EU wrangles over spiralling energy prices

Good morning and welcome to Europe Express.

Discussions over how to tackle spiralling energy prices, a situation worsened by the war in Ukraine, are likely to intensify in the coming days, with the European Commission tabling new proposals on Monday for leaders to consider at a summit later in the week.

Southern nations are pleading for a muscular intervention on energy markets, while northern nations, including the Netherlands whose minister we spoke to, seek to tackle the crisis by doubling down on energy efficiency and investments in renewable energy. The political wrangling comes just as Europe’s largest energy traders are asking governments and central banks to provide emergency assistance to avert a cash crunch caused by the sharp price increases.

With more than 3mn Ukrainian refugees having now fled abroad, the EU is seeking to speed up efforts to ensure that they can exchange at least part of their savings into euros, given that many banks are reluctant to acquire Ukrainian hryvnias.

And Ukraine’s ambassador to Dublin has outed low-cost carrier Ryanair for increasing its price on flights from Poland to Ireland, which are mainly used by refugees.

High-voltage talks

The EU needs “step up our game” in the fields of energy efficiency and the dash for renewables if it is to fulfil its aspirations to wean itself off Russian gas, the Netherlands’ climate and energy minister has said, write Sam Fleming and Andy Bounds in Brussels.

A number of southern European countries, including Spain, Greece and Italy, have been urging the EU to embrace price caps as a way of countering the recent surge in energy prices, alongside other potential reforms to the electricity markets.

Their argument is that the market is not functioning well and the impact of the war in Ukraine is being felt in soaring electricity prices, which are pegged to the price of gas. “It’s not a free market, it’s a free mess,” said one senior diplomat.

But Rob Jetten told Europe Express that the problem with measures such as price caps was that in the end someone would have to shoulder the cost — and this may end up falling on businesses or households. Spending money on price caps could mean diverting money away from wind farms, hydrogen and investments in energy efficiency, he added.

The immediate focus should be on diversifying sources of gas supply, economising on energy use, and focusing on boosting gas storage ahead of next winter, he said, setting out his priorities for ridding the Netherlands and fellow EU member states of Russian gas “as soon as possible”.

In Brussels, the European Commission is planning a 90 per cent target for gas storage by October. One way of fulfilling the goal would be to appoint a national company to purchase the gas needed for storage, Jetten said.

Another would involve the use of contracts for difference to compensate companies for the price gaps between the summer and winter. Officials have also been looking at compulsory storage requirements.

But in the medium term the focus needed to be on enacting the EU’s climate and energy efficiency agenda — including the emissions reductions in the Fit for 55 package. The Hague has a €35bn fund to deploy to turbocharge the building of wind and solar farms and hydrogen infrastructure, and the coalition on Friday will discuss “huge numbers” of new wind turbines in the North Sea.

Jetten added that countries such as Spain and Portugal could use solar power “to become the green hydrogen producers of Europe”.

The Hague is also embarking on a national information campaign to encourage energy efficiency. Measures include servicing boilers to reduce waste energy, and money for low-income households to install insulation.

Like other EU countries, the Netherlands is not averse to domestic subsidies to support energy customers. But Jetten stressed that his priority was on supporting lower-income households.

No easy fix

Brussels has said it wants to see urgent efforts to tackle the difficulties Ukrainian refugees are experiencing when they seek to convert savings they have brought with them into euros, write Sam Fleming in Brussels and Martin Arnold in Frankfurt.

The European Commission was working with the European Central Bank to find a way of addressing barriers to converting Ukrainian hryvnia into the single currency in EU banks, said Valdis Dombrovskis, commission vice-president.

The answer, he said, would involve euro-area countries providing support for a kind of “convertibility assistance”, which would permit a certain amount of savings to be swapped into euros. “We are working and are very much aware of the urgency” of addressing the issue, he said after the Ecofin meeting of finance ministers in Brussels on Tuesday.

The situation is not, however, an easy one to fix. Commercial banks are reluctant to hand out euros in exchange for hryvnia given the shattered state of the country’s economy and currency — and the difficulty in establishing any exchange rate.

The ECB was asked last month by MEPs to come up with facilities to help Ukrainian citizens to exchange their hryvnia currency into euros. But as we have written here, the ECB has been reluctant to provide euros in exchange for hryvnia without a specific guarantee from the EU or its member states to cover the risk of losses on the Ukrainian currency.

The central bank’s rules mean it can only accept assets above a certain level of risk when establishing swap lines and repurchase agreements to provide euro liquidity to other central banks in exchange for collateral, which are often in foreign currencies.

One way of addressing the issue would be for Paschal Donohoe, the eurogroup’s president, to provide a “letter of comfort” to the ECB assuring it of euro member states’ backing if there are losses on the foreign exchange transactions. Another would be the provision of a guarantee to the ECB from the EU’s own budget. The ECB declined to comment.

At this stage, officials are still tussling over the technicalities of the problem. Bruno Le Maire, France’s finance minister, vowed to work “swiftly” with EU institutions to tackle it. Politicians are well aware that every day that goes by without a solution compounds the pain experienced by the refugees flocking to the EU. At least 3mn people have now fled Ukraine.

The arrival of 1.4mn Ukrainian refugees in Poland has inundated the country’s banks with requests to exchange hryvnia. (As a reminder, the Polish central bank has opened an emergency swap line allowing refugees to exchange their savings into zlotys).

“The problem of the exchange of hryvnia from the Ukrainian citizens fleeing war is more and more important,” the Polish central bank told the Financial Times, adding that it was “currently working with one Polish commercial bank on the solution to this problem and hope to launch a channel of exchange for Ukrainian citizens soon”.

Chart du jour: Russian contraction

Economists expect a combination of sanctions, high interest rates, soaring inflation, capital outflows, lower business investment and weak consumer confidence to drag Russia into a deep recession this year. Scope, the rating agency, forecast that the economy would shrink by more than 10 per cent this year, after it predicted growth of 2.7 per cent in December. (More here)

Shaming Ryanair

Ukraine’s ambassador to Ireland has accused low-cost carrier Ryanair of increasing the price for flights from Poland to Dublin, a route used by Ukrainian refugees fleeing the war, write Philip Georgiadis in London and Valentina Pop in Brussels.

“Ryanair raised the prices and it’s unfortunate, and I’m waiting for a meeting with the minister for transport of Ireland,” Larysa Gerasko told a parliamentary committee in Dublin yesterday.

Several Irish legislators expressed their anger and said that the carrier should not charge Ukrainian refugees at all. The possibility of organising chartered flights to Ireland was also discussed, with Gerasko saying that she would be very grateful if that could be arranged “because it is very difficult to buy tickets from Warsaw or from Krakow to Dublin”.

She said she had written a protest letter to Ryanair a week ago but had yet to receive a reply.

By Wednesday afternoon, the next available seat on a Ryanair flight between Krakow and Dublin was on March 23 and priced at £180, which was higher than the normal £20 to £75, according to data from Google Flights. Trips in the following days were cheaper and fell to as low as £24 later in the month.

Similarly, the next free flight from Warsaw to Dublin is on March 24 and is priced at £146.

Ryanair did not respond to a request for comment, but Michael O’Leary, its chief executive, had previously pledged to “keep our airfares low” on routes from Poland following a “surge” in demand for flights.

What to watch today

1. Volodymyr Zelensky, Ukraine’s president, speaks to the German Bundestag by video link

2. EU environment ministers gather in Brussels

3. EU agriculture commissioner speaks in the European parliament about the impact of the war on food prices

Notable, Quotable

Oh, I think he is a war criminal

• US support: Following an address by Ukraine’s president to the US Congress yesterday, Joe Biden, US president, approved the delivery of new weapons systems, including drones and anti-aircraft systems. When asked about Vladimir Putin, Biden for the first time labelled him a war criminal.

• Looming default: Russia said yesterday that it had sent interest payments due on its dollar bonds for processing but that it could not guarantee that investors would receive the cash, leaving the country on the brink of its first debt default since 1998.

• Italian exposure: Intesa Sanpaolo, Italy’s largest lender, said yesterday that it had €200mn of exposure to Russian counterparties included in the list of individuals placed under sanctions by western governments. Loans to Russian customers amounted to €5.1bn, or 1 per cent of the group’s total, the bank said.

• No digital renminbi: China’s recently-launched digital renminbi is so far proving not to be a haven for Russian individuals and companies hit by sanctions. While Beijing has complained about the western sanctions, it has largely abided by them, with its companies and banks avoiding business with affected Russian companies.