Judy Asks: Can Tusk boost EU foreign policy?

Judy Asks: Can Tusk boost EU foreign policy?

Judy Asks: Can Tusk boost EU foreign policy?

Written by Ian Bond, 03 December 2014
From Carnegie Europe

Treacherous sands: the EU and terrorism in the broader Sahel

Treacherous sands: the EU and terrorism in the broader Sahel

Treacherous sands: the EU and terrorism in the broader Sahel

Written by Rem Korteweg, 01 December 2014
From European View

Special report: Putin's allies channeled billions to Ukraine oligarch

Special report: Putin's allies channeled billions to Ukraine oligarch

Special report: Putin's allies channeled billions to Ukraine oligarch

By Rem Korteweg, 26 November 2014
From Reuters

Link to press quote(s):


Hungary and the West: We need to talk about Viktor

Hungary and the West: We need to talk about Viktor

Hungary and the West: We need to talk about Viktor

Written by Agata Gostyńska-Jakubowska, Ian Bond, 26 November 2014

Prime Minister Viktor Orban still dominates Hungary’s political scene, in spite of recent large demonstrations in Budapest. But his political reforms and economic and foreign policies are raising more and more questions abroad as well as at home. If Orban thinks he can ignore such criticism, he is wrong: Hungary's economic development depends on its Western partners.

Worries about Orban’s intentions started soon after his election in 2010, when he quickly consolidated his Fidesz party’s grip on power, and purged political opponents from positions of influence. In 2011, German Chancellor Angela Merkel (among others) criticised measures to control the media; in 2012 the European Commission started infringement proceedings against Hungary for limiting the independence of the Central Bank and the data protection authority, and for compulsorily retiring 274 judges (who were replaced by more Fidesz-friendly figures).

But concerns about Orban have heightened recently as a result of two speeches. His inaugural speech to parliament in May, after his re-election, called for autonomy and 'communal rights' for ethnic Hungarians in neighbouring states, including Ukraine. It upset neighbours like Poland, where Prime Minister Donald Tusk suggested that it sounded too similar to Putin's line on ethnic Russians abroad. Orban’s speech to a gathering of Hungarian students in Romania in July 2014 caused even more trouble. In it, he proclaimed a shift from liberal democracy towards the construction of an “illiberal state" and cited Singapore, China, India, Russia and Turkey as models.

Does the reality of Orban’s policies live up to the rhetoric? Hungarians close to the ruling party argue that the rest of the West listens too much to Orban’s leftist political opponents. They claim that Hungary has been a reliable EU partner, whatever critics say. They point to Hungary’s successful presidency in 2011: it secured Croatian accession to the EU, and laid the foundations for the European Parliament’s involvement in the negotiations on the EU’s long-term budget.

Some foreign experts on Hungary suggest that however alarming the ‘illiberal’ label sounds, what Orban means is merely that the EU’s current approach to tackling the economic crisis is not working; and that the liberal model, which privileges the rights of the individual over the interests of the community, is one of the reasons for its failure. Orban, according to this interpretation, wants to build closer links with economically successful, albeit authoritarian states.

Even Hungarians who do not support Fidesz accept that some of the steps taken reflect a necessary if belated attempt to purge ex-Communists from positions of influence, where they could obstruct change and perpetuate the power of the Cold War-era nomenklatura.

Whether or not Orban’s motives were pure, the effect of his reforms has been to create strongly pro-Fidesz state structures, rather than a politically neutral administration. Murky links between business and politics have developed: in October the US government imposed visa bans on a number of officials, after repeated attempts to get the Hungarian authorities to tackle corrupt practices which favoured Fidesz-linked firms. And Orban has intensified pressure on civil society: in September police raided the Budapest offices of an NGO funded by Norwegian government grants, following Hungarian government allegations that it was funding Fidesz’ political opponents.

Economically, Orban has pursued populist policies, such as trying to reduce the role of foreign investors in key sectors. In September 2014 Deputy Prime Minister Zsolt Semjen said that nationalising the energy sector was the only way to guarantee security of supply for Hungarians, despite ample evidence that liberalising markets would work better. The government has also forced banks to take large losses in order to protect Hungarian borrowers against exchange rate fluctuations, and seems poised to buy up the assets of any banks that leave the Hungarian market as a result. In response, the Commission has expressed concern about Hungary's compliance with rules on state aid.

Orban might be able to thumb his nose at the Commission if his economic policies were a success. But from 2008-2013, Hungary’s GDP grew at the slowest rate in the Visegrad Group (which comprises Hungary, Poland, Slovakia and the Czech Republic and is often referred to as the V4).

The main victims of Orban’s domestic policies may be his own citizens, but his foreign and security policy could damage wider European interests. His statements often hint at a wish to revise Hungary’s borders, established after the First World War, which left Hungarian minorities spread across several neighbouring countries. His implicit encouragement of irredentism worries other countries, particularly Slovakia and Romania which have significant ethnic Hungarian populations. It also complicates co-operation within the V4.

As neighbours of Ukraine, the V4 should have been central to formulating the EU's response to Russia's annexation of Crimea and continued interference in the Donbass. The V4's experience of economic and political transition and of European integration should make them natural mentors for the new authorities in Kyiv. Instead, Orban has contributed to V4 disunity and questioned EU efforts to put pressure on Russia.

One European politician who has known Orban for many years suggests that his cultivation of Putin comes from a mixture of anger at the way other EU leaders treat Hungary and pure opportunism. Whatever the cause, Orban has tied his country closely to Russia, especially in the energy sector. In January 2014 he signed an agreement with Putin on expanding Hungary's Paks nuclear power station; 80 per cent of the project will be financed by a Russian state loan. In July, he restated his support for the South Stream gas pipeline from Russia to Europe (which would bypass Ukraine) – a project which the Commission has said is illegal in its current form.
And in September, after a meeting with Gazprom CEO Aleksei Miller, he halted the re-export to Ukraine of gas bought by Hungary; by doing so, he made Russia's cut of gas supplies to Ukraine more effective.

Though the US has loudly criticised Orban's democratic back-sliding and closeness to Russia, Brussels has more leverage with Hungary than Washington. What can the EU do with this awkward but democratically-elected man? So far, the member-states and the Commission have only grumbled, to little avail. As an organisation often criticised for its own lack of democratic legitimacy, the EU has hesitated to challenge someone who has a large majority in his national parliament.

If the political will to act exists, the EU has two types of tools it can use. First, the Commission can take action against a government which breaks European law and in the process goes against EU values. It allows the Commission to launch infringement proceedings. But such proceedings cannot address cases where a government acts contrary to the EU's values but does not break any specific EU law. In the case of the compulsory retirement of judges, the Commission based its legal action on EU rules against age discrimination in employment; but it had no standing to tackle more fundamental questions of the rule of law and independence of the judiciary. Hungary settled the case by compensating the judges but not reinstating them.

Second, the EU can address democratic shortcomings in a member-state through Article 7 of the Treaty on European Union, which enables the European Council to determine “the existence of a serious and persistent breach of EU values” in a member-state; and to suspend some of its membership rights, including voting rights. The European Council must decide unanimously (minus the country concerned) that a breach has taken place. Other countries would probably want to see evidence of much more serious misbehaviour than anything Orban has yet done before resorting to such a nuclear option.

Article 7 also has a ‘warning mechanism’: four-fifths of the member-states may determine that there is a clear risk of a serious breach of EU values in another member-state. This ‘yellow card’ permits a dialogue with the member-state in question before more radical steps are taken. But member-states are even afraid of using this mechanism. It would fuel debate about whether the EU should be able to interfere in the affairs of a member-state. It could also lead to an East/West split in the Council, if the Central Europeans believed that ‘old’ member-states were using Article 7 against them while overlooking failings in one of their own number. It is worth noting that in 2000, when Austria’s coalition government included the far-right Freedom Party, other member-states introduced political sanctions without using Article 7 that had been introduced by Amsterdam treaty and entered into force in 1999.

Doing nothing about Orban’s policies is not acceptable. He has challenged the EU’s role as the champion of democratic values, which was the basis of past enlargements and is the reason the EU has remained so attractive to countries like Ukraine. Inaction would weaken the EU’s power of example.

Some governments would like a proper debate about Hungary’s behaviour. In 2013 the German, Dutch, Danish and Finnish foreign ministers wrote to the Commission urging it to do more to promote respect for the rule of law in the EU. They proposed various measures to respond to breaches of EU principles that could be deployed before escalating to the use of Article 7. These ranged from political dialogue with the Commission about issues of concern to the suspension of structural funds (currently only possible if a country breaks the EU’s macroeconomic rules).

A majority of member-states have so far blocked proposals to enhance the EU’s role in policing the rule of law. Some, like the UK, fear that strengthening the Commission’s power would play into hands of eurosceptics; others, including in the Baltic States, worry that the EU would interfere with their policies towards national minorities. The General Affairs Council will revert to the issue of the rule of law in December, but there is no guarantee of progress. For the moment, therefore, more informal ways of handling Orban must be found.

The other members of the V4 have an important role to play. Some of them share Orban’s misgivings about sanctions against Russia; but they have developed a ‘brand identity’ as modern, successful European societies, and Orban’s populist nationalism threatens this reputation. They should work behind the scenes to shift Orban back into the liberal, market-oriented European mainstream.

British Prime Minister David Cameron should also speak up. Orban joined Cameron in his unsuccessful efforts to oppose the nomination of Jean-Claude Juncker as Commission President. Cameron’s views on the EU are sometimes compared with those of Orban. But unlike Orban, Cameron has been outspoken about the threat Putin's policies pose to Europe. Nobody has accused Cameron of trying to monopolise state institutions for the Conservative Party. Cameron could suggest that Orban join the UK in trying to reform and strengthen the EU, internally and externally, rather than chasing after illiberal democracies that have their own economic and political problems.

Perhaps the best hope is that other centre-right politicians in Europe can talk Orban round. He has benefited from the support of the European People’s Party (EPP), which unites most of the centre-right parties in the EU, including Fidesz. It is time for leaders like Angela Merkel of Germany or the new Polish Prime Minister, Ewa Kopacz, to remind Orban that almost 80 per cent of Hungary's trade is with other EU member-states, and that his main economic and political partners are still in the West, not in Moscow.

Agata Gostyńska is a research fellow and Ian Bond is director of foreign policy at the Centre for European Reform.

Сегодня вечером

Сегодня вечером

Сегодня вечером

By Ian Bond, 17 November 2014

Link to press quote(s):


Putin slipper for nye sanktioner trods verbal lussing fra Merkel

Putin slipper for nye sanktioner trods verbal lussing fra Merkel

Putin slipper for nye sanktioner trods verbal lussing fra Merkel

By Ian Bond, 18 November 2014
From Politiken

Ukraine after the elections: Democracy and the barrel of a gun

Ukraine after the elections

Ukraine after the elections: Democracy and the barrel of a gun

Written by Ian Bond, 27 November 2014

Ukraine has lost control of parts of its industrial heartland, as well as Crimea. The question is whether there will now be a government in Kyiv that can make a success of the rest of the country. There are reasons for concern.

The good news is that most of Ukraine voted for a new parliament on October 26th. Pro-European parties backing President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk won a majority of the 423 seats contested (which excluded occupied areas). More than 900 international observers monitored voting; they described it as "an amply contested election that offered voters real choice". The Russian Foreign Minister, Sergey Lavrov, said grudgingly that the elections seemed to be valid, though not in every part of Ukraine.

The first piece of bad news is that Russian forces and their local proxies did not give Ukrainians in the occupied parts of Donetsk and Luhansk regions the chance to cast a ballot. Instead, on November 2nd the separatists organised sham elections in the self-proclaimed statelets. These polls were criticised by the EU, the US and the Organisation for Security and Co-operation in Europe. The Russian foreign ministry, however, said that Russia respected "the declaration of the will of people in south-eastern Ukraine".

About 15 per cent of the Ukrainian population lives in the areas Russia controls (or used to live there – the UN estimates that the conflict has created over 900,000 refugees or internally-displaced persons). Ukraine, while asserting its territorial integrity de jure, is effectively challenging Russia to take responsibility for these areas: on November 15th, Poroshenko ordered state institutions in the occupied territories, including schools and hospitals, to close, and banks to cease operations. Poroshenko's action is understandable: he could not control what was happening in the area. But he risks consolidating the division between the self-proclaimed Donetsk and Luhansk 'People's Republics' and the rest of Ukraine.

The second piece of bad news is that the potential coalition partners are wrangling over the composition of the government, including which party should fill the important posts of interior minister and finance minister. The president’s 'Petro Poroshenko Bloc' has the most MPs, with the prime minister's 'People's Front' as runner up. Between them they have 214 seats, a narrow parliamentary majority. Important reforms such as devolving powers to the regions will require constitutional changes, for which 300 votes are needed. So coalition talks include three smaller parties (including the far-right 'Radical Party', which argues for Ukraine to have nuclear weapons).

What Ukraine needs, immediately, is a competent government with honest ministers, rather than one designed to divide the spoils among its constituent parties. The coalition parties should sink their differences and install a government based on ability and integrity rather than party affiliation. For most of the last two decades Ukraine was a case study in post-Soviet poor governance. The new government must do better. Fighting the corruption for which Ukraine has been famous will demand both government transparency and effective law enforcement. An EU mission will start work on December 1st on police and judicial reform; the EU should also attach advisers to ministries and agencies to help them combat corruption.

The third problem is a collapsing economy. The European Bank for Reconstruction and Development forecast in September that Ukrainian GDP would fall by 9 per cent this year and a further 3 per cent in 2015; meanwhile inflation will rise from minus 0.3 per cent in 2013 to 11.8 per cent this year. The current account deficit is undergoing a forced correction, from 9.2 per cent of GDP last year to 2.5 per cent in 2014, through a painful contraction in imports. The value of the hryvnia has fallen by almost 50 per cent this year, making imports impossibly expensive.

In theory, the devaluation of the currency should help Ukrainian exporters. Unfortunately, the Russian market, which absorbed around a quarter of Ukraine's exports in 2013, is now effectively closed; and as long as much of Ukraine's heavy industry in the east cannot operate, Ukraine's export potential will be limited.

The Ukrainian government cannot cope without international help. The $17 billion (€14 billion) IMF package and the €11 billion mixture of EU grants and loans agreed earlier in the year are insufficient. Yields on Ukrainian government bonds are over 18 per cent, with investors assuming a high probability of default. A senior American official suggested recently that Ukraine would need an extra $10-15 billion in 2015 alone. The US itself has been niggardly, giving around $1.3 billion in loan guarantees and grants; both Washington and its international partners need to do more for Ukraine to have a chance of succeeding. The EU should not have delayed implementation of its association agreement with Ukraine under Russian pressure. It should now do everything possible to accelerate Ukraine's convergence with EU standards and regulations. Then Ukraine can re-orient its economic ties westwards (as Georgia did, successfully, after its war with Russia in 2008).

Finally, the ceasefire agreed in September has broken down. According to NATO, Russian forces and equipment are again crossing Ukraine's border. The Russians' aim may only be to consolidate their hold, and perhaps straighten out some 'kinks' in the front line (for example by taking the town of Shchastya, home to a power plant supplying almost all the Luhansk region's electricity, or they may intend something more ambitious, such as capturing the port city of Mariupol and the rest of the coastline between there and Crimea (which is proving hard to supply by ship from Russia). Poroshenko has said that Ukraine is prepared for a "scenario of total war" with Russia; but in reality, while Ukrainian forces could certainly inflict large-scale casualties on attacking forces, they could not resist an all-out invasion from better equipped and more numerous Russian forces.

So far, Western leaders have refused to do much to increase Ukraine's military capability, hiding behind the mantra that "there is no military solution" to the conflict, and suggesting that arms supplies might encourage Kyiv to think that there is. But as long as Ukrainian forces are so much weaker than Russian forces, there is indeed a military solution: outright Russian victory. The best way to deter further Russian advances is to help Ukraine with equipment, training and intelligence, so that the domestic political cost of victory for Russia, in casualties incurred, becomes prohibitively high.

'Realist' commentators like Henry Kissinger often assert that Ukraine matters more to Russia than to Europe or the United States. A strong case could be made, however, that the success of Ukraine matters more to the West than it does to Russia. The EU and NATO would be better off with a prosperous, stable nation of 45 million people next door, rather than a corrupt, unstable economic basket-case. The West should be prepared to invest in achieving the right outcomes by both strengthening the government-controlled parts of Ukraine and preventing Russia from further demolishing the country.

Ian Bond
Director of foreign policy, Centre for European Reform

Iran nuclear talks: Patience is a virtue

Iran nuclear talks: Patience is a virtue

Iran nuclear talks: Patience is a virtue

Written by Rem Korteweg, 13 November 2014

When negotiators from Iran and the EU3+3 (France, UK, Germany plus the US, Russia and China) reached an interim agreement in November 2013 restricting Iran's nuclear programme, they set themselves a one-year deadline for sealing a comprehensive, long-term agreement. That deadline expires on November 24th. Now Western governments have to decide whether negotiators should stick with the deadline or extend the talks. They should choose the latter; the current geopolitical context does not favour the West and, in time, low oil prices could force Iran to compromise.

On the face of it, a deal should be within reach. The main point of disagreement is the number of centrifuges – tools for enriching uranium – Iran should be permitted to have. The more it has, the faster it can enrich enough uranium to build a nuclear weapon. US Secretary of State John Kerry has said he wants to ensure Tehran cannot build a bomb in less than one year. So far the Iranian government has built 19,000 centrifuges and says it intends to build at least twice as many. But the US and others want to reduce the number to the low thousands.

Under the November 2013 interim deal, Tehran agreed to suspend its uranium enrichment activities, dilute some of its higher enriched uranium stock and halt work at three nuclear sites. It also agreed to allow increased monitoring by the International Atomic Energy Agency (IAEA), the international nuclear watchdog. In return, the US and the EU, which had restricted Iran’s ability to sell oil and natural gas through a tough sanctions regime, released several billion dollars in Iranian oil proceeds and allowed access to specific goods, including medicine and aircraft spare parts.

The ‘prize’ of a successful negotiation is containing the spread of nuclear weapons in the Middle East. A comprehensive agreement would bring a dose of badly needed good news to the volatile region, and make a US or Israeli military strike unlikely. A deal would show that multilateral diplomacy involving the West and Russia can solve thorny international issues even when relations are tense because of the Ukraine crisis.

Even a comprehensive deal would not make Iran a friend of the West. But it would reduce the level of animosity and offer the prospect of a pragmatic détente. There are a number of regional issues which would benefit from greater co-operation, such as the conflict in Syria, Iraq and the threat from the terrorist group ISIL (the Islamic State in Iraq and the Levant), and the stability of Afghanistan. A deal would also help to revive Iran’s economy, for example by attracting investment into Iran’s energy sector.

Under a comprehensive deal the West may have to tacitly accept that Iran has the technical potential to develop a nuclear weapon. But Iran’s leaders would need to dismantle or roll back parts of the country’s nuclear programme, allow invasive inspections, make credible offers of transparency and accept that sanctions could be reinstated anytime. As economic and geopolitical realities influence the negotiations, Ayatollah Khamenei, Iran’s Supreme Leader – and his president, Hassan Rouhani – may not see the need to compromise enough to achieve a deal.

The US and Europe are using economic sanctions, particularly against Iran’s financial and energy sectors, to extract concessions at the negotiating table. Iran’s economy has suffered as a result: according to the US State Department, it is 25 per cent smaller than it would have been if it had continued to grow at its pre-sanctions rate. The economy has been in recession, Iran cannot market most of its vast energy resources and foreign reserves worth more than $100 billion (€80 billion) are out of Tehran’s reach, mostly locked in Asian banks.

However, Iran has had some success in circumventing the sanctions. According to the Central Bank of Iran, the first quarter’s growth rate was 4.6 per cent over the same quarter in 2013. Unemployment has dropped, and inflation has come down from 45 per cent to 27 per cent. The bank argues that the Iranian economy may recover, even under sanctions. If President Rouhani can deliver growth through negotiated sanctions relief and sanctions busting, he will have less interest in compromising during the nuclear talks.

In 2014, Iran’s national oil company exploited a loophole in the sanctions regime; exports of natural gas condensates – a very light oil – are only partially restricted. The interim agreement caps Iranian crude oil exports at 1 million barrels per day. But according to the International Energy Agency (IEA), in 2014 Iran exceeded the export cap by nearly 400,000 barrels per day ‒ mostly in the form of condensates ‒ adding $3.3 billion to the Iranian treasury.

Iran is also trying to attract the interest of foreign investors. In October, President Rouhani publicly endorsed a business roundtable in London that discussed post-sanctions economic opportunities. Tehran is luring international energy companies to return by offering them more profitable conditions, even though sanctions would only be lifted after a comprehensive deal was reached.

At the same time, cracks are appearing in Europe’s sanctions edifice. A ruling by the European Court of Justice (ECJ) on September 18th, citing procedural mistakes, annulled some of the EU’s restrictive measures against the Central Bank of Iran. On October 7th, another ECJ ruling in favour of Iran’s national tanker company allowed its assets to be unfrozen. While the EU responded by putting the company back on its sanctions list, these rulings suggest more of the sanctions package could be legally unpicked.

Iran may also be decreasingly willing to compromise for geopolitical reasons. US-led efforts to target ISIL are strengthening Iran’s regional influence. ISIL is an adversary of Iran’s allies in Damascus and Baghdad, and the group has targeted Shia communities and their holy sites in Iraq. In response, Iran’s Revolutionary Guard Corps helped prevent the fall of Irbil in August and is training Shia militias. Meanwhile Iran continues to prop up President Bashar al-Assad and offer him military backing through its Lebanese proxy group, Hizbollah.

A rapprochement between the US and Iran seemed possible in the run-up to US airstrikes on ISIL in late August. But Iranian officials have tied co-operation against ISIL to American leniency on Iranian centrifuges. The United States has made the opposite linkage: President Obama reportedly told Ayatollah Khamenei that co-operation against ISIL depended on Iranian nuclear concessions. But Iran has more influence on the ground in Iraq and Syria than the US does, and Obama is under domestic political pressure to deliver results against ISIL, strengthening Iran’s hand in the talks.

The Ukraine crisis could also help Iran’s negotiating position. Western negotiators say that Moscow is not letting the conflict in Ukraine contaminate the talks. But Russian attempts to frustrate Western diplomacy have emerged. In the energy domain, Iran and Russia are competitors. Yet Tehran is flirting with Moscow, hoping to agree on an oil-for-goods swap, which would see Russia importing 500,000 barrels per day from Iran and sending Russian manufacturing and drilling equipment in return. If relations between the West and Russia become more strained, this arrangement could go ahead, undermining the sanctions regime and Iran’s incentive to make a deal.

The oil price is another reason why Russia may not want a deal now and could be advising Iran to hold out. Any nuclear agreement will raise the prospect of more Iranian oil exports, putting downward pressure on the oil price. This would further harm a Russian economy dependent on oil exports and hit by Western sanctions over Ukraine. (The oil-for-goods swap would make sense to Moscow as the agreement would keep Iranian oil off the international market, while Russia would pay in kind, leaving spot oil prices undisturbed).

Although a compromise may be out of reach at present, neither the West nor Iran has an interest in talks breaking down. The Obama administration has invested significant political capital in a deal and sees it as a possible foreign policy legacy. For the majority-Republican US Congress, however, failed negotiations would confirm that the administration's diplomacy needs to be replaced by a more muscular policy of harsher sanctions. A reluctant Obama would face new pressure to put a military option back on the table.

Collapsed negotiations and a tougher US approach would cause splits in the EU3+3. Russia and China would consider bilateral trade and energy deals with Iran, and European companies would push their leaders to take a softer stance on sanctions. The sanctions regime could unravel.

America’s regional allies have been sceptical about the interim agreement from the start. If diplomacy failed and Iran resumed work on its nuclear programme, Israel and Saudi Arabia in particular would take counter-measures. These might range from lobbying Washington to take military action, to (in the case of Israel) launching unilateral military strikes or (in the case of Saudi Arabia) pursuing a nuclear option itself.

For Iran, the collapse of negotiations would put pressure on President Rouhani from hardliners to accelerate a weapons programme. On the economic front, the re-imposition of sanctions, or further measures, would be painful. Politically, Rouhani would have to gamble either that international solidarity would crumble, or that America’s next president would be as willing as Obama to try to do a deal, while facing opposition from Congress and US allies in the Middle East.

So if, as seems likely, the November 24th deadline cannot be met, the interim agreement and the talks should be extended. Initially, this is in the interest of all parties. The Iranians would get the continued benefit of some sanctions relief without having made major concessions, and need not fear a military threat. The Americans and the Europeans would steer away from yet another Middle Eastern conflict and a deal would still be within reach. And Russia could continue to build its commercial ties to Iran, without risking nuclear proliferation along its southern borders.

Looking ahead, an extension should favour the EU3+3. Due to the serendipitous ‘fracking’ revolution, America’s geopolitical clout is growing. US oil is flooding the market (and Saudi Arabia too is keeping the spigot open). In combination with slowing Chinese demand for energy, oil prices are now at their lowest point in four years. The IEA expects growth in oil demand to slow in 2015 and the International Monetary Fund (IMF) has adjusted its growth forecast for China downward. It suggests oil prices will remain down. The oil price at which Iran’s budget is balanced lies between $120 and $130, while the current market price is roughly $75-80. Iran’s economic recovery could be short-lived as low oil prices hurt its bottom line and offset likely gains from sanctions busting. Even a Russian-Iranian oil-for-goods deal would not be sufficient to keep its economy afloat. President Rouhani recently hinted at Iran’s vulnerability to the price slump. The longer it lasts, the more pain it will cause to Iran’s economy. An extension of six more months would allow the oil price to do its work on Iran’s willingness to compromise in the nuclear talks.

A sceptical US Congress could still try to derail an extension by imposing new sanctions on Iran. A two-thirds majority in both the Senate and the House is required to block a presidential veto. The House is strongly opposed to the talks, but Obama should be able to convince enough senators to back an extension.

By designating Catherine Ashton as the EU’s mediator on Iran, after her term as High Representative expired, the EU has signalled it could live with an extension. But the EU and its member-states should ensure that the loopholes in the sanctions regime – for instance on natural gas condensates – are closed, that EU lawyers successfully defend the sanctions regime at the ECJ, and that European companies that circumvent sanctions are fined – something which until now Europe has left to prosecutors in the US.

A deal might still be struck this month, but the odds are that it will not. In that case, Americans and Europeans should use their economic leverage to get a better agreement later.

Rem Korteweg is a senior research fellow at the Centre for European Reform.

EU membership is 'critical' for British exports

EU membership is 'critical' for British exports

EU membership is 'critical' for British exports

25 October 2014
From The Telegraph

Link to press quote(s):


Ukraine, Russia and the EU

Ukraine, Russia and the EU

Ukraine, Russia and the EU

Written by Charles Grant, 30 September 2014

President Vladimir Putin is skilled at exploiting the weakness of his opponents. During the Ukraine crisis he has at times appeared to follow the principle that Russia should take as much as it can get away with. Therefore the fragility of the Ukrainian state is troubling. Its problems were evident during the Yalta European Strategy (YES) conference that I attended recently. This annual event, run by Viktor Pinchuk, a liberal oligarch, used to take place in Crimea but has had to move to Kyiv. 

Eight months after then-president Viktor Yanukovych fled Kyiv, the Ukrainian state remains corrupt and unreformed. The politicians are divided over how to handle the Russians. The economy is shrinking and risks running out of energy. Most Ukrainians hope for closer ties to the EU – but in order to placate the Russians, the implementation of the EU-Ukraine trade agreement has been partially postponed. Meanwhile Russian propaganda that the EU provoked the crisis in Ukraine continues to resonate in many European countries.

President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk both impressed the international audience at YES with their eloquence and good English (still unusual for Ukrainian politicians). Poroshenko comes over as a bluff, reassuring figure who is trying to forge compromises, and Yatsenyuk as a bright technocrat with a hard edge. Poroshenko is the optimist among Kyiv’s politicians, believing that the truce which began on September 5th (and is just about holding) and his negotiations with Putin can lead to a peace deal. A key provision of any settlement would be far-reaching autonomy for parts of the Donbass, and the Rada (Ukrainian parliament) has passed a law to allow this. Poroshenko insists that he will not compromise on Ukraine’s territorial integrity, and that Kyiv will remain responsible for the foreign policy and security of the Donbass. But he emphasises that there is no military solution to the conflict. Many Ukrainians want peace at any price and back Poroshenko.

But Yatsenyuk and opposition figures like Yulia Tymoshenko are more pessimistic. They worry that the Donbass is becoming an enclave controlled, de facto, by Russia, just like Transnistria, a slither of Moldova. And they fear that Putin has designs on more of Ukraine. Some think he wants a ‘land bridge’ to connect the Donbass and Crimea; others that he wants to take the entire southern coast, all the way to Transnistria. Yatsenyuk and Tymoshenko do not overtly criticise Poroshenko’s attempts to deal with Putin, but doubt that any peace can hold for long. Yatsenyuk recently allied with militia leaders to form a party that is distinct from that of the president. Freed from prison in February, Tymoshenko is trying to revive her flagging career by adopting a hard line on Russia. A lot of Ukrainians share her concern that Poroshenko will give away too much and think the country needs to prepare for more war. If Poroshenko signed a deal that gave away Ukrainian territory, he would have to contend with a revolutionary Maidan.

The politicians are also divided over membership of NATO, which Poroshenko opposes. Any deal with Putin would presumably include Ukraine’s neutrality. Until recently most Ukrainians did not want to join the alliance. But the Russian invasion has shifted public opinion, which is now 50-70 per cent in favour of joining NATO. Yatsenyuk and Tymoshenko want to join, but most Western governments tell them to drop the idea, fearing that it will deter Moscow from seeking a settlement.

All the prominent politicians hope the West will supply lethal weapons and adopt stronger sanctions against Russia. But they are unlikely to get either unless Russia grabs more territory. One former intelligence chief, Ihor Smeshko, told the YES conference that Ukraine should build its own nuclear weapons – it would only take a year, he said, since the country had the necessary expertise. Though few Ukrainians echo his views on atomic bombs, many share his bitterness over the failure of the US and the UK to enforce the 1994 ‘Budapest memorandum’ (by which Ukraine transferred Soviet nuclear weapons to Russia in return for having its territory guaranteed).

In private, some Ukrainian politicians say they would happily give away the Donbass, so that the rest of the country could prosper as a more pro-EU and coherent entity. The rationale is that the people in Donetsk and Luhansk differ from other easterners, such as those in Kharkiv or Dnipropetrovsk, in not wanting to be in Ukraine. But such radical ideas shock other Ukrainians, who say that if you let Putin take one part of the country, he will then ask for another.

The state remains very weak. Entrepreneurs and NGOs are critical of Yatsenyuk’s government for having reformed so little. They believe that he is reluctant to upset oligarchs – some of whom back him – or the public with painful structural reforms. Ukraine’s governance problems remain: an inefficient state, widespread corruption, including in the judiciary, and politicians who are too close to oligarchs. The current Rada contains many former supporters of Yanukovych and cannot be relied on to back reforms – in September it refused to pass anti-corruption measures. A number of senior officials and ministers are widely regarded as incompetent. 

But Yatsenyuk claims that the current IMF programme, the EU’s Deep and Comprehensive Free Trade Agreement (DCFTA) and the government’s own ‘action plan’ are all driving reform. Poroshenko says that after parliamentary elections on October 26th, the priority will be reform of the courts and the security sector. But reform will be very hard to achieve so long as the country remains on a war footing.

Poroshenko’s strongest argument for trying to forge a deal with the Russians is that the economy needs peace. It may shrink by as much as 10 per cent this year. Inflation is close to 20 per cent and the budget deficit nearly 10 per cent. The current account deficit, having contracted after a summer devaluation, is not widening. Many of the exports that normally go to Russia, such as farm goods and steel, are blocked (Russia still takes armaments). The latest figures from the EU, however, suggest that Ukrainian exports to the EU in May-June 2014, after the EU removed barriers to them, rose by 25 per cent, or €587 million, over the same period in 2013. This almost balanced the effect of Russia’s embargo, which resulted in a fall in exports to Russia of €592 million in the same period.

One positive story is agriculture, which provides about a third of total exports; the country is the world’s second biggest exporter of grain. Nevertheless the existing promises of Western help – $17 billion from the IMF, $14 billion from the EU and less than $250 million from the US – are far from sufficient to meet future needs. 

Energy shortages are undermining the economy’s prospects. Russia normally supplies about half of Ukraine’s gas needs but cut off supplies in June. Ukraine produces nearly half of what it consumes but is now running down stocks of stored gas. It had started to import Russian gas indirectly, via Austria, Hungary, Poland and Slovakia, but Gazprom recently reduced deliveries to those countries, which have now ceased re-exports to Ukraine. Hungary stopped the reverse flow, after a meeting between Prime Minister Viktor Orbán and Gazprom CEO Alexey Miller. Many power stations rely on coal from the Donbass but the war has disrupted supplies. Energy subsidies cost the state 7 per cent of GDP, compared to defence spending of just 1.5 per cent. These subsidies explain why Ukraine is among the world’s most inefficient users of energy. The government has started to make modest cuts to energy subsidies, to comply with IMF prescriptions.

Not all the news is gloomy in Kyiv. Civil society is strong and vibrant. Many NGOs act as a check on the corrupt elite, monitoring what it does. The press is free and there is real political competition, even though the parties are built around personalities rather than policies. The Russian invasion has created a feeling of national unity across much of the country, including in many Russian-speaking areas.

The current crisis began last November when Yanukovych – under Russian pressure – abandoned the DCFTA and a related Association Agreement that his government had negotiated with the EU. Popular protests triggered the president’s flight. When Poroshenko was elected he revived these EU agreements. However, after recent talks between Brussels, Moscow and Kyiv, Ukraine announced that it would postpone the implementation of its side of the DCFTA for 15 months – meaning that it will maintain tariffs on imports from the EU. For more than a year Russia has been arguing that the agreement would unleash floods of imports from the EU, damage Ukrainian industry and lead to the dumping of Ukrainian products on Russia’s market. That is unlikely; Russia’s real concern is probably that it does not want its exports to face competition in Ukraine’s market. In any case, Putin has threatened “immediate retaliatory measures” if Ukraine implements any part of the agreement.

The EU has fulfilled its side of the DCFTA by scrapping tariffs on imports from Ukraine. At the YES conference, Yatsenyuk put a positive spin on the postponement, saying that Ukrainian industry needed time to prepare for the chill winds of EU competition, and that reform would not be delayed. Opposition politicians, however, were in despair at this caving in to Russian pressure. They fear that Russia will use meetings of the ‘association council’ that governs EU-Ukraine relations to engineer the amendment of the agreements’ implementing protocols in its favour. 

The EU is keen for Poroshenko to strike a deal with Putin. Therefore, despite having imposed several rounds of sanctions on Russia, it is holding out olive branches – and not only by agreeing to suspend parts of the DCFTA. Štefan Füle, the commissioner for the neighbourhood, told YES that the EU was willing to establish relations with the Russian-led Eurasian Economic Union and to contemplate a free trade agreement with it. The EU is also engaged in trilateral talks with Ukraine and Russia to solve the gas price dispute between Moscow and Kyiv. A deal on gas now seems within reach.

Ever since the crisis in Ukraine began, the Russians have held the EU culpable, claiming that it failed to consult them on the negotiation of the trade agreement with Ukraine. Not only have extremists like Nigel Farage and Marine Le Pen bought this story, but also a number of mainstream politicians and officials, including in Germany. An exchange at the YES conference shot down this canard once and for all. Commission President José Manuel Barroso recounted that for many years, at the six-monthly EU-Russia summits, he had put the DCFTA on the agenda. The Russians never showed any interest in discussing the matter until last year, he said. Then Igor Yurgens, formerly a close adviser of President Dmitry Medvedev, intervened: he said he had sat in on several EU-Russia summits, and confirmed that the EU had tried to raise the DCFTA but that the Russians had not wanted to discuss it. Barroso added that on several occasions Putin had told him he did not mind if Ukraine joined the EU.

Presumably Putin turned against the EU and its agreements with Ukraine when he decided to transform the Customs Union of Russia, Kazakhstan and Belarus into a more ambitious Eurasian Economic Union. Putin thought this project would count for little without Ukraine’s participation – and understood that it could not both adopt the DCFTA and join his Union (which has high external tariffs). 

The Western sanctions on Russia are making an impact, particularly on the ability of its firms to raise capital on international markets. The business climate in Russia is souring, investment by Russians and foreigners is tailing off and economic output is starting to drop. Though Russian leaders dismiss the sanctions as feeble, the prospect of stronger measures may be deterring Putin from further land-grabs in Ukraine. 

The other deterrent may be the prospect of dead Russians. The further that Russian troops move into Ukraine, the more of them will be killed. According to the Russian NGO ‘The Committee of Soldiers’ Mothers’, it is likely that several hundred Russian soldiers have already died, but the Russian media has more-or-less succeeded in hiding that fact from the public. More extensive casualties would be impossible to cover up.

The peace deal that Poroshenko hopes for would allow Ukraine’s economy to recover, give an opportunity for Kyiv’s politicians to modernise the state and enable the country to move closer to the EU. Such benign outcomes, however, may not suit Putin’s purposes, and he may try to prevent them.

The West therefore should do everything it can to strengthen Ukraine, including the provision of more generous financial assistance. NATO should train Ukraine’s armed forces and give them some of the weapons they need to defend their territory. The EU should maintain sanctions until Russia stops interfering in eastern Ukraine, while letting Moscow know that further encroachments will incur further measures. The EU should do more to strengthen Ukraine’s administration and judiciary, enhance energy links to European grids and dispense humanitarian aid where it is needed. And it should give Ukrainians a clear message of hope: the more they reform their country, the more closely it will become integrated with the EU. European governments must not close off the possibility that, in the very long run, Ukraine could become a member. 

Charles Grant is director of the Centre for European Reform.

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