Davos, Switzerland (CNN Business)When Ukrainian President Volodymyr Zelensky spoke by video to a packed room at the World Economic Forum in Davos, Switzerland, he thanked the West for its solidarity against Russia. But he also issued a warning to political leaders and business executives: Don’t lose your nerve.
“I would only wish you not lose this feeling of unity,” he said, calling again for maximum pressure on Moscow.
Three months after Russia’s invasion of Ukraine, leaders from Europe and the United States emphasize that they remain committed to sticking with unprecedented sanctions in an attempt to force President Vladimir Putin to pull its troops out.
“I am very worried about what a recession in Europe would do to European resolve to stick with it and continue to escalate the sanctions,” Jason Furman, a Harvard professor who previously served as President Barack Obama’s top economic adviser, told CNN Business.
That could complicate efforts to continue to apply pressure on Russia,despite warnings from billionaire George Soros and others that appeasement of Putin would have catastrophic consequences.
Fuel and food prices shoot up
At Davos, leaders from government and business stressed that they cannot capitulate to Putin. They agreed that the response to his annexation of Crimea in 2014, as well as the poisoning of Sergei and Yulia Skripal in Salisbury, England in 2018, was far too weak in hindsight.
“We have to stop compromising,” Eduard Heger, the prime minister of Slovakia, said with emotion during a panel discussion. Compromising with Putin caused “an aggressive war,” he continued.
But the economic backdrop could make life harder for politicians back home. AnnualInflation among the 19 countries that use the euro reached 7.4% in April, an all-time high. In the United States, inflation stood at 8.3%, and it hit 9% in the United Kingdom.
A big factor is energy costs. They were already rising due to a supply and demand imbalance after the pandemic, but have been driven even higher by Europe’s efforts to cut its dependence on Russian energy.
An oil embargo has been held up by landlocked states like Hungary and the Czech Republic, which say they would need years to make the transition to other suppliers or energy sources. It isexpected to be agreed in the coming weeks, however.
“The economic situation is definitely challenging. I don’t think it’s going to impact consensus on oil,” said Mujtaba Rahman, managing director for Europe at the Eurasia Group, a political risk consultancy.
Still, there will be consequences. Fears of energy shortages have already dramatically pushed up prices.In the United States, the average price of a gallon of regular gasoline reached a record $4.60 on Thursday. The situation is even worse in Europe. Recent data shows drivers in the United Kingdom paying $8.06 per gallon, and $8.43 per gallon in Germany.
“This is where the impact of the war in Ukraine is becoming more and more visible,” Georg Thiel, president of Germany’s Federal Statistical Office, said earlier this month.
However, even in Europe and the United States, lower-income households have increasingly been forced to choose between “heating and eating,” which account for a bigger proportion of their budgets. Economists worry that a pullback in spending could trigger recessions, especially as central banks raise interest rates to try to tame inflation.
“There’s real risk for lots of people,” Oxfam International Executive Director Gabriela Bucher told CNN Business. Even in the “rich world,” she added, there are people struggling “to fulfill their basic needs at the moment.”
The British government acknowledged the problem Thursday when it announced a $6.3 billion windfall tax on oil companies to fund payments to people struggling with energy bills.
The future of Western solidarity
American and European officials and top corporate brass say Ukraine’s victory is crucial. The brutal war and humanitarian crisis must come to an end, and democratic values have to prevail at what Germany’s Chancellor Olaf Scholz called a “turning point” for the world.
“It’s hard to see any issue that has united people in the West as much as this issue,” David Rubenstein, the billionaire founder of the Carlyle Group, told CNN Business. “I don’t think that the incremental increases that might be attributed to this with respect to inflation are going to change anybody’s views.”
American officials also see standing up to Putin as imperative to curtailing the ambitions of Chinese President Xi Jinping, who they say is closely watching how the situation plays out.
“Deterrence is a key here,” said US Congressman Michael McCaul, the top Republican on the House Foreign Affairs Committee. “As Xi looks at what’s happening in Ukraine, [he’s asking,] ‘Is it worth it?’ And we have to persuade him that it’s not.”
But balancing politics and economic concerns won’t be simple. Scholz conceded that “politicians have an important task to attend to” as they juggle different parts of their mandate from the public.
This could become a larger issue in the event of a major escalation by Russia, Rahman said. That could trigger louder calls for a full ban on Russian natural gas, which accounted for 45% of Europe’s supplies last year. Much travels by pipeline, which makes it more difficult to find alternatives.
That’s not on the table right now, though Scholz said Germany is working “flat out” to end its reliance on Russian gas as soon as possible.But if it came under serious discussion, it would be a trickier sell than anything else the West has so far proposed.
“We should achieve something with sanctions,” he said. “So far, we’re going basically from escalation to escalation and we have no choice. So I think sanctions, yes, but then how are we going to end this?”
“Negotiations need to begin in the next two months before it creates upheavals and tensions that will not be easily overcome,” Kissinger said. “Ideally, the dividing line should be a return to the status quo ante.”
“I do not want to hear the word ‘appeasement’ anymore,” European Parliament President Roberta Metsola said Wednesday, to applause.
Still, a weakening economy and high inflation could weigh on politicians as they return home, sparking a warning from NATO Secretary General Jens Stoltenberg.
“Freedom is more important than free trade,” Stoltenberg told the Davos crowd. “The protection of our values is more important than profit.”