Interview with Albanian Daily News, November 28, 2022

First of all, thank you Mr. Nemethy, for this interview in this hot weather and as I mention this worrying weather situation I kindly ask for your opinion on climate change. Do you think that the major powers will start realizing seriously the impact of global warming and will begin to ‘sacrifice’ their interests by taking measures to protect the environment although they have an impact on their economies?

The recent wave of extreme weather and forest fires is, I believe, convincing many sceptics. Most major powers have realized the impact of global warming, but as you say, have only “begun” to sacrifice their interests. Sacrificing interests in this context means losing economic growth, which translates into losing votes in the case of democracies, or in the case of dictatorships like China, political legitimacy.

In most countries, Governments lose votes/legitimacy if they do not sufficiently address climate change within their green constituencies; however economic contraction also leads to loss of votes/legitimacy. So, a real climate change agenda becomes a losing proposition for many Governments. Unfortunately, in my opinion, politicians have minimized fallout by designing programs that are seen to be doing something about climate change, or that are superficial (e.g. do not require major economic sacrifice).

Of course, the real solution, that does not involve economic sacrifice, would involve technological innovation. For example, today there are hundreds of ventures receiving hundreds of billions of dollars of funding in the area of nuclear fission. Cheap and safe nuclear fission would be a complete game changer. Replacing all coal and thermal power generation with fission reactors would greatly reduce carbon emissions.

Technologies exist even today with which carbon in the atmosphere could be greatly reduced—a judicious use of wind and solar in areas where there is plentiful wind and sun—but that does not provide base load energy. Nuclear is the only current carbon-free solution for that. Nuclear designs today are apparently much safer than the generation of Chernobyl and Three Mile Island reactors.

While Europe uses coal primarily as an emergency solution during the Ukraine War, China has been generating and will continue to generate vast and growing amounts of carbon and other pollutants. Why should the EU sacrifice its economic competitiveness and invest further in carbon-free energy efficiency, while Chinese carbon profligacy allows it much cheaper energy? In my opinion, the solution might be some kind of import duty on goods that bear an onerous carbon footprint.

To be fair, China has more nuclear reactors planned and under construction than the number of nuclear reactors currently existing in the rest of the world. The Germans, however, shuttered 14 of their 17 reactors, and have announced eventual closure of the remaining three. Nuclear has challenges of its own, but it is undeniably carbon free.

Unfortunately, the energy policy of Europe has been a disaster on more than just the nuclear front:
  • Huge solar farms have been installed in Northern Europe, where solar makes no economic sense.
  • EU planning seems to have neglected the case for base load electricity—if the sun does not shine and the wind does not blow, where does the base load energy come from? Predominantly Russian gas. We are now paying the price for that dependency.
  • Germany is now turning to lignite, the most polluting form of coal, to help solve its energy crisis.
  • Many rural households, who cannot afford gas, will be heating with wood this winter.
In short, poor planning in the EU has aggravated both the energy crisis we will be experiencing and the amount of carbon we will be emitting into the atmosphere.

The war goes on between Russia and Ukraine and along with it the West is increasing the sanctions against Moscow. Two questions: first, have the sanctions given the expected results on Russia and secondly, are the imposers of these sanctions feeling the impact of them?

The second question is easier to answer. The imposers of sanctions are certainly feeling the impact. Most notable are the quintupling of most gas and electricity prices in Germany, and several other European countries. The war has also contributed to inflation and increases in certain commodity prices globally.

The Russians have proven more resilient than expected. When the West began imposing sanctions, I don’t think anyone would have predicted that Russia would run its strongest trade surplus or that the ruble would soar.

And yet, I would argue that the sanctions are biting. Remember that Russia’s GDP is less than Canada’s, hence it is not nearly as self sufficient as say the US. Ultimately, the primary goal of sanctions should be to harm Russia’s ability to replace military hardware and ammunition as it is consumed in Ukraine. The Russians will be handicapped in their lack of access to microchips and other sophisticated technologies.

The sanctions are also felt at countless other levels. The following list is neither exhaustive nor in any particular order of importance:
  • exodus of tens of thousands of talented people, especially in the technology and IT sectors;
  • Massive capital flight.
  • Much of Russia’s hydrocarbon production is in areas of permafrost. Western technology played a vital role in unlocking these hydrocarbons, and without technology and know-how in maintaining and opening new reserves, Russia is likely to go the way of Venezuela, in terms of decline in hydrocarbon production, although the decline is likely to be slower.
  • While Russian consumers can very well survive without major Western brands, from McDonalds to Gucci, there is no doubt a segment of the population to whom deprivation from Western brands sends an important message—a message of isolation, being a pariah state. The average Russian citizen had access to these even during at least the last 10-15 years of Communism.
Do you think that the differences among the EU countries are increasing regarding the sanctions and will the approach of winter make them more complex? The first sign is Germany which has raised the frightening alarm about the energy crisis in winter warning of severe measures in the county?

There are bound to be differences among EU countries regarding sanctions. The question is how great these differences will be, and whether the differences will be reconcilable.

Some EU countries, for example, are much more dependent on Russian hydrocarbons than others. These countries are often more hesitant to impose sanctions on Russia, the extreme example being Hungary.

Germany has been a bit of a surprise, reversing decades of accommodating Russia under Merkel, to a new anti-Russian stridency, especially given its energy vulnerability. In my opinion, the Germans have realized they are out over their skis, and are now back-pedaling, or at least trying to bargain for time, while doing their best to shore up alternative supplies. They are even considering not closing their remaining nuclear plants, and opening some of their closed plants.

Within the EU you have the full gamut of views, ranging from the staunchly pro-Ukrainian anti-Russian Poles to the more Russian-friendly Hungarian Government. Certain Governments are willing to cut back energy consumption more than others. In my opinion, the Germans and the EU have enough carrots and sticks that they can cajole recalcitrant members into some kind of consensus.

Let me touch upon the world banking system and hard currencies versus ruble: What could you say about the perspective of such a clash at world level?

This clash is already taking place. Everything is being weaponized, from the US Dollar to foodstuffs. Your question pertains to currencies the banking system, so I will focus on that.

All Russian reserves in Western banks were seized, in excess of USD 300 billion worth. The West has made debt service payment by Government of Russia virtually impossible, forcing Russian debt into default. (The Russians claim willingness to pay in rubles, but international banking system made it impossible for them to pay in dollars. There will likely be massive litigation as to whether this truly constitutes default). This default is very recent, but its impact will unfold gradually over the coming years.

The Russians have hit back, wanting payment for hydrocarbons in rubles or gold. This has turned the ruble, despite sanctions, into the best performing major currency in the world this year.

In a previous interview you have said that Putin has done for Europe what the Europeans and Americans could not do for themselves: a sense of unity in Europe. We are at the end of July, more than 5 months since the outbreak of the Ukraine war. Do you think that the West is more united regarding economic and financial affairs and is there a more reasonable US towards its allies?

In a nutshell, yes.

You have seen neutral countries like Sweden and Finland recently join NATO. This indicates a major miscalculation by Putin. With his attack on Kiev, this major, albeit failed, projection of Russian power indicated a likelihood that his plans are no longer to stop at Ukraine. Putin has likened himself to Peter the Great, in terms of his role in reconstituting Russia. NATO was an organization that a decade ago was almost devoid of mission and purpose, and has been completely re-energized.

The Americans, too, must realize that Europe is ever more important as an ally, as a buffer against the Russians, particularly given the cozying relationship between Russia and China, and the possibility of a Chinese attack against Taiwan.

Turkey has recently mediated a deal on grain supplies between Russia and Ukraine. What is the importance of such a deal, and do you think that Turkey’s role is being seen by the EU countries helpful and could this bring about a softer stance of Brussels regarding reinvigoration of the accession process with Ankara?

I believe the main thrust of the Turkish-mediated agreement was to allow exports of grain from the port of Odessa. There are approximately 20 million tons of grain stranded in Ukraine’s Black Sea ports, contributing to a global food shortage. So negotiating this agreement is definitely a big feather in Turkey’s cap, boosting its perception as a regional power broker.

I should point out, thought, that the Russians have a very poor track record in observing such agreements, having negotiated and subsequently broken several such “corridor” agreements. It remains to be seen to what degree this agreement will be observed.

However, I do not see Turkey’s role in this agreement as anything that would help accelerate Turkey’s accession process.

As a follow up, at long last Albania and North Macedonia got the green light to start the accession negotiations with the EU. As a seasoned expert of the Western Balkans how do you see the perspective of quicker rapprochement of the regional countries with the Union?

Given that the Russian are annexing swaths of Ukraine and making noises about pushing farther, one would think it should be a geo-political priority for Europe to firm things up in its own backyard. Nevertheless, there are issues both within the EU as well as the accession countries that need to be addressed.

Some of the things that must be addressed by the EU:
  • There is an impending energy crisis—it is likely to be an extremely difficult winter energy-wise.
  • On the economic front there is the need to simultaneously address a likely recession and rampant inflation—a challenge because raising interest rates would put great stress on finances of both Governments and corporations.
Given that every country in the EU has a veto right, making headway often requires great political effort—the risk is that there may not be much bandwidth left for accession talks.

There is a widespread belief in EU countries that Balkan countries, including Albania and North Macedonia, also need to address issues like governance, corruption and making their economies more competitive, before accession.

In the meantime Albania and Serbia continue their drive regarding the Open Balkans while the Berlin Process seems to be in lethargy. However, the German Chancellor insists on the initiative ignoring the Open Balkans. According to you, Mr. Nemethy, is Open Balkans gaining ground versus the Berlin Process?

Prima facie, if Serbia and Albania can agree on something, that is a sign of progress and a good thing.

Prima facie, any deal that promotes free movement of goods, people and capital is also a good thing.

So what do I see as the problem with the Open Balkans process? First, it does not include all countries in the Balkans. Second, the Open Balkans process may end up being dominated by Serbia, due to its size, which may open a back door for Russian, perhaps even Chinese influence.

I do not know what is going on in the minds of Serbian and Albanian leaders, but my sense is that they may feel that by introducing an integration process that is competitive to the Berlin Process, they may hope that this will put pressure on the EU to accelerate the Berlin process. Perhaps. But there is also a risk that it backfires, or creates complications, and slows down the EU accession process.

Let us assume for a moment that the Open Balkans process is successfully implemented. Given that the countries involved have a free flow of goods, labor and investment between them, I do not see how the EU could admit one country, without admitting them all. Should one country prove to be a laggard in its admission process, that would slow down everyone.

Given that Albania and North Macedonia have been invited for direct accession talks with the EU, that seems to be the preferred route.

To conclude, Mr. Nemethy, it is being discussed about the division of the world in two. BRICS Summit whose countries represent more than 40 percent of the world population have recently agreed to boost their cooperation and diversify it in different fields including finance and banking. Which is your opinion on such an alternative and is this a sign of an increase of the confrontation between the West and developing world, and which might be the impact of such a new world order?

Yes, the world is fragmenting, but in my mind the fragmentation lines will not be north versus south or developed countries versus BRICS.

The Americans and the Chinese, to a lesser extent the Russians and the Europeans, are developing their own spheres of influence and supply lines. One can only speculate how this might progress. The Americans may choose to reassert the Monroe doctrine, holding at bay Russian and Chinese influence in Latin America. The Europeans will likely develop even closer relations with North Africa (manufacturing in Morocco, energy from Libya and Algeria, etc.). And the Chinese will try to increase their influence wherever they can in the developing world, from Indonesia to Zaire.

Unless there is a change of political leadership in Russia or China, their autocratic values may increasingly isolate them and draw them together, whereas the US and the EU, also with similar values, would also be naturally drawn together. While Trump and others have made noises about Europe being a competitor, I am hopeful that the alliance will strengthen.

The impact of such a new world order will be substantial. For example, supply chains will be optimized for security, not efficiency. In the same way as globalization helped us enjoy decades of very low inflation, this de-globalization process may already be contributing to higher global inflation.

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