Russia sanctions could splinter global financial order, says Citi CEO

Economic sanctions imposed by Western countries to punish Russia for its invasion of Ukraine is prompting some of Citigroup’s international clients to explore new ways to conduct trade and finance, according to the bank's chief executive.

Jane Fraser, who was speaking as a panellist at the 2022 Milken Institute Global Conference in Beverly Hills, California, said that in the Middle East “you hear the clients there talk about the fact that they don't trust the western financial order to put all of their eggs in that basket going forward, that they are going to be looking at other places.

“You have to anticipate the splintering of the old global financial order, the acceleration of new venues.”

As the most internationally diversified of the big banks based in the United States, Citigroup provides trade finance to corporations and wealth management to billionaires around the world. The group is currently in “active dialogue” on the sale of its Russian retail operations.

“This weaponisation of financial services is a very, very big deal,” said Fraser, who was appointed Citi’s CEO in March 2021. “It will probably accelerate the recognition of the emerging markets and the development of their own domestic capital markets.”

Fraser also reported that trading desks are dealing with volatility levels that markets last witnessed more than a decade ago. Traders are coping with inflation that has reached its highest level in a generation and investors who are increasingly worried about the likelihood of a global recession, she told delegates.

Australia lifts interest rate

The Reserve Bank of Australia (RBA) has increased its official cash rate by 0.25% - from 0.10% to 0.35% - and signalled that further increases are in the pipeline.

The increase, the first in more than 11 years, was more than expected. The RBA had cut the rate to a record low of 0.10% in November 2020, in response to the Covid-19 lockdown and its impact on growth.

“The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic,” RBA governor Philip Lowe said in a statement.

“The economy has proven to be resilient, and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up.

“Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

The rate increase was also the first to be announced during an election campaign since November 2007. Markets had pencilled in a smaller hike of 0.15 percentage points ahead of polling on 21 May.

Survey reveals expected boom in non-fungible tokens

Following a recent announcement from Goldman Sachs that it is examining non-fungible tokens (NFTs) and the tokenisation of real assets, a survey of Asia Pacific investors suggests a growing appetite for NFTs.

Goldman Sachs’ head of digital assets, Mathew McDermott said last week: “We are actually exploring NFTs in the context of financial instruments, and there the power is actually quite powerful. So, we will work on several things.”

Since 2014, NFTs have played a role in the cryptocurrency industry, with growth in their demands and role accelerating in 2020 and 2021. NFT trade volume almost tripled in January to US$6.86 billion against US$2.67 billion in December 2021.

The survey by digital currency market analysts CoinGecko suggests that NFT business volume could rise to as much as US$800 billion over the next two years. More than half of the respondents agreed that they foresee a crucial role for NFTs’ business in the future and have adopted what has become known as the ‘HODL’ (hold on for dear life) investment strategy. 

The survey sample comprised 871 investors from the APAC region; 72% of whom said that they already own one NFT and more than 50% owning five or more NFTs. Nearly nine in 10 NFT investors surveyed were no older than 50, with 43.6% aged between 18 and 30 and 45.2% in the 30 and 50 range.

“The metaverse sector is projected to move around US$800 billion over the next two years, and gaming appears to be the most likely entry point into the NFTs market,” the report states. “Our respondents have indicated that ‘flip and earn’ was the primary motivation behind their NFT purchases.”

A study reported by researcher TeleGeography found that 60% of traders preferred personal computers for NFT minting and trading. The report comments: “This can be attributed to the ease of using a PC to navigate time-sensitive NFT mints/trades.”

Floor price was the main factor that 38.5% considered when buying NFTs, followed by 29.7% considering rarity (rare traits and attributes). Asked about their reasons for owning NFTs, 50.9% cited current/future utility; 23% strong community; and 21.8% artistic value/attachment.

While most of the market investors said that they are not willing to sell NFTs at the moment, more than 50% of respondents reported that they have adopted the HODL investment strategy and are waiting a future time when NFTs could get a higher value in the market.

Asked to identify the leading chain for NFTs, 46.3% of respondents named Ethereum, with Polygon a distant second with 13.8% followed by Solana with 13.5%, while the other 26.4% went to smaller smart contract platforms. Marketplaces data shows OpenSea is the major player in the trading business with 58.7% market share, Solana has just over 10% and LooksRare less than 4%.

ESG and sustainability move further up UK corporate agenda

Environmental, social and governance (ESG) issues and sustainability continues to climb up the corporate treasury agenda for UK businesses, according to a new report. It notes that both features in the corporate debt capital structure are increasingly better understood while incorporating them in financings becomes less onerous.

In the latest annual Corporate Debt and Treasury Report, published by UK law firm Herbert Smith Freehills and the Association of Corporate Treasurers (ACT), 71% of respondents said they expect to include ESG or sustainability features in their next financing, reflecting a steady increase over the past two years (50% and 65% in 2020 and 2021 respectively). Sustainability-linked loans, mentioned by 47% of respondents are the most likely to be implemented followed by sustainability-linked bonds and green bonds, each at 28%.

The report captures the trends and outlook for corporate debt and tracks the growth of ESG and sustainability in corporate debt finance. Asked whether they consider that ESG and sustainability has become the norm in their principal debt financings, respondents were divided with 53% saying no and 47% yes

“ESG and sustainability continues to be the topic of treasury conversations,” commented Kristen Roberts, finance partner at Herbert Smith Freehills. “The general trend towards ever greater proportions of debt containing ESG or sustainability-linked features continues as the barriers to engaging in ESG and sustainability-linked financing subsides.”

The positive economic outlook reported in 2021’s research has receded with 70% of respondents this year citing a neutral to negative outlook. The threats of inflation, spiralling energy costs and ongoing supply chain issues were highlighted as headwinds. The risk of the Brexit UK-EU trade deal unwinding due to the operation or potential suspension of the Northern Ireland protocol was also raised as a potential concern to continued business investment and overall business health. 

“While the outlook may be less positive, the challenges facing the market are not expected to curtail the supply of debt but may impact on terms, pricing and the timing of raising debt,” added Roberts.

Comparing their organisation’s expenditure to last year, over 53% of respondents said they plan to increase spending on dividends, reflecting shoring up of balance sheets during the pandemic and the healthy bounce-back of businesses. Nearly half (48%) suggested greater capital expenditure possibly due to deferrals during the Covid-19 pandemic and the availability of super deductions for capital allowances, followed by working capital at 42%, which could be attributed to concerns around ongoing supply chain pressures.

Million-dollar boost for US real-time payments

Real-time payment (RTP) is expected to gain major traction in the US, following the recent major increase in the maximum limit applicable per transaction.

RTP provides immediate settlement of funds and instant payment notification for consumers and businesses of all sizes, meaning that companies are no longer required to wait days for a payment to settle and funds to flow into a bank account. RTP payments are less expensive than wire transfers, and unlike a wire, can be sent outside of banking hours.

The RTP network was originally launched by operator The Clearing House (TCH) in November 2017 to bring real-time to the US and have already begun to transform the corporate treasury function, delivering a more efficient payment experience for businesses, their customers, payees, and employees. Last month TCH announced that it would increase the value limit for payments on the network from US$100,000 to US$1 million. The change took effect from 18 April and will open up more opportunities for CFOs and treasurers who are considering RTP as a way to save time and money in their payments processes.

TCH said the increase comes as the transaction volume and number of users on the network continue to grow. “Increasingly, corporate users are looking for ways to transfer higher value payments for various use cases, including real estate closings, commercial loan funding, merchant settlement, supplier payments, and more,” the company announced on its website.

“Financial institutions and their customers have asked for the ability to send larger value RTP payments for a variety of payments needs, and we are responding,” said Jim Colassano, senior vice president of product development for TCH.

“Under the new system, depository institutions using the RTP network must accept payments up to US$1 million. However, individual participants can impose a lower value limit for payments they originate,” TCH added.

The tenfold increase comes one month after a similar move by the National Automated Clearing House Association (Nacha), which approved an increase in the same day ACH per-transaction limit to US$1 million from 18 March 2022. Introduced in 2016, same day ACH has grown in popularity and the upper limit had previously been increased in March 2020 from US$25,000 to US$100,000.

The Association for Financial Professionals (AFP) commented that the new RTP limit of US$1 million will be beneficial for business-to-business (B2B) payments, as the higher limit allows larger payments to use the same-day ACH system at a lower cost and with comparable remittance information to Fedwires. The new limit will also benefit other payments, from insurance claim payments and payroll funding, to tax payments and more.

EU indicates SWIFT to expel more Russian banks

More Russian banks are set to be evicted from the SWIFT payment network, according to a report from the AFP news service, which names European Union diplomat Josep Borrell Fontelles as its source.

Borrell, who holds the title High Representative of the European Union for Foreign Affairs and Security Policy, is quoted as saying: “In the banking sector, there will be more Russian banks that will leave SWIFT” and that a fresh EU sanctions package over Russia’s invasion of Ukraine is set to include more of the country's banks being expelled from the global network.

The news comes ahead of further moves this week by the European Commission, which is expected to propose the sixth package of EU sanctions against Russia in response to the invasion, including a possible embargo on buying Russian oil.

Ukraine's foreign minister Dmytro Kuleba, who met the EU representative on Sunday, insisted that the bloc’s next round of sanctions must include an oil embargo on Russia.

Meanwhile, Russia has recently been touting an alternative rouble-based payment system called the System for Transfer of Financial Messages (SPFS), which was set up in 2014 when Russia’s annexation on the Crimea triggered an earlier round of sanctions. In late April, the country's central bank said it would start keeping the names of participants confidential.

China’s Cross-Border Interbank Payment System (CIPS) — which processes payments in Chinese yuan — also has potential to provide an alternative to SWIFT. The system has an expansive network of 1,280 financial institutions, according to Peter Keenan, the co-founder and CEO of Apexx, a payments provider that used to work with Russia's domestic Mir payment card and compares against SPFS’ much smaller network of 400 users.

BNP Paribas sets out emission reduction targets

BNP Paribas has set out climate change targets for the companies that it finances in the oil, gas, power and car production sections

The French bank said that for power and utility companies in its corporate portfolio, it would reduce financed emissions by 30% relative to their power generation, using 2020 as a baseline and 2025 as a deadline.

BNP Paribas added that by 2025 it would cut credit exposure to the upstream oil and gas industry by 12% and seek to reduce its credit exposure to the upstream oil industry by 25%. However, upstream oil and gas and refining represented only 1.3% of its total credit exposure at the end of last year, it stressed.

The bank intends to increase its pressure on the oil and gas companies that lack transition strategies compatible with limiting the global temperature rise to 1.5 degrees Celsius. From this year onwards, it will no longer finance or invest in companies with more than 10% of their activities in tar sands and shale oil and gas.

Also on Its embargo list for financing and investment are oil and gas projects and related infrastructure in the Arctic and the Amazon regions.

BNP Paribas expects the share of electric vehicles in its portfolio to reach more than 25% in 2025, compared with just 4% two years ago, it said. In addition, the bank aims to gradually expand the targets to include capital-market activities such as helping companies issue stocks and bonds.

Goldman Sachs issues first bitcoin-backed loan

Bitcoin, widely regarded as the best-known cryptocurrency, has received a further boost after Goldman Sachs issued its first bitcoin (BTC) backed loan to a borrower.

A BTC-backed loan allows the asset holder to borrow fiat currency such as dollars or rupees after fronting-up their BTC as a collateral.

The global investment bank major permitted a customer to receive a cash loan backed by BTC as collateral for the first time with the loan made by the secured lending facility of the bank.

The loan is viewed as a crucial step toward broad scale adoption of cryptocurrencies by Wall Street. Crypto-backed loans are becoming more ubiquitous in decentralised finance (DeFi), but traditional institutions see crypto-backed loans as an alternative method to access increased capital.

Loans of this type can be riskier than regular asset-backed loans given BTC’s underlying volatility. If the BTC price declines too far the borrower may have to increase collateral to avoid being liquidated.

“We recently extended a secured lending facility where we lent fiat collateralised on BTC with BTC being owned by the borrower,” a Goldman Sachs spokesperson confirmed. “The interesting piece for us was the structure and the 24-7-365 day risk management”.

Goldman Sachs is understood to have begun researching the potential of BTC-backed loans in late 2021 and as reported above the bank also confirmed recently that it is seeking to tokenise real-life assets as non-fungible tokens (NFTs).