The European Union has finally, after months of wrangling, unlocked a major funding package for Ukraine. Simultaneously, it has also added to its sanctions on Russia, in the process upsetting China, which has retaliated.
Viktor Orbán’s recent election loss and the opening of the Druzhba oil pipeline from Russia to Eastern Europe – a point of contention for Hungary and Slovakia and a contributor to Hungary’s previous frustration of attempts to provide financial aid to Ukraine – cleared the way for the EU to approve a €90 billion ($147.5 billion) loan to Ukraine last week.
The majority of the loan, to be delivered over two years, will be to fund Ukraine’s defence spending, enabling it to buy more air defence systems and expand its production of drones, removing concerns that a domestic financial crisis might undermine its ability to sustain its war efforts.
Until the pro-Russia Orbán lost the election and the pipeline (damaged earlier in the war) was re-opened, Hungary had been the major stumbling block to European attempts to provide financial assistance to Ukraine, using frozen Russian central bank funds as collateral for a loan.
The Europeans are well aware that, with the withdrawal of support for Ukraine by a Trump administration that appears to favour Russia, the fate of the war, and potentially Europe’s own security, hinges on Ukraine’s ability to sustain its defence and the EU’s efforts to constrain Russia’s ability to wage war.
With the announcement of the funding package, the EU also unveiled its 20th round of sanctions on Russia, listing 120 more individuals and entities.
While the new sanctions include an extension of the list of usual suspects – Russian energy producers, its “shadow fleet” of oil tankers and Russian banks – it also includes entities in third countries, including China, Turkey and the United Arab Emirates, that it accuses of providing Russia with weapons and “dual use” goods, or products that can have both civilian and military applications.
It’s also targeted Russia’s alternative to the SWIFT global financial messaging service that underpins global financial transactions, a platform that Russia and China use – along with China’s own messaging platform – for their trading, as well as cryptocurrency exchanges that have been used by Russia to evade Western financial sanctions.
China isn’t amused that some of its entities have been included in the EU’s list, saying the move “seriously undermines” trust and the stability of bilateral relations and warning that it would take the “necessary measures” to protect Chinese companies, with the consequences to be borne by the EU.
The EU placed 27 Chinese mainland and Hong Kong entities on the list, accusing them of helping either Russia or its ally Belarus to circumvent western sanctions and of providing Russia with drones or their components for use against Ukraine.
Within 24 hours of the EU announcement, China placed a number of European defence and aerospace companies on its export control list, preventing them from receiving dual use items that originate within China.
While China’s action was presented as a response to EU arms sales to Taiwan and taken to safeguard China’s national security interests, the coincidence of its timing, immediately after the EU imposed its sanctions, strongly suggests that it was retaliatory.
China has shown increasing concern about its relationship with Europe which, worried by the prospect of a flood of cheap Chinese imports overwhelming its domestic industries because of the combination of China’s industrial overcapacity and redirected trade flows from America’s tariffs on Chinese imports, has started to develop protectionist instincts and measures of its own.
Earlier this month China’s State Council passed regulations that aim to counter foreign measures that China deems to violate international law or harm its sovereignty, development or the rights of its companies and organisations.
That is seen as a response to US and European sanctions that impact global financial activity, the global energy trade, shipping, technology and intellectual property (which the new EU list does).
It gives China the ability to target anyone who participates or promotes “improper” extraterritorial measures and impose countermeasures that could be anything from restrictions on trade and investment to the freezing of foreign assets within China.
The regulations are separate to the export controls China has announced and that will come into force later this year on strategic minerals, like rare earths, where China dominates production and processing, or the lithium-ion battery technologies that China also dominates.
If China were to use those controls to limit or ban exports of materials used in everything from smartphones and data centres to military equipment, global supply chains would shudder. The mere threat of a ban on rare earths was sufficient for Donald Trump to back down on a proposed punitive increase in the tariff rate on China’s exports to the US last year.
It is apparent that China has been building an armoury of potential retaliatory measures to the sanctions that the US and EU have imposed on its exports and its companies.
Russia is, of course, the primary target of the latest EU actions, with China the collateral damage.
The EU is aware that, while Trump’s recent waiving of the sanctions on Russian oil sales to try to maintain oil supply while the Strait of Hormuz has been closed by his war on Iran will provide the Russian economy with billions of dollars of windfall revenue, the Russian economy is struggling.
Earlier this month Russia’s central bank cut its policy rate for the eighth time in less than a year to try to encourage growth in an economy that shrink by 1.8 per cent in the first two months of the year.
Russia is, of course, the primary target of the latest EU actions, with China the collateral damage.
Vladimir Putin was concerned enough that, just over a week ago, he ordered economic officials to provide detailed reports on the position of the economy and an explanation of why “the trajectory of macroeconomic indicators is currently falling short of expectations.”
He said the economic indicators were not only below those of exports and analysts, but below the government’s own forecasts and those of its central bank.
While the war in the Middle East will generate extra revenue – sanctioned oil that was selling for prices in the $US40 to $US50 a barrel range would now be bringing in close to $US100 a barrel – that’s only temporary relief when the switch to a wartime footing is hollowing out the rest of the economy, causing threatening levels of inflation, generating budget deficits for a normally fiscally conservative government, chewing up its “rainy day” fund’s reserves and causing stresses within the non-war related sectors.
Ukraine has also intensified its attacks on Russian oil and gas facilities recently to try to limit the benefits Russia can gain from the easing of the sanctions.
The country’s economic development minister, Maxim Reshetnikov, has described the economic challenges as “not easy,” and called for a reallocation of labour – the war effort has caused labour shortages and wage inflation outside of the military-related activities.
“We coped will all of that somehow because somewhere in the economy there were reserves. Our current records show that these reserves have largely been used up; this truly is the situation and the macroeconomic situation is substantially more difficult,” he said.
With Ukraine’s capacity to continue to wage war for the next two years, at least, now funded and the web of EU sanctions around Russia’s war effort tightened, along with the attempt to throttle the flow of external financial and military aid from its regional allies and facilitators – and China – the existing economic challenges confronting Russia are intensifying.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.
Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
