Transcript of the Press Conference of the October 2019 Global Financial Stability Report



Tobias Adrian, Director, Monetary and Capital Markets Department

Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department

Anna Ilyina, Division Chief, Monetary and Capital Markets Department

Evan Papageorgiou, Deputy Division Chief, Monetary and Capital Markets Department

Randa Elnagar, Senior Communications Officer, Communications Department 

Ms. Elnagar - Good morning. Welcome to the 2019 Annual Meetings. This is the press conference on the Global Financial Stability Report. I am Randa Elnagar from the IMF's Communications Department.

Let me start by introducing our panel: Tobias Adrian, Financial Counselor and Director of the Monetary and Capital Markets Department; Fabio Natalucci, Deputy Director of the Monetary and Capital Markets Department; Anna Ilyina, she is the Division Chief that oversees the Global Financial Stability Report in the Monetary and Capital Markets Department; and Evan Papageorgiou, Deputy Division Chief in the Monetary and Capital Markets Department.

Tobias is going to give some opening remarks, and then we are going to take your questions. Tobias.

Mr. Adrian - Good morning, ladies and gentlemen. It is a pleasure to present the new edition of the Global Financial Stability Report. Along with the report, you will be interested in the leaflet that summarizes the report's findings.

Global markets have been subjected to the twists and turns of trade tensions and have been kept off balance by continuing policy uncertainty. Against the backdrop of deteriorating business sentiment, weakening economic activity, and intensifying downside risks, many central banks have adopted an easier stance on monetary policy. About 70 percent of the world's economies, weighted by GDP, have done so.

Investors have interpreted the central bank actions as a turning point in the monetary policy cycle. The shift has been accompanied by a sharp decline in long-term yields. In some major economies, interest rates are deeply negative.

Remarkably, the amount of government and corporate bonds with negative yields has increased to about $15 trillion. Moreover, markets expect about one-fifth of government bonds will have negative yields for at least three years.

With rates staying lower for longer, financial conditions have eased, helping contain downside risks and support global growth, for now. But loose financial conditions have encouraged investors to take more risks in a quest to achieve their return targets. Valuations appear stretched in some important markets, including equity and credit markets, in both emerging and frontier, as well as advanced economies.

As a result of easier financial conditions and stretched asset valuations, vulnerabilities have continued to intensify, putting growth at risk in the medium term. Let me draw your attention in particular to our assessment of global vulnerabilities, summarized in the radar chart.

The gray shading in that chart shows where vulnerabilities now stand.

As you can see, there has been a notable increase in vulnerabilities in the section marked "Other Non-bank Financials."

Vulnerabilities among non-bank financials, which include asset managers, structured finance vehicles, and finance companies, are now elevated in 80 percent of economies, as measured by GDP.

This is similar to what we have seen at the height of the global financial crisis. The search for yield among institutional investors, such as insurance companies, asset managers, and pension funds, has led them to take on riskier and less-liquid securities.

These exposures may act as amplifiers to shocks.

In addition, corporations are taking on more debt, and their ability to service that debt is weakening. In the event of a material economic slowdown, the prospects would be sobering. Debt owed by firms unable to cover interest expenses with earnings, which we refer to as corporate debt at risk, could rise to $19 trillion in a scenario that is just half as severe as the global financial crisis.

That is almost 40 percent of total corporate debt in the eight economies that we studied, which include the United States, Japan, China, and some European countries, could be addressed in such a downside scenario.

Among emerging and frontier economies, external debt is increasing, as they attract capital flows from advanced economies, where interest rates are lower. External debt has risen to 160 percent of exports on average, up from 100 percent in 2008.

A sharp tightening of financial conditions and higher borrowing costs would make it more difficult for them to service their debts. Overall, resilience of the banking sector has improved, thanks to stricter regulations and supervision since the global financial crisis.

However, there are still pockets of weak institutions. Negative yields and flatter yield curves have reduced expectations about bank profitability, and the market capitalization of some banks has fallen to low levels.

Among banks outside the United States, US dollar funding liquidity remains a source of vulnerability that could amplify the impact of a tightening in funding conditions and could create spillovers to countries that receive cross-border dollar loans.

Policymakers need to take urgent action to mitigate financial stability risks. They should deploy and develop, as needed, new macroprudential tools for non-bank financial firms to mitigate vulnerabilities, highlighted in this report.

They should address corporate vulnerabilities with stricter supervisory and macroprudential oversight, including the creation of targeted stress-testing of banks and the development of prudential tools for highly levered firms, which can help restrain debt at risk.

They should tackle risks among institutional investors through strengthened oversight and disclosures. Emerging and frontier economies should implement prudent sovereign debt management practices and frameworks.

Greater multilateral cooperation is needed in several areas. Policymakers should complete and implement the global regulatory reform agenda. They should ensure that there is no rollback of regulatory reforms.

In addition, policymakers should foster the further development of sustainable finance, an approach to investment that takes environmental, social, and governance factors into account.

To help promote awareness of climate threats and other risks to the financial system, policymakers should encourage better corporate disclosures and adequate standardization.

To sum up, with financial conditions still easy, and with vulnerabilities building, policymakers should act now to reduce the vulnerabilities that could exacerbate the next economic downturn.

Ms. Elnagar - Thank you, Tobias. We are ready to take your questions now.

Question - Can you be a little bit more specific on what types of debt that you see as most concerning? In the 2008 financial crisis, it was subprime loans that started everything. What areas are you looking at?

Also, can you be more specific on what you would recommend policymakers do? They have taken steps to shore up the banking system. So what other steps do they need to take? More specifically, though, what can they do to address these non-bank problems?

Mr. Adrian - Absolutely. So the banking system is safer today. There is more capital and more liquidity in the banking system, and stress tests are commonly done across jurisdictions. At the same time, vulnerabilities in the non-bank financial sector are building, so there is a growth of credit intermediation in the non-bank financial sector, and corporate vulnerabilities are rising.

So what we urge policymakers to do is to contain underwriting standards for those nonfinancial corporations at the issuing stage. This could be done by a number of policy tools.
Ms. Ilyina - Let me elaborate a little bit on what can be done to contain corporate sector vulnerabilities.

First, just to step back and maybe comment a bit on the 19 trillion USD number.

This is our estimate of debt at risk, which we define as debt owed by nonfinancial firms with weak debt repayment capacity; that is, that do not have enough earnings to cover interest payments.

That is not necessarily debt that will default immediately, but these are firms that would be at risk of distress in a significant material economic slowdown.

So the estimate that we provide in the report is for eight major economies, including the United States, China, Japan, and several European economies, in a material downturn, which is about half of the severity of the global financial crisis.

The reason why this number is large -- and the number is, indeed, large -- is because of, I would say, three things. I would highlight three things.

First, corporate debt levels have increased in major economies over the last decade, significantly.

Total corporate sector debt in these eight major economies now stands at about 51 trillion US dollars, and that compares to about 34 trillion in 2009, so this is a significant increase.

Second, corporate vulnerabilities are already elevated in a number of major economies. In some of them, debt at risk is already at about 25 percent of total corporate debt; and, of course, in an adverse scenario, it rises fast and further.

And what is particularly notable is that, even though the shock is only half the severity of the global financial crisis, in many of those countries, debt at risk rises to the same level as we have seen during the financial crisis or even exceeds those levels.

So that tells us that there are quite a few weak nonfinancial firms in these economies that are still able to roll over debt and continue to accumulate debt because of very low interest rates.

But, of course, the concern is that in an economic downturn, these firms may come under pressure.

They may experience difficulty in servicing their debt, and would have to deleverage. And so when they deleverage, they cut back on investment and employment, and that exacerbates the recession, what we have seen during the euro area crisis.

To answer your question on what can be done, as Tobias already mentioned, it should be done through a combination of more stringent supervision, particularly of credit assessment practices and lending practices of banks, which is what supervisors, presumably, already do.

But perhaps there are some areas where more attention is needed, like in regional banks that are more exposed to small- and medium-sized firms.

And if corporate debt is viewed as reaching systemic levels, then macroprudential tools can be activated as well, including sectoral tools, such as additional risk weights or additional capital buffers on bank exposures to corporates.

If the main source of credit is not banks but, rather, non-bank financial intermediaries, then this is somewhat more complicated because there are fewer policy tools to address that.

But, again, greater, more rigorous supervision is needed, more disclosure perhaps by these financial intermediaries to allow a more comprehensive assessment of risks by both investors as well as supervisors.

Of course, there are other tools that can be considered as well; for example, some criteria on the credit quality of securities that different financial intermediaries can invest in, and so on so forth.

Let me stop here.

Question - What you have outlined seems very familiar to those of us who have been here for quite a long time: lots of risk, lots of debt, lots of vulnerability, and a lack of policy action. How close do you think we are to repeating the mistakes of 2008, when action was taken but taken too late and only after the problem had exploded?

Mr. Adrian - Thanks for the question.

We are in a better place today, from the point of view of banking regulations. Banks have more capital. There has been tremendous progress in terms of banking regulation and, to some extent, insurance regulation as well. So I do think that we have to acknowledge that overall capital and liquidity levels in the banking sector are much better, and the banks remain the core of the financial system.

Some estimates are that, depending on the country, high-quality capital is about two to three times higher than it was prior to the last financial crisis. So tremendous progress has been made there.

But we do see a build up of vulnerabilities in the non-bank financial sector and in the corporate sector, in particular, as Anna has explained. And we particularly worry about the risks in the medium term.

In the short run, say, over the next year or so, risks have been contained to some extent by the sharp easing of monetary policy that has occurred in many countries around the world.

So that easing of monetary policy has taken out some of the downside risks. But in the medium term, say, over two to three years, we worry that vulnerabilities continue to build up. And in the scenario of adverse shocks, these vulnerabilities are amplification mechanisms that can make shocks worse. So financial vulnerabilities act as amplifiers for any negative shocks.

So we do worry about the medium term, and we urge policymakers to take action today, using prudential policy tools to contain the deterioration of underwriting standards to make sure that the non-bank financial system is safe and that underwriting standards in the corporate sector do not deteriorate too much.

Ms. Elnagar - The gentleman here.

Question - Good morning. How the trade wars, they would increase those vulnerabilities and put the financial risk worldwide?

Mr. Adrian - The question was about trade tensions.

What we have seen over the past year -- really, over the past two years is that trade tensions have moved markets. And many times when the markets became more pessimistic about trade, there have been significant moves. And downside risks to economic activity have been a function of those trade tensions.

So we urge policymakers around the world to continue to work together in order to resolve those trade tensions, as that is a significant source of uncertainty, and a significant source of creation of downside risks is trade uncertainty.

Now, the trade uncertainty is interacting with the financial vulnerabilities. So financial vulnerabilities are amplification mechanisms for bad news. So when there is bad news on the trade front, then the higher the financial vulnerability, the worse the amplification. That is our thinking about financial stability. And, as we pointed out, these vulnerabilities are rising, particularly in the corporate and the non-bank financial sectors.

Mr. Papageorgiou - I just wanted to make a very quick point.

In terms of the implications of trade tensions are, obviously, very important on the real economy and, obviously, on trade; but as Tobias also mentioned, there are real implications for portfolio flows, in particular, to emerging markets. Clearly, we are very concerned about -- the whole word is very concerned about China and the US but there is also real spillovers to emerging markets.

We have seen that equity flows of the emerging markets have reacted very closely to the ebbs and flows of that trade news. And there seems to be a domino effect from the external factors on those portfolio flows, rather than country-specific fundamentals. And we think that is very important because, much like you had strong inflows during periods of calm, during calm periods, you can have a sudden reversals of those flows.

Ms. Elnagar - Thank you.

Question - Yesterday we saw rather a spectacular explosion of an open-ended Fund empire in the UK, the Woodford Funds. I just wonder what you thought about the vulnerabilities of open-ended funds, and what steps should be taken by regulators to try and address that vulnerability?

Mr. Natalucci - We have one chapter in the Global Financial Stability Report that focused on the behavior of institutional investors in this lower-for-longer environment. So the three investor types we focus are asset management, pension funds, and insurance companies.

So the open-ended funds, which is one subset of the asset management industry, what we highlight there is that in this low-for-longer environment, there is an incentive for some of these players to reach out for yield in the form of more liquid security, higher credit risk, to achieve their return targets, whether they have nominal mandates or whether because they have nominal return targets or because of investment mandates.

So the two risks we highlight there are that liquidity buffers, some of these funds have decreased, and also that the portfolio seems to be much more correlated, much more similar; and so the reason why we highlight those is that those could become an issue of financial stability concerns.

On the one hand because those are the marginal bid for some of these assets, especially credit, and so they are pushing down higher valuation for credit, and so if that demand comes away, it could have a repercussion for asset valuation but also because those could be amplifiers in the sense that if these funds come under pressure, specifically those that provide the daily liquidity and invest in more liquid assets, that once they run the box where we provide a stress-test scenario where we look at what would happen in some of these funds if there are, in fact, demands for withdrawal and liquidity, and the number in terms of shock, it is about 160 billion, which is about 1.5 percent of the assets of the Fund under the scenario.

The weakness seems to be concentrated geographically more in Europe than other jurisdictions and also more among the smaller funds than the larger funds. So the point is, those are, as Tobias mentioned, amplifiers, if there are shocks and you go to a fire sale episode, that could in fact, amplify the price moves. So the recommendations were up there, so enhanced supervision and disclosure. Specifically, for the Fund a couple examples of measures that could be considered are, one, considering very strict liquidity risk management as well as stress testing as well as stepping up efforts to address leverage and maturity and liquidity mismatch in the funds.

Ms. Elnagar - We go to the gentleman here.

Question - Thank you. The Trump administration has been warning against Chinese debt in Africa.

Do you see any risk? Can you talk generally about Africa and China in Africa, especially China loans? Thank you.

Mr. Papageorgiou - The issue of non-Paris Club creditors as we have looked into it in this Global Financial Stability Report, you know, this is one of the issues that we identify as potentially creating some instability or some vulnerabilities.

Not that the debt itself creates problems. We examine some issues that debt has to be used for productive purposes, but usually debt that is given under non-Paris Club or multilateral types of agreements, more broadly in a lot of low-income countries, particularly a lot of Sub-Saharan African countries, the issue of debt vulnerabilities is becoming more and more prescient.

It is already, as the IMF in the IMF's evaluation, is more than a dozen countries that are either in distress or in high risk of debt distress, and there the issue again of either collateralization of that debt or the type of this debt may create a more difficult way of resolving it down the line through a debt restructuring, for example.

Mr. Adrian - Let me just complement that by saying that, of course, capital flows to Sub-Saharan Africa has to be dealt with in a responsible manner, and so when we look across countries in Africa, there is a variety of approaches, and so we do see an increase in overall debt levels, and there are both costs and benefits to that.

Ms. Elnagar - OK. I will go to the gentleman with the glasses.

Question - Thank you. I see that the way of corporate debt at risk in European countries as well as Japan has decreased in the past ten years, so are these countries still a concern for you, and if yes, why? Thank you.

Ms. Ilyina - So the chart that you are referring to presents debt at risk as of 2009 and as of 2019 relative to GDP. So in some cases, if we look at debt at risk relative to total corporate debt, the share may be high; but if overall corporate debt is not large relative to GDP, those numbers that you see would be smaller. So we would worry both about the high share of firms with weak debt repayment capacity in total corporate sectors as well as the overall size of corporate debt because that tells us something about how debt is distributed across firms that have various fundamentals.

So in several countries in the Euro Area in particular, debt at risk has declined since the Euro Area crisis because of the deleveraging efforts that have been undertaken, and that is true that in some of those cases, even in the stress scenario, debt at risk stays below the levels seen during the financial crisis.

So in that sense, that would be less of a concern, yes.

Mr. Adrian - It is a differentiated picture. So in some countries things have improved, and in others they have deteriorated, but the overall picture is one of concern.

Ms. Elnagar - The gentleman in the third row with the glasses.

Question - Thank you. My question is that China has made efforts on reforms to keep financial stability like structural deleveraging, control of local government debt, regulatory reforms, and international cooperation, so how do you evaluate the reforms and what are the vulnerabilities still remaining, and what is the reason to trigger that? Thank you.

Mr. Adrian - We welcome the efforts of the Chinese authorities to increase financial stability. As you mentioned, in a number of areas, financial regulations have been tightening, and the authorities have made an effort to deleverage some parts of the financial system, including the shadow banking system.

We do continue to urge the authorities to continue with that path of tightening financial regulations. The shadow banking system, while it has stopped growing, it continues to be large in size. We also have concerns for small- and medium-sized banks and regional banks. As you know, a number of banks have failed this year, and we continue to see some vulnerabilities in that sector.

Mr. Natalucci - In terms of vulnerabilities, the experience of the three small- and medium-sized banks over the summer in some sense highlight three global vulnerabilities that remain in the system, especially in small and medium banks in terms of reliance on outside funding on the liability side, investing in riskier asset on the asset side; and for some of these banks, the generally low level of capitalization, as well as profitability. That is one.

The second vulnerability has to do with maturity mismatch and use of leverage in the investment funds, so the shadow banking sector, so that is why the progress of deleveraging is something that we welcome.

The third one has to do with the remaining interconnectedness between the bank and non-bank sector, especially in a system that still continues to have essentially a guarantee in the system, implicit guarantees.

The point is the tradeoff here is in some sense increasing the resilience, so deleveraging the system, raising capital, raising liquidity, and on the other hand, maintaining growth and maintaining credit growth so that that can help boost the economy, that is the balance that in terms of intertemporal tradeoff we tried to highlight in the report. In terms of policy recommendation, the three banks' experience suggests there is need for crisis management framework, including resolution for banks, as well as continue to implement the asset management reform and increasing the solvency of the banking sector, especially the small and medium size.

Ms. Elnagar - I will take the gentleman in the blue shirt.

Question - In a previous answer to the question Anna was responding to where you said that probably non-bank financial institutions could take higher securities because there is limited scope for some of the other pools to control debt distress, but specifically in economies like what is coming out is that while they have been taking securities, the enforcement of the securities have been problematic, which is why the eventual recoveries of the loans have suffered considerably, and that is now turning out to be a bigger crisis within the economy so in terms of the IMF's recommendation with respect to what could be the nature of the securities and probably some of the enforcement tools that the government could introduce.

Mr. Papageorgiou - The question is about market structure, or what is exactly the question? Securities markets? OK. So obviously on India, a lot of steps have already been taken.

In terms of NPL, for example, the NPL recognition, which has accelerated in terms of recommendations related to more aggressive public sector bank (PSU Bank) disinvestment, privatization, and in general reducing the role of the public sector on the financial system. Enhancing the bank lending capacity would come on the back of that and could help reduce the fiscal contingency, if you will, from state through the PSU banks.

Question - [microphone off]. With respect to the non-banking sector what are the IMF’s recommendations?

Mr. Papageorgiou - That is obviously another channel of spillovers, but in banks and the nonbanks, you also had an NBFI default this year, a non-bank financial institution that is, default this year and a run on a COOP bank more recently. There it is a matter of stricter supervision and encouraging banks to divest or to manage their risks better.

Ms. Elnagar - Gentleman.

Question - Last time around, the financial crisis, the credit rating agencies received a lot of criticism for falsely giving investors confidence in both sovereign and corporate debt that was not warranted.

The efforts of reform are largely watered down. Does the IMF rely on those credit rating agencies at all? What is your degree of confidence in those?

Mr. Adrian - That is an excellent question. So after the financial crisis, there were initial reform efforts to change the governance of credit rating agencies, but as you point out, there have been some reforms but perhaps less than was originally envisioned, so there continue to be a number of governance issues, conflict of interest in the credit rating agency model.

Now, having said that, last time around one of the particular challenges was that there was a whole new asset class that was being rated, which was subprime mortgages, and the historical data for subprime mortgages was limited, so models were particularly deficient.

Today what we are worrying about are corporate sector vulnerabilities, and, of course, rating agencies have assessed the corporate sector for more than 100 years by now, so I would say that the model, so the analytics are probably more advanced in the corporate sector than they were in the subprime mortgage sector ten or fifteen years ago.

There is very nice work that has been done at the Fund and in other agencies that is documenting those failures of the models. It is just like the models were not good for subprime mortgages. And I think we do not see that particular problem.

So my answer is twofold. Yes, there continue to be certain governance problems with rating agencies, but in terms of the analytics, I think we are on a safer footing today. Having said that, of course, we do see that CLOs are an important buyer of corporate debt, and those are structured products. Now, CLOs fared well through the last crisis, which is one of the reasons investors continued to buy CLOs, as opposed to some CDOs, say, on mortgages. But we do observe that the quality of collateral that is entering into those CLOs is deteriorating, and that is a source of concern.

Ms. Elnagar - I will take one question online: In this context that describes vulnerabilities, what is the greatest risk in Mexico being an emerging economy linked to trade tensions between the US and China but also with high monetary policy rates.

Mr. Papageorgiou - Obviously Mexico has been directly in the forefront of the trade war and being concerned with the impact on global trade, so obviously having been exposed a lot to US manufacturing and trade would have to -- it is a very high priority for them. Our country team was recently in Mexico for the Article IV consultation, and the recommendations that came out of that visit was pursuing a more growth-friendly and inclusive fiscal policy, easing monetary policy, to the extent that inflation is in check and inflation expectations are anchored, boosting financial inclusion to strengthen the financial system, and then reinvigorating and promoting structural reforms, particularly on state-owned enterprises.

Mr. Adrian - Let me just add to that, that Mexico is, of course, an emerging market that relies on capital inflows, and trade tensions tend to make capital flows more volatile, so Mexico, along with other emerging markets, is exposed to the volatility in capital flows related to trade tensions.
Ms. Elnagar - We will go back to the room. The gentleman here.

Question - Good morning. Adrian, in your presentation, you highlighted the fact that external debt in emerging and frontier markets have been on the rise, which is the case we have seen in Nigeria; so would you recommend that frontier markets and Nigeria focus more on domestic borrowing instead of doing more external borrowing? Thank you.

Mr. Adrian - Both domestic and external debt markets are important for economic growth and economic development, and both markets should be well developed; but, of course, any borrowing has to be managed in a responsible manner. There are both costs and benefits. So borrowing can be helpful for economic growth and investment, but it can also be dangerous when negative shocks hit. So we have done a lot of work at the Fund on debt sustainability and debt management, and we have a host of recommendations of how to manage debt in a responsible manner.

Mr. Papageorgiou - Can I make a specific point on Nigeria? You mentioned local currency. Local currency borrowing could be preferred in some cases, but it is not a panacea. The guiding principle, as Tobias mentioned, is also prudent debt management. Over the summer, local currency flows have been more volatile, and Nigeria was not an exception to that. Nigeria has a large exposure to nonresident holders of domestic debt, particularly with central bank bills; and then as we understand the central bank bills, there is a lot of higher redemptions or has to deal with more rollovers of those in the coming quarters, and so managing those risks, particularly with respect to local currency debt and the behavior of nonresident investors is very important.

Ms. Elnagar - We will go to the back.

Question - Thank you. My question is about China's currency. Recently the US Treasury has designated China as a currency manipulator, and they say they are working with IMF on this regard. I am wondering is there an update on this? Has the US Treasury reached out to the IMF to discuss the issue? Thank you.

Mr. Adrian - So the IMF has an assessment of currencies, which is the External Sector Report, and the Chinese currency was not viewed to be excessively valued in either way.

Ms. Elnagar - The lady in the third row, and then we will wrap up.

Question - What are your recommendations on how to increase investment flows in Nigeria? Thank you.

Mr. Adrian - So flows of investment to Sub-Saharan Africa have been strong and are expected to reach record highs this year, so global financial conditions are favorable to countries such as Nigeria at the moment. Issuing bonds in hard currency and in domestic currency is currently possible because of the favorable global financial conditions.

Of course, it is key what countries such as Nigeria are doing with those borrowed funds, and as Evan was pointing out already, undertaking structural reforms to develop the economy is key.

Ms. Elnagar - Thank you very much for coming. We will wrap up now, and there is the Fiscal Monitor press conference after that. We will see you. Thank you for coming.
IMF Communications Department

Merkel’s political twilight sees Germany’s influence wane

As the chancellor’s final term ticks away, her ability to set the political agenda is diminishing fast

Guy Chazan in Berlin


Emmanuel Macron made a diplomatic overture last month that left many in Berlin speechless. Receiving Vladimir Putin at his summer retreat in Fort de Brégançon, the French president called for a new security architecture between the EU and Russia. Despite the “misunderstandings of the past decades”, he said Russia “is profoundly European . . . We believe in a Europe that stretches from Lisbon to Vladivostok”.

Diplomats in Berlin fumed. “Who gave him the mandate to negotiate a new European security architecture with Russia?” asked one official. “We’re quite happy with the one we have right now, and he shouldn’t be calling it into question.”

Days later, Mr Macron launched a new initiative on Ukraine, calling the first summit of the so-called Normandy Four — the leaders of Germany, France, Russia and Ukraine — since 2016. He insisted he was working in close co-ordination with Angela Merkel, the German chancellor. But the impression given was that he was muscling into an area of policy that has traditionally been Germany’s preserve. It was, after all, Ms Merkel who spearheaded western sanctions against Russia after its 2014 annexation of Crimea and brokered a ceasefire between government troops and Russia-backed separatists in eastern Ukraine. “Macron is stealing Merkel’s show,” the Süddeutsche Zeitung daily commented.

For some in Berlin, the French leader’s gambit reflected a broader trend — Germany’s waning influence on the international stage. There was a sense that Paris had simply stepped into a diplomatic vacuum once occupied by Berlin. “Macron can only be this active because Germany has become so passive,” says Omid Nouripour, foreign affairs spokesman for Germany’s opposition Greens.

epa07781204 Russian President Vladimir Putin (L) and French President Emmanuel Macron (R) attend a joint press conference before the talks at the fort of Bregancon in France, 19 August 2019. President Putin pays a working visit to France at the invitation of French President. EPA-EFE/ALEXEI DRUZHININ / SPUTNIK / KREMLIN POOL MANDATORY CREDIT
Emmanuel Macron, right, hosted Russian premier Vladimir Putin at his summer retreat in Fort de Brégançon. The French president has called for a new security architecture between the EU and Russia © EPA-EFE

Ms Merkel, in her twilight as chancellor, embodies this perception of decline. As her last months in power tick away, her ability to set the political agenda appears to be diminishing fast.

Domestically, too, she is weaker. The coalition with the Social Democrats, which has ceded its status as Germany’s leading left-of-centre party to the Greens, is fragile. Her health has suddenly become an issue of public concern, following three — largely unexplained — trembling fits in the summer. With a recession looming, critics complain of a sense of drift and purposelessness, and a government that is out of ideas.

“The coalition is just too self-absorbed, focused more on the tensions between the partners than with the big challenges facing Germany,” says Steffen Kampeter, head of the BDA employers’ association and a former state secretary in the finance ministry. “There’s a tendency towards provincialism . . . and that means Germany is unable to play a role in Europe.”

It was all so different five years ago. Then, Ms Merkel was at the height of her powers. Germany’s economy was booming, with surging employment, healthy exports and a bumper budget surplus. Her deft stewardship had helped the eurozone withstand its worst-ever crisis. Germany and the US formed two pillars of a transatlantic alliance that seemed unbreakable.

Then things started to unravel. Her decision to keep Germany’s borders open in 2015 and the subsequent influx of more than 1m refugees exposed deep faultlines in the EU and turned German politics upside down. Her Christian Democratic Union bled support to the anti-immigration Alternative for Germany, which became the biggest opposition party in the Bundestag. After inconclusive parliamentary elections in 2017, she was forced to form a grand coalition with the SPD that, from its inception, has been plagued by internal strife. And the once robust German economy, buffeted by the US-China trade war and fears of a hard Brexit, is contracting.

Ms Merkel no longer dominates the German political landscape. Last year, she stepped aside as CDU leader after 18 years, and said she would exit politics once her fourth and final term as chancellor ends in 2021. All eyes have been on the party’s new leader, Annegret Kramp-Karrenbauer, and her hapless attempts to establish herself as Ms Merkel’s heir.

epa07124883 Russian President Vladimir Putin (L), German Chancellor Angela Merkel (2-L), Turkish President Recep Tayyip Erdogan (2-R) and French President Emmanuel Macron (R), react after their press conference during the Syria summit in Istanbul, Turkey, 27 October 2018. Turkish President Recep Tayyip Erdogan, Russian President Vladimir Putin, German Chancellor Angela Merkel, and French President Emmanuel Macron met in Istanbul to plan a political resolution for the conflict in Syria. EPA-EFE/MAXIM SHIPENKOV / POOL
Angela Merkel with Mr Putin, Turkish president Recep Tayyip Erdogan and Mr Macron. The chancellor's multilateral approach has suffered in a political climate dominated by the likes of Erdogan, Putin and Trump © Maxim Shipenkov/EPA-EFE

“Merkel is too distracted with domestic problems — the instability of her grand coalition and the rumblings within her own party about the succession” to launch any big new foreign policy initiatives, says Mr Nouripour.

Ms Merkel’s personal approval rating remains surprisingly high. She is easily Germany’s most popular politician. But despite that, many crave a change.

“We live in an age when people want someone to give them direction, and they won’t get it from her,” says Andrea Römmele, professor for communication in politics at the Hertie School of Governance in Berlin. “I admire Merkel’s authenticity, her calmness and composure. But in many ways, Germany now needs a new political style.”

Nothing has damaged Germany’s confidence more than the constant attacks by Donald Trump, who has turned Berlin into his favourite punch bag. Ms Merkel has endured a torrent of abuse from the US president over everything from Germany’s weak defence spending to its huge current account surplus and reliance on Russian natural gas.

“The link to Washington was always critical to German foreign policy, and now it’s been severed,” says Ulrich Speck, senior visiting fellow at the German Marshall Fund in Berlin. “Merkel has been cut off by Trump and that leaves her in the dark.”

It is not just that relations with Washington are bad — Mr Trump has assailed all the values Ms Merkel holds dear. “She cares deeply about multilateral institutions, but how can they function properly in a world dominated by Trump, [Vladimir] Putin and [Recep Tayyip] Erdogan?” says the official. “She is all about forging alliances, and that is now harder to do than ever before.”

Satisfaction with German chancellor Angela Merkel

Germany is going through a difficult phase with another close ally, too — France. Mr Macron initially hoped Ms Merkel would join forces with him in a push to reform the EU and eurozone, and slow the rise of rightwing populism. But the chancellor, distracted by months of coalition building after the 2017 election, stayed silent.

“When Macron presented his reform proposals, Germany wasn’t even able to say whether they were good or bad — it didn’t say anything at all,” says Marco Buschmann, a senior MP for the opposition Free Democratic party. “Germany doesn’t even articulate its own interests any more.”

Yet teaming up with Mr Macron on a big reform drive would have been beyond Ms Merkel’s powers. The CDU’s conservative wing was already furious with her for pushing the party towards the centre — phasing out nuclear power, abolishing compulsory military service and keeping Germany’s borders open during the migration crisis.

She had “severely tested the patience of her party with her liberalism, and the price she paid was that she had much less freedom to act in other important areas”, Sigmar Gabriel, the former Social Democratic leader and deputy chancellor, recently told German TV.

The refugee crisis in particular took its toll. “You can see it really wore her out,” says one CDU MP. “Now she can’t seem to bestir herself to do anything.”

Frustrated by Germany’s passivity, Mr Macron has tended to go it alone.

epa07790591 German Chancellor Angela Merkel, center, talks to President of the European Council Donald Tusk, left, during a G7 coordination meeting with the Group of Seven European members at the Hotel du Palais in Biarritz, southwestern France, Saturday, Aug.24, 2019. Efforts to salvage consensus among the G-7 rich democracies frayed Saturday in the face of U.S. President Donald Trump's unpredictable America-first approach even before the official start of the summit in southern France. EPA-EFE/MARKUS SCHREIBER / POOL MAXPPP OUT
Ms Merkel with European Council president Donald Tusk at the G7 meeting in August. The summit in Biarritz saw the German chancellor take a backseat to Emmanuel Macron © Markus Schreiber/EPA-EFE

This new approach was clearly in evidence at last month’s G7 summit in Biarritz, where he posed as the world’s number one problem-solver, dedicated to tackling crises from Yemen and Libya to Iran and the Sahel.

Biarritz was not the kind of G7 meeting Ms Merkel is used to. “Before, they were all about patiently negotiating with like-minded leaders, something she’s very good at — but now it’s more like a prize fight,” says Josef Janning, senior policy fellow at the European Council on Foreign Relations in Berlin. “These days the G7 is about jockeying for position, preening and showing off. And that is not Merkel’s world.”

Mr Macron’s attempt to usurp Ms Merkel’s role as chief mediator in the Ukraine conflict was particularly galling. “She can’t approve of that, because Germany’s special relationship with Russia is one of the most important assets that she has as chancellor,” says Mr Janning. “Western leaders know we Germans can talk to the Russians in a way no one else can, not even Macron.”

Germany’s global heft has long been on the wane, say critics. Some blame foreign minister Heiko Maas, who they say lacks leadership qualities and a clarity of purpose. Under Mr Maas, German foreign policy has become more “dithering, vague and halfhearted”, says Mr Nouripour.

He compares Mr Maas to previous foreign ministers and the intense shuttle diplomacy they engaged in to solve global crises — Frank-Walter Steinmeier in Ukraine in 2014, Joschka Fischer in Israel and Palestine in 2001, and Hans-Dietrich Genscher throughout the cold war and in the run-up to German reunification. Mr Maas, he says, could have engaged much more in trying to end the war in Yemen and the crisis over Iran’s nuclear ambitions.

epa02121075 A handout picture released by the German Federal Government showing German Chancelllor Angela Merkel and her foreign politics advisor Christoph Heusgen chat during the flight from Lisbon to Rome, Italy, 17 April 2010. Merkel was forced to stop over in Lisbon on 16 April due to the volcanic ashes while on her flight back from the USA. Merkel and her delegation will head on to Bolzano in northern Italy by bus. EPA/GUIDO BERGMANN / HANDOUT EDITORIAL USE ONLY

Critics say the rot in German diplomacy set in when Christoph Heusgen, Ms Merkel's former foreign policy adviser, left the chancellory in 2017 © Guido Bergmann/EPA

Others say the rot in German diplomacy set in when Christoph Heusgen, who had served as Ms Merkel’s foreign policy adviser for 12 years, left the chancellery in 2017 to become Germany’s ambassador to the UN. Mr Heusgen played a central role in the Minsk peace process, which established a ceasefire in eastern Ukraine and is a “key part of Merkel’s legacy”, says Mr Speck. “The risk is that Macron and Trump will now take this policy over.”

There was consternation in Berlin when the US suggested that Russia should be readmitted into the G7 — a development that, if it ever came about, would mark a big defeat for Ms Merkel.

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It is not the case, though, that she has disengaged entirely from Ostpolitik. She was one of the first western leaders to host Volodymyr Zelensky after his surprise victory in the Ukrainian presidential election in April. Berlin was also the venue for a crucial meeting earlier this month between representatives of the “Normandy” powers — Russia, Ukraine, Germany and France — to prepare for the next four-way summit.

Yet in a rough transcript of a conversation between Mr Zelensky and Mr Trump released by the White House on September 25, the US president says Ms Merkel “doesn’t do anything” for Ukraine.

The German chancellor has thrown her weight behind other big diplomatic initiatives. She has been at the forefront of European efforts to ease poverty in Africa, and to reduce the instability and violence that have prompted hundreds of thousands to seek a better life in Europe. In May, she travelled to Burkina Faso, Mali and Niger to push the policy.

Ms Merkel has also floated the idea of hosting an international conference on Libya, which would be Germany’s first big diplomatic offensive since the Minsk peace process. The chancellor aims to act as an honest broker in a conflict that has destabilised the Sahel region, and has sought to win round Mr Macron and Mr Trump to her push for peace.

epa07850002 German Defense Minister Annegret Kramp-Karrenbauer looks on her phone during the beginning of a cabinet meeting at the Chancellery in Berlin, Germany, 18 September 2019. The cabinet of the German government meets on a regular basis. EPA-EFE/CLEMENS BILAN
Annegret Kramp-Karrenbauer, the Christian Democratic Union leader, has struggled to establish herself as Ms Merkel's heir © Clemens Bilan/EPA

Also, Germany will hold the rotating presidency of the EU next year: that could be crowned by a big investment protection agreement between the Europeans and China, which has long been in the works.

But with the clock ticking, some say Ms Merkel will struggle to achieve anything lasting in her remaining 730 or so days in power, especially in 2021 — an election year — when there will be few opportunities for grand political gestures.

Already, says Mr Kampeter, the signs do not augur well. “Next year Germany will be in the driver’s seat on all the fundamental decisions in the EU, setting the agenda for the whole bloc,” he says. “And right now, it’s focused on marginal issues, like whether to ban plastic bags and oil-fired heating systems.”

But even her staunchest critics say Ms Merkel is no “lame duck”. The FDP’s Mr Buschmann says: “She is very power-conscious. You should never underestimate her.”

Climate: package shows coalition’s lack of ambition

epa07855525 People carry a globe with the iscription 'There is no planet B' during a demonstration as a part of the Fridays for Future global climate strike in Berlin, Germany, 20 September 2019. Millions of people around the world are taking part in protests demanding action on climate issues. The Global Strike For Climate is being held only days ahead of the scheduled United Nations Climate Change Summit in New York. EPA-EFE/HAYOUNG JEON
Critics of the German government's €54bn climate change package say it is emblematic of an administration that seems to lack ambition and drive © EPA-EFE

The overwhelming response to the €54bn package of measures to combat climate change, unveiled to much fanfare by Angela Merkel’s grand coalition last Friday, was a shrug of the shoulders.

As part of the package, which was designed to ensure Germany meets its target for cutting greenhouse gas emissions by 2030, companies that produce and sell petrol, coal and heating oil will have to buy certificates to offset their carbon dioxide emissions. The carbon price underpinning the scheme will start at €10 in 2021 and rise to €35 by 2025.

That, says Ottmar Edenhofer, head of the Potsdam Institute for Climate Impact Research, is “ridiculously low”, and would have no impact on consumer behaviour. He advocates an initial price of €50 a tonne, rising to €130 by 2030. Ms Merkel has countered that “politics is always what is possible”.

But critics say the climate package is emblematic of a government that has long seemed to lack ambition and drive. “The CDU and SPD never really came together,” says Marco Buschmann, an MP from the opposition Free Democratic party. “As a result, whatever they agree on always has to be the lowest common denominator.”

Business leaders have long accused the government of lacking creativity. “A lot of things it promised just fell by the wayside,” says Dieter Kempf, head of the BDI, Germany’s main business lobby. He cites artificial intelligence: ministers promised to invest €3bn in the sector but in the end earmarked “just €1bn of new funds”. “So far, the coalition has allocated too much money to wealth redistribution measures [at the expense of investment], and that is the wrong way to go,” he says.

There is also anger that ministers have failed to adjust to a looming recession and a darkening global environment. “When tax revenues fall, the labour market weakens and uncertainties over the US-China trade conflict and Brexit start to bite, you have to start thinking about what is important for Germany and not just stick your head in the sand,” says Steffen Kampeter, head of the employers’ association, the BDA.

Fed ‘repo’ plan could face fund manager resistance

Large holders of US Treasury bills say they are reluctant to sell them to central bank

Joe Rennison in New York

FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo
The Federal Reserve plans to buy $60bn in Treasury bills a month © Reuters

Money market funds that are among the largest holders of US Treasury bills say they are reluctant to sell them to the Federal Reserve, presenting an obstacle to the central bank as it seeks to increase the amount of cash in short-term lending markets.

The Fed announced last Friday that it would begin monthly purchases of roughly $60bn of Treasury bills, which have a maturity of less than 12 months, in an attempt to inject money into the financial system following a cash squeeze that sent overnight “repo” lending rates surging in September.

Many investors had expected the Fed to act but were surprised by the size of the planned purchases, with some questioning how the central bank would be able to buy the debt without pushing down yields in the $2.3tn market.

The problem facing managers of money market funds — which are permitted to buy assets with no more than 13 months to maturity — is that they would rather keep the Treasury bills now in their possession than sell them to the Fed and then go back into the market to buy debt with potentially lower yields.

“We are not going to sell them,” said Pia McCusker, global head of cash management at State Street Global Advisors, which holds more than $22bn of T-bills in its $350bn of money market funds. “It’s a short-term gain and then I would have to replace it with something else at a much lower rate.”

Money market funds are among the largest holders of Treasury bills, accounting for almost $550bn at the end of August, according to data from the Investment Company Institute.

Several fund managers told the Financial Times that they have no incentive to sell without a steep increase in prices — and a corresponding fall in yields.

“It makes us question where are they going to find these bills,” said John Tobin, global head of liquidity portfolio management at JPMorgan Asset Management, which holds $70bn of T-bills across its $545bn money market funds. “When the Fed is going to be a large, indiscriminate buyer in the front end, that is going to put pressure on yields.”

Money market fund managers have already been dealing with falling yields on Treasury bills.

The yield on a 12-month bill in April, for example, stood at 2.45 per cent.

That same security now has just six months left until it matures, and six-month bills currently yield just 1.66 per cent.

Market yields are expected to head even lower by the end of the year.

Futures markets are pricing in a 70 per cent probability for a cut in rates by the Fed when it meets at the end of this month.

One further complication is the lack of alternatives on offer for money market funds to buy, given that banks tend to step back from short-dated lending markets at the end of each quarter, in order to tidy up their balance sheets for reporting deadlines.

Data on the other large holders of Treasury bills are scant.

Official foreign investors like central banks hold about $280bn, according to the US Treasury.

Companies with big holdings of cash are also thought to be large investors.

The group of banks responsible for ensuring the smooth auction of US government debt hold just $7bn.

Deborah Cunningham, chief investment officer of global liquidity markets at Federated Investors, said these investors may have different priorities from money market funds and could be more willing to sell to the Fed, easing potential pressure in the market.

“What the Fed will have to pay and who they will have to deal with to get to the amount of bills they want is not certain at the moment,” she said. “They could have to offer some pretty high premiums in order to entice people to sell.”

The Conservative Party conference

Boris Johnson makes the EU an offer it can refuse

The prime minister’s long-awaited Brexit proposal seems unlikely to produce a deal. Yet another extension beckons

FOR WEEKS the European Union has complained that, even as the October 31st deadline for Britain to leave drew nearer, Boris Johnson’s new government was failing to offer clear proposals to amend Theresa May’s failed Brexit deal. All Mr Johnson would say was that the hated backstop, an arrangement to avert a hard border in Ireland by keeping the United Kingdom in a customs union, had to go.

This week, after a tub-thumping party conference speech in Manchester under the slogan “Get Brexit done”, Mr Johnson at last put forward his plan. Yet despite his labelling it a “fair and reasonable compromise”, it went down badly with the EU, which sees it as a breach of promises, not the basis for a new deal.

As expected, Mr Johnson’s proposal would keep Northern Ireland under the EU’s agri-food regulatory regime. He now wants to expand this to cover manufactured goods as well. But Great Britain would opt out of the rules, implying checks on goods moving between Northern Ireland and the mainland. And the plan would apply for only four years after the transition period ends in 2021, at which point the Northern Ireland Assembly would decide whether to remain aligned with the EU or adopt British rules.

Meanwhile, the whole UK would leave the customs union. This implies customs checks between Northern Ireland and the south—though Mr Johnson insists these could be automated and, when necessary, conducted away from the border. He also wants Northern Ireland out of the EU’s value-added-tax regime.

The plan was welcomed by Tory Brexiteers and, more importantly, by the Northern Irish Democratic Unionist Party, which supports the Tories in Parliament. Yet it has little appeal in Brussels or, critically, Dublin. EU governments see it as a big step back from undertakings given by Mrs May in December 2017 to maintain an open, frictionless border in Ireland, preserve the all-island economy and avoid new customs or border controls anywhere on the island.

They are unhappy about the proposed unilateral four-year time limit. And they do not believe that promises to use new technology, exemptions for small businesses and a system of trusted traders would be enough to avoid physical controls at or near the border.

British ministers were out in force this week selling the new plan as what one called a “landing zone” that could satisfy all sides. Mr Johnson suggested that, just as he had compromised, so it was now the EU’s turn. Some in Brussels were relieved that he did not say it was his final, “take it or leave it” offer, as initial reports had suggested.

A few even hoped it might be tweaked to include alignment on customs as well as on regulations, or to revert to a Northern Ireland-only backstop. Yet the signals from Downing Street suggest that the prime minister sees little scope for more compromise on his side.

His sales pitch to the EU ahead of the crucial European Council summit on October 17th and 18th rests on two arguments. The first is that only a deal close to his can ever pass in Parliament. For evidence, he cites the Brady amendment, a version of Mrs May’s Brexit deal that replaced the backstop, which MPs voted for in January.

The second is that, if the EU is unwilling to accept his plan, he will have no alternative but to leave with no deal on October 31st. And although that may be bad for Britain, it will also hurt the EU, especially Ireland.

Yet in Brussels neither argument seems convincing. The EU knows that Mr Johnson has no parliamentary majority. He cannot rely even on his own Tory MPs, since some of the more extreme hardliners prefer no-deal to anything else. This means he needs significant Labour backing to pass any deal. And although some Labour MPs share the Tories’ desire to “get Brexit done”, and many are nervous about no-deal, few are prepared to rescue a prime minister whom they mistrust as a populist popinjay.

As for no-deal, everyone is aware of Mr Johnson’s repeated promises to take Britain out of the EU on October 31st, “do or die”. His ministers loyally repeated this pledge in Manchester. Mr Johnson himself argued forcefully against any further dithering or delay.

Yet Brussels also understands the terms of the Benn Act that was passed by Parliament last month. This requires the prime minister to seek the agreement of the EU to a three-month extension of the deadline if, by October 19th, he has neither secured a deal nor won parliamentary approval for a no-deal Brexit.

January is the new October

Mr Johnson says he will obey the law, but he also insists that Britain will leave the EU on October 31st, whatever happens. These two positions are clearly in conflict. Hence a favourite parlour game at the Tory conference: to hunt for loopholes in what Mr Johnson likes to call the “Surrender Act”. Some suggest he might formally ask for an extension but secretly tell Brussels he does not want one.

Or he could invite other EU governments to refuse an extension, so as to exert more pressure on MPs to accept a deal. He might invoke an emergency under the Civil Contingencies Act, to suspend the law. Some ministers claimed there was a secret wheeze to get round the Benn Act, but that it was confidential.

Yet one of the act’s authors, Dominic Grieve, a former Tory attorney-general, insists its drafting is legally watertight. He characterises the suggested tricks to try to get round it as “far-fetched and reputationally catastrophic”. He and his supporters, who have a majority in Parliament, are ready to legislate again if need be. They would go to court at the slightest hint that Mr Johnson might flout their law. Some even talk of passing a “humble address” to invite the queen to sack her prime minister in such circumstances.

Any extension of the October 31st deadline would be a humiliation for the prime minister, which is why some suggest he should resign instead. Yet there could be ways to turn matters to his advantage. One idea is to attach a confirmatory referendum to some version of a Brexit deal, which might win over a majority of MPs.

But Mr Johnson is averse to the notion of a second vote. He would prefer a general election which, after being forced against his will to request an extension, he could fight under the banner of backing the people who voted to leave the EU against an establishment determined to stand in their way.

The obstacle to this is the 2011 Fixed-term Parliaments Act. This requires a two-thirds majority of MPs to vote in favour of any early dissolution of Parliament. The effect has been to give the Labour opposition a veto over the prime minister’s repeated calls for an early general election.

The irony that it was a Conservative-led government, under David Cameron, that passed this particular piece of legislation is surely not lost on Mr Johnson.

What Moscow Really Wants From Venezuela

Russia has both economic and domestic political reasons for supporting the Maduro government.

By Ekaterina Zolotova

Throughout Venezuela’s ongoing political crisis, Russia has been among its staunchest supporters. Last week, Venezuelan President Nicolas Maduro visited Russian President Vladimir Putin in Moscow, hoping for some reassurances of the Kremlin’s continued support for his administration amid the ongoing turmoil in his country and international pressure for him to step down.

In September, the United States imposed new sanctions (against four shipping companies registered in Cyprus and Panama) aimed at stopping Venezuelan oil exports headed for Cuba. The U.S. also promised last week to provide the Venezuelan opposition with $52 million in aid. The European Union, meanwhile, introduced sanctions against seven members of the Venezuelan security and intelligence forces. Russia, however, hasn’t wavered in its support for Venezuela. Indeed, Moscow has not only foreign policy reasons to maintain strong relations with Caracas but domestic ones, too.
The two countries are long-time allies, but their ties peaked around 2012. Moscow considered Venezuela among its main strategic partners, provided generous loans and supplied a wide range of goods. Several Russian companies were involved in the development of Venezuelan oil fields, Russian-made KAMAZ trucks were in wide supply, and Russia participated in a pro-government housing construction program in Venezuela.

But geopolitical tensions, as well as tough sanction policies against both Russia and Venezuela, significantly complicated Russia-Venezuela relations. High inflation and the risk of default in Venezuela also affected the willingness of Russian investors and exporters to do business with Venezuela and the ability of Venezuelan companies to sell their goods to foreign customers.

Nonetheless, the Kremlin has chosen to seek greater cooperation with Caracas for several reasons. First, from an economic perspective, Russia and Venezuela have much to gain from maintaining close ties. Both have large markets and production potential.


Trade between the two has fluctuated over the years, however. When it comes to oil, Russian companies of course have an interest in Venezuela – the country, after all, has the largest oil reserves in the world, exceeding 300 billion barrels, according to OPEC. Some Russian oil companies have therefore invested in the Venezuelan energy sector.

But in recent years, many Russian oil companies have left Venezuela, put off by the political uncertainty, security risks and general low quality of Venezuelan oil, not to mention the threat of sanctions. Yet a small group of companies, including Rosneft and Gazprom Neft, remains, despite U.S. threats to impose new penalties. In early September, for example, Washington said it was considering sanctions against Rosneft for its involvement in the Venezuelan oil sector; Rosneft, however, continues to purchase oil and develop fields in Venezuela.

Russia also sees Venezuela as a potential market for Russian wheat (wheat exports to Venezuela in 2018 increased by 33 percent year over year), mechanical engineering products and medical supplies. Such products could provide some relief from the scarcity issues plaguing Venezuela since the crisis began. For its part, Venezuela sees Russia as a potential buyer of its agricultural products. Russia already buys food products from other Latin American countries – these tend to be cheaper than Russian food products despite logistical costs and tariffs. In fact, Uruguay and Argentina account for 7 percent and 5 percent respectiely of Russian dairy imports. In addition, Argentina is the second-largest supplier of cheese to Russia after Belarus.
The Kremlin also has domestic political reasons for wanting to increase cooperation with Venezuela. It sees an opportunity to boost its approval rating by backing the Maduro government because Russian public opinion tends to be favorable toward Venezuela, and Latin America in general. A survey released in February by the Russian Public Opinion Research Center found that 57 percent of respondents were interested in current events in Venezuela.

It also found that 20 percent of Russians see the deteriorating political and economic situation in Venezuela as a result of actions by other countries, particularly the United States. When it comes to the Venezuelan opposition and anti-government protesters, 15 percent said they felt indifferent, 12 percent felt distrust and 11 percent condemned them.

Thus, if Moscow were to refuse to help Maduro, it might experience some backlash from the Russian public. Moreover, the amount of support Russia has provided – food supplies and a small number of troops for nonmilitary support – doesn’t carry a huge financial burden for Moscow anyway. Considering that it, too, has seen a recent wave of anti-government protests, it has been inclined to help Caracas in its time of need.

In addition, Russia has an interest in increasing its presence in the Western Hemisphere, in the United States’ own backyard. It has done so primarily by getting close to Cuba – given its proximity to the U.S. – a country the Russian prime minister is scheduled to visit later this week for the first time since 2013.
But maintaining strong relations with Venezuela could also help the Kremlin boost relations with Cuba. It has been difficult for Russia to gain a substantial foothold in Venezuela, partly because the U.S. would react strongly to any Russian military involvement in the country.
For this reason, not to mention the expense and logistical requirements, it’s extremely unlikely that Russia would set up a military base in Venezuela, but it did send roughly 100 troops there in March, and a group of Russian military personnel arrived in Venezuela a week ago to carry out maintenance on Russian-made equipment. 
Venezuela used to be one of the largest buyers of Russian weapons; it had purchased Russian tanks, Grad multiple rocket launchers, Pechora-2M missile systems, S-300 air defense systems and many others.      
But today, Venezuela is no longer considered a major market for Russian arms. In the past, these goods were purchased mainly using Russian loans, and Moscow can no longer rely on Caracas to pay back its debts given the state of its economy.
Moscow too is short on funds and reluctant to offer loans it can’t be sure will be paid back. Thus, Russia’s defense-related activity in Venezuela today is limited mostly to fulfilling old contracts and maintaining assets that have already been delivered under previous agreements.
 Russia has unquestionable long-term economic and geopolitical interests in Venezuela.
But its ability to increase its presence there is limited, in part by its own economic obstacles, which include falling oil prices, reduced federal budget revenue and deteriorating living conditions for the Russian people.
Still, Moscow will continue to make gestures of increased cooperation with an eye toward strengthening ties in the long term, not only because of the potential economic benefits but also because the Kremlin knows this is a popular policy position at home.