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Brussels budget crisis scuppers climate consensus



The EU’s budget fiasco is overshadowing what should have been a big month for Europe’s international climate ambitions. 

An EU leaders’ summit next week had been earmarked as the moment for the bloc to sign up to an ambitious 2030 emissions target and mark a milestone in the continent’s drive towards climate neutrality. 

But a budgetary showdown with Hungary and Poland is threatening to scupper the green celebrations. 

Diplomats warn that an agreement for the EU to cut its emissions by “at least 55 per cent” by 2030 is at risk as those same capitals — Warsaw and Budapest — demand more money and guarantees that the green transition won’t hit their economies hardest. 

As the FT reported last month, a December deal on the 2030 target may well end up as the first significant casualty of the budget spat as tensions run high between Brussels and the illiberal squad. The EU had hoped to finalise an agreement on the 55 per cent target this year, paving the way for the bloc to upgrade its emissions goal as part of the Paris agreement. 

The danger of failing to have a budget ready for 2021 would mean that tens of billions of euros to fund the carbon transition simply would not be available next year. Poland, which has consistently demanded more aid for its coal-dominated economy, was due to be the biggest beneficiary of said funds. 

Poland and Hungary — joined by allies including Romania, Bulgaria, Slovakia and the Czech Republic — have also demanded that the 2030 target come with a detailed set of political promises to provide money and support for countries undergoing the transition (a so-called “enabling framework”).

“I don’t think it is feasible to agree on climate conclusions and an enabling framework when we don’t have a budget agreement and rule of law conditionality,” said one senior EU diplomat. 

It’s not just money at stake. The same group of eastern member states want guarantees that the green transition will not prohibit them from using controversial low-carbon technologies including natural gas and nuclear power. This has been a perennial demand of the EU’s nuclear champions, such as Czech Republic, which made similar calls at last year’s December summit.

But countries frustrated by the budgetary brinkmanship of Poland and Hungary aren’t in the mood to show too much generosity to the east. A draft set of summit conclusions does not mention that the green transition should be “neutral” on different forms of energy generation — a phrase prized by eastern governments. 

“This is not the time to bet on industries that have no future in a fairer and greener world,” said Sebastian Mang at Greenpeace. “Governments and the EU can’t duck the truth — cutting emissions as fast as possible to zero means there is no place for fossil fuels like gas, or risky and expensive technologies like nuclear power.”

Chart du jour: Russia’s hidden Covid-19 death toll

Chart showing that Russia’s all-cause mortality has climbed far above expected levels since its Covid-19 outbreak began

Russia is becoming the epicentre of Covid-19 deaths in Europe. Analysis from the FT shows that 123,000 excess deaths have been recorded in Russia since the pandemic began. This compares to an official state count of 41,053. Across the country, hospital capacity is exceeding 95 per cent in 17 out of 85 Russian provinces. The alarming rates of infections have led the Kremlin to declare that they will start vaccinating citizens “as soon as possible”, according to the country’s health minister. (chart via FT)

Europe news round-up

Poland’s deputy prime minister has suggested that the country could drop its budget veto if it receives ‘binding’ assurances over rule of law mechanisms © via Reuters
  • Is a budget endgame finally in sight? Poland has said it is ready to drop its veto over the EU’s €1.8tn recovery package if Warsaw can secure an explanatory declaration laying out the link between a rule of law mechanism and EU money, the country’s deputy prime minister has said. (Reuters) The comments from Jaroslaw Gowin, following a meeting with European Commission officials, are the most significant sign of a potential thaw in a long-running stand-off that threatens to freeze billions in EU budget money next year. Mr Gowin told reporters his government would accept a “binding” declaration that would state that the rule of law mechanism “would not be used to exert unjustified pressure on individual member states in areas other than the proper use of EU funds”. It comes a day after a senior commission official said Brussels was considering setting up a €750bn recovery fund without Poland and Hungary.

  • British officials have accused France of making new Brexit demands at the eleventh hour, leaving a future-relationship agreement hanging in the balance. Hopes remains on both sides that the last minute bust-up can be resolved and a deal be reached by Monday or Tuesday. The FT has more.

  • French authorities are monitoring 76 French mosques “suspected of separatism” and will order their closure if they are found to be in breach of republican values or acting as “breeding grounds of terrorism”, the country’s hardline interior minister Gérald Darmanin has said. (FT/Le Figaro)

  • Spain’s parliament has approved an annual national budget for the first time since 2016, giving a much-needed boost to socialist prime minister Pedro Sánchez, who is fighting off coronavirus outbreaks and years of budgetary gridlock. (Bloomberg)

  • After a year in Brussels’ top job, commission president Ursula von der Leyen talks to FT editor Roula Khalaf about handling a pandemic just three months in to her term, her relationship with her former boss Angela Merkel and her fondness for the British sense of humour.

  • Hungarian prime minister Viktor Orban has criticised his close ally and former Fidesz MEP Jozsef Szajer for his “unacceptable and indefensible” actions after it was revealed Mr Szajer broke Belgium’s lockdown rules by taking part in what local media described as a “sex party”. (Euractiv)

Coming up today

European Council president Charles Michel holds a press conference this morning to take “stock of the past year and look forward to future challenges”. There is a possibility Michel Barnier, the EU’s chief Brexit negotiator, will brief ambassadors.; @mehreenkhn

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Bets on coronavirus recovery may come good




Markets appear to have got the pandemic right. A plummet in shares as economies locked down gave way to a robust rally: investors trusted in a mix of vaccines, corporate adaptation and central bank stimulus. Mass vaccination programmes in the US and Europe are under way and in countries where they are most advanced like Israel and the UK, economies have unlocked and customers have come flooding back to shops and restaurants.

The virus takes advantage of our social natures to spread but markets had a different, equally human, trait in mind: ingenuity. That includes tech companies whose shares have been among the big winners as they kept businesses operating during lockdowns and new business models allowed shoppers to keep spending. Others too, have adapted, and lockdowns have become less damaging.

Even more important has been pharmaceutical innovation. Researching and developing vaccines has, likely, had among the greatest returns on investment of any human activity — as production accelerates the need to lock down, with its attendant economic costs, retreats. The next challenge — political rather than scientific — is to ensure a sufficient share make their way to poor countries. 

With little experience of pandemics, policymakers looked to the financial crisis. Fresh memories of what was in many countries a “lost decade” of meagre improvements in living standards, spurred central banks and governments to open the floodgates. The unprecedented monetary and fiscal stimulus has been notable for its speed as well as its size compared to the response in 2008, reducing long term damage: America’s vast spending, in particular, has added fuel to the rally and stimulus cheques have allowed retail investors to participate.

Claiming victory would be a mistake. The pandemic has been a story of reversals and countries that once looked to have the virus under control finding themselves overwhelmed. That includes, for example, Germany — lauded for its early response but struggling with a third wave — or eastern Europe, initially less affected than elsewhere but now among the most badly hit regions. Other countries which have reopened in the past had to swiftly lock down again as new waves spread. 

In 2009, the main US index rose 66 per cent in the 12 months after the trough but it took far longer, and successive crises in the eurozone, before economies would fully recover. Investors who got into the rally early were unlikely to regret it: cheap money helped power a decade-long bull market. This time the rebound has been similar as investors have learnt there is little to be gained from standing in the way of quantitative easing.

The big question remains the outlook for inflation. With little sign of economies returning to capacity after the financial crisis central banks kept rates low and asset purchases high, flooding the financial system with liquidity. A stronger recovery from the pandemic, thanks to a mix of government stimulus and households spending accumulated savings could see prices and wages start to creep up again — central banks may start to withdraw support too. The pandemic has also disrupted supply chains raising price pressures further.

Record first-quarter growth in China, where the recovery is more advanced, has already shifted the focus to “overheating” and the prospect of rate rises. An end to the persistent “lowflation” of the decade after the financial crisis would be a far better outcome for the whole world but it might mean markets have got ahead of themselves.

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Biden imposes tough new sanctions on Moscow




US president Joe Biden has imposed sweeping new sanctions against Russia including long-feared measures targeting its government debt in a sharp escalation of Washington’s confrontation with Moscow.

The first anti-Russian measures from the Biden administration also include the expulsion of 10 Russian diplomats from the US and sanctions against 38 entities, individuals and companies accused of taking part in efforts to interfere in US elections and conduct cyber attacks.

On Wednesday, the US for the first time formally blamed SVR, Russia’s foreign intelligence service, for the SolarWinds hack, which affected at least nine federal agencies and 100 companies. One senior administration official told reporters the hack gave Russia “the ability to spy on or potentially disrupt more than 16,000 computer systems worldwide”.

News of the measures sparked a sell-off in Russian assets and a warning from the Kremlin that they would harm efforts to reduce tensions between the two countries.

The fresh sanctions ban US financial institutions from trading in newly issued Russian state debt, known as OFZs, and bonds issued by the Russian central bank and National Wealth Fund. The ban affects debt issued after June 14.

Measures targeting new state debt have long been viewed as a “nuclear option” for the US and a milestone in Washington’s sanctions regime against Russia, which has steadily expanded since the first round of restrictions were imposed by the Obama administration in response to Moscow’s 2014 annexation of Crimea.

In remarks at the White House on Thursday afternoon, Biden played down the severity of the actions, saying the US wanted a stable, predictable relationship and was “not looking to kick off a cycle of escalation and conflict with Russia”.

“I was clear with President (Vladimir) Putin that we could have gone further, but I chose not to do so,” Biden said, referring to recent telephone conversations between the leaders. The US president said he was still prepared to take further action to respond to Russian aggression “in kind”.

The senior administration official said the new sanctions package would “impose costs for Russian government actions that seek to harm us”. The official added some US responses would “remain unseen”. The moves come after strong condemnation from Washington and other Nato powers over Russia’s heavy military build-up close to its border with Ukraine.

The package includes sanctions on 32 individuals and organisations accused of interfering in recent US elections, and six Russian technology companies alleged to support the country’s intelligence services, in view of the SolarWinds hack.

The rouble dropped as much as 2.2 per cent in early trading on Thursday to about 77.5 to the US dollar. It trimmed some of its initial losses and was down 0.7 per cent to trade at 76.41 by 2pm London time.

The decline in the value of the Russian currency erased gains made earlier in the week after a Tuesday call between Biden and Putin, in which the leaders discussed a potential joint summit aimed at easing tensions.

Moscow’s benchmark Moex stock index was down 0.6 per cent, while the market’s dollar-denominated RTS index was 1.8 per cent lower.

© Alexei Druzhinin/Kremlin/EPA/Shutterstock

The country’s benchmark 10-year bond yield rose 0.19 of a percentage point to 7.24 per cent, a touch below recent highs. Bond yields rise as prices decline.

The EU and Nato both issued statements expressing “solidarity” with the US over the sanctions.

Dominic Raab, British foreign secretary, said the US and UK were aware of Russia’s actions to undermine their democracies. “[We] are calling out Russia’s malicious behaviour, to enable our international partners and businesses at home to better defend and prepare themselves against this kind of action,” he said. “The UK will continue to work with allies to call out Russia’s malign behaviour where we see it.”

The UK’s security review, published last month, identified Russia as the “most acute threat” to its national and collective security, citing “hostile and destabilising” activity by Moscow.

Russia’s foreign ministry responded to news of the sanctions by summoning the US ambassador to Moscow for what it said would be a “difficult” discussion.

“Such aggressive behaviour will certainly be strongly rebuffed, and the response to sanctions will be inevitable,” ministry spokeswoman Maria Zakharova told reporters. “Washington must realise that it will pay for the degradation of bilateral relations.”

The Kremlin said earlier on Thursday that fresh sanctions could scupper efforts to arrange the planned summit between the two leaders.

However, in his remarks on Thursday, Biden said he thought the summit would still take place in Europe this summer, adding teams from both countries were discussing the event.

The Biden administration began drawing up measures to punish Russia following the SolarWinds hack, which officials said at the time was “likely of Russian origin”.

Russia has denied involvement and said it had never attempted to influence foreign elections.

The US has also condemned the recent arrest and jailing of Russian opposition activist Alexei Navalny after his recovery from a suspected assassination attempt, and accused Moscow of threatening Ukraine by deploying tens of thousands of troops to the country’s border.

A senior administration official said the US was not taking any countermeasures in view of a US intelligence assessment that concluded with only “low to moderate confidence” that Russian intelligence officers paid the Taliban to attack US and allied personnel in Afghanistan in 2019 and perhaps earlier. The official said the US would instead issue “strong direct messages” to Moscow.

The share of Russia’s rouble-denominated Treasury bonds held by foreigners fell to a more than five-year low of 20.2 per cent in March, down from more than 30 per cent a year earlier.

The sanctions will test the Russian finance ministry’s plans to soften the impact of restrictions against its sovereign debt. Potential countermeasures include a pause in issuance and regulatory easing for Russian borrowers, deputy finance minister Vladimir Kolychev told the FT late last year.

The ministry is also confident that, if needed, it can replace foreign OFZ holders entirely through domestic demand.

After cancelling a bond sale in March due to market volatility and sanctions fears, Russia sold a record Rbs354bn ($4.6bn) in OFZs a week later, with most of the issue going to Kremlin-run banks.

Additional reporting by Max Seddon in Moscow, Lauren Fedor in Washington and Hannah Murphy in San Francisco

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Biden will not change Putin but is right to talk to him




The west’s approach to Vladimir Putin’s Russia regularly falls prisoner to the perennial debate about realism and idealism in foreign policy. The choice is posed as between engagement and confrontation, the pursuit of interests and defence of values.

As Putin apparently threatens war in Europe by overseeing a menacing build-up of Russian troops on Ukraine’s eastern border, two thoughts arise. The Russian president is not about to change his ways. And the US and Europe have to deal with him.

Putin has been a big loser from Joe Biden’s presidential victory. Donald Trump fell under his spell. When they met in Helsinki in 2018, the then US president said of the evidence of Russian meddling in the 2016 US election, that he preferred the word of a former KGB operative turned Kremlin autocrat above that of his own intelligence agencies.

Trump offered Putin the respect he craves. It is always a mistake to underestimate the role of vanity in politics. Putin never forgave Barack Obama for an off-the-cuff reference to Russia as a “regional” power. Above all, Putin wants to be treated — and seen by Russians to be treated — as the leader of a nation that still stands as an equal with the US. The lopsided alliance he has forged with China will never serve as a substitute.

Biden’s victory has derailed eternal Kremlin hopes of splitting the Atlantic alliance. Washington’s relations with its European partners are warmer than for many years. German chancellor Angela Merkel looks increasingly friendless in her stubborn backing for the Nord Stream 2 pipeline being built to carry Russian gas under the Baltic Sea. French president Emmanuel Macron has failed in his efforts to recalibrate the relationship with Moscow.

Western diplomats are not sure what to make of the latest troop build-up. It contains an obvious warning to Kyiv not to seek to overturn the ceasefire with the pro-Russian separatists who seized territory in Ukraine’s Donbas after Moscow annexed Crimea in 2014. And there is a message to the US and Nato not to write a blank cheque for Volodymyr Zelensky, Ukraine’s president, and his government. 

Whatever the Kremlin’s ultimate military intentions, the deployments have served Putin’s purpose in grabbing the attention of the White House. Until this week Biden had largely ignored him, while offering a blunt assessment of the Russian regime. Putin is a “killer”, he remarked last month. Moscow was put on notice that the US would respond vigorously to cyber attacks and meddling in US elections.

The US president’s offer this week of a summit on neutral territory to discuss Ukraine and a clutch of other issues looks calculated to appeal to Putin’s vanity. Success or failure, a summit will offer clarity. And if it can take some of the tension out of the relationship by massaging Putin’s ego, why not.

It will not presage, however, a fundamental change in the relationship. The “reset” story has been played out many times during the past decade or so. The offer of a fresh start has come from several western leaders.

Logically, Putin should be attracted to the idea. Russia can survive US and European sanctions, but it badly needs western investment and technology. Its long-term strategic interests lie in a close economic relationship with Europe. If the Kremlin is in search of threats, it would do better to take a close look at China’s Eurasian ambitions.

Russia’s interests, though, are not Putin’s. His priority is the preservation of his own power and wealth. Autocrats need enemies. The supposed threat from the US and its allies sustains his populist pitch to Russian nationalism.

The question then becomes how much room there is for co-operation — whether on nuclear arms control, backing efforts to restore the nuclear agreement with Iran, or promoting stability in Afghanistan when US troops complete their withdrawal this year. The answer must be that the possibilities are worth exploring. Putin has already accepted Biden’s offer to extend the last remaining strategic arms treaty.

The notion of a binary choice between realism and idealism has never held much credibility. The argument that usefully can be had is not about the fact of engagement, but about its nature. Where does the line fall between securing interests and compromising values?

The idealists have a point when they say that the some of the overtures to Moscow in recent years have looked more like capitulation than engagement. Biden seems to have got the balance about right. Where it can, the west should work with Russia. Just not on Putin’s terms.

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