The West has united against Russia. Will his nerves survive when prices soar?

“I just wish you didn’t lose this sense of unity,” he said, again calling for maximum pressure on Moscow.

Three months after Russia’s invasion of Ukraine, European and US leaders are stressing that they remain committed to unprecedented sanctions in an attempt to force President Vladimir Putin to withdraw his troops.

“I’m very concerned about how a recession in Europe will affect Europe’s resolve to stick with it and keep tightening sanctions,” Jason Fuhrman, a Harvard professor who was formerly chief economic adviser to President Barack Obama, told CNN Business.

Cracks are already beginning to form in the European united front. Viktor Orban of Hungary, who was absent from Davos, prompted dissidents to block EU plans to impose an oil embargo on Russia to deprive Moscow of a major source of revenue. The task of completely getting rid of Russian gas can be even more difficult.
In the United States, President Joe Biden and the Democrats under huge pressure to prove that they are serious about fighting inflation ahead of the midterm elections in November, even though most of the inflation-causing factors, such as supply chain problems and strong consumer demand, are largely out of their control.

This could complicate efforts to further put pressure on Russia, despite warnings from billionaire George Soros and others that appeasing Putin would be disastrous.

Fuel and food prices are rising

At Davos, government and business leaders stressed that they could not capitulate to Putin. They agreed that the reaction to his annexation of Crimea in 2014, as well as to the poisoning of Sergei and Yulia Skripal in Salisbury, England, in 2018, was too weak in retrospect.

And the historic sanctions of the West against Russia this year may not be enough either. The Russian economy has been hit but is holding up better than expected, thanks in part to strong oil and gas revenues. This allowed the central bank lower interest rates on Thursday.

“We have to stop making compromises,” Slovak Prime Minister Eduard Heger said emotionally during a panel discussion. The compromise with Putin sparked an “aggressive war,” he continued.

Speaking to dinner guests, Soros warned that an invasion of Ukraine could herald the start of World War III and said that Putin must be defeated “as soon as possible” if the world is to preserve civilization.

But the economic background can make life difficult for politicians at home. Annual Inflation among the 19 countries using the euro reached 7.4% in April, which is an all-time high. In the US, inflation was 8.3%, and in the UK – 9%.

An important factor is the cost of electricity. They were already on the rise due to post-pandemic imbalances in supply and demand, but increased further due to Europe’s efforts to reduce its dependence on Russian energy resources.

The oil embargo is being held up by landlocked states such as Hungary and the Czech Republic, which say it will take them years to switch to other energy suppliers or sources. this is however, they are expected to be agreed upon in the coming weeks.

“The economic situation is definitely difficult. I don’t think this will affect the oil consensus,” said Mujtaba Rahman, managing director for Europe at Eurasia Group, a political risk consultancy.

There will still be consequences. Concerns about energy shortages have already driven prices up sharply. In the United States, the average price of a gallon of regular gasoline hit a record $4.60 on Thursday. In Europe, the situation is even worse. The latest figures show drivers in the United Kingdom paying $8.06 per gallon and $8.43 per gallon in Germany.

At the same time, food prices are rebounding as the war disrupts exports of staples such as wheat and sunflower oil, and some countries, such as India, subsequently impose an export ban to protect domestic supplies. In April, food prices in Germany jumped 8.6% from the previous year.

“This is where the impact of the war in Ukraine is becoming more and more visible,” Georg Thiel, president of the German Federal Statistical Office, said earlier this month.

European Commission President Ursula von der Leyen said this week that “fragile countries and vulnerable populations are suffering the most.” She added that bread prices in Lebanon have risen by 70%, and food supplies from Ukrainian Odessa are not reaching Somalia, which is struggling with a devastating drought. Protests against rising prices broke out in Peru and led to resignation of the prime minister in Sri Lanka.

However, even in Europe and the United States, low-income households are increasingly forced to choose between “heating and food”, which account for the bulk of their budget. Economists fear spending cuts could trigger a recession, especially as central banks raise interest rates in an attempt to curb inflation.

“There is a real risk for a lot of people,” Gabriela Bucher, chief executive of Oxfam International, told CNN Business. She added that even in the “rich world” there are people who are struggling to “meet their basic needs at the moment.”

The British government acknowledged the problem on Thursday when it announced a $6.3 billion contingency tax on oil companies to fund payouts to people struggling with energy bills.

The Future of Western Solidarity

US and European officials and senior corporate officials say Ukraine’s victory is critical. The brutal war and humanitarian crisis must end and democratic values ​​must prevail in what German Chancellor Olaf Scholz called a “turning point” for the world.

“It’s hard to imagine any issue that would unite people in the West as much as this issue,” David Rubinstein, billionaire founder of the Carlyle Group, told CNN Business. “I don’t think a gradual increase that could be related to inflation will change anyone’s mind.”

US officials also say standing up to Putin is necessary to limit the ambitions of Chinese President Xi Jinping, who they say is keeping a close eye on developments.

“Containment is key here,” said US Congressman Michael McCall, the top Republican on the House Foreign Affairs Committee. “While Xi looks at what is happening in Ukraine, [he’s asking,] ‘Is it worth it?’ And we have to convince him that it’s not.”

But balancing politics and economic interests will not be easy. Scholz acknowledged that “politicians have an important task” as they juggle various parts of their mandate from the public.

According to Rahman, this could become a bigger problem in the event of a major escalation from Russia. This could provoke louder calls for a complete ban on Russian natural gas, which accounted for 45% of Europe’s supplies last year. Much moves along the pipeline, making it difficult to find alternatives.

It’s not being discussed right now, although Scholz said Germany is “working hard” to end its dependence on Russian gas as soon as possible. But if it were to be the subject of serious discussion, it would be harder to sell than anything else the West has offered so far.

Companies, while expressing strong support for Ukraine, are also concerned about the growing pressure on their businesses. Herbert Diess, CEO Volkswagen (VLCAF)told CNN Business that the full impact of rising commodity costs and inflation won’t be apparent for the next six or 12 months, creating a “really tough” operating environment.

“We have to achieve something with sanctions,” he said. “For now, we are basically going from escalation to escalation, and we have no choice. So I think sanctions are yes, but then how are we going to end this?”

Henry Kissinger, the former US Secretary of State, caused backlash earlier this week when he suggested that Ukraine agree to hand over most of the Donbass and Crimea to Putin.

“Negotiations must begin in the next two months before they cause turmoil and tension that will not be easy to overcome,” Kissinger said. “Ideally, the dividing line should be a return to the old status quo.”

Zelensky compared Kissinger’s comments to appeasement of Nazi Germany in 1938.

“I don’t want to hear the word ‘appeasement’ anymore,” European Parliament President Roberta Metsola said Wednesday to applause.

However, a weakening economy and high inflation could put pressure on politicians when they return home, prompting a warning from NATO Secretary General Jens Stoltenberg.

“Freedom is more important than free trade,” Stoltenberg told those gathered in Davos. “Protecting our values ​​is more important than profit.”

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