Surveillance: Russia Sanctions with Usackas

and of course on the Bloomberg terminal. We don't need a history lesson right now, John, particularly with the guests that we have now, in all that he has lived in Lithuania, but needless to say, the speech, which I read every word of was absolutely extraordinary in translation. None

of this has been lost in translation. For Vigadishutzkis, he is the former European Ambassador to Russia, but beyond that has lived his Lithuania and he joins us this morning knowing that this is a short two twenties three miles across Lithuanian Vilnius to Colin and Grad. Ambassador, thank you so much for joining us. Robert Kagan Mike Robert Kagan last night in the Washington Post simply said the Baltic States are the most at risk by Mr. Putin's perception

of his Russian Empire, whatever that may be. Howard Risks this morning is Estonia Latvia and you're Lithuania. Well, we consent, of course because even being lumbers of NATO, the Mightists and the largest alliance military alliance in the world and members of the EU, our history taught us we can

not afford ourselves to be complacent. And of course, when the outcast Cold War is being rejected, and you know that that that the Bodhis and the twenty first century being written brutally and with a force, there's no to become glazing. And that's why we hope that one of the resolves nat TO and United States administration will demonstrate

by station i pulemanent troops in the Baltic States. When we see the moments of this weekend, the question has to be the application of NATO troops and indeed United States troops. Do you need to see a more active summoning of those troops to your Lithuania. Yes, we appreciate, you know, support what the United States has been in a very demonstrating recent visit of Secretary of Defense with Austin. However, you know Kremlin respects only US boats on the ground.

I know that from our experience, and that's what we what we expect pray and requests for the US to come to to rescue and prevent any kind of entertainments Gremlin may consider. So is it forced that ultimately is going to make a difference to latter where Putin forget about economic sanctions that he spent the past eight years trying to fortify his economy economy against the gaudis well.

I think it will require a jew strategic stamina and Western resolves, especially European resolves, to recognize what's going on. What puts In said yesterday, Um, I may sound politically incorrect is nothing new. He's been pursuing this narrative of assertation and aggressiveness since two thousand. Certain he plainly said that he does not consider Ukraine to be a normally even the state. It's part of Russia, It's part of

Russia nation. And you know, rewriting brutally the borders with disrespect to basic rules is showing experience, and that's what we hope that It will require a political stamina, will require troops of the ground, talking diplomacy but also sanctions as well well. And speaking of diplomacy, are are the Mixed A chords now dead? I think that I mean Putting the said it's it's it's over, and I I mean, you know, how how would you expect that to be written?

I think it means records are gone. UH, They've been shredded by by Gremlin. And now the question is how the West will will respond. I wish that the West will respond in a strategic terms. That's how what Putting understands.

And it will require sanctions most profound and severe, maybe freezing them before the summit between the President Biden and and Putin and then moving forward that would require that would require also a greater support to Ukraine because it's all about I mean independence and sovereignty of free nation. And the time is to come back to to the decisions by the West to extend membership Action Plan for Ukraine and invite for the negotiation talks into the EU.

That's how the europe Secluit architecture has to be built and maintained. Alongside we stop to putting on confidence building measures on arms controls. But it's only part of the much more complex puzzle UH and the litmus tests we are witnessing the most found in history. Ambassador Jeffrey Sachs and the financial Times this weekend. Of course, with all of its experience with gorber Schev and Yelsa, Russian professor sax as, Look, it's not appeasement, but there needs to

be a diplomatic negotiation. Do you fear or can you imagine that is part of a NATO diplomacy and frankly German, France and Russia diplomacy, that we would generate a strip of land from Russia across the Kalina Grad. Would that be a chip that we would have to give up with land across your Lithuania. Well, I think I'm sure that is not something what is being considered in Paris, Berlin or Washington, d C. In the wild House, we we trust, I mean the island, cloud assurances and the

security into Nadom. George W. Bush, which I was a party to host as ambassador of the Swing to United States at that time, he said in business anyone as as of now who makes the enemy of this wing will be the enemy of the United States. We trust those wits and we we we count on your support. We're not going to have you on the show with us this morning, said thank you for out us A

shouts cast. They form a EU ambassadors to Russia. Let us move on here to a discussion with Leslie Felconio, senior fixed income Strategies for UBS UBS Growth Wealth Management. We're through she could join us in the blur of news this morning, Leslie. The short order, is this international relations brings yield down? I believe I learned that's price up, yield down. Is this the ultimate by the dip or you run with the fortune of seeing price up, yield

down and fixed income? Well, I mean, I think this is obviously a short term flight to safety, but I don't think that alters actually the long term growth prospects that we're seeing, particularly for the US economy. And if anything, we would be more in terms of you know, selling the rally right now given our outlets that we anticipate, you know, at three point eight percent real GDP that

the consumer is still strong. So you're gonna have this flight to safety and sort of these pockets of vulnerability. And you know, as we know, we have this kind of risk, and we have this kind of short term bouts of volatility. You know, investors have a tendency to focus on downside side opportunity. Fold in here, UBS Economics did fifty basis did fifty point rate rate increase? Did

that drift away this weekend? I think the probability is has become increasingly low, even not just just just meet this weekend, but even you know, before this week and listening to some of the FED rehetoric, I mean, we don't think that they're going to start off at the fifty basis point rad hike. I mean, I think some of the FED rhetoric last week actually showed that. I mean, it doesn't mean that they won't do fifty later on, but to start off with that might be a little

bit too extreme. And look, I mean, they're still buying bonds, you know, they're still increasing their balance sheet, and I think they're going to wait to see exactly how the base case effects turn in terms of inflation the second half before they do such an aggressive move. Well, speaking of aggressive moves, obviously the West is reacting to what we saw from about Vladimir Putin over the long weekend.

We're now hearing from the UK's Boris Johnson that the UK will sanction five Russian banks as well as individuals. When we look at the potential implications for the fixed income market of this geopolitical crisis Leslie, and specifically the energy complex. What's the read through and to break evens

inflation expectations and therefore monetary policy ultimately. Well, you know, it's interesting because if you look at things like the five year factored forward swap, it's like a two point three percent Even if you look at the break even today,

we're noting this big rise in inflation expectations. I think it's a component, but I don't think it's going to be a driver, and I don't think it's going to alter necessarily the fence path, which we do believe will be around five right types by the end of the year. It will probably be a big gradual of twenty five the data that we know right now. But I don't think this is going to have a need jerk reaction where the FET has to become even more hawkish because

we're seeing rise in energy prices, all right. So there's obviously the break even component, Leslie. There's also the real yields component. Do we reach positive territory will they stay negative? Well even listen, I think five year real yields are very native. I mean, the tenure we've had a correction

with we're down negative rate fifty right now. We probably go to plus or minus twenty, but that five year real yield has remained stubbornly negative, and even though nominal yields in the five year side had gotten almost a two percent, which by the way, we don't think it's going to get that much higher. However, we do think those break even inflation expectations are going to fall from that two point nine level that we see right now, probably closer to that five year five year swop about

two point three. So we are expecting really yields to Risehether or not they turned positively this year is a question mark, but they could be close to it. Leslie, thank you for paying with us. What a busy morning for everybody. Leslie found County on there of UBS Global Wath Management joining us now to give perspective here, particularly for those listening in Europe. And Merita Son joins as

founder director of Research at Energy Aspects. I must say she's just fabulous at the dynamics of supply and demand in energy. Emerita. My fault is I don't spend enough time talking about natural gas. What can Mr Putin, Mr Medvedev do to change the dialogue of natural gas in Europe. Well, I think natural gas, of course, you know, it's it's been very prominently featured in in the media last year,

particularly because of North Stream too. But I will say Putin has come out even just a few hours ago and said that gas supplies will be uninterrupted, and I think that has been one of the big fears in the market, whether because of either Western sanctions or because Russia um decides to turn off both oil and gas supplies to Europe. But they have never done that before, including during the Cold War. So again I think Russia is not going to be the one acting on that

and using energy as a weapon. But of course we've seen the headlines with Germany halting the process, which which you know, which was one of the things we were expecting should the should the tensions escalct But you know, John emailed me a Sunday morning. Emread about five am the Netherlands natural gas code t ZT one commodity And the bottom line is it was cheap and then it became expensive with a spike up here, and it's come down and been managed. Who's managing the price of natural

gas in Europe right now? The recent natural gas prices have managed to come down in Europe has actually been thanks to Asia, because Asia had bought a whole lot of ellergy cargoes if you remember, not this winter, the prior winter was very very cold, they were caught short. So then as a result of them over buying and the weather was fairly mild, they had some access which they then managed to send over to Europe. That is

what has helped gas prices come off. But fundamentally, I mean we saw record high TTF prices, which is the price you're referring to last year. Those fundamentals haven't changed. Demand remains very very high, and also supplies, regardless of what's going on geopolitically with Russia, Russian supplies into Europe have remained very low and we weren't even expecting north Stream to to come online till November of this year anyway,

so it is still a very tight market. And reason how did you interpret the language from Chancellor Shelts earlier, was that a man putting things on ice or a man killing it. Well, look at the West has to be seen to be doing something right, and we've maintained our view that there will not be sanctions on energy supplies, prompt energy supplies, whether it be for oil or for gas.

Um Europe is just way too dependent. Means thirty five percent of gas European gas comes from Russia, thirty eight and thirty nine percent of oil and diesel comes from Russia. So it's it's just going to hurt the West a lot more, especially with crude close to hundred dollars and gas still very very high. Yes it's off the record highest, but it's still high. So um they need to be doing something, but it's going to be around technology sanctions,

potentially some bank some individuals being sanctioned. And again this was something where yes north Stream too, it wasn't supposed to be coming online tomorrow right it is still further down the pipeline, and it was something along the lines of future projects that could be affected and north Stream to falls under that category. And Rachel, we've got a decent understanding of where we are now and trying to work out where it will be by the time we

get to the end of the year. And Redwards, our colleague good friend here at Blombergh, caught up with Russell Hardy, the chief executive officer AVITZL Group and he said on the demand side, the one d Emberil number is probably going to be excited this year. This was on crude. He went on to say demand is going to surge in the second half, and so we understand how tight things are now, how tight do you think they'll be by the time we get to the end of twenty two.

I think the couple of things I would say where we could get some extra supplies. Iran is of course one of them. Potential sanctions lifting in the coming weeks, and you could get more oil out in the second half of the year. US producers again there's still being very disciplined, but potentially you could eke out a little bit more from them. But Russell Hardy is exactly right. We've been talking about this for months now that there

is a lot of pent up demand. Demand is going to be rising, particularly in Asia, and we've talked about this on this show before. Asia just hasn't been able to come out unlike the West over the last few years because of COVID restrictions. So they are itching to

fly and just get back to a normal life. So there is a lot of demand that we are going to see, particularly in the summer and the only way to then solve for this market, because you're not going to get much incremental supplies, is going to be through high prices because demand growth has to moderate. How much higher is one hundred dollar oil and above one hundred

dollar royal sustainable aim riada Um. Well, if you think about back to two thousand and eight compared or if you do it on an inflation adjusted basis, oil prices need to be thirty higher now than in two thousand and eight if you are to have the same impact on demand. So yes, it could go significantly higher before you start having an impact on demand. And Tom's going

to like this because it talks about elasticities. People have actually saved up a lot more money and governments are handing out a lot more checks, which means income elasticity right now is a lot stronger than price elasticity. So even at hundred dollar royal, even potentially at hundred twenty dollar oil, you don't see the slow down that you've seen in the past. We've already on our numbers. Oil

demand is already above hundred million barrels per day. We will surpast two thousand and nineteen levels in the second half of this year, and we will be effectively growing by over three million barrels per day this year. When does supply and demand then come back into balance or more of a balance, and start to change that equation. How long is it going to take? I think this is not a short term thing, you know, a hundred

dollar oil. I mean we've been calling for a hundred pluss dollar oil between twenty three and twenty six for a while, and that is precisely because this isn't a short term phenomenal show. You know, you're not going to get hundred dollar roil necessarily like this year on a sustained basis, geopolitical risk, socide. But this is ultimately about under investment. We've had years of underinvestment and now it's getting much much worse due to all the narrative around

energy transition. But demand simply isn't reacting. If anything, demand is actually rising quicker than anyone had expected. So therefore there's a huge policy mismatch. Governments are coming out and talking about, you know, at the end to fossil fueld without actually doing anything to reduce demand. It's going to be here for a few years. You know, it really shows up John and I got ratios in my head and reader said that was brilliant. The responsiveness is given

a higher incomes. It what barrel size, emery decent? Do we actually click in demand? Ankst Is it a hundred and thirty dollars a barrel? I don't think we know the answer quite yet, simply because of the amount of income and savings we've got in the economy. But yes, I would say it's not lower than one twenties, probably around the number you talked about, maybe even slightly higher. I'm ready to send thank you of any aspects. Thank

you very much. Anthony Capiano joins us right now on your vacation plans, and I know you can't get a room anywhere. I know the drill of course, writing her as chief executive officer Marriott International, I want to span your two price points and a hundred dollars a night out to five than some nights and these are we don't need to spend a lot of time on it

because Kaylee's got legitimate questions. There's big Jet TV stopping the world on Friday with the storm and London, and the next day he's from the roof of a Marriott Courtyard at Heathrow. Tell us about how you run the airport's big jet TV standing on. What's it like we're having the Courtyard franchise at a lower price point. Well, Tom, first of all, thanks for having me. It's it's one of the things that I love about our portfolio. I get questions all the time with thirty brands, do you

have too many brands? What's the right number of brands? The ability to offer that breadth of price points with a hundred and sixty million loyalty members, we feel good about the ability to offer that breath for every one of our customs. Let's go the other way to the Ritz Carlton in Moscow, which is five minute summer night, highest rated hotel in the country. How do you see and perceive your business in Russia? Given all that's going on, how are you going to handle the Ritz Carlton in

the coming weeks. But we've got about thirty hotels in Russia to hotels in the Ukraine as we sit here today, with a handful of deals in both entrees in the pipeline. Like every country we do business in, UH we are about safety and security for our guests and our associates. As we've watched the recovery from the pandemic, that recovery has largely been fueled by steady improvement in consumer and

traveler confidence. Political instability, as we've seen over the last forty eight hours, certainly has the potential to rattle that confidence, so we're watching it closely. Well, let's tie to those two stories together in terms of what we're seeing on the geopolitical front and what we're seeing with the consumer. Obviously, one of the concerns is that if you have repercussions on Russia, it's going to disrupt energy flows that is going to be more inflationary. How does that translate into

the discretionary spending of a US consumer. Are they going to be spending as much on travel and leisure in the face of some of these inflationary pressures. Well, I thought it was interesting right before I came on, I heard your your prior speaker talk about competition for consumer discretionary a spending and more and more folks that have been effectively locked down for the last two years thinking

about spending on travel and tourism. Uh, we watch fuel prices, particularly for leisure travel in the US, but I can tell you even last summer, despite some variability and fuel prices, we didn't see any meaningful dilution of the of the velocity of of leisure demand recovery. How far do we still have to go in that demand recovery? Tony Well.

In our fourth quarter earnings call, we talked about the fact that globally, revenue per available room was about nineteen percent behind where we were fourth quarter two thousand nineteen, But that was a forty point improvement from what we saw in the first quarter of last year, So we are seeing slow, steady improvement. Even in December of last year, RevPAR which is the acronym we use, was only down

eleven percent. Now, we did see a bit of a hiccup from the O Macron variant, but we're already back to booking volumes ahead of where we were before Oh macrons started. Financier question everybody I see, and of course if it's good numbers, everybody puts at the top of the press release, and if it's not so good numbers, it goes down. Do your compare and contrast pre pandemic right now, which ratio matters? So you measure back to

two thousand nineteen. Well, I think rev par matters, I think margins matter, and I think unit growth matters, which are among the metrics just because the time go to margins right now, because that's the heart and soul of it, isn't it. Well, we had to make some really tough decisions through the pandemic. Above property, we caught about thirty

percent of our costs. We've seen a several hundred basis point improvement of margins at the property level, and we as we see pricing power return, we think we can preserve the vast majority of those margins. How much of that on the cost side, Tony is related to labor?

What issues are you seeing there? Well, we are certainly, particularly in the markets where demand has recovered most quickly, we are seeing some wage pressure, as you might expect, But as you also might expect, that's where we're seeing pricing power uh the strongest. And we think even with wage inflation, some of the efficiencies we've identified, we can

preserve the vast majority of those margin improvements. The airlines, now I can report personally in my travel agent, Kayley lines is are stupid, crazy busy pack for the summer. What is this summer going to be like I think it's going to be an all time record. I think leisure demand has not slowed even a bit since the

start of the recovery. And maybe the most notable thing to think about, so much of that recovery around the world has been driven by domestic travel, and as international borders start to open, you've got whole new segments of leisure travelers that are gonna be traveling cross board. I try to get a Barriott slot in Paris and I had to book in Leon just to get in there. I mean, that's a joke. It wasn't that far away. He's encyclopedic because that's six hotels in Leoni's thinking about

right now, it's going to be a boom summer. Thank you, Tony, thank you so much coming by it. Thanks for having early visit. But far more importantly Tony Capiano there on the distance from Mary Courtyard to the Ritz Carlton as well. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg.