European Commission President Ursula Von der Leyen told delegates at the annual World Economic Forum in Davos that “economies of the future will no longer rely on oil and gas,” and reiterated a promise that Ukraine belongs in the “European family” during a speech on May 24.

“Today the WEF must address the costs and consequences of Putin’s war of choice. This is putting our whole international order into question. And that’s why countering Russia’s aggression is a task for the entire global community,” von der Leyen told delegates.

Since the Russian invasion of Ukraine on February 24 Europe has rallied and shown unusual unanimity, bringing down extreme sanctions on Russia that are increasingly targeting its cash-cow energy exports to the EU. Von der Leyen has been playing an increasingly central role in co-ordinating this effort and to some extent has taken over the role of her former colleague, German Chancellor Angela Merkel, as de facto leader of Europe.

Europe has been rushing an increasing amount of arms and aid to Ukraine to help it in its titanic struggle with Russia, which now occupies large swathes of eastern and southeastern territory.

“Ukraine must win this war. And Putin’s aggression must be a strategic failure. So we will do everything we can to help Ukraine prevail and retake its future into their hands,” von der Leyen said. “Ukraine’s fight is a defining moment for all democracies of the globe.”

The EC head said the work of reconstruction was going to be “colossal” and that she was launching an international reconstruction platform that would welcome contributions from anyone that wants to help Ukraine – from both government and the private sector – to raise money to rebuild the country. “We need everyone on board,” she said.

EU membership

Looking forward to the eventual end of the war, von der Leyen repeated earlier statements that Ukraine “belongs to the European family,” but stopped short of saying the country would be offered EU members candidate status.

Ukrainian President Volodymyr Zelenskiy formally submitted a request to join the European trade club in April, which is currently under consideration. A statement on the application is expected in June, but fast-track membership is very unlikely. Several prominent European voices have poured cold water on any aspirations Kyiv might have of joining the EU anytime soon.

“Ukraine's full EU membership might take 15 or 20 years,” French Minister for European Affairs Clement Bon said earlier the same week.

"You have to be honest… If we say that Ukraine will join the EU in six months, one year or two years, we are lying. This is not true. It is probably 15 or 20 years, and it is very long," Bon told a French newspaper.

Bon’s comments follow on from French President Emmanuel Macron, who said that Ukraine should not be offered EU membership at all but that a new European Alliance for Ukraine and other countries is still knocking at the door.

The new, less formal grouping of like-minded countries invested in European values would allow it to become more involved in European affairs but stop short of the full range of benefits like borderless movement of goods, labour and capital. Membership criteria would be based on geography and a shared set of values, and the new union’s oversight could include political co-ordination, collective security and energy, Macron later told reporters last week.

Marshall plan

In the meantime, the EU is clearly prepared to help Ukraine rebuild after the war is over and von der Leyen said that Ukraine should receive a Marshall plan similar to that given to Germany after the end of WWII.

The cost of the reconstruction of Ukraine varies, with the current estimates of the total economic damage ranging from $600bn to $1 trillion but the cost of repairing and replacing the physical damage anywhere between $100bn and $200bn, according to various estimates.

Kyiv is currently burning through an estimated $5bn a month, almost all provided by partners after its tax collection collapsed, and exports have been almost entirely halted by a Russian embargo on shipping from its main ports.

In addition to the economic sanctions and EU military aid, von der Leyen said the EU will also give Kyiv €10bn in macro-financial assistance to tide the government finances over, the first time in history the EU has given aid to a country under attack, as well as the biggest grant ever, and that Europe was “mobilising our full economic power.”

The EC president accused Russia of “weaponising food” and of curbing its own grain exports to increase pressure on the rest of the world. She said “global co-operation” was the “antidote to Russia’s blackmail” and added that the rest of the world was trying to increase grain production to ease the pressure.

“In Russian-occupied Ukraine, the Kremlin’s army is confiscating grain stocks and machinery. And Russian warships in the Black Sea are blockading Ukrainian ships full of wheat and sunflower seeds,” von der Leyen said, adding that Russia was using grain exports as “blackmail.”

Von der Leyen said that usually Ukraine exports about 5mn tonnes of grain a month at this time of year, but exports of grain have fallen to between 300,000 tonnes and 1mn due to the blockade that could result in a global food crisis. Currently some 20mn tonnes of grain are locked up inside the country unable to get to hungry customers in the Middle East and North Africa (MENA) region. The first of the spring harvest is due to be collected in the coming months and if the blockade is not lifted Ukraine will run into a storage problem too, as there are not enough silos to hold the entirety of the spring harvest grain as well.

Despite promises of several hundred billion dollars in aid to fund reconstruction, so far Ukraine has received only $11bn from partners and the bulk of the budget funding has come from the National Bank of Ukraine (NBU), which has paid out $4.1bn, and the sale of war bonds, which has raised $2.6bn, as of May 17.

And the bulk of the money is provided by international partners, but in the form of loans, not grants.

“Ukraine came into this crisis with a decent macro and public finance profile – a fiscal deficit of 3-4% of GDP and public sector debt to GDP ratio of sub-50%. It ran a close to balanced current account position and held close to $30bn in FX reserves. Market external debt due to year end was pretty light at a few billion bucks,” Tim Ash, senior sovereign strategist at BlueBay Asset Management, said in an emailed note to clients. “But the war has decimated public finances and estimates are that Ukraine has a budget financing shortfall of close to $5bn a month. So far it has received around $11bn in Western financing and this week got another promise from Western allies of close to $17bn in additional financial support… If the war continues to year end, with a possible 30-40% real GDP contraction, Ukraine’s debt/GDP ratio could well then be over 100%.”

Von der Leyen hinted that the EU might push to seize the $300bn of Russian central bank reserves frozen in European accounts, “if that is possible,” to pay for Ukraine’s reconstruction. That money is currently frozen, but technically it still belongs to Russia and it would take a legal decision to seize it. There has also been vague talk about Russia paying reparations at the end of the war, but no details have been discussed publically of how that could work.

Reforms with aid

The EC president also made it clear that when the war is over that Brussels expects any aid to be tied to concrete and comprehensive progress on putting into place long overdue reforms.

“The reconstruction of the country should combine massive investment with ambitious reforms,” she said.

The idea of offering Ukraine a Marshall plan has been raised before, but quickly dismissed due to the endemic corruption and the oligarchs' deeply entrenched position in the economy.

She said the reforms should “firmly establish the rule of law and the independence of (Ukraine’s) judiciary” and help tackle corruption, adding: “to fight corruption and get rid of oligarchs,” in a comment that will unsettle Ukraine’s business elite.

“To build a fair, sustainable and competitive economy, and thus firmly support Ukraine in its European path. Ukraine belongs to the European family. Ukrainians have stood tall in the face of brutal violence. They have stood for their own freedom, but also for our values and humanity. We stand with them,” she said.  

 

Cutting Russian oil imports & going green

“The European Union’s top official said the 27-nation bloc should “avoid becoming dependent on untrustworthy countries,” like it did with fossil fuels from Russia, as it moves toward a greener economy with the need to find crucial raw materials.

She said the green and digital transitions will increase the need for materials like lithium and silicon metal required for batteries, chips, electric vehicles or wind turbines.

“We rely on a handful of producers in the world, so we must avoid falling into the same trap as with oil and gas,” she stressed.

The European Commission has already banned the import of coal in its fifth package of sanctions – the first time Russian energy exports were targeted by sanctions – and has proposed banning oil in the sixth package, but a deal has proved hard to thrash out amongst the EU members.

As bne IntelliNews reported, the dependence on Russian oil varies widely across Europe, but some countries like Hungary and Bulgaria that are very dependent on Russia for supplies have prevented an agreement, despite being offered significant exemptions by the rest of the EU.

For its part Germany, which is also heavily dependent on Russian oil imports, has managed to reduce the share of Russian oil in its mix from 35% before the war to 12% now, and says it will drop to zero before the end of this year and hopes to make the ban Europe-wide by then.

The US has already banned imports of Russian crude, but the US is a net exporter of oil and cutting off Russian supplies will have little consequence for the US or Russia.

She added that the war in Ukraine has strengthened Europe’s determination to quickly get rid of Russian fossil fuels as part of the club’s Green Deal. Von der Leyen emphasised that as part of the green transition, while dependence on oil and coal will fall, the need for other materials will rise and specifically named lithium, silicon metal or rare earth permanent magnets which are required for batteries, chips, electric vehicles or wind turbines. Russia provides many of these inputs as well, including palladium and nickel, which are key components for electric vehicles (EV) manufacture and over which Russia has a near monopoly.