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EU considers relaxing state aid rules in response to war

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The informal summit to be hosted by Emmanuel Macron, French president, in Paris this week was supposed to set the tone for a reset of the bloc’s fiscal rules, but instead is likely to revolve around measures to mitigate the impact of Russia’s war on EU economies . Options include a further relaxation of the bloc’s state aid rules – and possibly the reallocation of some of the bloc’s post-pandemic recovery fund.

Further punitive measures against Russia, including a ban on oil imports, are also being discussed, according to US Secretary of State Antony Blinken. The analysis in the EU is that unlike gas, cutting off Russian oil would be easier to stomach for the bloc and hurt the Russian economy more, as Moscow’s oil revenues are more significant than the gas revenues.

“The question of oil and gas is clearly a central one,” said a senior French official, adding that discussions are looking at ways to stop energy prices from spiraling even higher and at how to manage stocks and supplies in the longer term.

Denmark meanwhile is having its own Germany-like policy U-turn, announcing a referendum that could result in NATO and EU country canceling its opt-out from the EU defense and security policy. It’s the latest move by a Nordic country to beef up its defenses in response to the war in Ukraine.

And we’ll also explore Turkey’s balancing act over Russia, after President Recep Tayyip Erdogan spoke to Vladimir Putin yesterday.

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Subsidies galore

The EU is rushing to find ways to help companies hit hard by the wave of sanctions imposed on Russia – including by loosening state aid rules for the bloc, write Javier Espinoza and Sam Fleming in Brussels.

EU officials are in early discussions on relaxing state aid just as they sought ways of helping companies faced with plunging revenues during the coronavirus pandemic, according to people with direct knowledge of the plans.

A consultation with member states could start as soon as this week, though the timing of the consultation could still slip, these people warned, adding that plans were a “moving target”.

But an official briefed on the plans said the treaty already allowed compensation for damage from exceptional circumstances, with the Russian invasion of Ukraine seen as such a situation.

Margrethe Vestager, the EU commission’s executive vice-president in charge of competition, will be leading any potential changes to the rules.

The European Commission said: “The commission is closely monitoring the situation and is ready to use the full flexibility of its state aid toolbox in order to enable member states to support companies and sectors severely impacted by current geopolitical developments.”

“We are looking at all tools at our disposal – permanent and temporary,” the commission said, adding that officials were mindful of the need to preserve the bloc’s level playing field and avoid distortions to competition.

As part of the options being discussed, member states could request quick approvals to use some of the money from the current EU budget to help these companies as officials sought to streamline the process in the same way they acted last summer during the devastating wildfires in Greece , a person said.

Brussels is also due to unveil a communication this week on how to diminish the bloc’s dependence on energy from Russia, with the bloc aiming to more than double the amount of gas in storage by next winter.

As part of the draft proposals, EU officials will seek to use state aid to help companies negatively affected by soaring energy prices.

“EU state aid rules offer member states a wide range of possibilities for providing short-term relief to companies affected by the high energy prices, and to help reduce their exposure to energy price volatility in the medium to long-term,” a draft proposal seen by Europe Express said.

Separately, the EU is looking at ways of marshalling the € 800bn Covid-19 recovery fund as part of the response to the crisis. One idea being discussed in member state capitals is to deploy recovery fund loans to underpin energy investments, as the commission seeks to wean itself off Russian gas exports.

Many member states still have the capacity to request additional EU loans under the lending component of the NextGenerationEU program – something the commission is likely to encourage them to do. The regulations also permit them to seek to amend their recovery plans in some situations – subject to EU approval.

Chart of the day: Safer waters

Lex map showing locations and value of Russian oligarch superyachts ($ mn)

Russia-linked superyachts are being pulled out of European hang-outs as possible asset seizures loom. France, Germany and Italy have already seized vessels that were docked in their ports. The Maldives is the most popular sanction-free destination; at least five oligarchs have sent their superyachts there. (More here)

Danish U-turn

Denmark, which for decades has prided itself on its opt-out from EU common security and defense policy, has announced a referendum in June that could herald a dramatic change of course, writes Richard Milne, FT’s Nordic and Baltic Correspondent.

Mette Frederiksen, Denmark’s center-left prime minister, was flanked by left- and rightwing party leaders as she announced Copenhagen would seek to go back on one of its hard-won opt-outs stemming from an initial rejection of the EU Maastricht treaty in 1992 , as politicians there respond to Russia’s invasion of Ukraine.

The government also announced it will increase its military spending significantly over the next decade in line with NATO requirements. Denmark will aim to raise its defense spending to NATO’s target of 2 per cent of GDP by 2033 from its current 1.4 per cent.

In addition, Frederiksen said that Denmark would end its dependence on Russian gas, as energy policy becomes increasingly linked to security.

“In our view, Denmark belongs at the heart of the west’s security policy co-operation,” said Frederiksen, as she announced a referendum on June 1.

Her move is a further sign of the extent to which Russia’s invasion of Ukraine has promoted far-reaching changes in European thinking about collective security policy. It comes as Finland and Sweden, the two Nordic countries not in NATO, debate whether to join the military alliance in the wake of Russia’s invasion of Ukraine.

Turkish offer

Turkey’s president has pressed his Russian counterpart to declare a ceasefire in Ukraine and offered to help resolve the conflict, writes Ayla Jean Yackley in Istanbul.

Recep Tayyip Erdogan, who calls President Vladimir Putin “my friend”, has vowed that Turkey will “abandon” neither Ukraine nor Russia. His government is seeking a role as mediator in the conflict, arguing it is one of the few western countries able to talk with Russia.

A ceasefire “would not only alleviate humanitarian concerns in the region, but also give an opportunity to seek a political solution”, Erdogan told Putin in a phone call on Sunday, according to a statement from the Turkish leader’s office. The Turkish president added: “Let’s pave the way for peace together.”

But Putin told Erdogan that Russia would only halt military operations if Kyiv ceased fighting and met Russia’s requirements, according to a statement from the Kremlin.

A member of NATO, Turkey condemned Russia’s invasion of Ukraine last month and has sold Kyiv armed drones under deals that were signed before the war began. But it has also refused to sanction Russia, upon which it depends for energy, wheat and tourism.

It closed the Bosphorus strait, which bisects Istanbul and connects the Black Sea to the world’s oceans, to all warships, not just Russia’s, using powers it has under the 1936 Montreux Convention.

Ankara is positioning itself as a potential peacemaker between its Black Sea neighbors. Ibrahim Kalin, a senior Erdogan adviser, has said Turkey is maintaining a “network of trust” with Moscow after western countries “burnt bridges” with it. European and US officials are pleased that Turkey remains in contact with Russia, even if they do not express this publicly, Kalin has said.

Erdogan discussed the war with Canada’s Prime Minister Justin Trudeau and Charles Michel, the European Council president, on Saturday, his office said.

US deputy secretary of state Wendy Sherman on Saturday met her Turkish counterpart in Ankara. They agreed to “close co-ordination” to support “a diplomatic solution”, the foreign ministry said.

And Turkey’s defense minister, Hulusi Akar, told his Ukrainian counterpart Oleksii Reznikov yesterday that Ankara was ready to help deliver humanitarian aid. A ceasefire was first necessary to allow civilians to evacuate, including Turkish nationals, he said, according to the ministry’s website.

What to watch today

  1. Italian PM Mario Draghi meets EU commission chief Ursula von der Leyen in Brussels

  2. European Parliament meets in Strasbourg to debate a ban on the ‘golden passports’ schemes in the EU

  3. EU development ministers are meeting in Montpellier

. . . and later this week

  1. EU leaders meet in Paris on Thursday and Friday for an informal summit that will look at the economic impact of the war

  2. Estonia’s Prime Minister Kaja Kallas speaks in the European Parliament on Wednesday

  3. European Central Bank governing council takes place in Frankfurt on Thursday

Notable, Quotable

  • Dutch reluctance: The Dutch finance minister in an interview with the FT warned against watering down the EU borrowing rules by stripping out defense and other strategic investments, saying the bloc needed to keep its eyes on debt sustainability even as it confronts the economic challenges posed by the war in Ukraine.

  • Shell trade: Oil group Shell stands to make a $ 20mn profit from a cheap cargo of Russian crude it bought just days after announcing it was pulling back from the country following its invasion of Ukraine.

  • VTB, out: VTB Bank, Russia’s second-biggest lender, is preparing to wind down its European operations after being hit hard by western sanctions, according to people with knowledge of internal discussions. VTB has an investment banking operation in London and a retail bank in Germany with 160,000 customers.

  • Dropping clients: City of London lawyers have moved quickly to sever ties with Kremlin-linked groups and oligarchs accused of propping up the Putin regime, ending what has been a lucrative business for decades. One of the Big Four accountancy firms, PwC, also announced it’s cutting ties with its Russian and Belarusian businesses.

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