Jan Mládek: Russia not yet a burning problem, but things will worsen

Neither sanctions nor Moscow’s countermeasures are the core problem, says Mládek. In his eyes, the worst thing is that no-one knows how far the conflict could escalate. He also observes: “The Italians, for example, who presently chair the EU, are not too bothered by Ukraine, but it is a huge problem for the entire Visegrád Group, including the Czech Republic.“

How do you view the current Europe-Russia situation? Would you agree that neither side has pulled out their big guns yet and that they are carefully calibrating their steps?

You are thinking, I hope, of economic measures?

Yes, I was referring to the measures introduced by the European Union versus the retaliatory steps from Russia, which, in my view, are in contravention of World Trade Organisation (WTO) rules.

Clearly, but when there is a war then, with all due respect, you can expect such WTO rules to sort of go by the wayside…

The primary impact of these European measures has to date not exactly been colossal…

My department, naturally, calculated [the impact] and we have quite accurate estimations on sales impacts per sector. Agriculture, forestry and fisheries would lose about 0.4 percent, mining and extraction 0.13 percent and the processing industry – and here the decrease is more significant – 3.71 percent, but all these figures would only apply in the event that there was a complete halt in exports to Russia.

I calculated it on the basis of gross added value for some sectors and the resulting figure was pretty slight, in the order of tenths of one percent. But it doesn’t mean that it all ends here, does it?

That is the first thing I’d like to underscore: in my view the main problem does not so much reside in the extent of the European sanctions and not even in the extent of the countermeasures but, unfortunately, in the fact that what is currently going on is just another point on a scale of escalation as since the spring we have witnessed that this issue is only getting worse. And no-one knows whether we have reached the peak, or how much further the conflict can or will escalate. That’s where I see the biggest danger – further escalation…

Do you feel that the EU is intent on escalating the conflict or that on the contrary it is acting in a reactive way?

But the EU is not the leader in this process. The leader is somewhere else. This, in spite of the fact that the EU has been exporting food and food products to Russia that amount to 14 billion dollars, whereas the US exports only amount to one billion…

The US not only plays a leading role but also has the ability to influence the financial sector…

And that is yet another aspect which I consider extremely important. When it comes to sanctions, we are dealing with four different fields – restrictions on weapons and military goods, restrictions on the export of dual purpose goods and technologies, restrictions on sensitive technologies for the oil industry and related sectors and restrictions in relation to the capital market. But I basically believe that regardless of all the negative impacts that there will be on the arms and mechanical engineering industries, military equipment and dual use, the biggest blow is definitely directed at the financial market.

But we don’t have anything in that area, do we?

Unfortunately we do, indirectly. It is, after all, not entirely clear what the impact on demand will be if the Russian public sector runs out of money. According to data from Czech companies, the Russian state supports the modernisation of machinery and if it finds itself out of money it won’t be able to support anything. This in turn influences demand among privately-owned companies…

And what about the pronouncements from Moscow on the localisation of production?

That is also something we worry about because at this point it is very difficult to gauge how wide the range of entities is which will be affected by this measure. We have no statistics [on ownership] that can tell us: here is the public sector where the measures apply but here it ends and so here the measures do not apply. That’s a problem…

As a result of the sanctions Russia could get in trouble in terms of refinancing. Have you any reports on how much Russia now wants to be financed by the Chinese and, from the other side, how willing the Chinese are to finance Russia?

Chinese investors are undoubtedly prepared. But this is the kind of data we have no real chance of getting, in the same way as we have no chance of finding out under which terms Putin signed the gas supply agreement [with China] which will definitely contain some sort of formula through which the gas price is set. And my worry is that it will be determined from certain spot prices – under markedly worse terms that is… It is clear, however, that the Chinese are capable of lending them money, but it won’t be for free the transfer of natural gas through Ukraine. It is of course good news for the Czech consumer that we won’t be directly affected by this as we have the Gazela, Opal and Nord Stream [pipeline] networks as an alternative. So here, I trust, there won’t be any dramatic measures regarding gas supplies. The bad news is that Ukraine will suffer significant problems and so will the Balkans – and that is where we can expect critical developments.

Also little acknowledged is the fact that the most industrial, eastern, part of Ukraine has been devastated by the conflict and this will inevitably lead to a drop in Ukrainian output. Added to that, a significant share of Ukrainian industry has to all intents and purposes continued living off its ‘Soviet essence’. Since Soviet times not much has been invested into the steelworks and other key production plants which, if severely damaged, are unlikely to attract any capital. At this point there is a clear commitment for Europe because it will be necessary to provide Ukraine with assistance very, very soon.

We must realise that the Ukraine issue is very much a problem for the Visegrád countries as three out of the four member states share a common border with Ukraine while the Czech Republic has a substantial Ukrainian minority. On a quite different side of Europe stand countries such as Italy with completely contrasting problems. There, day in day out, boats set out for [the Italian island of ] Lampedusa packed with hundreds of African refugees. So the Ukraine issue leaves the Italians – current holders of the EU presidency – unmoved and that is understandable. I must therefore once more repeat that Ukraine is rather a huge problem for the Visegrád countries and consequently us…

Does the present situation carry a strong potential for arresting the domestic economic recovery?

This potential exists, we already see this. It must be said that to now nothing much has happened – data on the first five months show that export has all in all not significantly decreased, but this does not mean it won’t happen. So far it is encouraging that our export to Russia has only marginally declined – but when it comes to Ukraine it is already a matter of tens of percent…