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Brussels hardens stance on Hungary, softens on Poland

Good morning and welcome to Europe Express.

Two days after Viktor Orban’s re-election, Ursula von der Leyen delivered her harshest message yet regarding the rule of law in Hungary. Not only is the European Commission starting a process that could freeze billions of euros the country is set to receive from the EU budget, but Budapest should also not expect to see any post-pandemic recovery funds anytime soon. Poland, on the other hand, is making real progress in its talks with Brussels, meaning the green light is getting more possible if Warsaw rolls back some of its last-minute demands.

The fifth package of Russia sanctions will be discussed today by EU ambassadors and is set to include a coal import embargo, a ban on Russian and Belarusian transport companies and a prohibition on trades with four de-Swifted banks. Oligarchs and family members of listed individuals are likely to be in the frame. We’ll look at enforcement problems and what solutions could be included in the package.

Speaking of sanctions, here is the FT’s Big Read on how the financial sanctions, notably the ban on the Russian Central Bank, came about — and what role Italy’s Mario Draghi played in it.

And in a rare mea culpa moment, German president Frank-Walter Steinmeier admitted having been wrong on Russian president Vladimir Putin and about ignoring the complaints from central and eastern European nations over Nord Stream 2.

Decoupling Budapest from Warsaw

Back in 2020, the Hungary-Poland tandem was a force to be reckoned with: for weeks, they managed to hold up the approval of the EU budget and the bloc’s unprecedented €800bn joint borrowing. Now divisions are opening up between Warsaw and Budapest that Brussels is only too happy to encourage, write Valentina Pop in Brussels, James Shotter in Warsaw and Sam Fleming in Luxembourg.

The key source of disunity is over the Russia problem. Viktor Orban’s ambivalence over the war in Ukraine and his close ties with Vladimir Putin are increasingly unpalatable to the Polish government, which is on the front line alongside the Baltic states in showing solidarity with Ukraine and demanding maximalist sanctions on Russia.

The EU is at the same time showing signs of taking sharply different approaches to the rule of law stand-offs it has with the two countries. The disputes have held up Poland and Hungary’s slices from the post-pandemic recovery and resilience fund (RRF) since they submitted bids for the money last spring.

Yesterday European Commission president Ursula von der Leyen took a notably tough line with Hungary as she addressed the European Parliament, saying that the issue Brussels has with the country is very clear — namely, corruption. She dashed Hungary’s hopes of quickly receiving €7.2bn of EU recovery funds that Budapest has been bidding for, and announced she would start a process to withhold EU money because of rule of law issues.

On Poland, on the other hand, officials and diplomats in Brussels say real progress is being made on the details of the Polish bid for the recovery fund. Von der Leyen will be in Warsaw for a donors’ conference on Ukraine this weekend, which would provide an ideal opportunity for her to mark a deal — if the talks can be finalised that soon.

The independence of the judiciary in Poland “is a big open question where we have an issue”, von der Leyen said. But she added this has been included on the list of required reforms for the post-pandemic recovery funds to start flowing — suggesting, unlike in Hungary’s case, that the commission is nearer to giving Warsaw the green light.

Her deputy, Valdis Dombrovskis, told reporters on Tuesday that the two sides were “making good progress”. Speaking after a meeting of EU finance ministers in Luxembourg, he said: “We do hope we will be able to finalise the work on the Polish recovery and resilience plan very soon.”

The problem, however, is Polish officials have been less upbeat on the talks this week, with prime minister Mateusz Morawiecki saying on Monday that he did not expect a deal this week. “I still hope that such an agreement will be reached in April or perhaps at the beginning of May,” he said.

The latest snag, according to EU diplomats, is that Poland insists on the commission dropping its infringement proceedings on the rule of law — something that Brussels can’t promise unless Warsaw complies with the EU rules it was infringing in the first place.

Poland’s ruling camp has put forward three bills in response to EU demands that it scrap a controversial disciplinary chamber for judges (which was at the core of a legal case for which Poland has to pay daily fines).

But squabbling factions in the government still need to agree on a final text, which must then be passed by Poland’s two houses of parliament, and signed by the president, before any changes become binding — a process that could take weeks.

The question remains whether Brussels is ready to turn the page with Poland before that process is complete.

If the commission does give the green light to the Polish recovery plan, there will be deep reluctance in other capitals to get in the way of approval.

“They are getting a lot of goodwill going for them at the moment,” said an EU diplomat. The same cannot by any means be said for Hungary.

Chart du jour: Marine rising

Over the past week, a lacklustre election campaign overshadowed by Russia’s invasion of Ukraine has been electrified by hopes on the extreme right that Marine Le Pen could win the presidency. Polls still put Emmanuel Macron ahead in the run-off on April 24 — but his lead has narrowed sharply to within the margin of error. (More here)

Assets register

As Brussels prepares to launch its fifth round of sanctions on Russia, officials are also considering ways of tightening enforcement and closing loopholes, writes Sam Fleming in Luxembourg.

One key question centres on the best ways of piercing the fog that often surrounds the ownership of assets by oligarchs and members of Putin’s entourage.

The Netherlands, for example, has been advocating measures to crack down on the use of shell companies and trusts to disguise the ownership of assets. The commission and western partners have separately proposed a transatlantic task force on implementation of the sanctions.

And Mario Draghi, Italian prime minister, has floated the idea of an international register of Russian citizens who own assets worth over €10mn, in the hope that this would help the effort to track down the yachts, houses and safe deposit boxes in which the country’s elites stow their wealth.

A problem, according to a paper being published by the Jacques Delors Centre today, centres on the exchange of information between EU member states. Policy fellow Sebastian Mack says what the EU needs is an EU-wide asset register, which would help enforce not only sanctions but also the crackdown on financial crime.

His proposals would involve creating an interconnected register, pooling information that is kept by national authorities and allowing officials to access cross-border data listing different kinds of assets and their owners.

That would permit authorities to check whether real estate belongs to a sanctions-hit individual, for example, or to investigate the ownership of a high-performance sports car, yacht or valuable painting.

The paper also argues that existing registers of financial information could be improved by showing beneficial owners of assets in more cases, and by broadening the kinds of asset that are recorded. It proposes that the EU’s proposed Anti-Money Laundering Authority could oversee the proposed EU asset register.

“Authorities should be able to identify, locate and seize the wealth of kleptocrats regardless of their nationality,” the paper argues.

“By making ownership information available to all relevant authorities, an EU asset register would substantially dismantle financial secrecy and thus reduce blind spots that enable financial crime in the first place.”

German mea culpa

German president Frank-Walter Steinmeier, long an advocate of close economic ties with Russia, has admitted failures and mistakes in his country’s relations with Putin and said there can be no going back to business as usual with Moscow, write Guy Chazan in Berlin and Valentina Pop in Brussels.

Steinmeier is a Social Democrat who served as chief of staff to chancellor Gerhard Schroeder at the time when the government sealed the deal for the first Nord Stream gas pipeline connecting Germany to Russia through the Baltic Sea and circumventing Ukraine. (Schroeder went on to serve on the board of Gazprom.) Steinmeier was also foreign minister in the government led by Angela Merkel before being re-elected as president earlier this year.

“What is really sad is that we have failed on many points,” he told ZDF public broadcaster yesterday, listing multiple areas of his party’s so-called Ostpolitik that was supposed to bring Russia into the west’s democratic fold by fostering economic ties.

“I did not believe that even a Putin of the year 2022 would accept his country’s complete economic, political and moral ruin for the sake of his imperial madness.”

Steinmeier expressed regret for having stuck to the Nord Stream 2 pipeline for so long, despite public criticism from Poland and the Baltic states. “We should have taken the warnings of our eastern European partners more seriously, especially in the period after 2014 and the building of Nord Stream 2,” he said.

“Sticking to [Nord Stream 2] was a mistake, not only because we ended up scrapping a project worth billions but also because it damaged our reputation and credibility with our eastern European partners.”

Looking forward, Steinmeier said he was certain that relations with Russia had been damaged beyond repair. “I am convinced that with a Russia under Putin, there can be no return to normality, no turning back to a status quo ante,” he said.

What to watch today

  1. EU ambassadors discuss the commission’s proposals for a fifth round of sanctions on Russia

  2. Leaders of Azerbaijan and Armenia meet in Brussels

Notable, Quotable

  • Treasury ban: The US Treasury said it would halt Russia’s ability to make debt payments in dollars through American banks, bringing Moscow a step closer to a possible default on its obligations to international investors. Even if Russia can avoid default on payments due on Monday, it faces a further hurdle to servicing its debts after May 25 when an exemption in US sanctions is due to expire.

  • Diplomatic exodus: The mass expulsion of Russian officials from embassies across Europe accelerated yesterday amid outrage over Moscow’s aggression in Ukraine and growing concern about spies masquerading as diplomats.

    Italy, Spain, Denmark, Sweden, Estonia and Romania announced the expulsion of a total of 90 Russian diplomats, following similar moves in recent days by Germany, Poland and Slovakia.

  • Helpful thermostat: Turning down the heating by 1C-2C in residential and commercial buildings across Europe would cut dependence on Russian gas by almost 10 per cent, according to Bruegel. The UK also could save more than half of the gas it sources from Russia if households turned down the level of heat.

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