Brussels Vice President of the European Commission Valdis Dombrovskis has long been seen in Brussels as a man of soft tones, as a cautiously weighing intellectual. But Russia’s war against Ukraine changed the Latvian. Dombrovskis is one of the most vocal supporters of a tough stance towards the Kremlin.
In an interview with the Handelsblatt, he explains how Russia should pay for the war damage and how Europe’s economic resilience is doing.
Mr Dombrovskis, the International Monetary Fund (IMF) recently called on governments to support central banks in their fight against inflation. Is Europe facing a return to austerity?
Our economic recommendations point in the same direction as those of the IMF. It is important that monetary policy and fiscal policy work hand in hand, that they do not contradict each other. In the fight against inflation, central banks are tightening monetary policy and using interest rate levers. The EU Commission is therefore advising the member states to pursue more prudent budgetary policies, reduce deficits and repay debt. It also means phasing out aid programs designed to cushion high energy prices as energy prices start to fall again.
Can Europe’s ailing economies even cope with this?
The economic prospects for the EU have recently improved. We have avoided a recession and expect growth of between 0.8 and 0.9 percent this year.
But there are growing concerns that the world is heading for a new cold war: a confrontation between the democratic world and authoritarian powers like China and Russia. Germany in particular would be hit hard.
It is clear that we find ourselves in an increasingly fractured and confrontational geopolitical environment. But I have a hard time contemplating a cold war when a real war is raging in Europe. Russian aggression against Ukraine is the subject of all our international talks.
So far, the Russian economy has got off lightly. What if EU sanctions hurt Europeans more than Russians?
That is definitely not the case. When we look at the sanctions, we have to consider the economic context. The past year was characterized by extremely high energy prices – it should therefore have been a very good year for the Russian economy. Instead, Russia slipped into recession. The Russian economy will shrink again this year, by 2.5 percent according to OECD estimates. On the other hand, the EU economy is growing, we have successfully decoupled from Russian energy.
The Kremlin doesn’t seem to be impressed so far.
Moment. The budget situation is deteriorating rapidly. In the first three months of the year, Russia’s budget deficit was as large as it was in the whole of last year. But Russia is a big country, so the sanctions will take time to take effect. Also, frankly, we have been quite slow in imposing sanctions on the Russian energy sector.
What do you mean specifically?
The EU embargo on Russian oil and the oil price cap of the G7 countries came into force last December, while the price cap on Russian oil products only came into effect this February. We know that fossil fuel exports are Russia’s most important source of income. If we had imposed the energy sanctions more quickly, we would already be seeing a bigger impact.
The G7 oil price cap aims to reduce Russian oil revenues.
(Photo: Reuters)
Can this error be corrected?
We can see now that the sanctions have been enacted that they take effect relatively quickly. With each passing month, the financial situation of Russia will deteriorate. This will reduce the Kremlin’s ability to wage war.
The federal government in particular has put the brakes on energy sanctions – for fear of security of supply. Was this concern exaggerated?
The supply risk was primarily for natural gas. We have therefore not imposed any sanctions on Russian natural gas. It was Russia that cut gas supplies, apparently to blackmail Europe. I’m talking about the oil sanctions, because oil is even more important to the Russian state budget than gas.
Should the price cap on Russian oil be lowered now to further increase pressure on the Kremlin?
We should discuss that. When the oil price cap was introduced, the idea was that it should reflect market conditions. We are therefore open to an adjustment of the price cap. However, the discussion must primarily take place within the group of the G7 countries. The EU wants to get rid of Russian oil completely. Our embargo has already caused oil imports from Russia to drop by 90 percent.
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Ukraine has renewed its demand to confiscate Russian assets in the face of new Russian war atrocities. Is the EU ready for this?
The World Bank estimates the cost of rebuilding Ukraine at $411 billion. This is a colossal sum that requires an extraordinary financial effort from the democratic world, and the EU in particular. It is therefore of course important that we observe the principle that the aggressor must pay. As an aggressor, Russia is obliged under international law to pay reparations to Ukraine.
… but will hardly do this voluntarily.
We will see. That’s why we need to look at the frozen Russian assets, including central bank reserves, anyway. The legal examination of what is possible is ongoing. In addition, in the tenth package of sanctions against Russia, the EU states have committed themselves to providing information about the Russian assets they have frozen. With it we will get an overview of what is on the territory of the EU.
The EU has decoupled itself from Russia, but finding new partners is not easy. You recently proposed a green trade pact to the US government. How was the reaction?
The persuasion work is going on, we hope for an agreement. The desired alliance for critical raw materials and the talks about an agreement on sustainably produced steel and aluminum could be building blocks of a green transatlantic economic area. The aim is to avoid new trade barriers and remove existing ones. It is also about minimizing the negative consequences of the American Inflation Reduction Act.
An important part of the EU trade agenda is the agreement with the Mercosur countries in Latin America. The German economy in particular has high hopes for this. Will there be a breakthrough before the EU-Latin America summit in July?
That is the aim and that is why we are talking to our partners in the Mercosur countries about an additional protocol on sustainability. I recently exchanged views with the new Brazilian trade minister. We should take the opportunity to nail down the results we have been able to achieve.
Mr. Dombrovskis, thank you very much for the interview.
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