10 May 2022
Orbán threatens veto
Hungary's foreign minister has formally notified the EU that his country would veto oil sanctions against Russia. While this is not the end of the debate, it constitutes a significant escalation.
Our own interpretation of what’s going on is that it’s only partly about the oil. Hungary is highly dependent on Russian oil supplies. As of 2020, Hungary received about 60% of its oil imports from Russia, and as a landlocked country it has limited alternatives for receiving seaborne oil. The Russian imports it receives come overland, through the Druzhba pipeline. There is some credence to the suggestion that they would need more time to reduce their dependency.
But we think that it’s also about other balls in the air, namely funding and the Commission’s rule-of-law conditionality mechanism procedures against Hungary. Consider the statement Péter Szijjártó, Hungary’s foreign minister, made after Ursula von der Leyen’s meeting with Viktor Orbán, in which he said, of the country’s energy security, that,
“As long as the European Commission does not offer a solution to these problems, Hungary will not be able to support the sanctions package, as in this form, without proposals for solutions, this package will amount to an atomic bomb dropped on the Hungarian economy.”
Talk of a longer extension is a fig-leaf: though Hungary is a small player in oil consumption, a five-year exemption would be a non-starter. What Viktor Orbán’s government is clearly looking for is extra money, a slow-walk on the conditionality mechanism, or both.
Whether Orbán would continue to be this difficult if the Commission hadn’t decided to formally launch a procedure against Hungary last month is a counterfactual that’s impossible to test. But it certainly can’t have helped. The Commission is now actively locked in a dispute with the Hungarian government that could see the latter lose access to EU funds. At the same time, it is trying to convince Orbán to back sanctions which he can hold up indefinitely, should he so wish.
The bigger-picture issue is the limits of European integration via the backdoor: what the EU can actually achieve institutionally without treaty change. This saga with Hungary is a case in point, as its government uses its powers within the treaties to frustrate the Commission using a mechanism outside of it to try and get to them.
It’s an especially big problem if a country is non-committal about EU membership. Orbán increasingly seems to be thinking this way. One small, but significant, political development we noted is János Volner, a member of Hungary’s parliament, changing the name of his personal political vehicle to the Huxit party.
Volner used to be the leader of right-wing opposition party Jobbik’s parliamentary faction. But after breaking away from both Jobbik and a far-right successor party, the Our Homeland movement, he has largely towed the government line. Given that Volner is basically a system opposition figure, coming out and starting a Huxit party looks like a trial balloon. Orbán can see whether he could muster political support for leaving the EU, without publicly associating himself with such a risky venture at an early stage.
9 May 2022
Gazprom tries a charm offensive
Have the Russians blinked first? At first glance, it might seem to be the case, but we are not buying it. While some buyers of Russian gas continue to wait for clarity from the European Commission on how to comply with sanctions, Gazprom has sought to reassure customers. They have said that even under the new decree buyers will be able to make payments within the scope of the sanctions.
To back this up, they point to a new modification that the Russian government has made to the original decree. This version, released last week, clarifies who in the payment process is responsible for converting payments into roubles: Russia’s national clearing centre, and not the Russian central bank. Elvira Nabiullina, the Russian central bank president, also said that the conversion process would have to be completed in a two-day timeframe.
The idea behind this seems to be giving the Commission, and buyers, a way out of the central point of the issue: that the Russian central bank could be involved. This has been the firm opinion of the Commission so far in their multiple statements that the dual account decree would lead to breaching sanctions.
It also addresses another possible reservation buyers could have outside of the sanctions: the opacity of the process. From a risk management perspective, having part of the payment process completely outside of the control of the buyer was also problematic. In theory, this should shed light on where the money is going and what happens with it.
But in practice, the problem is still this: the Russian government can basically decide to do whatever it wants with the payment process, and implement it overnight. Even if the central bank isn’t involved now, there’s little to stop Vladimir Putin from saying that it will now have to be involved through some other modification of the decree. And even if the European gas buyers don't formally breach the sanctions, they are still colluding in circumventing them.
We expect that noncommittal buyers and the Commission will jump at the chance. Since so many buyers have already either started paying in roubles, or have set up the means to do so, stopping them would have been like trying to close Pandora’s box.
What we don’t think, however, is that anyone should view this as an attempt at de-escalation from Putin. Instead, it’s merely the insertion of another rung on the escalatory ladder.
6 May 2022
Germany not delivering weapons after all
Unsurprisingly, the German public is divided over weapons deliveries to Ukraine, with a small majority in favour. Olaf Scholz' political error has been, and continues to be, his attempt to straddle the two camps, ending up alienating both. His strategy is to be seen as supporting Ukraine in public while frustrating help in the background. It is unsurprising therefore that the Germans are thinking of him as a weak leader.
The latest news is that the last week’s policy U-turn on weapons deliveries is actually not happening. A report in Die Welt, which reads like a Kafka story, suggests that the German government wasn’t able to find the ammunition for the Gepard tanks. When confronted with this information, the chancellery refused to comment. They never comment on weapons deliveries. It’s top secret for a reason.
There has been some progress on the diplomatic front after weeks of mutual recriminations between Germany and Ukraine. But the main actor is not the chancellor, but Friedrich Merz, the opposition leader. When Merz became the first senior German politician to visit Volodymyr Zelensky since the outbreak of this war, he persuaded him to talk to President Frank-Walter Steinmeier. Steinmeier had previously been told that he was not welcome. The two presidents spoke yesterday, and apparently aired their differences.
Steinmeier has been the principal architect of Germany’s Russia policy, but unlike Gerhard Schröder, the president rescinded his position, admitted that it was a mistake, and that Putin cannot be trusted. Scholz is still holding back with a personal visit, preferring to send Annalena Baerbock, the foreign minister instead. Steinmeier is now planning to visit Ukraine.
Because of the long tenures of Konrad Adenauer, Helmut Kohl and Angela Merkel, Germany had a very small number of chancellors. Scholz is number nine since 1949. As an orator he reminds us of Kurt-Georg Kiesinger, who governed from 1966-1969. Kiesinger, too, was a master of the backroom deal, but wooden in his delivery and without much personal appeal. Scholz' most surprising success so far has been to put together a coalition of unlikely partners to pursue the energy transition. Scholz enjoyed a brief honeymoon - but one that did not last even the customary 100 days. Robert Habeck, the economics minister, is now the most popular member of the government. If we had to place an early bet on the 2025 elections, we see this as a contest between Habeck and Merz. Habeck will be better prepared as a candidate than Annalena Baerbock was last time. And Merz is of a different political calibre than Laschet. The only scenario of a second term for Scholz would be one where the SPD was marginally ahead of the Greens, where the three current coalition partners would still enjoy an overall majority, and agreed to form a coalition with the SPD instead of the CDU.
5 May 2022
Crop protectionism: India edition
India is experiencing an unusually early heat wave that is threatening its grain harvests. The government is now considering limiting exports. How is this worsening the food crisis that the world is about to experience due to the war in Ukraine?
The problem is not for now, but for the next harvest, and thus grain exports in the year to come. The ministry slashed the expected harvest this year to 105m tons, down from 111m tons. Most of its wheat stays inside the country, but its exports were to expand into new markets to make up for the shortfall due to the war. Egypt and Turkey just added India to their supplier list. Traders have already contracted to export 4m tons in 2022-23. With more pressures due to a poor harvest at home, expect prices to rise, which will feed into world markets.
Usually India has a large reserve of grains, but those are strained due to the pandemic. They need about 25 tons for their welfare programme that subsidises food for about 80 million people.
Soaring food prices and grain shortages are a clear concern for India. Top officials are currently discussing what to recommend to the prime minister. One proposal is to set a minimum export price so wheat cannot be shipped overseas below this level, one ministerial source told Bloomberg. It is not an outright ban, but it would allow the government to ensure domestic supply and keep a check on prices.
Poor harvests are aggravating food security and ramping up prices not only at home, but in world markets. Other regions are experiencing worse harvests too. China’s agriculture minister predicts a poor winter wheat harvest due to flooding and delays in planting, according to AP. With crop protectionism on the rise, expect more increases in world prices.
4 May 2022
Disobedience and the French Left
After the Greens, the Communists joined the new alliance on the left under Jean-Luc Mélenchon’s leadership. On the programmatic side, they agreed to most of Mélenchon's agenda and simply excluded the one point they disagree on: the end of nuclear power. The Greens opted for a different tactic on their controversial points, Europe in particular, seeking assurances to define what the new alliance can and cannot do in European policy. Both subjects will eventually come to the fore, and will test the parties’ coherence inside this new alliance.
Mélenchon’s idea of selective disobedience opens up a new schism, promoting a Europe à la carte on the left, defining areas where national interests can trump EU interests.
The joint document between Mélenchon's La France Insoumise (LFI), and the Greens states that the alliance will have to be ready to disobey certain European rules in order to be able to apply its programme, in accordance with the mandate entrusted to it by the voters. Those are subject to a series of conditions set out in the text: As a founding member of the EU, France cannot adopt a policy that aims at either an exit from the Union, nor its disintegration, nor the end of the single currency. The press release then specifies that disobedience is conceivable in certain EU policy areas, such as the stability and growth pact, competition and the neoliberal orientations of the common agricultural policy. This can only be done in accordance with the rule of law, it assures.
So how can this possibly work? How can defying the stability and growth pact be in accordance with the rule of law? How can the alliance be disobedient and compliant? What this wording tells us is that both sides can go home and argue they saved their positions, while the two remain irreconcilable. Yes, LFI no longer advocates Frexit, but if disobedience is politically encouraged in a European Union built on the rule of law, this brings the house down eventually.
It also suggests that Europe will be back as a dividing subject for the left. Concrete agreement on how to be European and left in France is yet to emerge under this new alliance.
For Emmanuel Macron’s majority, it will be the point of attack during this campaign. The Socialists are split internally over whether the future is too much of a break with the past. If they were to agree to join the alliance under the leadership of LFI, expect an exodus of those who cannot be reconciled with this new course.
3 May 2022
Will there be treaty change?
The conference on the Future of Europe was concluded last Saturday when its plenary approved more than 300 proposals. It is the outcome of one year of work from 800 selected citizens, backed by over 40,000 entries on a multilingual debating platform. Citizens were asked to discuss how to make the EU work better along nine themes including climate change, health, the economy and social justice, democracy, digital transformation, education, and migration. These proposals will be submitted to EU leaders on 9 May.
It is very unfortunate that this conference has received so little public attention. A pandemic and a war intruded. But the EU is also less invested in this process of treaty change preparation than it used to be. The new mantra is to force political integration through rule-of-law mechanisms rather than new treaties. It is therefore questionable whether the EU will muster the necessary unanimity to agree the treaty changes needed for the EU to develop into a democratic political union.
Some ideas that emanated from the conference were straightforward, such as direct subsidies towards organic farming, establishing common minimum standards of health care at EU level, setting the voting age at 16 for European elections, and periodic citizens' assemblies to ensure more civil society participation in the process of developing European policies. Other proposals are bolder, like the end to the unanimity rules in all policy areas, including taxation and foreign policy, with the exception of EU enlargement or where fundamental values of the union are concerned. Or to grant the European Parliament the right to initiate European laws, which is currently the exclusive prerogative of the Commission, as well as real budgetary competence. These bold proposals would require treaty change.
The European Parliament will take this chance to move forward. As of Thursday, MEPs will vote on a resolution to give Roberta Metsola, the President of Parliament, a mandate to activate Art. 48. This would be a first step towards treaty revisions in a very long institutional procedure. As Les Echos points out, treaty change is not a necessary outcome of this procedure. Some proposals can be implemented in other ways. But without treaty change, there is only so much the EU can do to integrate.
29 April 2022
NI protocol: death by internal law?
Pacta sunt servanda, so it stated in the Vienna convention. The Northern Ireland Protocol is no exception. Changes are possible, but they have to be agreed between all parties. But No 10 Downing Street still nurtures the idea that it is possible to unilaterally override the protocol. The FT reports that the UK government could pass new legislation next month that would give its ministers broad discretion to override the protocol at their own behest, while at the same time reducing the risk of legal challenge. It could even override a Stormont consent vote. Under the current provisions, Northern Ireland's Assembly gets to vote every four years on whether the main provisions of the protocol should continue.
Undermining the protocol through internal legislation: is this the new way how politics is done? Under the Vienna convention, internal law cannot become a barrier for the treaty, including the protocol, to operate. An exception is if there is a manifest violation that would invalidate the UK’s consent. Such a case has yet to be made, unlikely to succeed as it already two years into the protocol, notes Simon Usherwood, professor at the Open University. Art. 16 of the protocol already gives the UK or the EU the right to introduce safeguard measures if the deal is causing serious difficulties which are liable to persist. What they need is a mechanism that helps them addressing problems arising from implementation in a joint manner.
What this talk about the new legislation means is yet more uncertainty just a week ahead of elections in Northern Ireland. Polls suggest that Sinn Fein, the main Irish nationalist party in Northern Ireland, is about to win these elections next Thursday. Under the power sharing rules this would mean that they would get the job as a first minister, while the unionist DUP would get the deputy's job, something that unionists may find hard to accept even if the de facto power of the two jobs is the same.
Some parties in Northern Ireland have strongly dismissed the idea of killing the protocol through internal legislation. London is accused by the non-sectarian Alliance and Socialist party of nurturing the hopes of extreme unionists without solving the issues, the BBC reports. The DUP played it down as speculative. Grace periods have been granted by the EU for months now for the protocol to be implemented in full. Earlier this month the EU changed its laws to ensure Northern Ireland could continue to import medicines from the rest of the UK. Uncertainty weighs on businesses and rattles politics.
If Sinn Fein were to score a solid win next week, the possibility of a border poll over uniting Northern Ireland with the Republic of Ireland is sure to come back on the agenda. From that perspective, the row over the protocol might just be a prelude of a much bigger storm to come.
28 April 2022
Turkey's carrot and stick tactics
What is Turkey up to? While everyone is focusing on Ukraine, Turkey has launched an operation into the semi-autonomous Kurdish region in Iraq. Yesterday, the Turkish air force provoked Greece with over 140 illegal overflights of armed fighter jets over more than 25 Greek islands, according to To Vima. Turkey may want to showcase its military might in the air, on the ground, and in the Black Sea. Why now?
Is this to keep the balance on the fine line of neutrality in mediating between Russia, Ukraine, and the west? It is a dream role for Recep Tayyip Erdogan. To prove Turkey’s neutrality, Erdogan won’t be boxed into the Nato consensus, while also keeping a distance from Russia. To prove its neutrality, and to advance Turkey’s interests in these geopolitical shifts, Turkey will maintain a multiple channel carrot-and-stick diplomatic approach towards Nato and Europe.
Yesterday, Ankara made possible the return of a US marine formerly imprisoned in Russia. The day before, the head of Turkey’s presidency of defence industries said they are still negotiating a possible agreement for a second batch of Russian S400 defence systems. Signalling while keeping all the cards close to one’s chest is an art.
Europe is on edge too, not only over provocative military operations in Greek airspace. The outrage over Turkey’s latest rule of law violation, a life sentence for Osman Kavala, the human rights campaigner, prompted calls to end nurturing the idea of Turkey’s accession to the EU. Then again, what about the refugee deal? Another refugee wave can be expected amid food insecurity in the Middle East and Africa as a consequence of the war in Ukraine. What about energy too? Turkey holds a key here as well, and talks about energy co-operation to make Europe less reliant on Russian gas have started.
Europe may wean itself off its dependence on Russia. But it still needs Turkey. A role very suitable for Erdogan’s ambition to matter on the geopolitical scene.
27 April 2022
How not to U-turn
We agree with Olaf Scholz on one specific point: there are an awful lot of suddenly emerging heavy weapons experts out there, especially on the social networks. We previously mocked the many armchair economists who used their arts to transmogrify themselves into experts on pandemics.
While we are no experts on weapons and viruses, we have an idea of what drove the policy shift by the German government when it agreed to send Gepard anti-aircraft tanks to Ukraine. The tanks are no longer used by the Bundeswehr, but they are still operational.
It is a massive U-turn following Olaf Scholz warning only a week ago that the delivery of heavy weapons would risk a nuclear war. If that statement had been true then, it would still be true today.
What happened over the last week is that Scholz came under relentless pressure, internally and externally. It is fair to assume that the US government increased the pressure on Germany. By holding the Ukraine conference at the US military base in Ramstein, the Americans put the German government on the spot. If the German government really believed that the delivery of heavy weapons would lead to a nuclear war, that would have been a good opportunity to explain this reasoning in some detail. But that didn’t happen. What happened instead was the U-turn.
The main driving force behind this change, however, was pressure that has built up inside the coalition. Scholz’s previous position had been informed by the reluctance of his own party. The SPD is reeling from attacks from the media and other parties over its relations with Valdimir Putin. Scholz himself was never part of the Russia-section of the SPD, but he is unwilling to confront his party on this sensitive issue, and force it to confront its past. But the bigger pressure on Scholz is from the Greens and the FDP. Both parties have been in favour of heavy weapons deliveries and have become increasingly vociferous.
The government could have faced an embarrassing vote in the Bundestag, brought forward by the CDU, over weapons deliveries. What happened now is that the CDU is withdrawing its controversial proposal, and rallying behind the government’s new policy. We see this as the first successful hit by Friedrich Merz, the new opposition leader, against Scholz.
Scholz is somebody with a clear preference to act behind the scenes. This is not the way you can act successfully in a situation like this. Nor is it the appropriate strategy in the era of social networks. We regard Scholz as a politician who is driven by outside forces. His big problem is that his increasingly assertive coalition partners have alternative power options and he does not. The agenda agreed by the traffic light coalition last year turned out to be a fair-weather project, based on the modernisation and investment in the energy transition. The Greens and FDP are closer to the SPD in those areas. What this war has done is open up big rifts within the coalition. Differing attitudes towards Russia is where this coalition is at its most vulnerable. Merz has the advantage of not having been part of the previous regime. It is easier for him to reposition himself, and to put a wedge between the coalition partners.
26 April 2022
We are not surprised to read that the UK’s Labour opposition is promising to scrap the non-dom tax status, which allows wealthy individuals with a multinational background to pay taxes only on income they earn in the UK. Even five years ago, such a policy pronouncement would have been met with outcry among wealthy elites. We recall that non-dom status was a big issue in the 2015 elections. Labour wanted to curtail it, but not scrap the system. We are not sure why Sir Keir Starmer keeps banging on about Downing Street parties, an issue that is guaranteed not to matter at the next general elections. Taxing high earners on their global income is a much more effective campaign theme, but only it is a part of a wider strategy. Anybody serious about tackling inequality should start right here. But it is only a start.
A Labour non-dom agenda would be politically awkward for the Conservatives. We know that Rishi Sunak’s wealthy wife was a non-dom. There are still unanswered questions about Sunak’s own tax affairs, especially his ownership of a US green card. Sajid Javid also admitted to having been a non-dom for a while. Non-dom is a very natural tax status for any wealthy individual with a foreign background, or with family connections abroad. It is not based on your nationality, but on the notion of where you eventually want to end up. By becoming a non-dom, you agree that you will eventually seek to leave the UK. What matters factually is not whether you do, but whether this is your intention. This is what makes it politically so toxic. The Sunaks and the numerous other non-doms in the British government have chosen a tax scheme that is premised on the notion that they want to live abroad. This, and not wanting to pay your taxes in full, is a killer combination for a politician. It is, of course, important to point out that non-dom status is perfectly legal. The problem is entirely political.
This is why we think non-dom is a potential, much under-appreciated, killer. It has struck down two potential successors: Sunak and Javid. But this can only be part of a wider strategy for post-Brexit Britain. That hasn't happened yet. Tackling tax inequality is a possible start. But it is only that.