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Russia’s invasion of Ukraine imposed a sudden energy shock on Europe 18 months ago. Faced with the prospect of much less Russian gas, there were fears that Europe’s energy infrastructure would not cope with winter 2022-23, causing economies to crumble.  Yet a mild winter and the EU’s gradual rollout of a plan to reduce its energy consumption and buy more from alternative suppliers saw it emerge shaken but not beaten on the other side. Germany, Italy and other gas-reliant nations pivoted from Russian dependency without major electricity shortages. Since then, there has been more good news. Energy prices have fallen steadily in 2023, while Europe’s gas storage levels hit 90% capacity three months ahead of the November target and could even hit 100% in September.  According to politicians like the German energy minister, Robert Habeck, the worst of the energy crisis is over. Yet, as we shall see, it’s a little early to be so confident. New vulnerabilities The share of EU piped gas imports from Russia fell from 39% to just 17% between early 2022 and early 2023. To cope with this shift, the EU has become much more reliant on shipments of liquefied natural gas (LNG) than before. LNG’s total share of EU gas imports rose from 19% in 2021 to around 39% in 2022, amid a rapid upgrade to infrastructure that aims to have grown LNG capacity by one-third between 2021 and 2024. (Indeed, 13% of LNG imports into the EU actually still come from Russia, whose shipments have also significantly increased since the invasion). This LNG increase has made European countries vulnerable to volatility in that market – particularly as 70% of these imports are bought at short notice rather than using the long-term oil indexed contracts that prevail in Asia. For example, we’ve seen Europe’s benchmark gas price ticking upwards in recent weeks due to concerns over strikes at Australian LNG plants. This shows that supplies remain tight and that there are many potential disruptions in our highly interconnected world market. To synchronise demand for LNG, the European Commission has introduced initiatives like the EU Energy Platform, an IT platform that makes it easier for supplier companies in member states to jointly buy the fuel. However, it is uncertain what level of supplies can be channelled through this instrument as it remains untested. Additionally, the industry fears this kind of state intervention could backfire and undermine the functioning of the market. As for pipeline gas, Norway has overtaken Russia to become Europe’s leading supplier, providing 46% of the requirement in early 2023 (compared to 38% a year earlier). This extra load has strained Norway’s gas infrastructure. In May and June, delayed maintenance work caused sluggish flows that drove up prices, again showing how tight the European market is at present. Extended maintenance work in Norway leading to more obstructions in future looks distinctly possible. Meanwhile, the EU is still expected to have to buy around 22 bcm (billion cubic metres) from Russia this year. That’s the equivalent of around 11% of all the pipeline gas used by the bloc in 2022. A large proportion is coming through Ukraine, and with the current Russia-Ukraine transit agreement unlikely to be renewed after it expires in 2024, this supply route is in jeopardy. As part of the pivot away from Russia, the EU managed to reduce gas consumption by 13% in 2022, according to the International Energy Agency (against a target of 15%). In the months ahead, war-weary EU states may not do so well on this front. It will not help that prices have fallen, nor that some states didn’t pull their weight last winter. Only 14 out of 27 EU members introduced mandatory energy reduction policies, while eastern states like Poland, Romania and Bulgaria did little to reduce consumption. Should there be a physical shortage of gas in continental Europe this winter, this might undermine calls for solidarity. What comes next The harsh reality is that for at least another two or three winters, Europe will have to hope for mild weather across the northern hemisphere without major interruptions to global LNG supply if it is to avoid significant gas price spikes. Even as things stand, European gas prices remain around 50% above their pre-invasion long-run average, which is hurting both households and businesses. This is particularly important for Germany, the EU’s industrial powerhouse, with its energy-intensive automotive and chemical industries. There are growing concerns that continued high energy prices could promote de-industralisaton as energy-intensive industries move elsewhere. The good news is that pressure on gas should at least subside from the mid-2020s. Significant new supplies of LNG will come online in the US and Qatar and the market will re-balance. European gas demand should also get significantly lower – down 40% by 2030, according to the energy reduction plan. There is even talk of a supply glut by the end of the decade, depending on renewable energy deployment accelerating in Europe, and a new generation of nuclear power stations coming on stream. This would significantly reduce Europe’s need to import gas for good, but will only happen if the bloc coordinates effectively. We saw what can be achieved in the months after the invasion when France supplied gas to Germany to help reduce its dependence on Russia, then Germany later supplied more electricity to French cities to help with outages caused by nuclear reactor maintenance. The challenge is to take the same approach to decarbonisation. While France tries to gather support for nuclear modernisation both at home and elsewhere in Europe, it is facing opposition from the likes of the German-led “Friends of Renewals” group, which advocates building out only renewable energy. Divisions like these may prove a serious obstacle in achieving a more rapid energy transformation away from fossil fuels. So while Europe has managed to pivot away from Russia’s pipeline gas, it will remain exposed to the volatility of global gas markets unless it reduces its gas demand significantly in the coming years.

Executive summary The EU’s unprecedented support to Ukraine has included temporary trade-liberalisation measures and the EU-Ukraine Solidarity Lanes, which have strengthened the country’s export capacities and the resilience of Ukraine’s wartime economy. In reaction to Russia’s blockade of the Black Sea, the EU set up EU-Ukraine Solidarity Lanes as an alternative way for goods to leave Ukraine by rail, road, and inland waterways. These measures have helped Ukraine maintain a slight increase in its total merchandise exports to the EU compared to the pre-invasion level. In contrast, Ukraine’s exports to other markets declined substantially. As a result, many Ukrainian producers and exporters were able to maintain their operations during wartime, receive critically needed export revenues, and deepen their integration into EU supply chains.  However, the insufficient logistics capacity and lack of adequate coordination and cooperation during the operation of Solidarity Lanes led to tensions between Ukraine and its Eastern European neighbours. Their unilateral import bans on a wide range of Ukrainian agri-food products in April 2023 violated EU Single Market legislation. As a result, Ukrainian export flows were immediately disrupted, given that Ukraine’s access to global markets remains limited. While a compromise of the European Commission and the Eastern European countries allowed the extension of temporary tradeliberalisation measures for Ukraine for a further year, resolving the immediate crisis, more is needed to ensure its smooth operation.  To prevent further crises and disruptions of transit flows, the EU should further increase investments in the transport and storage capacity of Solidarity Lanes and connectivity between EU neighbouring countries and Ukraine, enhance transparency and regular monitoring, data exchange, and coordination of transit flows, and conduct regular trilateral consultations between the European Commission, Eastern European countries, and Ukraine to avoid sudden and unjustified Solidarity Lane disruptions. Amid Russia’s new escalation and withdrawal from the Black Sea Initiative on 17 July, the international community should use all possible leverage to pressure Russia, double down on safeguarding Ukraine’s maritime export routes, and provide Ukraine with more defence capacity to protect its critical infrastructure in the Black Sea and the Danube. In addition, further trade liberalisation and Ukraine’s integration into the EU Single Market should be a priority on the EU-Ukraine agenda as soon as possible, in line with Ukraine’s accession path. Ukraine’s wartime trade losses and the need for further support The economic burden of Russia’s war on Ukraine is enormous and only continues to increase. Ukraine’s economy contracted by about a third, while exports dropped by 35.1%, meaning that Ukraine received $24 billion less in foreign currency revenue in 2022 compared to 2021 (see Figure 1). The iron and steel industry was hit the hardest, leading to the largest reduction in export supplies - 67.5% or $9.4 billion, in 2022 vs 2021. Significant cuts were also witnessed in ore exports (-56.7% or $4 billion), chemicals (-54.3% or $1.5 billion), machinery, and electronic equipment (-29% or $1.5 billion).  At the same time, the reliance of Ukraine’s economy on agricultural and food exports increased during wartime - agricultural and food products generated more than half of all critically needed export revenues (53% in 2022 vs 40% in 2021). Yet, total agricultural and food exports declined by 15.5% or $4.3 billion in 2022.  Ukraine’s ability to trade has been significantly hampered by Russia’s blockade of key Black Sea ports, disrupting the country’s main export route for grain, vegetable oils, metals, and iron ore. For example, before the full-scale invasion, about 90% of grain and oilseeds were exported from Black Sea ports. In addition, export capacities were hit by the destruction of production facilities and critical infrastructure (especially transport and energy), particularly in the South and East of Ukraine. Since Russia’s full-scale invasion of Ukraine, at least 426 large and medium-sized enterprises and thousands of small enterprises have been damaged or destroyed. Disruption of internal and external supply chains, shortages of critical imports, and surging production and logistics costs have become a big challenge for Ukrainian producers, undermining their profitability and competitiveness in global markets. In agriculture, significant losses were caused by Russia’s occupation of vast swathes of territory, mining, and physical damage to agricultural land, storage facilities, livestock, and agricultural machinery.  Many Ukrainian farmers have been driven to the edge of bankruptcy due to a sharp decline in export and domestic revenues and increased production and logistics costs (export costs for Ukrainian grain rose from $30-$40 per tonne pre-war to $140-$150 upon the invasion). The devastating destruction of the Kakhovka dam in Southern Ukraine on 6 June 2023 (leaving at least 500,000 hectares of farmland without access to irrigation water) has further undermined production and export potential. The Black Sea Grain Initiative and the importance of seaport routes Securing and unblocking Ukraine’s agricultural exports is vital for global food security. Ukraine is a major world exporter of maize, wheat, barley, rapeseed, and sunflower oil, supplying over 45 million tonnes of grain to the global market each year. Russia’s blockade of Ukrainian seaports is a major threat to global food security, especially for regions heavily reliant on shipments from Ukraine - North Africa, the Middle East, and South Asia. It placed huge pressure on food prices in global markets, which reached a record high after the invasion. The UN-Türkiye backed Black Sea Grain Initiative has allowed Ukraine to resume and significantly increase the volumes of its seaport agricultural exports to global markets since August 2022. However, only three Ukrainian Black Sea ports in Odesa were unblocked, and only for grain and oilseeds. Russia constantly threatened and sabotaged the implementation and prolongation of this deal, causing long queues of ships and making seaport shipments more expensive and complicated. Furthermore, export capacity under the deal was limited and unstable (2.9 million tonnes in January, 3.9 million tonnes in March, and 1.3 million tonnes in May 2023) due to Russia delaying the inspection of vessels in the Bosphorus and their registration for participation in the grain agreement. As a result, the workload of Ukrainian ports declined to 30-35% as of April 2023, and Ukrainian farmers were left with large stocks of grain, thereby facing uncertainty about export activities, and suffering significant losses.  According to the UN, almost 33 million tonnes of agricultural produce were exported through the Black Sea Grain corridor, about 50% of all exported grain and oilseeds since its application in August 2022. The agreements helped stabilise global food markets and reduce volatility, with global food prices gradually falling as of March 2022.  The major export destinations of Ukrainian grain through seaports included China, Spain, Türkiye, Italy, the Netherlands, Egypt, and Bangladesh (57% of all shipments under the agreement went to developing countries vs. 43% to developed countries). China was the largest buyer of Ukrainian grain, importing almost a third of all shipments under the grain agreement (mainly maize). By purchasing Ukrainian grain, China was diversifying its food supplies and enhancing its food security. At the same time, Turkish companies, for example, benefitted from re-exporting Ukrainian grain (both processed and unprocessed) to global markets. The grain deal was extended several times (last time– until 18 July). However, on each occasion, Russia usually intensified its pressure on Ukraine before negotiations for its further extension – by threatening to terminate the agreement unilaterally, blocking the work of the grain corridor, and demanding the removal of some Western sanctions. In May-July 2023, the capacity and effectiveness of the grain agreement declined as Russia significantly limited the registration of ships at Ukrainian ports required “to overcome obstacles to Russian grain and fertiliser exports” (see Figure 2). As a result, Ukraine has been reducing its reliance on the sea corridor over the last few months and shifting to alternative routes. However, the seaport corridor is important for Ukraine for its proximity, developed transport and storage infrastructure, and lower logistics costs.  The grain agreement has never been as important to Russia as it is to Ukraine, but rather a tool for pressuring Kyiv and the West. In an attempt to save the grain agreement, the UN suggested some compromises, including the connection of a subsidiary of the state agricultural bank to SWIFT. However, Russia refused, demanding that all of its demands be met, and withdrew from the agreement on 17 July. The subsequent attacks on Ukraine’s Odesa and Danube port infrastructure were clearly aimed at further hampering Ukraine’s export capacity and access to global markets, depriving Kyiv of a major source of foreign currency revenues (Ukraine received about $13 billion for its grain and oilseeds in 2022 in total), as well as increasing the reliance of developing countries on Russian food supplies. The suspension of the grain agreement also increases pressure on global grain prices (according to the IMF, they could rise by 10-15%), as well as make developing countries more reliant on Russian food supplies, thereby deepening their food insecurity. Alternative export routes for Ukraine via EU-Ukraine Solidarity Lanes Initiated in May 2022, the EU-Ukraine Solidarity Lanes provide alternative routes for Ukraine’s exports via Eastern European countries using land transport (trains and trucks) and Danube River ports to ship goods to global markets and EU member states (through seaports in Romania, Poland, and other EU countries). According to the European Commission, the Solidarity Lanes allowed Ukrainian exporters to partly compensate for the loss of sea routes and to unblock about 40 million tonnes as of the end of July 2023, which is more than 50% of Ukrainian grain and oilseed exports since the start of the invasion. In addition, the Solidarity Lanes have been the only option for Ukraine’s non-agricultural exports (metals, iron ore, chemicals) and the only option for Ukraine to import all the goods. The Solidarity Lanes have also helped export over 35 million tonnes of nonagricultural products from Ukraine. The capacity of Solidarity Lanes exceeded 3.5 million tonnes of grain and oilseeds in March 2023 (see Figure 2).  The Danube River, with the ports of Izmail, Reni, and others, has become the vital export route for Ukrainian grain and other products (it shipped about 30% of Ukrainian grain and oilseed exports after the invasion, about 40% in June 2023). Its capacity has been expanded to 2-2.2 million tonnes of grain per month, with volumes increasing. To alleviate obstacles to trade and increase the cargo flow via the Danube, Ukraine has been increasing the depth of the canals leading from the Danube ports to the Black Sea and creating infrastructure for grain storage and export. In particular, Ukraine has increased the depth of its Southwestern Bystre Canal on the Danube River from 3.9 to 6.5 metres and 7 metres in some parts of the canal. Rail and road export routes have handled about 1 million and 600-700,000 tonnes of produce per month, respectively. However, import restrictions against Ukrainian grain by five Eastern European countries reduced the flow of shipments in this direction during the last few months (to about 600,000 tonnes by rail and 200,000 tonnes by road).  Rail and road routes have also faced logistical bottlenecks, such as incompatible rail gauge widths between Ukraine and the EU, the limited transport and storage capacity of Eastern European countries, including shortages of appropriate trains and trucks, slow clearance procedures, and long waiting times at border crossing points. Logistics bottlenecks limit export volumes and raise the logistics costs of alternative routes, which have been considerably higher compared to seaport routes. There have also been organisational and coordination problems in implementing the Solidarity Lanes initiative. Ukraine, the European Commission, and EU member states have been implementing several infrastructure projects to alleviate existing logistical constraints, increase the capacity of the Solidarity Lanes and improve cross-border connections between Ukraine, Moldova, and the EU. The European Commission has mobilised one billion euros to fund the infrastructure developments of the Solidarity Lanes over 2022-2023, such as increasing the number of border crossing points for trucks, road improvements, rehabilitation of railway infrastructure and multimodal logistics in Romania and Moldova to Ukraine’s borders, etc. Additional funding opportunities have become available for Ukraine after its integration into the Connecting Europe Facility programme in June 2023, enabling Ukraine to apply for EU funding for projects in the transport, energy and digital realms.  The Solidarity Lanes have helped diversify and reduce Ukraine’s dependency on a single export route. Amid continued obstruction of seaports by Russia and the suspension of the grain deal, Ukraine needs to reorient its agri-food exports further, placing a larger burden on alternative routes via the Solidarity Lanes and risking new tensions with EU neighbours. Ukraine plans to export the major part of its expected grain and oilseed exports (up to 40 - 42 million tonnes from the expected 48 million tonnes of exports) across the three routes of Solidarity Lanes during the next season. Therefore, it is essential to ensure the smooth running and further expansion of the capacity of alternative export routes – deepening river canals, extending the rail network, and building transhipment terminals. The use of new routes and EU seaports, as offered by Croatia, the Baltic states, and Greece, can also help expand the capacity of transit routes. However, they imply longer distances and higher logistics costs, and require significant investments in rail, road, and storage infrastructure. EU trade-liberalisation measures for Ukraine during wartime EU-Ukraine trade relations were already significantly liberalised under the EU-Ukraine Deep and Comprehensive Agreement (DCFTA), which has been provisionally applied since 1 January 2016. As of the beginning of 2022, most tariffs for industrial and agricultural products had already been abolished under the DCFTA. However, the EU still applied tariff measures to certain Ukrainian exports, the most restrictive of which were tariff rate quotas (TRQs).  TRQs allow for duty-free import of a product’s specified volume, while beyond-TRQ supplies are dutiable and subject to EU tariff rates for third countries. Ukrainian agri-food producers complained about the low and outdated volumes of the EU TRQs under the DCFTA that did not reflect the current level of Ukraine’s production and export capabilities and the level of EUUkraine trade relations.  Ukraine was utilising 31-32 out of 36 EU TRQs under the DCFTA during recent years, from which the following TRQs were usually fully exhausted: honey, processed tomatoes, apple and grape juices, processed cereal grains, sugar, starch, processed starch, eggs, corn, corn flour and pellets, poultry meat, etc. For many of them, Ukraine’s supplies usually exceeded TRQ volumes (e.g. total supplies of honey from Ukraine to the EU usually exceeded the volume of the relevant TRQ by 8-10 times). However, out-of-quota import tariff rates and TRQ administration costs still had a restrictive impact on Ukrainian exports. As Ukraine’s major trading partner (accounting for about 40% of Ukraine’s trade before the invasion), the EU has been supporting the resilience of Ukraine’s wartime economy by restoring Ukraine’s ability to trade and generate export revenues.  The EU has introduced temporary trade-liberalisation measures such as the Autonomous Trade Measures (ATMs) since 4 June 2022 for one year (ATM Regulation 2022/870) including the complete removal of:   ●  The remaining import duties on industrial products; ●  All tariff rate quotas on agricultural and food products; ●  Entry prices on fruit and vegetables; ●  All trade defence measures (anti-dumping duties and safeguards mostly applied to steel products).   The EU also implemented other steps to facilitate transportation and border control for Ukraine’s exports. It has temporarily liberalised the transport of freight by road between the EU and Ukraine in relation to bilateral 8 operations and transit by abolishing the need for permits (the agreement was recently extended for one year - until 30 June 2024). Besides, in October 2022, Ukraine joined the Common Transit Convention which simplified customs transit procedures between the EU and Ukraine. EU-Ukraine trade dynamics after Russia’s invasion  After a significant decline in the first months of Russia’s invasion, Ukrainian exports to the EU even slightly exceeded pre-invasion levels by the end of 2022, while exports to other trade partners substantially declined. Consequently, the role of the EU as Ukraine’s main trading partner increased to 63% in 2022 from about 40% in 2021 (of $44.2 billion in Ukraine’s total exports of goods in 2022, about $28 billion were destined for the EU market).  The driving factor behind export recovery was the fast growth of agri-food exports to the EU - by more than $5.2 billion or by almost 70% year on year in value terms (including cereals – by 141.7%; vegetable oils – by 29.4%; oilseeds - by 96.5%). This helped to compensate for the significant drop in iron and steel exports (by 48.7%), iron ore (by 21.0%), and machinery equipment (by 10.0%) to the EU.  Increased agri-food exports to the EU in 2022 can be explained by several factors, including Ukrainian exporters reorienting to closer markets because of logistics problems and high freight and insurance costs, better access to the EU market due to EU trade liberalisation measures and new export routes, greater demand for imported grain in the EU as a result of a drought affecting many regions of Europe in 2022, as well as higher prices for many agricultural products in the EU due to Russia’s invasion.  Among all temporary trade-liberalisation measures, the suspension of TRQs has been the most impactful - in facilitating Ukraine’s exports to the EU. Namely, exports of sugars, apple juice, poultry meat, eggs, milk powder, starches, processed cereal grains, and cereals, earlier subject to TRQs, saw the greatest growth (see Table 1). The suspension of the over-quota import duties gave these Ukrainian products a competitive advantage in the EU market when compared to products from other third countries, as well as lower TRQ administrative costs for Ukrainian exporters due to the simplification of export procedures. In contrast, despite trade liberalisation, there was a drop in exports of some products such as honey and processed tomatoes. However, this can be explained by other factors (e.g. loss of production capacities due to the war). Unilateral measures of neighbouring EU countries against Ukraine’s imports Poland, Romania, Hungary, Slovakia, and Bulgaria - the five neighbouring Eastern European countries (EEC) in the frontline of the Solidarity Lanes - became the major markets for the export of Ukrainian goods in the EU. Their joint share in Ukraine’s exports of goods to the EU increased from 32% in 2021 to 56% in 2022. Ukraine’s exports of goods to these countries increased by 54% y/y in 2022 - to $15.7 billion, with agri-food products accounting for the significant increase.  Agri-food exports to five neighbouring countries increased by 5.2 times to a record $7.2 billion in 2022, of which $2.4 billion were generated by grains and $1.9 billion by oilseeds. Five Eastern European countries, which are also large agricultural producers, accepted about 35% of four major agri-food exports from Ukraine to the EU in 2022 vs 1% in 2021 (See Figure 3). Both transit flows and sales of agri-food products to these countries have substantially increased after Russia’a invasion. Due to logistical problems related to the Solidarity Lanes (insufficient storage and transport infrastructure and high logistics costs), substantial transit flows of grain and oilseeds to EU ports and third markets were disrupted, and much of Ukraine’s produce was sold in local markets. According to EU statistics, the physical volumes of Ukrainian wheat, maize, rapeseed and sunflower seed imports doubled in 2022 – 19.3 million tonnes in 2022 vs 9.5 million tonnes in 2021. From this, about 8 million tonnes were sold to the five Eastern European countries in 2022 vs only 176,000 tonnes in 2021.  Transit disruptions and large quantities of Ukrainian crops exhausted storage and transport capacities raised logistics costs for local farmers and put downward pressure on purchase prices of local agri-food products. Additionally, world agricultural commodity prices declined from their early-2022 peaks due to better harvests in major grain-producing countries, improved crop conditions in the EU, and the implementation of the Black Sea grain agreement. Amid these developments, local farmers in these countries responded with protests demanding that they are protected from duty-free Ukraine’s imports. These tensions also caused delays in the adoption of the new regulation on the continuation of duty-free trade with Ukraine. The Eastern European countries blamed Brussels for insufficient help to support them. The EUR 56 million in subsidies allocated by the European Commission to the affected farmers in response to their protests in early April 2023 failed to satisfy them and their national governments. They called for additional EU funding to speed up the development of transit infrastructure, as well as the introduction of automatic compensation for farmers, the possibility for the rapid introduction of trade defence measures and the re-introduction of tariffs and tariff-rate quotas on imports from Ukraine, and the purchase of grain in the EU market for humanitarian purposes.  The lack of adequate coordination and cooperation between the Eastern European countries, the European Commission, and Ukraine related to the operation of the Solidarity Lanes led to a crisis, with EEC adopting controversial unilateral restrictions. On 15 April, Poland’s government unilaterally introduced a ban on imports and transit of Ukrainian agri-food products until 30 June (the transit ban was abolished on 21 April). Hungary, Slovakia, and Bulgaria followed with import bans on certain Ukrainian products (without a transit ban), while Romania also considered taking similar steps.  As a result, Ukrainian exports were significantly restricted, becoming stuck at the Western borders for about two weeks, creating uncertainty and losses for Ukrainian exporters. Import restrictions in the EU neighbouring countries, as well as Russia’s increased pressure and sabotage of the Black Sea grain agreement, were the main factors of the decline in Ukraine’s exports of goods in April and May 2023 ($3 billion and $3.1 billion respectively) compared to March 2023 ($3.8 billion).  These national decisions raised a lot of criticism from Ukraine and the European Commission. A primary concern was their non-compliance with EU legislation, and international and bilateral commitments. Unilateral actions by member states are not allowed under EU law, given that trade policy is an exclusive EU competence. The safeguard clause of с 2022/870 on temporary trade liberalisation measures for Ukraine entitles the Commission to monitor and take necessary steps. The unilateral blocking of imports by one or several member states also undermines the principles of the EU Single Market, which provide for the freedom of movement of goods within common customs territory.  In addition, these decisions are not in line with the World Trade Organization (WTO) rules or the provisions of the EU-Ukraine Association Agreement on freedom of transit and the use of import bans. Additionally, the bans were applied immediately and adopted without proper bilateral consultations with the Ukrainian side.  Another important aspect - the EEC’s decisions were not supported by solid analysis of the import dynamics of specific products and their impact on the EU market. The scope of the bans application was too wide, and the criteria for the inclusion of certain Ukrainian products into the list of banned products was unclear in many cases. For instance, the Polish list was the longest and included a wide range of agri-food products - grains, sugar, meat, fruits, vegetables, oilseeds, processed fruit and vegetable products, wines, milk and dairy products, eggs, honey and others. These products demonstrated different import dynamics after Russia’s invasion, influenced by different factors, each requiring separate detailed analysis.  While many of these products got duty-free access to the EU market following the start of Russia’s invasion under ATM Regulation 2022/870, not all witnessed a significant increase in imports to the EU in 2022 vs 2021 and 2020 (see Table 1). For example, import volumes of Ukraine’s honey and processed tomatoes to the EU even declined in 2022 (in the case of Poland, imports of honey from Ukraine dropped from 16.9 thousand tonnes in 2021 to 10.6 thousand tonnes in 2022). At the same time, some of the banned Ukrainian products, such as oilseeds, frozen fruits, and sunflower oil, were not subject to any TRQs or tariff measures in the EU before the invasion.  Moreover, although the imports of some products subject to TRQs before Russia’s invasion (e.g. milk powder, sugars, starches, poultry meat) considerably grew in 2022 as compared to the previous years, the increased volumes still did not constitute a significant part of the EU extraimports or the EU intra-trade (see Table 1). For instance, EU imports of milk powder from Ukraine (under TRQ 09.4601) grew more than five times in 2022 – from 2 000 to 11 300 tonnes. However, Ukraine’s share in the EU extra-imports of these products was about 9% in 2022, and in the EU intra-imports - less than 1%. Considerable part of these products was imported to Poland (about 45%). However Ukraine’s share in Poland’s total imports of these products was only about 3%.  In a broader context, Ukrainian agri-food imports helped ease the inflationary pressure on the EU food market amid lower grain production in the EU last year. The EEC countries expanded agri-food exports by re-exporting Ukrainian products to other EU countries and worldwide, as well as producing and selling abroad agri-food products processed from Ukrainian crops (such as sunflower oil, processed cereals, flour, meat and dairy products, etc.). For instance, Poland’s agri-food exports reached a record level of EUR 47.6 billion in 2022, and its positive agri-food trade balance amounted to EUR 15.5 billion, or 23% higher than in 2021.  The positions of national governments were also influenced by challenging domestic political contexts, especially considering the upcoming parliamentary elections in Poland and Slovakia in 2023. The Polish government’s narrative was primarily focused on local farmers, whose votes are crucial for the ruling party.46 Farm lobbies tried to use this opportunity to restrict access to their markets for a range of Ukrainian agri-food products disproportionately. It is important to recognise local farmers’ reservations about a significant increase in imports of some agricultural products from Ukraine and their rights to raise these concerns. Still, unilateral responses of these countries are seen as quite unconstructive and undermining the unity and cooperation of EU members. The immediate bans against Ukrainian products were not in line with the solidarity efforts undertaken by Poland and other EU neighbouring countries for Ukraine. This situation also exposed possible challenges the future of Ukraine’s EU accession negotiations and their support for greater EU-Ukraine trade liberalisation and Ukraine’s integration into the EU Single Market. A compromise solution between the Commission and the five EU countries By adopting unilateral measures, the EEC put pressure on the Commission to agree on an urgent compromise: introduce exceptional and temporary preventive measures under Article 4(9) of the ATM Regulation 2022/870, namely a ban on imports of four Ukrainian products (wheat, maize, rapeseed and sunflower seeds, revealing the strongest effect on local markets) to five counties between 2 May - 5 June 2023, while the EEC countries agreed to abolish all their unilateral restrictions on all Ukrainian products. At the request of five EEC countries, these safeguards were prolonged until 15 September 2023. In addition, a further EUR 100 million will be allocated to support and alleviate the pressure on affected local farmers of grains and oilseeds in these countries. This decision allowed for more targeted restrictions compared to the earlier unilateral measures and ensured the free and unlimited transit of all Ukrainian products within the EU territory and their import to all EU countries except those bordering Ukraine. It has also allowed for the adoption of the new Autonomous Trade Measures Regulation (ATM Regulation 2023/1077) on the continuation of temporary trade liberalisation for Ukraine for a further year (until 6 June 2024).  Furthermore, the text of the ATM Regulation 2023/1077 has been amended to change the safeguard clause for the expedited reintroduction of the customs duties otherwise applicable under the EU-Ukraine Association Agreement (namely tariff-rate quotas and the entry-price system) on Ukrainian imports in case they adversely affect the EU market. In particular, member states have to provide sufficient prima facie evidence of the adverse effects of Ukrainian imports on the EU market to request the European Commission to initiate such an assessment, which must be concluded within three months of its launch. These amendments shorten the timelines of the safeguard procedure and better explain the requirements for launching an assessment, which should prevent unjustified claims for import restrictions from member states. The safeguard clause implies clear procedural rules with a prior evidence-based assessment before the adoption of any restriction.  In addition, the new regulation permits the Commission to implement immediate preventive measures under exceptional circumstances, as was the case with the ban on four Ukrainian products under the previous ATM Regulation 2022/870. The ATM Regulation does not define criteria for taking immediate preventive measures, nor the time limits for their possible application. However, since these measures are taken to address a situation requiring immediate action, they should be of an exceptional and temporary nature. The reached agreement and applied measures provided a short-term solution for a crisis. However, it still undermines the integrity of the EU Single Market and creates a precedent for further violations of EU law by allowing member states to bargain with the Commission to achieve additional support measures, thus weakening the enforcement of Single Market rules across EU countries. While the EU’s decisions signal its ongoing trade support for Ukraine, there are risks of prolongation or the introduction of new import restrictions in the EU. Poland and Hungary are again threatening to close their borders unless Brussels extends temporary restrictions against Ukrainian grain and oilseeds until at least the end of 2023 and ensure that none of the products remains in these countries. In addition, the Eastern European countries may request the Commission to impose preventive measures for other sensitive agri-food products from Ukraine such as poultry meat, sugar, eggs, honey, fruits, etc, under the current ATM Regulation. These risks create additional pressure and uncertainty for Ukrainian agri-food producers. Conclusions and recommendations During the first year of Russia’s war on Ukraine, EU trade liberalisation measures and EU-Ukraine Solidarity Lanes provided Ukraine with alternative export routes. They allowed the country to reorient part of its exports to the EU market, facilitating the gradual recovery of Ukraine’s exports after the first deep shock of the war.  The European Commission, EU member states, and the Ukrainian government should further intensify their dialogue and efforts to find a solution to the current trade dispute about import bans on Ukrainian grain and oilseeds, facilitate Ukraine’s trade flows and prevent sudden trade disruptions and restrictions. This has become critically important, especially after Russia’s withdrawal from the grain agreement and attacks on Ukraine’s port and export infrastructure.  At the same time, the crisis in the Eastern European countries also highlighted the existing logistics and connectivity bottlenecks between Ukraine and the EU. Their rapid resolution should be a priority of the EU, along with international financial support for Ukraine.  In addition, the precedent created by the application of unilateral measures in violation of the EU law revealed significant challenges with the enforcement of EU law by EU member states. This does not bode well for Ukraine’s future enlargement negotiations.  To address current challenges and prevent a repetition of this year’s crisis, the following next steps should be taken:  ● Enhance the strategic alignment and connectivity between Ukraine and the EU Ensuring smooth operation and increasing the capacity of the Solidarity Lanes is critically vital for the transit of Ukraine’s agricultural and non-agricultural exports to both the global markets and EU member states during wartime. This must include urgently increasing investment in EU-Ukraine road, rail, and river connections, deepening of river canals, increasing the available transport material, enhancing EU-Ukraine border infrastructure, building transhipment terminals, increasing grain and food storage facilities in the Eastern European countries, as well as further optimising customs operations and better coordinating transit across these countries. Although alternative routes cannot fully replace the Ukrainian seaports occupied by Russia, they have helped diversify Ukraine’s export routes, lowered Kyiv’s dependence on the grain agreement and seaport routes, and reduced Russia’s leverage on shipping Ukraine’s exports. After Russia’s withdrawal from the grain agreement, the significance of the Solidarity Lanes is increasingly critical for Ukraine’s trade.  Expanding Solidarity Lanes, extending European Transport Corridors (TEN-T) to the territory of Ukraine, and developing the Ukrainian part of the TEN-T network, improving connectivity and interoperability of transport systems in Ukraine and the EU is also important in view of Ukraine’s post-war recovery and further economic integration into the EU Single Market, and the involvement of Ukraine in European value chains. This will also enhance the performance and resilience of EU food supply chains and will work to the advantage of Ukraine, the EU and global food security.  ● Ensure security guarantees and increase the capacity of seaport corridorsThe importance of the Black Sea grain agreement and seaport exports for Ukraine and the world cannot be overestimated. Ukraine cannot reach the same export levels without functioning seaports, so any possibility and mechanisms to ensure free navigation in the Black Sea should be explored.  Ukraine needs greater support from the EU and international community in maintaining shipments through Black Sea ports, resurrecting the grain agreement and opening new sea corridors, purchasing Ukrainian grain in cooperation with the UN’s World Food Programme (WFP) and transporting it to developing countries.  Major stakeholders, including the largest buyers of Ukrainian agri-food produce (China, Türkiye, the countries of the Middle East, as well as many African nations), should use their leverage and increase pressure on Moscow to resurrect the deal and safeguard seaport corridors. As Russia seeks to strengthen its position in Africa, strengthening dialogue with African countries is even more crucial in terms of their possible influence on Russia’s position about the blockade of Black Sea navigation and Ukraine’s access to global food markets by sea. Many African nations expressed disappointment about Russia pulling out of the deal at the Russia-Africa Summit. ● Enhance coordination and unity between the Commission, EU member states, and UkraineEU member states should avoid a violation of EU law and unity and should engage in “sincere cooperation as a cornerstone of the EU legal order”. Unilateral drastic actions do not facilitate unity and coordination between the Commission, member states, and Ukraine and undermine potential solutions.  The European Commission should ensure the consistent enforcement of EU law and prevent a possible repetition of cases using the same political tactics with unilateral measures that violate EU law. To avoid a repetition of crisis situations, efforts from all sides should be intensified to improve the operation of Solidarity Lanes, including data exchanges, notifications of trade volumes and policy changes, monitoring and supervision of transit flows, customs operations, and trading practices in Ukraine and the EU countries. In this respect, the recently established Joint Coordination Platform led by Executive Vice-President Valdis Dombrovskis should foster regular consultations and coordination between the Commission, Eastern European countries, and Ukraine to address the concerns of all sides. Strategic partners Ukraine and EU neighbouring countries should demonstrate willingness to coordinate stances and support each other in important areas. ● Avoid sudden and unjustified Solidarity Lanes disruptions The EU and its member states should avoid the application of sudden bans or other restrictions on Ukrainian imports or transit from Ukraine. Such actions are the most harmful for exporters, causing losses and uncertainty. This is particularly the case during wartime when Ukrainian producers are already suffer from production and logistics shocks.  The European Commission should ensure that all decisions are made after proper consultations with the Ukrainian side and be taken on evidence-based assessments of the impact of Ukrainian products in the EU market.  In June, the Commission extended immediate preventive measures in the form of import bans on four Ukrainian grain and oilseeds until 15 September. As immediate preventive measures are exceptional and temporary, they should be replaced by welljustified policy decisions and procedures. Considering the serious challenges faced by Ukraine and its EU neighbours due to Russian aggression, a compromise solution should be found between Ukraine and these countries. It can imply, for example, lifting import bans against Ukrainian products and, at the same time, taking commitments by Ukraine not to exceed the agreed amount of export volumes to EU neighbouring countries (based on the assessment of the market situation, storage capacities and harvest forecasts). At the same time, non-neighbouring EU members should also be prepared to absorb greater volumes of reoriented Ukraine’s agri-food flows.  To increase the transparency of this process as much as possible, the Commission should implement a comprehensive monitoring and analysis of transit flows, the state of storage and transport capacities, and prices based on evidence from all sides and stakeholders.  ● Protect critical port and export infrastructure from Russia’s attacks Russia’s attacks on the Black Sea and Danube port infrastructure and possible interruptions of this traffic may significantly undermine Ukraine’s export potential, and international grain supplies and global food security. Ukraine urgently needs more defence capacity to protect its critical infrastructure in the Black Sea and the Danube from Russia’s attacks.  ● Facilitate EU-Ukraine trade liberalisation and Ukraine’s integration into the EU Single Market  EU member states must continue to demonstrate consistent, robust solidarity with Ukraine, which has been reinforced following Ukraine receiving candidate country status. Their solidarity and support is also critically important for Ukraine’s trade and integration into the EU Single Market.  EU-Ukraine trade volumes and Ukraine’s integration into the EU supply chains are expected to increase further as Ukraine advances on its EU path. Thus, further trade liberalisation and gradual integration into the EU internal market is an inevitable part of this process. Even before the war and the temporary ATMs, further trade liberalisation was on the agenda of EUUkraine relations. In 2021, the EU and Ukraine started negotiations to further liberalise and increase duty-free bilateral trade from both sides, including revising the DCFTA TRQs (as of now, these negotiations are paused).  The possibility for further trade liberalisation is envisaged in the EU-Ukraine Association Agreement (Article 29). It is expected that after the termination of ATMs, Ukraine will initiate an overhaul of these negotiations to have EU-Ukraine trade more liberalised on a permanent basis - up to Ukraine’s accession to the EU. In this regard, Ukraine is interested in ensuring access to the EU Single Market for its processed agrifood products, increasing food processing capacities and integrating into EU food processing value chains.

The tentative merger agreement announced in June between the PGA Tour, DP World Tour, and LIV Golf sent shockwaves through the sporting world. The commercial operations of the three organizations are set to form a “new collectively owned” entity exclusively funded by Saudi Arabia’s Public Investment Fund (PIF). The PIF will reportedly acquire a significant minority stake in the yet-to-be-named for-profit company by injecting an estimated $3 billion into it.  The controversial merger deal, which some have described as “Saudi Arabia’s de facto takeover of professional golf,” has provoked two separate inquiries in the United States Senate and is seen as the latest effort by the kingdom to implement its ambitious tourism and investment strategy. In fact, sport is but one of 13 “strategic” sectors identified by Saudi Arabia’s sovereign wealth fund (SWF). Yet succumbing to the temptation to focus narrowly on how the kingdom’s PIF has upended the professional world of golf risks missing the bigger picture: Gulf ruling elites, like their counterparts across the globe, are leveraging their SWFs to proactively drive nation-building projects, fortify strategic international partnerships, and assume a more prominent role on the world stage. When the COVID-19 crisis struck, Gulf SWFs snapped up stakes in distressed Western companies, capitalizing on market gyrations. As the world struggles to exit from the worst of the pandemic, Gulf SWFs have entered a new phase of dealmaking. Benefiting from massive capital injections derived from higher oil revenue, they have been spending vast sums at home and abroad. The rise of Gulf SWFs The number of SWFs around the world has grown steadily over the past two decades, from 62 funds in 2000 to 176 in 2023. During that time, SWF assets under management (AUM) have ballooned from a mere $1 trillion to $11.36 trillion. Four regions dominate the landscape in terms of the number of SWFs and aggregate assets: Europe (specifically Norway and countries in Central and Eastern Europe), North America, Asia-Pacific (specifically China), and the Middle East, with the latter two regions accounting for four-fifths of global assets. For resource-rich countries such as Gulf oil and natural gas producers, SWFs have emerged as promising tools to save for future generations, mitigate the effects of outsized economic shocks, and/or be deployed as reserve investment and strategic development funds to spend on human, natural, social, and physical capital. The Gulf is currently home to about 20 SWFs, with at least one such fund originating from each of the six Gulf Cooperation Council (GCC) countries. The various Gulf SWFs differ in terms of the size of their AUMs, investment strategies, as well as approaches to diversification, mandates and objectives, and governance structures. However, they share at least two broad similarities. The first is that the primary source of their funding is surplus revenues generated from the export of commodities, namely oil and gas. Second, they operate under the guidance and oversight of the government or ruling family. Gulf SWFs have deep pockets — collectively, they manage around $3.7 trillion. According to the Sovereign Wealth Fund Institute, the region’s seven largest funds have combined assets of over $3.2 trillion, amounting to about 40% of global SWF assets (see Table 1). In most cases, Gulf SWFs are directly controlled by members of the ruling families. Since March 2015, for example, Saudi Crown Prince Mohammed bin Salman has sat at the top of the PIF hierarchy. In March 2023, Reuters reported a reshuffling of wealth fund leadership, with UAE President Mohamed bin Zayed Al Nahyan naming his brother Sheikh Tahnoun — head of ADQ, Abu Dhabi’s third-biggest investment fund — to chair the ADIA. Another brother, Mansour bin Zayed Al Nahyan, leads Mubadala. In this way, Gulf monarchies can maintain close control over how resource wealth is spent and align that spending with their political, public, and personal objectives. Higher oil prices and ongoing market turmoil are the driving factors behind a windfall for Gulf oil and gas producers. To give just one example of the scale of the oil revenue bonanza, Saudi Aramco reported earnings of $161 billion in 2022, claiming the highest-ever recorded annual profit by a publicly listed company. The financial firepower generated by high oil prices has, among other things, translated into increased spending by the region’s SWFs. The top five funds — Abu Dhabi’s ADIA, ADQ, and Mubadala, along with Saudi Arabia’s PIF and Qatar’s QIA — deployed more than $73 billion in 2022 alone, according to online tracker Global SWF. Jihad Azour, the International Monetary Fund’s (IMF) director for the Middle East and North Africa, maintains that Gulf producers could earn up to $1.3 trillion in additional revenue through 2026. Patterns and trends in Gulf SWF dealmaking The current wave of dealmaking by Gulf sovereign funds, which began with the outbreak of the COVID-19 pandemic, features several notable changes in both the pattern and the destination of investments. Gulf SWFs’ spending targets reflect a shift toward alternative assets and “industries of the future,” an acceleration of domestic investments, a growing appetite for global startups, a heightened emphasis on co-investment with private equity (PE) and venture capital (VC) firms, and greater geographic breadth of focus. Diversifying into alternative assets and industries of the future Historically, Gulf SWFs have hunted for attractive opportunities in times of volatility and low valuations. However, Gulf wealth investors recently have shifted toward assets that yield returns and generate growth. Instead of parking wealth in low-risk, low-return assets, they have diversified their investments into more profitable areas such as PE and listed shares. Indeed, “alternative assets” constitute a large and increasing share of total assets from the region’s three largest funds. There is a concurrent shift underway in investment allocation. Gulf SWFs have shown a keen interest in investing in technology and innovation-driven companies, alongside high-priority sectors such as healthcare, logistics, renewables, broadband, and digital infrastructure. Accelerating domestic investments The number of strategic funds with a mission to attract foreign investment and co-invest in the domestic economy is increasing significantly. With the exception of ADIA, which solely invests abroad, Gulf SWFs are “flexible funds” that do both. Saudi Arabia’s PIF, one of the largest and fastest-growing sovereign financial investment vehicles, deploys most of its assets domestically, as is generally the case among Gulf SWFs. PIF is the driving force behind the development of the kingdom’s so-called “giga-projects,” most notably NEOM, the Red Sea Tourism Project, the Qidiyya entertainment city near Riyadh, and ROSHAN. The fund has investments across a wide range of industries, from Saudi Electricity to Saudi Arabian Mining and Saudi Telecom. Since 2017, PIF has established 79 companies across its 13 strategic sectors. PIF’s big domestic investment push began with the announcement in 2021 of a five-year strategy that aims to more than double the value of its AUM to $1.07 trillion and to commit $40 billion annually to develop Saudi Arabia’s economy until 2025. The fund now owns several strategic investments in the consumer goods and retail sector, such as Noon.com, Amazon’s Middle Eastern rival and the region’s leading online shopping platform. Recently, PIF agreed to purchase a 30% share of Tamimi Markets Co. in a bid to help transform the company into a national champion and major regional grocery and food supply chain. In February 2023, the fund invested $1.3 billion in four domestic contractors to improve local supply chains for projects in the country. The fund has set up dozens of fully owned subsidiaries to seek new investment opportunities and launch manufacturing facilities in the kingdom. The recently established Halal Products Development Company aims to localize the development of a wide range of halal products. The newly founded Aseer Investment Company will operate as the PIF’s investment arm, part of an ambitious effort to transform the southwestern region into a global tourist destination. Furthermore, in June of this year, PIF launched Lifera, a commercial-scale contract development and manufacturing organization, to boost biopharmaceutical industry growth. PIF has also taken steps to develop synergies between its investment holdings and build its global brand. For example, the player jerseys of Newcastle United F.C. — the English Premier League soccer club in which the PIF purchased an 80% stake — display the logo of sleeve sponsor Noon.com. Incubating new industries Gulf wealth funds have been increasingly active in the global startup scene, mainly in offshore markets. Sanabil, Saudi PIF’s private investment arm, has notably backed a lengthy roster of U.S. startups. At the same time, PIF and China’s Alibaba Group are raising funds to jointly back technology startups in Asia and the Middle East. QIA is leading a funding round for Builder.ai, a platform for businesses to create custom smartphone apps. It has also led and made a follow-on investment in the recent funding round of Singapore-based Insider Pte Ltd (Insider), an AI-enabled digital marketing platform. According to YourStory, a media tech company for startups, India has emerged as “an investment stronghold” for Gulf wealth funds. QIA has invested in Swiggy (a food ordering and delivery platform), Rebel Foods (an online restaurant chain), VerSe Innovation (a local language tech firm), and Flipkart (an e-commerce company). Abu Dhabi Development Holding Company has pumped millions into Byju (an ed-tech firm) and Spinny (a used car retailing outfit). Lastly, ADIA has purchased stakes in MobiKwik (digital financial services platform) and Jaipur-based DealShare (a social e-commerce startup). There also seems to be a slow but steady commitment by Gulf wealth funds to startups in the region. ADQ has invested in health-technology company Okadoc, while ADQ and Mubadala, together with the PIF-backed Riyad Taqnia Fund, have provided fresh financing to TruKKer, a startup focused on logistics in the land freight sector. PE rounds in 2022 included PIF’s investments in Almosafer, a travel services provider, and FOODICS, one of the largest cloud-based fintech platforms for restaurants in the Middle East. Expanding co-investment partnerships Gulf SWFs are teaming up with other wealth funds or financial investors through joint ventures (so-called sovereign-private partnerships, SPP). These collaborative strategies serve multiple aims, including cost saving, information sharing, and portfolio diversification. Importantly, by utilizing state funds, Gulf SWFs’ engagement in co-investment partnerships aims to bring companies to their shores to support domestic development plans. An increasing number of Gulf SWF investment partnerships have targeted Asian assets. QIA and ADIA are among the most active co-investors. ADIA, ramping up its exposure to Asia, has teamed up with Singapore’s SC Capital Partners to target data center investments across the Asia-Pacific region. In June, QIA joined a consortium led by Korea’s MBK Partners to invest $1.2 billion in SK On, an electric vehicle battery manufacturer. Mubadala, too, has formed strategic partnerships. These include forging an alliance with KKR Credit to tap into Asia’s growth potential, joining forces with BlackRock to fund Tata Power Renewable Energy’s aggressive growth plans, and co-leading a $315 million funding round for China’s Hasten Biopharmaceutic. PIF has teamed up with Bain & Company to develop an “India strategy” focused on the infrastructure sector, in particular on renewable energy, and it has joined with Japan Bank of International Cooperation (JBIC) to promote collaborative projects in decarbonization and digital transformation. PIF and Singapore’s SWF, the Government of Singapore Investment Corporation (GIC), have partnered to invest a combined $986 million in South Korea’s Kakao Entertainment Corp. QIA has parlayed its investment in Indian Edtech firm Byju to set up its wholly owned subsidiary in Doha to focus on students from across the Middle East. Widening the geographic scope Gulf SWFs are not just bankrolling ambitious projects at home to support diversification efforts but plowing billions of dollars into assets regionally and globally. Bargain hunting in the West North American and European assets have long been mainstays of Gulf SWF portfolios. Even during the 2008-09 financial crisis, Gulf investors held onto their major Western stakes, taking advantage of their long-term investment horizons to ride out the downturn and seek out undervalued assets. In 2022, Gulf SWFs spent almost $89 billion on investments globally, double the previous year. According to Global SWF, an outsized $51.6 billion of that amount was deployed in Europe and North America. The same source also reported that, out of the 60 SWF investments announced in 2022 that were larger than $1 billion, of which 26 were made by Gulf funds, 17 were invested in North American or European assets. This includes ADIA’s joint ventures with Rockpoint and Landmark Properties in the United States as well as Greystar in the United Kingdom. Other examples include Mubadala’s investment in British broadband provider CityFibre and acquisition of a stake in Scandinavian-based communications company GlobalConnect along with the deal by PIF that made it the second-largest shareholder of the luxury carmaker Aston Martin. Building bridges with neighbors Although the West continues to be the preferred destination of petrodollars managed by Gulf SWFs, the region’s wealth funds have been moving to diversify their overseas exposure. The Gulf states have been building economic bridges with their poorer neighbors, some of which they once considered adversaries. Three key regional destinations are Egypt, Iraq, and Turkey. Capitalizing on the withdrawal of foreign portfolio investments from Egypt, Saudi PIF last year launched the Saudi Egyptian Investment Company (SEIC) as its leading investment vehicle for acquiring stakes in local companies, with a focus on infrastructure, real-estate development, healthcare, financial services, food and agriculture, and pharmaceuticals. Soon after its establishment, SEIC purchased minority stakes for $1.3 billion in four Egyptian companies. Around the same time, Qatar’s QIA transferred $1 billion to the Central Bank of Egypt as part of a deal to buy stakes in local firms. QIA is reportedly negotiating with Egypt to conclude what could be a landmark investment deal to acquire stakes in seven historic hotels. The UAE’s ADQ, which established an office in Cairo in December 2021, has also taken steps to ramp up its investments in Egypt and support co-investment with The Sovereign Fund of Egypt (TSFE). After a lengthy period of estrangement, a cautious rapprochement between the Gulf states and Iraq appears to be gaining momentum, with clear evidence that Gulf wealth funds are interested in investing there. For example, Qatar QIA has said it plans to invest $5 billion in various sectors in Iraq over the coming years. Additionally, Saudi PIF has created a new unit to target investments in a number of Iraqi industries. The newly formed Saudi-Iraqi Investment Company, with a capital of $3 billion and headquarters in the kingdom, reportedly will seek investment opportunities in infrastructure, mining, agriculture, real estate development, and financial services. Gulf wealth funds, led by ADIA and ADQ, have also been scouting for investment targets in Turkey, amid signs of a political thaw in relations between Abu Dhabi and Ankara. And Turkish President Recep Tayyip Erdoğan is himself visiting the Gulf since July 17, partially in an effort to drum up investment in his country, having reportedly already secured a series of deals worth $50 billion with the UAE. The QIA last year bought a stake in the Eurasia Tunnel company in Istanbul and, more recently, partnered with Turkish firm Esas Private Equity to invest $105 million in Turkish artificial intelligence (AI)-powered marketing firm Insider. Pivoting to Asia Gulf SWFs are increasingly active in Asia, with China, India, and member states of the Association of Southeast Asian Nations (ASEAN) as the major beneficiaries. In addition to hiring specialist teams to study Asian markets, Gulf wealth funds have opened offices in the region — PIF has an office in Hong Kong, while Mubadala and QIA have set up shop in Singapore. The Private Equities Division (PED) of ADIA has deployed dedicated investment teams focused on “China and India-Southeast Asia.” As illustrated in Table 2, Gulf SWF spending targets in Asia span a wide range of sectors, including gaming and e-sports, agribusiness, renewables, and consumer tech and data services.  Recent deals in Asia map onto their overall investment strategies in interesting and important ways. PIF’s acquisitions in gaming and e-sports in Asia are complemented by its more than $3 billion worth of stock purchases in U.S. video game developers. These and other, similar investments aim to accelerate the growth of mobile e-sports, with a particular focus on the kingdom itself — a thriving market of 23.5 million gamers — and serve the broader objective of making Saudi Arabia a global industry hub. The purchase of a minority stake in Olam Agri by the PIF’s Agricultural and Livestock Investment Company (SALIC) serves the latter’s aim of achieving food security for the kingdom and follows other recent deals struck in the food industry, namely in Canada, Brazil, and India. QIA’s new venture, Bodhi Tree, is part of its big push to scale investments in sectors with deep consumer engagement — including media, healthcare, and education — in India and Southeast Asia. Gulf sovereign investors’ appetite for Chinese assets is strong. Yet it is also worth noting that Chinese venture capitalists and local officials are eager to access Gulf SWFs. Local officials from Shenzhen, Guangzhou, and Chengdu as well as the province of Sichuan are seeking to attract Gulf wealth funds to sectors prioritized by Beijing, including semiconductors, biotechnology, new energy, high-tech manufacturing, and infrastructure. These developments signify, in the case of Sino-Saudi ties and China-Gulf relations more broadly, a progression from a trade partnership to a “core investment relationship.” Conclusion Gulf SWFs have accumulated massive assets, developed seasoned teams, and crafted sophisticated investment allocation strategies. Although the region’s funds vary in the size, variety, and scope of their investments, all have become more active and expanded their international footprint in recent years. Gulf SWFs nowadays are not just caretakers of national wealth. They have emerged as a crucial financial resource for present and future needs and are an increasingly important tool for exerting their countries’ political power, both at home and abroad. Gulf states are using the latest windfall to serve not one, but multiple purposes. These include investing in industries of the future, in some cases preparing for the global energy transition, as well as increasing visibility, strengthening cross-border partnerships, erecting local platforms in underdeveloped sectors, and building national champions. The current phase of Gulf SWF dealmaking is marked not only by the funds’ expanding global footprint and growing influence, but by their mounting responsibilities. Most of the Gulf’s wealth funds today are asked to perform financially as well as create jobs, propel the domestic economy, contribute to decarbonization goals, and more. Aside from these responsibilities, Gulf SWFs have lately been exhibiting an increasing appetite for risk. The risks they face should not be minimized, and they include a track record marred by several big bets that underperformed, growing protectionism that threatens to curb inward investment, and the risk of getting caught in the escalating tensions over technology between the U.S. and China. Nevertheless, the ability of Gulf SWFs to surmount these challenges should not be underestimated. For despite being associated with their most eye-catching gambits in sport, Gulf sovereign funds have become sophisticated and flexible investors.

Welcome address by Christine Lagarde, President of the ECB, at the 9th ECB conference on central, eastern and south-eastern European countriesFrankfurt am Main, 17 July 2023 It is a great pleasure to open the ninth ECB conference on central, eastern and south-eastern European countries. The CESEE region – which comprises 21 different economies – can overall be considered a European success story in recent decades, having enjoyed rapid convergence towards higher-income countries. Between 2000 and 2021, the economic size of the region almost doubled to 40% of the euro area aggregate. And this strong growth has led to rising living standards, with average GDP per capita jumping from 36% to 54% of the euro area aggregate in the same period. But the world has changed dramatically since we last held this conference in 2019. A series of shocks have upended our old reality and replaced it with new uncertainties. Devastatingly, one of those shocks has been the outbreak of war in Europe – an event that we once thought consigned to the history books. Russia’s unjustified war against Ukraine and its people is a human tragedy. And it has had deep economic consequences for the CESEE region in particular. In parallel, the world is changing in ways which make the growth models of many CESEE countries more vulnerable, as these models generally involve high levels of trade openness and integration into global value chains. But as Graham Greene once wrote, a “feat of daring can alter the whole conception of what is possible.” And the challenge now facing the CESEE region is how to continue its convergence story and ensure that growth remains resilient in this new landscape. Fortunately, CESEE economies can already look back on a strong history of resilience – be it mastering the transition from central planning to market economies in the 1990s or recovering from the global financial crisis with impressive speed. I therefore have every confidence that they will be able to adapt to these new uncertainties. A changing geopolitical landscape There are two broad shifts reshaping the global economy that may have profound implications for the CESEE region: rising geopolitical tensions and weakening global trade. After a long period in which the United States was the sole superpower, the world is becoming more multipolar, with greater competition between major powers, less respect for international rules and norms and a waning influence for multilateral institutions. In this environment, even deep commercial ties may be insufficient to prevent trading relationships from becoming adversarial. This makes the global environment increasingly prone to shocks and the task of macroeconomic stabilisation for all countries much harder. Unfortunately, the CESEE economies know this all too well. Russia’s war against Ukraine triggered a massive shock to the global economy – especially to energy and food markets – and CESEE economies have been particularly exposed, given their geographic proximity to the conflict. While inflation has now started to come down, over two-thirds of economies in the CESEE region saw annual inflation hit 13% or above last year, with several countries seeing markedly higher price increases. By comparison, annual inflation in the euro area was 8.4%. Geopolitical tensions risk accelerating the second shift in the global landscape: weakening global trade. Since the global financial crisis, trade growth as a share of world GDP has plateaued. And we are also seeing rising levels of protectionism as countries reconfigure their supply chains to align with new strategic goals. Over the last decade, the number of trade restrictions in place has increased tenfold. The CESEE region, and Europe more generally, may be vulnerable to such a shift. Last year, trade as a share of GDP was higher than the euro area average for two-thirds of CESEE economies. And while other major economies, such as the United States, have seen trade as a share of GDP fall since the pandemic, in the euro area it reached a record high in 2022. A new foundation for strengthening resilience A changing geopolitical landscape means that, in the euro area and the CESEE region, we need to build a new foundation for strengthening resilience. This foundation rests on further deepening the European Union and its ties to the surrounding region. I see three key elements. The first is reinforcing openness within our region. Trade fragmentation could see the flow of goods and services increasingly being pulled towards different trade blocs, at the expense of countries outside those blocs. By leveraging our regional strength, Europe and the CESEE region can recreate some of the benefits of globalisation on a smaller scale. The euro area is already the main trading partner for most CESEE economies. And we can capitalise on this existing momentum. Between the year 2000 and last year, the share of euro area imports from the CESEE region increased from 5% to 10%. And the share of euro area exports to CESEE economies reached 11% last year, almost double that at the start of the millennium. Moreover, CESEE economies in particular can benefit from changing global trade patterns as companies seek suppliers closer to home. Survey evidence shows that firms in the CESEE region, and especially those based in the EU, are seen as highly reliable trading partners. The ECB also has a key role to play here as the guardian of the euro. Our monetary policy plays an important anchoring role for the CESEE region, as the euro is widely used in trade invoicing and financing. Euro cash also serves as an important store of value – demand for it surged in CESEE economies following Russia’s invasion of Ukraine. The second key element is increasing our collective security. Europe and the CESEE economies have already taken substantial steps to increase their energy security, given the dangerous historical reliance on Russian fossil fuels in their energy mix. In February 2022, the EU was importing around 36% of its natural gas from Russia. Within the space of nine months, that fell sharply to 13% as the EU reduced its gas consumption and diversified towards imports of liquified natural gas. Most, though not all, CESEE economies have also made significant progress in substituting energy imports away from Russia and in building up gas storage levels. But we cannot stop there. We need to accelerate our efforts to decarbonise and increase our energy independence. That is why initiatives that help to build renewable energy sources are so important – such as Next Generation EU and the EU’s recent energy support package for countries in the Western Balkans. The third key element is defending and spreading our common values. The attack on Ukraine was also an assault on European values – such as the respect for international law and human rights. That is why Europe has imposed unprecedented sanctions on Russia and provided substantial support to Ukraine following the invasion. To date, the EU has made available €38.3 billion in economic assistance and over €21 billion in military support. The strength of the EU’s response demonstrates not only its capacity for action, but also its appeal as a political project that others see the benefit of joining – what the West German Chancellor Konrad Adenauer once described as the “Magnet Europa” effect. The push for EU enlargement has recently gathered momentum as a consequence of Russia’s war. Last year, the EU granted Ukraine, Moldova and Bosnia and Herzegovina candidate status. And it launched the process to open accession negotiations with Albania and North Macedonia, while also becoming open to granting Georgia the status of candidate country, conditional on reforms. Conclusion Let me conclude. A series of shocks have dramatically changed the global landscape in recent years. And today, rising geopolitical tensions and weakening global trade mean that economies in the CESEE region need to build a new foundation of resilience. But the record of past crises has already demonstrated just how resilient CESEE countries can be. Despite an exceptionally difficult 2022, the prospects for the CESEE region are encouraging. There are clear structural strengths that stand to benefit CESEE economies in the medium to long run, such as well-educated workforces and strong ties with Europe. So the task at hand is how to channel that spirit of resilience to counteract these new uncertainties. And by leveraging our regional strength and further deepening our economic and political ties, I have no doubt that Europe and the economies in the CESEE region can flourish together. Thank you – and I hope you enjoy today’s proceedings.

How can the European Union achieve its target of eliminating all Russian fossil-fuel imports by 2027?Executive summary The European Union has committed to eliminate all Russian fossil-fuel imports by 2027. Progress has been made, with sanctions on oil and coal already introduced. The glaring exception is natural gas, on which the EU has so far refrained from imposing limitations, owing to greater dependence on Russia. Nevertheless, pipeline gas imports have fallen by four-fifths following Russia’s weaponisation of gas supplies. However, Russia’s exports of liquified natural gas (LNG) to the EU have increased since the invasion of Ukraine. The EU needs a coherent strategy for these LNG imports. Our analysis shows that the EU can manage without Russian LNG. Anticipated impacts are not comparable to those felt in 2022 as Russian pipeline gas dried up. The regional impact would be most significant for the Iberian Peninsula, which has the highest share of Russian LNG in total gas supply. Meanwhile, the global LNG market is tight, and we anticipate that Russia would find new buyers for cargos that no longer enter Europe. We discuss the options available to the EU. Wait-and-see implies delaying any action until 2027, while soft sanctions would discourage additional purchases but not break long-term contracts. We argue instead for an EU embargo on Russian LNG, to reduce exposure to an unreliable and adversarial entity, and to limit the extent to which EU consumers fund the Russian state. The embargo may be designed to allow purchases only if they are coordinated via the EU’s Energy Platform, with limited volumes and below market prices. This could be accompanied by the implementation of a price cap on Russian LNG cargos that use EU or G7 trans-shipment, insurance or shipping services.  1 Introduction The European Union has a target of eliminating all Russian fossil-fuel imports by 2027. Swift progress has been made, aided by Russia’s own decision to decrease natural gas pipeline exports to the EU. However, the EU’s liquefied natural gas imports from Russia have remained remarkably stable. Discussions are ongoing about adding Russian LNG to the list of products banned from import to the EU (Table 1).  Throughout 2022, Russia cut natural gas pipeline exports to the EU steadily, but did not reduce exports of LNG, which had been much smaller in volume. In the year after Russia’s invasion of Ukraine, LNG exports to the EU were valued at €12 billion. Unless there is decisive change from the current situation, the EU could pay up to another €9 billion to Russia in the second year of the war (Demertzis and McWilliams,2023).   Accordingly, in March 2023, the European Union said it had started to develop a mechanism to allow member states to block Russian LNG imports. This would be done by granting permission to EU countries to block Russian companies from booking LNG import infrastructure. This is a similar approach to when Russian companies were prevented from booking gas-storage capacity in the EU that they were then intentionally leaving empty. At time of writing, this proposal is not finalised, and it is unclear how it would affect non-Russian companies that wish to book import capacity for the purpose of importing Russian-origin LNG.  In this context, we outline four different options available to the EU. In the first, ‘wait-and-see’, the EU would continue to import Russian LNG and would wait to introduce sanctions until the second half of this decade, when LNG markets are less tight. The second approach, ‘soft sanctions’, would entail a partial effort to reduce imports of Russian LNG without dramatically impacting long-term contracts that form the basis of much EU-Russia LNG trade. Under a full ‘EU embargo’ scenario, sanctions on Russian LNG would force companies to declare force majeure on long-term contracts and no Russian LNG would enter the EU. A fourth approach, ‘EU embargo with EU Energy Platform offer’, would see the bloc tear up the existing trade structure and return to the table as one entity to negotiate. This could be done through the new EU Energy Platform for joint purchasing of gas, which might make offers to purchase limited volumes of Russian LNG, which would be phased out over time, depending on the situation in Ukraine. This approach could be complemented by the introduction of a price cap on Russian LNG imports that rely on EU or G7 services, including trans-shipments, vessels and shipping insurance. To assess the options, we begin by providing an overview of the growing role LNG (including from Russia) plays in Europe’s gas mix. We assess the impacts on the EU of an end to Russian LNG imports, by evaluating quantitatively the impact on gas balances and storage, to identify whether the EU would manage without Russian LNG. In investigating the impacts on Russia, we discuss the nature of LNG exports from Russia to the EU, which are characterised by long-term contracts and the multi-nationally owned Yamal liquefication plant. Finally, we discuss the impacts of the options available to the EU on global LNG markets and Russia.  2 The growing importance of LNG Increased LNG imports, alongside domestic demand reduction, prevented the European Union from running out of natural gas during the peak of the energy crisis in 2022. Together, these measures enabled a remarkably smooth transition away from the EU’s historically largest supplier – Russia. Russian pipeline exports made up about 40 percent of the EU’s total gas supply prior to the invasion of Ukraine, but today account for less than 10 percent. In the year from 1 April 2022 to 31 March 2023, the EU imported 950 terawatt hours (TWh) less of Russian pipeline gas than in the previous 12-month period. The EU made up for the shortfall by boosting imports from other sources and reducing demand (Figure 1).   In 2022, the EU’s imports of LNG increased 66 percent year-on-year. The largest proportion of this growth came from the United States, while Russia is currently the second largest provider of LNG to the EU, though far behind the US. In the first quarter of 2023, Russian LNG exports to the EU were 51 TWh, accounting for 16 percent of LNG supply and 7 percent of total natural gas imports. The largest share of Russian LNG is imported through Spanish ports, while Belgian, Dutch and French ports account for most of the remaining volumes. We consider the Iberian Peninsula separately from the rest of the EU for our subsequent analysis because of the region’s relatively high dependence on LNG and because of the limited connections between the Peninsula and the wider European gas market. In the first quarter of 2023, the Iberian Peninsula imported 17 TWh of Russian LNG, or one quarter of total LNG supply and 20 percent of total natural gas imports to Spain and Portugal. Figure 2 plots EU LNG imports by supplier. The left panel shows the EU without Spain and Portugal and the right panel shows the Iberian Peninsula separately.   The nature of LNG imports means they pass through ports before distribution throughout the wider European gas grid. A country’s LNG imports do not necessarily remain there but may transit on to neighbouring countries. Contractual information on these flows is not publicly available, but we have estimated the relative importance of Russian LNG by country. Figure 3 shows these results for winter 2022-2023. According to our accounting basis, Russian LNG made up 18 percent of Spanish gas supply, 15 percent of French supply and 10 percent of Belgian supply.  Figure 3: Estimated shares of total gas supply to Russian LNG, winter 2022-23    3 EU gas balances without Russian LNG In the EU embargo scenario, all Russian LNG would stop flowing to the EU. This might also be the case in the EU Energy Platform offer scenario, and might happen irrespective of EU decisions if Russia chooses to block exports. We therefore assess the impact of an immediate halt to Russian LNG supplies by modelling the evolution of EU gas balances and storage, performing a separate analysis for the Iberian Peninsula and the rest of the EU (EU25). Scenarios begin with actual gas storage of 746 TWh in the EU25 and 36 TWh on the Iberian Peninsula as of 1 June 2023. We make assumptions about natural gas imports, with and without Russian LNG, based on the most recent flows (see Annex 2). In our baseline scenario, demand reduction would continue to be 15 percent below the five-year average. This is in line with the March 2023 Council of the EU agreement to maintain a 15 percent demand reduction target until March 2024, and recent observations of actual demand reductions (McWilliams and Zachmann, 2023). Figures 4 and 5 show our results.   Figure 4 shows that the EU25 will be well able to fill storage facilities over the summer months without any Russian LNG, with the only consequence being a slight postponement of the moment when storage reaches full capacity. While stored volumes will deplete at a marginally faster rate, the EU25 will also not face a substantial additional challenge to manage the winter of 2023-24.  It is notable that under both scenarios, storage would reach maximum capacity before winter months start to see draws on storage. The EU would be able to prepare better for winter 2023-24 if it had greater storage capacity. One area for exploration in this respect is the extent to which gas storage sites in western Ukraine could be used for storing excess gas that would benefit both the EU (largely eastern regions) and Ukraine.   For the Iberian Peninsula we assess three scenarios. Again, all scenarios assume that the 15 percent demand reduction target is met. In scenario A, all imports remain the same as they have in the past months (including Russian LNG), and the draining of gas storage facilities over the winter would be at typical levels, with the Peninsula comfortably managing. In scenario B, all Russian LNG flows would be halted and not replaced at all. In this scenario, storage facilities would run out by January.  We do not think scenario B is a serious possibility but include it for illustrative purposes only. In reality, Spain would replace lost Russian LNG cargos by purchasing on the global market. In scenario C, we show that this replacement rate would need to be 50 percent for the Peninsula to maintain reserves above 20 percent throughout winter, Spain should find alternative supply for one out of every two lost Russian cargos. We note also the possibility of increased pipeline imports from Algeria, although we do not include this in our scenarios because of ongoing diplomatic tensions. Therefore, while the EU25 would manage comfortably without Russian LNG, the situation on the Iberian Peninsula would depend on the ability to find alternative LNG supplies. As they are traded by sea, LNG cargos are somewhat fungible. If Russian LNG stops flowing to the EU, Russia will look to sell this LNG elsewhere at the same time as EU buyers look for alternative supply. In theory, the global market should rebalance with an additional layer of friction caused by less efficient trade routes. This would be similar to the impact of the EU’s Russian crude oil embargo (McWilliams et al, 2022). One limitation less present in the oil market is the volume of LNG, which is contracted under long-term contracts with fixed destination clauses, limiting the ability of markets to rebalance. However, the EU’s experience over the winter of 2022-23 suggests there is substantial flexibility in the market. Higher prices in Europe were well able to bring in additional cargos. The return of the Freeport liquefication terminal in the US also provides a boost. A fire in June 2022 stopped operations at the terminal, which had accounted for 20 percent of the US LNG export capacity. The plant’s capacity of 200 TWh per year matches Russia’s total 2022 LNG to the EU. In May 2022, the last month before the fire, the plant shipped over half (10 TWh per month) of its cargo to the EU. We consider that the EU is likely to be able to find cargos to replace Russian ones.  4 Russian LNG exports without the EU In any scenario in which Russian LNG stops flowing to the EU, the impacts on global markets and Russian revenues will depend on Russia’s ability to redirect cargos. If Russia is not able to redirect cargos, the extra demand from the EU in the market will have the effect of pushing up global LNG prices in a competition for a temporarily tighter supplies of global LNG. In 2022, Russian LNG exports to the EU amounted to 197 TWh, or 44 percent of Russia’s total LNG exports. Exports to China accounted for a further 20 percent, and the rest of the world 36 percent. Figure 6 shows the evolution of these shares over the past three years.   Tight LNG markets mean that there is likely to be demand for Russian LNG, especially if it can be contracted at a discount to global prices. The experience of the EU’s crude oil embargo shows that Russia was able to find new buyers without difficulty as demand from the EU and G7 was withdrawn.  One peculiarity is the trade route a Russian LNG carrier must take. Much of the European LNG demand is served by LNG plants on the Yamal peninsula on the northwest Siberian coast. In summer months’ ships travel east to Asian markets where demand may be found for cargos no longer flowing to the EU. However, during the northern hemisphere winter – when LNG demand is typically higher – passing through the Arctic Circle is typically not possible. LNG carriers would have to embark on a substantially longer route via the Suez Canal, with higher costs. This route also involves trans-shipment via terminals in the EU, most notably Zeebrugge in Belgium (Figure 7) and the French terminal Montoir-de-Bretagne. Ships departing from Yamal unload LNG at Zeebrugge into storage or directly into different ships, in which it is then transported to Asian or other global markets. This trade is critical for smoothing year-round export from Yamal to Asian markets. Total volumes are significant, accounting for 12 percent of Yamal LNG exports in March 2022, and 38 percent of exports that were destined for Asian, Middle Eastern or South American markets. The trade is governed by a long-term contract that began in December 2019, allowing for up to 110 TWh per annum. The additional cost for Russia to re-direct cargos would depend on whether these services were still feasible in a scenario in which direct Russian LNG trade with the EU ends. Russia is also developing its own abilities for trans-shipment via domestic ports, including Murmansk.   BOX 1: Status of EU-Russian LNG trade  Exports to the EU from Russia mainly depart from the Yamal LNG terminal. The terminal has an export capacity of 16.5 million tonnes LNG per annum (235 TWh). The ownership of the terminal is a joint venture between Novatek (50.1 percent), Total Energies (20 percent), China National Petroleum Cooperation (20 percent) and the Silk Road Fund (9.9 percent). Over 90 percent of the exports from the Yamal terminal are covered by long-term contracts (Table 2). To attract this foreign investment into the Yamal LNG terminal, the Russian government provided a temporary exemption for exports from export duty and mineral extraction taxes. Firms that export from the terminal do pay a 34 percent tax on profits (Corbeau, 2023).)   The terms of these contracts are not publicly available, and therefore we do not have information on the prices paid for these LNG cargos. Typically, contracts will contain a weighted lag of regional or global natural gas pricing indicators. The exact terms of the contract are relevant for assessing the impact of sanctions, as they will determine the lost export revenues when compared to the ability of Russia or Novatek to resell unwanted cargos on the spot LNG market.   5 Options for the EU The EU’s target of phasing out Russian fossil-fuel imports by 2027 implies that long-term contracts will be interrupted before their end dates. Until they are interrupted, Russian LNG cargos cannot be considered a reliable component of the EU’s security of gas supply and the EU should work under the precautionary assumption that these flows might stop at any time. In the first scenario, wait-and-see, the EU would continue to turn a blind eye to Russian LNG imports. Global natural gas markets should be better balanced in the second half of the decade as a new wave of liquefication projects come online. As the EU approaches its 2027 deadline for ending Russian fossil-fuel imports, an embargo could be discussed. This option is a cautious one and refrains from testing tight global LNG markets. However, it implies that EU consumers continue to send billions of euros to Russia for LNG. A soft sanctions scenario, meanwhile, would discourage and ultimately prevent imports of spot LNG from Russia. It would also stop the renewal of expiring contracts and the signing of any new LNG contracts with Russia. At the same time, companies do have some flexibility over the volume of gas they import under long-term contracts, and could be encouraged to keep these volumes as low as possible. However, the scenario would not break the existing long-term contracts. Consequently, the EU would continue to import significant volumes of Russian LNG, while disruptions to the global market would be limited. This scenario is closest to our interpretation of the proposal that, at time of writing, has been put forward to the European Parliament, and which would prevent Russian companies from booking LNG-import capacities. A more significant move would be for the EU to explicitly sanction the import of Russian origin LNG (our EU embargo scenario). This would force importing companies to declare force majeure and exit existing long-term contracts. Consequently, the EU would cease to import Russian LNG and our analysis shows that the bloc would manage such a disruption. There would, however, be an impact on global LNG markets. The export of Russian LNG to the EU accounted in 2022 for a little over 3 percent of the total market, which would be the maximum supply shock. Any temporary increase in global prices would be determined largely by the ability of Russia to redirect cargos eastwards. An alternative approach, EU embargo with Energy Platform offer, might be facilitated by the EU’s new Energy Platform. The platform was initiated in April 2022 as a joint purchasing mechanism for the EU. In the first tender, 63 companies submitted requests for a total volume of 120 TWh of natural gas. The platform would be suitable as an EU vehicle to coordinate purchases of Russian LNG. After terminating existing long-term contracts with Yamal LNG, the EU as a bloc could then offer to purchase Russian LNG at a lower than market price, which may be revised, depending on the evolution of the situation in Ukraine.   This coordination mechanism would provide a pathway for the termination of long-term contracts that run post-2027, while smoothing any bumps to the gas market caused by the gradual phase-out of Russian LNG. It would also allow the platform mechanism to distribute volumes to areas of greatest need. There is no guarantee that Russia would wish to engage with such a strategy, and Russia might prefer to refuse any LNG exports to the EU. Russia’s compliance with the oil price cap, following an earlier declaration that it would be ignored, does however suggest cooperation may be forthcoming. Based on economic logic alone, geographical proximity implies that Russia should be willing to accept a discount on exports to the EU market. In any case, pursuing this fourth option must only be done on the basis that the EU is ready for a full termination. Beyond imports, the EU also faces a decision on the future of Russian LNG trans-shipment via EU ports. These trans-shipments are important for Yamal LNG to reach global markets, especially during winter months. Limiting these trans-shipments would be an even more aggressive step. It would increase the difficulty for Russia to re-route LNG cargos, but likely exacerbate global LNG tensions. The EU might consider a temporary tax or price limit on cargos using such trans-shipment facilities. In recent years, construction has been underway on two new terminals to facilitate trans-shipment in Russia. While trans-shipments are already taking place at the port of Murmansk in Russia, the exact capacity of the terminals and whether they are already able to replace all the volumes passing through Zeebrugge is not clear. It is possible that technology sanctions may have had an impact by delaying projects.  Such a strategy could be expanded into a full price cap on Russian LNG traded with third countries. In similar fashion to the trade in crude oil, EU and G7 members have significant control over the ownership and insurance of the ships used to transport Russian LNG. Between January and May 2023, all ships were insured by, and over 90 percent were owned by, companies resident in the EU or G7. One complication with imposing a price cap on LNG trade is that it is typically governed by long-term contracts with prices determined by a fixed formula. The price-cap mechanism therefore may not be appropriate for all Russian LNG exports but could be applied to exports from Yamal that may be sold on the spot market in a scenario in which an EU embargo puts an end to existing long-term contracts.  At the same time, the EU is yet to introduce sanctions on Russian pipeline gas imports and continues to import Russian gas by pipeline at roughly comparable volumes to LNG. These pipeline imports could be negotiated through the Energy Platform. Such a strategy would provide a European tool for exerting pressure on Russia, in the context of the EU’s ambition to develop strategic autonomy capabilities. The strategy has a clear aim of reducing dependency on an adversary and of phase this risk out gradually over time, while approaching the situation from a position of relative strength.  6 Conclusions LNG has become a crucial element of Europe’s security of energy supply. Flows from Russia have formed an important part of this for the past 18 months. However, the EU must now seriously assess whether this trade has a future. The possibility that Russia unilaterally blocks exports of LNG to the EU remains, and the EU must be prepared for such a risk. Moreover, the EU should consider sanctioning Russian LNG. Continuing the trade implies that European consumers will continue to send money directly to Russia and will remain dependent on an unreliable entity. Our analysis has shown that the EU would manage without Russian LNG. Impacts over the summer months should be very limited, while winter months may see marginal price increases. The extent of these price increases depends on the overall tightness of the global LNG market, which determines the premium EU markets must pay to attract flexible LNG cargos. The impact of an end to Russian LNG would not be comparable to the shocks caused by the drop in Russian pipeline gas flows in 2022. Meanwhile, Russia is likely to be able to re-route a large share of its LNG cargos. In the short run, there may be frictions in finding new buyers, especially during winter months, depending on the situation regarding trans-shipments in Europe. Ultimately, new buyers will step in for LNG cargos, as shown by the shift in Russia’s oil trade. The introduction of a price cap for access to EU or G7 controlled trans-shipment facilities, vessels and shipping insurance would increase the difficulties for Russia in re-routing. Nonetheless, the volume of the trade implies that sanctions will not have the same impact as the oil embargo and price cap in terms of reduced revenues for Russia. Given that the EU will be able to manage the shock, and that a scenario of inaction or limited sanctions implies that EU consumers will continue to fund the Russian state, and by extension the Russian war effort, we argue that the EU should bring forward a full embargo on Russian LNG. An embargo would also reduce exposure to an unreliable and adversarial entity. The embargo may be designed to allow purchases only if they are coordinated via the EU Energy Platform. Dealing as a bloc with Russian LNG would maintain the EU’s strategic position, allowing it to wind down imports in line with the 2027 target. Moreover, offers could be made to purchase Russian LNG at below market prices, with the accompanying threat or actual introduction of a price cap.

Annotation        The systems of aggregation of demand for natural gas and its joint purchases in the EU are considered from the point of view of the impact on contractual relations in the international trade of natural gas, an assessment of their impact on regional and global energy supply is given KeywordsEuropean Union, AggregateEU, Russia, global climate change, anti-Russian sanctions, energy-intensive industries, international law, gas supply, LNG  In the modern world, various natural disasters occur almost weekly, primarily due to the consequences of global climate change. At the same time, their negative impact on the world economy will gradually increase in the future. This objectively worsens the economic and financial situation of the States directly affected to varying degrees, and in many cases the socio-economic situation there also deteriorates. Since the modern world economy predetermines the high interdependence of states, the constant accumulation of negative factors begins to have a negative impact on all participants in international economic relations.The deterioration of the economic and social situation also leads to political instability. At the same time, political events are increasingly taking place, the appearance of which previously seemed simply incredible - for example, the intention to reunite the Orkney Islands with Norway or the solution to the problem of hunger in Africa based on the intensification of abortion.The current stage of development of regional gas markets is characterized by certain features. The specificity of the situation in the gas supply of the European market is a significant fragmentation of parts of broken supply chains, the creation and improvement of which has been spent for more than 50 years.At the same time, political forces interfere in the most complex mechanisms for the formation and implementation of contractual relations between suppliers and consumers of gas, which do not sufficiently take into account the specifics of gas as an energy carrier and a commodity of international trade. If we add to this the numerous bureaucratic innovations of the European Commission, then the subjects of the EU gas market objectively cannot form guidelines for their long-term development, and this, in turn, negatively affects long-term investments.This is critically important, since gas trade is characterized by the need for huge and long-term capital investments, primarily for its transportation and storage. At the same time, hopes pinned on a regional energy transition with a corresponding reduction in hydrocarbon fuels are not justified even in the short term.Both the efficiency of the functioning of the national economy and the reliability of energy supply to consumers based on renewable energy sources are doubtful. All this is happening in the context of aggravating negative problems in the development of the world economy, a high probability of unexpected political events, and a deteriorating state of the environment.As for the expected decline in prices for energy products supplied from Russia under the influence of sanctions, it turned out that they, first of all, changed the structure of oil and gas imports to the European Union, as a result of which prices for them objectively began to rise.Economic practice has shown the futility of using anti-Russian sanctions for these purposes. In addition, anti-Russian sanctions in the context of the destruction of the system of international law objectively led to the destruction of the system of long-term contracts and, consequently, to an additional increase in prices.In April 2023, the EU bureaucracy finally began to gradually formalize the cartel principles of relations between regional buyers of natural gas and its sellers. It is obvious that the main goal of the proposed aggregate demand and joint purchases of natural gas is, first of all, the formation of a coordinated negotiating position to put pressure on gas suppliers in order to reduce prices.  In addition, the interest in expanding gas imports using the new principles implicitly confirms the recognition of the fact that the idea of focusing on the widespread use of green electricity is increasingly becoming questionable.By proposing a new form of preparation and conclusion of gas contracts (AggregateEU), the EU bureaucracy presents it as a means of increasing the transparency of transactions and forming new forms of cooperation (Regulation 2022/2576), as well as an important means of increasing the level of security of consumer security (Regulation 2022/1032). This highlights the particular benefits of aggregation for small companies or companies from landlocked countries (i.e., those with no potential access to LNG). However, in modern contracts for the purchase and sale of gas, everything is very obvious.  As for the development of new forms of cooperation, in gas supply, the aggregation of demand will further complicate the problem of contractual distribution of responsibilities of the parties.It should be noted that the mandatory aggregation of demand applies only to 15% of the volume of gas storage facilities of the EU member states, including those that do not have them on their territory. Surprisingly, gas storage facilities, the main purpose of which is to secure the gas pipeline network in conditions of peak levels of daily gas withdrawal (usually winter), are perceived by the European Commission as ordinary storage tanks (Regulation 2017/1938).Meanwhile, with regard to gas supply, now the second, summer peak of energy consumption has finally formed in the region. This means that with sharp fluctuations in weather conditions characteristic of modern climate change, their extremely negative consequences are possible both in winter and in summer. It will now be almost impossible to resist them, since for many consumer countries, a reliable and large-scale source of energy - pipeline gas from Russia - has been largely lost.It is important to note that a characteristic feature of the above-mentioned documents is the possibility of multivariate interpretation of their articles by buyers, which means in the future the uncertainty of their potential contractual obligations and, accordingly, the orientation of gas exporters mainly to spot supplies.That is why economic practice shows that the most far-sighted importers of natural gas in the EU countries are not going to lose a reliable and profitable source of gas supply, which based on the existing long-term trade and economic ties. Thus, in July 2023, the Austrian oil and gas company “OMV” confirmed its intention to continue purchasing natural gas from Russia on a long-term basis, and Spain became the European leader in the import of Russian LNG.Naturally, the energy-intensive industries of those EU countries that have lost access to reliable and cheap supplies of natural gas from Russia have finally lost their competitive advantages.Thus, the ideas of the European Commission on reforming the regional natural gas market on the basis of aggregate demand and joint purchases can be relatively successfully implemented only in terms of spot supplies. Moreover, LNG exporters, for whom the market of China and other rapidly developing Asian countries is more attractive in terms of volumes and prices, as well as in terms of stable long-term prospects for gas consumption growth, are likely to avoid direct contracts with buyers from Europe, preferring intermediaries. And this, naturally, will lead to an additional increase in regional prices.It is obvious that in order to really improve the situation with gas and energy supply to the EU countries, it is not bureaucratic exercises in the field of export-import operations that are required, but the integration of main gas pipelines with the subsequent creation of a unified gas supply system for the region.As for the global natural gas market, the impact of European "innovations" on it will be insignificant. It is obvious that the majority of modern politicians in the European Union are not sufficiently aware of the peculiarities and scale of changes in the global and regional economy. As before, external threats seem more dangerous to them in comparison with accumulating internal ones.However, it is the deterioration of the regional economic situation in the foreseeable future that will lead to the loss of effective access by the EU countries to global export flows of natural gas.  

In April 2023, South Korea and the United States released the Washington Declaration to reiterate and upgrade their treaty alliance. In outlining a joint nuclear deterrence strategy, the Declaration reaffirmed that South Korea would not pursue independent nuclear capabilities, and instead continue to rely on the alliance-based approach. This paper considers the strategic impact of the Washington Declaration beyond the U.S.-ROK nexus. Highlighting the importance of the agreement on security and stability in the broader Indo-Pacific region, this paper focuses on India’s stake in the new development. In particular, this paper emphasizes that despite its stated focus on the North Korean nuclear threat, the Washington Declaration also considers the Chinese and Russian threats in the region, making it of immense interest to India. It analyzes whether and how the Washington Declaration can complement India’s interests, and the potential for it to pave the way towards a closer India-U.S.-South Korea trilateral partnership in the Indo-Pacific.  Introduction  The release of the Washington Declaration in April 2023 has not just temporarily halted the Republic of Korea’s (ROK or South Korea) ambitions of developing its own nuclear weapons, but has also given more attention to the debates on nuclear deterrence in the Indo-Pacific. Even as the United States is concerned about growing nuclear developments in China, Russia, and North Korea (or the Democratic People’s Republic of Korea, DPRK), it is primarily focused on countering China – “the most comprehensive and serious challenge to U.S. national security.” Given that China’s military activities in its extended neighborhood, including in the Taiwan Strait, South and East China Seas, and the Himalayan borderwith India, have attained built greater momentum in the past decade, the Declaration assumes greater significance: As a forward-looking step to mollify U.S. treaty allies and partners in the region with the larger aim of bolstering a “cooperative” approach against the growing nuclear threat.  In this context, even as the Washington Declaration does not directly impact India, its implications for the IndoPacific amid India’s substantial role in the budding IndoPacific security architecture compels a closer examination into the new debates centered on South Korea’s extended deterrence. India is a “special strategic partner” for the ROK: Post the launch of the ROK’s Indo-Pacific strategy in December 2022, the two are exploring their increasing strategic convergence via respective inclusive policies as “pivotal” Indo-Pacific partners. Therefore, the security concerns in East Asia are not just important for India because of the domino effect on South Asia—home to near-perpetual instability due to the three nuclear states of China, India, and Pakistan—but also in terms of the negative impact on India’s (as yet) nascent efforts to boost multilateralism, middle power coalition, and regional integration.  Can New Delhi capitalize on South Korea’s gains from the U.S.’ latest declaration against North Korea’s and China’s nuclear threats? Could the Washington Declaration complement an envisioned India-ROK-U.S. trilateral in today’s divisive geopolitics? Could the new nuclear debates focusing on extended deterrence engender mechanisms for strengthening South Asian nuclear stability? Contextualizing the Washington Declaration Beyond the Peninsula Undoubtedly, the bilateral summit, including the Declaration will have an impact not just on the ROK but also on all stakeholders in the region—from U.S. partners like Japan and India to nuclear rivals China, Russia, and North Korea. What does the new pact bring to the fore for the ROK? In what ways will the latest U.S. approach to the Korean Peninsula affect the Indo-Pacific security landscape and partnerships, particularly for India?  Parsing the Declaration – (Not) New Significance for ROK?  In April 2023, the ROK-U.S. bilateral summit in Washington commemorated the 70th anniversary of the ironclad U.S.-ROK alliance—the duo’s dynamics have evolved from security treaty allies under the Mutual Defense Treaty, signed in October 1953, to global comprehensive strategic allies in May 2022. Presidents Joe Biden and Yoon Suk-yeol, through their joint statement, press conference, and a separate “Washington Declaration”, reiterated the shared commitment under the Mutual Defense Treaty, as well as toward establishing peace and stability in the IndoPacific. Moreover, Yoon’s state visit resulted in a stream of “political understandings” that ranged from billion-dollar economic and environmental tie-ups to technological and developmental cooperation. However, the event that has grabbed the maximum eyeballs is the Washington Declaration—unveiling new measures to concretize the “ambitious path” to secure the U.S.-ROK defense and global security cooperation and advance shared priorities in the Indo-Pacific.  This new pact claims to further the credibility of U.S. extended deterrence measures—referring to modernizing the U.S. capabilities, including nuclear forces, to deter attacks on allies, as also discourage allies from going nuclear, in the increasingly threatening regional security environment. For instance, the U.S. has constituted at the assistant secretary level a Nuclear Consultative Group (NCG) to assuage the ROK about the U.S.’ intent to formulate a consensus-based approach to handling the North Korean threat. This includes not just enhancing deployment of U.S. strategic assets, including nuclearcapable platforms, in and around the Korean Peninsula, but also augmented information-sharing, joint contingency planning, and an inter-agency table-top simulation. One of the most important objectives of this comprehensive outcome was to showcase to the domestic public in South Korea that the U.S. is a long-term reliable security partner—while also exemplifying the same for the other U.S. allies and partners in the region, such as Japan.  The U.S.-Japan-ROK trilateral is a central aspect in the Northeast Asia deterrence measures given that they face common threats from North Korea. Yoon has already opened the doors for a “three-way” strategic and nuclear planning “at any time” in the future to boost the combined response to a nuclear contingency: “The Washington Declaration is a bilateral agreement between Korea and the U.S., but we do not rule out Japan’s participation.” Already, there are speculations about Japan joining the NCG. For the present, the three countries have agreed to strengthen trilateral military cooperation including regularizing ballistic missile defense exercises and antisubmarine warfare exercises. They have also initiated efforts toward a “data sharing mechanism to exchange realtime missile warning data before the end of the year,” in line with the November 2022 trilateral leaders’ summit commitments.  At the same time, the Declaration has put on hold, even if temporarily, South Korean goals to build autonomous nuclear weapons. Yoon, who has been facing criticism at home for not heeding the extraordinary public support for acquiring an indigenous nuclear weapons program, had earlier this year stirred up a hornet’s nest by openly declaring nuclear weapons development as a possible policy option, which at the very least pushes the U.S. to re-deploy nuclear weapons. However, the Declaration clearly reaffirms the ROK’s continued commitment to the Nuclear Non-Proliferation Treaty (NPT) and the new 123 Agreement, with the U.S. president as the “sole authority” to launch nuclear weapons. It has therefore curtailed any independent nuclear notions for the near future and only served to strengthen the ROK’s alignment with the U.S. view of the global non-proliferation regime.  Consequently, the response in the South Korean media was subdued, if not sweepingly critical. Despite Yoon hailing the alliance as “nuclear based”, polls conducted during April-May 2023 (by the Korea Institute for National Unification, KINU) showed a significant drop in public support for the ROK going nuclear, especially in cognizance of the risks involved. The ROK government describing the Declaration as a Mutual Defense Treaty 2.0 or attesting to its “nuclear sharing” aspect have been touted as “false claims”; U.S. officials have also noted that the Washington Declaration is not a “de facto nuclear-sharing” agreement.  Importantly, questions have been raised domestically about South Korea paying a “high price” in return for “hardly … any substantive changes” in the U.S. nuclear policy on South Korea—sharply referred to by some domestic critics as “a redundant declaration produced by mutual distrust in the South Korea-U.S. alliance.” In concrete terms, the pact has been likened to the “jettisoning” of South Korea’s right to protect itself from the nuclear threat from North Korea—U.S. President Biden has categorically stated that he has the “absolute” authority as commanderin-chief to use nuclear weapons even though it would be in consultation with the allies. There are also legitimate concerns about the agreement having turned China and Russia into “de facto adversaries”. Misgivings have also been raised about the lack of U.S. assurance on increased business and investment ties, including in semiconductors and green technologies—areas where closer ties with the U.S. could help reduce Korean dependence on China.  The Chinese state media has raised serious concerns about the ROK “sacrificing” its “win-win” economic ties with China, but at present, maintains that “cooperation remains an irreversible trend in the long run.” Regarding these worries, some political observers in Seoul have contended that the ROK need not go back to its “strategic ambiguity” approach to pursue economic ties with China. This is primarily because countering China’s rise as a strategic challenge while maximizing economic benefits is a concern faced not only by the ROK but all liberal democracies in the present complex, transitional geopolitical scenario. Notably, the North Korean response has been predictable, calling it an opportunity for the DPRK to “perfect” its nuclear option; the official DPRK statement labeling it a “nominal” declaration highlights that the Kim regime sees it as business as usual.  A disconcerting aspect of the Declaration, even though it is in line with the sentiment of the times, has been the relegation of “pursuit of dialogue and diplomacy” with North Korea to a byline at the end. It indicates a closing of doors on diplomacy, albeit with a rogue state (namely the DPRK) unwilling to compromise, but nonetheless important given the near-consensus about the Declaration being an “evolution” in deterrence but not a panacea for the peninsular concerns. Some have also contended that “these outcomes will likely not provide enduring solutions to the North Korea challenge.”  Another notable issue that would have impacted the U.S.- ROK summit is the fallout from leaked U.S. intelligence documents, days before Yoon’s state visit, which suggested that the United States was spying on one of its foremost treaty allies. There are concerns in South Korea that the U.S. has “already penetrated into the Korean government’s networks and intercepted communications, possibly including phone and email.” As the U.S. has been accused of spying on the ROK in 2013, too, when its extensive surveillance program was exposed in press reports, the mistrust between the allies is likely to re-surface time and again. Therefore, in view of the South Korean government’s restlessness and nuclear claims prior to the April joint statement, there is some truth to the assertion that the Declaration arises out of the need to downplay the U.S. allies’ misgivings and trust issues. Its importance hence lies in shoring up of the U.S.-ROK partnership amid fears of the current security situation in Northeast Asia and the Indo-Pacific becoming worse due to the growing divisions in global geopolitics. Nonetheless, Yoon’s embrace of “strategic clarity” for the Indo-Pacific construct; sanctions on Russia during the Ukraine war; the success in resuming the U.S.-ROK-Japan trilateral in the past year; and the importance accorded to Yoon’s state visit, including the broad-ranging joint statement and the not-so-definitive yet formidable Washington Declaration, all highlight that the upward trajectory of the U.S.-ROK bonhomie is not a superfluous achievement. It points to a steady, forwardlooking alliance with implications for the wider IndoPacific. Ascertaining India’s Interests At a broader level, for the Indo-Pacific, especially for U.S. allies and partners in the region, the 2023 Washington Declaration is a sign of the U.S.’ willingness to negotiate the partners’ growing need for an inclusive, if not entirely equal, cooperation mechanism. Such an approach will not only strengthen the respective bilaterals with the United States but also present a stronger coalition in the fight against both North Korea and China. The latter is intent on destabilizing the existing status quo through its military aggression—from the Taiwan Strait to the Himalayas.  For India, which has been facing the brunt of China’s military tactics along the Line of Actual Control (LAC) with an increased frequency in the past decade, the Washington Declaration highlights a strengthening of like-minded partnerships in the continuing democratic face-off against China. Thus, the Declaration’s impact is felt in Indo-Pacific geopolitics, including India’s immediate neighborhood— particularly as it compels the ROK to sharpen its global pivotal leadership by embedding itself deeper in the U.S.- led Indo-Pacific construct. Though the Declaration is specifically targeted against North Korea, not China, the evolving alliance is a response to the ever-growing threats in and around the Korean Peninsula, as well as in broader Asia: From Central Asia to the Middle East; the Himalayan States to the Indian Ocean; the South China Sea to the East China Sea, China’s diplomatic-economic clout and military presence is growing. In short, the Chinese threat is the main concern for the U.S.  As a result, China’s Foreign Ministry Spokesperson Mao Ning was stringent in his criticism of the new pact: “What the U.S. is doing ... provokes confrontation between camps, undermines the nuclear nonproliferation regime and the strategic interests of other countries.” China was also immediate to voice its opposition against Japan’s potential involvement through the Washington Declaration, after Yoon was positive about turning the bilateral agreement into a trilateral one in the future. The inclusion of the phrase “peace and stability in the Taiwan Straits” and critical technologies cooperation in the joint statement also raised hackles in China in terms of South Korea isolating China and crossing its red lines.  China sees this agreement as another U.S. tool to strengthen a values-based security coalition in the region à la Quadrilateral Security Dialogue (Quad comprising Australia, India, Japan, and the United States). The Quad’s successful bonhomie has not only inspired other such U.S.- led platforms (e.g., the latest with Australia, Japan, and the Philippines and the West Asian one with India, Israel, and the UAE) but has also become a thorn in the side of China’s goals of regional dominance. Any deterrence for China’s growing ambitions is in India’s interests, which is not only facing a continental threat but also recognizes China’s growing reach in India’s traditional stronghold of the Indian Ocean region.  Consequently, despite not being directly connected to this agreement, India may nonetheless benefit from the Washington Declaration in a number of ways both in the Indo-Pacific and the Korean Peninsula. Firstly, the Declaration is critical to increasing the Quad’s strength. The reaffirmation of U.S. commitment to its Indo-Pacific allies and partners, including India, will not only boost the Quad but also set the stage for renewed deliberations on the Quad “Plus” framework, of which the ROK is a part, thereby opening up more avenues of India-ROK collaboration. In turn, such integration of South Korea with the Quad will further push the North Korean agenda onto the Quad’s table.  Secondly, in response to Chinese (and North Korean) aggression, the Washington Declaration emphasizes the need for maintaining the status quo in the Indo-Pacific and rejects any illegitimate maritime claims, militarization of reclaimed features, and coercive actions. This might be seen as normal diplo-speak; however, it will further concretize the ROK’s aims to build greater maritime collaborations, including naval deterrence capabilities, in the Indo-Pacific. For instance, the Chungnam frigate (FFX), launched by South Korea’s Hyundai Heavy Industries (HHI) in April 2023, will be incorporated into the ROK Navy— its second-largest naval expense. Such an investment is poised to contribute to stronger South Korean presence in the Indo-Pacific in line with its newly launched IndoPacific strategy. It is a positive development for India, which is looking to bolster its IOR presence through likeminded partners like the ROK, the European Union and its members, and Japan.  Here, it is also important to note that even though the ROK has traded off its nuclear development ambitions for “deeper, cooperative decision-making on nuclear deterrence” in the Washington Declaration, the road to fulfilling its nuclear-based ambitions has not closed down. In the future, for instance, Seoul might still be inclined to renew its post-AUKUS (Australia-UK-U.S. defense pact) demands to gain access to the U.S.’ nuclear-power submarine technology. India, which is one of the few countries to have nuclear-powered submarines with ballistic missile launch capabilities, can use this opportunity to further increase naval exercises with the ROK, along with making a stronger push towards defense technology and manufacturing collaborations.  Thirdly, India and South Korea are strengthening their bilateral and regional relationship based on democratic and inclusive visions, characterized by the centrality of the Association of Southeast Asian Nations (ASEAN). Their future-oriented partnership has a sound foundational convergence, namely the Act East Policy (AEP)-New Southern Policy (NSP) Plus connect. Notably, the degree to which the Yoon government embraces India’s AEP (and Indo-Pacific vision) will not only determine the natural progression of India-South Korea regional relations but also provide momentum to diversification goals. The latter is important in light of the ROK’s growing security and techno-economic dependence on the United States at the cost of neglecting its long-standing economic partner China, as underscored by the latest joint statement and China’s response to it.  In this context, India’s and the ROK’s quest for economic security, through participation in various regional and panregional forums, will enable them to build strategic links, and work together to balance regional developmental goals and their own economic-military growth. Both countries can use their participation in platforms like the Asian Infrastructure Investment Bank (AIIB) and the Indo-Pacific Economic Framework (IPEF) to build a stronger economic partnership. For example, the ROK, which joined the AIIB in 2015 and is the fifth-largest stakeholder of the AIIB with its shares at 3.86 percent, is looking to expand ties and find new joint project opportunities. India, as a founding member and the second largest shareholder with the largest project portfolio within AIIB, could facilitate the ROK’s enhanced contributions in the bank’s turn toward green infrastructure for providing “high-quality development finance.” India and ROK’s participation in forums like the Supply Chain Resilience Initiative (SCRI) and the U.S.- led Minerals Security Partnership (MSP) respectively, can help them coordinate their actions as they look to diversify critical value chains. The contested Asian and Indo-Pacific landscape has made supply chain diversification a priority. As U.S.-China trade and technological competition makes economic security vital, India and South Korea can build on their natural complementarities and work together to restructure their supply chains to reduce reliance on Chinacontrolled supply chains. While South Korea can support India’s goal of emerging as a manufacturing hub for key industries, India can be an important partner in South Korea’s aim to diversify its economic partnerships beyond China under the NSP.  Lastly, if South Korea heeds to domestic criticism about “jettisoning” its strategic autonomy (that is, deferring to the U.S. by not acquiring a nuclear weapons development program), it will continue to diversify its partners, particularly in defense manufacturing and new technologies. Given that India and the ROK have expanded their defense cooperation, including joint production and export of military hardware, in recent years, the new pact will allow the ROK to push boundaries. For instance, the ROK could continue supporting India’s membership bid for the Nuclear Suppliers Group (NSG) or the MSP and India could facilitate South Korea’s increased participation in the Quad, a much-desired goal for Yoon.  Moreover, ROK-India could partner for peaceful nuclear purposes. At present, India does not allow foreign direct investment in the nuclear power sector, but as per Indian media reports, the government is mulling changes in the near future. Their coming closer together, which is already in motion, will consolidate the middle power-dominated multipolar Asia architecture, primarily to mitigate the constraints due to the growing bipolar rivalry. It will further their common goal to achieve a global standing while preserving strategic autonomy. U.S.-ROK-India: A Trilateral Inches Closer? The latest U.S.-ROK summit and the Washington Declaration have certainly strengthened the U.S.-led alliance structure in the region, giving partners outside this alliance hope for a consultative and cooperative security mechanism for the region, U.S. primacy notwithstanding. What is clear is that a democratic values-based coalition will be able to successfully maneuver the ups and downs through the times and give impetus to the new-era security, economic, technological, and diplomatic cooperation. In this vein, the Declaration could be seen as a clarion call for unity to deal with the current hostile regional and global geopolitical circumstances. The boost to the Japan-ROKU.S. trilateral through this pact, as well as the bilateral summit’s assertion to implement their respective IndoPacific strategies while enhancing “Indo-Pacific voices in multilateral forums, especially in addressing climate change, sustainable energy access, and food insecurity,” could pave the way for other minilateral coalitions.  India as a vital cog in the Indo-Pacific security network will naturally play a significant role. India’s increasing closeness to the United States as a counterweight to China and a strategic partner, especially in defense and technological areas, for a free and open Indo-Pacific (FOIP) makes it an important component in today’s U.S.-led liberal order, which is at a transition stage. Moreover, the bonhomie with South Korea is based on growing common values and interests of assertive middle powers, including strategic autonomy and global governance aspirations.  India will be closely watching to see whether Seoul’s emphatic turn to “strategic clarity,”—first with its “Strategy for a Free, Peaceful, and Prosperous Indo-Pacific Region” and now the Washington Declaration—will enable the ROK to fulfill its middle power potential as a “technological, economic powerhouse.” In other words, for India, the new ROK approach could enable a deeper strategic connect between the two partners by moving beyond economic and limited regional ambitions. The new goals would have to include extended joint military exercises, joint manufacturing of defense equipment, expanded connectivity (digital and physical), regional integration initiatives, global supply chain resilience, increased green technology sharing, effective critical mineral collaborations (to lower dependency on China and Russia), and technological norms building, among others.  Importantly, as both India and the ROK have signed the respective 123 Agreement with the U.S. on peaceful uses of nuclear energy, there is potential for cooperation in the power sector, as well as via technical exchanges, scientific research, and safeguards discussions. In March 2018, India and South Korea signed a bilateral civil nuclear agreement that allowed Korean companies to participate in India’s civil nuclear industry (including in atomic power plant projects and selling nuclear reactors to India). With energy security front and center on the global agenda in wake of the Ukraine crisis, trilateral cooperation in the civil nuclear sector can be an important step forward. Notably, nuclear exports are an important part of China’s Belt and Road Initiative (BRI). By 2030, China plans to build about 30 nuclear reactors abroad, worth $145.5 billion; it has already built four nuclear reactors in Pakistan (and is now building two more), has signed agreements to build reactors in Argentina, entered the UK nuclear market, and is currently negotiating with several other countries including Saudi Arabia and Kazakhstan. Amid the ongoing energy crisis, China’s foray into the global nuclear market could give it greater influence and potentially enhance its coercive power. In this context, the U.S., South Korea, and India have reason to bolster cooperation in this area and ensure they can stand as competitive nuclear vendors against China’s offer of advanced technology, competitive prices, and rich financing.  India, the ROK and the U.S. have several shared interests and are already engaged in high-level cooperation at bilateral and multilateral levels; as such, a trilateral between the three powers would help coordinate their actions in pursuit of their regional goals. At the same time, for India and the ROK, any such trilateral cooperation could serve to provoke China and make managing the U.S.-China equation much more difficult. Nevertheless, while India faces a belligerent China on its border and South Korea is dealing with an economically coercive China, a trilateral partnership could be necessary to bolster collaborations and further shared interests. Furthermore, the benefits of a U.S.-ROK-India trilateral would be equally distributed to not just the three countries, but also other regional powers. Improvement of ties between Japan and South Korea—which is shaping up to be a focal point of both Yoon’s and Fumio Kishida’s leadership legacies—will gain smoother and faster traction owing to Japan’s close ties with India and the alliance with the U.S. Australia and Indonesia, too, have responded positively to South Korea’s Indo-Pacific strategy. The establishment of a new U.S.- led defense-ministerial level quadrilateral mechanism with Australia, Japan, and the Philippines is another shot in the arm for “allied and like-minded” countries. Therefore, the U.S.-India-ROK trilateral would draw on the bilateral gains and their common belief in ASEAN centrality to further regional integration aims. This will also give impetus to Seoul and Delhi (and also Canberra) emerging as strong candidates for an extended G-7. Overall, the Declaration sets the stage for a strong U.S.-ROK camaraderie that will extend beyond nuclear deterrence goals, impacting broader regional multilateral dynamics of the Indo-Pacific. Lessons for South Asian Nuclear Dynamics: Potential for Reassurance and Deterrence? In many ways, the Washington Declaration seeks to be a show of strength—and a reprieve—against the North Korean nuclear threat that has rapidly escalated over the past year with the sudden rise in missile tests and an expanding nuclear program. Since his election for presidency, Yoon has frequently expressed willingness for South Korea to be a more active player in the Indo-Pacific, including by being a part of the Quad framework. The Declaration is a part of Seoul’s efforts to meet its security goals. While it is certainly a significant step to counter the North Korean threat, it is also an indication of a stronger alliance against provocative actions by China. The bolstered U.S.-ROK partnership under the Declaration is a step towards a more proactive and stronger South Korea in the region, and could eventually ease the way for Seoul’s productive involvement in the Quad, perhaps through a Plus framework. While South Korea will still need to establish itself as a reliable partner with the other members of the Quad, the Declaration certainly demonstrates its commitment to regional (and global) security, and by extension, the important role it can play through greater interaction and burden-sharing with the Quad.  Undoubtedly, this new bilateral agreement between the U.S. and the ROK (potentially also involving Japan through the trilateral) will usher in new lessons for the wider Indo-Pacific, and in turn for India, too. For instance, the prospects of closer consultations that will strengthen the combined defense posture are relevant for not just U.S. treaty allies like the ROK and Japan but central strategic security partners like India that is facing a two-front border escalation with China and Pakistan. However, could this new deterrence declaration in Northeast Asia pave the way for a common strategic mechanism between the U.S. and India that enhances deterrence and provides a degree of reassurance against the growing nuclear risk in South Asia?  As much as it is possible that the U.S. extended deterrence for ROK would fuel an arms race, as also underscored by Russia and China in their response to the Declaration, not just in Northeast Asia but also in nuclear-heavy South Asia, it is often contended that “the drivers of nuclear instability in the region have more to do with conventional warfighting strategies.” The grave escalation in 2019 between India and Pakistan is one such example, and the accidental firing of a missile into Pakistan’s territory in 2022 that fortunately did not result in a retaliatory attack is another—both highlight the need to pursue definitive de-escalation and crisis management measures, and the latter puts a spotlight on the current fragility of the South Asian situation. The danger of an accidental nuclear war in such tense conflicts has not been stressed enough, and it bears repeating that such a threat was a constant refrain during the Cold War posturing.  Broadly speaking, today, India and Pakistan are not signatories to the NPT but have been gradually increasing their nuclear arsenals. China is a nuclear weapons state recognized by the NPT, and has accelerated its nuclear development program. All are developing newer “ballistic missile, cruise missile, and sea-based nuclear delivery systems.” As of January 2023, Pakistan’s nuclear arsenal was about 170 warheads (by some estimates the stockpile might go up to about 200 by 2025), China’s about 410 nuclear warheads; and India’s about 164 nuclear weapons.  Moreover, while India and China both have declared nofirst-use (NFU) policies, Pakistan has no such policy; its “full spectrum deterrence posture,” especially the development of tactical nuclear weapons capabilities for use on the battlefield to offset India’s (superior) conventional military tactics has been of concern to not just India but the United States as well. At the same time, recently questions have been raised about China shifting its nuclear policies, including the NFU, because of the nuclear expansion and modernization. Vis-à-vis India, too, there are speculations that “India could be transitioning towards a counterforce nuclear posture to target an adversary’s nuclear weapons earlier in a crisis, even before they could be used.”  In this context, controlling escalation is not a conclusive plan of action, and dialogue, too, has limitations when the live-wire conflict, as it is with both India-Pakistan and IndiaChina, has historical roots and nuclear leverage. Also, India has called nuclear risk reduction an “interim” strategy; and as per its security review in 2003, India retains the option of nuclear weapons in the event of an attack by chemical and biological weapons. However, as part of its doctrine of credible minimum nuclear deterrence, including the NFU and non-use against non-nuclear weapon states, India is “prepared to convert these undertakings into multilateral legal arrangements.”  Therefore, for South Asia, the U.S. and its partners, including India, need to focus on building creative, reliable mechanisms for limiting the possibilities of crossing the nuclear threshold, as well as controlling the use of highprecision conventional weapons. For example, India, Japan, South Korea, and the U.S. should either as a new minilateral or in conjunction with Quad (Plus) strengthen a strategic dialogue that looks into ways of information sharing, including intelligence on nuclear threats in the sub-region, as well as take into account India’s pursuit of “global, verifiable and non-discriminatory” multilateral legal arrangements for a nuclear weapon free world.  Importantly, a vital tool that should be widely used is the dissemination of information about the dangers of nuclear weapons and the limitations of ballistic missiles among the public and policymakers. Lessons must be drawn from the South Korean scenario where public survey results in the recent past have highlighted a concerning trend of a high degree of support for nuclear weapons deployment without fully being made aware of the pitfalls. A recent study revealed that even in the U.S. and the UK, there is a lack of awareness about “nuclear winter”—a term used to illustrate the potential “catastrophic long-term environmental consequences from any exchange of nuclear warheads”— and that even brief exposure to these risks reduces the public’s support for nuclear retaliation. The dramatic lowering of public support for nuclear development is seen in the latest (aforementioned) KINU survey in the ROK, too, when presented with different possibilities of risks. Raising awareness and educating the public and decision-makers about such risks should also be part of the state’s strategy to reduce the heightened perceptions about nuclear weapons: the responsibility surely lies to a large degree on national governments and relevant multilateral organizations, which seem to have been caught napping.  In the wake of the Washington Declaration, which has rekindled the nuclear debates in the Indo-Pacific, it is imperative that concerted efforts be made by all stakeholders, especially the nuclear states and the ones desirous of autonomous nuclear weapons capabilities, to first raise regional public awareness about the ramifications of nuclear armament, and only then pursue responsible deterrence measures.

Understanding the Chinese Perspective The relationship between the United States and China is one of the most important and mutually beneficial bilateral relationships in the world. Nonetheless, it is also complex and contentious, with both countries vying for geopolitical influence and economic dominance. This brief examines drivers of U.S.-China strategic competition from the perspective of Beijing incorporating the prism of MarxistLeninist ideology, domestic politics in the U.S., China's needed alignment with Russia, nationalism, technological advancements such as AI, the role of regional players such as ASEAN, Japan, and the E.U., and Comprehensive National Power (CNP). Understanding this analytical lens contributes to deeper comprehension of China's security anxieties and world view that may provide insight to enhance engagement, resilience, and deterrence in bilateral relations with China. Introduction The relationship between the United States and China is one of the most important and mutually beneficial bilateral relationships in the world today. To illustrate, according to data published by the U.S. Bureau of Economic Analysis (BEA), total imports and exports grew 2.5 percent year-on-year to reach US$690.6 billion in 2022, breaking the previous record of US$658.8 billion set in 2018. This increase is despite the divisions associated with the COVID-19 pandemic and mutual unfavorable ratings. Nonetheless, the U.S.-China relationship is also complex and contentious, with both countries vying for geopolitical influence and economic dominance. Whether it is the rules-based Free and Open IndoPacific or the realization of Xi Jinping’s China dream, the competition for primacy between the U.S. and China will impact friends, partners, and foes of both states. Viewed from Beijing, Chinese scholars and analysts base their assessment of the trajectory of the U.S.-China strategic competition through several lens including the prism of Marxist-Leninist ideology, domestic politics in the U.S., China’s needed alignment with Russia, nationalism, technological advancements such as AI, the role of regional players such as ASEAN, Japan, and the EU, and Comprehensive National Power (CNP). Shaped by Marxist-Leninist Ideology Marxist-Leninist ideology has played a leading if not central role in shaping the Chinese Communist Party's (CCP) approach to governance and foreign relations. The CCP came to power in 1949 following a successful revolution led by Mao Zedong. Mao was heavily influenced by Marxist-Leninist thought. Since then, the CCP has maintained a commitment to Marxist-Leninist ideology, although its interpretation and application have evolved over time. Today, as former Australian Prime Minister Kevin Rudd and author of The Avoidable War: The Dangers of a Catastrophic Conflict between the US and Xi Jinping's China writes, Xi’s China leans left in terms of Marxist-Leninist socio-economic organization and right in terms of nationalism. Rudd’s analysis echoes President Xi’s speech on “Hold High the Great Banner of Socialism with Chinese Characteristics and Strive in Unity to Build a Modern Socialist Country in All Respects” in his report to the 20th National Congress of the CPC. In that speech, Xi stressed that “Marxism is the fundamental guiding ideology upon which our Party and our country are founded and thrive. Our experience has taught us that, at the fundamental level, we owe the success of our Party and socialism with Chinese characteristics to the fact that Marxism works, particularly when it is adapted to the Chinese context and the needs of our times.” At its core, Marxist-Leninist ideology emphasizes the importance of class struggle and the need for the working class to overthrow the ruling class to achieve a classless society. In the Chinese context, this has translated into a focus on creating a socialist society and promoting the welfare of the Chinese people under the umbrella term ‘Socialism with Chinese Characteristics’. In terms of China’s relationship with the U.S., Marxist-Leninist ideology has contributed to a view of the U.S. as a capitalist and imperialist power that seeks to undermine China’s socialist system. This view is rooted in the Marxist-Leninist belief that capitalist powers are inherently expansionist and seek to dominate other countries to secure their own economic and political interests. They see the U.S. as an imperialist power seeking to maintain its hegemony over the world, while China represents a rising power challenging the established order, as written by Graham Allison in his book Thucydides’ Trap. Chinese analysts believe that the U.S. is threatened by China’s rise and is seeking to contain it through various means, including economic sanctions, military posturing, and diplomatic pressure as evidenced by the Trump administration’s trade war, its network of alliances throughout the region, the advent of minilateral cooperation such as the Quad and AUKUS, and the perceived fomenting of independent movements in Hong Kong, Xinjiang, and Taiwan.  They argue that the U.S. is using its military alliances and partnerships with countries such as Japan, South Korea, and Australia to encircle China and limit its influence in the region. These perspectives ignore that the U.S. alongside with Japan and others openly supported China’s entry into the WTO, the 2008 Summer Olympics, and gave China a leadership position at the Paris Climate Accord. These initiatives demonstrated that the U.S. and other countries were willing to work with China on global issues and support its development. Destabilizing Influence of U.S. Domestic Politics While Marxist-Leninist perspectives of U.S.-China relations offer a macro-level understanding of how China views the inevitability of great power rivalry between Washington and Beijing, Chinese analysts also pay close attention to domestic politics in the U.S. and its impact on U.S.-China relations. Chinese analysts believe that the current political climate in the U.S. is highly polarized, and that these domestic political dynamics are affecting U.S. foreign policy, including its stance towards China. They see the Trump administration’s trade war with China as a reflection of this polarization, and argue that it has damaged the relationship between the two countries. They also note that the Biden administration has continued many of the same policies as the Trump administration, including maintaining tariffs on Chinese goods and pursuing a tough stance on technology transfer and intellectual property theft. The build-up to the 2024 presidential election for most will be one of intensifying securitization of relations with China. President Biden will not be in a position to show any weakness in his China policy. Equally so, the Republicans, whether it is former President Trump or an alternative GOP candidate will take an “All because of China” approach, when it comes to foreign policy, like advocating for a hard decoupling of the economies or even more provocatively, possibly migrating away or redefining the “One China” policy. Developing China-Russian Alignment Chinese analysts also view the relationship between China and Russia as an important factor in the trajectory of U.S.-China relations. They see the two countries as natural partners, sharing a common interest in challenging U.S. dominance of the world. They believe that the China-Russia all-weather partnership is growing stronger and that it poses a significant challenge to U.S. interests. For Russia, Pax Sinica would offer it a much more hospitable environment than the one provided by the Pax Americana, according to the authors of The Beijing-Moscow Axis: The Foundations of an Asymmetric Alliance published by the Centre for Eastern Studies (OSW). For China, a tightening of the alignment with Russia will be critical to ensuring that U.S. does not drive a wedge between China and Russia by pursuing a policy of containment against both countries, a policy that Chinese analysts view as unlikely to succeed. The invasion of Ukraine is a case in point. Despite Russia’s invasion violating the U.N. Charter and China’s Five Principles of Peaceful Co-existence, Beijing has taken a pro-Russian neutrality position refusing to condemn Russia. This is not an endorsement of the invasion or of Putin. It is a clear indication of the importance China places on the deepening Sino-Russian alignment and the reality that neither country can afford a geopolitical divorce. In fact, the recent paper ‘China’s Position on the Political Settlement of the Ukraine Crisis’ continues to echo President Xi’s Workers Report at the 20th Party Congress in October 2022, which explicitly used the expression that “no country’s security should come at the expense of another country’s security,” an explicit rejection of the U.S. and Western countries’ views that Russia has engaged in an unprovoked attack against the sovereign state of Ukraine.  Intensifying Nationalism Chinese nationalism is another important factor by which Chinese analysts understand the trajectory of U.S.-China relations. They view Chinese nationalism as a natural response to the country’s history of humiliation at the hands of foreign powers, including the U.S. Carefully curated since the Tiananmen Square incident in 1989, Zheng Wang writes in his book Never Forget National Humiliation: Historical Memory in Chinese Politics and Foreign Relations that Beijing has placed the century of humiliation at the center of China’s national building process and a nationalist movement in which victimhood, national rejuvenation, and a perineal sense of insecurity concerning the West and particularly the U.S. is the major pillar. These narratives have been meticulously manipulated and deployed to build a national identity in which China must resist anti-China forces and those states that wish to prevent “China’s rightful rise.” Events such as the 70th Anniversary of Victory of Chinese People’s War of Resistance Against Japanese Aggression and World Anti-Fascist War, 100th anniversary of the founding of the Chinese Communist Party, or national aspirations such as the China Dream are all constructed with the purpose of infusing into Chinese citizens a nationalism linked to the CCP’s selective understanding of history. Based on these selective views of history, scholars such as Qin Pang in their co-authored article on “China’s Growing Power Makes Its Youth Hawkish?” Evidence from the Chinese Youth’s Attitudes toward the U.S. and Japan’ find that Chinese citizens view the United States as seeking to contain China’s rise and limit its influence in the region, and that this is seen by many Chinese as an affront to their national pride. Chinese analysts believe that Chinese nationalism is a powerful force that will shape the country's foreign policy for years to come, and that it will continue to be a source of tension in U.S.-China relations. For the U.S. and other like-minded states, Chinese nationalism that is based on victimhood, national rejuvenation, and a perennial sense of insecurity concerning the West will not be a platform for stabilizing and creating constructive relations, especially if this nationalism drives territorial expansion in the South and East China Seas, the Himalayan plateau or across the Taiwan straits.  Dominating AI and Other Technologies  The rapid advancement of technology, particularly in the areas of AI and 5G, is another factor that Chinese analysts believe will shape the trajectory of U.S.-China relations. They see China as a leader in these areas, with the potential to surpass the United States in terms of technological innovation and economic growth. Chinese analysts argue that the U.S. is threatened by China’s technological progress and is seeking to limit its access to advanced technology, particularly in the areas of AI and 5G. They also believe that the United States is using national security concerns as a pretext for restricting Chinese access to these technologies. The U.S. Chips Act and the growing first tier semiconductor and technology firewall that is being erected around China by the U.S. in cooperation with Japan, South Korea, the Netherlands and Taiwan demonstrate the centrality the U.S places on dominating these spheres of technology. The consequence for China according to analysts in and out of China is that it will no longer have access to the most sophisticated semi-conductors, semiconductor producing machines and the associated expertise to keep up in the race to be the first mover when it comes to AI and other technologies that rely on first tier semi-conductor chips. In concrete terms, this means that as the U.S. and its allies will form a chips coalition among like-minded countries resulting in their collective abilities to generate scientific breakthroughs that can be translated into military and economic advantages that will preserve U.S. dominance and the existing rules-based order. Beijing is aware of this challenge and has attempted to reduce its reliance on the U.S. and Western states through its Made in China 2025 strategy and Dual Circulation Strategy. Whether these initiatives will be sufficient to outmaneuver U.S. initiatives to dominate semi-conductors and ultimately AI and other sensitive technologies is yet to be determined. Role of ASEAN, Japan, and the EU Chinese analysts also pay close attention to the role of regional players such as ASEAN, Japan, and the EU in the trajectory of U.S.-China relations. They believe that these countries have a significant influence on the balance of power in the region and that their relationships with the United States and China are critical. Japan’s release in December 2022 of three strategy documents—the National Security Strategy (NSS), National Defense Strategy (NDS), and Defense Buildup Program aims to uphold the current rules-based order and prevent the emergence of Chinese hegemony in the IndoPacific region. Meanwhile, the new Washington Declaration between the United States and the Republic of Korea (RoK) commits to engage in deeper, cooperative decision-making on nuclear deterrence, including through enhanced dialogue and information sharing regarding growing nuclear threats to the ROK and the region. The recent meeting between U.S. President Biden and Philippine President Marcos reaffirms the United States’ ironclad alliance commitments to the Philippines, underscoring that an armed attack on Philippine armed forces, public vessels, or aircraft in the Pacific, including in the South China Sea, would invoke U.S. mutual defense commitments under Article IV of the 1951 U.S.- Philippines Mutual Defense Treaty.”. These are explicit examples of how U.S. allies, through their cooperation and partnerships with the U.S., are aiming to preserve U.S. hegemony. In short, Chinese analysts argue that the United States is seeking to use its relationships with these countries to contain China’s rise, while China is seeking to build closer relationships with its neighbors and BRI partners to expand its influence and build win-win relationships based on its Five Principles of Peaceful Co-existence. Lastly, U.S. and ASEAN watchers in China believe that the United States is losing influence in the region, particularly with ASEAN countries, and that China is poised to fill the power vacuum owing to its extensive economic ties in the region, ties that many in Southeast Asia are dependent on for sustainable development despite reservations over the possible negative ramifications of increased Chinese economic and diplomatic influence in the region. Heft of Comprehensive National Power (CNP) Sensitive to the changing power balances and what this means for China’s ability to achieve its core national interests, China places enormous weight on Comprehensive National Power (CNP) as a key measure of a country’s overall strength and capability in all aspects of national development, including economic, military, technological, cultural, and diplomatic power as Hu Angang and Men Honghua write in their article title “The rising of modern China: Comprehensive national power and grand strategy”. The concept of CNP has been used by Chinese leaders since the 1980s to assess China’s relative strength compared to other countries, particularly the United States. In recent years, China has focused on increasing its CNP as part of its strategic competition with the U.S. Beijing aims to surpass the U.S. in terms of overall power and influence, believing that a higher CNP will enable the country to better protect its national interests, enhance its global influence, and achieve its long-term strategic goals. To increase its CNP, China has pursued a range of policies and initiatives. One of the key areas of focus has been economic development, with China becoming the world’s second-largest economy and a major player in global trade and investment. Through the Made in China 2025, the Belt Road Initiative (BRI), and the Dual Circulation Model, China has also invested heavily in science and technology, with a particular emphasis on emerging technologies such as artificial intelligence, quantum computing, and 5G networks.  In addition, China has modernized its military and expanded its global military presence based on the civil-military fusion (MCF), with the goal of becoming a world-class military power by the middle of the century. China has also pursued a more assertive foreign policy, seeking to expand its influence in key regions such as Southeast Asia, Africa, and the Middle East. Concurrently, China has also sought to promote its soft power, through initiatives such as the Belt and Road Initiative (BRI), which aims to enhance connectivity and economic cooperation between China and other countries. China has also sought to promote its culture and values through the Confucius Institutes and its latest Global Civilization Initiative calling for “called for respecting the diversity of civilizations, advocating the common values of humanity, valuing the inheritance and innovation of civilizations, and strengthening international people-to-people exchanges and cooperation.”  China’s focus on increasing its CNP is driven by its desire to become a major global power and to challenge the U.S.’ dominant position in the international system. While China’s rise has brought many benefits to the country and the world, it has also raised concerns among some countries, particularly the U.S., about the potential implications of China’s growing power and influence. This is especially true as we have seen a growing track record of economic coercion, grey zone tactics, and rejecting international law such as the Permanent Court of Arbitration’s July 2016 decision against its claims in the South China Sea.Conclusion Chinese analysts clearly view the relationship between the United States and China through a complex lens. They see the relationship with the United States as one of the most important in the world and believe that it will continue to shape the trajectory of global politics and economics for years to come. While there are significant challenges and tensions in the relationship between the two countries, Chinese analysts also see opportunities for cooperation and collaboration, particularly in areas such as climate change and global health.

France is looking to give political impetus to reform of the global financial architecture. Others should swing in behind its gambit  Almost 500 days into the war in Ukraine, Europeans and Americans are anxious about their relationship with the global south. While the transatlantic allies are united, they have been left perplexed by the often tepid reaction of third countries to Russia’s aggression. And the gap between north and south appears only to be growing. The global crises of the last five years – covid-19, Russia’s war on Ukraine, inflation, climate change – have pushed Europeans’ focus inward, while these challenges have plunged much of the developing world into economic decline alongside exacerbating energy and food insecurity. Worse, some of the solutions put in place to overcome these crises – border closures, sanctions, re-shoring – have had major negative impacts on the global south. Meanwhile, the multilateral system has spiralled further into crisis, accelerated by the effects of the US-China rivalry, and has failed to provide relief to developing and vulnerable countries. More deeply affected by this ‘polycrisis’ than the global north, they have much less resource to tackle its consequences: dozens of low-income and medium-income countries now face crippling debt. To start to address these problems, President Emmanuel Macron is holding an ambitious event that seeks to focus political attention on the injustices and inequities of the current global financial architecture. Hurriedly decided on after last year’s COP27 in Egypt, his Summit for a New Global Financing Pact will bring leaders, civil society advocates, private actors, and international financial institutions together in Paris. The gathering’s goal is to find ways to build a more inclusive and equitable financial system, one that enables the climate transition and promotes biodiversity without jeopardising development. From its colonial and post-colonial history, and with its permanent seat on the United Nations Security Council, France maintains many close relationships on other continents. In response to brewing discontent and despair, Macron has stressed the need to address global south grievances, using frequent speeches to do so, whether in New York, Washington, or Bratislava. He is now once again engaged in an ambitious yet hasty endeavour: inspired by COP21 in Paris in 2015, the president believes diplomatic elbow grease goes a long way in mobilising around global issues, and he has made good use of it. As early in his first presidency as 2018, he launched the Paris Peace Forum, an annual event bringing together leaders and civil society to work towards a revived and innovative multilateral order. After President Donald Trump rescinded the Paris Agreement on climate change, Macron launched summit after summit on aspects of the issue (One Planet, One Ocean, and One Forest). To tackle the impact of covid-19 on Africa, in May 2021 France hosted the summit on the financing of African economies. This time, the goal is to reinvent the global financial architecture. Ever since the paradigm shift brought about by the pandemic, Macron has argued for a new approach – a “Paris consensus,” in a reference to the 2015 Paris agreement on climate change – to replace the market-orientated Washington consensus with net zero, sustainable economic development goals. In his view, the metrics used in the past are “not valid any more to fight against poverty, for the decarbonisation of our economy, and for biodiversity”. He is therefore pushing to reform the global architecture to incentivise net zero investments for a sustainable future. Macron’s idea behind the new summit is to give a political boost to an issue all too often discussed only on a technical level, and in silos. No one expects an actual “pact” to be signed, but France – along with the summit’s steering committee, which is composed of states and international organisations – is aiming for a political declaration that would muster firm commitments from world leaders, and force consequences down the line. And world leaders are indeed showing up: the secretary general of the United Nations, the new president of the World Bank, the president of the European Commission, the US Treasury secretary, the president of Brazil, the German chancellor, and the Chinese prime minister are all expected to attend, along with 40 heads of state, one-third of whom will be from Africa. As so often before, Macron hopes to be transformational in record time. The summit planning started with high ambitions, but sources say it has had to adapt due to a lack of time and focus. Initially launched around the Bridgetown initiative of Barbados prime minister Mia Mottley, France had aimed to include topics other than climate, such as health and poverty, and sought a G20 presidency endorsement by India. Unfortunately, Indian prime minister Narendra Modi will be in Washington during the summit and, despite the fact that India is co-chairing the summit’s steering committee and the expected presence of Lula and Li Qiang, the event may not in the end be a show of force for the global south. NGOs have been privately critical of the lack of inclusivity and transparency of the working groups, and disillusionment is running high. Some concrete results could still emerge from the four working groups, if negotiations are successful. Among the ambitions floated are debt suspension clauses for natural disasters, reallocation of special drawing rights, scaling up private capital flows through improved de-risking instruments, freeing up more concessional resources from multilateral development banks, and new international taxes (such as a levy on maritime transport). In an increasingly fragmented world, a united political declaration in support of these changes at the conclusion of the summit would be a win for everyone. However, a more modest but attainable goal from the summit would be the emergence of a “coalition of ambition,” in which a number of committed countries, or “champions,” take on specific challenges and sustain the diplomatic effort beyond the summit in Paris. Many other opportunities to build on momentum created in Paris will shortly follow: the African Climate Action Summit, the SDG summit, the New Delhi G20 Leaders Summit, and COP28 in Dubai. Since this summit has no mandate, it can only be a success if it is able to agree actions that then endure. For global south countries, the gathering should in turn create opportunities to strengthen support for their demands in all these upcoming forums. The success of the Paris summit will also depend on the capacity of states and other major players to take on the challenge – including Europeans. Germany is backing France in this effort, but most Europeans have yet to show their commitment to the process. Thirteen world leaders have penned a declaration of good will in an op-ed ahead of the summit, although without offering specific pledges or a timeframe for results. Unfortunately, the American president will not attend the summit, nor will the Italian, Canadian, or British prime ministers. The choice to stay away may stem from irritation at yet another grandiose French summit. But rich industrialised countries have no excuse for lacking interest in the dire situation of developing and vulnerable countries. It also puts responsibility on France to continue to move the ball forward after the summit – and not be content with the impression that it tried. Even if France may indulge in summit-mania, and however imperfect the event will inevitably turn out to be, Europeans and Americans must realise that France’s solo act is worth supporting. With clear steps taken by France ahead of the summit, such as the reallocation of 30 per cent of its special drawing rights (about €7.8 billion), Macron is defending his concept of an effective multilateralism in action, one that delivers. With Russia seeking to peel global south states away from the West, Europeans and the United States need to take up concrete actions that correct the imbalances of the current system and offer developing countries greater voice and power. By finally accepting that the institutions set up after the second world war must change, they would enhance their own credibility among global south states while escaping multilateralism limbo. The only way to salvage international cooperation – and to push back against the narrative of an inevitable north-south polarisation – is to demonstrate that it bears fruit for all.

The last-minute resolution of the US debt ceiling crisis recently has led to a collective sigh of relief in global financial markets. But the way it was resolved has renewed concerns about the the dominant role of the US in the world economy at a time of unprecedented challenges including low growth, high inflation and worries about the stability of the banking system. There is a high degree of uncertainty about how these issues will play out. But the political paralysis in Washington, the rise of populism and a retreat from free trade means that the US may not have either the means or the will to deal with another global crisis as effectively as it once did. As a BBC economics reporter during the 2008 global financial crisis, I saw first hand the dominant role the US played, both domestically and internationally, in resolving the situation. There is little evidence of the same commitment from the US today. The US Federal Reserve Bank played a crucial role in 2008. It stabilised the global banking system by lending over US$1 trillion (£796 billion) to other central banks through so-called “swap lines”, which pumped money into the financial system. This facilitated the bailout of the European banking system by lending much-needed dollars. This year, at the height of the banking crisis in March, the Fed intervened again to provide daily currency swaps to other central banks. During the 2008 crisis, the US was also the driving force behind urging the major industrial countries to introduce expansionary policies to grow their economies in order to avoid a global recession. It also enabled the International Monetary Fund (IMF) to make a further US$1 trillion available to stabilise the threat to the financial system and help emerging market and low-income countries. And the US took the lead, through the G20, in creating the global financial regulator, the Financial Stability Board (FSB), to ensure the stability of large global banks. More recently, the world’s financial system has been shaken by another financial crisis, although it has been smaller in scope: the failure of several US regional banks and the rescue of Swiss bank Credit Suisse. The latter is one of only 30 global systemically important financial institutions identified by the FSB as likely to cause a financial crisis if they fail. It is by no means clear that the latest banking crisis has run its course. There are concerns about the so-called shadow banking system, largely unregulated financial institutions that now make up half of all global financial assets. For example, in the US many people invest in money market funds, which pay higher interest than banks, but provide no deposit insurance. Meanwhile, the international regulatory system created in 2008 has been either ineffective or weakened. Political pressures led the US to reduce regulation and capital requirements for its regional banks, during the Trump administration, while worries about their soundness remain. Internationally, geopolitical tensions within the G20, due to differences between emerging market countries and G7 countries on Ukraine, have furthered weakened the impact of FSB recommendations. The future of US global economic influenceThere are strong reasons to doubt whether the Fed would be willing or able to lead another large-scale 2008-style bank rescue. In the first place, in contrast to the relatively low inflation in 2008, the Fed is now facing conflicting pressures, having sharply raised interest rates to curb inflation. This might surge again if the Fed is forced to cut rates to save banks which lent heavily during the recent period of low rates and are now seeing a rise in bad debts as rates rise and borrowers struggle to manage their repayments. For the same reason, the Fed would be reluctant to support a further expansion of the US economy, which could add to inflationary pressures. Finally, the US’s ability to mount a major bank rescue, either domestically or internationally, is limited by the fact that the Fed still has a huge balance sheet overhang remaining from the 2008 rescue, which it is trying to reduce by US$30 billion, and soon US$60 billion, per month. And the Fed’s authority to issue swaps to other central banks could also be challenged by politicians who might question the need to help the US’s economic rivals. The twin threats of inflation and slow growth have not yet been tamed, either in Europe or the US. This calls the credibility of central banks – which is key to their ability to manage the economy – into question as never before. Meanwhile, the value of financial assets that underpin the global financial system, particularly US Treasury bonds, have seen dramatic fluctuations due to the banking and debt ceiling crisis, as well as concerns about the huge size of fast-rising US government debt. Recent attempts by right-wing House Republicans to block the passage of some spending bills could ultimately lead to a government shutdown. This would further weaken the US government’s credit rating. All of this has put unprecedented pressure on the stability of the banks around the world. The growing tensions within the globalised financial system, coupled with a weakened US in retreat from its global role, could spell danger for world economy.