“I just wish I didn’t lose that sense of unity,” he said, again calling for maximum pressure on Moscow.
Three months after Russia’s invasion of Ukraine, leaders in Europe and the United States stress that they remain committed to maintaining unprecedented sanctions in an attempt to force President Vladimir Putin to withdraw his troops.
“I’m very concerned about what would make a recession in Europe for the European decision to go ahead and increase sanctions,” Jason Furman, a Harvard professor who previously served as the president’s top economic adviser, told CNN Business. Barack Obama.
Cracks are already beginning to form on the European single front. Hungarian Viktor Orban, who was not present in Davos, has led dissidents in blocking EU plans for an oil embargo on Russia, an attempt to cut off a major source of revenue for Moscow. The goal of finally eliminating Russian gas could be even more difficult. In the United States, President Joe Biden and Democrats are under enormous pressure to show that they are serious about fighting inflation ahead of the November midterm elections, although most factors the causes, such as supply chain thicknesses and high consumer demand, are beyond their control.
This could complicate efforts to keep up pressure on Russia, despite warnings from billionaire George Soros and others that Putin’s appeasement would have catastrophic consequences.
Fuel and food prices soar
In Davos, government and business leaders stressed that they could not capitulate to Putin. They agreed that the response to their annexation of Crimea in 2014, as well as the poisoning of Sergei and Yulia Skripal in Salisbury, England in 2018, was too weak in retrospect.
And the West’s historic sanctions against Russia this year may not be enough. Russia’s economy has been damaged, but is holding up better than expected, bolstered in part by strong oil and gas revenues. This allowed the central bank to cut interest rates on Thursday.
“We have to stop committing ourselves,” Slovakian Prime Minister Eduard Heger said excitedly during a roundtable. The engagement with Putin provoked “an aggressive war,” he continued.
Speaking to dinner guests, Soros warned that the invasion of Ukraine could mark the start of World War III and said Putin must be defeated “as soon as possible” if the world is to preserve civilization.
But the economic context could make life difficult for politicians at home. Annual inflation in the 19 countries using the euro reached 7.4% in April, a record high. In the United States, inflation stood at 8.3%, and in the United Kingdom it reached 9%.
An important factor is energy costs. They were already rising due to an imbalance between supply and demand after the pandemic, but they have been further boosted by Europe’s efforts to reduce its dependence on Russian energy.
An oil embargo has been maintained by landlocked states such as Hungary and the Czech Republic, which say it would take years to make the transition to other suppliers or energy sources. It is expected, however, that it will be agreed in the coming weeks.
“The economic situation is definitely a challenge. I don’t think it will have an impact on the consensus on oil,” said Mujtaba Rahman, Eurasia Group’s director general for Europe, a political risk consultancy.
Still, there will be consequences. Fears of energy shortages have already pushed prices up dramatically. In the United States, the average price of a gallon of regular gasoline reached a record $ 4.60 on Thursday. The situation is even worse in Europe. Recent data shows that drivers in the UK pay $ 8.06 per gallon and $ 8.43 per gallon in Germany.
At the same time, food prices are rising as war disrupts exports of key commodities such as wheat and sunflower oil, and later some countries such as India enact export bans to protect internal supply. In April, food prices in Germany soared 8.6% year-on-year.
“This is where the impact of the war in Ukraine is increasingly visible,” Georg Thiel, chairman of the German Federal Statistical Office, said earlier this month.
European Commission President Ursula von der Leyen said this week that “it is fragile countries and vulnerable populations that suffer the most”. He added that bread prices have risen by 70% in Lebanon and that food shipments from Odessa to Ukraine have failed to reach Somalia, which is battling a devastating drought. Protests over rising prices have erupted in Peru and led to the removal of the prime minister from Sri Lanka.
However, even in Europe and the United States, lower-income households have been increasingly forced to choose between “heating and eating,” which account for a larger proportion of their budgets. Economists fear a drop in spending could trigger a recession, especially as central banks raise interest rates to try to control inflation.
“There’s a real risk for a lot of people,” Oxfam International Executive Director Gabriela Bucher told CNN Business. Even in the “rich world,” he added, there are people struggling “to meet their basic needs right now.”
The British government acknowledged the problem on Thursday when it announced a $ 6.3 billion extra tax on oil companies to finance payments to people struggling with energy bills.
The future of Western solidarity
US and European officials and senior business officials say Ukraine’s victory is crucial. The brutal war and the humanitarian crisis must come to an end, and democratic values must prevail in what German Chancellor Olaf Scholz called a “turning point” for the world.
“It’s hard to see any problem that has brought people together in the West as much as this problem,” David Rubenstein, the billionaire founder of the Carlyle Group, told CNN Business. “I don’t think the incremental increases that can be attributed to this in terms of inflation are changing anyone’s views.”
U.S. officials also see it as essential to confront Putin to reduce the ambitions of Chinese President Xi Jinping, who he says is watching closely the situation.
“Deterrence is key here,” said U.S. Congressman Michael McCaul, the top Republican in the House Foreign Affairs Committee. “While Xi is looking at what is happening in Ukraine, [he’s asking,] ‘Is it worth it?’ And we have to persuade him that this is not the case. “
But balancing political and economic concerns will not be easy. Scholz admitted that “politicians have an important task to attend to” while juggling different parts of his term with the public.
This could become a bigger problem in the event of a major escalation in Russia, Rahman said. This could lead to stronger calls for a total ban on Russian natural gas, which accounted for 45% of Europe’s supplies last year. Many trips by pipeline, which makes it harder to find alternatives.
This is not on the table at this time, although Scholz said Germany is working “in its own right” to end its dependence on Russian gas as soon as possible. But if it were seriously discussed, it would be a more complicated sale than anything the West has ever proposed.
While companies are telegraphing strong support to Ukraine, they are also concerned about growing pressure on their businesses. Herbert Diess, CEO of Volkswagen (VLKAF), told CNN Business that the full effects of rising commodity costs and inflation would not be evident for another six to 12 months, creating a “truly” operating environment. carry”.
“We should achieve something with sanctions,” he said. “So far, we’re basically going from climbing to climbing and we have no choice. So I think the sanctions are, but then how do we end that?”
Henry Kissinger, the former US Secretary of State, provoked a reaction earlier this week when he seemed to suggest that Ukraine should agree to cede much of the Donbas and Crimea to Putin.
“Negotiations should begin in the next two months before disruptions and tensions are created that will not be easily overcome,” Kissinger said. “Ideally, the dividing line should be a return to the status quo ante.”
Zelensky compared Kissinger’s comments to the appeasement of Nazi Germany in 1938.
“I don’t want to hear the word ‘appeasement’ anymore,” European Parliament President Roberta Metsola said on Wednesday, to applause.
However, a weakened economy and high inflation could weigh on politicians when they return home, prompting a warning from NATO Secretary-General Jens Stoltenberg.
“Freedom is more important than free trade,” Stoltenberg told the Davos crowd. “Protecting our values is more important than profit.”