Research & Insights #34

Yellen now supports windfall tax on Russian assets

US Treasury Secretary Janet Yellen has backed a European Union plan to impose a tax on profits gained from frozen Russian assets. She said it was a “sensible” way to help fund Ukraine’s reconstruction. Yet, last year, she declared that the transfer of assets would be illegal under US law, and some legal experts see the idea as a violation of so-called “sovereign immunity”. Most of the frozen Russian central bank assets (more than €200 billion) are held in Europe, with most of them at settlement giant Euroclear in Belgium, where they generated some €1.7 billion in revenues in the first half of 2023. Many experts believe that a seizure of Russian assets or the revenues they generate could undermine confidence in property rights in Europe and the USA, and reduce the West’s leverage over Moscow. “It sounds like a reasonable proposal,” Yellen said in an interview for Bloomberg, adding that “[Taxing the income], it’s not the same as seizing assets”.

Russia bans exports of petrol and diesel 

On 21 September, Russia temporarily banned the export of gasoline and diesel to all countries outside a group of four ex-Soviet states (Belarus, Kazakhstan, Armenia and Kyrgyzstan). The aim of the measure is to stabilise its domestic fuel. A shortage has gripped southern Russia as a result of rising international prices, the weakening ruble and reduced subsidies to domestic refineries to encourage increased domestic supply. Bloomberg reports that Russia has also significantly increased fuel deliveries to its military units near and inside Ukraine. Russian refiners earn much more from exporting diesel than they do from supplying the domestic market, and high international prices have provided an additional incentive to export. According to the Russian government, these temporary restrictions are designed to increase fuel supply within the domestic market. The energy ministry said the measure would prevent unauthorised “grey” exports of motor fuels. Russia exported 4.81 million tons of gasoline and almost 35 million tons of diesel last year.

Tension mounts in Europe over Ukrainian cereals

Ukraine plans to sue Poland, Hungary and Slovakia in the World Trade Organization over bans on Ukrainian agricultural products. Restrictions imposed by the European Union in May allowed Poland, Bulgaria, Hungary, Romania and Slovakia to ban domestic sales of Ukrainian wheat, maize, rapeseed and sunflower seeds, while allowing transit of these shipments for export elsewhere. On 15 September, Poland, Slovakia and Hungary announced their own restrictions on Ukrainian grain imports, after the European Commission decided not to extend its ban on imports into Ukraine’s five neighbouring countries. Polish President Andrzej Duda has reminded Kiev that it is through his country that aid flows to Ukraine. “It would be good if Ukraine remembered that it receives aid from us and that we are a transit country for Ukraine too,” Duda said. In the context of these tensions, Warsaw has stopped supplying arms to Kiev and is concentrating instead on its own armament, Polish Prime Minister said.

Russia to increase defence spending

Russia is planning a massive increase in defence spending next year, according to Bloomberg, citing draft budgets. Defence spending is estimated to reach 10.8 trillion roubles (US$112 billion) in 2024, or 6% of GDP, up from 3.9% in 2023 and 2.7% in 2021. The draft presented by Prime Minister Mikhail Mishustin cites the “strengthening of the country’s defence potential” as a key priority, along with the “integration of the new regions” partially annexed to Ukraine last year. The government sees revenue amounting to more than 35 trillion rubles, up 22% from 2023, and the deficit halving to 0.9% of GDP in 2024 from 1.8% this year. It expects the deficit to continue to shrink to 0.4% of GDP in 2025 despite the rising costs of the war and the impact of sanctions. To become law the fiscal draft needs the approval of both houses of parliament and then to be signed off by the president.

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