“EU sanctions against Russia are suicide” – Italian banker

The trade war between the EU and Russia is hurting business all over Europe. And while political gains from the standoff are debatable, business losses are as real as it gets. As the sanctions escalate tensions, bringing about the smell of war, entrepreneurs are piling pressure on their governments to stop the stand-off before it’s too late. Antonio Fallico, an Italian banker with extensive experience of doing business in Russia, shares the white-collar view on the economic conflict.

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SS: Mr. Fallico, thank you for coming to our program, we’re very glad to have you here today. You said that the sanctions imposed on Russia could start WWIII. But sanctions are a temporary measure, can they really destabilize the situation so much?

AF: It’s an undesirable prospect, but we can’t rule it out. It’s unclear why the United States, knowing that Russia isn’t some unimportant country, would resort to this sort of provocation. So Ukraine is undoubtedly just a pretext, it can’t be the real reason. Does the US believe that Ukraine means less to Russia than the Falkland Islands to Argentina? It’s really unclear, because either the US acts very irresponsibly, or it is fully aware of what it’s doing and willing to have a full-scale confrontation. Let’s not forget how WWI started: no one was expecting it, but it happened. So when I say we need to spare no effort in order to prevent WWIII, I mean it and I’m ready to work on it.

SS: Russian Economic Development Minister Aleksei Ulyukayev says foreign investors are apologizing to their Russian partners for the behavior of their politicians. Is it true? If so, what can be done about it? Can the business community influence the political elite?

AF: It’s true. He’s right, and I can confirm that most of the Italian entrepreneurs and also European and even American businessmen object to the sanctions policy. In short, we don’t deserve the political leaders who are reluctant to work for the benefit of their people unless the situation reaches a boiling point.

SS: Again, you say “we have to stop the sanctions,” and by “we” you mean Italian business people. Is this a widely supported opinion? Is anyone listening to what you’re saying?

AF: I assure you, all Italian businessmen share this opinion, and the measures taken by our government and the EU authorities drive them to despair. I should point out that the Italian government has its own stance. Our Prime Minister stated on several occasions that he was against sanctions, especially regarding the second round of sanctions.

SS: Yes, we’ll get to your Prime Minister in a minute. Since 60 percent of transactions between Russia and Italy go through your bank, you can really monitor all the developments in bilateral trade. So, which sectors of the economy, would you say, were hit hardest?

AF: Right now it’s high tech, that is, the civilian high tech. There was also a joint military project between Rostec and Italy’s Finmeccanica, but , of course, it is now out of the question. Actually, put together, all the high tech projects were worth ten times more than the losses suffered by agricultural and food industries that everyone talks about.

SS: When you said that the Italian government has its own stance on sanctions, I recalled that there are other countries like that too. For example, the Hungarian Prime Minister said that sanctions were like shooting yourself in the foot. So it seems that there’s no consensus on Russia among the European countries. Did I get that right?

AF: That’s right. There’s no consensus. Moreover, take Turkey, for example. Turkey refused to impose sanctions. Italy could have done the same thing.

SS: I was talking mainly about the EU. Is it possible for the EU to have an efficient policy if there’s no consensus?

AF: As long as Germany’s stance – which has changed dramatically after Chancellor Merkel’s last visit to President Obama – remains so anti-Russian, it will use its economic leverage to make Italy and France toe the line.

SS: If you think about it, the US economy isn’t really affected by these sanctions, but for the EU it’s a hefty sum. We’re talking about 40 bln euros. Germany is also part of the EU, so I’m just trying to understand why the EU would opt for something like that.

AF: I think the actual sum is much higher than 40 bln, since the EU-Russia trade amounted to 326 bln euros. In 2013 there was a 5% decrease in trade as compared to 2012, and the estimations show a 15% decrease for 2014. EU sanctions against Russia - it’s not a reasonable decision, it’s just suicide. This stance does not take into consideration economic conditions and ramifications. It’s based solely on geopolitical considerations which are, in fact, no longer relevant.

SS: You said that to resume political dialogue we should start with the economy, but how is that possible in the current situation?

AF: That’s right, the process aimed at lifting sanctions should originate at the grassroots and work its way up. It should start with economic actors, that is, businessmen. The problem is many businessmen are scared to go to the frontlines, so to speak.

SS: What is it they should do, exactly? Revolt against the government?

AF: You know perfectly well what the connection between the economy and politics is: politics is the façade of economic lobbies and their interests. That’s how it works both in the US and in the EU. Such politicians should be removed from office – through purely peaceful means, of course – and new ones should be elected in their place to work with the interests of the economy and their people in mind.

SS:To continue with this subject, I’d like to discuss South Stream. It would seem that implementing this project would ensure uninterrupted gas supply from Russia to Europe bypassing Ukraine. But the EU is blocking this project. Why? Do you believe the reason is economic or political?

AF: It’s 110% political.

SS: So it’s like unofficial sanctions against Russia?

AF: No doubt about it. Of course, if you ask this question directly you’ll hear calculations that prove this project is not cost-efficient anymore.

SS: Do you think it is?

AF: Yes, it’s a very cost-efficient project, because the energy demand will continue to grow. If we stop being near-sighted and stop considering only the near future, it’s clear that this project would prove very beneficial in the long term.

SS: Again, there’s no consensus on South Stream, either. For example, the Italian Prime Minister is in favor of it and he even managed to come to an agreement with Austria, if I’m not mistaken. However, Brussels is blocking the project. That means that Brussels is ignoring the interests of other countries.

AF: Let’s just say that Oettinger has always been against this pipeline and now he’s trying to persuade other EU members to side with him. Our government has in no way opposed this project.

SS: Quite the contrary, I think.

AF: However, Eni, the company responsible for 15% of the South Stream construction, is now putting the brakes on it. It’s fairly obvious that the reasons for that are not economic, but purely political.

SS: You said that in the long term the project would prove very cost-efficient, though assessments vary. Political squabbles will eventually die down, but are there any guarantees that the project will be implemented after that?

AF: The project is unquestionably cost-efficient, and the new European Commission will undoubtedly approach it with more objectivity. Even though changing the route means increasing the initial cost, surprisingly enough it actually makes South Stream more cost-efficient. And just like with Nord Stream, we are willing to finance this project.

SS: But, as far as I understand, Europe is still looking to diversify its energy sources….

AF: This is a fairy tale for children. At the moment shale oil production cost, even if we exclude logistics costs, is $65 a barrel. In order for the US shale oil to be competitive at the European market, they have to sell it at $110-115 a barrel. Today oil costs $85 a barrel. We have to thank the US and Saudi Arabia for this.

SS: So you are ruling out the prospects of shale gas and oil production in Europe as well as the prospects of the US supplying its energy resources to Europe, am I right?

AF: If you are a reasonable person, you cannot think differently.

SS: You are absolutely right when you say that European countries and Italy in particular are dependent on Russian natural gas very much. President Putin assured everyone that there won’t be any problem as far as Russia is concerned. Does Europe believe him?

AF: If we talk about European businessmen and ordinary people, they not only believe Putin, but truly appreciate what he has been doing since the crisis in Syria until now.

SS: Well, I believe the gas issue is more pressing right now. Ukraine claims that it cannot guarantee uninterrupted gas supply to Europe and asks the EU to sign a new transit agreement. Will the EU agree to do so?

AF: It seems that some people in Europe think Russia wants Europe to pay for the gas it supplies to Ukraine. Europeans say, we are poor, we cannot afford it. The US say: this is not our problem. So now Russia has to supply gas to Ukraine at its own expense despite the fact that Ukraine already owes Russia $4 billion. The agreements reached in Milan at the ASEM summit look like a joke to me. They say: we have agreed on the $385 gas price. Very good! Then they say: we are going to ratify the agreement within a few days. But we haven’t agreed on who is going to pay for it. The IMF says: this is not our responsibility. Europeans say they have no money.

SS: Actually, Putin offered the EU to pay for Ukraine.

AF: This is a reasonable offer.

SS:Is Europe ready to pay for Ukraine? Is Italy, for example, ready to pay for Ukraine?

AF:Not only Italy is not ready to pay for Ukrainian gas – Italy cannot even pay for its own gas. Just think about it: we have signed a long-term agreement which will be valid until 2026, and now Eni is planning to go to court over take-or-pay pricing. They are arguing that Russian gas is more expensive than the Algerian gas and demand a reduced price. This is not a reasonable demand because we have a long-term agreement until 2026, so the prices are all set until the agreements expire in 2026. And actually this agreement is beneficial to Italy.

SS:Let’s talk about the outcomes of the crisis. What will happen if Russia won’t be able to supply gas to Europe through Ukraine this winter? The EU claims it’s able to meet its own energy needs. But others say that countries like Serbia, Poland and Greece will get up to 60 percent less gas than they need. What will happen to those countries if worst comes to worst?

AF: I’m absolutely sure that Gazprom is going to meet its obligations on gas deliveries to Europe. Russia has always done so, even during the Cold War. The only reason the above-mentioned countries may be undersupplied is that Ukraine may siphon off some of the gas intended for Europe. In that case it will be Ukraine’s fault, not Russia’s.

SS: I’m not asking whose fault it is; I’m just asking what will happen to those countries if they don’t receive Russian gas for whatever reason, possibly for the reason you’ve just mentioned.

AF: Of course, their economies will suffer, and people who live in northern countries will suffer. They will be freezing.

SS: I heard that EU Energy Commissioner Guenther Oettinger encourages countries to share their energy resources in case of a crisis. Do you think this is realistic? Do you think EU countries will agree to do so?

AF: This is another fairy tale for children.

SS: I have also heard that Brussels suggested a European company to become a mediator, that is to buy gas from Russia and then to sell this gas to Ukraine. How will the EU benefit from this?

AF: First, you have to find a company which will agree to become such a good Samaritan. Probably, it’s just that the outgoing Energy Commissioner wants to leave with his head held high.

SS: Rosneft CEO Igor Sechin has suggested moving away from the dollar in oil transactions. How will this influence the market?

AF: The idea is not new. Igor Sechin mentioned this several years ago. This may actually be a good option for Russia because it will benefit from transactions in national currencies. Also, Russia has to reconsider its exchange rate policy. I personally cannot understand why the Russian currency basket is 55 percent US dollar and 45 percent euro.

SS: How will this affect the industry in general?

AF: Do you mean the Russian industry or the global industry?

SS: I mean the global oil industry.

AF: Naturally, global currency trends won’t change overnight. Of course, it will take a lot of effort to put an end to dollar’s supremacy. This is similar to moving away from the unipolar world order.

SS: I would like to ask you another question concerning sanctions, particularly the sanctions targeting Putin’s close associates. I know that Italy has always been supporting Russian investments in Italy, including wealthy Russians who invest in real estate and Italian businesses. Suddenly all those people became Europe’s enemies. How come before they were welcome to invest, and now their bank accounts are frozen and their property is seized. Let’s take Mr. Rotenberg for example.

AF: If you want to create a scandal, it’s always more effective to target your enemy’s close associates. Even though the man you mentioned had only small stakes in two Italian hotels, this was enough to arrest those hotels and to freeze the accounts of certain companies, not individuals, mind you, just because the authorities suspect that this person may control those companies. Well-informed sources think this is abuse of authority and will discourage Russians from investing in Europe.

SS: Now I would like us to talk about the EU’s internal issues. Italy and France recently approved their budgets, which contradict the austerity policy pursued by Berlin and Brussels. Does this mean that austerity is over?

AF: You are talking about the Stability Law. Our government wants to exceed the budget by 3,5%. A preliminary agreement has been achieved regarding 3%. So the 0,5% budget deficit is the reason why Brussels did not approve Italy’s Stability Law, which proves once again that the EU is ruled by Germany, not by the European Commission.

SS: I understand that, but how can the EU overcome the crisis if it does not agree on a common economic policy?

AF: We have been asking the same question. The thing is that the EU not only has no economic policy, it has no industrial policy, no development strategy. The fact that the EU countries have a common currency doesn’t mean there’s financial unity. It simply means that we have a common currency.

SS: Do you expect this currency to survive in a situation where, as you just said, there’s no financial, political or strategic unity?

AF: I regret to say the answer is yes, because unfortunately there is no way out of this situation, there is no going back on euro. What we need urgently is a common fiscal policy and a common industrial policy. And I would also say that we need a common Constitution. To this day, Europe does not have a constitution.

SS: It’s been my recent observation that a lot of Chinese capital has come to Italy – in investment banks, in large business projects. Does that mean that Italy and Europe possibly see Beijing as their rescue?

AF: I wouldn’t call these investments particularly large. Indeed, there are some investments, but they are not that significant.

SS: Is it a backup plan? Have you turned to China because you’re going down without Russia? Or is there another reason?

AF: Frankly, Italy is not in love with China at all. Italy is in love with the Arab world – but that’s so only because Italy was told so by the United States.

SS: Would you rather be in love with China?

AF: My personal choice would be for Italy to go along with Russia. I don’t have anything against China. It would be only fair to keep the Chinese presence that is already there. But Europe and Russia go back together for centuries, back to the times of the Grand Duchy of Moscow.So I would be happier if it were Russia.

SS: And the last question. Given the situation, do you plan to participate in the next Economic Forum in St. Petersburg or rather not?

AF:I certainly do hope and plan to attend – especially since we have recently signed a cooperation agreement between the St. Petersburg Economic Forum and our modest International Forum in Verona.