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24 March 2022

Germans on the verge of a nervous breakdown

We are in general sceptical of opinion polls because they tell us what we already know. If the evening news bulletins are bleak, then so are public perceptions the next morning. It is therefore unsurprising that the Germans have transitioned from complacency to panic with the same speed as SPD politicians have shifted their views on Vladimir Putin.

Having said this, it is still worth reflecting on a poll by Allensbach, Germany's oldest polling institute, which has been running the same annual poll on public sentiment since 1949, the year the federal republic was founded. This year, the results, published in FAZ, are the worst ever. Only 19% are now optimistic. The most curious result is that a majority is now in favour of prolonging the remaining nuclear power stations. The terror attacks in 2001, the Korea and Vietnam wars, the cold war, and the 1970s oil crisis also affected sentiments, but nothing quite like this.

One third of Germans now believe that there will be a third world war. Putin's annexation of Crimea in 2014 hardly had any effect on sentiment.

The pessimism clearly translates into economic expectations. 63% believe that there will be economic downturn. Only 7% believe in an upswing. The number of people who approve of Olaf Scholz has gone up, but not support for the SPD as a whole, which has slumped back to the bad old polling days. Whatever the three coalitions partners agreed last year has now been taken over by a new political reality.

In a situation as febrile as this, politics is prone to changing quickly. Many assumptions we may hold about German attitude towards the economy, like nuclear power, or relations with Russia, could turn on its head in no time. We may only be one chemical attack away from a complete shift in German energy policy, for example. At that point, many more taboos will fall. And polls will reflect that. 

23 March 2022

Business as usual?

We are not at war with Russia. Emmanuel Macron’s statement has a certain authority. Given that he has had at least 19 telephone conversations with Vladimir Putin since the invasion, it also has some credibility. This is at least how the French companies invested in Russia read it. They continue to stay there despite the war in Ukraine, the sanctions, and the real possibility that things could get a lot worse. Macron, the guarantor and mediator of peace, and French companies as a manifestation of this trust.

US and British companies have been withdrawing from Russia already. This has exposed their enterprises there to nationalisation via the insolvency procedure. Insolvency in Russia can be invoked if the management stops leading the company, for example because the management left Russia. Or if the group management carries out actions that lead to an unjustified cessation of activity, liquidation or bankruptcy. McDonald’s, for example, closed 847 restaurants in Russia, totally leaving the country from a business perspective. The Russian government has renamed all the previously McDonald's branded restaurants as Uncle Vanya. They are still delivering burgers, but under a Russian name and leadership.

French companies stayed put. One of them is Auchan, the French supermarket chain with 300 stores in Russia. So did Leroy Merlin, with its 112 stores selling homeware and gardening goods. Leroy Merlin even seems to thrive under current conditions. In a letter to suppliers, the head of the Russian unit said that their sales have even significantly increased since Russia invaded Ukraine, according to the Telegraph. Its competitors, H&M and IKEA, halted their operations in Russia. Decathlon has stayed open too with its 80 stores throughout Russia.

Can this last? This will depend on the reputational pressure those companies face in the west and how the war is proceeding. If Russia were to employ chemical weapons, this may be a red line, like it was for Francois Hollande over Syria. Some companies already take their precautions. Total just announced that it will end its Russian gas and crude oil supply contracts for its German refinery, and instead source it from Saudi Arabia and via Poland instead.

Business as usual is a sign of French confidence, not turning Russia into a pariah state because of its president’s decisions to invade Ukraine. But the management has to walk a tight line between two very different realities. Don’t mention the war may work as a communication strategy for now, but they are not free of moral dilemmas, and the chances they may trip over is about to grow.

22 March 2022

Hungary's veto strawman

Hungary’s government declared yesterday that they would veto EU sanctions against Russian gas transfers, a no-fly zone over Ukraine, and even an EU peacekeeping mission. First reaction is, wow, it is happening again. A second look reveals that this position is much less contentious than it seems.

A no-fly zone will never have any backing in the EU anyway, so there is not much threat potential in this assertion.

Then there is the veto against sanctions on Russian gas. This option is certainly on the table, but Germany is the most prominent opponent of this proposal. The brunt of criticism would not end up landing on Hungary, but Germany. Promising to veto such a proposal is piggy-backing on something that Germany is paying the price for.

An EU peacekeeping mission? This is the first time we've heard about this in public. So far we only heard about a European defence union and a European army. We have been talking about arms deliveries to Ukraine and what kinds of arms we are willing or not to export. But peacekeeping forces, as much as we like this idea, seems far off. The Hungarians bringing this into a debate by threatening their veto makes it tempting to actually have such a debate in the first place. Should we in the EU, whose DNA is built on peace in Europe, not invest more in peacekeeping and leave defence to Nato?

Let’s not forget this is election season for Viktor Orbán with only 10 days to go before voters head to the polls. All this talk of vetoing EU decisions is his way of rallying his national anti-EU supporters to his rescue. It still could mean further troubles down the line if Orbán gets re-elected. But hardly over Russian gas, and certainly not over a no-fly zone.

21 March 2022

What you are not reading in the Times

One of the most interesting and surprising pieces of research we have seen in quite some time is an analysis of how Russia communicates. Carl Miller, research director of the centre for the analysis of social media at Demos, has come up with a counter-intuitive thesis:

When we say Kiev is winning the information war, far too often we only mean information spaces we inhabit.

His analysis, using semantic modelling, reveals that Russia is targeting the so-called Brics countries, which apart from Russia itself, include Brazil, India, China and South Africa. Russia is not targeting the western media, or hyperventilating western academics and journalists on twitter.

This result is consistent with Vladimir Putin’s own statements. He sees the west as weak and decadent. To him, the end of McDonalds and Gucci handbags is a promise, not a threat. He has miscalculated for sure. The western response was more united than he thought. Nobody in his government saw the central bank sanctions. His military campaign is surprisingly ineffective. We heard a prediction from Ben Hodges, the former commander of US forces in Europe, that Putin’s campaign was in so much trouble that it could collapse within a week.

We defer judgements about military strategy to others. What makes us cautious about such assessments is that Russia has a large arsenal of weapons of mass destruction, and that Putin has in the past shown that he is willing to use them. Much of our armchair reasoning is premised on the notion of all things being equal.

Our thinking on the long-term impact of the Russia-Ukraine war is similar to that of the Bulgarian political scientist Ivan Krastev, who predicts that it it will mark the end of the age of globalisation and turbo-charged just-in-time trading structures:

We don’t know what will happen in Russia after Putin, or in Europe, which currently finds itself in a romantic phase. But we shouldn’t make the same mistakes as in 1989. Back then, we thought the east would change dramatically, but not the west. Now, Russia is going to change dramatically. But so will we.

18 March 2022

One instrument, one goal. Remember?

One of the biggest curses of western policy is the belief that you can achieve several goals with a single policy instrument. The one-instrument-one-goal rule used to be stringently observed by central bankers. Nowadays, central banks use their limited toolkit to control inflation, fund government deficits during a pandemic, stabilise financial markets and fight climate change. If central banks succumb to attention deficit hyperactivity disorder, ADHD, they will find that they achieve none of these goals. 

The one-instrument-one-goal rule applies to other policy areas too. Does the EU want to spend its limited political capital on penalising member states through the rule-of-law procedure, or create an economic union, for which it needs the unanimous consent of all its members? It won't be able to do both.

Perhaps the most tragic of all examples is how we are losing the fight against climate change. Given the sheer size of the land masses occupied by Russia and China, there is no way we can achieve our goals of a 2 degree reduction in average global temperature without their active co-operation. There is going to be trade-off between policies that target human rights abuses in those countries and our wish to co-opt them in the fight against climate change. The Arctic is of central importance to the global climate. After the war, the west will need to work with whoever is Russia’s leader. And that may well be Vladimir Putin. We can, of course, also focus on bringing Putin in front of a war crimes tribunal. But we are not going to be able to do both.

ADHD is now a political problem.

17 March 2022

Seen and unseen economic consequences

Russia may only be the size of the combined Belgian and Dutch economies, but what complacent GDP comparisons always underestimate are the network effects. Remember that Creditanstalt and Lehman Brothers were not particularly large banks before they set off global financial crises.

We have already noted that Ukraine and Russia are among the world's largest exporters of wheat, on which the Middle East and Africa have become reliant. Egypt gets 80% of its wheat from the two countries. We saw a report in the BBC yesterday that the famous English national dish of fish and chips is now becoming more scarce, and more expensive, because Russia has been one of the biggest exporters of white fish. Our supply chain networks in the late stage of globalisation have become so interwoven that our economies were not resilient to a pandemic and a minor war.

Perhaps even worse are the yet-unseen effects of the sanctions. Russia is one of the world's largest exporters of chemicals used in fertilisers. The disappearance of Russian chemicals from global markets could have severe implications for world harvests. We are already hearing of farmers in Europe not willing to grow their fields because of exploding fertiliser costs.

The IMF weighed in yesterday with a warning about three effects: the first is another round of price increases for energy and foods. The second is a supply shock for the global economy, and especially for poorer countries; and the third is a regional shock for economies in Ukraine's immediate neighbourhood.

The IMF also picked up on an issue we have been highlighting in the past few days: the financial fallout from western sanctions. It sees a potential shift in the international economic order in the long run, as international payment systems become fragmented and member states rethink where they hold their national reserves. After the west froze Russia's foreign reserves, other countries will consider whether their reserves are safe too.

So we are dealing with a short term shock and a long-term shift. We are not sure that those who imposed the economic sanctions thought this through.

16 March 2022

Money to burn

Italy and Germany have followed France’s government quickly to the pump. In Italy, measures to contain the impact of energy prices on the economy that Mario Draghi’s government will announce tomorrow or Friday will probably include a €0.15 per litre rebate. This is the same at what the French government announced.

Germany could go in an even more dramatic direction. Christian Lindner, the finance minister, said that if it were up to him the rebate would be higher than €0.10 per litre, and last longer than a month. Florian Toncar, Lindner’s deputy in the finance ministry, said on Twitter that the aim would be to bring petrol prices under €2.00 per litre.

These measures will cost a fair amount of money. A €0.20 per litre rebate, which is what would be currently necessary to bring prices below €2.00 per litre, could cost Germany €10-13bn a year. Along with every other measure governments will have to take to mitigate energy costs going up, the question is how to pay for it, after the pandemic added significantly to EU debt piles.

Both Germany and Italy’s rebates will at least, in theory, be revenue neutral since they are set to be funded through increased VAT receipts from the price of oil. But Clemens Fuest, president of the German Ifo institute, points out that this is a false economy. Being able to fund a large enough rebate through VAT receipts to cancel out the price increase is difficult, if not impossible. Increased consumer spending on petrol will mean that spending falls elsewhere, cancelling out the VAT boost.

These policies are also misguided because they are regressive. Rather than supporting the households least able to bear the brunt of energy price increases, they will be subsidising middle-class car users more in both countries.

Then there’s where the money goes. In 2019, 27% of the EU’s crude oil imports came from Russia. While it is less reliant on Russia for oil than for natural gas, this still means a lot of money sent to fund Vladimir Putin, almost $100bn in 2021. With a petrol rebate and no oil embargo, which would be unfeasible because it could lead to retaliatory sanctions, that means EU countries literally subsiding Russia’s government.

Increasing defence spending makes less sense to us if you’re also sending more money that Russia can use to rebuild its army, and counteract the weapons you’re sending to Ukraine. It’s also the height of hypocrisy to cheer on Ukrainian bravery, while EU governments send more money Russia’s way to kill more Ukrainians.

We expect Italy’s rebate to be more of a fait accompli than Germany’s. It’s hard to see the right-wing parties in Draghi’s coalition, his most difficult partners, objecting to it. In Germany, it’s more up-in-the-air. The Greens are far from sold on the idea and, sensibly, view encouraging energy savings as paramount, something that the rebate definitely wouldn’t incentivise.

15 March 2022

What to believe, and what not

We can all see how Vladimir Putin is manipulating information. He is cutting off his country from all news sources from outside Russia. But manipulation occurs on both sides. Ours is more subtle. It works through embedding journalists with troops, and especially through off-the-record briefings. The best strategy in these times is to never trust unsourced stories, and to insist on at least two independent sources or eyewitnesses. When you hear someone quote a European official, or a US intelligence official, prepared to be lied to.

We therefore have no way to ascertain whether China has indeed agreed to deliver weapons to Russia. It is just as possible that the US is trying to justify an extension of its sanctions to China for reasons that may be unrelated to Russia. Both are alarming scenarios in their own right. With China on his side, Putin might win his war. But if the US is merely trying to extend its sanctions, we should prepare for yet another global supply shock. Fighting Russia and China at the same time does not seem like a very good idea to us.

This is why we treat the US threat of unspecified consequences for China with a degree of caution. Either this is a bluff, or we will be in more trouble than we think. We would be surprised if this threat has much of an impact on Chinese policy. China is still subject to the punitive tariffs imposed by Donald Trump. China's interest is to keep trading, and to develop its financial sector to displace the dollar as the leading global currency. For China, this war constitutes an opportunity.

So what do we know? We know that Jake Sullivan, the US national security adviser, and Yang Jiechi, a member of China’s Politburo, held a seven-hour long meeting in Rome which was described by both sides as tough. The content was not disclosed. The stated purpose on the US side was to dissuade China from allying itself with Russia, and from undermining western sanctions. Chinese state media played the fanboy role of denouncing the Americans. American government officials did the same through off-the-record briefings. When that happens, this usually means that the two sides are not about to cut a deal.

Will China supply arms to Russia? The honest answer is that we don't know. The FT reports that the US has cabled other European governments that China is indeed planning to sell arms. We are sure that the US is spreading this information. But we have not yet seen any corroboration.

But what this is telling us is that China is still pursuing a fence-sitting strategy. Whether China will emerge as a peacemaker is open to question. In any case, we don't think China will join and support western sanctions, and especially not block Russia's access to its yuan reserves. Nor do we believe that the Chinese government would actively discourage companies that try to exploit western sanctions to their advantage. If sanctions leak, that would be an obvious source. It is possible that China will go further and actively support Putin. But what interest does China have in losing its position of neutrality?

14 March 2022

War carries on in space

The war in Ukraine will have far reaching consequences that we are slowly becoming aware of, even in space. Space is one of the last remaining areas where the US and Russia still cooperate. Now  this seem to come to an end too.

The most visible instance of US-Russian space cooperation is the International Space Station, the ISS, a joint project between the US, Russia, the EU, Japan and Canada. Dmitry Rogozin, the head of Russian space agency Roscosmos, warned on Telegram that the ISS could crash as a result of the sanctions.  Russian ships refuelling the ISS have been targeted by sanctions, thus interrupting its workings.

The space station and its management was built on the principle of interdependence. The US provides electricity in one segment, while the Russians correct the orbit of the space station in another segment. The space station loses 50 to 100m per day of altitude due to its surrounding atmosphere. The Russians correct this by lifting the ISS back into its orbit. Without this lifting, the station will eventually fall out of the sky. Rogizin published a map indicating that it will land on earth, pointing out that it will not be in Russia.

The space station is operated by a multi-national team. At the moment, there are seven astronauts on board: four Americans, two Russians and one German, conducting scientific experiments.

Roscosmos called off any scientific cooperation with the German on board, in response to the sanctions. Rogozin also announced that Moscow would no longer supply engines for American Atlas and Antares rockets.

At the moment, however, it is not envisaged that the Russians disengage completely from the ISS. The intergovernmental contracts from 1998 foresees that this is only possible if notice is given one year in advance, and if it does not compromise the functioning of the station. Russia committed until 2024, while the US, Canada, the EU and Japan committed to until 2030.

Roscosmos announced its intention to prioritise the construction of military satellites as Russia. Other space cooperation is compromised too. Russian Soyuz launchers have been brutally decommissioned, a particular problem for satellites in the Galileo system.

The longer the war lasts, the stronger the isolation of Russia will be, the more repercussions we will see. Russia will not sit still. Cutting them off politically, economically and culturally will lead Russia to respond by seeking to de-westernise its own country, forming other alliances with less hostile partners such as China and India. New space projects, such as the Russian-European ExoMars that was scheduled for 2022, won’t take off in this climate.

11 March 2022

Is the EU losing its mooring?

A picture says more than a thousand words. Since the beginning of Russia’s invasion into Ukraine we have been immersed in images and videos of devastated cities, exploding bombs, of human suffering and death. War seems so close to us Europeans, and so familiar. In response, we open our doors for over 2m people who are fleeing the war, and show our support to Ukraine by standing ovations in parliaments or by painting blue and yellow wherever we can. Now it is us who create our own pictures: one that identifies the bad and one that makes us look good. One that suggests to those in other war zones in Africa or the Middle East that they are not equal to those from Ukraine.

By empathetically engaging with the suffering and the push against the aggressor, we may become blind about how we are becoming part of its narratives. We have never seen so many pictures of the suffering in Iraq, Yemen or Syria in our press coverage. Yet, atrocities were committed there too and with our active help. This leads to a bias in our narratives and perceptions of our impact in this war, and skews our analysis.

What will come after? Ukraine will not be the last war. How will we show up in the next war? Empathetic as we are now, ready to do what is necessary or exhausted from spending all our emotional capital on this one war that appeared to us more European than others? Why, because the enemy and the victims are more familiar to us, and because they look more like us? Our past may dictate what we see and do not want to see. This is a reflex Europeans should resist. Otherwise no real neutrality is possible.

If we do not clarify our position in the effort to mediate for peace and protect the vulnerable, we risk of being exposed even more with our double standards. Will the war in Ukraine help us to reform the Dublin pact? Can Turkey not point to us next time saying, well, clearly you do have enough room and capacity to take in refugees, so why do you not take some from us?

We burnt bridges to mediate peace in this war. But we are running the risk of losing our mooring.