
Its task in hammering out a consensus
has been complicated by the war, finan-
cial distress in some countries and a
slowdown in most leading economies.
New Delhi has remained neutral in
the war but has been vocal about its
impact on the Global South, of which it
sees itself as a leader, while trying to
bridge differences between Russia and
China on the one hand and western
democracies that have supported
Ukraine on the other.
India is also pushing the group to
accept the African Union as a full mem-
ber during its presidency.
Martin Wolf see Opinion
and then back up north past Okinawa, a
movement closely tracked by Japan’s
Self-Defence Forces.
A senior Japanese official said Russia’s
invasion of Ukraine had destroyed any
illusion that Tokyo could develop rela-
tions with its northern neighbour to bal-
ance China. “This exercise proves that
we are now faced with a threat on two
fronts,” the official said.
Chinese defence experts defend the
growing co-operation with Russia as a
response to US hegemony and pressure
from Nato.
“We are both on the receiving end of
challenges to our legitimate security
interests,” said a defence strategy expert
at the Academy of Military Science in
Beijing who asked to remain anony-
mous because he was not authorised to
speak to foreign media.
The expert said Nato’s move to simu-
late an air war with Russia during the
western group’s Lithuania summit had
reinforced concerns in China over the
dangers of US alliance networks.
“The US keeps talking about deter-
ring China through working with their
allies,” he said. “Let them see that we
have friends, too.”
Summit
IAN JOHNSTON — BRUSSELS
Europe and Latin America failed to
agree on even an expression of “con-
cern” over Russia’s invasion of Ukraine
at their first summit in eight years, but
leaders maintained the event had
pushed forward relations between the
two blocs.
Wording on Ukraine had already been
significantly watered down over the
course of the two-day summit, includ-
ing by removing any reference to Rus-
sia, to the frustration of European lead-
ers. But Nicaragua, whose president
Daniel Ortega is an ally of Vladimir
Putin, was the sole holdout on a text
approved by 59 other nations that
expressed “deep concern on the ongoing
war against Ukraine”. That prevented a
unanimous statement on the issue.
After the summit, Charles Michel, the
president of the European Council, said:
“It’s also an essential to note that our
friends in Latin America and the Carib-
bean support us . . . the war is a prob-
lem for Europe and the world.”
Wednesday 19 July 2023
Heightened tension
after crossing
border into
North Korea
CHRISTIAN DAVIES — SEOUL
FELICIA SCHWARTZ — WASHINGTON
DONATO PAOLO MANCINI — LONDON
A US soldier was taken into North
Korean custody after crossing the
inter-Korean border yesterday, in a
bizarre incident amid heightened
tensions between Pyongyang and
Washington.
The soldier had been on a guided tour of
the Joint Security Area at the heart of
the demilitarised zone, or DMZ, that has
separated the two Koreas since the
1950s.
The UN Command, the multinational
resident force in South Korea,
announced in the afternoon that a US
citizen had crossed the demarcation line
into North Korea “without authorisa-
tion”.
“We believe he is currently in [North
Korean] custody and are working with
our Korean People’s Army counterparts
to resolve this incident,” it said, refer-
ring to Pyongyang’s armed forces.
A US official confirmed that the citi-
zen in question was a serving soldier.
The individual, a private in the US army,
is understood not to have been on duty
when he crossed into North Korean
territory.
As part of a deal between the UNC and
North Korea signed in 2018, landmines,
guard posts and firearms were removed
from the Joint Security Area, which is
often used as a venue for negotiations
between the Koreas as well as between
the North and the US.
While there are no physical barriers
preventing visitors to the area from
crossing into North Korean territory,
tour groups visiting the area from the
South are supposed to be closely super-
vised by UNC troops.
The UNC’s statement was released
just hours after Kurt Campbell, the
White House’s top official for Asian
affairs, announced that the USS Ken-
tucky, a nuclear-capable ballistic mis-
sile submarine, had arrived in the South
Korean port of Busan.
Campbell made the announcement in
Seoul after co-chairing the inaugural
meeting of a new bilateral nuclear con-
sultative group designed to give Seoul
more insight and input into US war
planning. It is the first time a US nucle-
ar-armed submarine has paid an open
visit to South Korea since the 1980s.
The military deployments are
designed to reassure the South Korean
public that Washington will defend its
ally from any potential attack from
North Korea.
But they have provoked a furious
response from the North Korean regime.
On Monday, Kim Yo Jong, a senior
regime official and the sister of leader
Kim Jong Un, accused Washington of
committing “foolish acts that provoke
us even at the risk of its own security”.
Go Myong-hyun, senior fellow at the
Asan Institute for Policy Studies in
Seoul, said that Pyongyang could seize
upon the crossing of the US soldier into
its territory as “an opportunity to open a
direct line of communication with the
White House”.
“We have seen signs in recent months
that the Kim regime could be ready to
engage in dialogue,” said Go. “How it
responds to this incident will reveal its
true intentions.”
European leaders stressed they
achieved broad agreement for the
expression of “concern” about the war,
including from other Russian allies such
as Cuba, Venezuela and Bolivia.
“What’s important to me is that all the
EU members are aligned on that and all
the Celac members are aligned except
Nicaragua,” said Emmanuel Macron,
the French president, referring to the
Community of Latin American and Car-
ibbean States.
“The meeting was very important and
very ambitious,” said Alberto Fernán-
dez, president of Argentina.
While talks on the joint statement
were held up by Nicaragua, there was
progress in side-meetings to the two-
day summit.
Brazilian president Luiz Inácio Lula
da Silva and European commission
president Ursula von der Leyen said
they hoped to reach agreement on the
long-delayed EU-Mercosur deal by the
end of the year.
Additional reporting by Henry Foy in
Brussels and Michael Stott in London
Wednesday 19 July 2023 ★ FINANCIAL TIMES 3

INTERNATIONAL

Armenia emerges as staging post on Food supply

new silk road to sanctions-hit Russia
Thousands of used cars are being traded through the Caucasus to circumvent US and EU curbs
POLINA IVANOVA — GYUMRI, ARMENIA
CHRIS COOK — LONDON
Rows of cars stretch in every direction
from a customs office on the outskirts of
Gyumri, Armenia’s second city. Many
were missing a bumper; some had
crumpled wings or doors taped up with
plastic bags.
Young Russian men roamed between
the vehicles. For them, this corner of the
Caucasus has become a key stop on a
booming trade route: bringing used cars
to Russia, where sanctions over Mos-
cow’s invasion of Ukraine have left west-
ern-brand cars hard to find.
“None of what you see here stays in
Armenia,” said one. “It all gets re-ex-
ported to Russia, some to Kazakhstan.”
Armenia is not a car producer, but
exports of vehicles from the tiny coun-
try to Russia have soared since last
year’s full-scale invasion of Ukraine,
from $800,000 of vehicles in January
2022 to just over $180mn of vehicles in
the same month this year.
“In Russia, all the auto dealerships
have closed, BMW, Audi, everything,”
said the young trader. Like other Rus-
©Mapcreator.io | OSM.org
300 km
RUSSIA
Moscow
Astana
K A Z A K H S TA N
G EO RG IA
UZ
Poti Tbilisi BE
KI
ST
Gyumri ARME NIA AN
TURKMENISTAN
Yerevan
sians working at the Gyumri customs
terminal, he declined to share his name.
“Any wealthy person who would have
previously gone to a dealership and
bought a car, they can’t do that any
more,” he added. “So they turn to
us . . . and get the car brought in.”
Nearby, a transporter was being filled
with dented Fords. Along the edge of the
customs lot, brokers advertised on bill-
boards: “Purchase of vehicles on US auc-
tions”; “Transfer in closed container to
Gyumri”; “Re-export to Russia”.
Exports of other goods from Armenia
to Russia have also surged, leading to an
almost two-fold increase in trade
between the countries in 2022. Russian
consumers have turned to third coun-
tries to fill the gaps left by western sanc-
tions and corporate departures, placing
countries such as Armenia, Turkey and
Kazakhstan at the heart of a new trade
route for consumer goods.
For Armenia, this has fuelled a boom,
with its gross domestic product growing
a record 13 per cent in 2022, more than
double the previous year’s rate.
But it has left western capitals frus-
trated. The US in March listed Armenia
among states used “to smuggle prohib-
ited goods” to Russia. The EU’s latest
sanctions package, focused on prevent-
ing third-country circumvention, lists
entities in Armenia among the culprits.
Armenia strongly denies the accusa-
tion. Reports of sanctions circumven-
tion “are nothing more than rumours”,
Prime Minister Nikol Pashinyan said in
March. “The reality is just the opposite.”
The “leadership of Armenia has
clearly publicly voiced its commitment
to restrict trade in all risky items”, its
foreign ministry said, adding that it was
working closely with the US and EU, and
items that could be used by the Russian
Brisk trade: military were under strict control.
the car market For Russians, foreign cars are a prized
in the customs asset after the US prohibited all light
office on the vehicle exports to Russia, used or new.
outskirts of The EU also banned exports of vehicles
Gyumri, valued above €50,000 and recently ex-
Armenia
Polina Ivanova/FT
panded this to include all larger cars
with an engine size of two litres or more.
Many foreign car companies have
sold their production plants and shut
dealerships inside Russia. Some have
also pulled out of the market even
though they are not subject to direct
export controls. South Korea’s Hyundai
has suspended operations and plans to
sell its Russian factories.
Chinese models are available but
unpopular. Domestic models are few,
and their production has been hugely
depressed by sanctions cutting carmak-
ers off from production tools. Prices on
the second-hand market have shot up.
Cars arrive primarily from the US via
the Black Sea port of Poti in Georgia,
brokers and buyers say. Many are then
brought to Armenia for customs clear-
Armenia has seen a boom
in car sales to Russia
Value of monthly passenger car
exports from Armenia to Russia ($mn)
Full-scale invasion
of Ukraine
Jan 2022
2023
Source: Trade Data Monitor
ance, as the country shares a free trade
bloc with Russia.
The city of Gyumri is a hub from
where the vehicles head north to Russia
by road, crossing through Georgia again.
“This scheme, US-Georgia-Armenia-
Georgia-Russia, is not the only one.
There are so many,” said Pavel, a new
trader passing through Gyumri from St
Petersburg. “These schemes have
spread like the roots of a tree.”
Sitting at an open-air café filled with
the smell of petrol and grilled meat,
Pavel said he had considered heading to
Belarus, the entry point for cars from
Germany, but settled on the Caucasus
route. The trader in his twenties said he
wanted to get into the car import busi-
ness himself, and this was his test run.
He spent months researching the mar-
ket and chatting online with a Russian
“car selector” in Georgia. The selector
helped him find a used Hyundai auc-
tioned in the US.
Many other traders also go for US
cars. In January 2022, before the start of
Russia’s full-scale invasion of Ukraine,
Armenia imported $2.8mn of cars from
the US. A year later, that number soared
to $29.5mn. Since then the rate has con-
tinued to climb. In April this year Arme-
nia imported $34mn of US cars.
200 Most are bought cheaply in the US at
second-hand insurance auctions where
cars are deemed written off, buyers and
150
brokers say. Then the cars are fixed at
repair shops in Georgia or Armenia.
100
This keeps profit margins strong.
Repaired second-hand cars can be sold
50
in Russia for a lot more than their cost,
despite the long route they have to take.
0 It also keeps traders in line with the
Jan European sanctions price cap. “That’s
why everybody imports smashed-up
cars,” the young Russian trader in
$800,000 Gyumri said. “Expensive ones, but bat-
Value of vehicles tered about enough to be cheaper than
exported to Russia $50,000 [sic] on the invoice.”
from Armenia in Pavel came from St Petersburg to
January 2022 southern Russia by plane, then across
the border to Georgia by bus, carrying
$180mn about 1.5mn roubles ($17,000) in cash.
Value of vehicle He found the Hyundai in great shape
exports to Russia in after being fixed at a repair shop.
January this year After clearing customs in Gyumri, he
was about to drive it home, where he
13% was confident it would be an easy sell.
Armenia’s GDP
“Everything’s bad in the Russian mar-
growth in 2022, ket,” he said. “People will buy it because
more than double they don’t really have any options,
the rate of 2021 because of the circumstances.”
Most Russians have turned to buying
€50,000 second-hand cars. Last year used cars
EU limit on value of
made up almost three-quarters of sales.
a vehicle exported But even this market was getting tight,
to Russia said Alexander, a young Russian clear-
ing a car at Gyumri customs for his
personal use. Prices are steep, and good
used cars are scarce.
Alexander said he had just sold his
Ford Focus in Russia, receiving more
money for it now than he paid for it new
in 2009, “even though it had aged, its
mileage had increased and its condition
had worsened”. He used those funds to
find a car in the Caucasus because “Rus-
sians have swept up all the half-decent
used cars from Germany already”.
Alexander said Russians were famil-
iar with, and resigned to, the tortuous
process requited to import cars.
“This business has existed for a long
time. It was super popular in the 1990s
as the official market hadn’t developed,
dealers and brands hadn’t entered Rus-
sia yet,” he said, referring to the period
immediately after the collapse of the
Soviet Union when trade was often
murky and underhand.
“Now the 1990s are coming back.”
Kyiv links
air strikes
to Kremlin’s
grain deal
withdrawal
ROMAN OLEARCHYK — KYIV
HENRY FOY — BRUSSELS
MAX SEDDON — RIGA
The Ukrainian port cities of Odesa and
Mykolayiv were rattled yesterday by
Russian air strikes hours after Presi-
dent Vladimir Putin pledged a “respon-
se” to a sea drone attack on a Crimean
bridge blamed on Kyiv.
Officials reported damage to port infra-
structure and civilian buildings, but the
extent of the damage was not immedi-
ately clear. Ukraine’s air force said 31 of
36 kamikaze drones and all six cruise
missiles fired from the Black Sea region
were intercepted.
Andriy Yermak, Ukrainian president
Volodymyr Zelenskyy’s chief of staff,
linked the strikes to Russia’s decision on
Monday to withdraw from a UN and
Turkey-brokered agreement struck last
year allowing Ukrainian maritime grain
exports to continue despite the war.
“The night attack of the Russians on
Odesa and Mykolayiv with the use of
missiles and kamikazes is another proof
that the terrorist country wants to
endanger the lives of 400mn people in
various countries that depend on
Ukrainian food exports,” Yermak said.
“The world must understand that the
goal of the Russian Federation is hunger
and killing people. They need waves of
refugees. With this, they want to
weaken the west.”
Putin’s spokesman, Dmitry Peskov,
said yesterday that Russia was still
working out its response to the Crimean
bridge strike. Russia accused Ukraine of
conducting a second drone attack in the
eastern regions of Crimea, a day after an
assault on the Kerch bridge, which links
the occupied peninsula to Russia.
Russia had blockaded Ukraine’s Black
Sea ports, which are the country’s main
grain and food export route, early in its
invasion of February 2022.
A deal brokered by the UN and Tur-
key to restart those flows has seen more
than 30mn tonnes of grain shipped out
of Ukraine since last August, and Rus-
sia’s decision to exit it on Monday was
criticised by the UN and Kyiv’s western
backers, including the US and EU.
The EU is still hoping to convince Rus-
sia to return to the pact, a senior official
said yesterday, and was working with
the UN and Turkey for a solution.
“We are asking Russia to reconsider,
as our first line of response,” the official
said. “[Turkey and the UN] have our full
support, but it’s for them to renegotiate
and to work out what the terms are for
Russia to return to this deal.”
But the official added that Brussels
was also “working on expanding and
reinforcing our solitary lanes”, an initia-
tive that has allowed large amounts of
Ukrainian grain to be exported over
land into EU member states.
Late on Monday, Zelenskyy appealed
to the UN and Turkey to “ensure opera-
tion of a food corridor” in a “trilateral
format” despite Russia’s move and
Ukraine’s effort to expel invading forces
that continue to occupy. “If a bunch of
people somewhere in the Kremlin think
they supposedly have the right to decide
whether food will be on the table in dif-
ferent countries . . . then the world has
an opportunity to show that blackmail
is not allowed to anyone,” he said.
Moscow has blamed EU countries for
not upholding their end of the bargain
by rolling back sanctions on payments,
insurance and shipping for Russia’s
grain exports.

War victims

Saudi Arabia and Turkey broker talks to repatriate Ukrainian children held by Moscow
FT REPORTERS
Saudi Arabia and Turkey are seeking to
broker a deal to repatriate Ukrainian
children taken to Russia and held in
children’s homes or adopted by Rus-
sian families, according to four people
familiar with the talks.
Officials in Kyiv and Moscow are com-
piling lists of the thousands of children
moved to Russia since President
Vladimir Putin’s invasion of Ukraine, as
part of the mediation process, which has
not been previously reported.
The sensitive talks, which have been
taking place for several months, indi-
cate third parties are looking for ways to
agree compromises between Ukraine
and Russia in the hope they can evolve
into channels for potential peace talks.
Former Chelsea football club owner
Roman Abramovich, who has previ-
ously mediated in peace negotiations,
prisoner exchanges and a grain deal as
Putin’s unofficial emissary to Ukraine, is
also involved in the discussions, said
two people familiar with the matter.
The need for mediators highlights the
complexity of repatriating the Ukrain-
ian children, an issue that led the Inter-
national Criminal Court to charge Putin
with war crimes in March, along with his
children’s rights commissioner, Maria
Lvova-Belova. The issue is so conten-
tious that Ukrainian and Russian offi-
cials have refused to speak to each other
directly, unlike for some prisoner swaps
and ceasefire negotiations.
“There is no [direct] communication
with the Russian side,” said Daria Hera-
symchuk, children’s rights commis-
sioner in Ukraine president Volodymyr
Zelenskyy’s office. “There can be no
talks in this direction, as it is not a ques-
tion of exchange of prisoners of war,
these are civilians, these are children.”
Saudi Arabia raised the issue at the
G20 summit in June during wider talks
about the need for third parties to talk
to Ukraine and Russia, said a diplomat.
Western countries gave Riyadh their
blessing to continue mediating on this
and other issues, including the grain
deal, fears over contamination at a Rus-
sian-held nuclear power plant in south-
ern Ukraine and potential nuclear esca-
lation, the diplomat said.
Turkey’s President Recep Tayyip
Erdoğan has sought a role as a peace-
maker by brokering the failed talks on
an end to the war last year, as well as the
grain deal and prisoner exchanges.
The Kremlin, Zelenskyy, the Turkish
government and Abramovich did not Russia, while the differing circum-
comment. Riyadh did not comment. stances in which they were taken make
Ukraine alleges that Russia arranged drawing up a full tally or working out
the abductions of as many as 20,000 where to send them difficult.
children with the intent of erasing their “There’s one situation when mom and
Ukrainian identity. Yale’s Humanitar- dad are on Ukrainian territory. There’s
ian Lab says at least 6,000 Ukrainian another where there’s no mom and dad
children went to Russia, while Russia’s but there’s an aunt in Voronezh [south-
official figures count fewer still. ern Russia],” a person briefed on the
Neither side has kept records of how talks said. “The goal is to count all the
many children have been relocated to children to understand how many there
are and find the best solution for each.”
Back home: Moscow has used children in Russian-
Alla Yatsentiuk speaking areas of eastern Ukraine as
embraces her propaganda tools to justify its invasion.
14-year-old son, Some children brought to Russia have
Danylo, who been enrolled in “patriotic” classes
returned to where they are taught that the Ukrain-
Ukraine in April ian nation never existed, and are told
after being sent Moscow is fighting a war on “Nazism”.
to Russia Kyiv claims Russia is trying to eradi-
following the cate the children’s Ukrainian identity.
invasion “We are aware that their actions are not
Valentyn Ogirenko/TPX/
Reuters
chaotic but had a well-planned genocide
policy towards us,” Herasymchuk said.
“They are kidnapping our children
to replenish their dying nation.”
Another factor complicating the talks
is the different ways the children
arrived in Russia. While some were for-
cibly taken early in the invasion by sol-
diers and publicly paraded, others were
brought in by pro-Russian relatives or
sent to summer camps, then separated
from their families when Ukraine
retook their hometowns.
Although Russia has said it will let any
child return to Ukraine if a legal guard-
ian can physically reclaim them, par-
ents must go on their own. Many of the
Ukrainian parents lack passports or
money to travel, making the route into
Russia via Poland and Belarus or the
Baltic States even more challenging.
About 370 children, a fraction of the
total number that Kyiv says are in Rus-
sia, have returned to Ukraine.
Max Seddon and Anastasia Stognei in Riga,
Henry Foy in Brussels, Christopher Miller
in Kyiv and Samer Al-Atrush in Dubai.
Additional reporting by Adam Samson in
Ankara
4 ★ FINANCIAL TIMES Wednesday 19 July 2023

INTERNATIONAL
GLOBAL INSIGHT
Mediterranean region

Europe struggles with scorching heat

PARIS

Countries affected close
tourist attractions and
step up medical assistance
ALICE HANCOCK — BRUSSELS
AMY KAZMIN — ROME
ELENI VARVITSIOTI — ATHENS
As temperatures reached near-record
highs across the Mediterranean, the
record temperature of 48.8C set in Sicily
two years ago had been broken this
week. Temperatures are set to ease
slightly towards the end of the week but
will remain “much warmer than nor-
mal” in many parts of southern Europe,
Buontempo said.
On Monday and yesterday tempera-
tures hit the high 40Cs in Sardinia and
Sicily, and were only slightly lower in cit-
Leila
Abboud
The weather has had drastic conse- ‘We do tion for heat-related problems. In
quences for tourism, agriculture and Rome, where tourists struggled to find
expect
industry. Multiple wildfires outside Ath-
ens, which started on Monday, were still
burning yesterday, destroying homes
heatwaves
cool or shady resting spots, the city’s
protection organisation and volunteers
set up 28 help points to provide water
French president
and cars and forcing thousands of resi-
dents and children from summer camps
to become
more
and medical assistance to those over-
come by the heat.
needs more money
to evacuate the area.
High winds together with high tem-
peratures set greater Athens on the
intense
Italy’s farming lobby, Coldiretti, said
dairy farmers had resorted to using fans
and sprinkler systems to cool livestock.
to grow ‘bonsai army’
and to last

European weather forecasting agency
warned that the continent should pre-
pare for more intense and longer lasting
heatwaves.
“We do expect heatwaves, such as the
ones that affected Europe last summer
or the one ongoing, to become more in-
tense and to last longer because of cli-
mate change,” said Carlo Buontempo,
director of the Copernicus Climate
Change Service.
He added it was unclear whether the
ies such as Madrid and Rome, causing
authorities to close tourist attractions
and issue alerts.
The extreme heat is a result of an anti-
cyclonic high pressure system, named
Cerberus by the Italian Meteorological
Society after the mythical monster that
guarded the gates of hell. It follows the
hottest June on record globally and the
hottest first week in July. According to
Copernicus, temperatures in June
were 0.5C above the global average.
Germany. Construction
highest level of alert for wildfires.
Lina Mendoni, the Greek culture min-
ister, said she had been receiving hourly
updates about the heat to decide
whether to keep tourist sites open.
“We all need to adapt ourselves in the
climate crisis we are facing,” she said.
In Italy, health officials declared heat
emergencies in 20 cities yesterday,
which will rise to 23 today, while hospi-
tals have been warned to ready for a
surge of people requiring urgent atten-
O
Luca Bergamaschi, founder of Ecco,
longer an independent climate think-tank, said
because the extreme heat, just two months after
Italy’s northern agricultural heartland
of climate was hit by floods, should be a wake-up
change’ call to Italy’s rightwing government.
Prime minister Giorgia Meloni insisted
her government did not include “dan-
gerous climate change deniers” but any
measures on climate change should not
affect Italy’s economy and traditions.
Pilita Clark The FT View
n the eve of the Bastille Day military parade,
President Emmanuel Macron celebrated his
government’s seven-year defence budget as a
“proactive” one that would maintain France
as an influential power. The fruits of spending
were on display with new kit on show; Guépard helicopters
(part of a €10bn order from Airbus) flew by, and new Ser-
val armoured vehicles graced the Champs-Élysées.
Yet behind the pomp lie some hard truths: France’s
armed forces are essentially running to stand still and have
not recovered from decades of cuts after the cold war,
made in the name of the “peace dividend”. The 2024-2030
budget passed this month amounts to €413bn, a 40 per
cent rise (in nominal terms) on the €295bn allocated in the
2019-2025 budget, but inflation will cut about €30bn, or

Housing outlook piles pressure on Scholz

Labour shortages, inflation,
high rates and material prices
undermine chancellor’s pledge
GUY CHAZAN — BERLIN
Olaf Scholz came to power promising to
alleviate Germany’s housing shortage
by building 400,000 homes a year.
Nearly halfway through his term, the
chancellor’s failure to reach that goal
weighs heavily on millions of Germans
struggling with high inflation, unem-
ployment and rising rents.
Just 295,300 dwellings were built in
Germany in 2022, well short of the
chancellor’s target. Industry executives
expect the numbers for this year and
next to be even lower — bad news in a
country facing a shortage of 700,000
homes, according to the German Prop-
erty Federation.
“The outlook for 2024-25 is cata-
strophic,” said Dirk Salewski, head of
the BFW, the association of independ-
ent property and housing companies.
“We are seeing a massive slump in
demand for new developments.”
The industry is facing a perfect storm
as interest rates and energy prices climb
sharply, supply chain disruptions push
up the cost of building materials and an
acute shortage of skilled workers plays
havoc with construction schedules.
Matters could deteriorate. Contrac-
tors have reported a sharp decline in
orders, an alarming sign in a sector with
long lead times. The FIEC, Europe’s con-
struction industry federation, said they
fell 9.7 per cent in real terms in 2022,
compared with the year before.
“Right now, building firms have full
order books stretching into next year,”
said Tim-Oliver Müller, head of the
HDB, the construction industry associa-
tion. “But there are no new orders com-
ing in. And that is very worrying.”
The downturn could exacerbate an
already overheated housing market
where demand vastly outstrips supply.
Empirica Regio, a research firm, has
identified a “supply gap” of 23,177
dwellings in Berlin, 13,632 in Hamburg
and 10,577 in Munich. In all three cities,
rents are exploding.
Many contractors blame the govern-
ment, saying it is imposing ever more
burdensome environmental rules on
developers, including a ban on new oil-
and gas-fired boilers, due to be adopted
about 30 per cent of the spending uplift, found Julien Mali-
zard of defence institute IHEDN.
Much of the rest will go on maintenance costs on equip-
ment, as well as ballooning prices on increasingly high-
tech kit; for example, a Rafale fighter jet costs about
€80mn, more than double the Mirage model it replaced.
offer, you get less for every euro you So France will not end up with a step-change in capabili-
invest.” He said the company would not ties. It will continue to have what critics call “a bonsai
launch any more developments until all army”; a reference to the Japanese art of cultivating minia-
those in planning had been completed. ture trees. France would have the basic range of capabili-
“That’s unusual compared to our ties of the more powerful US army, just on a tiny scale.
approach over the last 15-20 years,” he Macron does deserve credit for beginning to address the
said. Reflecting the move, its annual problem, even before Russia’s full-scale invasion of
investment budget is to fall by €10mn to Ukraine last year. In an apparent dig at Germany’s Zeiten-
€40mn. wende, Macron said France did not need “a wake-up call to
The company’s approach is typical for be conscious of the need
much of the industry. Investment in res- to reinvest” in its mili-
idential construction fell 8.5 per cent to tary. Under his direction,
‘Our armies are
€9bn last year compared with 2021, annual defence spending short of everything.
while the number of building permits is set to reach €68bn in
for new dwellings dropped 27.3 per cent 2030, double the level of
The €413bn in the
in the first four months of 2023, com- 2018. Even with this budget will only
pared with the same period last year. effort, France will only
Residential completions are expected just make the Nato target
mitigate the disaster’
to fall from 295,300 in 2022 to 242,000 of spending at least 2 per
in 2023 and 214,000 in 2024, according cent of gross domestic product on defence, Malizard
to the GdW, a trade body representing added, after falling short for almost a decade.
housing associations. That compares Christian Cambon, the long-serving head of the French
with an annual average of 405,000 Senate’s foreign affairs and defence committee, admitted
between 1950 and 2022. there was an unfortunate “optical effect” where France
Germany is not the only European was spending big without seeing much growth in pro-
Fewer homes are being completed in Germany New building permits country experiencing such problems. grammes. It “creates the impression you’re not getting
Building investment is expected to drop much for your money”, he said.
while the construction backlog grows slumped since 2021 5 per cent in Spain and 5.7 per cent in Former colonel Michel Goya was harsher in comments
Number of homes (’000) Monthly building permits for Italy this year, according to the FIEC. to RMC radio in May: “Our armies are short of everything.
dwellings (’000) And France experienced a 15 per cent The €413bn in the budget will only mitigate the disaster.”
Other homes Completions Construction backlog
Flats 800 800 40 decline in housing starts and a 30 per Goya is among the critics who argue the latest budget
Detached and cent fall in permits for new housing in shows that France has not learned the lessons from the war
semi-detached the first four months of this year com- in Ukraine (a high-intensity land war) and has put off
houses 600 600 30
pared with the same period in 2022. tough strategic decisions about what kind of army it truly
Skeleton But the chill the sector is experiencing needs and what it can afford. Should it stick with its model
construction 400 400 20
complete
is particularly worrying in Germany, of having an expeditionary force that can be deployed
where the construction industry abroad for short-term missions, or beef up to become more
Skeleton
construction 200 200 10 employs 2.5mn people, received €476bn capable of fighting a land war, such as in Ukraine?
under way
Trend in investment in 2022 and is a big driver The government has to an extent avoided the question
Seasonally adjusted of economic growth. and chosen relative continuity. A big chunk of the new
Not yet begun 0 0 0
2012 15 20 22 2012 15 20 22 2010 15 20 23 Small companies, such as BGFG, a defence budget (13 per cent by one Senate estimate) will go
Sources: Pestel Institut; German Federal Statistics Agency Trend cycle component (Berlin procedure) building co-operative in Hamburg, are to updating France’s nuclear weapons, aircraft and subma-
also slowing their activities. It has rines for them, long the cornerstone of national defence.
shelved plans to construct 140 dwell- France will put enough money into the army to ensure it
Munich: a this year. They also criticise its decision The upshot is clear, said Franz-Bernd ings, the last stage of a large residential can maintain the same number of brigades by 2030, and
‘supply gap’ of last year to halt targeted support for Große-Wilde, chief executive of Spar- development on the Elbe River, south- sharply increase the number of reservists. But there will be
nearly 11,000 new energy-efficient buildings. und Bauverein Dortmund, one of Ger- east of Hamburg centre. no big increase in the size of the naval and air fleets; some
homes has been The government insists it is trying to many’s oldest housing co-operatives. Peter Kay, BGFG’s chief executive, long-awaited equipment acquisitions have been delayed.
identified in the help the industry. It has launched a Decisions made today to shelve projects said the problem was not just higher The air force will, for example, buy 48 fewer Rafale fighter
Bavarian capital €2bn subsidy programme for climate- risk creating a substantial housing “gap” material costs but the fact that some jets and 15 fewer transport aircraft than planned, and the
Christof Stache/AFP/Getty
Images
friendly construction, including in two to three years. “It’s just going to materials had disappeared completely. army almost 500 fewer armoured vehicles.
€350mn a year in cheap loans for fami- become much harder for people to find BGFG used to make its windows from Drawing lessons from the battlefield in Ukraine, France
lies on low incomes seeking to buy their a flat,” he said. Siberian larch, which has been banned will plough more money into munitions, drones and air
own home. It is also providing €14.5bn Set up in 1893 to provide affordable under anti-Russia sanctions. “The alter- defences but it has stopped short of adding enough “mass”
in support for the building of social housing for Dortmund’s industrial native is oak and that is a lot more to be able to fight an extended ground war.
housing by 2026. workers, the co-operative exemplifies a expensive,” he said. Cambon pointed to the main trade-off: France has to
Experts say subsidies will have little wider trend. For the first time in nearly Salewski said the figure for comple- balance military ambition with heavy public debts and the
effect. “You only qualify if your house 20 years, it has scrapped plans to build tions last year was a “success” consider- need to fund other demands. “We are not an attacker
meets the highest energy-efficiency apartments. ing the effect of the war in Ukraine and country but we must be capable of defending ourselves, in
standards, and such houses are 20 per “We’re taking a break from new its impact on supply chains. “The short- co-operation with Nato and our European allies,” he said.
cent more expensive to build,” said projects,” said Große-Wilde. “With costs to medium-term outlook is a lot worse
Salewski. “How can people afford that?” rising and fewer government grants on than the results for 2022,” he added. leila.abboud@ft.com

Antitrust watchdog Commonwealth event

Macron criticises EU for hiring US economist Australia state pulls plug on Games as costs rise
JAVIER ESPINOZA AND IAN JOHNSTON
BRUSSELS
SARAH WHITE — LONDON
Emmanuel Macron has criticised the
EU’s antitrust watchdog for its
“extremely worrying” move to hire an
American economist, saying it would
be better to find a “great European”.
The French president’s intervention
escalated the dispute over the European
Commission appointing Fiona Scott
Morton as chief economist, a former
official in Barack Obama’s administra-
tion and a Yale University professor.
Macron claimed yesterday that the
appointment highlighted the EU’s lack
of ambition. “Are there no great Euro-
pean researchers with the academic
skills needed to do this job? If that’s our
conclusion, it’s an extremely worrying
one,” he said at a summit in Brussels. “It
means we have a big problem with all of
the academic systems in Europe.”
China or the US would never have
appointed a European to such a position
of influence, he added.
The clash over Scott Morton has high-
lighted deeper fissures within the EU,
with France leading calls for a tougher
approach that protects Europe’s eco-
nomic independence against the power
of the US, Big Tech and China.
Margrethe Vestager, the EU’s compe-
tition commissioner, defended the
appointment yesterday in the European
parliament, praising Scott Morton’s
expertise and dismissing concerns over
potential conflicts of interest. “I find it
questionable to assume that someone’s
nationality will automatically lead to a
bias in favour of companies originating
from that same nationality,” she said.
Vestager argued applications were
rightly opened up to the US because the
pool of eligible candidates was small,
and stressed the decision to make the
offer to Scott Morton was a collective
one by the commission’s top officials.
Macron’s government has argued that
Scott Morton’s past consulting work for
US tech groups will leave her sidelined
from Brussels work on important cases,
just at a time when the EU is seeking to
enforce its landmark digital rules and
step up antitrust scrutiny of Apple,
Amazon and Google.
But Vestager said Scott Morton, who
as chief economist would contribute to
competition investigations and broader
policy work, would only have to recuse
from a very limited number of cases.
She said that the idea that having
worked for Big Tech would make her job
“irrelevant” was “simply not true”.
Her appointment last week led to a
string of co-ordinated tweets led by sen-
ior French officials. French foreign min-
ister Catherine Colonna expressed
“astonishment” at the choice. Several
big European parliament political
groups said the appointment would risk
“foreign interference” in EU decisions.
But there has also been support for
Scott Morton. A group of economists
from institutions such as the London
School of Economics and the European
University Institute wrote a letter back-
ing Scott Morton as “one of the best
economists in the world in the domain
of industrial organisation”.
NIC FILDES — SYDNEY
The Australian state of Victoria has
said it will not host the 2026 Common-
wealth Games because of its projected
cost, throwing the event into doubt.
Daniel Andrews, the Labor premier of
Victoria, said the cost of hosting the
sporting event in the state’s rural and
coastal towns had trebled to as much as
A$7bn ($4.8bn) from the A$2.6bn pro-
jected last year. The decision to pull out
had not been difficult, he added, as it
would be a case of “all cost, no benefit”
for the indebted state.
The Games, staged every four years,
involve nations from the Common-
wealth competing in a variety of sports,
similar to the Olympics.
Craig Phillips, chief executive of Com-
monwealth Games Australia, said the
move was “beyond disappointing” for
athletes, organisers and fans, and ques-
tioned the numbers that Andrews had
used to justify pulling the plug on the
event three years ahead of its start. The
organisation said it was informed only
yesterday and the decision had thrown
the Games into chaos. “We’ll reset and
move on,” Phillips added.
He said the new cost estimate was a
“gross exaggeration” and not reflected
in meetings held as recently as June with
the Victorian government. “I find that a
little hard to believe,” he said of the new
projection, adding that the Games
‘The Games aren’t what
they used to be. They
don’t provide the
return on investment’
in Birmingham, UK, in 2022 cost about
A$1.8bn.
It is the second time in a row that the
Commonwealth Games has been
thrown into disarray. Durban in South
Africa pulled out of the last event due to
concerns over financing, with the event
moved to Birmingham.
Other Australian states were quick to
rule themselves out as hosts. “The Com-
monwealth Games aren’t what they
used to be . . . they don’t provide the
return on investment,” said Western
Australia premier Roger Cook.
Australia has built a reputation since
the Sydney Olympics in 2000 as one of
the leading locations for international
sporting events. The Women’s World
Cup, co-hosted with New Zealand, kicks
off this week while the netball and rugby
union world cups and the 2032 Brisbane
Olympic Games are due to be held in the
country over the next decade.
Anne Ruston, shadow federal sport-
ing minister, said the cancellation
would undermine future bids. “Today is
a sad day for Australian sport,” she said.
Tim Harcourt, an economist with the
University of Technology Sydney, said
the cancellation was short-sighted as
Australia was looking to build its geopo-
litical and trade strength in the Indo-Pa-
cific region. “The Commonwealth
Games are pretty significant for trade. It
is not so much they’ve gone out of fash-
ion but that they’re not being leveraged
for how important they could be.”
Wednesday 19 July 2023 ★ FINANCIAL TIMES 5

Burden of gilt Investors offload UK government bonds amid fears inflation woes will push borrowing costs higher still y MARKETS

Bullish Morgan Luxury choice Milan’s Zegna picks LVMH

executive to lead fashion house Tom Ford
Novartis to
return $15bn
Stanley aims to after turning
back on deals
manage $20tn DONATO PAOLO MANCINI — LONDON

Novartis has announced plans to

return $15bn to shareholders after fail-

of investments ing to find anything compelling to buy.

3 Gorman talks of ‘unstoppable force’
3 Fixed income trading revenues slide
JOSHUA FRANKLIN — NEW YORK
Morgan Stanley chief executive James
Gorman projected that the Wall Street
bank would eventually triple its assets
under management to $20tn, even as an
aggressive push into wealth manage-
ment failed to make up for lacklustre
trading in the second quarter.
Gorman, who plans to step down as
chief executive next year, has led Mor-
gan Stanley’s expansion into more sta-
ble businesses such as wealth and asset
management in order to make it less
reliant on volatile investment banking
and trading.
Despite that push, Morgan Stanley’s
Net income suffered a fall
of 13% year on year to
$2.2bn, which was in line
with analysts’ estimates
earnings remain subject to market
swings, with a sharp drop in fixed
income trading revenues weighing on
profits in the second quarter. Net
income fell 13 per cent year on year to
$2.2bn, in line with analysts’ estimates.
Gorman, however, said yesterday that
the bank’s wealth management busi-
ness had become “a pretty much
unstoppable force” that, together with
its asset management division, would
make good on a target for $10tn in assets
under management and eventually get
to $20tn. “I know people are going to call
me crazy and I know it’s the end of my
tenure and I get to do this kind of stuff.
But if you did 5 per cent [compounding]
over 14 years, you end up at $20tn,” Gor-
man told analysts.
Morgan Stanley shares were up more
than 6 per cent in early trading in
New York.
When Gorman steps down as chief
executive, Morgan Stanley is expected
to select his successor from a trio of
internal candidates, Ted Pick, Andy
Saperstein and Dan Simkowitz, each of
whom run one of Morgan Stanley’s three
divisions.
The bank’s wealth management unit,
run by Saperstein, reported revenues of
$6.7bn for the quarter, up 16 per cent
from a year ago and ahead of estimates
of $6.5bn. The business took in $89.5bn
in net new assets, well ahead of the
$60.3bn that analysts had expected.
UBS analysts described the asset
inflow as “very strong”.
Investment banking revenues were
flat at just under $1.1bn, ahead of esti-
mates of $1bn and ending a run of more
than a year of falling revenues amid a
dealmaking slump. Fixed income trad-
ing fell 31 per cent to $1.7bn, in contrast
to 12 months ago when the business was
boosted by central banks lifting interest
rates. Equity trading revenues were 14
per cent lower year on year at $2.5bn.
Meanwhile, Bank of America yester-
day reported better than expected sec-
ond-quarter profits, buoyed by a strong
performance from its Wall Street busi-
nesses, the benefits of higher rates, and
a growing economy. “We continue to see
a healthy US economy that is growing at
a slower pace, with a resilient job mar-
ket,” said boss Brian Moynihan.
The nation’s second-largest bank
lifted profits 19 per cent in the second
quarter from a year ago to $7.4bn, ahead
of analyst expectations of $6.9bn. BofA
was boosted by its markets business,
with revenue from its closely watched
bond, commodities and currency trad-
ing up 18 per cent in the quarter.
JPMorgan Chase last week reported
that investment banking fees fell 6 per
cent, while Citigroup suffered a 31 per
cent drop in fees. JPMorgan’s trading
revenues were down 10 per cent and
Citi’s were 13 per cent lower. Goldman
Sachs reports its results today, with ana-
lysts braced for a weak quarter.
Gildo Zegna: the Italian group’s chief executive wants to expand newly acquired unit Tom Ford — Francesca Volpi/FT
SILVIA SCIORILLI BORRELLI — MILAN
LEILA ABBOUD — PARIS
Italy’s Ermenegildo Zegna Group has
poached an LVMH executive to run
its recently acquired Tom Ford fash-
ion business as it plans to expand the
brand in Europe and Asia.
The Milan-based company has
recruited Lelio Gavazza, who oversaw
sales and retail at jeweller Bulgari, as
the new chief executive of Tom Ford
Fashion, which includes luxury men’s
and womenswear, an accessories line
and a children’s collection.
Estée Lauder bought Tom Ford last
year from its eponymous founder and
co-founder Domenico De Sole for
$2.8bn including debt. The US con-
glomerate operates the beauty line
and owns the Tom Ford trademark
but sold the fashion business, valued
at about $175mn excluding debt, to
the Zegna group as part of the deal.
The agreement includes a 30-year
licence of the Tom Ford trademark for
the Italian group. Estée Lauder also
licensed the eyewear business to
another Italian company, Marcolin.
Gildo Zegna, chief executive of the
fashion group, told the Financial
Times that he wanted to put the brand
among the top 10 names in fashion.
“The aim is to grow the womens-
wear business and strengthen the
Tom Ford distribution outside the US,
so in Europe and Asia,” he said.
Gavazza, who starts his role in Sep-
tember, will work closely with crea-
tive director Peter Hawkings, Ford’s
successor, and Tom Ford chief execu-
tive and president Guillaume Jesel.
Zegna said he would be a “bridge
builder” between the different parts
of the Tom Ford business. Jesel, who
was appointed by Estée Lauder, is
based at the New York headquarters
and Hawkings, for decades Ford’s
right-hand man, works in London.
This month it was announced that
Hawkings’ debut fashion show in Sep-
tember would take place in Milan. “It
restarts in Milan where Tom [Ford]
did one of his first fashion shows in
the 1990s,” said Zegna.
Meanwhile, French luxury group
Kering has announced a management
overhaul that will parachute in a tran-
sitional leader to fix underperform-
ance at Gucci, its biggest brand, and
name two deputy CEOs.
The moves unveiled by chair and
CEO François-Henri Pinault yester-
day aim to give direction to the group.
Gucci CEO Marco Bizzarri will step
down in September and be replaced
on a temporary basis by Jean-
François Palus, a long-time lieutenant
of Pinault, the billionaire owner.
Francesca Bellettini, who has led an
expansion at Yves Saint Laurent since
2013, will become deputy CEO for
brand development.
Finance chief Jean-Marc Duplaix
will be the other deputy CEO, oversee-
ing operations and finance. Before
launching his brand, Ford was crea-
tive director of Milan-based Gucci.
The Swiss drugmaker, which is sitting
on a large cash pile after selling its stake
in domestic rival Roche in 2021,
announced a new share buyback pro-
gramme yesterday after completing one
of similar size last month.
Harry Kirsch, chief financial officer,
said Novartis had found no “bolt-on”
acquisition targets it was convinced
would improve returns and had decided
against pursuing any large deals.
“If we were to find more bolt-on
acquisition targets that we could spend
the capital on, where we have high con-
viction . . . that we could generate an
attractive return for shareholders, we
would rather do that,” he said as
Novartis raised its full-year earnings
forecast.
After a strong performance from its
innovative medicines division in the
first half, Novartis now expects reve-
nues for the full year to increase at a
high single-digit pace, up from an ear-
lier prediction of mid single digits.
Core operating income is forecast to
rise in the low double digits from an ear-
lier prediction in the high single digits.
Shares in Novartis closed 4.64 per
cent higher in Swiss trading yesterday,
but have languished this year.
Vasant Narasimhan, chief executive,
has been trying to focus on more profit-
able drugs since he took over in 2018. As
part of that plan, Novartis is spinning off
its Sandoz generics drugs division.
The business, which has about $10bn
in annual revenues, had attracted pri-
vate equity interest before the rapid rise
in interest rates chilled dealmaking.
“The current interest [rate] environ-
ment does not make it easy for them
[private equity firms],” said Kirsch, not-
ing that any viable offers would be dis-
cussed by the board.
The planned spin-off of Sandoz would
be in the “best interest” of shareholders,
said Kirsch, adding that their feedback
had been “very positive”.
Assuming shareholders approve the
plan, the spin-off is expected to happen
by early October, he said.
Novartis said that its second-quarter
sales rose 7 per cent to $13.7bn.
“Our growth drivers and rich pipeline
continue to provide confidence in our
midterm growth outlook,” Narasimhan
added.

China’s corporate woes are narrower than ‘Japanification’ worries

bank, of the balance sheets of 3,000
INSIDE BUSINESS listed Chinese companies.
As in Japan, Chinese mortgages and
ASIA company borrowings have been sub-
dued over the past couple of years
despite relatively low interest rates,
Joe indicating low demand for debt, says
Gary Ng, a Natixis analyst. But home
Leahy prices in China have not crashed in the
same way that they did in Japan, instead
annual reports from onshore and off-
shore non-financial Chinese companies
by Thomas Gatley, China strategist at
Gavekal, underlines the challenges.
On average, listed developers have
deleveraged from a peak of 1.2 times
debt to equity in 2018 to less than 1
times now. Yet while their debt is about
Rmb5.7tn ($790bn), their non-debt lia-
bilities — from presales of apartments

A
s Chinese companies warily
emerge from three years of
Covid-19 controls and regu-
latory crackdowns, there
are concerns that another
big problem looms — a balance-sheet
recession akin to what Japan went
through after its boom.
The argument goes that China’s situa-
tion in 2023 somewhat resembles
Japan’s after its 1980s real estate bubble
imploded. China’s property market has
ground to a halt after a long, debt-
fuelled boom and few expect it to
bounce back soon. Consumers scarred
by the pandemic controls and distrust-
ful of the real estate market do not want
to spend — at least not on new homes.
Private businesses, equally battered
after the pandemic and worried about
low demand for their products, do not
want to invest. Banks, meanwhile, are
laden with property and related assets
as well as loans to another stricken sec-
tor — local government finance vehicles,
which have ploughed money into low-
return infrastructure projects.
The stage is set, some say, for a Japan-
style balance-sheet recession as all par-
ties, from companies to individuals
focus on paying down debt at the same
time, sending growth into a downward
spiral. The argument is compelling but
matters may be more nuanced, accord-
ing to a study by Natixis, the French
edging slowly down in recent months.
The financial health of Chinese com-
panies overall is also relatively stable.
Their main problem is that the slug-
gish economy is hurting revenue gener-
ation, lowering their ability to repay
debt. The ratio of Chinese companies’
earnings before interest, taxation,
depreciation and amortisation to inter-
est expense is about six times, or half the
global average, according to Natixis.
That is the over-
all picture. But ‘Early signs of balance-
within China’s cor-
porate sector some sheet recession and
segments, notably the stress is very
private property
groups and local concentrated on private
government-
owned enterprises,
real estate developers’
are doing far worse. In fact, they may
already be suffering from what Ng calls
“balance-sheet deterioration”.
The ability of local government-
owned enterprises and private compa-
nies including real estate groups to
repay their debt is relatively low, at an
ebitda to interest expense ratio of less
than four times. By contrast, non-
property private sector companies and
central government state-owned enter-
prises have an average ebitda to interest
expense ratio of more than six times.
“Early signs of balance-sheet recession
and the stress is very concentrated on
private real estate developers,” Ng says.
A separate study of more than 6,000
and accounts payable — is more than
three times this amount.
“With housing past its structural
peak, it may be difficult for firms to
grow out of this pile of liabilities, or raise
equity to deleverage,” Gavekal says.
The shocks of recent years have
increased the number of companies
that generate insufficient earnings to
cover their interest payments. These
account for 9 per cent of listed busi-
nesses, about three times more than in
2018, Gavekal says. Many private real
estate groups are in this category.
Some areas of China’s economy are
still doing well, such as capital goods and
tech hardware producers. These are sec-
tors that Beijing favours as part of its
geopolitical rivalry with the US. But on
their own, they are not big enough to off-
set the depressed property market and
weakened domestic consumption.
So, while China is some way off from
Japan’s situation in the 1990s, policy-
makers may need to act quickly to give
an incentive to the more productive
areas of the economy. That means help-
ing the private sector as a whole, includ-
ing industries that do not necessarily fit
Beijing’s strategic objectives such as
ecommerce. “China should probably
consider giving more room for the pri-
vate economy to grow — that will reduce
its chance of following what happened
in Japan in the late 1980s,” Ng says.
joseph.leahy@ft.com
6 ★ FINANCIAL TIMES Wednesday 19 July 2023

COMPANIES & MARKETS

Technology Financials

Microsoft aims high with fees for AI
Chief defends planned $30
monthly charge for use of
features in software suite
RICHARD WATERS — SAN FRANCISCO
Microsoft is to charge $30 a month for
generative artificial intelligence fea-
tures in its widely used productivity
software, slapping a bigger premium
than expected on a technology that
many in the industry hope will bring a
powerful boost to revenues.
For customers who sign up, the new
features are set to add a hefty 53-83 per
cent increase to the average monthly
cost of business-grade versions of the
Microsoft 365 service, a suite of software
formerly called Office 365 that is used
by hundreds of millions of workers.
Satya Nadella, Microsoft chief execu-
tive, defended the pricing decision as
part of a generational shift in technology
that would bring a new dimension to
one of the software company’s core
products.
“I would think of this as the third leg”
of Office, he said, after applications such
as Word and Excel and cloud services
like Teams. Speaking in an interview
with the Financial Times, he claimed
the new AI features “are the same class
of value”, automating routine work and
increasing productivity.
The pricing news came as the US soft-
Airlines. Growth path
ware group used its annual partner con-
ference to reveal products and services
based on generative AI, including a busi-
ness-grade version of the chatbot it
added this year to its Bing search engine.
The new chatbot is aimed at businesses
worried their workers are secretly feed-
ing sensitive corporate data into Chat-
GPT, which is run by close Microsoft ally
OpenAI, despite an attempt by many
employers to ban its use.
Microsoft has become the first tech
company chosen by Meta to make avail-
able a commercial version of the social
media company’s family of open-source
large language models, known as
LLaMA. Meta has licensed the technol-
ogy for research use only, until now.
A commercial launch of the well-re-
ceived software has been considered an
important moment, bringing a new
form of competition for OpenAI and
Google.
Microsoft’s pricing of generative AI
has been hotly anticipated in the tech
world, given the wide use of the com-
pany’s productivity software. More than
382mn people used commercial ver-
sions of the Office 365 software in the
latest quarter, the company said.
The price is “at the higher end of what
we see for other generative AI services”,
said Jason Wong, an analyst at Gartner.
OpenAI charges $20 a month for the
premium version of ChatGPT, while the
monthly fee for a business version of
Microsoft’s generative AI coding assist-
ant, GitHub Copilot, is $19.
Evidence that the GitHub service has
made coders more productive is “what’s
giving us real confidence that a more
‘horizontal’ co-pilot like [Microsoft
365]” will have a big impact on “every
[type of] sales, finance, HR or general
knowledge work”, Nadella said.
Companies using enterprise-grade
versions of Microsoft 365 pay $36 a
month for each user of the E3 version
and $57 a month for the E5 version. The
extra $30 a month will apply when the
Copilot feature, which is in trials with
customers, becomes generally availa-
ble, the company said.
Additional reporting by Hannah Murphy
Fugitive
Marsalek
sends letter to
Wirecard trial
OLAF STORBECK — MUNICH
Jan Marsalek, one of the world’s most
wanted white-collar criminal suspects
and former Wirecard executive, has
sent an unsolicited letter giving his
opinion about the evidence presented
against his former colleagues to the
judges presiding over their trial in
Munich.
Marsalek’s German lawyer submitted a
letter on his client’s behalf to the court,
according to spokespeople for the
Munich District Court and the city’s
Public Prosecution Office.
The letter is the first known interac-
tion by the now-43 year old Marsalek
with German authorities since he fled to
Austria and Belarus in June 2020, days
before Wirecard crashed into insol-

United runs into challenges at its largest hub
US carrier risks helping rivals
by cutting Newark flights in
response to June travel chaos
CLAIRE BUSHEY — CHICAGO
On a good day, passengers flying into
Newark airport in New Jersey can catch
a glimpse of the Statue of Liberty. On a
bad day, passengers waiting at the air-
port have to sleep on the floor.
No company’s fortunes are more
entwined with the airport than United
Airlines, which accounts for 57 per cent
of passengers. An hour from Manhat-
tan, Newark is a pillar of chief executive
Scott Kirby’s plan to use bigger, more
efficient jets to grow the carrier. It is also
United’s transatlantic gateway at a time
when international travel is rebounding
from the pandemic.
But last month the airport was the
source of operational difficulties, which
undercut Kirby’s claim that United was
better prepared for the busy summer
season than rivals. Kirby has since said
the airline will operate fewer flights
from Newark to minimise disruption,
something analysts fear could create an
opening for competitors.
“It hurts,” said Savanthi Syth, an ana-
lyst at Raymond James. “It’s good, high-
quality demand that you want to be able
to meet. It’s never a good thing if you
have to cut down capacity. The risk is
that you cut it and someone backfills.”
The meltdown at the end of June was
caused by thunderstorms, but Kirby
was quick to blame understaffed air
traffic control towers for failing to deal
with weather that airlines were once
able to take in their stride. “Airlines can
plan for things like hurricanes, sub-zero
temperatures and snowstorms,” he
wrote in a memo to employees on July 1.
“United has never seen an extended
limited operating environment like the
one we saw this past week at Newark.”
Passengers at Newark camped out on
chairs, tables and luggage carts, while
the disruption at the airline’s hub had a
knock-on effect on services departing
from and arriving at other airports. In
total, 3,300 United flights were can-
celled over a seven-day period and
7,800 were delayed.
Kirby is likely to face questions on the
disruption from analysts tomorrow dur-
ing a call to discuss its performance in
the quarter. Wall Street expects the
company to report adjusted earnings of
$4.04 per share on $13.9bn in revenue.
New York’s airspace is among the
world’s most congested, and air traffic
control services operating under the
High hopes: jurisdiction of the US Federal Aviation
Newark airport Administration in the region are staffed
in New Jersey is at 54 per cent of the agency’s target.
a pillar of Newark has 40 departures scheduled
United’s plan per hour, a figure that was reduced by
to expand up to 75 per cent between June 25 and
through the use June 27, Kirby said in the memo. Com-
of bigger, more pounding the problem, understaffing at
efficient jets Canada’s air traffic control operation
Eduardo Munoz/Reuters
prevented United pilots from flying
north, then west through Canadian air-
space to dodge the storms. “Airlines,
including United, simply aren’t
designed to have their largest hub have
its capacity severely limited for four
straight days,” Kirby’s memo read. “The
reality is that [Newark] can’t function
under thunderstorm conditions unless
there are departure routes to the west.”
The disruption paled in comparison
with the operational catastrophe at
Southwest Airlines in December, which
resulted in almost 17,000 cancellations
and 2mn stranded passengers. But
United had boasted of its preparedness,
telling investors in April it was “built to
run well and recover fast” and “ahead of
the curve” for the summer.
It also calls into question United’s
wager on Newark, the airline’s largest
hub for international departures and
arrivals. It went all-in on the airport in
October when it consolidated its New
York-area operations there after pulling
out of John F. Kennedy International for
the second time in eight years.
United had tried in 2021 to restore
some services at JFK to attract business
customers on routes to and from Cali-
fornia, but concluded it did not have
enough clout to complete with rivals.
In addition to its international impor-
tance, Newark is a plank of “United
Next”, Kirby’s plan to increase capacity
in a cost-effective way by replacing
smaller regional jets with larger planes.
United ordered 270 narrow-body jets
in June 2021 and signed contracts for
another 100 wide-bodies in December.
The bigger planes should allow the air-
line to carry more passengers without
adding more flights.
At the time, United said that share of
Newark-based flights being flown by the
larger planes would grow from 55 per
cent in 2019 to 70 per cent by 2026. The
airline claimed the change would
increase capacity while “driving inter-
national growth, by connecting more
customers from US cities to Newark/
NYC for their international flights”.
The airline was in “a transition
phase”, said Fitch Ratings analyst
Joseph Rohlena. While it had commit-
ted to spending to expand its fleet, it had
not yet “started to see the bulk of the
benefit”. Meanwhile, some United staff
say it is disingenuous to put all the
‘It’s never a blame on understaffed air traffic control
services. Passengers had to wait in long
good thing queues at airport counters. Some crew
if you have members could not contact the airline’s
scheduling department to be reassigned
to cut down to flights that should have been able to
capacity. take off, according to Garth Thompson,
a captain and chair of the United unit of
The risk is the Air Line Pilots Association.
that you cut Pilots reached a tentative deal with
United last week that raises wages up to
it, and 40 per cent over four years, with more
someone protection for pilots’ days off, which will
now go to union members for a vote.
backfills’ “They are going to have to make
Newark work better for this to be the
crown jewel of the Atlantic,” said
Thompson.
United is trying to capitalise on
rebounding international travel from
the west coast. On Tuesday it ann-
ounced routes from California airports
to the Philippines and New Zealand
while increasing service to other Pacific
destinations. But like other airlines, its
expansion plans have been hampered
by delays at Boeing and Airbus.
“It’s a little frustrating, to be candid,”
said Patrick Quayle, United’s senior
vice-president of global network plan-
ning. When orders from both jet makers
were delayed, “it does have a direct
impact as to our capacity plans and how
we’re deploying our fleet globally”.
vency after admitting that €1.9bn of
cash did not exist.
Marsalek’s lawyer did not immedi-
ately respond to a request for comment.
Two people familiar with the letter
said that it was sent in recent weeks and
that in it Marsalek asserted the exist-
ence of Wirecard’s outsourcing opera-
tions in Asia — backing the view of his
former boss Markus Braun and con-
trary to the opinion of Wirecard’s
administrator and Munich criminal
prosecutors.
Marsalek also claimed that the testi-
mony from his former Dubai-based col-
league Oliver Bellenhaus, who is the
[Marsalek] is one of six
Austrians on Interpol’s ‘Red
Notice’ list of the world’s
most wanted suspects
prosecutors’ chief witness, was not
accurate on all accounts, the same peo-
ple say.
Another person familiar with the
matter told the Financial Times that it
was unclear if the letter, which was first
reported by Wirtschaftswoche, would
be incorporated in the trial.
The court case against Braun, Bellen-
haus and Wirecard’s former head of
accounting Stephan von Erffa started in
December and is expected to run at least
until mid-2024.
If found guilty, the three men could
each face up to 15 years in jail.
Prosecutors accuse Braun, Marsalek
and others to have fraudulently inflated
Wirecard’s sales to raise more than
€3bn in debt, citing Bellenhaus’s testi-
mony as evidence.
Marsalek took a private jet from a
small airport in Austria to Minsk in
Belarus where his trace was lost.
He was the executive who was directly
in charge of the outsourced business at
the centre of the fraud allegations that
on paper accounted for half of Wire-
card’s revenue and all of its profits.
During their testimonies, both Braun
and Bellenhaus heavily implicated Mar-
salek, who cannot be trialled in absentia
under German law.
The former executive is one of six
Austrian citizens on Interpol’s “Red
Notice” list of the most wanted suspects
in the world.
In March 2021, Germany’s foreign
intelligence service shunned an offer to
meet Marsalek in Moscow, fearing that
the invitation to speak with the fugitive
was a trap set up by Russia’s FSB spy
agency.
In the same year, Munich police inves-
tigated an €80,000 payment from a
bank account in Dubai to the landlord of
Marsalek’s fiancée in Munich, which
came with the reference “für Jan” (“on
behalf of Jan”).

Property Technology

Evergrande reveals $81bn post-default losses
THOMAS HALE — SHANGHAI
Evergrande has posted losses of $81bn
over a two-year period, revealing for
the first time the financial fallout of a
2021 default that sparked a crisis in
China’s property sector.
The Chinese property developer, which
is in the midst of a restructuring after it
failed to make bond payments almost
two years ago, reported losses of
Rmb476bn ($66bn) for 2021 and
Rmb106bn for 2022. Revenues halved
in 2021 to Rmb250bn against
Rmb507bn a year earlier.
Evergrande doubled down on China’s
property boom to become the world’s
most leveraged developer and later
embodied the sector’s struggles when its
default shocked global markets in 2021.
“The release of results seems to indi-
cate that management and regulators
have finally accepted that a housing
rebound isn’t imminent,” said Brock Sil-
vers, chief investment officer at Kaiy-
uan Capital, a private equity firm in
Hong Kong.
The company’s problems precipitated
a wider cash crunch across China’s prop-
erty sector, which remains paralysed at
a time when policymakers are also grap-
pling with trade headwinds and a weak-
er-than-expected post-Covid recovery.
Evergrande’s financial reports are the
first glimpse into the scale of its plight,
which has been characterised thus far
by a lack of disclosure and opaque dis-
cussions with creditors.
They show that total liabilities, which
measured about $300bn at the time of
its failure, rose to $340bn by the end of
last year — an indication of the difficul-
ties the company, the government and
investors face in resolving the weak-
nesses of a sector that accounts for over
a quarter of China’s economic activity.
“Evergrande’s results show a com-
pany that no longer has a business
model capable of supporting its existing
debt. A politically difficult and econom-
ically painful sector bailout is on the
way, even if Beijing hasn’t yet accepted
this reality,” said Silvers.
Trading in Evergrande’s Hong Kong-
listed shares has been halted since
March last year. It risks being delisted if
shares are suspended for 18 months.
The company said in its filing that trad-
ing would remain suspended.
In a separate filing on Monday, the
company said it was aiming to convene
meetings with creditors next week as
part of a restructuring process that has
not been fully approved yet.
“The financial statements provide lit-
tle evidence the group can normalise
operations after a debt restructure,”
said Charles McGregor, head of Asia at
Lucror Analytics.
Many of its peers, including Sunac
and Kaisa, have similarly defaulted on
their offshore debts. Kaisa was last week
subject to a winding-up petition from an
investor in Singapore.
See Lex
Straubel start-up closes in on $5bn valuation
PATRICK MCGEE — SAN FRANCISCO
IVAN LEVINGSTON — LONDON
Tesla co-founder JB Straubel’s battery
recycling start-up is in talks to raise
$700mn in a deal that would value it at
almost $5bn and help fund the com-
pany’s plant in Nevada.
Straubel established Redwood Materi-
als in 2017 to reshape the supply chain
for electric vehicles by recycling the
materials in batteries and reducing the
need to mine for more of the minerals
the industry needs.
Since it was founded, Redwood has
been backed by investors including
asset managers T Rowe Price, Baillie Gif-
ford and Fidelity. Several of its existing
investors are set to participate in its fun-
draising, according to people familiar
with the matter.
After raising more than $700mn at a
$3.7bn valuation in 2021, Redwood this
year received a conditional commit-
ment for a $2bn loan from the Depart-
ment of Energy. Like the loan, the fund-
raising is intended to help finance Red-
wood’s development of a recycling facil-
ity near Reno, which will turn end-of-
life battery and production scrap into
materials for use in electric vehicles.
At full capacity, the plan is expected to
support output of more than 1mn elec-
tric vehicles a year, as the US market
grows and Joe Biden tries to accelerate
the transition to renewable energy.
People familiar with the matter cau-
Redwood Materials is developing
a battery recycling plant in Nevada
tioned that the fundraising had yet to be
finalised, but said the talks were
advanced.
Redwood declined to comment.
Straubel, credited with co-founding
Tesla in 2004, a year after it was incor-
porated, was the carmaker’s technology
chief for 15 years, helping to create the
company’s first powertrains and to
build its gigafactory. He recently joined
Tesla’s board.
Biden has set a target that half of all
new vehicles sold in the US will be elec-
tric by 2030. Electric vehicle sales in the
US hit the 4mn mark at the end of June,
according to data from consultancy
Atlas Public Policy. The sales are being
driven by a combination of price cuts at
the likes of Tesla and Ford, tax credits
worth up to $7,500 for consumers, and
greater manufacturing capacity.
In December, Redwood announced a
plan to develop its next facility near
Charleston, South Carolina, including a
$3.5bn investment.
Wednesday 19 July 2023 ★ FINANCIAL TIMES 7

COMPANIES & MARKETS

Automobiles

Asian tech rivals Grab and GoTo slash Ghosn files

‘superapp’ spending as losses mount
Cash-burning groups face reckoning as shares plunge and rising interest rates end cheap funding era
MERCEDES RUEHL — SINGAPORE
For south-east Asia’s so-called super-
apps and their investors, life is suddenly
looking a lot less super.
Singapore-based Grab and Indone-
sia’s GoTo spent much of the past decade
in a dash to bundle consumer services
from ride hailing to food delivery into a
single app. Global investors pumped in
money, betting on strong growth from
the region’s tech-savvy consumers in
the wake of China’s experience with
superapps and a boost from pandemic-
inspired demand for digital services.
But Nasdaq-listed Grab and Jakarta-
listed GoTo have been forced into a
retreat over the past 12 months, shed-
ding thousands of jobs and cutting back
marginal business units. Their share
prices are more than 60 per cent below
their respective listing prices.
Rising interest rates are ending an era
of cheap funding and forcing the cash-
burning companies into a reality check
on whether their business models will
lead to profits, analysts said.
“Covid gave GoTo and Grab supernor-
mal growth,” said Angus Mackintosh,
founder of CrossASEAN Research. “It
accelerated their take-up. They still
have a superapp model but have had to
pare it back a lot. They cannot go out in
the same aggressive fashion they used
to. They have to make a profit.”
Grab and GoTo, south-east Asia’s big-
gest start-ups before their listings, took
inspiration from the grandfather of
superapps, Tencent’s WeChat. The Chi-
nese app is the world’s most popular,
with more than a billion users, and com-
bines messaging, online payments,
ecommerce, video conferencing, video
games, photo sharing and a host of other
functions.
WeChat’s success gave birth to a simi-
lar revolution in the region from South
Korea to Indonesia, where consumers
suddenly gained access to services pre-
viously unavailable to them, including
lending for millions of poorer consum-
ers with patchy access to regular bank
services. SoftBank, KKR, Temasek,
Warburg Pincus, Microsoft, Google and
Tencent were among the backers of
GoTo and Grab.
The frenzy culminated in the block-
buster listing of Grab through a record
$40bn merger with a special purpose
acquisition company in New York in
2021; and a tie-up between ride-hailing
group Gojek and Indonesian ecom-
merce group Tokopedia, which led to
the public listing of the merged com-
pany GoTo in Jakarta in 2022 with a val-
uation of $32bn.
Now the model — which relied on
enticing customers with expensive sub-
sidised perks such as free delivery, dis-
counts and gifts to dominate markets
from Thailand to the Philippines — faces
a reckoning. In addition to laying off
11 per cent of its workforce, or more
than 1,000 people, last month, Grab also
cut its cloud-kitchen business, rolled
back subsidies in several areas, and is
spending less time on expansion into
units such as entertainment.
Grab founder Anthony Tan said the
En route: job cuts were not a “shortcut” to profita-
GrabFood bility. He said the Singapore-based
delivery riders company was on track to break even by
leave a the end of the year on an adjusted earn-
McDonald’s ings basis.
restaurant in But with that has come much slower
Singapore. growth and fewer transactions by
Owner Grab’s customers.
shares have Grab reported a smaller quarterly loss
fallen more than of $244mn in the first three months of
60 per cent 2023. However, gross merchandise
below its value, or sales volumes, eked out 3 per
listing price cent growth, compared with 24 per cent
Suhaimi Abdullah/NurPhoto/
Getty Images
for all of 2022 and 11 per cent year-on-
year growth in the final quarter of last
year.
GoTo also reported narrowing losses
in the first quarter of this year with a net
loss of Rp3.9tn ($260mn). Its growth
also slowed, with gross transaction
value up only 6 per cent to Rp149tn for
the first quarter compared with the pre-
vious year. That compared with 33 per
cent growth for all of 2022 and 18 per
cent year-on-year growth in the final
quarter of last year.
“Slower growth is driven by the con-
scious decision we have made to weed
out low-quality, subsidy-driven transac-
tions as we calibrate our business for a
future in which every user can be profit-
able,” the company said in a statement.
GoTo has also gone through several
rounds of job cuts and scrapped numer-
ous on-demand business lines such as
GoClean and GoMassage, which brought
cleaners and masseurs to customers’
doorstep.
Last month the Indonesian group
appointed Patrick Walujo, a nationally
known corporate figure and longtime
investor in the business, as chief execu-
tive in a move some investors said could
bring more restructuring.
“He is the consummate Indonesian
businessman, and he is not a sentimen-
tal guy,” said one investor. “If there are
difficult decisions to be made or deals to
be done, he will do it.”
Shane Chesson, founding partner of
Openspace, a venture capital fund man-
ager and early investor in Gojek, said the
superapp model still “makes sense” for
capturing customers’ daily activity.
“Companies have refocused on essen-
tials and dropped the more frivolous
services. Expectations around constant
discounts being doled out to consumers
have also been moderated,” he said.
One Grab executive, who wished to
remain anonymous, said while the com-
pany had become “more streamlined”,
it still believed it could offer multiple
services and be profitable along the lines
of Uber, which offers food delivery and
mobility services. The San Francisco-
‘I don’t based company, which is an investor in
Grab, in May reported record first-quar-
think the ter adjusted earnings before interest,
superapp taxes, depreciation and amortisation.
Others have doubts on whether
model has south-east Asian superapps can bring
matured investors consistent profits. While GoTo
and Grab claim there is ample opportu-
enough yet nity because market penetration is still
to offer a low in south-east Asia, they have far
more competition.
sustainable Well-financed Chinese rivals such as
future’ ByteDance-owned TikTok Shop have
crowded into ecommerce in the past 12
months. Another fast-growing competi-
tor with multiple businesses is Tencent-
backed Sea, the operator of online com-
merce platform Shopee. It has moved
into food delivery and is also competing
hard in financial services, an area in
which Grab and GoTo hope to grow.
Still, some said GoTo and Grab might
be spread too thinly.
“These companies still offer a lot
more services on a single app than an
Uber does and have a lot of competi-
tion,” said one global investor who
decided not to invest in what was then
Gojek in 2019. “I don’t think the super-
app model has matured enough yet to
offer a sustainable future. It is still a
choice between growth or profitability.
You can’t have both.”
$1bn lawsuit
to keep Nissan
bosses from
their sleep
KANA INAGAKI — TOKYO
RAYA JALABI — BEIRUT
Carlos Ghosn said he had filed a $1bn
lawsuit against Nissan to ensure those
behind his 2018 ousting would not be
“able to sleep quietly in their bed”.
The former Nissan chair recently filed a
claim with the public prosecutor in Leb-
anon, where he has lived since his
escape from Japan in a musical equip-
ment box in late 2019.
His lawsuit alleges defamation, slan-
der, libel and the “fabrication of mate-
rial evidence” by the Japanese carmaker
and about a dozen individuals. Nissan
has declined to comment on the lawsuit.
“What I’m looking for is not revenge
but I’m just trying to have a part of my
rights back,” Ghosn said during an
online news conference yesterday.
“I just want to make sure that
all . . . the plotters cannot sleep quietly
in their bed after what they have com-
mitted.”
Once feted in Japan for rescuing Nis-
san from collapse after he took over as
‘What I’m looking for is
not revenge but I’m just
trying to have a part
of my rights back’
president in 2000, Ghosn was arrested
in November 2018 on a series of finan-
cial misconduct charges.
He has consistently denied those
charges, arguing that his spectacular
downfall was the result of a plot orches-
trated by an old guard within the com-
pany whose influence he had been una-
ble to eradicate.
“Nissan created a lot of damage for me
— damage that cannot be repaired. The
only thing I can obtain is a small com-
pensation for the damage,” Ghosn said.
More than three years after his
escape, Ghosn, who holds French, Leba-
nese and Brazilian citizenship, said he
did not regret fleeing Japan despite his
once-flamboyant lifestyle being
restricted.
Interpol issued a “wanted” notice for
Ghosn in 2020 at the request of Japanese
investigators. French prosecutors last
year also issued an arrest warrant for
the former Renault chair and chief exec-
utive.
“Frankly, the justice system in Leba-
non is equivalent to the justice system in
Japan,” Ghosn said. “They will decide if
I’m right or not.”
He also projected that the partnership
he oversaw between the Japanese car-
maker and France’s Renault for nearly
two decades would shrink into what he
called a “mini-alliance”.
Nissan has been shaken by a bitter
clash in its top leadership that culmi-
nated in the departure of one of the
strongest opponents of the terms under
which the Japanese group is seeking to
rebalance its capital tie-up with
Renault. “With the latest agreement,
they’re trying to go for a mini-alliance
with a very reduced scope of co-opera-
tion,” Ghosn added.

Financials. Debt costs

Private equity fund managers turn to net asset value funding

Portfolios are being borrowed
against to return cash amid
struggle to exit investments
WILL LOUCH, ANTOINE GARA
AND CHRIS FLOOD
Private equity fund managers are bor-
rowing against asset portfolios to return
cash to investors as they struggle to exit
investments, adding a layer of debt to
the loans financing their buyouts.
Firms are increasingly resorting to the
technique, called net asset value financ-
ing, as rising debt costs and concern
over the economy are making it difficult
for them to sell or list the companies
they own.
Texas-based Vista Equity Partners
and Sweden’s Nordic Capital have used
NAV financing this year, while groups
such as Carlyle, Hg Captial and SoftBank
have previously turned to the mecha-
nism to return cash to investors.
NAV financing is perceived as less
risky than lending to a single company.
It is cheaper for the borrower, according
to private equity executives.
But some analysts have voiced con-
cerns that such borrowing heaps extra
debt on buyout portfolio companies
that are already grappling with higher
borrowing costs and a weakening eco-
nomic outlook.
“These aren’t universally a good thing
to adopt. You have to look at the overall
leverage across the portfolio,” said Mag-
nus Goodlad at advisory firm Rede Part-
ners. NAV financing had provided “an
alternative means to introduce liquid-
ity” at a time when “all M&A metrics are
down and exit activity is dramatically
reduced [and] refinancing at the indi-
vidual asset’s level is more expensive
and difficult”.
Goodlad said NAV financing activity
was on track to surpass its 2022 total,
estimated by Rede to be $21bn.
By contrast, as of mid-June, buyout
groups had raised less than $37.7bn via
listing portfolio companies, PitchBook
data shows, on course to be the lowest
amount in a decade. Sales to corporate
buyers and other private equity are also
on course to fall to their lowest level in a
decade, the data shows.
Firms typically seek to return cash to
investors as they gear up for a cycle of
fundraising. Vista Equity Partners,
which is seeking to raise as much as
$20bn for its latest flagship fund, has
tapped Goldman Sachs to arrange a
$1.5bn loan secured against its portfolio
companies. This was used in part to
repay its backers earlier this year,
according to people with knowledge of tive to leverage”. Joana Rocha Scaff, to Limited Partners. Carlyle declined to floating rates, which means their costs,
the loan. Goldman declined to comment head of European private equity at Neu- comment. while still less than other financing
on the Vista loan. berger Berman, said that, while such London-based Hg Capital has raised routes, will have increased “enor-
Nordic Capital was in talks to raise a techniques “can have some useful bene- at least £500mn via NAV loans to help mously” as base rates have risen, hurt-
loan secured against some of its invest- fits, they add incremental financial risk finance payouts and continues to view it ing fund returns, noted Grant Crosby,
ments, said people familiar with the to the fund”. as a useful tool, according to people head of fund solutions at Investec.
matter, with one saying the Stockholm Last year Goldman Sachs and Car- close to the firm. While they could be a useful tool, they
group could raise as much as €600mn. lyle’s internal capital markets unit In late 2021, SoftBank borrowed more “don’t take the exit pressure off”.
Nordic Capital and Vista declined to helped arrange a loan exceeding €1bn than $4bn from lenders led by Apollo
comment. for Carlyle late last year, securing it against groups in its Vision Fund 2, to
Ted Goldthorpe, head of the credit against assets in the US firm’s fifth Euro- return money to itself as the fund’s larg-
unit at BC Partners, which provides pean buyout fund, according to two peo- est investor. SoftBank used the money
NAV financing loans, cautioned that ple with knowledge of the borrowing. for new investments. The loan was
investors in PE funds “can be very sensi- The loan was used to send money back taken out at a 5 per cent fixed rate and
secured against assets worth nearly
Deal value by type $50bn. The value of the assets in VF2
$tn has since decreased, without SoftBank
coming close to defaulting, according to
Public listing 2.0 a person familiar with the matter. Soft-
PE buyout Bank did not respond to a request for
Corporate acquirer comment.
1.5 The terms of recent loans viewed by
the FT showed that borrowers have
1.0 agreed to pay at least 7 percentage
points above benchmark rates and nor-
mally ask for payment-in-kind features
0.5 that give them the option of paying
interest with resources other than cash.
At current rates, NAV borrowing costs
0 are at a minimum of 10 per cent in the
2013 14 15 16 17 18 19 20 21 22 23* US and Europe and can reach as high as
* Year to Jun 15 20 per cent or 30 per cent, according to
Source: PitchBook
market sources. Many such loans have
8 ★ FINANCIAL TIMES Wednesday 19 July 2023

COMPANIES & MARKETS

Fixed income. Policy fears Currencies

Big investors steer clear of gilts

Wall St banks
turn bearish
as high UK inflation lingers on dollar bets
as soft landing
hopes increase
JENNIFER HUGHES — NEW YORK
GEORGE STEER — LONDON

Big investment banks are turning more

Government borrowing costs
have risen well above those of
other developed economies
MARY MCDOUGALL AND KATIE MARTIN
LONDON
Big investors say they are steering clear
of UK government bonds despite some
of the highest yields in the developed
world, fearing that the country’s outsize
inflation problem will push borrowing
costs higher still.
Their reluctance to dive into the mar-
ket has pushed UK debt yields well
above those in other major bond mar-
kets, piling further pressure on the gov-
ernment’s finances as it attempts to find
buyers for record quantities of gilts.
“You need a bigger risk premium on
UK government bonds as a result of the
more challenging inflation backdrop,
the more challenging labour market
and the greater challenges for the Bank
of England,” said Hugh Gimber, markets
strategist at JPMorgan Asset Manage-
ment.
Sinking prices mean UK borrowing
costs have shot above those of rival
economies this year — with a 10-year gilt
yielding 4.4 per cent compared with 3.8
per cent in the US and 2.5 per cent in
Germany.
Even the higher rates now on offer in
the UK had failed to make gilts “stand-
out attractive” compared with other
sovereign bond markets, Gimber said.
Treasury yields have dropped since
US headline inflation was last week
shown to have dropped to 3 per cent.
In the eurozone, it has also fallen to 5.5
per cent. But data is expected to show
today that the UK rate is running at 8.2
per cent, and investors are more scepti-
cal of a pullback in gilt yields.
UK government debt yields surge ahead of US and Germany
Benchmark 10-year yield (%)
US
Germany
2021 22
Source: Bloomberg
In addition, the country faces what
many fund managers have called a
“time bomb”. Unlike other countries,
UK homeowners tend to have short-
term mortgages that renew every two
years.
Last week, the BoE calculated that
1mn households faced mortgage pay-
ment increases of £500 a month or
more by the end of 2026.
That puts the BoE in a difficult spot.
“You have a very problematic inflation
trajectory in the UK and it’s not clear
how the fiscal authorities will respond
to the mortgage crisis,” said Christian
Kopf, head of fixed income at Union
Investment, Germany’s largest asset
manager, who has “very little” exposure
to gilts.
“A number of things could go wrong,”
he noted. “The Bank of England could
raise rates by less than is required and
lift its inflation target because it’s too
painful for mortgage holders, and
there’s the risk the government will fail
to undertake the necessary adjustments
to prevent a further rise in the debt-to-
GDP ratio.”
Investors are also wary of the UK rela-
5 been criticised
UK
4 accuracy of its
3 forecasting and
2 the lack of spare
1 capacity in the
0 Charlie Bibby
-1
23
tive to other big debt markets owing to a
less predictable monetary policy path in
the country, heightened last month
when the Bank of England surprised
markets by raising rates by 0.5 percent-
age points to 5 per cent.
In early March, the BoE signalled that
interest rates — then at 4 per cent —
were close to their peak, and the bank
has been criticised over the accuracy of
its forecasting and failure to assess
the lack of spare capacity in the labour
market.
“The Bank of England has had a cheq-
uered history in sending comforting sig-
nals to investors,” said Anders Persson,
fixed income chief investment officer at
Nuveen Asset Management, which
manages $1.2tn of assets. “And it is
unfortunate that there have been mis-
steps from the government approach
more broadly.”
Persson said he was “neutral” on gilts
while he saw more attractive opportuni-
ties in US and European sovereign bond
markets, where central banks were
closer to the end of their rate-rising
cycle and where he believed the risk of a
prolonged recession was lower.
Poor reflection: The reluctance on the part of some
the Bank of large asset managers is awkward as it
England has comes at a time of intense need for
investor funding on the part of the gov-
over the ernment.
The UK plans to sell £241bn of gilts in
the current financial year, a sharp
failure to assess increase from £139.2bn issued in the
last financial year, with issuance net of
BoE bond sales and purchases expected
labour market to be about three times more than the
average over the past decade.
This year, UK government debt rose
to more than 100 per cent of GDP for the
first time since 1961.
The Office for Budget Responsibility,
the UK’s spending watchdog, said this
month that UK public finances were in a
“very risky” position and “more vulner-
able” when it came to debt than other
advanced economies.
Some buyers have been keen to take
advantage of higher yields, such as small
investors keen to earn better returns
than those on offer from bank savings
accounts.
Winterflood Securities, a govern-
ment-appointed dealer for UK debt that
ensures there is a continuous supply of
gilts available for private investors and
wealth managers, said its retail trading
volumes rose sevenfold last month com-
pared with the previous year.
‘The Bank Others will take more convincing.
of England Greg Peters, co-chief investment officer
of PGIM Fixed Income, added that it was
has had a “too premature” to increase exposure to
chequered gilts given the UK’s “continued inflation
problem”.
history in He added: “Ultimately, the UK is a
sending rock in the middle of the ocean that has
separated itself from the world with
comforting Brexit. Candidly, the more entrenched
signals to the inflation issue is, the more central
banks feel like they have to raise rates in
investors’ order to shake it out of the system.”
bearish on the dollar as expectations
grow that a soft economic landing will
reduce the need for the US Federal
Reserve to raise interest rates much
further.
Morgan Stanley, JPMorgan Chase,
Goldman Sachs and HSBC are among
the lenders to have either scrapped bull-
ish dollar calls or forecast further
declines for the currency in the wake of
last week’s unexpectedly large drop in
US inflation.
The US currency sank to a 15-month
low against an index of rivals following
last week’s figures, which bolstered
expectations that the Fed could soon
end its campaign of monetary tighten-
ing without tipping the world’s largest
economy into recession.
“Signs of further improvement in the
global growth-inflation mix and a US
soft landing sow the seeds for US dollar
weakness ahead,” analysts at HSBC said
in a note to clients yesterday, adding
that the currency was likely to break out
of the tight range in which it had traded
since late 2022.
The world’s de facto reserve currency
has seesawed for much of the year,
‘The soft landing camp is in
the ascendancy and that’s
the environment where
the dollar does least well’
strengthening in February after a flurry
of alarming inflation data before sinking
in March and April following the col-
lapse of several US regional banks.
Goldman Sachs analysts also said that
the recent move was likely to be the
start of a bigger decline.
“There’s more where that came from,”
Goldman wrote to clients last Friday.
“We think this can extend in the near
term.”
Morgan Stanley’s currency strategists
on Monday shifted to a neutral position
on the dollar from overweight while
JPMorgan’s team last Friday closed its
recommended dollar trades after eco-
nomic data that they said provided “a
gut check” to bullish thinking.
Trading in interest rate futures
implied a quarter-point rate rise is
priced in for the US central bank’s meet-
ing next week but tentative bets on a
further September rise subsided follow-
ing the data, implying a 14 per cent
probability, according to CME’s Fed-
Watch tool, compared with 22 per cent
a week ago.
Traders emboldened by June’s rela-
tively benign inflation figures are grow-
ing increasingly optimistic that the US
economy will avoid a recession alto-
Our global gether.
team gives you “With better inflation data, the soft
market-moving landing camp is in the ascendancy and
news and views, that’s the environment where the dollar
24 hours a day does least well out of the three scenar-
ft.com/markets ios,” said Alan Ruskin, chief interna-
tional strategist at Deutsche Bank.

Equities Equities

GQG buys stake in Indian food group
fronted by yoga televangelist Ramdev
CHLOE CORNISH — MUMBAI
ORTENCA ALIAJ — LONDON
Florida-based investment group GQG
Partners has bought a 6 per cent stake
worth an estimated $290mn in an
Indian foods company fronted by con-
troversial yoga televangelist Baba
Ramdev.
The investment in Patanjali Foods
marks a further bet on India by GQG,
which in March invested almost $2bn in
the embattled conglomerate of infra-
structure tycoon Gautam Adani.
Ramdev, whose yoga channel is
watched by millions, is the face of Patan-
jali and a non-executive director.
He has in the past campaigned for
India’s prime minister, Narendra Modi,
and courted controversy by describing
modern medicine as a “stupid bankrupt
science” during the pandemic.
In a filing to Indian stock exchanges
on Monday, GQG said it had acquired
21.5mn shares in Patanjali, 5.96 per cent
of total shares of the biscuits-to-edible
oils seller.
GQG did not disclose how much it
paid for the stake but the clearing price
for professional bidders was Rs1,103.8
per share, according to the BSE stock
exchange. This would suggest GQG paid
about Rs23.8bn ($290mn).
GQG is betting heavily on India’s
economic growth. In a blog posted on its
website in June, GQG praised Modi for
making business-friendly reforms and
“following the playbook” of world
leaders including Margaret Thatcher,
Ronald Reagan and Lee Kuan Yew of
Singapore.
GQG’s founder and chief investment
officer, Rajiv Jain, was the first major
investor to bet on the Adani Group after
Baba Ramdev has branded modern
medicine a ‘stupid bankrupt science’
US short seller Hindenburg Research hit
the conglomerate with a short selling
attack in January this year.
Hindenburg, in January, published a
report alleging share price manipula-
tion and accounting fraud — accusations
Adani strongly denied.
The report wiped about $150bn off
the market value of listed Adani Group
companies at their lowest point.
Opposition politicians have accused
Adani and Modi of having a close rela-
tionship dating back to Modi’s time as
chief minister of Gujarat, where Adani’s
businesses are based. Adani has long
denied any inappropriate links.
The sale of the Patanjali stake allows
the food company to meet Indian secu-
rities rules that require at least 25 per
cent of a listed company’s shares to be
held by outside investors.
The Patanjali deal reveals a deepening
business relationship in India between
GQG and US investment bank Jefferies
Financial Group, which acted as brokers
for Patanjali Foods in the sale along with
IIFL Securities. Jefferies also introduced
GQG to Adani.
GQG and Jefferies did not immedi-
ately respond to requests for comment.
US investment funds hit limits on
holdings of high-flying tech stocks
NICHOLAS MEGAW — NEW YORK
Many of the largest US investment
funds are being blocked from buying
more shares in popular stocks because
of diversification rules as they struggle
to keep up with indices that are
increasingly dominated by a few mas-
sive tech groups.
Major asset managers and mutual fund
specialists such as Fidelity, BlackRock,
JPMorgan Asset Management, Ameri-
can Century and Morgan Stanley Invest-
ment Management have run into strict
regulatory limits that determine
whether a fund can be categorised as
“diversified”.
The trend is a further sign of how a
lopsided rally powered by just a handful
of big companies is creating unexpected
issues for investors and index providers.
It followed news that even the Nasdaq
100 — the index most closely associated
with high-flying tech groups — will be
rebalanced to reduce the dominance of
the largest groups such as Apple, Micro-
soft and Nvidia.
The S&P 500 has added 18 per cent so
far this year but seven large tech stocks
have accounted for the majority of gains.
Mutual funds that register with the
Securities and Exchange Commission as
“diversified” cannot put more than 25
per cent of their assets into large hold-
ings — with a large holding defined as a
stock that represented more than 5 per
cent of the fund’s portfolio at the time of
investment.
Funds are not punished if the value of
their existing large holdings naturally
‘But suppose you think
Apple and Microsoft’s
future prospects
are stupendous?’
rises past the 25 per cent limit but, once
it is hit, they cannot buy any more of the
affected stocks.
At the end of May, Fidelity’s $108bn
Contrafund, for example, could not buy
any more shares in Meta, Berkshire
Hathaway, Microsoft and Amazon
because they made up a combined 32
per cent of its portfolio.
BlackRock’s Technology Opportuni-
ties Fund was blocked from buying
more shares in Apple, Microsoft and
Nvidia while JPMorgan’s large-cap
growth fund was over the limit for
Microsoft, Apple, Nvidia, Alphabet and
Amazon.
The recent rally means that even
funds that merely mirror major bench-
marks such as the Russell 1000 Growth
Index would exceed this limit.
The SEC said in 2019 that it would not
enforce the more stringent 25 per cent
limit on passive investment funds that
breach the guidelines while tracking an
index but the restrictions make it
harder for active managers to make
bets.
“If rules are not being enforced, it usu-
ally means the rules didn’t make sense,”
said Rob Arnott, chair of $130bn asset
manager Research Affiliates.
He added: “What happens to anyone
who wants to go slightly overweight on
companies that are already large in the
index? I personally think valuations
have gotten way ahead of them-
selves . . . [but] suppose you think
Apple and Microsoft’s future prospects
are stupendous?”
BlackRock, Morgan Stanley, JPMor-
gan, Fidelity and American Century all
declined to comment.
Wednesday 19 July 2023 ★ FINANCIAL TIMES 9

COMPANIES & MARKETS

The day in the markets Just blaming pay

What you need to know
rises for inflation
3 Wall Street rises on robust earnings
risks backfiring
from US banks
US bank stocks rise on upbeat results
3 European stocks advance after ECB Share price (rebased)
policymakers signal halt to rate rises
3 Asian indices lose ground, with Tokyo
the regional outlier
10
Mohamed El-Erian
Global stocks rose yesterday as results
from big US banks boosted investor Morgan Stanley
0
Markets Insight

E
sentiment while policymakers in Europe -10
signalled that they might soon stop
raising interest rates. xcessive wage increases are at the Mansion House gathering of high- vision of essential public services, is also
The S&P 500 index of blue-chip US -20 increasingly being framed as level representatives from the finance vulnerable to strike action.
stocks added 0.5 per cent by midday in Bank of America the sole cause of a UK infla- industry and elsewhere. Bailey also kept It may be tempting to perceive these
New York, lifted by Charles Schwab after tion problem that is causing the door open for a second consecutive problems as uniquely British given that
the Texas-based broker and bank -30 mortgage difficulties and 0.5 percentage point interest rate hike at inflation is running at more than twice
reported that its profits beat analysts' forcing families to make tough choices the upcoming meeting of the BoE’s the US level and above that in the euro-
forecasts in the second quarter of 2023. with their shrinking purchasing power. Monetary Policy Committee. zone, and wages are increasing at a
The tech-focused Nasdaq Composite -40 While this message gained traction The UK inflation debate now focuses faster pace. This inclination is amplified
added 0.4 per cent. Charles Schwab recently due to the latest wage data and excessively on wage-push inflation, by the country’s historical tendency
Bank of America, the second-largest US inflation warnings from the UK chancel- where providers of goods and services towards industrial action and more
bank, also reported a better than -50 lor and the Bank of England, it is partial pass on higher wage costs to consumers. stubborn resistance to real wage ero-
expected profit for the same period. Jan 2023 Jul and can easily mislead. It oversimplifies This is unfortunate for three reasons. sion, albeit dating back decades.
The big banks' earnings came despite Source: Refinitiv
the inflation challenge and the appro- First, it comes at a time when real However, given the strength of the
lingering investor concerns over lenders' priate policy response. wages have already been significantly services sector in all three economic
balance sheets, with the KBW Nasdaq It also increases the risk of economic eroded by an inflation that peaked regions, there is a substantial risk that
Bank Index still down almost 16 per cent further downshift lies ahead,” said Kieran The pan-regional Stoxx Europe 600 stagnation, exacerbating the current above 10 per cent. Even the latest wage the US and the eurozone may eventually
since the start of the year following the Clancy, senior US economist at Pantheon gained 0.6 per cent, recouping losses inflation and interest rate predicament. adopt a similar framing of the challenge
collapse of several regional banks in the Macroeconomics. from the previous session, while the CAC The current phase of high UK infla- and solution to inflation. This would
spring. Yields on two-year Treasuries, which 40 in Paris and Frankfurt's Xetra Dax tion is similar to advanced countries’ It increases the danger further impede global growth, which is
Meanwhile, data from the US Census are sensitive to interest rate expectations, both advanced 0.4 per cent. experience in the 1970s and 1980s. of economic stagnation, already hindered by a disappointing
Bureau showed that retail sales rose 0.2 were flat at 4.73 per cent while those on Asian equities extended losses, with Initially driven by a few factors economic recovery in China.
per cent in June, missing economists' benchmark 10-year bonds fell 3 basis the Hang Seng declining 2.1 per cent as (energy and food in this case), it leads to exacerbating the current The UK should lead others in imple-
expectations of a 0.5 per cent rise but points to 3.77 per cent as investors Hong Kong markets resumed trading broader price increases across the entire interest rate predicament menting a more comprehensive policy
adding to evidence that US consumption bought the debt. after a day-long halt triggered by a storm. goods sector before impacting on serv- response. This approach should com-
remained strong despite pressure from Across the Atlantic, stocks rallied after China's CSI 300 index of Shanghai and ices. Consequently, inflation does not plement interest rate hikes and wage
high interest rates and inflation. European Central Bank governing council Shenzhen stocks retreated 0.3 per cent fall rapidly even after the initial shock gain, although high in nominal terms, restraints with meaningful measures to
“The broader picture, however, is that member Klaas Knot signalled that and Seoul's Kospi slid 0.4 per cent. has subsided. falls short of the May consumer price invigorate the supply side. It should
growth in consumers' spending has policymakers could soon halt their Tokyo's Topix index was the session's Meanwhile, the process itself fuels inflation of 8.7 per cent. take advantage of the necessary energy
weakened significantly since the Fed aggressive monetary tightening outlier in the region, advancing 0.6 per and is fuelled by wage growth which is Second, the drivers of inflation are transition, embrace exciting tech inno-
started hiking rates aggressively — a campaign. cent. Daria Mosolova less sensitive to interest rate rises. more complex and diverse than just vations and reassess the best path to
According to the latest data, annual- wages. They include the initial timid taking inflation to a low and stable level.
ised wage growth for the three-month policy response to what was mischarac- Such an approach would not only
Markets update period ending in May was 7.3 per cent, terised as “transitory” inflation by most reduce the risk of stagflation but also
surpassing the consensus forecast of 7 central banks; disrupted international enhance prospects for sustainable pro-
per cent. Private sector pay rose by 7.7 supply chains; a tight labour market; ductivity growth and expand the coun-
per cent, outpacing the public sector’s and the prioritisation of profit margin try’s growth potential.
US Eurozone Japan UK China Brazil 5.8 per cent. maintenance by some companies. It would provide a better chance of
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa The data pushed market interest rates Third, focusing excessively on wage tackling the long-term challenges posed
Level 4546.05 1823.75 32493.89 7453.69 3197.82 118316.17 higher while mortgage providers, react- restraint as the main tool for reducing by climate change, high debt, low
% change on day 0.51 0.58 0.32 0.64 -0.37 0.08 ing to previous rate increases, raised the inflation increases the probability of a growth and the excessive inequality of
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $ average two-year mortgage rate to over recession. It would undermine house- income, wealth and opportunity.
Level 99.747 1.124 138.625 1.308 7.171 4.800 6.6 per cent, a level not seen in 15 years. hold demand at a time when high mort-
% change on day -0.095 0.089 -0.352 0.000 -0.020 -0.736 This followed the calls for wage gage costs are already placing a signifi- Mohamed El-Erian is president of Queens’
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond restraints from both chancellor Jeremy cant burden on households. College, Cambridge, and an adviser to
Yield 3.764 2.381 0.482 4.402 2.684 10.363 Hunt and BoE governor Andrew Bailey Economic activity, as well as the pro- Allianz and Gramercy
Basis point change on day -6.060 -9.700 0.660 -9.600 -1.000 -3.900
World index, Commods FTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 461.10 79.55 75.27 1949.60 24.81 3780.00
% change on day 0.38 1.34 1.61 -0.21 0.16 -1.75
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index
4640 1880 8000

4480 7680
1840
4320
1800 7360
4160
| | | | | | | |
4000 | | | | | | | | | | | | | | | | | | | |
1760 | | | | | | | | | | | | | | | | | | | | 7040 | | | | | | | | | | | |

May 2023 Jul May 2023 Jul May 2023 Jul

Biggest movers
% US Eurozone UK
Charles Schwab (the) 12.24 Oci 3.55 Ocado 19.04
Morgan Stanley 6.50 Basf 2.88 Taylor Wimpey 4.61
Ups

Mosaic (the) 5.65 Bayer 2.39 Persimmon 4.30

Old Dominion Freight Line 4.99 A.p. Moller - Maersk B 2.21 Barratt Developments 3.89
Apa 4.71 Sanofi 2.18 Johnson Matthey 3.31
%
Prologis -3.72 Casino Guichard -10.37 Compass -1.51
Solaredge -3.21 Dt.telekom -1.93 Beazley -1.42
Downs

Charles River Laboratories Int -3.06 Edp -1.46 Bt -1.14

Align Technology -2.96 Hermes Intl -1.39 Rentokil Initial -1.12
Enphase Energy -2.88 L'oreal -1.39 Vodafone -0.65
Prices taken at 17:00 GMT Based on the constituents of the FTSE Eurofirst 300 Eurozone
All data provided by Morningstar unless otherwise noted.

Wall Street Europe London

Rallying to the head of the S&P 500 index Switzerland's GAM jumped on news Topping the FTSE 100 index was online
was broker Charles Schwab, which that an investor group controlling 9.6 per grocer Ocado, which reported half-year
reported adjusted net income of $1.5bn cent of the asset manager planned to buy core earnings of £16.6mn against a loss of
for the second quarter, down 25 per cent a further 28mn shares, representing a £13.6mn a year earlier.
year on year but ahead of the $1.3bn 17.5 per cent stake. Core profits at its joint venture with
analysts had expected. The shareholders including French Marks and Spencer were also expected to
Underscoring these results was an 11.5 billionaire Xavier Niel and wealth manager be “marginally . . . positive” for the full
per cent rise in asset management and Bruellan offered SFr0.55 per share, a 32 per year, it said.
administration fees to $1.17bn for the cent premium to Monday's closing price. Heading the FTSE 250 index was
period. This followed a rival all-share takeover Darktrace, which said the findings of
Tech behemoth Microsoft joined offer made in May by UK peer Liontrust auditor EY would not affect its previous
Schwab in the top half of the blue-chip — a bid this group rebuffed. financial statements although the
benchmark, hitting a record high after It argued that an independent GAM accountants did discover “a number of
revealing that it planned to charge $30 a could be “successfully restructured” and areas” where processes or controls could
month for generative artificial intelligence returned to profitability. be improved.
features for its office software — more Norway's Nel rose sharply off the back Back in February, the cyber security
than Wall Street had expected. of record revenue of NKr475m ($47.2mn) group brought in EY to “review of its key
It also expanded an AI partnership with in the second quarter, topping the financial processes” following a short
Facebook owner Meta through the launch NKr375mn that RBC Europe expected. seller's report that flagged potential
of Llama 2, a large language model that Citi said the renewable hydrogen issues such as “accounting anomalies”.
will run on Microsoft's cloud service and group's loss of NKr138mn was also Boosting shares further were
operating system. “backward-looking” as its newer projects expectations that its profit margin for the
A chunky earnings miss weighed on commanded higher margins. year would be no less than 22 per cent,
medical device maker Masimo, which Germany's Atoss, which provides which was ahead of its previous guidance
forecast second-quarter revenue of workforce management software, rose of “at or around” 19 per cent.
between $453mn and $457mn, way below sharply after lifting its full-year outlook, Joining Darktrace at the top of the
the $553.2mn analysts had expected. forecasting revenue of “at least” €142mn mid-cap index was the insurance and
Several factors were behind this — up from the €135mn previous stated. retirement specialist Just Group, which
shortfall, including a delay to large orders Another boost to guidance sent said retirement income sales had more
and “elevated sensor inventory levels at Swedish Orphan Biovitrum rallying with than doubled to £1.9bn for the six months
some customers”, it said. the pharma group anticipating high ended June 30.
Clinical-stage biopharma group 9 single-digit revenue growth in 2023, up Demand for annuities had increased off
Meters tumbled on news that it had filed from an earlier “low-to-mid single-digit” the back of higher interest rates, it said.
for bankruptcy protection. Ray Douglas estimate. Ray Douglas Ray Douglas
10 ★ FINANCIAL TIMES Wednesday 19 July 2023

MARKET DATA

WORLD MARKETS AT A GLANCE FT.COM/MARKETSDATA

Change during previous day’s trading (%)
S&P 500 Nasdaq Composite Dow Jones Ind FTSE 100 FTSE Eurofirst 300 Nikkei Hang Seng FTSE All World $ $ per € $ per £ ¥ per $ £ per € Oil Brent $ Sep Gold $

-2.05% -0.352% -0.21%

No change No change
0.51% 0.29% 1.09% 0.64% 0.58% 0.32% 0.38% 0.089% 0.39%
Stock Market movements over last 30 days, with the FTSE All-World in the same currency as a comparison
AMERICAS EUROPE ASIA
Jun 19 - - Index All World Jun 19 - Jul 18 Index All World Jun 19 - Jul 18 Index All World Jun 19 - Jul 18 Index All World Jun 19 - Jul 18 Index All World Jun 19 - Jul 18 Index All World

S&P 500 New York S&P/TSX COMP Toronto FTSE 100 London Xetra Dax Frankfurt Nikkei 225 Tokyo Kospi Seoul
4,546.05 20,282.56
19,975.37 7,588.48 16,201.20 16,100.25 33,706.08
4,409.59 2,609.50 2,607.62
7,453.69 32,493.89

Day 0.51% Month 3.06% Year 18.63% Day 0.64% Month 1.90% Year 9.47% Day 0.64% Month -2.42% Year 3.25% Day 0.35% Month -1.42% Year 25.35% Day 0.32% Month -3.59% Year 21.31% Day -0.43% Month -0.69% Year 11.87%

Nasdaq Composite New York IPC Mexico City FTSE Eurofirst 300 Europe Ibex 35 Madrid Hang Seng Hong Kong FTSE Straits Times Singapore
14,286.87
19,912.89
13,782.82 54,931.06 1,830.11 1,823.75 9,431.90 9,455.70 19,015.72 3,260.03 3,254.26
53,544.88
Day 0.29% Month 4.30% Year 25.69% Day 0.90% Month -1.37% Year 15.27% Day 0.58% Month -1.25% Year 10.95% Day 0.19% Month -0.41% Year 19.00% Day -2.05% Month -5.13% Year -6.33% Day -0.01% Month -0.25% Year 4.93%

Dow Jones Industrial New York Bovespa São Paulo CAC 40 Paris FTSE MIB Milan Shanghai Composite Shanghai BSE Sensex Mumbai
34,963.08 28,706.76 66,795.14
34,408.06 119,857.76 7,314.05 7,319.18 3,252.98
118,622.78 27,754.18 3,197.82 62,917.63
Day 1.09% Month 1.93% Year 12.52% Day 0.08% Month -0.38% Year 22.07% Day 0.38% Month -0.94% Year 21.26% Day 0.34% Month 3.03% Year 37.13% Day -0.37% Month -2.31% Year -0.94% Day 0.31% Month 5.38% Year 24.24%

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Wednesday 19 July 2023 ★ 13
14
A city and a world in eight and a quarter films
The Taiwanese director of
acclaimed arthouse movies
such as ‘A One and a Two’
is celebrated in a retrospective
in Taipei, writes Alex Jen
A
schoolboy unsheathes a
samurai sword left in Tai-
wan by a repatriated Japa-
nese general. He can’t
speak a word of English but
loves crooning Elvis, and, despite his
short stature, defends his friends from
gangs in his postwar military village. In
1990s Taipei, a convenience store owner
foolishly decides to franchise kindergar-
tens and ends up owing millions to the
mob. An estranged couple have their
last conversation in a dark apartment,
realising that emigration to the US and
starting over is just an illusion.
All the above are scenes and charac-
ters from the films of Edward Yang, a
Taiwanese director of great breadth and
intimacy who completed just eight-and-
a-quarter works before dying of cancer
in 2007. Taipei was his chosen subject,
but in effect it was any globalising city.
He walked the line between hope and
desire, showing rare human connection
— and the greed and defensiveness that
thwart it.
Yang turned to filmmaking at 33, after
a decade working in the US as a compu-
ter engineer. A screening of Werner
Herzog’s Aguirre, the Wrath of God (1972)
reignited his interest in cinema, and
waning martial law and loosening cen-
sorship in Taiwan encouraged him to
return in 1981 to make films there. His
first feature, That Day, On the Beach
(1983), is a daughter’s tale about quietly
resisting patriarchal family dynamics,
told through inventive flashbacks.
This weekend, the most comprehen-
sive retrospective of Yang’s work to date
opens at the Taiwan Film and Audio-
visual Institute (TFAI) and the Taipei
Fine Arts Museum (TFAM). Yang has
had numerous retrospectives interna-
tionally, but A One and a Two: Edward
Yang Retrospective is the first to present
his archives — scripts, essays, diaries —
and screen his early and unfinished
work, including theatrical productions
and clips from The Wind (2007), an ani-
mated tale of kids in imperial China that
was to be produced with Jackie Chan.
The exhibition is named after A One
★ FINANCIAL TIMES
ARTS
Top: Lisa Yang and Chang
Chen in Edward Yang’s
‘A Brighter Summer Day’.
Above: Jonathan Chang,
left, and Nien-Jen Wu in
‘A One and a Two’ — Alamy
and A Two (Yi Yi), Yang’s last and best-
known film, a profound and gentle por-
trait of a middle-class family that won
Yang the award for Best Director at the
2000 Cannes Film Festival. In its large
cast of extended family, first loves, class-
mates and business partners, each has
their distinct personality. The film ques-
tions our deepest habits and values.
What do we choose to hide even from
those closest to us?
Born in Shanghai in 1947, Yang emi-
grated to Taipei with his family in 1949,
along with 2mn civilians who followed
the Kuomintang-led Republic of China
to Taiwan after their defeat in the Chi-
nese civil war. President Chiang Kai-
shek prioritised social and economic
stability over personal freedoms. “In my
generation, the typical phenomenon
was outward conformity and inner
rage . . . The whole texture of life
seemed unreal,” Yang said in a 2001
interview. Yet he was able to see films by
Bresson, Fellini, Godard, Ozu and more.
Curators Wang Jun-Jieh, director of
TFAM, and film scholar Sing Song-Yong
want to reveal new facets of Yang’s per-
sonality. “Kaili Peng [Yang’s widow]
encouraged us to show his playfulness,”
Sing says. “Yang was full of vitality, and
she did not want the exhibition to be too
tedious or solemn.”
New multichannel video installations
cut from his films introduce his style
and intersecting metaphors. Selected
from more than 10,000 items, high-
lights include a meticulously shaded
comic strip of besieged soldiers with
smoking guns, drawn as a teenager; a
cartoon character map for his film A
Confucian Confusion (1994); and an
alarm clock of a sleeping Astro Boy
figurine gifted by the character’s creator
Osamu Tezuka’s son to Yang’s own son,
Strong personalities play as one
JA Z Z
Christian McBride trio
Wigmore Hall, London
aaaae
Mike Hobart
American bassist Christian McBride is a
jazz polymath whose current projects
range from big-band modern jazz to
high-energy contemporary funk and
the left-field piano-free quartet New
Jawn. His decade of Wigmore Hall per-
formances includes duets with classi-
cal/bluegrass bassist Edgar Meyer and
the late jazz pianist Chick Corea.
This performance, a trio of piano,
voice and double bass, found McBride
adapting his power and pinpoint accu-
racy to an equally broad song-based
repertory. The walking bass lines, slurs
and nonchalant strums remained, but
now they uplifted songs from Jacobean
England and Mexican-American Texas.
Jazz was a common element; pianist
Francesco Turrisi is a fluid improviser
with a delicate touch, and American
songbook evergreens were in the mix.
But it was vocalist Rhiannon Giddens
referencing a deep spread of Americana
roots who set the evening’s tone.
The first set opened with “You Put the
Sugar in My Bowl”, a track from Gid-
dens’ soon-to-be-released album You’re
the One that references similarly titled
songs by Bessie Smith and Nina Simone.
Here Giddens channelled the growls,
stridency and prowling sexuality of
Smith over double bass and piano sup-
port. “Mal Hombre” came next, first
recorded by the Mexican-American
singer Lydia Mendoza in 1934, delivered
here in Spanish with a fine balance of
theatricality and style. Then a cover of
Ethel Waters’ subtle riposte to racial
stereotyping on her 1933 recording
Sean, showing Yang’s life-long affinity
for Japanese manga. All were kept by
Peng, a concert pianist who composed
the music for A One and A Two.
British critic Tony Rayns says Yang
was accepted in “serious” film circles
around 1986, after his second feature
Taipei Story (1985) premiered at the Lon-
don Film Festival, and Terrorisers (1986)
won the Silver Leopard at the Locarno
Film Festival. Yet his films remained dif-
ficult to see. “Those were very conserva-
tive times for arthouse distributors in
western countries, but I recommended
Edward’s film to various festivals and
wrote about it wherever I could,” Rayns
recalls. Today, Yang’s films can be found
on streaming services.
Taipei Story tells of childhood sweet-
hearts Ah Chin and Ah Lung (pop star
Tsai Chin and fellow director Hou
Hsiao-hsien, neither of whom had acted
professionally before). We see imported
cars and beverages, and endless con-
struction. “How was Los Angeles?” an
old coach asks Ah Lung, a fabric sales-
man holding on to his former stardom
in little league baseball. “About the same
as Taipei,” he replies.
Terrorisers was made on the heels of
Taipei Story, and is a flinty, surreal pic-
ture that links the lives of a novelist, a
doctor, a photographer and a police
chief to ambiguous ends. It is often com-
pared to Michelangelo Antonioni’s
Chen Shiang-Chyi in Edward Yang’s
‘A Confucian Confusion’
of “Underneath the Harlem Moon”.
Although Giddens gets to the essence
of classic vocal styles, she brings a host
of other influences into the mix, some-
times within a few bars. Thus on “St
James Infirmary”, high notes gained an
operatic tone and vowels were sensu-
ously stretched. Add in vocal embellish-
ments darting off at angles, and accom-
panists needed to be on their toes.
Turrisi, a long-term collaborator with
Giddens, has a strong personal voice in a
broadly mainstream modern jazz piano
style. Eschewing the obvious, his lush
voicings and stark harmonies added
romance and pathos in equal measure.
The two musicians have worked closely
together since releasing their first
album, There Is No Other, in 2019 — a pas-
sionate “Brown Baby” ended the first set
— and Turrisi consistently enhanced
Giddens’ intriguing narrative shifts.
McBride was equally on song, impres-
sively so, since this was only the trio’s
second gig. The bassist’s strength
of purpose and sense of time came to the
fore on “How Deep Is the Ocean”, an
Wednesday 19 July 2023
Filmmaker
Edward Yang,
who died
in 2007
Sygma/Getty Images
Blow-Up (1966). Yang also dabbled in
satire, with A Confucian Confusion (1994)
and Mahjong (1996), about yuppies and
grown-up rich kids, romance and
racketeering in a globalised Taipei.
These slyly refer to his own struggles in
a profit-driven movie industry.
A Brighter Summer Day (1991), a four-
hour epic often cited as Yang’s magnum
opus, is set in an uncertain postwar Tai-
wan and was filmed at the prestigious
all-boys’ high school he attended. The
director immerses his viewers by means
of wide-angle shots: a crowd of boys
chase a rival gang member up the school
steps at night; soft-spoken Si’r (Chang
Chen) skips class in an open field with
Ming (Lisa Yang), a gang leader’s
‘In my generation, the
typical phenomenon was
outer conformity and
inner rage,’ said Yang
girlfriend, as soldiers run war drills. In a
memorable scene, after Si’r is wrongly
accused of cheating, his father, played
by Chang’s actual father, tells him:
“A person who’ll apologise for wrongs he
didn’t commit is capable of all sorts of
terrible things. The purpose of educa-
tion is to search for truths to believe in.
If you can’t be brave enough to believe
them, then what’s the purpose of life?”
This is what Yang did best: give life
structure, not to change it but to accept
its hard truths, with grace. “Making
films is not merely about retelling
dreams, but to give life to dreams so that
they resemble reality closely,” Yang
wrote in 1991. “The power of film lies in
how this fabricated reality can be so inti-
mately related to each individual’s iso-
lated living experience which is con-
fined by a meagre lifespan.”
“Why watch films?” he scrawled else-
where. “To keep us curious about the
next moment.”
July 22-October 22
tfam.museum, tfai.org.tw
instrumental duet, and it was McBride
who opened the second half with a
magnificent unaccompanied cover of
“Frankie and Johnny” that conjoined
melodic phrases with bursts of energy
and subtle slurs and strums.
But what impressed most was the way
these three strong personalities united
as one and refreshed a set of evergreen
songs. Each piece was packed with
detail, ebbed, flowed and had dynamic
highs and lows. Henry Purcell’s “Dido’s
Lament” gained delicate piano voicings,
a moody “Dos Gardenias” featured a
subtle salsa shift and McBride followed
the vocalist’s every move on “Nobody
Knows You When You’re Down and
Out”. “At the Purchaser’s Option”, a raw
indictment of slavery, unfolded in a
single key.
The set ended with “Rosetta”,
the audience singing along to a gospel
high. “She’s Got You” was the encore, a
slice of Southern soul that brought the
house down.
wigmore-hall.org.uk
Christian
McBride and
Rhiannon
Giddens at
Wigmore Hall
Roger Thomas
Wednesday 19 July 2023
Tuition fees are not keeping up with the rising costs of the country’s world-class higher education sector,
leading to calls for a radical rethink — before even the most elite institutions find themselves diminished.
The looming crisis at UK universities
B
ritish government ministers
are fond of reminding voters
that the UK has the second-
most Nobel laureates of any
nation and four of the world’s
top 20 universities.
It is a comforting counter-narrative
in an era when the country seems to be
struggling to keep up with other dev-
eloped countries on areas from produc-
tivity growth to healthcare outcomes.
For now, the UK does indeed punch
above its weight, with elite institutions
such as Oxford, Cambridge and Impe-
rial College London still high in the
world university rankings.
But alarm bells are sounding about
the wider sector’s finances. Educational
experts, analysts and university vice-
chancellors are warning that a serious
rethink of the long-term funding of
English universities in particular — the
funding models are different in
devolved nations — is needed.
They face a shortfall of approximately
£2,500 on every home undergraduate
student this academic year, according
to an analysis by the Russell Group of
research-intensive universities. Present
trajectories suggest that could grow to
£5,000 by 2029-30, leading universities
to warn that the sector is facing a return
to an acute funding crisis like the one in
the mid-1990s that presaged the intro-
duction of university tuition fees.
At the heart of the immediate chal-
lenge, according to Simon Marginson,
professor of higher education at Oxford
university, is a “triple whammy” of a
sudden rise in inflation, a loss of EU
funds and growing uncertainty around
the future of the international student
market as China’s relations with the
west come under growing strain.
Inflation is driving up operating costs,
including energy bills, while eroding
the real-terms value of domestic tuition
fees. DataHE, a consultancy, has calcu-
lated that the £9,000 fee originally
introduced in England in 2012 would
now be more than £12,000 if it had
increased in line with consumer prices.
Instead it is £9,250.
International students, who typically
pay about double the home fees, are
the primary source of additional income
enabling many universities to make
ends meet. International fees account
for nearly 20 per cent of universities’
income — up from about 10 per cent just
over a decade ago. For a long time this
money helped fund research, but it now
makes up the shortfall on domestic
undergraduate tuition.
At the same time, Brexit has cut off
access to EU funding streams that were
worth an aggregate average of £800mn
a year to UK higher education institu-
tions between 2010 and 2020.
There are further threats coming
down the line. FT calculations based on
Office for National Statistics population
projections suggest the UK will need to
find an additional 45,000 university
places in 2030 if current rates of higher
education participation are to be main-
tained. Without action, Marginson
warns, history is in danger of repeating
itself. Between 1975 and 2000, the
amount of funding per student — the
“unit of resource” — in UK universities
almost halved. This precipitated the
crisis which led to the deeply unpopular
introduction of £3,000 tuition fees in
the early 2000s by the Labour govern-
ment of Tony Blair.
If today’s decline in the real-terms
value of fees continues, Marginson
argues, then within a decade even the
UK’s most elite institutions will find
themselves diminished. This could be
further exacerbated as countries such as
China — a key source of lucrative over-
seas students — pour money into their
own higher education systems.
“The path we are on is unsustainable,”
warns Vivienne Stern, the chief execu-
tive of Universities UK, a lobby group
that represents 140 institutions. Lower
funding, she says, will lead inexorably to
worse staff-student ratios, deteriorating
facilities and reduced ability to attract
investment and world-class research.
“There is an urgent need to have a
national conversation about how uni-
versities are funded,” Stern adds.
Broken system
Starting that conversation is proving
difficult. In the present economic cli-
mate, the idea of giving more money to
universities, either from the public
purse or by raising tuition fees, does not
play well with taxpayers, students and,
therefore, politicians.
To the intense frustration of univer-
sity leaders like Stern, the higher educa-
tion minister, Robert Halfon, batted
★ FINANCIAL TIMES
FT BIG READ. EDUCATION
By Peter Foster, Anna Gross and Amy Borrett
Spending per student is falling in real Tuition fees from non-EU students now
terms make up almost a fifth of total income
Higher education spending per student in England Income of UK higher education institutions from
(2022-23 prices, £’000) non-EU tuition fees (%)
12
Fee cap set at
£3,000
10
8
Fee cap rises to
£9,000
6 0
1990 2000 10 20 1995
Sources: IFS; OECD; European Commission
‘We are away talk of a crisis while giving evi-
dence to the House of Lords in May.
clearly at a Noting that UK universities receive
point of about £40bn from all funding sources,
Halfon said the sector was “not doing
change, and too badly financially”.
no one is While between 30 or 40 institutions
are facing financial difficulties, Halfon
yet really contended that “management and lead-
thinking ership” issues were more likely to be
about the the root cause of their problems than
the funding system.
structure of Universities should not take public
the sector sympathy for granted either, according
to Sir Chris Husbands, the outgoing
in 15 to 20 vice-chancellor of Sheffield Hallam
years’ time. University, who will step down at the
end of this year. Even though holding a
That needs degree will increase overall average
to change’ career earnings by £130,000 for a man
and £100,000 for a woman, according
to the Institute for Fiscal Studies, at the
less prestigious end of the university
spectrum the financial benefits of rack-
ing up about £60,000 in tuition and
maintenance loans are much less clear.
Recent Conservative governments
have also questioned the value of the
expanded sector, attacking “low value”
university courses while seeking to pri-
oritise non-academic skills. On Monday,
Prime Minister Rishi Sunak said he
would order the regulator in England to
limit student numbers on courses that
are less likely to lead to well-paid
employment or further study, and fine
institutions with high dropout rates.
The sector’s handling of Covid-19 also
caused substantial reputational dam-
age. At one point in 2020, thousands of
new students were locked down in their
halls of residence and a legal class action
by more than 100,000 students is now
seeking compensation for their reduced
experience during the pandemic as
teaching moved online for long periods.
Five years of attritional industrial
action by university staff have eaten
into teaching time and, more recently,
caused a marking strike that has
delayed some graduation ceremonies.
The size of some university vice-chan-
cellor salaries also still rankles in White-
hall, according to the crossbench peer
and educational expert Professor Alison
Wolf, who until February was a part-
time adviser on skills in Number 10. She
warned at the Centre for Global Higher
Education’s annual conference in May
that the sector had “lost the confidence”
of the political class in Westminster.
Faced with such a hostile economic
environment and an apparently unwin-
nable political fight over the need to
20
15
10
5 Ireland
2000 05 10 15 20
increase tuition fees, Husbands, of
Sheffield Hallam, fears that the sector is
tacitly defending a system that it knows
is not sustainable.
That stance may be viable for higher
end institutions that are confident they
can attract sufficient international stu-
dents to cover costs, but is of little conso-
lation to what he calls the sector’s
“squeezed middle” — the bulk of institu-
tions outside the Russell Group that will
provide the backbone of the UK’s future
graduate workforce.
“We are clearly at a point of change,
and no one is yet really thinking about
the structure of the sector in 15 to 20
years’ time,” he says.
Future template
University leaders are clear that ensur-
ing the future competitiveness of higher
education in England will require both
physical and financial restructuring.
The present system reflects the
benign policy environment from which
it emerged: high tuition fees, low infla-
tion, generous government research
grants, EU structural funds and growing
numbers of international students.
Now those conditions are shifting,
universities are exploring ways to
organise themselves better, says Karen
Cox, vice-chancellor at the University of
Kent. Cox questions whether it is neces-
sary or viable for the UK to have more
than 150 separate higher education
institutions all operating independently
from each other.
Like other vice-chancellors, Cox is
clear that unless the chronic funding
issues are addressed “then we’re poten-
tially going to lose something that’s
hugely valuable to UK plc”, warning that
“the sector is in this bind where we’re all
dancing around this issue”.
Already there are signs of what a more
efficient future might look like. Cox
points to the Kent and Medway Medical
School, which was born out of a collab-
oration between the University of Kent
and Canterbury Christ Church Univer-
sity. It has shared financial and admis-
sions structures at the back end, along-
side combined teaching expertise —
Kent did not previously offer nursing
and midwifery, for example — with stu-
dents attending lectures on both univer-
sity campuses.
Cox sees such joint operations as a
template for the future, perhaps as
a precursor to the formation of multi-
university groups, akin to multi-acad-
emy secondary school trusts, which are
overseen by a single governing body and
UK universities rely on domestic and European financial support has collapsed
international fee income, as government since Brexit
spending is comparatively low EU funding for UK higher education institutions, €mn
Total government spending on tertiary education
per full-time equivalent student, 2019 ($’000 in
purchasing power parity)
Germany
France
US 12.6
Canada 12.0
11.6
UK 7.0
Australia 6.9
Japan 6.4
create opportunities to share knowledge
and resources. “Universities have their
own senses of identity, but I don’t
believe that it will look this way in 20
years’ time,” she says. “There will be
more collaborations that change the
way they look and feel.”
But finding organisational synergies
and other cost savings, such as pruning
the number of courses offered, will not
be enough to address the coming fund-
ing squeeze, according to James Purnell.
The former Labour culture secretary is
now vice-chancellor of University of the
Arts London, which is losing £3,000 on
every home student it educates.
Purnell is among those who are not
completely pessimistic about the pros-
pects for a better settlement, but
equally clear that the UK cannot afford
to do nothing and still remain attractive
to international students who can
choose to spend their education dollars
in rival destinations such as Germany,
Canada, Australia or America.
Despite the difficult politics, Purnell
believes a future Labour government
could take some steps to safeguard the
future of universities. His suggestions
include linking tuition fees to inflation
or depoliticising them by allowing an
independent advisory body to set their
level, as well as the government fully
funding research grants that at present
only cover about 70 per cent. Purnell
adds: “Even politicians who are most
sceptical about universities must con-
cede that if we keep the fee at £9,250,
then something has to give.”
Politically unpalatable
Based on UK political opinion polls,
determining the shape of that “some-
thing” is likely to fall to a Labour
government under Sir Keir Starmer.
His party will have to find answers to
difficult questions about university
funding but also living costs for students
and access to better maintenance grants
for the least well-off.
In February 2022, the Conservative
government reformed the student loans
system to reduce the burden of unpaid
loans on the public purse. Mindful of the
political impact of raising tuition fees
during a cost-of-living squeeze, the gov-
ernment adjusted the interest rate on
loans to ensure graduates only ever
repay what they borrow after adjusting
for inflation.
But it also reduced the earnings
threshold for starting repayments from
£27,295 to £25,000 and lengthened the
repayment period from 30 to 40 years.
15
1,200
End of Brexit transition period
1,000
15.9 800
13.7
600
400
200
0
OECD
average 1995 2000 05 10 15 20 23
As universities The reforms will save the government
face a squeeze nearly £3bn on each annual intake of
on funding, students, according to analysis by Lon-
students are don Economics, a specialist policy con-
questioning the sultancy, but do nothing to address the
value of the fees escalating university funding crisis.
they pay
FT montage/Getty Images/
The Labour party is yet to present
any big ideas to fix the funding model.
Dreamstime
Starmer has already backtracked on a
longstanding Labour promise to abolish
tuition fees entirely and promises only
to introduce a “fairer” system.
A person briefed on Labour’s higher
education policy notes that it would be
“unpalatable” politically to even broach
increasing tuition fees. “What we’ve
been looking at is how we can reform the
existing system,” the person says, noting
that recent changes to the loan system
will penalise low- and middle-income
graduates and benefit high earners.
“The average nurse will pay more, the
average lawyer will pay a lot less,” the
person says, adding that Labour is look-
ing at changing the level of interest rates
paid depending on income and recali-
brating repayment thresholds.
But it is not clear this will address the
systemic funding issues. Nicholas Barr,
the professor of public economics at the
London School of Economics who was
instrumental in the reforms that led to
the £3,000 fees being introduced in
England in 2006, is arguing for a system
that reduces or freezes the £9,250 tui-
tion fee while lowering further the point
at which graduate repayments begin
and reducing the initial repayment rate
from the present 9 per cent.
It would be politically sensitive,
because higher earners could also be
asked to pay more than they borrowed
‘Universities — 120 per cent of their loans, say — to
help share the cost burden of unpaid
have their loans, which at present are shouldered
own senses entirely by the taxpayer.
Barr argues that in a world where
of identity, loans cannot sustainably finance the
but I don’t entire system, a government wanting to
defend standards in the UK system will
believe that ultimately have to increase the element
it will look of taxpayer funding too, particularly in
this way in expensive subjects such as laboratory
science or engineering. As things stand,
[the future]. the UK spends less than half as much
There will per university student than Germany.
But while universities can muddle on
be more for a few years yet, says Tim Bradshaw,
collaboration head of the Russell Group, at some point
tough political decisions will have to be
that changes made. “If you’re going to have an econ-
the way they omy based on ideas and innovation, at
some point you have to decide if you
look and feel’ want to invest and prioritise that.”
16 ★ FINANCIAL TIMES Wednesday 19 July 2023

The FT View
Hollywood’s strikers are writing a script for other industries
More sectors will face
battles over how to share
the spoils in the age of AI
Pity the Teamsters. The US union repre-
senting 340,000 UPS employees is
barely two weeks from a strike vote that
could strand a quarter of the country’s
parcels, but its thunder has been stolen
by two unions representing professions
with rather less capacity to upend the
US economy. Hollywood’s actors last
week joined its scriptwriters in going on
strike, in Tinseltown’s first double-bill
industrial action since the heyday of
Ben-Hur. Picket lines have featured
stars like the Hulk actor Mark Ruffalo.
The Milken Institute estimates that
the Hollywood strikes’ economic
impact could be up to $4bn. But they
deserve particular attention because
they are among the first labour disputes
to involve the impact of artificial intelli-
ft.com/opinion gence — and how to divide the spoils in a
new era of digital delivery. As intangible
assets increasingly drive corporate
profits, creators of intellectual property
expect a bigger share. These negotia-
tions will inform battles between capital
and labour in other industries reshaped
by technology.
The studios and their suppliers are at
odds on many issues. The biggest,
though, are how to share out streaming
revenues and how AI models might
replicate actors’ and writers’ work. The
investments needed to launch stream-
ing networks, just as Covid-19 and
changing habits eroded cinema
and cable TV revenues, have hit
studios’ profits. Executives are asking,
reasonably, why unions demand as
many people in a writers’ room for an
eight-episode season of Stranger Things
as for 24 episodes of Seinfeld.
At the same time, AI models have
raised the prospect of scripts, or at least
their first drafts, being generated
without human involvement. And stars
and extras alike worry about digital
versions of themselves being used
without them being consulted or paid.
Hollywood’s crisis will offer short-
term opportunities for international
rivals, from Pinewood to Bollywood. US
actors and writers may soon be as
threatened by the next Call My Agent!
(which came from France) or Squid
Game (South Korea) as Midwestern
metal bashers have been by foreign
competition. But other global entertain-
ment hubs will soon have to confront
the same questions as Hollywood.
The first is over streaming income.
Actors are demanding 2 per cent of the
revenues generated by the likes of Netf-
lix and Disney+, with those revenues
audited by an independent body. The
industry is resisting sharing data on its
hits (and misses). But it will undoubt-
edly need to share more royalties with
actors and writers, who have taken the
bigger hit from the switch to streaming.
Second, actors want a guarantee that
their digital likenesses be used only
with compensation and consent. The
Stars and principle of paying for digital doubles
extras alike seems fair. How to compensate writers
for AI scripts “inspired” by their earlier
worry about
work will be harder to calculate —
digital versions a reminder that some of these issues will
of themselves require regulation to resolve.
being used People on both sides have been quick
without to point to the wealth of a few individu-
being consulted als at the top of the other’s industry.
Actors making millions of dollars per
or paid film are not the most sympathetic rep-
resentatives of struggling workers. Last
week’s comment by Disney’s chief exec-
utive, Bob Iger, that actors’ demands
were “not realistic” enraged strikers, as
he had just signed a contract increasing
his annual bonus target fivefold.
Barry Diller, the media tycoon, has
suggested one way to rebuild flagging
trust would be for top actors and top
executives each to take a 25 per cent pay
cut. That seems an unlikely plot twist,
even for Hollywood. But the industry is
so high-profile and the issues so reso-
nant that how they are finally resolved is
sure to attract a big audience.

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lead us out of climate crisis AI’s use in medicine poses dilemma over who is the ‘expert’
Andy Carter No one doubts that artificial
intelligence will have an impact
on the delivery medical care, but
its application will be lumpy.
(“Should the AI doctor see you now?”
Opinion, July 14).
John Thornhill is right to be wary.
In some sense, we are already there.
For example, in the treatment of
breast cancer, the US National Cancer
Institute publishes guidelines for
treatment devised by experts based
on well-controlled studies that span
decades, data needed because of the
decade-long latency of recurrence of
breast cancer. As such, the latest
guidelines are based on studies
that started at least 10 years ago,
sometimes 15-20 years. These
guidelines, admittedly very
conservative, are rigidly adhered to
by medical oncologists and only
the sanctioned treatments are covered
by insurance.
If these oncologists think “out of the
box”, they potentially put the patient
at risk with unnecessary or unproven
treatments or too little. And, invariably
the patient has to pay for such tests
and therapies. So we already have
a situation where, for one very
common disease, the physician does
very little “thinking”.
Will AI replace these guidelines?
I hope not. A large language model
will indiscriminately hoover up all
publications on breast cancer
treatments, including those from the
last 10 years that will not have followed
enough patients for enough time to
formulate sound management advice.
This is compounded by the fact that
the number of substandard published
studies far outweigh the number of
high-quality studies.
My own experience as a physician
using AI as applied to science and
medicine is that one has to be an
expert on a given topic to interpret
what AI is producing.
How long one needs to be an
expert to evaluate “expert” advice is
the critical question in adopting AI as
our doctors.
Hugh Young Rienhoff Jr MD
San Carlos, California, US

Renewed ties to Horizon Market ecosystem will Fed at the forefront of

Oil company leaders could use it to try
Pilita to persuade shareholders of the need
to shift. Alas, too many are doing the
Clark opposite.
Some run firms that lobbied for
years against cutting emissions they
would bolster UK science benefit from more data inflation-driven losses
In our view it is vital that the
government now confirm the UK’s
I was pleased to read the opinion piece
by Camilla Palladino, “It is in the UK’s
Martin Wolf (“Inflation’s return
changes the world”, Opinion, July 5)
association with the Horizon Europe
programme, the EU’s key funding
interest to treat investment research as
a public good” (Opinion, July 13).
rightly points out the “further
problems . . . as losses build up in
scheme for research and innovation. The proposed changes set out in the institutions most exposed to property,

W
hat should an oil com-
pany like ExxonMobil
do about the alarming
spate of heatwaves,
rainstorms and wild-
fires raging across the world?
How should Shell or Saudi Aramco
respond to the record-shattering rise
in global temperatures we are seeing
at what appears to be just the start of a
serious warming El Niño event?
These questions are more acute
than ever for any company whose
financial lifeblood comes from fossil
fuels — the oil, gas and coal that are by
far the largest contributors to global
warming. The answers are messier
than they often seem. Oil and gas com-
panies may not sell coal, the dirtiest
fossil fuel. But as the world blasts
through ever more climate records,
such firms face pressure to upend
their business models by shifting to
Only governments
have the power to cut
demand and their job
has barely started
cleaner revenues, without upsetting
those owners or shareholders who
want no such thing.
Many investors bought into an
industry offering historically healthy
financial returns, thanks in part to
a cartel, Opec, that could support or
stabilise prices in a difficult market.
Why switch to the uncertainty of a
renewables sector with no cartel, no
comparable record of returns and, for
some green firms, no stonking profits
like those made last year as the war
in Ukraine supercharged fossil fuel
prices?
It’s true this may not last. The Inter-
national Energy Agency says a much-
anticipated peak in global oil demand
could come before the end of this dec-
ade. That’s partly because of what the
agency calls the “explosive” growth of
electric car sales — a reminder that
technology can move in ways inves-
tors don’t expect.
In the early 1980s, when the US tele-
phone giant, AT&T, asked consultants
at McKinsey to predict how many cell
phones would be in use worldwide
by the turn of the century, it was told
the total market would be about
900,000. But 900,000 new subscrib-
ers were joining mobile phone services
every three days by 1999, according to
a report on the advice that year in The
Economist. This story is instructive.
knew were harmful, on the grounds
this would hit the world’s poorest
hardest. “What good is it to save the
planet if humanity suffers?” Exxon’s
former chief executive, Rex Tillerson,
memorably told a company annual
meeting in 2013.
Tillerson’s tactics live on. On July 6,
as scientists confirmed Earth had just
had its hottest June on record by a
“substantial margin”, the BBC broad-
cast an interview with Wael Sawan,
Shell’s chief executive, who said cut-
ting oil and gas production would be
“dangerous and irresponsible”. Chil-
dren in poor countries such as Paki-
stan had to “study by candlelight”
when their nations lost a bidding war
for gas supplies after war broke out in
Ukraine, he said.
This would be the same Pakistan
that is still recovering from devastat-
ing floods caused by massive rainfalls
last year, probably intensified by glo-
bal warming.
Yet Sawan’s comments are helpful.
They serve to distinguish Shell from
other oil and gas companies that
appear to take climate change more
seriously, such as BP.
BP may have cheered some share-
holders this year by deciding to slow
the pace at which it lowers its oil and
gas output this decade. But the 25 per
cent reduction it is aiming for by 2030
is still more than most of its rivals have
pledged and it is sticking with a plan
to develop 50 gigawatts of renewable
power by the same year.
This is just a plan and it’s nowhere
near enough. There is a strong case for
oil majors to break themselves up into
separate green and fossil fuel busi-
nesses to better expose the value of
green ventures. At the very least they
should do more to stop leaks of meth-
ane, a powerful greenhouse gas.
Ultimately though, we should not
expect the fossil fuel industry to lead
us out of a crisis caused by fossil fuels.
Only governments have the power to
cut demand for these fuels, and their
job has barely started.
Coal’s share of G20 countries’ elec-
tricity fell from 43 per cent in 2015
down to 39 per cent in 2022 as initially
subsidised wind and solar power ate
into its market. Electric cars are set to
do the same for oil. Heat pumps could
do it for gas. But both need to become
even cheaper and easier to use, and
fast — which requires a big helping
hand from the state. That may seem
politically impossible. But so does life
in a world where fossil fuels have
altered the climate system in ways we
are now struggling to understand.
pilita.clark@ft.com
The Leverhulme Trust is the largest all-
discipline charitable funder of research
in the UK, with a spend of £100mn a
year, and we firmly believe that
association with Horizon Europe will
enhance the effectiveness of research
funding in the UK and benefit the
country and its economy.
The spirit of collaboration that
Horizon Europe fosters enhances our
research ecosystem and enables the UK
to address complex challenges that
transcend national borders.
The UK’s continued ability to attract
and retain the finest global talent is
also directly linked to our involvement
in Horizon Europe. UK-based
researchers have consistently
demonstrated their exceptional
achievement in previous European
Framework Programmes.
In sum, association with Horizon
Europe will enable the UK to nurture
and bolster its already remarkable
advancements in research, innovation
and scientific discovery and we urge
the government to act.
Niall FitzGerald
Chair
Anna Vignoles
Director, The Leverhulme Trust
London EC4, UK
Trustees can make the
most of pension reforms
Some of the negative reaction to the
chancellor’s proposed pension reforms
is depressing but unsurprising (Report,
July 11).
Pension trustees should be willing to
embrace positive changes that
continue to protect the primacy of
members’ interests, while enabling
greater diversity in investment
strategies, particularly if this brings
significant potential benefits to the
wider economy. After all, as trustees
we are responsible for investing some
£2.5tn — more than all foreign direct
investment into the UK in 2021.
It’s almost as though some pension
trustees are unable or unwilling to
accept that things can be improved, or
are too frightened to challenge the
accepted orthodoxy.
Rather than looking for reasons to
reject reform, we should be working to
ensure that changes deliver more
positive outcomes for our members,
their retirement savings, the businesses
they own and the UK economy in
general. Trustees need to be telling
advisers what to do, rather than the
other way around.
Rory Murphy
Chair of Trustees
Merchant Navy Officers Pension Fund
West Sussex, UK
A great way to engineer
new domestic capital
The newly announced plans by the
government to unlock capital through
pension funds to support growing UK
businesses will be welcome news for
many across the engineering,
technology and innovation ecosystem
(Report, July 11).
Access to domestic growth capital
has been a challenge for UK-based deep
tech entrepreneurs, with innovative
companies who wish to grow in the UK
often facing tough decisions to exit
earlier than would otherwise be
desirable for both the company and the
UK ecosystem or moving offshore to
upscale because investment is more
easily accessible. The potential for up
to £50bn from this compact by 2030,
however, provides crucial growth
capital for ambitious engineering and
deep tech businesses to upscale
substantially within the UK.
Strengthening entrepreneurship
across the country and enabling better
and more impactful commercialisation
will be a key driver to enable the UK’s
ambitions to become a science
superpower and capitalise on critical
technologies like AI, quantum and
semiconductors. Actions that improve
outcomes for both investors and
entrepreneurs alike not only help the
UK to be a more attractive place to
invest and grow a company but,
crucially, allow pioneering innovations
to make it from the lab to the market
faster.
The UK has unique engineering,
science and technology capabilities
across the country that we need to
nurture and scale. We hope that
further measures will be implemented
to unlock capital, providing confidence
to engineering entrepreneurs to scale
their businesses in the UK and
continue to create jobs and economic
growth in regions around the country.
John Lazar
Chair, Enterprise Committee
Royal Academy of Engineering
London SW1, UK
Kent Review will help to reinvigorate
investment research, encourage more
investment research providers,
broaden market coverage, ensure
greater investor choice and support the
creation of a more resilient UK capital
market ecosystem.
We support the publishing of over
90 per cent of investment research
globally, which gives us a unique
insight into industry trends. Since the
Mifid unbundling rules came into
effect in 2018, there has been a 15 per
cent increase in the volume of
investment research published each
year. However, over the same period
there has been a 12 per cent decline in
the number of providers publishing
research. The proposed measures to
reform that market will encourage
innovation and new providers.
More research coverage is critical for
increasing the visibility of companies
outside the FTSE 100 — among both
retail and institutional investors —
increasing liquidity and enabling firms
to access the capital. Offering flexible
ways to pay for research, with a greater
variety of charging models, will help to
enable this and ensure investors can
make sound, data-driven decisions.
Patricia Horotan
Co-founder and Chief Executive Officer
BlueMatrix, New York, US
‘Active patients’ still need
professional support
Chris Ham (“Why patients need
support so they can care for
themselves”, Letters, July 15) is surely
right to emphasise supporting the
“active patient” in dealing with long-
term health conditions, especially
those of later life.
There are good examples of this
working in practice — he mentions
diabetic management as one such. But
it is also important to recognise the
limitations of the approach.
“Patient activation” or “lay-led self-
management” can be seen by providers
as a means of managing down demand,
rather than improving outcomes. As
health conditions worsen over time,
high-quality professional support, both
in the community and in the clinic, can
make substantial differences to
patients’ lives. In these later stages,
terms such as “patient activation” can
ring rather hollow.
“Taking more responsibility” is all
very well, but people also need the care
that professionals can bring. Such
support does not come cheap.
Mike Bury
Emeritus Professor of Sociology
Royal Holloway, University of London
Egham TW20, UK
interest rate and maturity risks.”
He does not mention that the
institution with the biggest losses of all
from interest rate risk, the one most
changed by inflation’s return, is none
other than the world’s leading central
bank. In the past nine months, the
Federal Reserve has suffered
previously unimaginable operating
losses of $74bn from its deeply
underwater interest rate risk position,
a loss which far exceeds its total capital
of $42bn. In misleading and arguably
fraudulent accounting, the Fed refuses
to reduce its reported capital by these
losses; with proper bookkeeping, it
would now be reporting capital of
negative $32bn, growing more negative
every month. It insists that no one
should care about its negative capital,
but carefully cooks the books to avoid
reporting it.
The Fed is on the way to operating
losses of an estimated $110bn this year.
Its mark to market loss as of March 31
2023 was $911bn. The Fed has no
possibility of generating offsetting
gains from revaluing gold, since it owns
exactly zero gold. Wolf reasonably asks
if “economies must be kept
permanently feeble in order to stop the
financial sector from blowing them
up”. We can likewise ask, “Must central
banks make themselves so feeble in
order to prop up economies and the
financial sector?”
Alex J Pollock
Senior Fellow
Mises Institute, Auburn, AL, US
The west cannot afford to
ignore China and India
Thank goodness someone, your
distinguished commentator Martin
Wolf, has the courage to tell it how it is
(Opinion, July 12.)
For far too long, the views espoused
by the west on a range of issues —
economic, military and social matters
— have sounded, and continue to
sound, as deeply self-centred,
particularly when we’re all faced with
the most serious issues the world has
ever faced: climate change,
international aggression and the
breakdown of long-held ideas about
democracy and how properly to
govern.
Even if we disagree about the
direction of travel of nations like China
and India, we in the west must keep
lines of communication open as we can
ill-afford to turn our backs on two
super powers whose trading influence,
which affects us all, grows ever
stronger.
Alastair Conan
London, CR5, UK
Wednesday 19 July 2023
POLITICS
Janan
Ganesh
T
o judge by the trailer,
Ridley Scott’s biopic of
Napoleon will entertain,
inspire and extravagantly
miss the point. But then so
did the paintings of the same subject by
Jacques-Louis David. Napoleon wasn’t,
or wasn’t just, a conqueror. He was,
over and above all else, history’s
greatest bureaucrat.
What survives of him isn’t the French
empire (which he left smaller than he
found it) but the Banque de France,
standardised education, prefects who
keep French regions in line with
The west’s
sensible bet
on India
Martin Wolf Economics
Its population and economy are forecast
to grow rapidly over coming decades,
offering a counterweight to China
T
he enemy of my enemy is my
friend. On this basis, closer
western relations with India
make good sense. Joe Biden’s
warm embrace of the once-
banned Narendra Modi, now its politi-
cally dominant prime minister, in Wash-
ington and Emmanuel Macron’s equally
warm embrace of the Indian leader in
Paris are aimed at forging a close rela-
tionship with a country expected to be a
powerful counterweight to China. Is this
a good bet for western powers? Yes. India
is indeed likely to be a rising great power.
Interests also align. But how far values
are shared is a more open question.
Where is India now and where might
it go, economically and politically?
Today, India has the world’s fifth-larg-
est economy at market prices and third
largest at purchasing power. Its popula-
tion is 1.43bn, almost exactly the same
as China’s. By 2050, however, India’s
population is forecast by the UN to
reach 1.67bn, against 1.31bn in China.
India’s GDP per head (at purchasing
power) is close to 40 per cent of China’s
levels, according to the IMF. Back in
1990, India and China were both almost
equally poor, with GDP per head, meas-
ured at purchasing power, estimated at
4.6 per cent and 4.1 per cent of US levels,
respectively. In what is surely the most
remarkable economic performance in
world history, China’s GDP per head
reached 28 per cent of US levels last
year, against India’s 11 per cent. Yet,
while China’s relative performance
was incomparably the best, India came
BUSINESS
Helen
Thomas
T
heodore Roosevelt’s reputa-
tion is as a crusading
“trust buster”, standing up
to business and battling
corporate concentration in
the early years of the 20th century.
The US president was also a frustrated
regulator, who argued that “a succes-
sion of lawsuits is hopeless from the
standpoint of working out a perma-
nently satisfactory solution” to the
issues raised by excessive market
power. “What we should have is a much
stricter government supervision of
these great companies.”
Populism has given the elites more power than ever
Parisian diktat and a Civil Code that
still influences jurisdictions around
the world. To this day, the adjective
“Napoleonic” describes something
centralised and perhaps officious, not
something martial.
Prepare for a Napoleonic world, then.
The most important governmental
trend today is the rise of protectionism.
In the US, Europe, China and India, the
state is turning from open trade to the
cultivation of domestic industries. One
justification is strategic: don’t count on
frail or hostile regimes for essential
goods. Another is progressive: give
skilled manual labour a break for once.
Both trace back to the election-winning
arguments of Donald Trump in 2016.
And so we have something of an irony.
Populism, which sets itself against the
elite, against the “deep state”, is going to
leave it more powerful, not less. The
technocrat, vilified so recently, will be
the string-pulling figure of our age,
second among the seven largest emerg-
ing economies. (See charts.)
China’s was an extreme example of
the most successful development strat-
egy of the modern era — high invest-
ment, rapid industrialisation and pro-
gressive upgrading of exports of manu-
factures. This was also Japan’s path.
India has followed a very different one.
Between 2014 and 2023, its investment
rate has averaged just 31 per cent of
GDP, against China’s 44 per cent, and its
national savings rate averaged 30 per
cent, against China’s 45 per cent. More
strikingly, the share of manufacturing in
India’s GDP has been falling, not rising,
as would have been expected at this
stage in its development. This share was
13 per cent of GDP in 2022, against
China’s 28 per cent. While the ratios of
trade to GDP (at market prices) have
become roughly equal, China is by now a
far bigger exporter to world markets.
What then might lie ahead?
Let us start with the fundamentals.
India’s gross savings rate, though not as
high as China’s, is high enough, particu-
larly given the possibility of importing
capital, to finance a growth rate of at
least 5-6 per cent. India also has reason-
able macroeconomic stability. Entre-
preneurship is abundant and infra-
structure is improving. India will defi-
nitely not suffer from labour shortages,
but the opposite. As Ashoka Mody notes
in India is Broken, the inability to gener-
ate sufficient good jobs is a great failure.
Yet another is the inability to educate
the population to a high standard:
Global antitrust needs police as well as guard dogs
Today’s economies on either side of
the Atlantic seem to need both, as
might the antitrust enforcers who are
struggling to make good on promises of
a tougher approach.
The Federal Trade Commission last
week suffered a high-profile defeat,
when a judge ruled against its attempts
to block Microsoft’s $75bn deal to buy
games maker Activision. That, as its
chair Lina Khan was reminded by
a congressional committee, makes the
agency zero for four in court under the
current administration.
The decision left the UK competition
watchdog, whose decisions face only
limited judicial review, hanging as the
only body globally to have blocked the
deal: it took the unprecedented (and
slightly baffling) step of agreeing that
Microsoft could submit a restructured
deal to try to address concerns.
This is a blow to those, like Khan and
Department of Justice antitrust chief
★ FINANCIAL TIMES
Opinion
dispensing subsidies, guiding this sec-
tor, shunning that one. Corporate lead-
ers will have an ever tighter and more
collusive relationship with government,
not as a corrupt byproduct of the system
but as a central feature of it. Populism
was meant to take the governing class
down a peg or two. Its main legacy will
Demagogues will at some
point have to choose which
they hate the most —
free trade or the blob
be something close to the opposite.
When would you rather be a politician
or civil servant: now, when you might
shape a whole industry, or in pre-popu-
list times? When would you rather be a
lobbyist in the “swamp”: during the
laissez-faire age, when government and
Among large emerging countries India
has lagged behind only China in raising
its relative GDP per head
GDP per head at purchasing power, % of US levels
50
40
30
20
10
0 Brazil
1990 2000 2010 2020
Source: IMF WEO database
human capital is likely to prove a far
tighter constraint than physical capital.
India is an obvious location for com-
panies following a “China plus one”
strategy. It also has the advantage over
obvious competitors of a large home
market. Nevertheless, India has repeat-
edly failed to exploit opportunities for
fast growth of exports of manufactures
over the last 75 years. Suspicion of open
trade always gets in the way.
As was true of many other countries,
India has suffered from an overhang of
Entrepreneurship in
the country is abundant
and infrastructure
is improving
Jonathan Kanter, who want a reset of
antitrust thinking after decades of
lax enforcement. Economies in the
US and Europe have become more
concentrated across a wide range of
industries. Globalisation or digitisation
Enforcers are
struggling to make
good on their promises
of a tougher approach
may have favoured larger firms.
But since 2000, argue academics at
New York University, increasing US
concentration has looked inefficient,
entrenching leaders, increasing barriers
to entry and translating into lower
investment and growth.
The agencies may have to continue
taking their lumps in the courts. An
business were at least nominally
distinct, or the protectionist one, when
no sector wants to miss out on public
largesse? (If chipmaking is strategic,
why not agriculture?)
The elites are going to be stronger and
more incestuous as a result of populism,
a movement dedicated to their down-
fall. Perhaps we should have seen the
paradox coming. Populists have a rebel-
lious style but a paternalist agenda.
They hate the so-called blob, but want it
to shape much of the private sector.
They resent elites, but more often for
abdicating power — over markets, over
national borders — than for hoarding it.
They have a thing for direct democracy
but also for Singapore. This is a move-
ment that was always in two minds on
the question of faceless authority.
The contradiction is most obvious on
the US right. Trump apparatchiks
dream of taming the deep state if their
man gets to govern again. So-called
India has quite high saving and investment
rates among large emerging economies
2013-23 average rate (%)
0 10 20
Turkey China
Russia Indonesia
China India
Mexico
Turkey
Brazil
Indonesia
Russia
India
Mexico
Source: IMF WEO database
bad debt since the global financial crisis.
This “twin balance sheet problem” was
a significant constraint on growth. But,
argues this year’s Economic Survey, “in
the course of the last decade, Indian
non-financial private sector debt and
non-financial corporate debt as a share
of GDP declined by nearly 30 percent-
age points”. Bank balance sheets have
also been repaired. In all, the credit
engine is once again in quite good shape.
The IMF forecasts annual economic
growth at a little over 6 per cent from
2023 to 2028, with GDP per head grow-
ing at roughly one percentage point more
slowly. Such growth would be quite close
to the averages of the past three decades.
Provided the country is not buffeted by
big global or domestic shocks, this sounds
perfectly feasible, even rather plausible.
But what about the longer term?
imminent update to US merger
guidelines could improve the policy
backdrop. But thus far, the US courts
have resolutely failed to embrace the
concerns around vertical deals, where
a company buys a supplier, shared
by antitrust divisions in the US, UK
and Europe.
The Microsoft judgment noted a
“dearth of modern judicial precedent on
vertical mergers”. This is particularly
true of dynamic or potential threats to
competition in fast-moving sectors, or
where dominance in one market can
spillover into an adjacent one, as has
been seen in the tech sector.
It’s not that the guard dogs for com-
petitive markets are without victories.
Vertical deals, such as Lockheed
Martin’s purchase of Aerojet, have been
pulled in the face of opposition. But
success in court (or legislative change)
is still needed for the lasting shift in
approach that Khan and others seek.
Schedule F appointments would make it
easier to fire civil servants. In an execu-
tive branch version of what the right has
done to the judiciary, partisan cadres
are being groomed for bureaucratic
posts throughout Washington.
At the same time, the Trump world
demands more industrial strategy. Is
there a record of it being done well,
anywhere on Earth, without a perma-
nent, independent bureaucracy,
licensed to plan and invest regardless of
the churn of elected administrations?
At some point, demagogues will have
to choose which they hate more: free
trade or the blob. Curbing the one tends
to empower the other. Notice that,
though Trump started the move to
industrial protection, it has achieved
real substance under a centre-left
government. The right could never
follow its antitrade logic to its natural
conclusion, which is the aggrandise-
ment of officialdom. Trump managed to
India’s economy has grown without
industrialising
Manufacturing as a share of GDP (%)
30 40 50
30
South Korea
20
10
Total
investment
Gross national 0
savings 2005
Source: World Bank
Remember that India still has huge
room for catching up. It is also a young
country, with a grossly underemployed
labour force, potential for improving
the quality of that labour force, a rea-
sonably high savings rate and increas-
ingly widespread hopes of greater pros-
perity. A great deal of adaptation will be
required to meet the climate change
challenge, given the failure to bring glo-
bal emissions down. But the energy
transition also offers huge opportunities
to India. On balance, I judge that India
should be able to sustain growth of GDP
per head at 5 per cent a year, or so, up to
2050. With better policies, growth
might even be a bit higher, though it
could also be lower.
So, let us assume that India’s GDP per
head continues to grow at 5 per cent
a year, while that of the US grows at
There should also be more focus on
policing poor corporate behaviour —
particularly in the tech world where the
growth of the biggest companies has
defied conventional antitrust thinking.
“I believe there is scope to be much
more aggressive through the FTC’s con-
sumer powers,” says William Kovacic,
an academic and former FTC chair.
“There will be a closer look at other
policymaking tools that can achieve
some of the same ends and where the
FTC has more room for manoeuvre.”
This isn’t straightforward. A congres-
sional push for new tech rules
failed. The FTC’s existing rulemaking
powers could also come up against a
sceptical judiciary.
The agencies are being creative in
dusting off old legislation, such as the
1936 Robinson-Patman Act on price
discrimination in supply chains or a
1975 act on consumers’ rights, and in
resurrecting dormant tools. The FTC
17
fall out with the national security state,
of all things. The idea that he could
abide a US version of Japan’s former, and
lordly, Ministry of International Trade
and Industry, is fanciful. Yet that kind of
technocratic power is what, via the hand
of his successor Joe Biden, populism has
inadvertently created.
I fear, though cannot know, that we
are living through the biggest wrong
turn in government policy of my
lifetime. A decade into this protectionist
age, we might regret the waste, the pork,
the higher consumer prices (do
“workers” not pay those?) and the
fragmentation of the west into squab-
bling trade zones. But the wrongness of
this trend is another column. For now,
what stands out is the improbable
winner of it. Imagine being told in 2016
that elites would have more clout, not
less, and owe it to their own tormentors.
janan.ganesh@ft.com
China
Japan
India
2010 2015 2020
1.4 per cent, roughly as it has over the
last three decades. Then, by 2050,
India’s GDP per head (at purchasing
power) would reach about 30 per cent of
US levels, roughly where China’s is
today. According to UN median fore-
casts, India’s population would also be
4.4 times as big as that of the US. So, its
economy would be some 30 per cent
larger than the US’s.
It is, in sum, quite reasonable to
assume that India will become a great
power. It is not that hard to imagine that
its economy will be of a similar size to
that of the US by 2050. Thus, western
leaders are making a sensible bet on an
alliance of convenience with India. But
will India also be a liberal democracy? I
will discuss that issue next week.
martin.wolf@ft.com
has used its consumer powers on
so-called dark patterns, or online
practices that persuade consumers to
do things to benefit the business.
A shift is more evident in Europe. The
consumer powers of the UK Competi-
tion and Markets Authority are being
strengthened. Britain’s digital markets
unit (and the Digital Markets Act in
Europe) will put watchdogs squarely
into the role of regulator for Big Tech — a
position that antitrust bodies, culturally
law enforcers, have historically resisted.
“The inherent economics of digital
platforms tend towards very few players
being successful,” said one US antitrust
practitioner. “As a pragmatist, I’d antici-
pate that you will need a lot of regulation
because pure antitrust will not deliver
robust competition.”
Tackling the trusts may require a
bigger toolkit than ever.
helen.thomas@ft.com
18 ★ FINANCIAL TIMES Wednesday 19 July 2023

Swedish banks: sweat lodges

The region’s banks have lent generously to the real estate sector and contributed to rising property prices.
With the bubble bursting, landlords are selling assets to de-lever. Variable-rate mortgages leave home
buyers exposed too. SEB helped out its customers with covenant tweaks in the second quarter.

Actions related to SEB’s lowest credit real estate clients* Sensitivity to interest rates
Twitter: @FTLex % Household interest expenses / disposable income (%)
Actions taken (Q2 2022 to Q1 2023) 8
Actions taken (Q2 2023) Forecast
6
Sweden
Alzheimer’s drugs: pharmaceutical research following new
weight-loss medicines and Covid-19
Capital expenditure cuts
4 Online beauty/Oddity:
brain gain vaccines. Asset divestments 2 looking good
Their significance exceeds their Eurozone
Bond buybacks 0

Alzheimer’s disease has wrecked the
hopes of countless drug researchers as
thoroughly as the lives of its many
sufferers. But persistence pays.
Eli Lilly’s new drug donanemab
significantly slows memory loss, the US
group revealed this week. It is on track
to win the second approval this year of
a drug capable of altering the course of
the disease. The drug removes a toxic
Going concern
modest clinical benefits. Better Back in the 2010s, canny marketing
1995 2000 02 05 07 10 12 15 17 20 22 24
treatments will supersede them. New equity Source: SEB gave a leg-up to brands selling “direct-
Expected provision and property to-consumer” via the internet.
Suspended dividends exposure for Scandinavian banks Footwear group Allbirds and mattress
EU carbon prices: Bond-to-bank refinancing
2023 consensus
estimate provision
Property and construction
loans outstanding
seller Casper claimed to sit at the
intersection of tech and retailing.
short bread (Skr bn) (% of total) High cash burns floored valuations
SEB actions 3.0 30 previously running into billions. But
Carbon prices are supposed to provide Renegotiation of terms online beauty retailer Oddity Tech
and conditions 2.0 20
a readout of progress — or the lack of it proves the DTC model still has merit.

protein called amyloid. This partly
vindicates scientists who believe
countering amyloid is key to treating
Alzheimer’s. The advance is shared
with a similar drug, lecanemab, made
by US biotech Biogen and Japan’s Eisai.
It paves the way for a whole new
class of treatments for dementia, rife
among the ageing populations of the
developed world. Neither drug has a
clear edge. Patients receive infusions of
donanemab every four weeks, half as
often as for lecanemab.
They can be taken off the drug if
scans show that amyloid “plaques” on
the brain have cleared.
Safety is a worry for both drugs.
There were three suspected treatment-
related deaths in each study.
The potential of Eli Lilly’s drug has
helped raise its share valuation. The
stock trades at 49 times forward
earnings, double where it was three
years ago. But that has largely been
fuelled by high expectations for its
diabetes and obesity drugs, which
account for almost 60 per cent of the
drugmaker’s net present value,
Berenberg says. Even assuming peak
sales for donanemab of $8bn, Lilly’s
Alzheimer’s pipeline represents only
7 per cent of total NPV.
The stakes are higher for Biogen and
Eisai, given their smaller sizes. When
encouraging trial results for lecanemab
were released in September, Biogen’s
shares rose almost 45 per cent, while
Eisai’s climbed 17 per cent. The US list
price for lecanemab, called Leqembi, is
$26,500 a year. Analysts expect Eisai
and Biogen to split sales of $7.8bn and
operating profits of $5.2bn in 2030,
according to Visible Alpha.
These promising trial results will not
end the scientific debate over
Alzheimer’s. The amyloid protein is
unlikely to be the only cause of the
disease.
Still, the new drugs further validate
— in the energy transition. The EU’s
Emissions Trading System prices the
element at about €86 per tonne of
carbon at present, near historic peaks.
That looks odd to one trader, Per
Lekander at Clean Energy Transition.
He thinks ETS carbon prices are
overvalued, partly because Europe has
done well in cutting emissions. He may
be right on the first proposition, wrong
on the second. Europe’s natural gas and
thermal coal prices more than halved
this year alone. Historically, ETS
carbon prices move in line with gas
prices, given their link to power costs.
Under the EU’s “cap and trade”
emissions system, higher carbon credit
prices should discourage purchases of
polluting fuels and encourage
investment in renewables. That
explains the relationship with natural
gas and coal. On this basis, ETS prices
look high and should fall in parallel
with fossil-fuel prices. After all, gas
tucked away in European storage is a
quarter above the five-year average.
But persistently high ETS prices also
hint that the industry’s progress on
decarbonisation is slow. Companies
cannot feel confident that emissions
are falling rapidly. Carbon pollution in
the EU dropped about 3 per cent from
2019 to December 2022. That included
pandemic effects and gas demand cuts
because of Russia’s reduced supply.
More importantly, the supply of ETS
credits is declining. Free allowances to
help heavy emitters change their
businesses are on the way out. This
follows a reform of the scheme in July
2021 to meet EU-wide carbon goals.
The supply of credits will fall more
than 4 per cent annually until the end
of 2030, estimates Rystad Energy.
If energy prices keep declining this
summer, EU carbon prices should do
the same. That would reward investors
such as Lekander, whose payback
horizons are as short as their positions.
Repossessed collateral
0 25
FT graphic Source: SEB *BBB- rated or below, about 20% of outstanding loans
Scandinavia is known for its saunas.
Property owners in Sweden are hot
and bothered for other reasons.
Rising debt costs are bursting a real
estate bubble. Homeowners and
commercial landlords are feeling the
heat. But Swedish lenders Swedbank
and SEB offered a cooler assessment
of conditions yesterday.
Commercial property risk has been
in focus since regional banks in the
US collapsed this year. Lenders in
Sweden have an outsized exposure to
the sector. A large stock of variable-
rate mortgages is a further concern.
Yet the country’s largest mortgage
lender, Swedbank, said net profits
doubled thanks to better interest
margins. Johan Torgeby, chief
executive of SEB, echoed that
Longer term, supply and demand of
carbon credits will make them a decent
investment.
Evergrande:
crash-test dummy
Critics always regarded Evergrande as
an accident waiting to happen. Now,
even company bosses are conceding
that the expected collision has
occurred. Property prices have not
rebounded as they had hoped. That is
reflected in an $81bn loss in results for
2021 and 2022, published this week.
Creditors are pushing for the
bankruptcy of a real estate unit of
Evergrande in Xian. China high-yield
dollar bonds have fallen to the brink of
Default
1.0
0 0
50 75 100
sentiment, pointing to minimal new
provisions for bad loans.
That does not stack up with the
experience of past property crashes.
Banks simply do not expect to lose a lot
of money on property lending,
however.
SEB has added just 2 basis points of
its outstanding loan book to expected
losses so far this year. During the
pandemic, it added 26 basis points, or
13 times more. Swedbank has
increased expected losses by 10 basis
points this year.
Losses are firstly a function of default
risk and secondly the likelihood of
recovery. Default risk is yet to peak.
Some property owners are barely
coping. SEB outlined what its lowest
quintile of real estate credits are doing;
distress, signalling that fallout is
spreading. Evergrande’s excessive
gearing made it an outlier even in
China’s leveraged property sector. A
weakening economy has rendered the
business more contagious than feared.
Borrowings rose to $340bn at the
end of last year. The real picture may
be worse. Evergrande’s auditor signed
off accounts with a disclaimer about
scanty audit evidence. Stating the
obvious, the board questioned whether
the business was a going concern.
The shares have been suspended
since a default last March. The
company needs at least three-quarters
of each group of creditors to approve a
debt rejig. That looks challenging.
Evergrande faces more than 1,300
lawsuits with claims of $45bn. Many
come from disaffected offshore
10
Swedbank SEB Handelsbanken
Source: Citi Research
most are cutting capex, about half are
selling assets, and about a third are
raising equity.
Renegotiation of lending terms,
largely interest cover agreements,
was a new feature of the second
quarter.
Even if defaults do rise, potential
recoveries appear healthy. Loan-to-
value ratios at SEB remain below half
for commercial real estate and
residential.
A further 25 per cent fall in
property values is needed to breach
regulatory risk limits, SEB thinks.
That would take prices only back
to where they were in 2016. With
higher interest rates expected,
Swedish bank investors should
continue to sweat.
investors. They would prefer quick,
court-ordered liquidations to lengthy
restructuring talks.
Yesterday, the average price of China
high-yield bonds fell to about 70 cents.
Sub-investment-grade dollar bonds are
heavily dominated by real estate
issuers. Even so, fears are growing of
wider fallout. So much for assurances
from analysts in January that the worst
was over for Chinese bonds.
Peers such as Wanda and Sino-Ocean
Group may follow Evergrande into the
crash repair workshop. Prudent
foreigners never invested in the
overleveraged outliers in China’s
property pack. Any creditors still in
there should consider selling out to
distressed debt specialists with the
patience and risk appetite for the
struggle ahead.
The Israel-founded company, last
valued at $1.5bn, has filed for a listing
in the US. Ignore Oddity’s headline
grabbing “AI investments” and the fact
that it raised money via a digital token
last year. The company’s appeal lies in
the profitability of its high-margin
beauty products, not in tech R&D.
Companies like Allbirds aped the
tech start-up model of spending
heavily to acquire customers. But they
lacked the network effect that might
eventually lower costs to produce
profits. To boost sales, they expanded
into physical stores and distribution
partnerships. Meanwhile, traditional
retail rivals increased digital sales.
Allbirds shares are down 91 per cent
from the listing price. Revenue is
expected to drop by almost a fifth in
the current quarter compared with last
year. With $143mn in cash left on the
balance sheet, the lossmaking group
has about 18 months to break even.
Oddity follows the DTC model of
spending heavily on advertising to
build an online following on social
media apps. When Allbirds went
public, marketing was equal to 25 per
cent of revenue. Oddity’s is 28 per cent.
The difference is that Oddity sells
high-priced goods. Its 71 per cent gross
margin in the past quarter exceeds that
of California’s listed make-up company
Elf Beauty, whose share price more
than doubled this year.
Valued on the same trailing sales
multiple as fellow DTC company
Allbirds when it listed, Oddity would
be worth $3.2bn. On the same earnings
multiple as Elf, it would reach $3.6bn.
Oddity, as its name suggests, should
do well in the current unwelcoming
market for initial public offerings.
Lex on the web
For notes on today’s stories
go to www.ft.com/lex

CROSSWORD
No 17,472 Set by GOLIATH
        ACROSS

1/7 Song and dance and poor ratings

after each class (10,4)
  9 Some jewellery for lovemate (4)
10 Cartoons showed space voyage before
squadron leader got demoted (5,5)
11 See 22
  12 Very dull in hospital department
recently (2,2,4)
13 Without me, don’t assume nasty
surprises (8)
  
15/3 Artistic collection showing stricken

fort in the midst of viral illness (9)
17 Selection of recipes turned into a poem
    (4)
19 Some strange country bumpkin
 outside missing his family (8)
22/11 Darling, bananas seldom new fruit
   (8,6)
23 All the nuts? Deadly (6)
25 Tear possibly caused by doctor
engaged in minor procedure (6,4)
  26 This could be the top twenty (4)
27/28 A role model doesn’t put down
a poor past lover more than necessary
(3,1,3,7)
 
DOWN

2 Speak fast (7)

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JOTTER PAD 4 Backtrack about the FT being contrary
(8)
5/24 Why Le Monde matters to Macron
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$ 5 6 ( 1 , & & $ 6 6 2 & . onlookers (6)
& 0 $ 2 $ $ 8 ( 7 Are they perhaps asleep? Not when a
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 FT SPECIAL REPORT

National Security
Wednesday July 19 2023 www.ft.com/reports

Tech remains core battle with Beijing Inside

Export controls are a become self-reliant in chips but are

instead tailored to make its strategy fail.
key security policy but ‘The US is “It did this by applying pressure at the
some fear they will spur [giving high end of the market where Chinese
companies are now cut off from critical
China to act faster, says China an categories of US technology, and at the
low end of the market where Chinese Focus on security
Demetri Sevastopulo incentive] to companies still face competition from powers US energy
indigenise superior foreign firms,” explains Allen. American fuel exports

C
hina’s test of a hypersonic
weapon that circumnavi-
gated the globe, in 2021, pro-
vided a startling reminder
that the country has become
a formidable military rival to the US
even faster than expected.
Pentagon experts were stunned that
Chinese scientists had overcome con-
straints posed by the laws of physics in
developing a missile that was able to fire
another projectile as it flew at hyper-
sonic speed.
But the episode sent another clear
message: China was using American
technology to undermine US security.
Chinese supercomputers involved in
developing hypersonic weapons, for
example, were running on chips that
used US software.
Alarm bells were already ringing on
multiple fronts. By the time President
Joe Biden took office in 2021, concerns
had mounted that emerging technolo-
gies were helping China close the gap
with the US military. However, while the
US was worrying about the rising
number of Chinese warships, aircraft,
missiles and satellites, it also had to
focus on how China was gaining from
technologies such as artificial intelli-
gence, and making rapid advances in
areas including quantum computing
that could make it easier to break US spy
agency encryption.
In a stark warning just two months
after Biden became president, the
National Security Commission on AI, a
group of leading experts led by former
Google chief executive Eric Schmidt,
suggested the US had become compla-
cent. “China is already an AI peer and it
is more technically advanced in some
applications,” the commission warned
in a 756-page report. “Within the next
decade, China could surpass the US as
the world’s AI superpower.”
In one catastrophic illustration,
just over a decade ago, Chinese intelli-
gence was able to identify — and in some
cases execute — spies recruited by the
CIA. People familiar with the situation
say China had become far better at
technical surveillance — for example,
using AI-driven facial recognition
technology — than the CIA had realised.
China’s use of AI in security also rein-
forced one of the growing problems for
the US and its allies in countering Bei-
jing: the rising prevalence of dual-use
technologies in a world where multilat-
eral regimes, designed to prevent the
spread of such technology to militaries,
have become increasingly obsolete with
the pace of change.
“US officials show increasing scepti-
cism about the ability to safely export
dual-use technologies to China, seeing it
as a fool’s errand to try to distinguish
between civil and military uses within a
political system that intentionally blurs
the lines between the two,” says Emily
Kilcrease, a US-China economic secu-
rity expert at the CNAS, a defence think-
tank. She cites China’s “military-civil
fusion” programme, which forces Chi-
nese companies to share tech with the
People’s Liberation Army.
Biden took the baton from the Trump
administration in using export controls
to complicate Chinese efforts to secure
US tech with military applications. In
October, his team unveiled an array of
controls designed to make it harder for
China to obtain, or produce, advanced
chips. It also worked with Japan and the
Netherlands to cut off Chinese access to
critical equipment for chipmaking.
Jake Sullivan, US national security
literally
everything’
Evan
Feigenbaum
On command:
Beijing’s
‘military-civil
fusion’ policy
forces Chinese
companies to
share tech with
the PLA
Thomas Peters/Reuters
adviser, has described the approach as a
“small yard, high fence” policy that
seeks to make it as hard as possible for
China to obtain a narrow range of highly
advanced technologies with military
applications.
“Our strategic competitors should not
be able to exploit American and allied
technologies to undermine American
and allied security,” Sullivan said in a
Georgetown University speech shortly
after the restrictions were unveiled.
Gregory Allen, an AI expert at US
think-tank the Center for Strategic and
International Studies, says the restric-
tions are not designed to convince
China to moderate its ambition to
The US administration is now prepar-
ing to update the controls to make it boom as Ukraine war
harder for companies such as Nvidia to upends global market
supply chips to China that are critical for Page 2
AI applications. The White House is also
poised to unveil an executive order to Cyber collaboration
provide a screening mechanism for US
investment into Chinese companies in Partnerships with
fields such as AI, advanced chips, and private business are
quantum computing. helping to
Biden’s approach to China and
advanced technology has been largely counter
applauded in Washington and wel- Russian
comed by allies, even if some are con- cyber
cerned about the economic impact on
their companies. But one big question is
attacks
whether, rather than hinder China, the Page 2
strategy will in fact provide an impetus
for the country to move faster.
In the case of chips, some experts say Opinion
the strategy will create a critical window Elizabeth Economy
that will allow the US to develop other
military capabilities that will help in the Pay more heed to
case of a conflict with China over Tai- China’s ability to
wan. And they argue that China will shock us
struggle to replicate all of the parts of Page 2
the hugely complex semiconductor eco-
system and its supply chain.
However, others worry that the US Military surge tests
policy may just encourage China to pour manufacturers’ limits
even more money into advanced tech-
nologies and so accelerate its efforts to
Western defence chiefs
close the gap with the US military. fear running out of
“The US is incentivising China to indi- munitions
genise literally everything,” argues Evan Page 3
Feigenbaum, an Asia expert and vice-
president for studies at the Carnegie
Endowment for International Peace
Opinion
think-tank. Mark Sedwill
Feigenbaum says this has led to a Nato needs to make
“much less integrated and dependent new commitments to
China” that exports its own indigenous
technology in an effort to set global President Zelenskyy: on
standards — something that concerns weapons; future
Washington. defence; and a road
But the Biden administration has
made clear that it does not intend to map to membership
change tack. During her recent visit to Page 3
Beijing, US Treasury secretary Janet
Yellen told her Chinese counterparts
that, while Washington did not want to
decouple from China, it would continue
to implement “targeted actions” to
make sure it was protecting its own
national security.

Climate action in era

Global rivals History offers few lessons for the US and its allies in today’s big power play, says Edward Luce

China and the revenge of geopolitics of power competition

It is easy to forget that early in Joe
Biden’s presidency he made a bridge-
building overture to Vladimir Putin.
During the 2020 campaign, Biden
barely mentioned Russia as a geopoliti-
cal rival to the US. China hogged all the
attention. At the Geneva summit with
his Russian counterpart in June 2021,
the US president went to great lengths to
massage Putin’s ego, even calling Russia
a great power.
A few weeks later, Biden withdrew
America’s remaining forces from
Afghanistan in a debacle that threat-
ened to define his presidency.
In retrospect, it is clear that the two
seemingly unrelated events — Biden’s
positive mood music towards Russia
and his Afghanistan pullout — rein-
forced Putin’s decision to invade
Ukraine. The west, in Putin’s view, was
unlikely to react any more decisively to
his planned annexation of Ukraine than
it had to Crimea in 2014.
Such misunderstandings have char-
acterised geopolitics through the ages.
In this case, the consequences of Rus-
sia’s blunder in Ukraine — and the west’s
unexpectedly unified response — are
likely to reverberate for years, if not
decades. Sixteen months into Russia’s
“special military operation”, the world is
at greater risk of great power conflict
than since the most dangerous points of
the cold war.
Talk of reviving the liberal interna-
tional order — a state of global being that
was never quite what its nostalgists hold
it up to have been — sounds increasingly
quixotic. The world is moving into a new
type of great power rivalry. But compar-
isons with its 19th century precursor are
at best misleading. That long period of
so-called Pax Britannica ended in the
tragedy of the first world war. Today’s
world cannot afford a direct conflict
Treasury secretary Janet Yellen, left, and Chinese vice-premier He Lifeng at the
Diaoyutai State Guesthouse in Beijing this month — Mark Schiefelbein/AP
between the US and China, its two com-
peting giants.
The challenge facing the US and its
western allies is threefold.
The first is in maintaining western
unity against Putin. This is brought into
sharpest relief by next year’s US elec-
tion. Rarely has a US presidential elec-
tion contained such divergent possible
outcomes for the state of the world. If
Biden were re-elected, the world could
expect some continuity in US foreign
policy until 2028. If Donald Trump, the
likely Republican nominee, were to
return to power in 2025 it could destroy
western unity.
Trump has promised to end the war in
Ukraine within 24 hours of resuming
office. That prospect, and that alone, is
sufficient motivation for Putin to sus-
tain his war on Ukraine for the next 18
months in the hope that Trump will ride
to his rescue.
It is almost impossible for America’s
European allies to hedge against that
spectre. Their fate — and Ukraine’s —
lies in the hands of US voters.
The second challenge for the west is in
forging a common front on China with-
out it spilling over into direct confronta-
tion. Unlike the war in Ukraine, which
must eventually reach some kind of
messy conclusion, the rivalry between
the US and China is a project without
end. For the purposes of strategic plan-
ners, it offers no natural conclusion.
This is where history ceases to offer
much guidance. Short of Armageddon,
there is no scenario in which either the
US or China will emerge as the world’s
sole hegemon.
This presents a novel challenge to a
west that has been schooled in
Manichean conflicts that result in one or
other side claiming victory. It will
require unusual strategic patience and
skill. To paraphrase China’s former
paramount leader Deng Xiaoping, the
west will have to cross the river by
feeling the stones, except that the far
bank of the river will never be fully
visible.
This year, president Xi Jinping
accused the US of trying to “suppress,
contain and encircle” China. Biden
insists that his aim remains to co-oper-
ate with Beijing where possible, com-
pete where necessary, and confront if
left with no other choice.
Managing the China threat is a gar-
gantuan challenge. It is evident that a
Trump victory next year could throw
Biden’s complicated US-China balanc-
ing act into disarray.
The west’s third challenge is to find
solutions to the existential threats facing
humanity, starting with global warming.
Even without the revenge of geopolitics,
this would be a steep climb. But war in
Ukraine and growing tension with China
have made it far more complicated.
The global south is a key zone of com-
petition for influence between the US
and China. It is also the chief victim of
the fallout from Russia’s full-scale inva-
sion of Ukraine. The energy and food
price inflation triggered by the war and
the west’s subsequent sanctions on Rus-
sia have combined with rising US inter-
est rates to bring the global south to the
brink of a new debt crisis.
Taken together, these challenges
might seem insuperable. But the west
can do well by doing good. The more
relief that it can offer to the global south
— in the form of green energy financing,
debt relief, and pandemic resistance —
the better the west will fare on the geo-
political front.
The so-called new great game with
China is a zero sum contest. The best
way to limit China’s reach is for the west
to offer solutions to the mounting prob-
lems facing the rest. On paper, the path
of choice seems obvious. In practice, is
the west capable of taking it?
OPINION
Meghan L
O’Sullivan
At the foot of the Eqi Glacier in
Greenland in June, I watched ice formed
thousands of years ago drop into the
warming ocean. With this vivid
depiction of climate change in my mind,
I was disappointed that neither of the
conferences held last month to prepare
for the UN’s upcoming COP28 summit
had produced any real breakthroughs.
However, while the need for climate
action is rising, the stakes for COP,
perhaps counter-intuitively, look to be
diminishing. An underwhelming COP28
would be a missed opportunity but it
may not be a tragedy. Twenty or even 10
years ago, it was reasonable to hope a co-
operative approach could address
climate. But it is no longer a realistic
expectation — nor the most promising
route for progress.
For a generation, the co-operative
approach embodied in the COP made
sense. As carbon emissions transcend
borders, the best strategy was a co-
operative one; no one country can
address the challenge alone. For most of
the past 30 years, that logic was
consistent with the dominant
international dynamic. While there
were disagreements, there was an
absence of great power rivalry.
Today, we are in a different world.
Collaborative undercurrents of the past
have been replaced by great power
competition that has permeated across
the globe. US-China tensions pull at
countries from south-east Asia to Latin
America. The effects of Russia’s war in
Ukraine have been crippling for people
living thousands of miles from Europe.
The dominant dynamic is one of
competition, and even conflict.
The Biden administration and other
governments have hoped that climate
can be an exception to this new power
play — an island of co-operation
between the US and China in an
otherwise hostile sea. Yet, although
Washington and Beijing share deep
common interests in addressing climate
change, these interests have not led to
meaningful co-operation on action and
are unlikely to do so as their
relationship deteriorates further.
It is therefore not just folly, but also
irresponsible, to expect that a co-
operative mechanism like COP will be
the primary means to deliver climate
action in an era of global competition.
Without question, governments,
‘Collaboration has
been replaced by
great power
competition that
has permeated
across the globe’
business and civil society should make
the most of the opportunities that COP
and other such venues present.
However, governments should think
more strategically about how they can
harness the competitive dynamic
characterising global politics today to
achieve climate goals, rather than
hoping for a respite from it.
Already, elements of a competitive
approach to tackling climate change are
emerging. The US Inflation Reduction
Act was spurred in equal parts by the
desire to address climate and the
imperative to enhance American
Continued on page 2
2 ★
Eqi Glacier is actively dropping ice
Climate action
in new era
of power
competition
Continued from page 1
competitiveness in the face of Chinese
challenges. Similarly, the revival of
industrial policy around the world
reveals not only the recognition that
policy is required, alongside markets, to
expedite the energy transition, but also
the need to enhance domestic industries
and curb foreign dependencies.
The challenge for policymakers is to
further map out a competitive approach
for climate action.
A good next step is to consider climate
finance. Although there is not yet agree-
ment on how to tackle the issue at
COP28, good work is being done on how
to reform the global financial system to
expedite the flow of capital to develop-
ing countries caught in the crosshairs of
the energy transition.
Perhaps a more competitive approach
will yield further — or complementary
— results. The IRA has transformed how
the US aims to tackle climate change
domestically but allocates no resources
for a different policy internationally.
Washington and the governments of
other developed countries have the
opportunity and the imperative to rem-
edy this.
Building deep connections between
their economies and those of the devel-
Good work is being done
to expedite the flow of
capital to countries caught
in the crosshairs of the
energy transition
oping world through climate-related
investments will have geopolitical
advantages in an era of great power
competition.
Appreciation of this should lead to an
increase more concessional lending to
the global south for climate reasons —
which should expand the number of
plausible investments, and spur a signif-
icant uptick in climate-related projects
in the developing world.
Instigating a race between the US,
China, and other actors like the Gulf
States — and their private sectors — to
meet climate financing needs of coun-
tries in Africa, south-east Asia, Latin
America and elsewhere is what will cat-
apult us to a new level of climate action
— with or without a successful COP in
November.
The writer is director of the Belfer Center
for Science and International Affairs,
Harvard University Kennedy School of
Government
Contributors
Demetri Sevastopulo
US-China correspondent
Edward Luce
US national editor and columnist
Derek Brower
US political news editor
Mehul Srivastava
Cybersecurity correspondent
Steff Chávez
Breaking news reporter
Nathalie Kilby
Commissioning editor
Steven Bird
Designer
Esan Swan/Alan Knox
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China wins advantage with art of surprise
OPINION
Elizabeth
Economy
China has repeatedly caught the world
off-guard. Its Belt and Road Initiative
launched in 2013, its management of
Covid at home and abroad and, most
recently, its emergence as the world’s
biggest auto exporter and leader in
electric vehicles have all surprised
large segments of the international
community.
Typically, the element of surprise in
international politics relies on a
determined effort to deceive or do the
unexpected. But the Chinese
government has perfected the art of
surprise by default. The opacity of its
system enables China to routinely
shock the rest of the world and force
others to spend time, energy and
money adjusting their expectations
and policies in response.
There is no way to avoid all surprise,
Oil & Gas Putin’s war puts US supply at heart of
global trade and energy security, finds Derek Brower
US gains as
Russia ‘loses
energy battle’
W
hen a pandemic-in-
duced drop in demand
turned US oil prices
negative for the first
time three years ago,
then president Donald Trump implored
Russia and Saudi Arabia to cut produc-
tion to restore order to energy markets
— and spare US oil and gas producers.
Eventually, they agreed. But that
period of co-operation, and that US vul-
nerability to other oil and gas produc-
ers, seem like distant memories now.
The soaring fuel prices and energy cri-
sis triggered by Vladimir Putin’s
invasion of Ukraine last year have
upended long-established global energy
trading patterns. As a result, Russia’s
fossil fuel dominance in Europe has
been shattered.
The US oil and gas producers so
imperilled in 2020 have capitalised with
bumper profits and exports. And the
Biden administration has pushed ahead
with sweeping climate legislation
designed to break decades of western
dependence on fossil fuels. “The war put
energy security front and centre in a
manner people thought was no longer
feasible,” says Amy Myers Jaffe, a New
York University research professor and
energy expert. “The US came out ahead
with rising oil and gas exports and a new
multibillion congressionally mandated
plan to win in clean tech.”
Ukraine provides template for cyberdefence
Cyber security
Military tie-up with western
tech helps harden response,
reports Mehul Srivastava
In an unassuming office building in a
quiet suburb of Kyiv, young Ukrainians
in military uniform employ a shock-
ingly effective shield against Russian
cyber attacks: a combination of train-
ing, vigilance and the chutzpah of a dig-
ital Sparta to thwart a powerful enemy.
In one room sits an Israeli replica of
the industrial system behind Ukraine’s
hydroelectricity grid, which they use to
identify, and then fix, any hacking vul-
nerabilities. In another, a mass of
screens use US software to track Russian
cyber attacks in real time. But there is
also a break room, where couches and
beanbags mimic a tech start-up’s cul-
ture of work and play — in the hope that
the unit avoids burnout under the
relentless 24/7 cyber attacks.
But as Ukrainian networks, from tele-
coms to critical infrastructure like the
power grid, continue to withstand the
most sophisticated cyber attacks ever
seen, a false notion has taken hold: that
the Russian cyber-offence is as under-
resourced as its army, bogged down in
FINANCIAL TIMES
National Security
but we improve the odds by adopting a
comprehensive framework for
understanding China: one that pays
attention not only to its on-the-ground
reality, but also its long-term ambition;
not only to Chinese leaders, but also to
Chinese society; not only to the view
from outside China, but also to that
from within.
Chinese policy reflects a mix of both
on-the ground reality and long-term
ambition. The startling rise of China’s
EV sector, for example, was not an
overnight miracle. It was a long-term
national strategic priority.
In 1999, China put in motion targets,
timetables, and a range of central and
local government actions that
supported domestic clean vehicle
production and complicated efforts for
foreign manufacturers.
Progress was, at times, grim. Top-
down mandates yielded electric buses
without seats and cars without
batteries. As late as 2020, China missed
its goal of 5mn units by several million.
But, last year, China produced 5.8mn
EVs. Now, as China prepares to unleash
This advantage seems likely to last. In
the wake of the war, European and
Asian utilities have been signing deals to
keep buying American energy into the
2040s as they diversify supply. Even as
the US and EU try to accelerate the tran-
sition to clean tech fuels, American fos-
sil fuels are becoming more central to
global trade and energy security.
Decades of dependence on Russian oil
and gas made Europe’s response to the
invasion all the more stunning. Just days
after Russian troops entered Ukraine,
Brussels had unveiled REPowerEU, a
plan to slash imports of Russian gas by
‘The invasion coincided
with and amplified a historic
shift . . . to energy security’
the end of 2022, replace them before
2030, reduce energy consumption, and
“fast forward the green transition”.
Western countries followed up with
tough sanctions against the Russian
energy sector. Then, last September,
mysterious explosions destroyed parts
of the huge Nord Stream gas pipeline
system linking Russia and Germany.
By 2021, Russia had been supplying
about 150bn cubic metres of natural gas
inch-by-inch trench warfare with its
weaker, poorer neighbour.
In fact, Ukraine’s cyber defence offers
an innovative template for other coun-
tries’ security efforts against a danger-
ous enemy. Constant vigilance has been
paired with unprecedented partner-
ships with US and European private sec-
tor groups — from Microsoft and Cisco’s
Talos to smaller firms like Dragos —
which take on contracts to protect
Ukraine in order to gain a close-up view
of Russian cyber tradecraft.
Amazon Web Services has sent in suit-
case-sized back-up drives. Cloudfare
has provided its protective service,
Project Galileo. Google Project Shield
has helped fend off cyber intrusions.
“Moscow [has found] itself up against
not just Ukraine but a global network of
public and private cyber security pro-
fessionals — limiting the extent to which
it [can] exploit cyber space,” says US
think-tank the Center for Strategic and
International Studies (CSIS), which has
studied dozens of Russian attacks and
the Ukrainian response to them.
These companies have become de
facto military contractors. And the suc-
cessful, layered and collaborative
defence has yielded a model that
Ukraine’s allies, wary of Chinese
assaults, have now fully embraced.
“This is a new scale of collaboration —
its cars on the rest of the world,
automakers — particularly in Europe,
where the economic barrier to Chinese
EV imports is low — are left struggling
to respond.
But ambition does not always
translate into reality. Beijing planned
1,000 Confucius Institutes to promote
Chinese language and culture in
universities worldwide by 2020, but
there are just over half that number. Its
Thousand Talents programme did
recruit 8,000 scientists and engineers
to China from overseas during 2008-
2018, but few were top-tier — and only
390 were born outside China.
And, of course, Belt and Road has
been a complicated mix of success and
failure — cementing China’s economic,
political, and strategic influence in
some countries, while prompting
significant popular backlashes in
others.
For the international community,
though, there is also a price to pay for
overestimating China’s success.
Its government’s support for Russia
is evident: presidents Xi Jinping and
Tanking up: US LNG shipments to Europe have soared – Mark Felix/Bloomberg
per year to Europe, or about 40 per cent
of EU demand, says the International
Energy Agency. Last year’s collapse of
those supplies pushed gas prices to a
record high above €343 per megawatt
hour, sparking fears of an economic and
humanitarian catastrophe on the conti-
nent, and a rush for alternatives.
But, even with Russian exports to
Europe at a fraction of their prewar
level, the continent’s stocks of stored
natural gas remain plentiful. Prices
have retreated to pre-crisis levels. Mild
winter weather helped, and recession
cut demand further. It now appears that
“Russia has lost the energy battle” with
Europe, according to Fatih Birol, execu-
tive director at the IEA.
If so, the US is collecting some of the
spoils. In oil, western sanctions such as
the G7’s price cap on Russia’s exports
have shrunk its market share in Europe.
US and Middle Eastern exports have
filled the gap, while Russia has shipped
discounted barrels to Asia, instead.
“Trade flows have been turned on
their head with Middle East and the US
exporters the key beneficiaries,” says
Amrita Sen, head of research at consul-
tancy Energy Aspects.
The war has been a boon for the US’s
growing liquefied natural gas industry.
Until the invasion, China and other
developing countries offered US export-
ers of LNG the most promising markets.
Cyberdefence in a Kyiv suburb
not a procurement of vendors that help
government; instead, this time, it is a
voluntary involvement with geopoliti-
cal flavour,” says Yuval Wollman, a
former director-general of the Israeli
intelligence ministry and now president
of US-based security firm CyberProof.
“They are taking a political stand, to
some extent, with the company’s lead-
ership making a strategic decision in a
certain geopolitical context.”
That geopolitical context now has a
sprawling canvas, says Robert M Lee, a
US military and National Security
Agency veteran who co-founded Dra-
gos, a cyber security company that
Vladimir Putin in 2020 declared that
the “friendship between the two states
has no limits”. But we must not assume
there is no discourse or dissent within
Chinese society. A number of
academics have publicly denounced
Beijing’s strong support for Moscow.
And, as Russia’s internal challenges
and external failings mount, internal
pressure on Beijing to modify its
The startling rise of China’s
EV sector was not an
overnight miracle; it was a
long-term strategic priority
position may increase. The Chinese
government’s Covid U-turn
demonstrated how even a seemingly
unshakeable policy can be shaken
given the right domestic pressures.
Spending time in China is essential to
avoid surprises. Its political
environment may not be as welcoming
Now, Europe’s thirst for the fuel has
added more competition for supplies.
Most US gas is sold under long-term
contracts. But, as European prices
spiked last year, producers such as
Cheniere Energy eked out extra supplies
to sell in the spot market, while traders
diverted cargoes to Europe. US LNG
shipments to Europe soared 140 per
cent compared with 2021, to almost
2.5tn cubic feet, or about 70bn cubic
metres, according to the US Energy
Information Administration — equiva-
lent to about half the volume Russia
E
once piped to Europe.
uropean anxiety over energy
security has also improved
the longer-term outlook for
US LNG exporters.
In late 2020, France’s gov-
ernment pushed Engie to scrap a US
LNG deal amid concerns about the envi-
ronmental impact of shale drilling.
European utilities no longer appear so
concerned. Since early 2021, they have
signed up for US supplies equivalent to
about 100bn cubic metres a year, says
S&P Global. Engie is among the buyers.
In June, Germany’s SEFE — Securing
Energy For Europe, a state-run entity
— agreed with Venture Global LNG, the
newest US exporter, to buy gas for 20
years. Until Moscow’s full-scale inva-
sion of Ukraine, Germany had no need
provides defences for industrial sys-
tems, including power grids.
“We have seen the Russians pick out
key targets and get access across critical
sectors in Europe and the United
States,” he says. “[The Europeans] are
keenly aware of the position they are in,
by supplying natural gas, and they are
keenly aware of the threats that they are
facing from Russian actors.”
These skirmishes, which do not rise to
a level categorised as acts of war, are
increasingly common in the European
energy sector, he adds, as Russia
counters sanctions on its energy exports
and the still unexplained destruction of
the Nord Stream pipelines.
Experiences in Ukraine show that
successful defence is possible. In 2015, a
Russian cyber attack knocked out parts
of the country’s energy grid. Last year, a
similar assault on a power generator
was foiled. Microsoft technicians in the
US noticed a single computer behaving
oddly in an undisclosed location in
Ukraine and alerted engineers in the
Kyiv suburb.
The potency of Russian cyber aggres-
sion is still being parsed, but lessons
have emerged. During full-scale hostili-
ties, for instance, cyber attacks are of
limited value; blowing up a power plant
with a missile is cheaper and more likely
to succeed than a months-long subter-
Wednesday 19 July 2023
to foreigners as previously, but that
means more, not fewer, foreigners
should travel there. Analysts,
journalists, businesspeople and
students need to be in China to plumb
the complexity and nuances of the
country and its politics.
As travel to China opens up, leaders
in the US and elsewhere are taking the
opportunity to engage with their
Chinese counterparts and witness how
the country works. No good coach
would actively ignore the opportunity
for a first-hand look at the mindset and
playbook of a top competitor.
President Xi has set out an array of
grand-scale initiatives to promote
China on the global stage. Some will
come to fruition, some will not. But, by
looking at China through a range of
lenses, the international community
has the best chance of avoiding missed
opportunities and costly surprise.
The writer is on leave as a senior fellow at
the Hoover Institution at Stanford
University and author of The World
According to China
or infrastructure for LNG. Now, Berlin
has committed about $10bn to
increase import capacity. Three float-
ing terminals are in operation, another
three are due to launch in coming
months and more are planned — a stra-
tegic shift that will make the country a
major long-term competitor with
China and other Asian buyers for
American LNG.
The US is the world’s biggest LNG
exporter thanks to projects begun
before the war. Its lead will grow with an
ExxonMobil-led plant’s start-up next
year. Meanwhile, Europe’s renewed
demand for US gas is translating into
more contracts for future supply, too —
a signal that will give investors’ the con-
fidence to fund another wave of expan-
sion of LNG output, along the Gulf coast.
That will anger those concerned
about the climate impact of more fossil
fuel projects — given Europe’s ultimate
priority is to boost renewable energy
supplies and accelerate decarbonisa-
tion. For now, though, Moscow’s aggres-
sion has altered geopolitical priorities,
analysts point out.
“The invasion coincided with and
amplified a historic shift from the pri-
macy of decarbonisation to energy secu-
rity,” says Bob McNally, a former White
House adviser who now runs Rapidan
Energy Group. “For US exporters, it has
been a Godsend.”
fuge involving malware and hacking.
Instead, cyber is particularly useful
for more traditional espionage and for
disinformation and causing panic. One
Russian assault in the early days of the
war simply sent citizens a faked text
message from a bank saying their
money was safe, prompting a bank run.
Russia has since pivoted to so-called
wiper attacks, where phishing links
download a malware that simply deletes
all the data from a targeted network.
Most of the disclosed attacks have
tended to be on private businesses,
underlining the fact that industries are
as much a target in the cyber war as gov-
ernments. But, while they might have
expected — reasonably — that govern-
ments would come to their defence, now
they must erect perimeters against hos-
tile state actors. CSIS researchers — not-
ing that business tends to respond to
incentives more than generalised con-
cerns — say it is up to governments to
lead the private sector into substantive
investments in cyber security.
“The more incentives the US govern-
ment can offer for public-private sector
collaboration, the more likely cyber
defence will hold against future
attacks,” the CSIS researchers conclude.
“The ends and ways are clear: bolster
cyber defences through increased pub-
lic-private collaboration.”
Wednesday 19 July 2023
Munitions put into focus as stockpiles dwindle
Defence
War in Ukraine, a fragile
industrial base and slow
procurement hamper
supply, says Steff Chávez
J
ust as Russia’s full-scale inva-
sion of Ukraine has awoken
western defence officials to the
reality of hot war, so has it also
exposed the need to recalibrate
weapons procurement priorities — to
ensure that their militaries are prepared
for combat.
War games have identified munitions
— everything from bombs to bullets — as
an area of risk that needs urgent atten-
tion. They found, for example, that the
US could use some munitions, such as
anti-ship missiles, faster than they are
produced. And there could be scenarios
where it does not have enough of some
missiles to sustain a war — for instance,
in the Indo-Pacific region.
Experts have also identified a discon-
nect between the US and European
defence industrial bases, when instead
they could be complementing and bol-
stering each other in times of need.
This partly stems from the western
defence apparatus spending decades
prioritising efficiency and lower costs,
adopting the same sort of just-in-time
supply chain used by the auto industry.
That suited a period of relative peace
but, say observers, has cut the slack in
the system necessary to expand weap-
ons production quickly.
Tensions between Ukraine and its
western backers, which have spent a
combined $170bn on defence and finan-
cial aid for Kyiv since Russia’s invasion
last year, have now begun to emerge as
Ukrainian president Volodymyr Zelen-
skyy continues to ask for more and
more weaponry.
The war in Ukraine “reminds us
about the risks of being slow” to pro-
duce weaponry, says Cynthia Cook,
director of the Defense-Industrial Initi-
atives Group at US think-tank the
Center for Strategic and International
Studies. CSIS calculated in its Taiwan
war games this year that the US would
use its entire stock of long-range anti-
ship missiles — approximately 450 —
Nato must support Ukraine with
clearer road map to membership
OPINION
Mark
Sedwill
Last week’s Nato summit had three
tasks: consolidate support for Ukraine;
strengthen the alliance’s military
capabilities; and deepen ties with
Pacific allies in facing the common
challenge of China. Did it meet
expectations?
Russia’s invasion of Ukraine has,
paradoxically, strengthened Nato.
Allies have recommitted to invest at
least 2 per cent of gross domestic
product on defence. The accession of
Finland and Sweden, two significant
military powers (and EU members), to
the alliance will strengthen Nato’s
northern axis, and the — still fragile —
rapprochement with Turkey’s
President Erdoğan will do the same for
its southern flank.
When I was national security adviser,
I was often asked to name the most
serious threat. I always demurred. To
draw on a sporting analogy, we have to
play what is in front of us.
Today’s threat is Vladimir Putin’s
Russia. Yesterday’s was terrorism and
trafficking emerging from state failure.
Tomorrow’s inevitable challenge is
China, particularly as climate change
opens Arctic waters and brings Nato
and China into proximity in the high
north. What next? State failure in post-
Putin Russia? Uncontrolled artificial
intelligence? Resource wars in Africa?
These and more are possible, as are
unknown unknowns. The western
alliance, with Nato at its core, must be
ready for anything.
Alliance members must invest in
their defence industries so that
production of equipment and ordnance
can be surged when a crisis arises, and
ensure that increasing defence
expenditure is invested in real
capabilities, not eye-catching prestige
or nostalgia programmes.
Nato’s nuclear doctrine also needs a
refresh: we should signal to Russia that
any use of nuclear weapons anywhere,
not just in Nato territory, could be met
with force. Nuclear deterrence is
terrifying, but more terrifying is an
isolated, desperate autocrat misjudging
our resolve and pressing the button.
The other key lesson as a result of
within a week of conflict. LRASMs
would be valuable for striking “Chinese
naval forces and directly [reducing]
Chinese invasion capabilities”, it says.
Western nations supplying weapons
to Ukraine have recently had to replen-
ish their armament stockpiles and
recommit to military spending. But the
defence industrial base has struggled to
increase production, leaving experts
concerned about the west’s prepared-
ness for a potential conflict — for
instance, with China over Taiwan.
“The defence industry is so consoli-
dated that it can’t very quickly expand
to support a greater demand,” warns
Stacie Pettyjohn, director of the defence
programme at the Center for a New
American Security, a think-tank. “So
we’re slow and behind and don’t have
enough of anything” in munitions.
The US defence industrial base has
consolidated significantly since the
1990s — the number of prime contrac-
tors at the Pentagon has fallen from 51 to
five. As some parts are made by only one
or two suppliers, there is typically no
way to replicate production elsewhere.
Plagued by cost overruns and delivery
Existing inventory is ‘too
small to blunt an initial
invasion, let alone prevail
in a protracted conflict’
delays, the notion of reforming the US
acquisition process is perpetual, but the
challenges in doing so are “hard baked
into the system”, says Cook, with the
Pentagon, White House, and Congress
all having input on procurement.
The Pentagon tends to prioritise
big, expensive items such as ships, air-
craft and vehicles, “leaving missiles and
munitions with inadequate funding”,
according to a recent CNAS report.
Michael O’Hanlon, director of foreign
policy research at the Brookings Institu-
tion think-tank, says Washington is fac-
ing the “conundrum” of how to be “best
prepared for a war that comes out of
nowhere, that you need to fight — and
fight well — on day one”.
The CNAS report says existing inven-
tory is “too small to blunt an initial
No concessions: President Zelenskyy
Russia’s invasion of Ukraine concerns
Nato’s engagement beyond the Euro-
Atlantic. Climate change, the tech
revolution, ageing populations,
migration, the resurgence of the
petrodollar, and competition for raw
materials critical to the green
transition and modern economy are
already having a geopolitical — as well
as socio-economic — impact.
Much of the world is rediscovering
the appeal of non-alignment. So we
should reinvest in our relationships
with countries such as Brazil, India,
South Africa and in the Gulf. Although
many countries fear aggressive
neighbours and few support Putin’s
invasion, they also complain of western
arrogance and double standards. Old
friends we have neglected welcome
China’s investment and its boundless
appetite for their raw materials.
How Nato acts on Ukraine
will determine how others
align themselves in this era
of strategic competition
More private western investment in
the global south could be unleashed if
underwritten by political investment in
sustained and stable relationships. And
the welcome, if still tentative, efforts by
Washington and Beijing to stabilise
their relationship will be more resilient
if underpinned by a common approach
with the US’s European and Pacific
allies. The Vilnius meeting was a useful
step forward in that endeavour.
★ FINANCIAL TIMES 3
National Security
invasion, let alone prevail in a pro-
tracted conflict against China”, adding:
“To deter and — if deterrence fails —
defeat China, the [Pentagon] needs
large stockpiles of stand-off missiles,
maritime strike weapons, and layered
air and missile defences.” Buying more
long- and medium-range missiles is
essential.
“We can’t keep chasing shiny things,”
says Richard Spencer, a former secre-
tary of the navy under Donald Trump.
The US defence department has sig-
nalled its intention to refocus on muni-
tions after years of under-investment.
In its 2024 budget, it asked for $1.1bn to
fund 118 LRASMs, up from $550mn for
the 83 it requested the year before. It is
also seeking more than $30bn for muni-
tions, up 23 per cent from the previous
year, and $315bn overall to fund new
weapons.
Unlike fighter jets and ships, which
are purchased through multiyear com-
mitments, munitions are bought via
annual contracts and requirements
vary. But this volatility in Pentagon
munitions purchases means US defence
companies are reluctant to expand pro- The Scranton Army Ammunition Plant in Pennsylvania is a supplier of US artillery shells for Ukraine —Hannah Beier/Getty Images
duction capacity — because capital
investments for new factory lines can be Land-attack weapons receive the most attention US defence department has asked for $1.1bn
hard to justify to shareholders without to fund long-range anti-ship missiles
multiyear contracts.
Precision-guided munitions procurement
Anti-ship Air defence Land-attack Projected LRASM procurement (anti-ship missiles)
However, the Pentagon has recently
sought multiyear contracts for five pre- BARS: Quantity (’000) LINES: Cost ($bn) 150
cision-guided missiles — key munitions 80 8 2024 budget
Forecast for LRASM
that include the LRASM and the SM-6
(Navy)
anti-ship missile. Congress appropria- 60 6 100
tors appear less convinced, though, 2024 budget
threatening the viability of the revised for LRASM
approach as they hesitate on approval. 40 4 (Air Force)
US production capacity is under 50
strain from parts and labour shortages, 20 2 2023 budget (Navy)
too. And Max Bergmann, director of the
Europe, Russia and Eurasia programme 2023 budget (Air Force)
0 0 0
at CSIS, dismisses the notion that Euro- 2010 2015 2020 2025 2024 2025 2026 2027 2028
pean defence groups can fill the gap.
Source: Center for a New American Security
With 27 member countries, the EU has a
“really fractured defence industrial
base where the big European countries contracting centre at George Mason The US has also sought to maintain its interests” if the European defence land-
like Germany, France [and] Italy are University’s business school. dominance in weapons production by scape is weaker?
usually focused on selling to them- The Pentagon has historically focused frequently telling its Nato partners that Bergmann suggests that the US must
selves”, he says. on buying American for its own defence their Article 5, which stipulates a collec- make clear to its allies “that a strong
Despite close US intelligence ties capabilities, but McGinn argues that tive defence, is strengthened when European defence industrial base is
with about 10 countries including increasing international industrial col- other countries buy American-made important”, and take the “foot off the
the UK, Australia and Canada, such laboration, as part of a “build allied” weapons, says Bergmann. gas a little bit when it comes to our
co-operation is absent in the defence approach, should be at the centre of its “It’s good for our companies” when aggressive advocacy of some of our sales
industrial complex, says Jerry McGinn, weapons acquisition strategy in order to Europe buys US weapons, he says, “but abroad, particularly if there’s strong
executive director of the government boost production. what does that mean for our larger European competitors”.
But the summit fell short on
Ukraine. Given the G7 pledges of
support, diplomats will doubtless be
arguing already that better
management of Ukrainian
expectations in the face of American
and German caution over the road map
to Nato membership would have
enabled the summit to be seen as a step
forward rather than a setback.
Reeling from the humiliation of the
Wagner mutiny, Putin, instead of
feeling the screw turned, will have seen
a glimmer of opportunity in the Nato
frictions over this and scratchiness
about Ukrainian gratitude. Nor will
President Biden’s guarantee of strategic
patience worry him much, after the
scuttle from Afghanistan. If his forces
can dig in and stall the Ukrainian
counteroffensive, he will hope that
pressure will build on President
Volodymyr Zelenskyy to talk as well
as fight.
Putin will already be comforted by
the plans of some of US Republicans to
restrict support to Ukraine and,
presumably, hopes that the 2024
election will produce a president ready
to concede land for peace. President
Zelenskyy, however, will not cede
Ukrainian territory after such a fierce
struggle for national survival. And
Putin’s disregard for the Minsk
agreements between Russia and
Ukraine, signed in September 2014,
demonstrates that he would regard any
ceasefire deal as just a tactical pause to
regroup.
So Nato should not relax after the
Vilnius summit. Instead, in his last
year as secretary-general, Jens
Stoltenberg should secure three
commitments for Ukraine: more
weapons now to support this year’s
counteroffensive; long-term support
for developing the advanced
capabilities to repel and thus deter
future Russian aggression; and that
guaranteed road map to Nato
membership.
As governments across the world
wrestle with climate change, the tech
revolution, ageing populations,
migration and the retreat from
globalisation, how the western alliance
meets this challenge will determine
how others align themselves in this era
of strategic competition and thus who
writes the history of the 21st century. It
is a decisive period.
The author is a member of the House of
Lords and former national security adviser
4 ★ FINANCIAL TIMES Wednesday 19 July 2023*