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14 September 2023

How sanctions created new markets

Sanctions on Russia were meant to stop trade and coerce Vladimir Putin into a U-turn on Ukraine. Instead, Russia continues to bide its time in Ukraine, and Russian oil in particular continues to flow into world markets. The buyers may have changed and the way markets operate. What was transparent before all of a sudden turned opaque.

The west did also not completely cut themselves off from Russia despite all rhetoric. Western firms and banks are still operating in Russia, even if the numbers have dwindled. Russian gas is still flowing into Europe, albeit at much-reduced volumes, and could even increase thanks to a recent deal between Bulgaria and Turkey. Russian crude oil is still exported into the world, avoiding sanctions by trading below the price cap of $60 per barrel. Western companies can even make profits thanks to the war in Ukraine. It is not only the military equipment industry which is booming thanks to the war.

Elisabeth Braw, writing for Foreign Policy, has a cracking story about how Greek shipowners made a fortune selling their oil cargo ships second hand. Since the war in Ukraine started, Greece sold 290 ships. They do not sell at a discount. On the contrary, the story gives examples of where the ship price has doubled or tripled compared to the original price the Greek owners paid. In markets like these where money is not a limiting factor, tankers are a desired object that cause a hike in prices. A whole new tanker market has come alive as a result of the war.

The buyers are much more mysterious than the sellers. Companies based in the United Arab Emirates bought most of the tankers, followed by buyers in China, Turkey and India. In 2022, a stunning 864 new maritime companies with an association or link to Russia emerged according to S&P Global Market Intelligence. Sometimes there is not even an email address linked to those companies. The role of the UAE is not surprising, as Dubai has emerged as the new Geneva for Russian oil trading companies. China and India both have stepped up their imports in Russian oil and need tankers for transport.

But those tankers, and cheap oil, come at the peril of predictability. Second-hand tankers enter the sea with unclear insurance, and take roundabout routes, and use technical tricks, to avoid being spotted. What happens if one of those tankers leaks or catches fire may not be a concern in the sale. Once such an incident occurs though, it has implications not only for people onboard, but for the oceans and maritime wildlife.

What is happening with Russia should not be a surprise to anyone. The tricks it is using are right out of Iran's sanctions-avoiding playbook. But Russia produces roughly three times as much oil as Iran does on average, meaning that it has a materially larger impact. 

13 September 2023

Two geezers meet

When Eurointelligence got going 17 years ago, Gerhard Schröder and Oskar Lafontaine had already disappeared from the mainstream political scene. Their feud was one of the most consequential political divorces in modern German history. It split the left, and paved the way for 16 years of CDU rule. It is remarkable now that the two are publicly staging their re-union. We would not be writing about this if it were not for the fact that the two are united in rejection of Olaf Scholz's support for Ukraine, and the fact that Lafontaine's wife, the politician Sahra Wagenknecht, is about to launch a new party to exploit that very sentiment.

FAZ reminds us this morning that Schröder and Lafontaine used to be political allies back in the 1970s, united in opposition to Helmut Schmidt's support for the stationing of US cruise missiles on German ground. They both became SPD state premiers during the reign of Helmut Kohl, but fell out over economic policy in early 1999. We doubt they have spoken much in the intervening years. But the two met for five hours in Lafontaine's house in Saarbrücken on the occasion of Lafontaine's 80th birthday. Schröder, who will turn 80 next year, also published an open letter of congratulations, thanking Lafontaine for years of friendship.

What unites the two today is exactly what united them in their youth: opposition to Nato and the wish to reset relations with Russia. Both of them have alienated themselves from their former parties - two parties in the case of Lafontaine, who was party leader of the SPD, and later the Left Party. Neither of them are seeking high office, but that won't stop them from wielding power. The AfD is currently the only party that serves those who oppose German arms supplies to Ukraine. Naturally, neither Schröder nor Lafontaine would ever align with the AfD. Nor would Wagenknecht. Bild reported on the weekend that the Wagenknecht party is about to go ahead, though there has been no official announcement yet. We believe that too, with Schröder and Lafontaine acting as godfathers in the background. Wagenknecht defines her main political adversary as the Metropolitan centre-left: modern Greens and Social Democrats who are pro-Nato and pro-EU. 

The main hope of the Scholz government had been for the Left Party to fail to clear the 5% hurdle at the next elections in 2025, and for the AfD to run out of steam. The AfD has been getting stronger, and if a new Left Party were to rise from the ashes of the old, that calculation would turn out to be complacent. We see the electoral potential of the two extreme parties at around one third of the electorate. This is why we are not dismissing the get-together of these two political geezers as a celebration of the good old times.

12 September 2023

EU's Africa policy has failed

How should we understand the series of coups in Francophone West Africa? A contagion of seemingly unrelated events? What does it mean for the EU?

The immediate effect is that it is de facto ending the EU’s foreign policy doctrine of combining security and development. It produces political turmoil in African countries just when stability is most needed to combat climate change. And it opens the scene for Russia and China to enter as an alternative partner to Europe.

The coups in Mali, Niger, Burkina Faso, Guinea and most recently Gabon are all different in kind. In Gabon, a political dynasty is coming to an end after half of a century, and after manipulating the polls one time too many. In Niger, a democratically elected president has been overthrown by the military in their quest for power and money. The two cases could not be more different. Yet the common denominator is poverty and poor democratic institutions.

Mo Ibrahim, one of Africa's most informed and listened-to voices, asks: why is it that a continent ten times the size of India, three times the size of China, with 18% of the world's population and 30% of its mineral resources, remains by far the poorest continent? This question is what agitates a new generation, fed up with lecturing from the west that has not produced any lasting results. They will have to find their way forward, and the west needs to take a back seat.

Europe has to do a rethink in its foreign policy. The French logic of military presence as a way to influence policy there no longer works. French troops are being kicked out and the new leaders refuse to be told what to do. French-bashing is thriving in Francophone Africa. Dominique Moisi describes the dilemma in Les Echos as one where on the one hand a continent rejects its own responsibilities by passing the baton on to former colonisers. On the other hand, the west is refusing to understand that in Africa the past is still present and always will be. Those past traumas of slavery, exploitation and genocides will not simply heal by ignoring the past. Africa has been the object, not the subject, of many of our conflicts and economic exploitations over past centuries. It is likely to become once more the object and focal point for another cold war confrontation between the west, Russia and China.

We agree with Nikolas Busse in FAZ when he concludes that a values-based foreign policy, promoted by Germany and other EU countries, does not work in such a world. It is virtue signalling without practical relevance. And it is seen as interference in their affairs. As peaceful Europeans, we like the world to be as we are. But this is not the reality on the ground. For those countries that turn away from us, the western reflex is to impose sanctions. The EU has already agreed on some for Mali and is preparing others for Niger. This has nothing to do with real politics, which would require us dealing with non-democratic leaders. But turning away as it happened in Afghanistan is also not an option and should not be repeated in West Africa.

This means re-examining our foreign policy and development doctrines. What direction should aid take in the future? How to face migrant flows and jihadis that are coming towards Europe? These coups expose our hypocrisy that migration and terrorism is best dealt with in countries where they come from. But by sending troops and development aid to the country, we are still far from dealing with the root causes.

11 September 2023

Zelensky's fair weather friends

Volydymr Zelensky has gained an important insight about his new political friends in Europe. Many of those who pretended the loudest that they are supporting Ukraine are now starting to lose interest. The following remark, made in an interview with the Economist, struck us.

“I have this intuition, reading, hearing and seeing their eyes [when they say] ‘we’ll be always with you,’he says… But I see that he or she is not here, not with us.”

We are seeing that too. At the moment, everybody is sticking to the script, but we struggle to see the same degree of support surviving another winter and another summer. The brutal reality is that Europeans are factually and politically not able to take ownership for Ukraine's support without the US, and that there is a lot of Ukraine-virtue-signalling going on in European capitals, and in the media. 

Mark Milley, the chairman of the US joint chiefs of staff, said Ukraine has about 30-45 days with its counter-offensive, and that we should withhold judgement of its success or failure until then. When those 30-45 days are gone, and the cold weather sets in, this will be the critical moment. Russia will have another winter to build up new defence lines. It will become progressively harder for Ukraine to liberate lost territories. We do not think that Joe Biden will want to enter the pre-election summer season with a war still raging. In Germany, political support for Ukraine is not as strong as it was, and is weakening. In the absence of a magical turnaround, Olaf Scholz may be fighting for his political survival. 

We are well aware that outcomes of wars are hard to predict. Our baseline scenario, that Ukraine will manage to re-occupy some, but not all of its territories, literally splits the difference. That judgement may turn out to be wrong. But we are sticking with our judgement that in the absence of an overwhelming military success shortly, western support for Ukraine is time-limited. Zelensky is reading the body language right.

8 September 2023

Maréchal is back

Marion Maréchal, Marine Le Pen's niece, has returned to the political scene. She will lead a new list into the European elections for Reconquete!, Eric Zemmour’s party. Will this comeback be just a stunt, or for real? As presidential candidate, Zemmour was a fast-rising star. At one point, he was a serious challenger to Le Pen and Valerie Pecresse, the then-presidential candidate for Les Républicains. But Zemmour did not get to the finish line, and ended up only fourth in the first round. He won an important ally on the way with Maréchal, who left her finishing school in Lyon and joined him when he was taking off in the polls. It may not have worked out then, but it got them started.

Zemmour is back in the news, together with Maréchal. She will compete against Jordan Bardella, the party chief of Le Pen’s Rassemblement National. Both are young and talented politicians, and the race could redefine the conservative-far right spectrum.

Thematically both Reconquete! and  Rassemblement National differentiate themselves not so much on immigration but on economics. Rassemblement National is more socially-oriented than the libertarian Réconquete!. There is also a difference in style: Zemmour is closer to the Catholic scene and has some big financial backers, while Le Pen stayed clear of them or any other powerful group, for whom she did not want to become the political speaker.

At the level of the EU, the two parties could compete to enlarge the far right camp as they appeal to different constituencies. On Cnews, Zemmour identified immigration as the challenge of the century for France and Europe, between the Islamic world and the Christian world. For Maréchal, the elections are a historical chance to pull the EU  away from the centre to the right. 

Réconquete! is in talks to join the eurosceptic European Conservative and Reformist group, according to Euractiv. Led by Giorgia Meloni’s Fratelli d’Italia, the group fits the identity based, anti-immigration, anti-islam, pro-Nato course. Reconquete! has currently one MEP, a former member of Rassemblement National, who switched over to Zemmour during his quest for the presidency.

Opinion polls suggest that the new list could get some 6.5-7% of the votes, which would translate into 5-6 seats. Rassemblement National is at 25% and seems to be solid in leading the polls. Maréchal’s new list may not cannibalise their voters, but instead attract support from Les Républicains, especially now under Eric Ciotti’s leadership. The big question is whether the centre still holds. Parts of the answer will become apparent when the new immigration law will be debated this autumn.

7 September 2023

Bavaria's Trump

We had to spare you this story that has dominated the German news headlines for some weeks now. The reason we are reporting on it now is because we see some parallels to what is happening in the US, and in the EU as well: the more you hound a populist of the right through the legal system, or in Germany's case through the media, the stronger they get.

Hubert Aiwanger is the deputy Bavarian prime minister. He leads a party called the Free Voters, a populist party with more-or-less centrist policies. It became known that at the age of 17 his teachers found an odious anti-semitic leaflet in his school bag. Markus Söder's CSU relies on Aiwinger's party for its majority.

All this stuff is, of course, coming out because Bavaria holds elections on 8 October. It is the most important state election of the year, and very important for the coalition in Berlin, too. The latest polls have the FDP at 4%. Five years ago, the FDP narrowly scraped in, but this time they might narrowly miss the 5% representation threshold.

But the bigger story is the massive rise in support of the Free Voters. They had 11.6% last time, and had been polling at around the same level. But the latest poll has their support surge from 12 to 16%. This is an increase by a third. They are not out-polling the AfD, which at 14% is also performing stronger than in the previous elections, and stronger than in the previous polls. This is disaster for the CSU and the other centrist parties. 

This is the result of weeks of coverage by Germany's more centre-left media outlets, including national television, and the ensuing outrage. Olaf Scholz himself entered the debate and asked Söder to clear this up and fire his deputy. A reluctant Söder eventually sent Aiwanger a series of questions. Aiwanger responded with a delay, apologised, and that was it. The election campaign is now in full swing, and Aiwanger is the star of the beer tents, the agora of Bavarian democracy.

The overall lesson is that you have to defeat your opponents at the ballot box. Not in the courts. And certainly not the court of reported public opinion. The EU commits the same error with its rule of law procedure that it has tried to apply against the populist governments of Poland and Hungary. They are blinded by superficial successes. Poland, for example, revised the law on the disciplinary chamber for judges. But the end result has been in both cases a political backlash. We don't express any views on the outcome of the 15 October Polish elections, but after all these scandals, and two consecutive terms in government, they should not be polling as strongly as they are. They are 8 points ahead of Donald Tusk's Civic Coalition. Viktor Orbán, the Hungarian prime minister, last year scored a landslide victory, against a disparate coalition, after being hounded by the EU. 

The same is also happening in the US with Donald Trump. There are enough non-Trump supporters who are outraged by the fact that Democratic attorney generals are trying to get rid of Trump through legal processes. These trials are backfiring on the Democrats.

This is now happening in Bavaria too. We are living in a twilight zone where the traditional media still command the bully pulpit, but where they no longer call the shots because voters have other, and usually better, information sources available to them. In the UK, the media succeeded by persuading enough Conservative MPs to dump Boris Johnson, and to replace him eventually with Rishi Sunak against the wishes of the party members. To oust a popular politician like Johnson through backdoor proceedings has predictably backfired on the Conservatives. Is the nomination of a prime minister against the wishes of party members not the bigger scandal? 

Populists owe their success to a large extent to the predictable reflex of mainstream parties, and their supporters in the media and in the legal professions.

6 September 2023

Labour will win, and then what?

Elections are, by definition, a zero-sum game. This is best captured by the notion that it is governments that lose elections, not oppositions that win them. The fact that Britain's Conservatives have been self-destructing since Brexit, with a progressively more disastrous choice of party leaders and prime ministers, means that Labour is now the odds-on favourite to win the next election, which will probably be held at some point next year. 

What the early 2020s and the late 1990s have in common is that the Conservatives are way past their sell-by date. The main difference is that the Labour Party of the 1990s was full of new ideas, whereas the Labour party today is full of fear. Sir Keir Starmer is the odds-on favourite to become the next prime minister. His reshuffled team will enjoy the ministerial limousines. But the seeds of destruction of that Labour government are already visible today, in a way that this was not the case in the 1990s. It was the power that corrupted Tony Blair. It was not the policies.

This is different this time. Labour's policies are orthodox in most policy areas. Foreign and defence policies will be the same. There will be no re-accession negotiations with the EU. The next government will respect the same fiscal targets as the current ones. This means there will be no more money for investments. A new Labour government will re-nationalise public transport, but this would only produce benefits to commuters if there are more investments or lower prices. Neither is likely. The only interesting policy difference we discern is housing, where Labour have promised to allow local councils to grant building permissions for green-field sites. The Conservatives are constitutionally incapable of reforming housing, despite what they promised at the last elections.

Unfortunately, Sir Keir has demoted the shadow secretary in charge of that policy, Lisa Nandy. It is her second demotion. The Labour leader seems to bear grudges, and likes to surround himself with non-threatening people. We recall Nandy pushing against the Brexit U-turn Sir Keir spearheaded ahead of the last election. She was right to warn about the electoral tolls this would take in Northern industrial towns.

In the UK, political changes have tended to occur in large cycles: 18 years of Conservative government from 1979, 13 years of Labour government from 1997, and another 13 years of Conservative government since 2010. We are not going to enter the mug's game of predicting future elections, not even next year's one. Labour may still miss the threshold of an absolute majority. But Sir Keir's Labour Party is too focused on getting into power, and not enough on what it wants to do. The Tories never outgrew the Thatcher vs one-nation Tory divide. Labour is still stuck with its own divide between Blairites and the old left. The big prize in UK politics will go to the politician who will come up with something new. The one prediction we are happy to make is that Sir Keir is not that guy.

5 September 2023

Concrete problems for Sunak

When Rishi Sunak took over the premiership from Liz Truss, we were, to put it mildly, apprehensive about his chances of succeeding in an election. We believed that getting rid of Boris Johnson, which Sunak played a key part in, would backfire on the Conservatives, and still think that’s true. But we did think that he would, unlike his predecessors, make it to the next election: surely there was no way his party could swap another prime minister out. Now, we’re not as certain about that.

Sunak has found himself caught up in an increasingly serious political crisis over the decrepit state of the UK’s school buildings. Because of safety concerns, the government has had to shut more than 100 schools ahead of the new academic year, although the Department for Education (DfE) says there could be more. The underlying cause, a lighter form of concrete the UK used to use, is something the British government has known about for a while.

The political fallout for Sunak got worse yesterday after Jonathan Slater, a former civil servant in the DfE, revealed that while Sunak was Chancellor, he’d downgraded yearly repair plans for schools. According to Slater, the DfE had said 300-400 schools would need to be rebuilt or repaired a year, but asked for enough budget for 200 due to logistical constraints. He then said that Sunak initially approved enough resources to repair 100 a year, then cut it to 50.

This is clearly very damaging politically. It also illustrates several of Sunak’s liabilities. One of the Conservatives’ main problems ahead of next year’s election is that the legacy of austerity is catching up with them. As Chancellor, Sunak himself oversaw some of these continuity austerity policies, implicating him personally in a number of these failings. Collapsing schools are not the first incident, and they will not be the last either.

What makes it much worse is that Sunak is an awful media performer. In a response to Slater’s claims, he called them, in his words, utterly wrong, whilst confirming the central allegation that the budget only covered 50 schools a year. After calling Slater wrong, and then basically proving him right, Sunak defended his actions by saying these were in line with what his predecessors had done.

This is not a justification you want to use if your party has been in power for more than a decade. The press has had a field day with this, running that clip back-to-back with one of Gillian Keegan, the education minister, going on a profanity-laced rant against everyone. Together, the two responses portray Sunak, and his government, as patronising and defensive, refusing to take responsibility for their actions.

Keegan is probably done. But sacrificing her might not save Sunak. The conclusion any sensible MP will draw from this is that Sunak is too associated with the ancien regime, and too bad at explaining himself to salvage the next election. The Conservatives’ polling hasn’t gotten much better since he took office. If yesterday is any indication, it could get worse.

We do not think getting rid of Sunak and swapping him out will change anything. Like Johnson, Sunak is a symptom, the cause, of the Conservatives’ malaise. But it will be tempting because it gives the party the illusion of control. If you’re an MP worried about losing your seat, trying something may be more appealing than doing nothing and accepting fate.

Sunak also has a rough October coming up. It will kick off with the Conservative party conference, where the mood is not going to be cheery. Then there will be two by-elections: one for Nadine Dorries’ old seat after she dragged out her resignation, and one for Chris Pincher’s after he lost an appeal against his suspension from parliament. At the end of the month, the year-long grace period protecting Sunak from a no-confidence motion will run out.

4 September 2023

Erdogan's road to Sochi

Recep Tayyip Erdogan is meeting Vladimir Putin in Putin's summer residence in Sochi today. A return of the grain deal is on the agenda, which is probably more valuable to Turkey than it is to Russia. Turkey’s own ships are affected by increased hostilities in the Black Sea. Turkey’s economy is also suffering from reduced grain exports, and Erdogan no longer can portray himself as a mediator between Russia and Ukraine if he does not get Putin back to the deal. Russia, meanwhile, insists on the west offering better conditions for its own exports while increasing its aggressions in the Back Sea as if it was its own territory. Like it was the case with gas, Russia also uses high grain prices as the result of the embargoed grain deal to offer its own discounted deals, and even give out free grain exports to African countries that are willing to support Russia.

Now Erdogan has come to Sochi to get Russia back to the deal. It is a balancing act of relative power. Moscow may be able to install a de facto naval blockade on Ukraine with its aggressions, but Turkey controls the strategic Bosphorus and Dardanelles straits, which connect the Black Sea with the Mediterranean Sea. But cargo shipping has become increasingly dangerous and costly in terms of insurance premiums.

Russia and Turkey know each other well as adversaries in various proxy wars, including in Syria and Libya. They have a common history of wars in the Black Sea during the Ottoman Empire's long decline and fall. The power battle in Sochi today will be about whether they can meet on equal terms, or whether Moscow imposes itself on Turkey, not the other way around. Ankara wants to get some form of deal out of the meeting today, if only to prevent the scenario of Nato presence in the Black Sea. Russia is much less interested, and can afford to play with Turkish interests.

Erdogan and Putin both play games with each other. After his re-election, Erdogan turned more to the West and provoked Moscow by releasing Ukrainian generals captured by Russia, to Turkey for safekeeping, and openly backed Ukraine joining Nato. Russians, meanwhile, boarded a Turkish cargo ship on course towards Turkish waters and published a video showing the crew forced to kneel at gunpoint. All ships towards Ukraine are considered potential carriers of weapons, so the Russian defence ministry. This is all part of power posturing.

But economic interests may prevail in the end. Turkey and Russia are large trading partners to each other. The fact that Turkey did not participate in the sanctions against oil means that it more than doubled its imports taking advantages of the discounts Russia offered.

And Russia did not say no just yet. Instead they offered an alternative plan, one that would send grains to Turkey, and ship them from there to African countries with the financial support of Qatar. A decisive question will be at what point will Moscow accept the guarantees that the UN has brokered with the west to allow Russian grain exports into the world market. This is mostly outside Erdogan’s control.

1 September 2023

How to lose the next Europe referendum

There is something unbelievably immature about the European debate in the UK, which is flaring up from time to time. It is a debate that is framed purely in terms of UK politics. Rejoining the EU is not a matter of ticking a box on a ballot sheet. The polls are meaningless because they don't ask the right question. It will not be: do you want to rejoin the EU. It will be: Do you want to join the EU and accept all of its arrangements: the passport-free travel area, a common policy on immigration, the euro, and the charter of fundamental rights?

We agree that there may well come a time when UK political views on the EU will shift. But the supporters of EU re-entry will be confronted with an immediate problem. The EU is facing a bifurcation point. It can continue on the same path, and accept its decline. It would then not be a club worth joining. Or it would reform itself on the basis of a new treaty, and possibly split into an inner and outer group in the process. We see that as the only scenario in which it would be worthwhile for the UK to join the EU. The question then becomes: what bit do you want to join? 

Next, think about how this would play out in a referendum. There are two possibilities. A future government could negotiate an accession agreement and then put it up for a vote. Or it could start with a referendum to give it the green light for the negotiations. We don't think the EU would accept the first. They did this before with David Cameron, who kept on making demands he needed to win the referendum. If it is the latter, expect the euro to feature very prominently in the debate. You will not be able to campaign on the basis that you can get your old deal back. There will be enough Europeans out there - us included - who will tell you loud and clearly that there is no chance of this happening.

If you were serious about rejoining the EU, this is where you would need to start. The Remain campaign in 2016 was premised on the notion that the UK had a great deal by not being part of the euro and Schengen. You won't be able to do this again. We will need to convince the electorate of the benefits of the entire acquis communautaire of the EU. 

Good luck with this. The reason why we think this won't happen is not the British electorate. It is the fact that the EU supporters in the UK are mostly delusional about the EU.