The Russian economy appears to be more robust than estimated at the start of the Ukraine war. But the outlook is far from rosy.

Russian gas exports have already fallen sharply, but the oil industry has yet to be affected. The Russian economy is contracting this year and the next, but less sharply than previously estimated. On balance, income from oil and gas exports has increased considerably, which is filling the state treasury. The European oil boycott will put pressure on revenues, while other sanctions will also hurt more.

Russian economy

Is Europe sinking as Russia climbs out of the trough? A Russian journalist recently asked this question during a press conference of the International Monetary Fund. Wishful thinking, the IMF economists clearly hinted in their response. They expect a contraction of -3.4% for this year, -2.3% for next year, while the eurozone is expected to grow slightly in 2023. However, last April, a contraction of more than 8% was expected for 2022.

Energy exports

Where does this relative windfall come from? Earlier analysis of the Russian economy still assumed a financial crisis. This scenario did not materialize because capital movements were restricted. Russian monetary authorities also prevented a bank run by raising interest rates. Friend and foe praise the attitude of the Bank of Russia, which operates independently and paints a fairly realistic picture of the economy. In a recent publication, the central bank stated that the economic recovery stalled in September, while inflation is rising again — partly due to ‘the exodus of suppliers and retail chains from unfriendly countries’.

Higher returns from energy exports keep Russia going. It is true that Moscow has largely turned off the gas tap to Europe of its own accord (exports are 80% lower than a year ago), but the sale of gas before the war ‘only’ accounted for a quarter of oil revenues. Oil is therefore much more important to the Russian economy. The price per barrel is higher this year than in 2021 (the recently announced production cut by the oil cartel Opec sets a new floor), while the export volume has remained stable. The state is likely to receive RR 11,700 billion (€194 billion) from oil and gas sales this year, an analyst estimates, compared to RR 9,100 billion last year (€151 billion).

The big blow

Western sanctions are potentially disastrous for Russian industry, which relies heavily on imports of machinery and technology. So far, Moscow has succeeded in limiting the effects with a bit of trickery and wizardry. As soon as the stocks run out, it is expected that major problems will arise. In the meantime, the combination of robust energy exports, falling imports and strict monetary policy is resulting in a strong ruble. This also dampens inflation, as imported consumer goods are relatively cheap as a result.

Normally, the strength of the currency says something about the strength of the underlying economy. But in the case of Russia, this is misleading. Analysts still expect the war to cost the country 10% to 15% of GDP, although this bill is spread over several years. The biggest blow will be the European boycott of Russian oil, which will take effect in December.

Emigration wave

This impending intervention has already led to shifts in trade flows: less to Europe, more to Asia. But can the entire decline of exports to Europe (accounting for about half of Russia’s oil exports before the war) be absorbed by, for example, China? It would then have to import more than twice as much Russian oil. Given the limited supply of tankers, this is only possible if new pipelines are built — and that costs time and money. Bofit, the think tank of the Finnish central bank, foresees an ‘exceptionally large drop’ in Russian exports before 2023. Finnish economists expect a 4% contraction for the Russian economy this year and next, making them more pessimistic than the IMF.

Oil and gas sales account for 40% of Russian government revenue. Lower exports will push up the budget deficit. In view of the low, largely domestically financed government debt, this is not an acute problem.

The decline of the Russian economy is happening in slow motion. This not only concerns the effects of the sanctions, but also of the wave of emigration as a result of the mobilization. Demographers expect a declining birth rate, accelerating the population decline that started in 2018. Bloomberg economists now estimate Russia’s potential economic growth at 0.5% annually — up from 2.5% before the war.

Russia is getting stronger, the West is weakening

While Russia is gaining ground in eastern Ukraine, there was also positive military news last week. With the weapons received by the West, Ukraine has launched a number of successful attacks against the Russian army and is preparing a counter-offensive against southern cities like Kherson. Ukraine also launched its first attack on a Russian naval base in Crimea.

In addition, a new study by scientists at Yale showed that the sanctions are effective and have now paralyzed the Russian economy.

With the beginning of the transit of food from the Black Sea, the image may arise that Russia would be ready for an agreement. However, this is implausible. The country is already preparing for a long-term conflict and unfortunately Russia’s position vis-à-vis the West could improve significantly in the near future.

First, we must realize that Russia is expanding the conflict to more and more stages. In space, for example: Russia has indicated that it would stop collaborating on the International Space Station, which may endanger the entire project. This also applies to the maritime level: Putin this week approved a new maritime doctrine against American dominance of the world’s seas.

Not to mention the diplomatic scene, where Russia is very active and is trying to influence its image worldwide. In the former Soviet sphere, Putin has visited Tajikistan and Turkmenistan and has held summits with leaders in Kazakhstan and Uzbekistan. Important consultations have been held with regional powers Iran, Turkey and Saudi Arabia. In Uzbekistan, Foreign Minister Sergei Lavrov met ministers from the Shanghai Cooperation Organisation, an Asian bloc led by China and Russia.

The same Lavrov also visited Africa, where he disseminated the Russian perspective on the war in Egypt, Uganda, Ethiopia and Congo. This ties in with anti-Western sentiment and with the economic concerns of many African leaders, as already demonstrated by Macky Sall, president of Senegal and currently chairman of the African Union.

In Africa, Russia has other instruments. In recent years, the Russian private army, the Wagner Group, has gained influence in countries such as Mali, the Central African Republic, Libya and more recently Burkina Faso. This could cause unrest on Europe’s borders.

Even more important than Russian diplomacy is that Western unity threatens to crumble. First, take the US. After the summer, the mid-term elections for the House of Representatives and the Senate will take place there and it is very likely that Biden’s position in Washington will weaken. Ukraine is currently not a major topic in the US. Foreign news in the US is about China and Saudi Arabia. However, the main topic on the news is inflation. Rising prices combined with a recession do not bode well for the incumbent government and its ability to conduct coherent foreign policy.

Consider Europe. Here we see a similar dynamic. The pain of higher prices is becoming more and more apparent and this is causing political tensions. Italian Prime Minister Mario Draghi was the first prominent victim of this when he resigned after clashing with the Five Star Movement over aid packages. After new elections, a right-wing coalition that favors a more positive relationship with Russia could come to power. Everywhere, including in rich countries such as the Netherlands, economic problems will put a lot of pressure on politicians in the coming months.

Tensions will also increase between European countries. The new Italian government will take office at a time of rising interest rates, which will bring renewed concerns about the debt burden of southern European countries. And also think of Eastern Europe. Viktor Orbán, prime minister of Hungary, stated last week that the European sanctions policy is failing and that the EU should not align itself with Ukraine, but between Russia and Ukraine. Impending energy shortages will sharpen the dividing line between countries that are more and less dependent on Russian gas.

So it is quite possible that Western unity and support for Ukraine will come under great pressure in the coming months, let alone possible disruptions such as a new corona wave.

This does not mean that Russia is going to win the war or that the West should push for an agreement with Russia now. This is not feasible. But it does mean that we have to think now about what we will do with a weaker position. And that it is time to look more outwardly and launch our own EU diplomatic offensive.

Read the original piece written in Dutch by Haroon Sheikh here

The Netherlands has the highest gas price in the EU

Last month, the Netherlands had the highest gas price of all countries in the European Union.

Dutch households paid 283 euros per megawatt hour (MWh) of gas in July, more than twice as much as the average EU household. Gas is also about half the price in neighboring countries Germany and Belgium. A month earlier, gas in Sweden was more expensive than in the Netherlands, but in July Swedish households paid 237 euros per MWh.

(Bigstock/JKLS photography)

Purchasing power crisis

Energy prices have been rising rapidly for some time due to the war in Ukraine. Food and rent prices are also rising sharply. There is currently a purchasing power crisis that we have not experienced in decades.

The energy prices are the average rates (including taxes) that energy companies charge for a new energy contract. 283 euros per MWh comes down to 2.76 euros per cubic meter.

People also pay relatively high amounts for electricity in the Netherlands: 419 euros per MWh, including taxes and a reduction in energy tax. Only in Italy and Denmark prices are higher.

An average household that has to renew its energy contract has lost about 3700 euros per year extra compared to last year. The Dutch Budget Information Service Nibud warns that one in three households will run into problems as a result. “Some just need to cut back a bit, but there is also a large group who can’t get by even if they budget well.”

High prices also affect middle incomes

People with a low income can apply for an energy allowance of 1300 euros in the Netherlands. “That is not enough to keep people afloat”, according to Nibud. “We see too many groups who have too little income structurally to make ends meet. This also applies to people with a regular income.”

Companies make record profits

What we are seeing now is that inflation is impoverishing citizens while companies are making record profits. There’s plenty of money, but it all flows to companies.

De brexiteers kunnen het Brexit-trilemma nog steeds niet onder ogen zien

Maker: PA

Op 8 september sprak Brandon Lewis de inmiddels beroemde woorden: dat de wet op de interne markt van de Britse regering “het internationaal recht slechts op een zeer specifieke en beperkte manier zou schenden”. Dat zette een reeks gebeurtenissen in gang die zelfs nu, twee maanden later, de discussie over dat wetsvoorstel hebben gevormd en zou betekenen dat Groot-Brittannië niet bereid is om het Withdrawal Agreement (dat de regering van Boris Johnson slechts 8 maanden geleden heeft ondertekend) en het Goede Vrijdagakkoord te respecteren, en op deze manier dus bereid is om internationaal recht te overtreden.

Eurocommissaris Maroš Šefčovič legde op 10 september een krachtig geformuleerde verklaring af. De vicevoorzitter verklaarde in niet mis te verstane bewoordingen dat de tijdige en volledige uitvoering van het terugtrekkingsakkoord, inclusief het protocol over Ierland/ Noord-Ierland – waarmee premier Boris Johnson en zijn regering hebben ingestemd, en dat zowel het Britse Lager- als Hogerhuis minder dan een jaar geleden hebben geratificeerd, een wettelijke verplichting is. De Europese Commissie volgde op 1 oktober met een kennisgeving aan het VK, waarop het VK overigens niet heeft gereageerd.

Ondertussen heeft de overwinning van Biden bij de Amerikaanse presidentsverkiezingen de aandacht gevestigd op wat de verkozen president eind september zei over de Brexit:

Maar zelfs nu – nadat de wet op de interne markt deze week een grote nederlaag leed in het Britse Hogerhuis (van de Lords stemden 433 tegen en 165 voor), blijft de Britse regering bij haar standpunt.

De Ierse minister van Buitenlandse Zaken Coveney vatte het als volgt samen:

Wat is hier aan de hand?

De EU, Ierland, de nieuwe Amerikaanse regering en een grote meerderheid in het Hogerhuis zijn het hier allemaal over eens: er kan geen doorbraak in de richting van een Brexit-deal komen tenzij de clausules die in strijd zijn met het terugtrekkingsakkoord en het NI-protocol worden verwijderd. Je kunt al deze mensen bijna horen roepen: “Hoe kan Boris Johnson c.s. zo dom zijn?”

Ik vraag me echter af of we allemaal het punt missen. Dat het politieke establishment – mensen zoals ik en al die instellingen – verkeerd hebben geïnterpreteerd hoe Johnson dit spel speelt.

Toen ik John Redwood’s belachelijke brief aan Joe Biden las, realiseerde ik me onze denkfout. “Het is de EU die nieuwe grenscontroles aan hun kant van de grens lijkt te willen instellen, die u misschien graag met hen zou willen bespreken”, schreef Redwood. Hoe – zelfs nu – kan hij ooit zoiets schrijven, zei ik hoofdschuddend tegen mezelf.

De reden is dat hij nog steeds weigert het trilemma van afwegingen te erkennen dat J. Daniel Kelemen het meest beknopt samenvat en in de afbeelding hieronder wordt weergegeven. Johnson’s gewijzigde terugtrekkingsakkoord en het NI-protocol is optie A – een grens- of douane-infrastructuur tussen Noord-Ierland en de rest van het VK, en het VK verlaat de interne markt en de douane-unie. D is de onmogelijke optie, maar daar hoopt Redwood nog steeds op.

En dit is eigenlijk niet zo gek veel anders dan wat Johnson in september zei – dat het terugtrekkingsakkoord “nooit logisch was” met betrekking tot Noord-Ierland. Nou, in die zin had hij gelijk – want ook de DUP had daar in december 2019 op gehamerd! En dat leidt je naar zoiets als C op Kelemen’s diagram … en terug naar de deal die May sloot met de EU, en de deal die Johnson afdeed als te soft.

Met andere woorden: terwijl het grootste deel van het debat over de Internal Market Bill gaat over het al dan niet overtreden van het internationaal recht, zijn Johnson en de Brexiteers nog een stap verder terug – ze weigeren zelfs nu in het reine te komen met de realiteit dat het terugtrekkingsakkoord en het NI-protocol het onvermijdelijke resultaat oplevert dat er grensinfrastructuur nodig is tussen Noord-Ierland en de rest van het VK (zie bijvoorbeeld de kopzorgen over parkeerplaatsen voor trucks). Als er een Brexit-deal komt tussen het VK en de EU, plaatst het wetsvoorstel voor de interne markt het VK in kwadrant A in het diagram – en dat verklaart waarom de bepalingen die in strijd zijn met het terugtrekkingsakkoord en het NI-protocol zo belangrijk zijn voor Brexiteers. 

Je zal het een Breexiter niet als zodanig horen zeggen, maar in wezen is de reactie van Redwood, Johnson, Hannan en gelijkgezinden op de beschuldiging dat het wetsvoorstel voor de interne markt in strijd is met het internationaal recht: “So what? Als we dat debat zelfs maar aangaan, betekent dat dat we de impliciete gevolgen van de Brexit moeten erkennen.” Wie ook maar probeert de boodschap over te brengen dat het tijd is voor verantwoorde beslissingen – of het nu het Hogerhuis of Biden of Coveney of Von der Leyen is – Brexiteers willen deze zeker niet horen.

Dit alles – met het verstrijken van de tijd tot het einde van 2020 en dus het einde van de transitieperiode – kan slechts tot één resultaat leiden: No Deal.

Phil Syrpis is tot een vergelijkbare conclusie gekomen – en gebruikt ook Kelemen’s Brexit Trilemma – in dit stuk. Phil’s stuk concentreert zich meer op de juridische implicaties, het mijne meer op de politiek en communicatie, maar de essentiële conclusie in beide gevallen is in wezen dezelfde.

Dit stuk is in het Engels geschreven (link naar originele artikel) door Jon Worth en met zijn toestemming naar het Nederlands vertaald en gepubliceerd. Volg Jon’s blog hier.

How a “no deal” Brexit can be avoided

 It starts with acknowledging the consequences of one.

Brexit, deal or no deal

Britain’s conservatives are fond of Australia, an Anglosphere place with a flourishing economy, fine weather and fabulous beaches. So when trade talks with the European Union were briefly suspended before resuming this week, and Boris Johnson told Britons they might end up not with the Canada-style free-trade agreement he wanted, but instead leave on “Australian terms”, he made the prospect sound beguilingly sunny.

This is typical Johnsonian spin. If the latest face-to-face talks should collapse and Britain end up with no deal, the terms on which it leaves would not be those that apply to Australia, which has many side-deals and is seeking its own free-trade agreement with the eu. They would be closer to those of Afghanistan, Bhutan or Congo: Britain would have no trade deal at all with its largest trading partner, and little prospect of getting one.

Read more in The Economist