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IMF tells France to end its 'whatever it takes' policy

The Washington-based institution is urging France to funnel aid towards the least well-off in the face of the energy crisis and to accelerate public spending cuts.

By Elsa Conesa and Julien Bouissou

Le Monde

Published on November 22, 2022 at 10h04, updated at 10h04 on November 22, 2022

"Deficit reduction should not be a concern while the crisis is ongoing," the International Monetary Fund (IMF) said in 2020, in the midst of the global Covid-19 pandemic. Two years later, while the war in Ukraine has slowed down the recovery, caused energy prices to soar and increased deficits, the Washington-based international organization has become much less complacent, particularly with regard to France. In its annual report on France, published on Monday, November 21, the IMF sent a thinly-veiled warning, calling on the country to speed up the pace of its public spending cuts and urging it to restrict its support measures only to its most vulnerable citizens in response to the energy crisis.

"We have supported the 'whatever it takes' measures, but now it is time" to end them, said Jeffrey Franks, IMF mission chief for France, at a press conference. Mr. Franks was presenting the conclusions of the mission which, each year, reviews France's economic, budgetary and financial situation, as provided for in Article IV of the organization's statutes.

The message is a clear warning, as the government is preparing to release an additional €50 billion to support households and businesses indiscriminately in 2023, as part of the budget currently being debated in Parliament, and as interest rates rise.

It also contrasts with the recommendations made to Germany in July. At that time, the IMF deemed the country's fiscal stance for 2022 "appropriate," and even urged Berlin "to overcome long-standing impediments to a rapid and decisive increase in public investment." Germany has since announced a €200 billion package to help households and businesses facing energy price inflation.

France has not, however, entered the energy crisis with its finances in the same state as those of its neighbor. Nevertheless, it has mobilized considerable sums (more than €100 billion since the fall of 2021, in total) to absorb the bulk of price rises for households. While the IMF admits that this has enabled it to keep inflation below the level of other European countries, this has come at the cost of a massive increase in spending, added to the hundreds of billions already spent to support the economy battered by Covid-19, and fueling a new "whatever it takes" response.

'Structural reforms'

"The measures implemented in 2021-2022 totaled more than 2% of gross domestic product [GDP]," the IMF pointed out. In any case, this amount would place France around the European average, according to the European think tank Bruegel. However, two-thirds of this spending is not targeted − freezing gas prices, freezing electricity rates, rebates at the pump. They have cushioned the impact, but "driven up costs, while reducing incentives to reduce energy consumption."

The budget law for 2023, currently being discussed by the Sénat, also postpones the bulk of the budgetary effort to 2024 and beyond, the IMF lamented. It will further increase the deficit, since it plans to abolish a tax on companies (the CVAE), the yield of which will not be compensated by the "exceptional revenues recorded in 2022." Paris should therefore reduce spending from 2023, reserving its aid for "those most affected" by energy inflation, the institution believes, which could allow a budgetary tightening of a quarter of a point of GDP.

Then, "in the following years," France could rely on "structural reforms," such as unemployment insurance and pensions, or training and education. It could also review its tax niches, such as the research tax credit, whose effectiveness is regularly questioned, and undertake a "rationalization of the civil service workforce."

The French Ministry of Finance welcomed the slight correction made by the IMF to its growth forecasts, raising them from 0.7% to 0.75% for 2023

Finally, the IMF is concerned about the rejection by MPs of the public finance programming law for 2027, a text that sets the fiscal path to return to 3% of public deficit by that time. "The adoption of the medium-term programming bill is essential for the new fiscal framework to become fully operational," the institution insisted. France expects a public deficit of 5% in 2023, after 4.9% in 2022, and expects to return to 3% in 2027, targets that its larger neighbors plan to reach more quickly.

The government's reaction to this budgetary solution was not long in coming. "We have stopped the 'whatever it takes' approach" said Bruno Le Maire, the minister of the economy, speaking on French 24-hour news channel BFM-TV a few hours after the IMF report was published. "We are targeting [aid] to the companies that need it most and targeting will be the rule for state aid in 2023." France's ministry of finance was especially pleased with the IMF's slight correction to its growth forecasts, raising them from 0.7% to 0.75% for 2023. France is betting on a GDP increase of 1% for next year.

'A thousand different situations'

The question of targeting public aid − one of the IMF's unchanging recommendations − has plagued the government throughout the Covid-19 crisis, and has come up again in the face of the energy crisis. Targeting aid means taking the risk of abandoning some of the economic actors that may be having difficulties, but helping them all means jeopardizing the country's public finances as a whole.

The executive has so far chosen to support the entire French population uniformly, partly to avoid criticism, but also because of the difficulty of building simple and effective targeted mechanisms. The finance ministry worked for months on the subject, almost systematically coming up against technical implementation problems. Added to this is the opposition's resistance to the plan. This summer, the right wing opposed any targeted aid for motorists in the face of soaring gas prices, because "this always leads to the exclusion of the middle classes," said Les Républicains MP Véronique Louwagie in July, during the vote on the purchasing power package.

Ministry officials have also looked for ways to better target the "tariff shield," which freezes gas and electricity prices, so that it goes to the least well-off households. One approach was to have the government pay for households' "basic" consumption of electricity, leaving the most energy-hungry to pay for their excess use, as Germany is planning to do. It was quickly abandoned. "How do you define what basic consumption is? There are a thousand different situations," said one person close to the discussions. "It risked becoming a huge mess."

Paradoxically, the IMF's message also gives the ministry political arguments, which by nature advocates greater fiscal rigor, and to the government to defend its reform program. "The IMF is playing its role," said Nicolas Véron, an economist at the Bruegel Center and the Peterson Institute in Washington. "It is not a question of being alarmist, but it is important that all countries, and France in particular, give out signals of fiscal discipline, because there is currently a great deal of instability. No one can say what the reference economic scenario is at the moment." Hence the widespread feeling, over the past few weeks, that "the risks of a crash are being underestimated by both politicians and the markets," the economist continued.

This feeling is further reinforced by the difficulties recently experienced by the United Kingdom, which remind us that "a financial crisis is not a theoretical risk, it can happen to any country, even a large country with a good rating from the agencies," stressed François Ecalle, a specialist in public finances. "Within a few days, the situation was turned upside down, because the new government was not credible, even though British public finances had not posed any particular problem until then. The markets can sleep for years and then suddenly wake up."

Elsa Conesa and Julien Bouissou

E.U. diplomats aim to agree on a price this week, clearing the way to enforce the measure before a Dec. 5 deadline.

Oil tankers off the coast of Novorossiysk, Russia. Next month, the European Union is set to impose a near-total embargo on Russian crude shipments.Credit...Associated Press

By Matina Stevis-Gridneff and Alan Rappeport

Matina Stevis-Gridneff reported from Brussels and Alan Rappeport reported from Washington, D.C.

Nov. 22, 2022Updated 9:53 a.m. ET

A complex effort by Ukraine’s allies to deprive Russia of billions of dollars in oil revenue by putting a cap on the price paid for its crude is reaching a crescendo this week.

European Union diplomats will meet on Wednesday to try to set that price after discussions with the United States and other Group of 7 industrialized nations, with two weeks to go before the cap is scheduled to take effect.

The diplomats’ meeting in Brussels will mark the last stage of implementing the policy that requires regulatory and logistical alignment in the complicated business of ferrying the fuel out of Russia to markets such as India and China.

The policy must be in place by Dec. 5, when the European Union’s near-total embargo on Russian oil begins, one of many actions the bloc has taken to hobble Russia’s economy and limit its ability to wage war in Ukraine.

The idea behind setting a price cap is to limit the revenue Russia can make from its oil exports while also averting a shortage of the fuel, which would force prices up and compound a cost-of-living crisis around world.

The way the G7 nations want to make this work is by putting the burden of implementing and policing the price cap on the businesses that help sell the oil: global shipping and insurance companies, which are mostly based in Europe.

This is why the regulatory framework to enforce this measure needs to be adopted in Europe as well as other G7 members such as the United States, Britain and Japan, which also host companies active in transporting or insuring Russian oil.

E.U. ambassadors will need to approve the price per barrel by unanimity. The decision is expected on Wednesday, several diplomats said, but there could be delays.

Because the cap would require a change in the European Union’s sanctions against Russia, unanimous consent among the 27 E.U. nations on the price is needed.

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Seven senior E.U. diplomats said there was political support for the policy, but opinions differed on where the price should be set. They spoke on condition of anonymity because they did not want to upset ongoing talks.

The idea is to set the price high enough over the cost of extracting oil to incentivize the Russians to continue selling, but low enough to make a meaningful dent in the profits they earn.

The cost of extraction per barrel in Russia is estimated between $12 and $20; Russian oil recently traded at nearly $70 per barrel on the global markets. Treasury Secretary Janet L. Yellen and several European diplomats have cited $60 per barrel as a potential price. But E.U. diplomats from nations closer to Ukraine who take an even stauncher pro-Ukraine line have indicated they would prefer a lower price.

The United States is letting the European Union take the lead in determining a price that can win approval there. A Treasury spokesman said that the United States has no plans to privately propose a price to European partners.

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Diplomats from Poland and its neighbors in the Baltic Sea said they would also like to see the price cap come with commitments for sanctions that would target still-protected European trade with Russia, such as diamonds and fuel for nuclear reactors.

The European Union embargo on Russian oil that kicks in on Dec. 5 also includes a ban on European services to ship, finance or insure Russian oil shipments to destinations outside the bloc, a measure that would disable the infrastructure that moves Russia’s oil to buyers around the world.

To implement the price cap, these European shipping providers will instead be permitted to transport Russian crude outside the bloc only if the shipment complies with the price cap. In other words, it will be left up to them to ensure that the Russian oil they are transporting or insuring has been sold at or below the capped price; otherwise, they would be held legally liable for violating sanctions.

Dutch court sides with squatters of sanctions-hit Russian’s mansion

Ruling against Arkady Volozh in Amsterdam could set awkward precedent in Europe for rich Russians

The Guardian

Pjotr Sauer in Amsterdam

Tue 22 Nov 2022 13.45 GMT

Perched as it is in an upmarket neighbourhood overlooking the scenic Vondelpark, it is not hard to imagine why a Russian billionaire would have been interested in the 1879 five-storey Amsterdam property with a lush private garden.

That billionaire was Arkady Volozh, a co-founder of Russia’s biggest search engine, Yandex. He bought the £3m house in 2019, becoming one of the dozens of wealthy Russians who have invested in property in the Dutch capital.

But since October, the mansion, which had been undergoing extensive refurbishment, has been taken over by a group of squatters, who issued a statement saying they had done so in a protest against Volozh’s reported ties to the Kremlin, and the wider housing crisis in Amsterdam.

Last Wednesday, a Dutch court ruled the squatters did not have to vacate the property.

When the Guardian visited the house, it was hung with banners criticising the war in Ukraine. The Guardian was refused entry to the apartment by one of the squatters, who declined to give her name, citing security issues.

Lighting a cigarette, the squatter said she was relieved by the judge’s verdict. “The law is finally on our side,” she smiled.

Volozh was placed under EU sanctions in June after the bloc accused him of “materially or financially” supporting Russia as the country launched its invasion of Ukraine. For years, Russian opposition figures have argued that Yandex’s news aggregator, which has become a key source of information for many Russians, was censoring articles critical of the government and propping up Kremlin-friendly narratives.

Arkady Volozh was placed under EU sanctions in June. Photograph: Maxim Shemetov/Reuters

An EU statement at the time of Volozh being placed under sanctions accused Yandex of “promoting state media and narratives in its search results, and deranking and removing content critical of the Kremlin, such as content related to Russia’s war of aggression against Ukraine”.

Volozh declared the European Commission’s decision “misguided” and quickly resigned from his position as chief executive to prevent Yandex from also being targeted by sanctions.

Heleen over de Linden, a Dutch lawyer who represented the squatters, said of the court ruling: “I was convinced we were in the right, but I was still somewhat surprised to see the judge agree with our arguments. These sanctions are new, so we haven’t had many cases like this before.”

De Linden said that traditionally the Netherlands had strict property rights that favoured owners, meaning the ruling could set an important precedent.

The west has imposed sanctions on hundreds of Russian politicians and prominent businesspeople since the start of the war, often seizing their multimillion-pound properties and yachts. The ruling in Amsterdam exposes the increasingly difficult situation for Russia’s rich and powerful in Europe, a region where their money and investment were once welcomed with open arms.

As an individual under sanctions, Volozh is prevented from entering or transiting EU territory. The sanctions also mean all accounts belonging to Volozh have been frozen, and he is prohibited from making any profit from renting out property.

Volozh’s lawyer, John Wolfs, argued in court that his client was renovating the flat with the aim of subsequently moving into it with his family. “Their main residence is elsewhere. But because Mr Volozh’s activities take place in Europe, they regularly visit Amsterdam. They think it’s a beautiful city,” Wolfs said in court.

Although he is barred from entering the Netherlands on his Russian passport, Volozh acquired Maltese citizenship in 2016 through the controversial “golden passport” scheme, which could open the door for him to travel to and reside in the Netherlands.

Wolfs pointed to a section of EU law that permits individuals under sanctions to use their property for “personal consumption”.

“Assets which are only suitable for personal use or consumption, and therefore cannot be used by a designated person to obtain funds, goods or services, do not fall within the definition of ‘economic resources,’” the Council of Europe said in a report in June 2022. “Therefore they are not covered by the regulations and no authorisation is required to make them available to a designated person.”

De Linden questioned the idea that Volozh intended to move into the apartment. “The property is very nice, but would a Russian billionaire really move to the centre of Amsterdam with his grownup children? This property is not like a massive mansion or a private island that Russian oligarchs usually live on,” she said.

“Even if he would move to the property, his life would be severely restricted here. He can’t pay for food or other services. He isn’t even allowed to pay for a taxi,” the lawyer added.

There were also signs that Volozh was renovating the house in order to rent it, or part of it, out. According to information available on the Dutch public registry, a new address was added to the apartment in 2022, which property experts said could mean that Volozh may wish to rent or sell.

“You don’t add addresses if you’re going to live somewhere yourself, there is no reason to do that. This is usually done so that you can rent out the extra home or plan to split the building and sell it as separate flats,” said Gert Jan Bakker, an expert in the Dutch housing market.

Yvo Amar, a specialist in the field of sanctions and export control, said the refurbishment posed legal questions. “A sanctioned individual is not allowed to refurbish his flat unless his contractor received an exemption from the ministry of finance,” Amar said. “The house grows in value after you renovate it. That goes against the sanctions,” Amar added.

Having heard both sides, the court sided with the squatters. The judge ruled Volozh was unlikely to move into the property given the sanctions and the fact that he had no reason to travel to the Netherlands as he had resigned from his position at Yandex, a company that has its European headquarters in Amsterdam.

In a statement to the Guardian, Wolfs said he planned to appeal. “There is no legal basis whatsoever for squatters to take over a family home simply because it was empty while undergoing renovation. We are appealing the decision, and trust that the rule of law and facts will prevail,” he said.

In London, which according to one estimate has more than 1,895 Russian-owned properties, squatters have also been moving into the mansions of Russian billionaires who have been placed under sanctions. In March, police arrested four squatters who had moved into the £50m London mansion of Oleg Deripaska, an aluminium magnate and close ally of Vladimir Putin.