Aurelia Butler

Today’s Free Lunch brings the last part of our mini-series on financial sanctions against Russia. (If you missed them, here are the preview and parts one, two and three.) Thanks again to my colleagues Daria Mosolova and Claire Jones for their help in the past few months of looking into these issues, and all the experts we have talked to (you know who you are) in a journey that has taken my level of understanding from the obscure to the merely foggy.Apologies for the mammoth length of today’s article, but this is an area where the more you look, the more you find to unravel. On Tuesday, I described the phenomenon of Russia’s “shadow reserves” — the large surplus energy earnings that were not placed under sanctions last year. As I explained, the motives for blocking access to official reserves, ie central bank assets, apply with equal force to the shadow reserves. I don’t know whether the western sanctioning coalition is tracking what has happened to the unsanctioned payments and is preparing to put restrictions on the resulting cash piles. But I do know that if it wants to, it should be able to have a good sense of where the money has ended up — certainly a much better sense than the limited detective work that can be done with public data.As I pointed out last week, however, even in the case of central bank reserves, the sanctioning coalition has been slow to begin systematically mapping what is held where. So I fear that there has been even less monitoring of the unsanctioned payments, which may become even harder because of other sanctions decisions. “De-Swifting” Russian banks — kicking them out of the Swift interbank messaging network — has made it much more difficult (though not impossible) for targeted banks to transact across borders. But as Elina Ribakova pointed out to us, “the question is whether Swift actually helps following the money”. Swift is, after all, based in Belgium and also reports to the US. On the other hand, a person familiar with the sanctions decision-making in Washington told me Gazprombank had remained unsanctioned in part to encourage most transactions to go through a single channel so they would be easier to track.We can be sure that Moscow is thinking about how to put its unsanctioned cash pile, however big it is, beyond the reach of western jurisdiction. The Putin regime’s operators understand that once Europe fully sheds its dependence on Russian energy, an important reason to limit sanctions will have gone. How to secure itself as far as possible against possible future sanctions would be the logical extension of Russia’s work to reduce its vulnerabilities to western measures since its first invasion of Ukraine in 2014. This “de-dollarisation” strategy is well described in a paper by Maria Shagina, and includes both shifting its reserves out of the dollar — most strikingly towards gold and Chinese renminbi — and building up alternative payment processes that don’t rely on Swift. (But as Alexandra Prokopenko has pointed out, Russia’s increasing reliance on China comes with risks of its own.) How might Moscow have gone about protecting its shadow reserves? The starting point is that energy earnings not hit by sanctions will initially have been paid to state-controlled companies in dollars and euros. Take the case of European payments for gas. They would, in a first step, have been paid into a euro account whose ultimate beneficiary is Gazprom — “ultimate” because President Vladimir Putin’s demand to be paid for gas in roubles last year involved setting up Gazprombank accounts “on behalf of” buyers. So let us think about Bank GPB International, the Luxembourg subsidiary of the Gazprombank group (Gazprom’s bank). What happens when the buyer pays euros for gas is that the buyer’s bank — either in the eurozone itself or through a correspondent eurozone bank, instructs (through Swift) Gazprombank to credit the account designated by Gazprom as the one to pay into. At the same time, it debits the buyer’s account and “pays” Gazprombank through the eurozone Target2 settlement system in the form of claims on the eurosystem of central banks. And when that payment crosses national borders, there will be a similar transfer of Target2 credits between the countries’ central banks. (Here is a good overview article about the international payment system, and here is the European Central Bank’s explainer of how Target2 works.)So the first incarnation of a European payment for Russian gas is a claim of Bank GPB on the Banque centrale du Luxembourg, and the parallel BCL asset in the Target2 balances. In the normal course of events, these euros would then move on and partly be spent by Russia on imports, invested by Russian residents in various instruments abroad, or added to Russia’s central bank reserves (largely not held in Luxembourg). So the BCL balance sheet would only contain a stable “buffer” amount of flow-through funds related to Gazprom’s gas sales, which we would in any case not be able to distinguish from other monies in the aggregated public data. But we can ask what we would expect to see in a situation where gas earnings balloon and many of the normal routes for that money to move on are closed down. We would expect a sudden increase in both the BCL’s Target2 assets and its liabilities to Luxembourg-resident banks. And then, if Russia managed to find new ways to spirit the money away, we should see a fall in both. In fact, here is what we see:Now, I have no way of telling if this data in fact reflects that Moscow had Gazprom pile up record euro earnings in Luxembourg through GPB until mid-2022, then abruptly managed to move them somewhere else. But this is what it would look like if that had happened. And we would be seeing something similar inside the dollar system for oil sales and any non-euro gas sales (such as liquefied natural gas contracts). As it happens, US banks saw a significant rise in liabilities to Russian counterparts in the first half of 2022 and a steep drop in the third quarter. Luxembourg authorities are, of course, perfectly able to verify whether this is a red herring. One hopes that the sanctioning coalition has been receiving a very detailed breakdown of information from the BCL and Luxembourg bank supervisors. One is even allowed to hope that it will start to tell us something about what they find.Supposing something like this is indeed what has happened, what would have been the escape routes for this money once it started moving out? Here are three possibilities.One is simply that Gazprom and Gazprombank turned in their euros, exchanging them for roubles with unrelated parties in order to pay taxes or dividends at home. In that case, the new holders of the euros would be those who have been trying to get money out of Russia. Matthew Klein attributes a lot of the Russian asset accumulation in 2022 to households transferring hard currency-denominated deposits abroad or taking out foreign exchange cash; he points out that Russian data showed this happened in large quantities. In this scenario, Gazprom/Gazprombank and their ilk would have sold their accumulated euros — probably on the Moscow Exchange, on which more in a moment — and those euros would have been bought by households trying to get their money (and often themselves) out of Russia.But I am unpersuaded, for a simple reason: the international banking data I analysed on Tuesday that shows large increases in Russian claims on western banks, shows no change in the claims of households. Mostly the changes are in western liabilities to Russian banks; or conversely Russian banks’ deposits in western ones. In addition, of course, there are capital controls on taking money out of Russia. Above all, surely Moscow would have wanted to build up its shadow reserves, not accommodate all capital outflows. Here is a second possibility. This also involves Russian exporting companies exchanging many of their euros and dollars for roubles (or making their buyers do so), because Russian law has required it. And here we return to the Moscow Exchange. A smart study by Bank of Italy economist Michele Savini Zangrandi points out that the Russian decree demanding that gas buyers convert their payments into roubles also specified that the conversion must take place on the Moscow Exchange through its National Clearing Centre division, the central counterparty for currency trading. Zangrandi suggests that linking the NCC to energy payments would protect it from sanctions, much like Gazprombank has been. This sounds plausible: although the US has imposed sanctions on its chair, the NCC itself remains connected to Swift and keeps unrestricted correspondent accounts in euros and dollars with JPMorgan in Frankfurt and JPMorgan Chase in New York, respectively. (You can look up the account numbers if you are looking to buy large quantities of roubles.) But what exactly does it mean to exchange euros (or dollars) through the NCC? Apart from outright selling the euros for others — unrelated to the Kremlin — to buy, could it for example involve simply committing euros as collateral for a future trade or a current rouble loan? Could it mean placing euros with the NCC to hold in its correspondent account on the ultimate owners’ behalf? Could it mean taking a derivative position for which only the limited margin calls have to be honoured up front? These various options will determine on whose balance sheet the euros will sit, and in particular who takes the currency risk. It seems conceivable that Gazprom could pay its rouble taxes to the Russian government by borrowing roubles against euro collateral (sitting in Luxembourg) or that the NCC borrows roubles to buy Gazprom/Gazprombank’s euros from it. Either way, there could be an enormous currency mismatch on some entity’s balance sheet. But from both the Kremlin’s and western policymakers’ points of view, this shouldn’t matter too much. What matters instead is that these kinds of manoeuvres would retain hard currency at Putin’s disposal: shadow reserves. As far as euro holdings are concerned, they would presumably sit in the NCC’s account in Frankfurt, if they have not been sold off to other state-connected companies. Either way, that is easy for German authorities to know. (Ditto for the Federal Reserve and NCC dollars in the New York account.) One hopes that they have found out and shared their findings with the rest of the sanctioning coalition.If this is indeed what has happened, then there should have been a shift of Target2 claims from the BCL to the Bundesbank. Now, German Target2 assets are so big it is hard to make much of moves of “only” a few tens of billions, and some of their movements reflect pandemic monetary policy action. But for what it’s worth, I have charted the changes in the two Target2 balances below. Most interesting is how they diverged from mid-2022.Neither of these first two possibilities seems like they would satisfy Moscow, however. If euros have been sold off to help capital flight, then they are no longer within the Kremlin’s reach. If they remain in the NCC’s correspondent account, or can be traced to other state-connected companies’ euro accounts, then they remain within reach of sanctioning governments.So we should expect huge efforts at the third possibility: to hold on to the hard currency but move it to friendlier jurisdictions. And I don’t mean exchanging dollars or euros for renminbi or gold, which has limited use and which the Russian government has a lot of already. The challenge is to find someone who can hold hard currency on your behalf beyond the reach of sanctions. Here is one way. Gazprombank could issue a euro or dollar-denominated loan to a friendly company in a friendly third country. The recipient would see a hard-currency credit in their bank account, for which their local bank will have a matching claim on its central bank. That friendly third country’s central bank will, in turn, have a matching claim on the originating bank’s central bank — say an increased reserve deposit with the eurosystem central banks (paid by reducing Gazprombank’s claim), or in the case of a dollar loan, this will have shifted to a deposit with the Fed. All above board, and untouchable if the friendly third country doesn’t join the sanctions and won’t itself be hit with sanctions.If I were the Kremlin, I would be looking at places such as Turkey, the United Arab Emirates and India (China is trickier because of its tight capital controls) — just the countries US and EU sanctions officials have paid many visits to this past year. So it’s interesting that Gazprombank made a big loan to Rosatom’s Turkish subsidiary last year, ostensibly to finance a big nuclear plant, but seemingly issued up front rather than drawn down as and when needed. If this is what happened, there should now be about $15bn sitting in a Turkish bank account, matched by the increase of about that amount that could be observed in Turkey’s foreign exchange reserves last summer — no doubt a welcome capital inflow for a currency under pressure. In time, maybe when sanctions are lifted, the loan could be paid back or spent as the Kremlin sees fit.It would not be without risk: Turkey could conceivably use up its official reserves in defending the lira, which would cause problems once the Rosatom loan was to be either spent or paid back. But it seems preferable from the Kremlin’s perspective to either see the hard currency disappear altogether or to leave it within the sanctioning jurisdictions. Again, these numbers do not prove that Putin used this transaction to move shadow reserves beyond the reach of sanctions. But if he did, it would show up in numbers just like these. And if so, there are surely more manoeuvres of this sort going on.Almost everything I have described above as plausible is information that the western sanctioning countries have or can get: movements in and out of GPB in Luxembourg, of the NCC’s Frankfurt and New York correspondent banks, and changes in a third country’s reserves with the western central banks. My hope is they are already scrutinising it intensely; my wish is that they went public with it. In the meantime, I would love to hear what funny Russian financial manoeuvres Free Lunch readers may have noticed.Other readablesWhat do shipping containers and artillery shells have in common, asks Paul Krugman.Volkswagen has decided to build an electric vehicle plant in South Carolina, and is planning a battery plant in the US for which it thinks it will receive up to $10bn in subsidies. My FT colleagues report that the car company is putting on hold a battery factory project in Europe, to “[wait and] see how the EU would respond to Washington’s incentives before pressing ahead”. My take is that the whiff of blackmail is hard to avoid, given that it makes sense to build in Europe for the undoubtedly expanding European EV market whatever the US does.Martin Wolf is pessimistic about Europe’s ability to sustain its post-national aspirations in a hardening world.Numbers newsEl Salvador has built a prison that is supposed to become the world’s biggest by population — and the most overcrowded by design, according to my FT colleagues’ data analysis. The Central American country has the world’s highest incarceration rate.

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Swati Dhingra, a Bank of England interest rate-setter, does not want rates to go higher, judging that the bulk of UK inflation is trade-related and not caused by domestic pressures. More

“Next year we are launching a thematic stress test on cyber resilience, which will try to test how banks are able to respond to and recover from a successful cyberattack,” Enria told Verslo žinios.The ECB has long been warning banks to be alert for cyberattacks from Russia after the European Union passed a long series of sanctions against Moscow over its invasion of Ukraine.”There has been a significant increase in cyberattacks,” Enria said. “We cannot apportion this to any specific source, but it is a fact that the number of these attacks has increased since the war started.” Enria said that part of the problem is that banks are outsourcing some of their critical IT infrastructure to outside providers or other entities in their group. But banks can be cut off from counterparties quickly, including through sanctions, leaving them vulnerable. Results of the test are due around the middle of 2024, Enria said. More

Joseph Stiglitz, who won the Nobel prize for economics in 2001, New America Foundation President Anne-Marie Slaughter, and Fred Krupp, president of the Environmental Defense Fund, were among the 53 people who signed a declaration backing Banga.”Ajay Banga possesses a rare combination of leadership; track record of building successful alliances across the public, private, and social sectors; and experience working in developing countries,” they wrote. “He’s the right person to lead the World Bank at this critical moment.”The declaration reflects growing momentum for the candidacy of Banga, an Indian-born U.S. citizen who has won support from India, Kenya, Ghana and Bangladesh, and received positive reviews from France and Germany at last month’s meeting of Group of 20 finance officials.U.S. President Joe Biden last month nominated Banga, 63, to replace David Malpass, who announced his resignation after months of controversy over his initial failure to say he backed the scientific consensus on climate change.The signatories highlighted Banga’s work on an agriculture program in Latin America aimed at strengthening the resilience of farmers to climate disasters, and a crop insurance program he shaped with the World Food Bank and private partners. “He understands that the World Bank must serve as a force multiplier by setting the right agenda and then catalyzing action across governments, the private sector, multilateral development banks, civil society, and philanthropies,” they said.No other contenders have been publicly announced, although Russia says it is consulting with its allies about nominating their own candidate, in a move that could slow progress toward the bank’s goal of electing a new president by early May.The World Bank has been headed by someone from the United States, the lender’s dominant shareholder, since its founding at the end of World War Two.A challenge from Russia or an allied country is unlikely to change the outcome, given the bank’s shareholding structure, but it could expose simmering tensions between the U.S. and Western nations and China – the bank’s third largest shareholder – over the bank and other global financial institutions. More

Unlike the previous administration, which relied on foreign financing, including from China, Marcos has said he prefers to tap private capital to bankroll his infrastructure ambitions.Economic Planning Secretary Arsenio Balisacan said the 123 projects comprise mostly of those improving physical connectivity, including long-distance railways near the capital and in central and southern Philippines, and an upgrade of the ageing Manila international airport, the country’s main gateway.The list also includes water infrastructure, like irrigation and flood management, and projects in digital connectivity, health, power and energy, agriculture, and others, Balisacan said in a regular news conference.This brings to 194 the government’s priority infrastructure projects that will see faster permitting processes, 45 of which will be funded by the private sector through public-private partnerships.Marcos is banking on infrastructure to support his goal of growing the Philippine economy by as much as 8% before his six-year term ends in 2028, and halve the country’s poverty rate to 9%.($1 = 55.2550 Philippine pesos) More

WASHINGTON (Reuters) – U.S. President Joe Biden will travel to the swing-state of Pennsylvania on Thursday to unveil a federal budget plan laden with spending proposals and higher taxes on the wealthy that will form a blueprint for his expected 2024 re-election bid.Biden’s proposal, which resurrects many items stripped from last year’s budget plan, faces even stiffer opposition in Congress this year, after Republicans won control of the House of Representatives in November’s midterm elections. It comes in direct defiance of Republican House Speaker Kevin McCarthy’s threat to block an increase in the $31.4 trillion limit on federal borrowing unless Biden agrees to rein in federal spending. Speaking at a Philadelphia union hall, the Democratic president will highlight plans to cut the nation’s deficit by nearly $3 trillion over 10 years by raising taxes on those earning more than $400,000 a year and ending corporate tax breaks enacted in 2017 under then President Donald Trump.A White House official, who was not authorized to speak publicly, contrasted Biden’s vision with that of Republicans, saying the budget would reduce the U.S. deficit while lowering costs for families.It also proposes raising taxes on the wealthy and large corporations, the official said, and “tackles wasteful special interest giveaways.”Biden’s budget plan proposes funding higher outlays and closing the deficit by imposing a 25% minimum tax on billionaires and doubling the capital gains tax from 20%, the White House official said. Biden has also said the budget will propose quadrupling a 1% stock buyback tax, while going after corporations and rich individuals who skip paying taxes.Biden, will promise to protect those earning less than $400,000 a year from tax increases and safeguard Social Security, Medicare and Medicaid. At the same time, he will offer relief to working families by investing billions to ease the cost of childcare and ensure free preschool for all of the country’s 4 million 4-year-olds, and promises to increase rail safety.White House officials say that lowering the cost of childcare will boost the economy and allow more women to return to work. Such proposals also enjoy strong support and could help boost Biden’s low approval ratings as he gears up announce his reelection bid this spring.Republicans say Biden’s spending during his first two years in office drove inflation to nearly 40-year highs last summer and are already readying $150 billion in cuts to non-defense discretionary programs – including about $25 billion from the Department Education and cuts in foreign aid and programs aimed at preventing sexually transmitted diseases – that they say would save $1.5 trillion over a decade.Is there common ground? “Very little, very little,” Republican Representative Ben Cline told Reuters. “He doesn’t want to cut any spending, he just wants to raise taxes.” More

European stocks fell at the open on Thursday as investors looked ahead to the release of crucial economic data that help determine if the Federal Reserve will combat lingering inflation with faster and higher interest rate rises.The region-wide Stoxx 600 fell 0.4 per cent, the German Dax 0.1 per cent, and the French Cac 40 0.4 per cent. London’s FTSE 100 lost 0.6 per cent.At a two-day hearing in Washington, Federal Reserve chair Jay Powell said that the US central bank was willing to return to more aggressive interest rate rises but stressed that “no decision” had been made yet.Stock and bond markets have begun to price in a half percentage point increase in March but are awaiting critical economic data like Friday’s non-farm payrolls numbers, which will reveal if the economy has started to cool.In January, 517,000 jobs were unexpectedly created, spurring investor concern about the extent of rate hikes and hawkish rhetoric from the Federal Reserve.“Good macro news equals terrible market news,” said Florian Ielpo, head of macro and multi-asset portfolio manager at Lombard Odier Investment Managers. He added that a high reading will “confirm that more is needed to curb dynamism in the labour market. The reason we saw big numbers last month was because of service job creation which is slower to react than industry. When it will is hard to say.”US futures contracts for the blue-chip S&P 500 slipped by 0.3 per cent, while those tracking the Nasdaq fell 0.5 per cent.Yields on two-year US Treasuries, which are more sensitive to monetary policy, fell 0.02 percentage points to 5 per cent, while 10-year notes rose 0.01 percentage points to 3.99 per cent. Yields on 10-year German Bunds rose 0.05 percentage points to 2.68 per cent.The dollar index, which measures the greenback against a basket of six peer currencies fell 0.2 per cent.In Asia markets were muted, with Hong Kong’s Hang Seng index falling by 0.6 per cent and China’s CSI 300 dropping 0.4 per cent. This followed weaker than expected Chinese inflation data, with consumer prices up 1 per cent and producer prices down 1.4 per cent — its lowest reading since November 2020.In commodities, Brent crude fell 0.3 per cent to $82.40 while WTI, the US equivalent, was down 0.4 per cent to $76.37. More

Turkey has clinched its first international bond deal since last month’s earthquake as the government starts a massive effort to rebuild homes, businesses and critical infrastructure that were wrecked in the disaster. The country on Thursday raised $2.25bn in dollar-denominated debt in its first bond deal on foreign markets since January, according to the finance ministry. The February 6 earthquake caused $34bn in damage, according to the World Bank, though some local engineers and officials have estimated that the final reconstruction bill could be up to $100bn. Economists expect Turkey to pay for the recovery partially through fundraising on debt markets and bilateral deals with international partners, although Thursday’s deal was not marketed as a reconstruction bond.UK, US and other European investors accounted for 70 per cent of the bond deal, with 10 per cent going to those in the Middle East. Domestic investors scooped up 19 per cent of the issuance. The bonds, which mature in March 2029, were sold on Thursday with a yield of 9.5 per cent, or 5.2 percentage points higher than US Treasuries. That compared favourably with the 6.2 percentage point “spread” Turkey paid on a $2.75bn dollar bond deal in January. The relatively high borrowing costs reflect Turkey’s speculative-grade credit rating. Turkey has retained its access to international financing despite deep concerns over President Recep Tayyip Erdoğan’s management of the economy. Inflation exceeded 85 per cent last October as the central bank slashed interest rates in contrast to most other countries that raised them. The lira has tumbled in recent years as international investors eschew the market, reaching a record low of TL18.96 to the dollar on Thursday. Investors are keeping close tabs on the campaign for the May 14 Turkish presidential election. It kicked into high gear on Monday when a coalition of six opposition parties picked Kemal Kılıçdaroğlu as its candidate to challenge Erdoğan, who has led the country for two decades. The opposition alliance, known as the “table of six”, has agreed on dozens of policy proposals, including investor-friendly measures such as ensuring the central bank remains independent and focuses on inflation. Erdoğan, who is a longtime opponent of high interest rates, in effect controls monetary policy and had insisted on last year’s rate cuts. Erdoğan has sustained intense criticism over the cost of living crisis, the government’s sometimes stuttering earthquake response and lacklustre compliance with building regulations that worsened the damage caused by the natural disaster. More than 45,000 people were killed by the earthquake in Turkey with thousands more dying in neighbouring Syria. “The probability of regime change materialising is rising, which was true before the earthquakes, but more so now that crisis conditions have formed,” Wells Fargo economist Brendan McKenna told clients on Wednesday, while noting that his baseline expectation was still for Erdoğan to win. The US bank said that if the opposition managed to score an upset, “the lira could experience one of the most sizeable rallies in modern history as an independent central bank gets restored and an orthodox monetary policy framework is implemented”.Thursday’s debt deal was first reported by Bloomberg. Deutsche Bank, HSBC and JPMorgan were hired on Wednesday to manage the fundraising. More

A small canal at the mouth of the Danube river has become a geopolitical flashpoint between Ukraine and Romania, sparking fears of Russian meddling and dwindling support in Bucharest for its war-torn neighbour.The dispute erupted when Kyiv said last month that it had dredged the Bystre canal — a Ukrainian waterway about 10km long that connects the Black Sea with the Danube’s Chilia branch, which forms a natural border between the two countries.The increase in Bystre’s navigable depth from 3.9 metres to 6.5 metres was its “first since independence” from the Soviet Union in 1989, Ukraine’s infrastructure ministry said, adding: “We keep on developing the Danube port cluster.”Expansion of the Danube Delta’s shipping channels is crucial to Kyiv’s plans to develop alternative export routes after Russia blockaded Ukraine’s Black Sea ports following its full-scale invasion a year ago. While a UN-backed grain deal to reopen three ports last year was a lifeline for Ukraine’s war-battered economy and boosted global food supplies, Kyiv is determined to secure viable routes that offer more protection from Russian aggression.It argues that the deepening of the canal is part of an earlier EU-sponsored Solidarity Lanes programme to facilitate Ukraine’s trade with the bloc. But the announcement sparked a backlash in Romania, where officials have claimed that the dredging threatens the Danube Delta, a world-protected natural reserve known for its biodiversity and abundant birdlife. Romania’s foreign ministry summoned the Ukrainian ambassador and demanded that its neighbour halt “all dredging works” if the purpose went beyond regular maintenance of the waterway. Bucharest also requested that it carry out its own measurements of the Chilia branch and the Bystre canal.With the spat threatening to damage bilateral ties, Ukraine’s embassy has appealed to Romanians to “not play along with Russian propaganda” that aims to undermine their support for Kyiv as the war drags on.Ukraine’s embassy in Bucharest quickly sought to clarify that the works were of an “operational nature” to remove silt that had reduced the depth of the waterway. But the topic has become highly politicised in Romania, an EU and Nato member state that has strongly supported Ukraine since Russia’s invasion, including by hosting thousands of refugees.Klaus Iohannis, Romania’s president, deplored “inflammatory speeches” and urged fellow citizens to first let experts establish “what is really happening there”.“I do not think it is appropriate to attack the Ukrainians based on uncertain data,” Iohannis said during a meeting with US president Joe Biden and fellow regional leaders in Warsaw last month. “They don’t need to be scolded, they need support.”Romanian president Klaus Iohannis: ‘I do not think it is appropriate to attack the Ukrainians based on uncertain data’ © Tomas Tkacik/SOPA Images/LightRocket/Getty ImagesDuring the same week, a far-right Romanian lawmaker, George Simion, posted a video from a boat on what he said was the Bystre canal. In the video, Simion criticised political opponents for not caring about the Danube Delta.Ukraine has approved the request from Romania to carry out its own hydrographic measurements on the Bystre canal and Chilia branch to clarify “conflicting information”, said Romania’s transport ministry. The measurements are earmarked to begin on March 15.On Tuesday, talks mediated by the European Commission were held in Izmail, a Ukrainian port town on the Danube about 60km west of the Bystre canal.“We [will] do common measurements to clarify everything to avoid any politicisation,” Dmytro Barinov, deputy head of the Ukrainian Sea Port Authority, said after the talks. He added that Ukrainian Naval Forces, which will oversee security, still needed to give their approval. “We will speed up the process as much as possible.”

A cargo ship sails through Ukraine’s Bystre waterway last July © Operational Command South press service/Reuters

For Gabriel Paun, president of the Romanian environmental group Agent Green, the public discourse so far has been saturated with “too much politics and too little science”.“I know that Romania and Ukraine should have consensus before any work should be carried out in any corner of the Delta,” he said. “The consensus must prioritise ecosystem conservation before economic gains.”Adina Vălean, a Romanian politician who is the EU’s transport commissioner, said the commission had asked both countries to show “full transparency” and resolve their differences. Contrary to Ukraine’s statement, she said the Bystre canal was not part of the Solidarity Lanes programme, which includes several Danube ports in both countries and had allowed for the export of 51mn tonnes of goods from Ukraine from the programme’s launch in May to the beginning of February.“The Danubian corridor is very important,” Vălean told the Financial Times, adding that more funding would be made available for Romania to improve navigability and boost export volumes via its own canal, Sulina, which runs along another branch of the Danube Delta and is the main waterway for cargo ships connecting to the Black Sea.

Adrian Stănică, a researcher at the National Institute for Marine Geology in Bucharest, points out that it would be costly for Kyiv to develop and maintain the Bystre-Chilia route. But he said regular maintenance works had negligible effects on the biosphere. With bilateral ties at stake, he added that in Romania discourse on the matter had become “intoxicated” by fake news and possibly fuelled by a third country, without naming Russia.Costin Ciobanu, a Romanian political scientist at the Royal Holloway University of London, said that only the facts would enable an “informed discussion about what the Ukrainians did and whether their works on the Bystre canal were a threat to the Danube Delta”.“Romania’s key interest is that Ukraine wins this war, and should not let episodes like this cast a doubt.” More