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Energy & Economics
Logo of Global Gateway Project

Digital diplomacy: How to unlock the Global Gateway’s potential in Latin America and the Caribbean

by Angel Melguizo , José Ignacio Torreblanca

If the Global Gateway is to compete with the Belt and Road Initiative, it must go big, green, digital, and ethical. And it can prove it in Latin America  The European Union launched its Global Gateway initiative in December 2021, but its results have not yet matched the expectations it raised. If it is to compete with China’s Belt and Road Initiative (BRI), the Global Gateway must be bold, green, digital, and ethical. The digital alliance that the EU is setting up in Latin America and the Caribbean provides an opportunity for the EU to put its money where its mouth is.  On 14 March, the executive vice-president of the European Commission, Margrethe Vestager, and several ICT ministers from Latin America and the Caribbean established the EU – Latin America and Caribbean (EU-LAC) Digital Alliance – one of the European Commission’s initiatives launched in the framework of the Global Gateway programme. The alliance will focus on three pillars: investments in connectivity, aimed at closing the gap in internet access between the region and the EU, and within and between the countries of the region; cybersecurity, where despite the great progress made by the region, significant gaps remain that threaten citizens, businesses, and sovereign states alike; and digital rights, a field of enormous potential, as both regions share a human-centric approach to digital transformation. The project is of major strategic importance and potential for the EU. Russia’s invasion of Ukraine has given new prominence to the EU’s relationship with Latin America and the Caribbean. The region comprises 33 countries which are key to sustaining a rules-based multilateral order and whose votes China and Russia have courted in the United Nations General Assembly. There are also massive investment opportunities in the green and digital sectors in Latin America and the Caribbean, making it an important region in the EU’s search for strategic autonomy. However, relations between the two regions have gone through numerous ups and downs since leaders first spoke of a “strategic association” at an EU-LAC summit in Rio in 1999. In recent years, the EU financial crisis, the United States’ lack of interest in the region, and the covid-19 pandemic have allowed China and, to a lesser extent, Russia to expand their presence in the region: while EU trade with the region doubled between 2008 and 2018, China’s trade multiplied tenfold thanks to its strategic approach through the BRI, which has added to China’s already significant foreign direct investment flows and loans to the region. The EU is seeking to revitalise this relationship. But for the EU-LAC partnership to be successful, it is essential that these political agreements and declarations are accompanied by a meaningful investment agenda and package, as well as a clear roadmap for implementation. So far, the EU’s approach to the region has focused on programmes such as the Bella submarine cable connecting Europe and the region and the Copernicus Earth observation satellite system, which lack the scale to change perceptions of the EU. For its part, the Global Gateway programme is far from mobilising the €300 billion in investments initially announced, and the €3.5 billion  earmarked for investment in Latin America is insufficient to alter the strategic balance in a region where the required investment just for connectivity is estimated at $51 billion. The digital transition that the EU and the countries of the region want to promote could be the catalyst for a change of step in relations The digital transition that the EU and the countries of the region want to promote could be the catalyst for a change of step in relations. But for this to be feasible, certain conditions must be met. Firstly, if the Global Gateway is to be attractive for the region and effectively compete with the BRI, it must rebalance its geographical focus to pay more attention to the region. At present, 60 per cent of projects are focused on sub-Saharan Africa, while only 20 per cent are devoted to Latin America, and another 20 per cent to Asia. It should then focus more efforts on digital initiatives: currently, energy and green transition initiatives make up 80 per cent of projects, while digital initiatives account for 15 per cent and social initiatives for 5 per cent. The projects identified in the digital field are almost exclusively focused on connectivity issues, such as financing fibre, cable, satellite, and 5G investments. Closing connectivity gaps is urgent. Currently, over 35 per cent of Latin Americans still do not have access to a fixed broadband internet connection, and 20 per cent do not have mobile broadband access  – twice the average for OECD countries – concentrated in the lowest income quintile and rural and remote areas. However, the digital agenda in 2023 must be one of transformation, not just connectivity. It should therefore include issues such as cybersecurity, the digitisation of public administrations and services (including health, migration, justice, and taxation), training and education in key skills, the regulation of artificial intelligence, and data governance. Alongside the deployment of 5G and investment in digital, technical, and soft skills, this would bring the financing requirements for the region closer to $300 billion, which is 3 per cent of regional GDP. To address these geographical and thematic imbalances, the region therefore requires a more intensive European investment plan. The Global Gateway envisages mobilising private financial resources by setting up co-financing mechanisms from development banks, in particular the European Investment Bank, the CAF bank, Central American Bank for Economic Integration, and the Inter-American Development Bank. Despite the current meagre projections, it should be possible to mobilise the funding. After all, the EU is the leading foreign direct investor in Latin America, its telecom companies are global players, it plays a pioneering role in digitalisation in banking, insurance, infrastructure, energy, public services, industry, agriculture, and mining, and it holds first-class cybersecurity and hybrid threats capabilities. The launch of the digital alliance is expected to be accompanied by a business meeting of key Euro-Latin American companies, which, if confirmed at high-level, is a promising sign.   The EU’s digital agenda is attractive to third parties compared to China’s BRI because it includes green, social, and ethical components, making it an ally of the green transition, not a competitor. Many of its initiatives contribute to both digital and green goals, including the development of the ‘internet of things’ for the design of smart cities, the use of big data and cloud data to monitor the temperature of the oceans, and artificial intelligence applied to the protection of biodiversity. Europe’s rights-based, human-centric approach to digitalisation should also appeal to Latin America and the Caribbean. The region is seeking to align its approach with that of the EU, with a special focus on social, gender, and territorial inequalities and inclusiveness, which are not Chinese priorities. The cost of these inequalities is huge: achieving full gender parity in Latin America would expand the region’s GDP by $2.6 trillion – the equivalent of Brazil’s economy. Closing the internet access gap and investing in skills will help reduce these inequalities in the region, especially among women and in rural areas, and help younger generations. The Global Gateway has been criticised for over-promising and under-delivering. The EU-LAC Digital Alliance offers an opportunity for the EU to show the worth of the Global Gateway and demonstrate that it can offer an alternative to the Chinese Digital Silk Road.

Energy & Economics
Almerimar, Spain: desert landscape with many plastic greenhouses and an old abandoned truck

Spain prays for rain on the plain

by William Chislett

Spain is suffering a prolonged drought, sparking water rationing in some parts of the country because of depleted reservoirs, causing the wildfire season to start months earlier than usual and destroying crops or farmers deciding not to plant them, which could push up food inflation (13% in April).  April was abnormally hot. The state meteorological agency Aemet said temperatures were between 7ºC and 11ºC above the average, making that month the hottest since records began in 1961. The temperature at one point in Andalusia reached an unprecedented 38.8ºC in Córdoba, underscoring Spain’s vulnerability to climate change. The temperature cooled down in May, but there was very little rain.  Spain’s dramatic situation came as the World Meteorological Organisation predicted that annual average temperatures will most probably break records again in the next five years.  So desperate are people for rain that parishioners in the Andalusian city of Jaén held a procession this month, bearing aloft a statute of Christ known as El Abuelo and calling for the first time since 1949 for the Lord to open the heavens and bring rain.  The Socialist-led coalition government announced an unprecedented €2.2 billion package of measures, including increasing the availability of water by building desalination plants and doubling the proportion of water reused in urban areas. Olive oil production –Spain accounts for 45% of the world’s supply– could be more than halved this year. The government also announced legislation that will ban outdoor workers when the meteorological office issues high temperature alerts. This followed the death of a Madrid street sweeper during last July’s heatwave.Drought is not a new phenomenon in Spain, but this one is something extraordinary. Spain has not had ‘normal’ levels of rain for three years. Just 12 litres per square metre of rain fell in the first three weeks of April, one-quarter of the normal amount. In early May, 27% of Spanish territory was in either the drought ‘emergency’ or ‘alert’ category, creating a tinderbox. Blazes ravaged 54,000 hectares of land in the first four months of the year, three times the amount in the same period of 2022, according to the European Forest Fire Information System (EFFIS).  Spain’s last severe drought was in 1993-96 when around one-quarter of the population was subject to water restrictions. Some towns in Andalusia had supplies cut off for more than 15 hours a day. In 2008 a prolonged drought forced the authorities to bring in water to Barcelona via boat to guarantee domestic use. Catalonia is again one of the most affected regions. Restrictions in many areas have been in force since March, including limiting showers to five minutes, banning the cleaning of cars and the watering of gardens. At the town of L’Espluga de Francolí (population 3,600), water supplies are turned off for nine hours during the night. The Sau reservoir, a key drinking water source, is so low that a medieval village, flooded when the reservoir was created in the 1960s, has emerged.  Rain is very unevenly distributed in Spain. The areas with the highest water abundance per surface unit are in the north and Galicia (known as the ‘wet’ Spain), much more sparsely populated than in the south, in particular, with values higher than 700 mm/year. A popular saying among Galician farmers –la lluvia es arte– (‘rain is art’) was once turned into a tourism slogan. In the rest of the country (the ‘dry’ Spain), water availability does not exceed 250 mm/year. The lowest water availability in Spain occurs in the Segura basin, where it does not reach 50 mm/year (around 20 times less than in Galicia and five times lower than the national average).  In the late 1970s the Spanish government turned Murcia, Alicante and Almería in the south-east –an area where water is minimal and none of the major rivers flow– into ‘Europe’s market garden’ by transferring water from the Tagus through the 300km Tajo-Segura Trasvase, a system of pipelines and an aqueduct. This feat of hydraulic engineering was originally planned during the Second Republic in 1931, built during the Franco dictatorship and put into service after the dictator’s death.  In a country with 17 regional governments of different political colours, as of the 1978 Constitution, water management is a sensitive issue that crosses boundaries and inflames sentiments. One of the major providers of water for the trasvase is the vast reservoir at Buendía in the region of Castilla-La Mancha, where I have long had a house. Farmers there feel aggrieved when they are restricted in using ‘their’ water because it is needed elsewhere. The trasvase has long been embroiled in disputes over how much water should or should not be transferred through it.  Farmers in the south-east benefiting from the trasvase, who produce around 70% of Spain’s vegetables and a quarter of fruit exports, are up in arms over the plans of the Socialist-led minority national government to raise the minimum level of the Tagus at source as this will result in less excess water being transferred. The level needs to be increased in order to remain in line with EU regulations on river water levels, following court rulings. Ecologists say the Tagus is at risk from overexploitation by agriculture and climate change. The plan aims to increase the river’s flow from 6 cubic metres per second to 8.6 cubic metres by 2027.  Without sufficient water, 100,000 jobs are at risk, according to the farming association SCRATS. The father of the novelist Antonio Muñoz Molina, who had a market garden in Úbeda, Andalusia, used to greet ecstatically the year’s first rain with the following words: Es lo mismo que si estuvieran cayendo billetes verdes (‘It’s as if it were raining green banknotes’, in reference to the 1,000 peseta notes at the time).  The politics of the trasvase are complicated: the Socialists control the region of Castilla-La Mancha and back the national government; Valencia, which Alicante forms part of, opposes the plan, despite being also governed by the Socialists, as does Andalusia, where Almería is located, and Murcia, both of them regions run by the conservative Popular Party (PP).  Farmland surrounding the Doñana national park, Europe’s most important wetland and a UNESCO World Heritage site, has been particularly prone to illegal wells. The authorities have long turned a blind eye. Virginijus Sinkevičius, the EU’s environmental chief, attacked a plan last month by the government of Andalusia to increase the amount of irrigable land around Doñana by 800 hectares. This would be tantamount to an amnesty for the strawberry farmers who have already sunk illegal wells there. He said the bloc would use ‘all the means available’ to make sure Spain complied with a 2021 European Court of Justice ruling condemning it for breaking EU rules on excessive water extraction in Doñana.  Farmers switched some years ago from olives to strawberries and other berries, which consume more water. Close to half of Spain’s aquifers are already in poor condition. Before 1985, groundwater was treated as private property and thus not subject to any regulations.  In another part of Andalusia, near the city of Malaga, the Civil Guard arrested 26 people in raids on illegal wells. The Guard’s environmental crimes division identified 250 infractions by fruit farmers. Spain is Europe’s biggest producer of tropical fruit.  Prime Minister Pedro Sánchez called the drought ‘one of the central political and territorial debates of our country over the coming years’. Resolving the water problem will require a national political consensus, something that is woefully lacking in so many other areas.

Energy & Economics
Solar wind power

Cleantech manufacturing: where does Europe really stand?

by Giovanni Sgaravatti , Simone Tagliapietra , Cecilia Trasi

A single European Union cleantech manufacturing capacity target should be based on an understanding of the situation in each cleantech sector. Securing a competitive edge in cleantech manufacturing has increasingly come to be seen as a priority for Europe. China’s dominance of this sector and the subsidies offered under the United States Inflation Reduction Act (IRA) (Kleimann et al, 2023), compelled the European Commission in February 2023 to publish a Green Deal Industrial Plan with the goal of boosting the European cleantech sector and speeding up the transition towards climate neutrality (European Commission, 2023a). The industrial plan’s regulatory pillar is the draft Net Zero Industry Act (NZIA), which includes a target for the European Union by 2030 to have the capacity to manufacture at least 40 percent of its cleantech deployment needs (European Commission, 2023b). Assessing Europe’s cleantech manufacturing capacity Meanwhile, basic facts on the status of cleantech manufacturing in Europe are missing from the discussion, which has so far been mainly about global shares of cleantech manufacturing capacity (Figure 1). When looked at from a high-level perspective, China is dominant but this perspective does not allow the situation in Europe to be captured fully. Figure 1: Regional shares of manufacturing capacity of selected clean technologies, 2021  To address this, we provide an overview of Europe’s current cleantech manufacturing capacity and compare it to current cleantech deployment levels. This assessment is useful for two reasons. First, it allows for a better appreciation of the scale of the EU’s manufacturing capacities. Second, it shows that adopting a one-size-fits-all 40 percent manufacturing target, as proposed under the NZIA, may make little sense considering the very different situations of different clean technologies. A caveat is here important. A significant share of European cleantech production is currently destined for export and not the EU domestic market. We ignore this trade dimension and compare only domestic cleantech manufacturing capacities to deployment levels, thus taking an approach that is similar to the NZIA and its 40 percent headline target. Our analysis covers the manufacturing and deployment levels of five technologies pinpointed by the NZIA: solar photovoltaic (PV) panels, wind turbines (onshore and offshore), electric vehicle batteries, heat pumps and electrolysers (Figure 2). A variable picture Figure 2 shows the limited scale of the EU solar PV industry. EU countries installed 41.4 GW of new solar PV capacity in 2022, while EU manufacturers only produced 1.7 GW of wafers, 1.37 GW of cells and 9.22 GW of modules (SolarPower Europe, 2023). In other words, EU solar manufacturers, had all their output been deployed in the EU, would have met only 4 percent, 3 percent, and 22 percent of solar deployment needs, respectively. For wind turbines, however, Europe is well placed. In 2022, EU countries installed 19.2 GW of new wind power capacity in 2022: 16.7 GW onshore and 2.5 GW offshore (Wind Europe, 2023). In 2021, for onshore wind capacity, EU manufacturers produced 17 GW worth of turbine blades, and more than 11 GW of nacelles and towers (Wind Europe, 2023), equivalent to 102 percent and 71 percent of the deployment needs of the following year. For offshore capacity, they produced blades, nacelles, and towers equivalent to 2.9 GW, 6.7 GW and 7 GW respectively (IEA, 2023), or the equivalent of 116 percent and 286 percent of the deployment needs of the following year. Meanwhile, over 90 percent of clean energy transition-related additions to battery capacity in the EU in 2021 were related to electric vehicles (Bielewski et al, 2022). European electric vehicle sales in 2021 amounted to 2.3 million units, roughly equivalent to a battery capacity of 156 GWh. But domestic battery manufacturing capacity hovered around 60 GWh, or the equivalent of about 38 percent of the domestic deployment needs (but currently representing only about 7 percent of global manufacturing capacity) (IEA, 2022). Heat pumps produced in Europe mostly serve the domestic market. In 2021, global heat pump production capacity (excluding air conditioners) was 120 GW. The EU contributed about 19 GW and accounted for 68 percent (Lyons et al, 2022) of Europe’s 2.18 million newly installed heat pumps. China supplies most compressors for air-air pumps, while Europe remains the main source for air-water and ground-source pumps. Finally, water electrolyser manufacturing capacity in Europe stands currently between 2 GW and 3.3 GW per year (Hydrogen Europe, 2022), many times more than the current installed capacity, which is equal to 0.16 GW (European Commission, 2023c). The wide disparity between the current manufacturing capacity and deployment is explained by delays between investment decisions and operational deployment, lack of hydrogen demand compared to supply capacity, and regulatory bottlenecks. It is noteworthy that EU electrolyser manufacturing capacity is still far from the 17.5 GW/year target set for 2030. Too easy for some, too hard for others One implication of this analysis is that applying the same 40 percent manufacturing target to each cleantech sector as set out in the NZIA proposal, may make little sense considering the very different situations of different clean technologies. For solar panels, reaching this target would be very challenging and likely very costly, while it would be much easier (and even too conservative) for other technologies, including wind turbines and batteries. It is also unclear to what extent the target would apply to the components and materials used in the identified clean technologies. This is a crucial issue, because access to these components is often a major bottleneck for domestic manufacturing in Europe (Le Mouel and Poitiers, 2023). Instead of setting cleantech production targets, the EU would better focus on facilitating private sector investment in cleantech by providing the right enabling framework conditions. That is the only course of action that might ultimately secure Europe a competitive edge in cleantech manufacturing.

Energy & Economics
Turkish lira banknote and financial stock chart

Erdoğan has wrecked Turkey’s economy – so what next?

by Gulcin Ozkan

Turkey’s 2023 election is one of the most significant in its hundred-year history. After years of currency crashes, vanishing foreign currency reserves and surging inflation, rethinking economic policy will be a top priority for whoever is eventually sworn in. At the time of writing President Recep Tayyip Erdoğan is claiming victory, but votes are still being counted and a run-off round is looking distinctly possible. Erdoğan and his ruling AKP (Justice and Development Party) came to power in 2002 not long after the previous incumbents’ economic mismanagement had caused a major crisis that sent the lira and stock market plunging. In exchange for an IMF rescue, the outgoing government had introduced reforms such as an independent central bank, banking and finance regulators, taking steps to reduce public deficits and debt, and proper public procurement rules. The AKP wisely stuck to these reforms, which paid handsome dividends. Inflation fell from above 50% in 2001 to single digits within three years. Foreign investment improved significantly, allowing annual economic growth to average 7% from 2002-07. This produced sizeable productivity gains, and benefited large parts of society, significantly reducing inequality. The global financial crisis of 2007-09 caused Turkish exports to collapse, but the country recovered relatively quickly after advanced economies cut their interest rates to almost zero. This encouraged investors to borrow cheaply and put money into emerging markets like Turkey in search of decent returns. Choppy waters The turning point, both politically and economically, came in 2013. Demonstrations in Istanbul against construction activity in Gezi Park, one of the last remaining green areas in the city, quickly turned into a nationwide movement against the government’s growing authoritarianism. Erdoğan responded with a crackdown, deploying riot police and detaining hundreds of protesters. This would become a defining characteristic of his regime, permeating through to all other aspects of governance. Around the same time, international investors began pulling back from emerging markets as the US Federal Reserve started tightening monetary policy. There have been several cycles of loosening and tightening since then, but the money hasn’t returned to Turkey. Foreign ownership of Turkish government bonds has fallen from 25% in May 2013 to below 1% in 2023. Similarly, investors have pulled out more than US$7 billion (£5.6 billion) from the Turkish stock market. Investor concerns grew worse after a referendum in 2017 created an executive presidency that bestowed enormous powers on Erdoğan. He has used this to the full, effectively reducing most institutions to independent entities only on paper. The central bank of Turkey is a case in point. As inflationary pressures started to mount in 2021, and unlike almost every other central bank, it cut interest rates sharply - from 19% to 8.5% today. This pushed inflation to a 24-year high of 84% in August 2022. Erdoğan’s insistence on low interest rates to promote growth has also severely weakened the lira, which is down 80% against the US dollar in the last five years. To add to the problem, Turkey’s imports are much higher than its exports, causing a current account deficit of 6% of GDP. Turkey’s tragic lira: Lira vs US dollar. TradingView To prop up the lira, the authorities have squandered a huge amount of foreign exchange reserves. They have also resorted to swapping agreements with friendly Gulf nations like the United Arab Emirates, in which Turkey has borrowed Emirati dirhams in exchange for lira. But this doesn’t address the underlying problems. As of April 2023, Turkey’s net foreign currency reserves are down to negative US$67 billion. The authorities have been forced to introduce unconventional measures to keep the wheels turning. These have included protecting lira bank deposits against dollar depreciation by promising to make up any losses, requiring exporters to relinquish 40% of their foreign currency earnings, and barring banks from lending to companies with significant foreign currency holdings. What next? A rethink is inevitable after this election, though two very different scenarios are foreseeable. If Erdoğan wins, one would expect some normalisation with the west. Turkey has been difficult over major issues such as Sweden and Finland joining Nato, recently yielding on Finland but continuing to object to Sweden. With the EU the major destination for Turkey’s exports and hence source of hard cash, Ankara’s approach to the west could potentially soften under Erdoğan after the election. On the other hand, the AKP’s election manifesto has not offered any novelty on the economic policy front. It seems very unlikely that Erdoğan would change his stance on low interest rates, in which case the lira is likely to plunge further. Opposition leader Kemal Kilicdaroglu has consistently been ahead in the polls in the run-up to the election and has just been boosted by the withdrawal of one of the other main candidates. An opposition victory, especially if decisive, would allow for a proper reset, most obviously starting with raising interest rates to deal with high inflation. This would maximise foreign investment, boosting economic growth while alleviating the pressure on the lira. This is easier said than done, however. Interest rates might need to rise to 30% to break inflation, which would likely cause a nasty recession. As if that wouldn’t put enough pressure on the government’s finances, there have been various electoral giveaways and costly promises from both sides. Much other spending is also required. The US$50 billion cost of building new homes in regions hit by the two recent earthquakes is just one example. Meanwhile, there has been a significant deterioration in the rule of law, press freedoms and civil liberties. The AKP has relied overly on construction for growth, which has come at the expense of farming, turning a country that was once self-sufficient in food into a major importer. Education and procurement have suffered from endless reforms. Success in any business in Turkey now requires access to the ruling party elite. But if undoing all this damage is going to be arduous, it still matters greatly for the rest of the world. Turkey is a key part of international community, not only as a member of Nato and the G20 but at the crossroads of trade between Asia and Europe. It still has enormous potential, with a young population and dynamic business culture. The results of this election are therefore likely to have ramifications far beyond Turkey’s borders.

Energy & Economics
European Commissioner for Energy, Kadri Simson giving speech during the European Green Deal

Industrial Policy, Green Energy of the European Union and Long-Term Regional Developement Problems

by Pavel Sergeev

Annotation The features of the implementation of the industrial policy of the European Union aimed at achieving the goals of ensuring the functioning of green energy are considered, an assessment of the prospects for regional and global development in the context of rising prices for energy products is given The beginning of 2023 showed the correctness of scientists who have long warned about the strengthening of the negative impact on humanity of natural and climatic changes, natural disasters, man-made disasters and their consequences, which leads to a decrease in the sustainability of global economic and social development. The most incomplete list of them includes the earthquake in Turkey, the danger of a new pandemic, the strongest tornado in the USA. As for the problems of climate change for the European Union countries, at present the problem of drought and the increasing shortage of fresh water is becoming increasingly urgent there. Moreover, in the most unexpected places, natural hazards that are not characteristic of the region, including volcanic activity, may also occur. Clearly, overcoming this kind of problem will require, at a minimum, a reliable energy supply. However, the orientation of the region's industrial policy towards green energy, the creation of capacities for the production of alternative energy sources means, if we do not consider the negative environmental consequences of this, a sharp decrease in the reliability of energy supply. This is all the more important since the EU own energy production is at a rather low level. The prospective restructuring of regional gas supply means for the EU a significant decrease in the competitiveness of goods produced in the region, which, without the supply of cheap Russian natural gas, leads to the loss of the main markets.  At the same time, it is possible that regional crises, such as climate, environmental, migration, demographic, food, logistics, which continue to intensify, will one day lead to global consequences, including a financial crisis. And it will eventually lead to an exchange crisis, which will necessarily spread to commodity markets with appropriate consequences. In a natural way, ordinary EU citizens understand how the abandonment of a cheap and reliable source of energy supply will end, including its long-term consequences. And the companies of the global energy market are now confident that the time has come for long-term contracts. The fact is that modern competition, conducted by individual subjects of international relations in a very specific way, began to deny international law, primarily the UN Charter (at least Article 1.3). The result of all this will be serious disproportions in the development of the global economy and very many will have to refresh the survival skills formulated by Robert Baden-Powell (1857-1941) at the beginning of the twentieth century.

Energy & Economics
Cargo ship on Pacific Ocean Cost

UK joins Asia-Pacific trade bloc

by Marina Strezhneva

At the end of March, the negotiations that started in June 2021 on the accession of the United Kingdom to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) were successfully concluded, reflecting radical changes in British trade priorities after Brexit. More broadly, this move by London undoubtedly confirms the special importance that the Indo-Pacific region has acquired in the concept of "Global Britain" and in its subsequent relevant updates. The signing ceremony is scheduled for July 2023, for which the trade ministers of the participating countries and the United Kingdom will meet in Auckland (New Zealand). As a result of London's accession, this bloc will surpass the EU in terms of the combined population of its constituent countries. However, unlike the European Union, which the United Kingdom, on the contrary, left, the CPTPP does not have - to the satisfaction of British Eurosceptics - its own court like the EU Court of Justice, or a supranational budget. The union operates as a multinational trade agreement. An important obstacle that hindered reaching an agreement more quickly was London's refusal to weaken national food standards. But in the end, Ottawa (Canada) backed down on calls for London to lift the ban on importing beef with growth hormones. Beijing has also applied for membership in the CPTPP following London (the Chinese application is dated September 16, 2021, but negotiations have not yet begun). However, with London's accession as a full member of the agreement, China's chances of joining the bloc look somewhat weaker, as London is likely to obtain veto power on this issue. It is possible that they will use this veto under the pretext of ensuring higher trade standards within the agreement (including issues related to ecology and food safety). In any case, as It is known, the current British Prime Minister Rishi Sunak refers to China as a "systemic challenge", which London intends to respond to with "dynamic pragmatism." Currently, the CPTPP includes 11 states (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), none of which are European. These countries collectively account for 13% of global GDP. The new partnership replaced the Trans-Pacific Partnership agreement of 2016 with 12 participants, after former US President Donald Trump withdrew the US from the agreement in 2017. In 2020, the 11 countries of the CPTPP accounted for 8.4% of goods and services exported from the United Kingdom. In turn, 6.8% of imports to the United Kingdom came from these countries. The terms of the Trans-Pacific Partnership eliminate unnecessary barriers to mutual trade of services by opening financial markets and reducing obstacles to cross-border investment, facilitating data exchange, increasing business mobility, and ensuring regulatory transparency. All of this will support the British government's plans to turn the country into a global technology and service hub, strengthen semiconductor and critical mineral supply chains to produce electric vehicles and wind turbines.London already has trade agreements with most members of this trading bloc, but now these relationships can deepen, and 99% of British goods exported to the bloc countries will be subject to zero import tariffs. Tariffs on imports of Peruvian bananas, Vietnamese rice, crab sticks from Singapore, and Malaysian palm oil into the UK will be reduced (this is a controversial issue that has sparked discussion in the UK, as the production of palm oil, as ecologists point out, leads to deforestation of tropical forests). At the same time, according to assessments by the British government itself, joining the CPTPP is expected to add no more than 0.08% per year to the country's economic growth in the long term (while the slowdown in growth due to Brexit is estimated at 4%). Many politicians and trade experts rightfully point out that participation in the Trans-Pacific Partnership is not capable of compensating for the economic losses that the UK is experiencing due to its departure from the EU. Moreover, due to differences in its rules and standards from European regulations, Britain's accession will prevent it from returning to the European Union in case of a change of priorities. In other words, this agreement is like driving an additional wedge into the relationship between London and Brussels, which are just starting to improve. It is worth remembering in this regard that it was Liz Truss, a former trade minister in Boris Johnson's cabinet and one of the main advocates of independence from the EU, who submitted the British application to join the CPTPP. So far, for London, it is not so much a direct economic, but rather a strategic and symbolic acquisition, firstly due to the rapid growth (according to some estimates, up to 65% by 2030) in the number of middle-class consumers in a dynamically developing region, committed to innovation, and secondly, because of the fact that in the foreseeable future, mid-ranking trading powers such as Thailand and South Korea, which have already submitted applications, are planning to join the Trans-Pacific Partnership. Membership in the TPP is becoming more important for Britain due to the unattainability of a large trade agreement with the United States and the crisis in the World Trade Organization, which is currently unable to firmly enforce the rules of global trade. The matter is not limited to trade alone as London's foreign policy is clearly shifting towards the Indo-Pacific region. In this sense, Australia and Japan, concerned about economic pressure from China and its military ambitions, see Great Britain as a natural ally in opposing Beijing. It is assumed that stronger economic ties will lead to the strengthening of geostrategic alliances. Due to the high dependence of countries such as Chile on Beijing, which is the largest trading partner and main investor for Chileans, Britain's participation in the CPTPP, according to London's opinion, will contribute to the establishment of necessary connections that are seen by Britain's partners in the region as an attractive alternative to ties with China.

Energy & Economics
European Commission President Ursula von der Leyen during a visit to Tunisia hosted by President Kais Saied along with Dutch Prime Minister Mark Rutte and Italian Prime Minister Giorgia Meloni

To Deal or Not to Deal: How to Support Tunisia out of Its Predicament

by Michaël Béchir Ayari and Riccardo Fabiani

Tunisia is beset by deepening political and economic challenges. President Kais Saied is transforming the country’s parliamentary system into an authoritarian presidential one that has become increasingly repressive. Arrests and convictions of opposition politicians have surged. Saied’s aggressive anti-foreigner discourse has fuelled xenophobic sentiment and contributed to a spike in violent attacks against sub-Saharan migrants. Economically, Tunisia is grappling with the fallout of a decade of sluggish growth compounded by a series of economic shocks since 2020. The nation’s public debt has soared, with significant debt repayments looming. As the country tries to deal with mounting financial constraints, its inability to attract foreign loans is further clouding its economic future. Saied now must decide whether to embrace a credit agreement with the International Monetary Fund (IMF) or potentially default on Tunisia’s foreign debt. Against this backdrop, the EU and, in particular, Italy have a pivotal role to play. They can either help steer Tunisia toward a more stable economic future or watch it descend into chaos. A worrying political and economic outlook While the protests that led to the Arab Spring began in Tunisia, the promise of a more democratic and egalitarian society in the North African country did not come to fruition. To be sure, the protests did lead to the overthrow of autocratic Tunisian President Zine El Abidine Ben Ali in 2011. Moreover, Tunisia was the sole country to emerge from the regional uprisings with a new democracy. That experiment, however, foundered after Saied – who was elected to the presidency in 2019 – seized a monopoly on power in July 2021. Over the past two years, he has replaced the country’s semi-parliamentary system with one lacking checks and balances, consolidating power in his hands. People’s fear of repression resurfaced. Since mid-February 2023, arrests and convictions of public figures, especially politicians, have accelerated, undermining a disorganised and divided opposition. Meanwhile, large sections of the population have focused on survival in the face of a worsening economic crisis and have increasingly disengaged from politics. President Saied has attempted to shore up his dwindling support by pushing nationalist policies. He has jailed members of the opposition in a move that seems aimed at bolstering his standing with swathes of the public who are frustrated with the former political class. Saied has also xenophobically accused sub-Saharan migrants of conspiring to change Tunisia’s identity, creating a climate conducive to repeated violent attacks against a vulnerable minority. Economically, the country is still reeling from a decade of slow growth. After the 2011 uprising, the Tunisian government combatted rising unemployment in part by hiring hundreds of thousands of civil servants. Today, the public sector is the country’s largest employer and half of the annual budget is spent on the public payroll. At the same time, public and private investment in infrastructure, research and other growth-enhancing spending items has dropped significantly, leading to a sharp decline in GDP growth. External factors also chipped away at the Tunisian economy. The Covid-19 pandemic brought a collapse in tourism. Russia’s invasion of Ukraine, meanwhile, led to a spike in commodity prices. Surging inflation – particularly in food prices – and shortages of basic goods have eroded Tunisian living standards. Against this backdrop, Tunisia’s public debt has skyrocketed, reaching nearly 90 per cent of GDP in 2022, with substantial financing requirements needed to maintain current levels of spending. Credit rating agencies have downgraded the country as it struggles to balance its budget. The latest downgrade took place in June, when Fitch lowered Tunisia’s rating to CCC- (well into junk status territory). As a result, access to international financial markets has been virtually shut off, given the prohibitive interest rates (over 20 per cent) that this sovereign rating would entail. While the current account deficit has shrunk and foreign currency liquidity has improved over the past few months because of an uptick in tourism revenues and remittances from Tunisians working abroad, servicing its external debt will continue to be extremely challenging. With 2.6 billion US dollars in repayments scheduled for 2024 (including a euro-denominated bond maturing in February, equivalent to 900 million US dollars), it is still unclear how the government will be able to secure sufficient funds to meet these liabilities. The 2024 budget draft anticipates loans from Algeria and Saudi Arabia, as well as other, as yet unknown, external sources. The IMF deal and the role of the EU Despite these financing difficulties, Tunisia has not yet signed a deal with the IMF. In October 2022, Tunisia and the IMF agreed on the terms of a 48-month, 1.9 billion US dollar loan aimed at stabilising the economy, but Saied rejected the deal, fearing social unrest from cutting subsidies and reducing the public sector wage bill. The IMF board postponed the deal in response. Since then, the president has remained steadfast in his rejection of what he calls “foreign diktats” from the IMF and Western states. The Europeans – in particular, Italy – have pressed the IMF to reopen negotiations and offered incentives to persuade Saied to accept a revised deal, despite their internal divisions on how to treat Tunisia. They are applying this pressure largely because the economic fallout from a debt default could further increase the number of people – both nationals and migrants from sub-Saharan Africa – leaving Tunisia for Europe. While some EU member states, such as Germany, have taken a more critical stance towards Kais Saied’s authoritarian turn, eventually the migration, security and economic interests of Italy and, to an extent, France seem to have prevailed within the EU. Due to its geographic proximity to Tunisia, Italy would receive a majority of a migration influx, at least initially. For this reason, the Italian government has reiterated its concerns over Tunisia’s economic situation on multiple occasions, while refraining from expressing any criticism of the country’s increasingly authoritarian turn and violent attacks against sub-Saharan migrants. The EU has offered incentives to Tunisia to accept a deal with the IMF. After Giorgia Meloni and later EU Commission President Ursula von der Leyen and Dutch Prime Minister Mark Rutte visited Tunis in June, they unveiled 900 million euros in macro-financial assistance conditioned on a deal with the IMF and 105 million euros for joint cooperation on border management and anti-smuggling measures to reduce irregular migration to Europe. Despite the sweeteners the EU offered, the likelihood of a revised deal between Tunisia and the IMF has receded. In August, Saied removed the head of government, Najla Bouden, who had been directly involved in the negotiations with the IMF, and replaced her with a more pliant official, Ahmed Hanachi. Since then, Tunisia hasn’t put forward a revised proposal to the IMF. In October, the president reinforced his position by sacking Economy Minister Samir Saied after the latter claimed that a deal with the IMF would send a reassuring message to Tunisia’s foreign creditors. Tunisia has also rejected part of the funds offered by the EU. On 3 October, Saied rejected the first tranche of EU financial help, declaring that this “derisory” amount ran counter to the agreement between the two parties and was just “charity”. The repercussions of this refusal on the rest of the EU’s financial incentives are unclear. A fork in the road There are obvious reasons for Tunisia to secure a loan from the IMF. It would send a reassuring signal to Tunisia’s foreign partners and creditors. It could encourage Gulf Arab states to provide additional financial support in the form of government loans and deposits with the central bank, and investment in the economy. That would provide the Tunisian government with breathing space. But implementation of reforms required under the loan’s terms could set off anti-government protests by the country’s main trade union (the UGTT) and, in turn, government-led repression. To forestall such a scenario, the president himself could incite protests and riots by using nationalist rhetoric to scapegoat the IMF for any unpopular measures required by the loan. A no-agreement scenario, however, would have much more severe and potentially even catastrophic consequences. Without a loan, Tunisia would struggle to find alternative funding sources to meet its scheduled foreign debt repayments. Saied could then resort to a politically motivated strategic default, followed by negotiations to restructure the country’s external debt. Some Tunisian economists and supporters of the president are advocating for this approach: they say that declaring bankruptcy on external debt would allow the government to hammer out a restructuring plan with creditors and argue that the impact on the economy would be fairly limited, thanks to Tunisia’s capital controls and its banking sector’s low exposure to foreign bonds. But this approach carries great risk, as a foreign debt bankruptcy could lead to a run on Tunisian banks and destabilise the financial sector. In addition, the government could end the central bank’s independence to print money, fuelling an inflation spiral. Politically, a default and its socio-economic repercussions could open the door to a dangerous spiral of social and criminal violence. It could also boost irregular outward migration, with Tunisians fleeing the growing political and economic chaos. Widespread protests may erupt against the disastrous social effects of the president’s failed economic policy, prompting a violent response targeting businesspeople and political opponents for their alleged links to the West, as well as Western diplomats and the local Jewish community. Balancing economic support and respect for rights In light of these two possible scenarios, the EU and Italy should continue to encourage the Tunisian authorities to negotiate with the IMF, which remains the least politically and economically destabilising option on the table for Tunisia, if carried out with due care. At a minimum, a revised deal should include reduced expenditure cuts compared with the earlier proposal, particularly in the context of energy subsidies. At the same time, Italy and the EU should exercise caution and avoid turning their understandable concerns about Tunisia’s stability into a blank check for the president. In particular, they should press the authorities to rein in the abuses perpetrated against migrants and stave off potential attacks against opposition politicians, businesspeople and the local Jewish community. Aside from humanitarian considerations, this would serve Italy’s overarching goal of curbing migration: after all, attacks against the sub-Saharan minority have spurred outward migration, a trend that would accelerate if government persecution becomes even more severe. While supporting the deal, however, the EU and Italy should also prepare for the possibility of Tunisia continuing to reject it and declaring a foreign debt default. In such a scenario, the EU should be prepared to offer emergency financing to the country to help with imports of wheat, medicines and fuel. In doing so, the EU should synchronise the positions of member states to prevent conflicting agendas. Schisms have already emerged between countries like Germany and Italy over how to address Tunisia’s authoritarian drift. For this reason, acknowledgement of the importance of internal stability could provide a common ground in overcoming divisions and helping prevent a new wave of anti-migrant violence.

Energy & Economics
Tourist exchange rates at a streetside booth as the Thai Baht falls for the 7th week on June 9, 2013 in Bangkok, Thailand

Strong dollar snowballs across Asia

by Brad W. Setser

The dollar’s strength is placing pressure on economies around the world, including in developing Asia. What makes this bout of dollar strength unique is that the stress is not limited to Asia’s developing economies. Asian economies are diverse and the direct financial impact of dollar strength varies. Some regional economies have significant foreign currency debts and limited foreign currency reserves. Unsurprisingly, these economies are in financial trouble. Sri Lanka defaulted on its bonds earlier in the year and is now trying to restructure its external debt. Pakistan has had to seek an emergency financing package from the International Monetary Fund, backstopped with pledges of additional support from both China and the Gulf. Bangladesh has proactively sought out IMF financing in the face of a terms of trade shock. Laos is, in all probability, relying on the continued forbearance of China’s policy banks to manage its unsustainable debt loads. All these countries are struggling to pay for imports of oil and natural gas. A broader set of Asian economies have relatively strong foreign currency balance sheets and are not at risk of immediate financial distress. Many have been able to rely on their local currency bond markets to finance fiscal deficits, limiting their direct financial vulnerability to swings in the dollar. India is in a much stronger position than during the 2013–14 ‘taper’ tantrum. It started 2022 with US$650 billion in foreign reserves, more than double the US$250 billion it held in 2012. The Indian government’s external debt, primarily to the multilateral development banks, only totalled US$125 billion. Thailand’s government started 2022 with over US$250 billion in foreign exchange reserves — or over 50 per cent of its GDP — while owing a bit over US$30 billion to external creditors. Other countries have more subtle strengths. For example, a substantial share of Indonesia’s US$80 billion in international sovereign bonds are denominated in yen. At the same time, balance sheet resilience is not sufficient to insulate a country’s broader economy from the impacts of a strong dollar. Even countries that have little to fear financially worry about the impact of currency weakness on households’ costs of living. There has been little correlation to date between the extent of currency depreciation across the main Asian currencies and the underlying strength of countries’ foreign currency balance sheets. The currencies of advanced Asian economies have actually depreciated more than the currencies of developing Asian economies. Japan — with plenty of reserves, significant foreign assets in its government pension fund and insurance companies that are structurally ‘long’ dollars — has experienced the largest depreciation. Taiwan and South Korea have followed. Meanwhile India, Indonesia, Malaysia and Thailand have experienced smaller depreciations. The reason for this is simple. Up until Japan’s heavy intervention in late September 2022, lower income Asian economies had been more willing to defend their currencies through a combination of rate increases and foreign reserve sales. There are signs that this is changing. Japan intervened heavily in September and October. South Korea is now worried that the won  has become too weak and is seeking to join Japan in obtaining a standing Federal Reserve swap line to meet dollar liquidity needs in its financial sector — potentially freeing up more of its existing reserves for intervention. Even though the dollar is now off its October peak, developing Asian economies continue to face several risks. The first is that certain economies may overestimate their balance sheet strength and sell foreign exchange for longer than is prudent. The basic principle is that temporary shocks can be financed with borrowed or reserve sales while permanent shocks require adjustment. The longer global energy prices remain high and the dollar remains strong, the more difficult it will be for countries to avoid adjustment. The second risk is the possibility of an additional shock from Japan. Japan’s efforts to limit the yen’s depreciation through intervention may fail, as it is harder for Japan to defend its currency through intervention than it is for smaller economies, whose financial markets remain less integrated into global markets. There is the additional risk that yen weakness and imported inflation could lead the Bank of Japan to abandon its policy of ‘yield curve control’ and that the associated rise in long-term Japanese government bond rates could push up interest rates globally. Many emerging economies would likely need to raise their domestic interest rates to avoid importing additional inflation, and to limit popular pressure for fiscal subsidies to offset higher fuel prices. This would be the Asian version of what is now called a reverse currency war. The third risk is a currency shock from China. China has long relied primarily on the signal sent by the People’s Bank of China’s daily fix — the central reference point for daily trading — to manage the yuan with only limited direct intervention by its central bank. To date, the pressure on China appears manageable. News reports suggest that the PBoC has leaned on China’s large state banks to use their balance sheets to help maintain the trading band around the yuan, but there is little evidence of pressure on the central bank’s reserves. However, if its economy remains weak, China may choose to allow more depreciation — both against the dollar and against the currencies of its trading partners to restart its economy. This would be an admission that China’s ability to avoid a prolonged stall through internal demand is limited and that exports are again required for growth. A yuan that is as weak as the yen could easily trigger a race down across the currencies of developing Asia. Many, though not all, developing Asian economies are less vulnerable to a repeat of the 1997 crisis. But few countries will be able to escape the fallout from the dollar’s current strength. A broader overshoot of many currencies that amplifies concentrated pockets of debt difficulties and complicates the fight against inflation globally remains a real risk.

Energy & Economics
Oil refinery plant in Louisiana, United States of America

US Needs to Play Larger Role as Swing Producer of Oil and Gas in the Current Crisis

by Thomas J. Duesterberg

In response to Russian aggression in Ukraine, European nations have drastically reduced imports of crude oil, refined petroleum products, and natural gas from Russia. The 2021 levels of these energy imports were around 2.2 million barrels per day (mbd) of crude oil, 1.2 mbd of refined products, and 155 billion cubic meters (bcm) of natural gas on an annual basis.In addition to extreme difficulties in obtaining new sources of natural gas and to a lesser extent oil, the price increases throughout Europe since the onset of the war have been of historic proportions. In the days following the invasion, natural gas prices shot up by 62 percent, and UK energy prices were up by 150 percent. The full impact of the war, along with the related need to rein in the highest inflation numbers in over 40 years, has pushed Europe into a recession that threatens households and small businesses as well as European manufacturers’ ability to remain competitive. As a result, if the region cannot quickly assemble alternative supplies, the European commitment to assist in containing Russian aggression may weaken.  Swing Producers Alternative sources of crude oil and refined products are more readily available than natural gas since the latter requires costly new infrastructure to be put in place. Building new pipelines, liquified natural gas (LNG) facilities, and transportation infrastructure and ramping up production all require permitting and financing that is difficult to obtain , at least in the developed world. Saudi Arabia and other OPEC members were the traditional swing producers of crude oil and some refined products until the fracking revolution in the US. OPEC has decided to cut back production in the current situation, apparently at least in part to placate its Russian fellow traveler. Both the Saudis and the Emiratis, despite embarrassing entreaties from the Biden administration, have publicly sided with President Vladimir Putin on the question of supplies in the short run. Both Venezuela and Iran, whose oil sectors are now under US sanctions, could conceivably put new supplies on the market. The ongoing negotiations to renew the Joint Comprehensive Plan of Action (JCPOA)—which the European Union and some voices in the Biden administration are promoting—and behind-the-scenes US-Venezuela talks are both intended in part to address existing shortages and high prices. In addition to how agreements with these two rogue powers would damage long-standing US policy, relying on these authoritarian states would set back any hope of progress in reducing atmospheric pollution. Figure 1 shows some of the world’s largest emitters of methane, which is 80 times more potent as a greenhouse gas than carbon dioxide (CO2). Methane is responsible for about 25 percent of today’s global warming, according to the Environmental Defense Fund. Russia, Iran, and Venezuela rank among the world leaders in this race to the bottom, even though the much larger US, European, and Chinese economies produce more of this gas. Figure 2 shows that, in terms of methane intensity, the US emits about 35 tons of CO2 equivalent in methane per million dollars of GDP. The equivalent number is 404 for Russia, 733 for Iran, 137 for Saudi Arabia, and 1,864 for Venezuela. Figure 3 gives similar comparisons for CO2 intensity for leading countries. Again, Russia is much more profligate in its performance than the US or EU, releasing about 1,006 tons of CO2 per million dollars of GDP. Iran, Venezuela, and Saudi Arabia spew out 2,162, 1,756, and 651 tons of CO2 per million dollars of GDP, respectively.  China now produces about 750 tons of CO2 per million dollars of GDP, compared to 225 for the US and 174 for the EU. China is by far the world’s largest producer of CO2, with higher levels of greenhouse gas emissions than all members of the Organization for Economic Cooperation and Development combined (see figure 4). This measurement does not include emissions that will occur after the completion of 94 thousand megawatts (MW) of new coal-fired electric generation capacity that is now under construction or the 196 thousand MW of new capacity already permitted. China is not a major oil and gas producer but has built up 30 percent excess capacity in oil refining, using crude oil imports in large and growing quantities from Russia, Venezuela, and Iran at favorable prices. Figure 5 shows recent data, derived from Chinese customs statistics, on the level and price of crude oil imports from Russia.   As the US and Europe have closed refineries in recent years, due in part to policies that made the financing of new fossil fuel projects uneconomic, China could possibly rush to compensate for current shortages of diesel fuel and aviation fuel. Whether for crude oil or refined products, relying on US- or European-based products is clearly preferable from an environmental point of view.  There are of course many other producers of crude oil: Norway, the United Kingdom, Brazil, and Africa. The reserves of these countries are large, and for the most part, their production has not been subject to political instability, except in certain African countries. Nonetheless, there are limits to their future expansion in the near term. Much of the production outside Africa is offshore, where the fields are difficult, expensive, and time-consuming to ramp up. Many Sub-Saharan countries rely on Chinese development assistance, which has already resulted in distressed debt in 60 percent or more of these countries. Volumes from these areas are unlikely to meet immediate needs. Finally, as figure 6 illustrates, Central Asia and the Caucasus have been exporting around 1 mbd to the EU. Much of this comes to Europe through a pipeline from Tengiz in Kazakhstan to the Black Sea and onto Europe and other destinations. But the pipeline passes through southern Russia and is potentially subject to sanctions from the EU and the US. Russian firms hold about 36.5 percent of the project while US majors own about 22 percent. Russia could cut off the flows through this pipeline at any time. Huge amounts of oil reserves are available in this region but must be transported via Russia or Iran to reach western destinations. Neither of these allied powers is keen on competition from non-aligned sources of petroleum, although Russia has allowed some exports of oil from Azerbaijan. Larger supplies of oil from Kazakhstan across the Caspian Sea could be brought through pipeline via Turkey, but these too are complicated by the interests of the Iran-Russian entente. Sources of Natural Gas for Europe Since February 24, 2022, Europe has only had partial success in replacing the huge amounts of natural gas that either EU sanctions or Russian actions have cut off. Most of the replacements have been in the form of LNG. A relatively mild summer in East Asia and price arbitrage allowed cargoes contracted to this region to be resold to Europe, but this source of supply is beginning to decline as winter approaches. The EU also has negotiated new pipeline supplies from existing sources in North Africa and Norway. Prior to the Russian aggression, Norway regularly supplied Europe with about 100 bcm yearly. It has raised supplies by some 8 percent since late 2021, but this represents only a small proportion of the 155 bcm that Russia previously delivered. There is huge potential to increase pipeline imports from Central Asia and the Caucasus. But again, the difficulty of bypassing Russian and Iranian territory and these countries’ opposition to competition makes any near-term additions unlikely. The existing “Southern Corridor” pipeline from Baku is delivering about 10 bcm of Azerbaijani gas through Turkey and into southern Italy. Plans to increase production and pipeline throughput are in place but remain difficult due to political instability in the Caucasus and hesitations of both buyers of the gas and financial providers to undertake long-term, risky investments at this time. Figure 7 shows the largest LNG exporters as of 2021. The Gulf Cooperation Council members have ample supplies of gas, but only Qatar ships LNG in any material amount to Europe. Its exports via LNG to Europe were about 11 bcm in 2021. Qatar has plans to expand capacity significantly, but not until 2026 at the earliest. Its plans also depend on securing long-term contracts with buyers, and European buyers remain hesitant to agree to these. Australia was the biggest LNG exporter in 2021 but sent only 0.037 bcm directly to Europe that year. Australia has no current plans to expand its capacity for exports, and internal politics have turned against new exports in any case. Role of the United States The US will have the largest volume of LNG export capacity in the world when new plants that are now being built and are expected to become operational in the next two years start production. Figure 8 charts the progress of LNG export capacity in the US, which in 2022 has already become the largest exporter of this comparatively clean fossil fuel resource, with projected exports of 114 bcm. New capacity coming online between 2023 and 2025 represents more than 50 bcm of capacity. The newest facility started exporting in August and represents 17 bcm of additional capacity. The US has already exceeded President Joe Biden’s pledge in March to increase LNG exports to Europe by 15 bcm this year, and it is estimated that the total increase will reach 45 bcm in this calendar year.Total production of natural gas in the US has reached all-time records throughout 2022, facilitating increases in exports. The US is thus poised to steadily increase its exports to Europe and the rest of the world if public policy does not undermine further gains in production or infrastructure construction. It is worth noting that, as of 2020, only 11 percent of total natural gas production in the US originated on federally owned lands. Reliance on private property for gas production will limit the current administration’s ability to reduce production, although it does have other means to prevent the building of new infrastructure and discourage financing of new projects. In short, the US does have the means to be a swing producer and exporter of natural gas to address the current energy crisis. US production of crude oil and refined petroleum products remains below peak levels set prior to the pandemic. The pro-production policies of the Trump administration, as well as the de facto tolerance of the Obama years, facilitated production and export capacity growth. In contrast, the Biden administration has adopted a whole-of-government effort to discourage and prevent crude oil exploration and development, as well as the construction of infrastructure required to bring supplies to refineries, chemical plants, and export facilities. Over 25 percent of crude production in the US originates on federally owned lands. New federal leases for exploration and development on federal lands are at the lowest levels since just after World War II, partially explaining the loss of production in recent years. Crude oil production in 2022 is averaging about 1 mbd below the peak reached in late 2019. Total exports of crude oil and petroleum products declined in 2021 but grew to early 2020 levels during the summer months as prices rose and the administration depleted the national petroleum reserve to levels not seen since the 1980s. However, exports of crude and refined products to leading destinations in Europe are trending upward. Figure 9 shows that EU imports of oil and gas from the US by volume have increased substantially in the last five years. The pace of increases has accelerated since February 24. Summary Europe is in a desperate economic slump. High prices for energy are sapping the ability of homeowners to heat their homes, small businesses to remain solvent, and energy intensive industries to keep operating. High prices are also affecting other countries around the world, including close allies in the Pacific Rim. The US has the raw resources of oil and gas to be a bridge producer to meet much of the current shortage. The Biden administration ought to make a more substantial contribution to alleviating these problems. Instead, it asserts that the US must concentrate its ambitions and funding on developing renewable energy resources, even though these new sources will require decades to replace oil and gas power in the modern economy. Biden’s approach also ignores the fact that renewables production relies on China—which accounts for 80 percent of global supplies of solar panels, 58 percent of wind turbines, 60 percent of the rare earths needed for solar energy and ubiquitous semiconductors to power the modern economy, and nearly 80 percent of the lithium-ion batteries needed for electric vehicles and power storage in a renewables-based electric grid. China is also the largest emitter of CO2 and methane in the world and continues to build new fossil fuel capacity. The US needs a realistic course correction to address the economic and political crisis caused by Russia’s aggression against Ukraine, and to minimize the environmental damage caused by the need to replace Russian oil and gas from other sources.

Energy & Economics
Abandoned nuclear power plant

Developing Nuclear Energy in Estonia: An Amplifier of Strategic Partnership with the United States?

by Tomas Jermalavičius , Max Bergmann , Peter Crail , Thomas O’Donnell , Tomas Janeliūnas

IntroductionEurope is confronting twin energy crises resulting from the impact of climate change and its energy dependence on Russian fossil fuels. Addressing these crises will require the European Union (EU) and its member states to engage in nothing short of an energy revolution that will decarbonise Europe’s energy usage and end dependence on Russian fossil fuels. Russia’s invasion of Ukraine has focused transatlantic attention on the importance of energy security and ending energy reliance on Russia. While the EU and US are now both taking immediate steps to reduce consumption and reliance on Russian supplies, some of these steps may result in increased emissions or will lead to greater reliance on other autocratic suppliers. To address the twin challenges of climate catastrophe and Russian aggression, significant action will be needed on the energy transition front in the short, medium, and long term.  Estonia, like other EU (and NATO) members is therefore at an energy crossroads. Unlike many of its EU fellow member states, it has not been highly dependent on Russian energy supply and is relatively energy secure. Domestically produced oil shale accounts for 55% of Estonia’s domestic energy supply (as of 2020).While, prior to the Russia-Ukraine war, Estonia received roughly 93 percent of its natural gas from Russia, natural gas accounts for less than 8% of Estonia’s overall energy consumption.Furthermore, the imports of the Russian gas came to an end as a result of steps taken by the Estonian government, in response to Russia’s aggression, and were replaced by liquified natural gas (LNG) from other suppliers. However, oil shale is very carbon-intensive, while increasing reliance on natural gas will do little to decarbonise energy system in the long-term. In order to meet Estonia’s climate commitments, embedded in the EU’s Green Deal and “Fit for 55” goals, Estonia will need to develop alternative sources of energy but will encounter manifold challenges in this transition. As the climate crisis deepens, the failure to meet climate targets could also have significant reputational costs internationally. Moreover, the effort to “electrify everything” – from cars to heating – will likely lead to increased demand for electricity. This will require not simply swapping out energy sources but producing more electricity with the goal of having an abundance of energy. Additionally, an abundance of cheap and clean energy will be necessary to support carbon removal projects, such as through direct carbon capture and storage technology. Thus, no matter the technological developments in other energy types, there will be demand for an abundance of clean energy. Furthermore, while there have been significant advances in renewables, there are also concerns about intermittency – when the sun is not shining, or wind is not blowing – as well as space needed for deployment. One potential zero carbon technology for Estonia to consider is new advanced nuclear technology in the form of small modular nuclear reactors (SMR). Developing a small modular reactor could contribute to enhancing regional energy security within the EU and to achieving the EU’s climate objectives. A decision to adopt nuclear energy, however, has implications not only for the national energy system or broader climate objectives. It is a sensitive area that intersects with geopolitical and national security considerations. Its pursuit means new opportunities for deepening strategic partnerships, and cooperation in nuclear energy technology is often an effective vehicle to enhance not only commercial and technological interactions but also security and foreign policy ties between countries. This is of particular importance to countries such as Estonia that seek the greater involvement of main allies such as the US, UK, France, and Germany in the Nordic-Baltic area to counter geopolitical pressure from Russia and China. The United States stands out as a pivotal ally, but the US “footprint” in Estonia remains small compared to what it could be. Also, Estonia’s foreign and security policy is currently heavily tilted towards diplomatic, military and cyber aspects when it comes to engaging the US, while energy security and energy technology receive far less attention. Nuclear energy cooperation would create new opportunities for enhancing US-Estonia ties.  At the same time, any efforts of Estonia to have “more US” in the region – particularly in such sensitive sector as nuclear energy, but also across the board – may encounter resistance. Some of it would inevitably arise from Russia and its geopolitical confrontation with the West, but it would also stem from the notions of “European sovereignty” as well as some persistent characteristics of intra-European relations, structural issues in national energy policies, and diverging geopolitical perspectives of some key countries in the EU. These aspects must be factored in when considering the geopolitical prospects of nuclear energy in Estonia and the highly appealing transatlantic dimension of these aspirations.1. Estonia’s Energy Security and Nuclear Energy OptionThe Estonian government is yet to make its decision regarding the adoption of nuclear energy for electricity generation. There is an inter-agency nuclear energy working group established to analyse the issue and articulate recommendations by 2024.The electricity prices crisis of late 2021-early 2022 drew attention and elicited many favourable assessments from various public figures. The government even decided to expedite decision-making on the matter. Prime Minister Kaja Kallas and the then Minister of Economic Affairs and Infrastructure Taavi Aas indicated their support to possible adoption of nuclear energy. Political leadership of major parliamentary political parties both in the governing coalition and opposition are mostly in favour, while only the Greens, who do not hold any seats in the parliament, are opposed. Public opinion polls conducted in early 2022 also showed high public support to nuclear energy, with 59% of the respondents being in favour. At the same time, some officials emphasize that Estonia need to carefully follow the International Atomic Energy Agency (IAEA) guidelines on national nuclear energy programme deliberations, limiting how much decision timelines could be compressed.The political decision-makers might also decide to put the option for a vote in a referendum. Estonia, by some accounts, has a strong anti-nuclear undercurrent in society, stemming from the negative experiences of Soviet-era environmental mismanagement and the civil nuclear disasters of Chernobyl in 1986 and Fukushima in 2011. If Estonia is to adopt nuclear energy, this sentiment would have to be engaged and mitigated well before any further practical steps are made, which opens opportunities for hostile disinformation operations by malignant actors. Currently, there is only one clear proposal on the table – by Fermi Energia which also has Swedish Vatenfall as a minority shareholder and expects more investors to join soon. Fermi Energia assesses that it can ensure, within a framework of a long-term contract, supply of electricity at the price of €55 per MWh for 15 years, which is about half or even one third of the current market prices in NordPool spot market in early 2022. Given that price volatility is likely to continue and even worsen, while pressure to accelerate decarbonisation will only increase, as Estonian electricity production is the most greenhouse gas-intensive in Europe, this could be seen as an economically attractive and competitive proposition. In addition, there would be heating supply available to nearby municipalities at a very competitive price compared to natural gas option. Theoretically, Estonia could, instead of developing own nuclear power, join as an investor and participant in a larger project (e.g., in Poland). However, the lead times of such projects are often too long and compound various risks, as illustrated by the recently cancelled Hanhikivi-1 project in Finland.Estonia also has a very negative experience from the Lithuanian Visaginas Nuclear Power Plant (NPP) project debacle that led to failure of Lithuania to launch a regional NPP project agreed with the other Baltic states and Japan’s Hitachi in 2011-12, while the option of buying into one of the upcoming Polish projects might not be very appealing to Estonia.In the view of some Estonian energy executives and policymakers, Polish energy needs would likely supersede those of any other participating country’s when allocating the output, and many small investors are not of high interest to nor needed by the Polish companies behind Poland’s nuclear projects. There is, however, room for cooperation in training, regulatory capacity building, R&D and similar aspects, much of which could be undertaken in the framework of the Three Seas Initiative (3SI), where the US has a leading role. Even in construction, if it takes place in parallel, some common pooled purchases could be undertaken.  Thus, should there be an affirmative decision by the government, Estonian developers are leaning towards having a national solution, even though remaining open and even actively courting participants from neighbouring countries as investors, thus in reality turning it into a regional project. Latvia is among the priorities and shows a clear interest, as demonstrated by discussions between Fermi Energia and state-owned energy corporation, Latvenergo (in this case, if Latvenergo joined the project, Estonia would deploy four SMR units instead of two). There are also ongoing talks with Finnish Fortum as a potential investor into the Estonian project, as the Russian electricity trade embargo enacted by the Kremlin – possibly in response to Finland’s application to join NATO – and the failure of the Hanhikivi-1 venture prompted Finland to seek new sources of supply in the region to satisfy future electricity demand.Thus, the company leading the Estonian project sees it as a regional one, just without the governments being in the lead. On the other hand, some officials insist that governments would inevitably come to play an essential role in such a project of strategic importance not only to Estonia, but also to the wider region. The Estonian project developers have already chosen BWRX-300 by GE Hitachi, a joint US-Japanese venture. So far, it appears that BWRX-300 will be the only reactor type that might be fully licensed – by Canada – and could obtain license in Estonia by 2030. This date is a crucial milestone for Estonia due to the plans to close oil shale-based power generation plants and the need to make further and faster progress towards fulfilling Estonia’s climate neutrality commitments – the pace of which is strongly criticised by the civil society – without losing domestic generation capacity necessary to provide stable baseload which the rapidly growing but intermittently performing renewables would not be able to ensure. At the same time, some of Estonia’s energy policy stakeholders insist that, come 2030-40, the renewable sector will possibly have addressed, through technological innovation in grid storage and other areas, the intermittency problem and, given especially the offshore wind potential in the Baltic Sea, might make introduction of nuclear energy with all the attendant complexities and societal stigma unnecessary altogether. Indeed, the government's decision in August 2022 to accelerate the energy transition to 100% renewable electricity consumption in Estonia as early as 2030 indicates the abundance of optimism about such innovation. Others, however, believe that renewables and nuclear energy can successfully co-exist and point to Finland as an example, but there are views that an Estonian SMR could be ready by 2040 at the earliest. If Estonia decides to adopt nuclear energy and given that the company leading the project selected GE Hitachi SMR, its deployment can be expected to be a high priority in US-Estonia and Canada-Estonia cooperation and possibly the highest value business engagement for the period of 2024-35 until the reactors have been deployed and operate routinely. The US would be the main partner on maintenance services, training, and education. According to the Fermi Energia executives, GE Hitachi would be the design supplier, which includes all technical drawings, equipment specifications, safety studies, and personnel training, as well as the supplier of final fuel elements, fuel assembly services, instrumentation equipment and software, turbines, generators and more. Canada, as the first-of-a-kind (FOAK) deployment nation for this type of SMR, would be important in personnel training and supply chain management, with very significant supplies such as reactor pressure vessel (RPV), primary steam piping, RPV internals, valves, pumps, and uranium being provided by the Canadian suppliers. French Orano, 51% owned by the French government, could have a significant role in fuel cycle by providing the uranium enrichment and spent fuel recycling services, thus mitigating potential French objections to more US tech in Europe as contravening European “tech sovereignty” notions. It is likely that companies and export credit agencies from Sweden, Finland, France, US, Canada could be important investors and creditors. The envisaged capital expenditures (CAPEX) breakdown would be roughly as follows: in the US – 30%; in Canada – 30%, other countries – 10%; in Estonia – 30% (local suppliers of construction materials, services during the construction, etc). In addition, given its nuclear competence, very close economic ties with Estonia, and Vattenfall’s investments, Sweden would also be an important partner, especially in personnel training. Estonia’s success could also provide know-how and a point of reference to countries such as Lithuania, where there are already some voices calling for deploying SMRs as a solution to achieving energy independence, a goal of its national strategy.The fact that Estonia is “nuclear naïve” at the moment does not seem to put off potential investors; quite to the contrary, it makes Estonia’s lack of legacy baggage more interesting to partners from Sweden, Finland or Canada. However, it is the political sentiment and geostrategic considerations in the US and EU – both in the EU institutions and among key member states – that will be of paramount importance if Estonia goes forward with nuclear energy and selects an SMR solution of US origin.2. The US Policy and InterestsThe United States has a strategic interest in increasing European energy security, particularly in the Baltic region. Washington has long been concerned about European dependence and reliance on Russia for its domestic energy. Throughout the previous decade, US administrations have opposed the Nord Stream 2 (NS2) pipeline and have pressed Europe to diversify its energy supply away from Russia. In the aftermath of Russia’s invasion of Ukraine, the US and Europe sought to increase pressure on the Russian economy, and Russia’s energy sector which accounts for about 45% of Russia’s total exports became one of the key targets of comprehensive sanctions. Admittedly, the US also has its own parochial reasons to push Europe away from Russian gas. Over the last decade, America has undergone its own energy revolution, becoming a major producer of natural gas with fracking technology. It has become a major exporter of LNG and has encouraged Europeans to expand their LNG infrastructure to take advantage of American supplies. There are major US political stakeholders that have an interest in expanding US LNG exports to Europe and see an opportunity in the current crisis to increase market access for US exports, which would justify increasing investment to expand domestic production. However, LNG is not the only game in town when it comes to the US interests. Nuclear energy sector is increasingly becoming a pivotal area of geoeconomic competition with such rivals as Russia and China. SMRs and their potential market are viewed as an important aspect of US efforts to regain a share of the global nuclear reactor market and are a feature of both US commercial marketing and diplomatic outreach. The establishment of the Foundational Infrastructure for Responsible Use of Small Modular Reactor Technology (FIRST) programme in April 2021, which Estonia joined in January 2022, is indicative of the US government’s focus on SMRs in its near-term nuclear export strategy. Market research organisations estimate the SMR market to grow by 15% and reach roughly $19 billion by 2030. The United States began considerable investment in SMR development in 2012 with the US Department of Energy’s establishment of the SMR Licensing Technical Support Program. Since that time, a wide variety of SMR designs have been under development and are in various stages of licensing. The twin geopolitical and geoeconomic interests have seen the United States become a major proponent of the 3SI. This initiative was launched by the Presidents of Poland and Croatia in 2015 with the goal to develop north-south infrastructure, particularly relating to energy infrastructure. The United States views the 3SI as a way to expand LNG imports to reduce dependence on Russian natural gas, as well as provide a potential counter-balance to China’s Belt and Road Initiative and its 16+1 format. There is strong US support for the Three Seas Initiative (3SI). For instance, President Donald Trump attended the 2017 Three Seas Annual summit. In November 2020, the House of Representatives passed a bipartisan resolution “expressing support of the Three Seas Initiative in its efforts to increase energy independence and infrastructure connectivity thereby strengthening the United States and European national security” (H.Res. 672, 116th Congress). In December 2020 the US approved a $300 million investment in the 3SI Investment Fund, “primarily for projects focused on energy security.” This investment was enabled by the European Energy Security and Diversification Act of 2019, which eased restrictions on investing resources for energy infrastructure projects in higher-income countries, such as the European Union. In February 2021, a bipartisan group of members of congress urged the new Biden Administration to continue the previous Administration’s pledged financial support for the 3SI and to finalise its approved $300 million investment. While the 3SI has drawn significant attention, its projects are largely supported by European, not US, investments and several pre-existing projects were simply rebranded as part of the 3SI. Nevertheless, 3SI has focused attention on the need for north-south infrastructure within Europe. For instance, 3SI is supporting a gas interconnection between Poland and Lithuania, thus connecting the three Baltic states and Finland to the European gas network. Of note, however, is that this project was funded through EU and member state contributions. The United States is a secondary player when compared to the EU in terms of infrastructure investment. For instance, three-fourths of the funding to desynchronise Baltic states from the Russian grid and synchronise them with the continental comes from the EU, with the US playing a much smaller financial role. Nevertheless, the pressure from Congress on the Biden administration to make investments in European energy security will likely increase due to Russia’s aggression. Congress will be especially focused on expanding LNG infrastructure. The Ukraine supplemental funding bill, which passed congress in March 2022, urged the administration to create a “Baltic Security and Economic Enhancement Initiative.” The purpose of such an initiative is to provide the Baltic states with security assistance, bolster “physical and energy security needs,” look for opportunities for US foreign direct investment, and improve “high-level security and economic cooperation.” Congress has also called on the administration to send high-level representatives to the Baltics at least twice a year and attend trade, energy, and business fora.How and whether this initiative will be implemented by the Biden administration remains to be seen. But there is now significant funding being made available to the administration for security assistance and energy financing. Pressure will therefore increase on US agencies to show support for the Baltics and Eastern Europe, leading US agencies to scramble to identify sensible projects and investments. Should Estonia pursue American SMR technology, there will be immense US support for the project from the US congress and the Biden administration. It is increasingly visible that the US government has already identified the Trimarium region as one of the priority directions for advancing nuclear energy through the so-called Partnership for Trans-Atlantic Energy and Climate Cooperation (P-TECC) – an international platform initiated by the US Department of Energy. This nuclear energy strand of a broader effort to improve energy security and resilience across the region clearly checks a lot of boxes for US government agencies: It serves a strategic purpose of expanding European energy supply, it promotes American businesses, and develops new zero carbon technology. Thus, there would be strong support from within the US government for stronger bilateral engagement in this area. This is illustrated by a recent P-TECC meeting that focused on nuclear energy in the Central and Eastern Europe. The Estonian SMR project, if pursued, would likely become a show-piece project for the US government, and the US officials would take great interest in its success. For instance, one major topic on the agenda during the visit of Assistant Secretary of State for Non-proliferation, Elliot Kang, to Estonia was SMR technology. There is little doubt that proceeding with a climate-friendly energy project that has geopolitical ramifications and is based on cutting-edge US technology would help to deepen diplomatic relations with the United States. It would also further bolster Estonia’s image in the United States as an incredibly capable and cutting-edge ally that punches above its weight within the transatlantic alliance.3. Security Dimension of Nuclear Energy and Cooperation with the USThe evolution of the bilateral security cooperation agenda that is likely to take place as a result of Estonia’s choice to pursue nuclear energy based on the US SMR technology largely depends on what security risks result from this choice and how the US government could assist Estonia in addressing those risks.Traditionally, US security assistance to help protect and secure nuclear facilities has been largely focused on countering the threats posed by terrorism – whether preventing terrorist attacks against the plant itself or addressing the proliferation threats to ensure nuclear materials do not fall into the wrong hands. However, the war in the Ukraine has made clear that nuclear power plants are also national strategic assets and therefore potential military targets. Moreover, the hybrid threat environment in which Estonia finds itself means that its SMR project could be exposed to the use of various vectors of attack (e.g. cyber, disinformation, etc) applied by hostile state powers seeking to advance their interests through the medium of so-called “grey zone” conflict. Interaction between the US government and Estonian authorities in monitoring and countering such risks would form an important strand of bilateral security cooperation. 3.1 Conventional Military ThreatRussia’s invasion of Ukraine provides important lessons for Estonia to consider when assessing whether to proceed with an SMR. This war has created an unprecedented situation in which nuclear power plants have been in the crossfire of war. The war in Ukraine demonstrates that an SMR would be a potential target for Russia, whether in a conventional military operation against Estonia or in conducting asymmetric or grey-zone operations to weaken or undermine the government in power. For instance, Russia in 2015 targeted Ukraine’s power sector through a cyberattack, successfully shutting off the power for 200 000 Ukrainians before Christmas. Similarly, during the war in Ukraine, Russia has also launched cyberattacks against Ukraine’s power grid. The targeting and seizing of power plants in Ukraine means that Estonia must consider the likelihood that Russia will target an SMR in a potential conflict. In a conflict with Estonia, Russia’s military objectives may also differ significantly than its objectives with Ukraine. Russia has appeared intent on changing the regime in Kyiv and occupying the country and has therefore allowed plants to continue operating. But in an attack against Estonia, Russia may have more destructive ends that would resemble the aims of its large-scale strike campaign against Ukraine’s energy system since Autumn 2022. Hence, instead of seizing and operating power plants, Russia may simply seek to destroy the SMR and deprive the country of significant source of electrical power. Thus, the construction of an SMR, which if built, would likely provide Estonia with an important portion of its power supply and potentially provide power to Latvia as well, would be a prime target for Russia in the event of a military conflict. 3.2 Cyber, Espionage, and Terrorist TargetAn SMR, especially one tied to the United States, would also be a prime target for Russian cyber and espionage campaigns. Developing robust cyber security standards would be a must, as would maintaining extremely careful security protocols for staff. Power plants and power grids have been major targets for Russian cyber operators in the past. For instance, Ukraine’s electrical grid was taken offline in December 2015, with the attack impacting more than 225 000 Ukrainian customers. Russian intelligence and cyber hackers would likely see the plant as a key target both to disrupt operations at the plant, as well as to conduct industrial espionage to improve Russia’s nuclear industry. Lastly, an SMR or any high-profile critical infrastructure must be seen as a potential target for terrorist networks. 3.3 Disinformation TargetThe impact of malignant disinformation campaigns on political processes and national security is well understood by the US and Estonian governments, as is the role of hostile state powers in orchestrating such campaigns. Given the societal sensitivities about nuclear energy, disinformation is one of the most serious challenges that an SMR project would face in Estonia, especially during the public debate on adopting nuclear energy and then during the project’s implementation. In 2006-12, Lithuania’s intentions to build an NPP together with Latvia and Estonia would have significantly changed the current picture of electricity generation in the Baltic region, but Russia’s actions designed to negatively influence the public debate contributed to the suspension of this project. Similar actions should be expected to target Estonia.4. Headwinds and Tailwinds from Other PlayersFrom the geopolitical standpoint and as far as diplomatic strategy concerns, three fellow EU member states and NATO allies – Germany, France, and Poland – stand out for Estonia when considering embracing US nuclear technology and cooperation. The former two have historically formed the most important tandem in shaping the direction of the EU, while the latter has emerged as an important hub for the Trimarium. All three are highly important security and defence partners for Estonia and other two Baltic states. They are, however, positioned on different points of two axes – anti-/pro-nuclear axis and transatlantic/Eurocentric axis – and thus pose different, if somewhat overlapping, sets of challenges. When it comes to the nuclear part, France and Poland are natural allies in making a continued case in favour of nuclear energy’s role in future climate neutral world. Poland also would be an important partner whenever collaborative efforts are required to maintain and benefit from the US involvement in nuclear energy development in the region. Due to the scope of its nuclear ambitions, Poland may come to dominate the US attention and thus diminish the potential political benefits for Estonia, particularly in terms of visibility. Inevitably, Tallinn will have to be very careful and specific about which aspects of practical nuclear cooperation with Poland are desirable – for example, pooled training, specialist mobility, R&D, etc. – and which ones are not. It would be important for the Estonian government, ministerial and commercial actors, as well as civil organisations, such as think-tanks and academic organisations, to establish regular and institutionalised consultations with their Polish counterparts in SMR deployment. A consistent, shared legal, regulatory and standards framework, if possible, would seem highly desirable, to simplify cooperation for decades hence. However, it is important to understand that, although the Polish SMR deployment – just as in Estonia – is more an industry-initiated and led endeavour with state support, the overall Polish programme specifically focuses on large-scale reactors. Germany’s policy, on the other hand, continues to be dominated by anti-nuclear sentiment and “renewables-only” perspective about future energy supply, which is unlikely to change due to the structural and ideological forces at play in German economy and society. Contrary to Estonia’s already strong emphasis on and commitment to renewables, such as offshore wind, Estonian nuclear aspirations are therefore likely to be unpopular in Berlin and will possibly draw continuous criticism. This criticism would lack credibility, given the complete failure – in geopolitical and energy security terms – of the German energy policy, exposed by Russia’s war against Ukraine. However, unlikely as it is to do much significant damage to the overall bilateral relations in foreign and security affairs, Berlin’s anti-nuclear stance – given the sheer lobbying weight of Germany – may still dampen the enthusiasm in the Baltic region and, more importantly, in Brussels over the long-term prospects of nuclear energy industry in the EU. Furthermore, reliance of the Estonian programme on the US may kindle the anti-American instincts in those sections of the German political establishment and policy community that have long sought to balance out the US role in the European security order through energy relations with Russia and industrial relations with China. There will also be growing geoeconomic competition between Germany and the US over the shape of energy policies and the attendant commercial opportunities in the Trimarium, with the former advocating for more alignment with the philosophy of global energy transition, or Energiewende, and with the latter emphasizing the need for nuclear power in the energy mix as a pathway to energy security of the region. Tallinn will have to invest diplomatic efforts into cultivating the transatlanticist policy stakeholders in Berlin and highlighting the strategic benefits of the US involvement in energy security of the Baltic region and Europe as a whole. Estonia’s constructive role in maintaining German interest in building synergies and complementarities with the US contribution to the region’s energy security – including through the 3SI framework – rather than competing with the US would be beneficial to all sides. It might even help Berlin offset some of the loss of political capital and credibility in the Trimarium, incurred by the NS2 saga and then its ambivalence regarding the extent, speed, and nature of support to Ukraine during the war with Russia. Reliance on the US in a nuclear energy programme, however, may prove more problematic in the geopolitical and geoeconomic analysis of Paris. Its agenda of pushing forward European sovereignty means that extensive technological dependence on the US may not be viewed very favourably in some quarters, especially as France continues developing its own SMR for sales in international markets. Estonia should expect that France will make a persistent case for cooperation on the European SMR and will highlight that the EU framework already provides sufficient range of security cooperation instruments to address the risks associated with the adoption of nuclear energy. Some of the potential political opposition from France can be defused by integrating its nuclear industrial base into the supply chains of the Estonian nuclear energy programme, even after choosing the US SMR as the proposed project intends, but this will be hardly sufficient to avoid the optics that Estonia is not supportive of strengthening the EU’s sovereignty aspirations in practice. Estonia will have to be prepared to make a strong case to Paris that dependency on the US – be it in energy technology or military technology – is not contrary to Europe’s interests but rather conducive to greater cohesion and strength of the collective West. The EU has been playing a pivotal role in pushing for and coordinating common responses to the climate crisis and Russia’s use of energy as a tool of geopolitical coercion. Policy instruments and strategies agreed by the member states, such as the EU Green Deal and RePowerEU, advance the diversification of energy sources, promote the energy transition to climate neutrality, and provides for greater coherence, solidarity, security, and closer integration of national energy systems.Although choices concerning national energy mix remain the prerogative of the member states, the overall policy direction undertaken by the EU and the general sentiment in Brussels about the approaches of individual member states clearly matter in assessing the risks and opportunities for Estonia related to nuclear energy. At the end of 2021, the Commission finally completed an extended process that culminated with a decision to include nuclear energy – and natural gas – in its Green Finance Taxonomy (often referred to as simply “green taxonomy” in most discussions), established under the Union’s Green Deal. On the upside, the pro-nuclear decision can be considered a victory for science- and data-driven policy against green-populism, with crucial input made by various scientific studies on the climate impact of nuclear energy. The EU Commission’s decision primarily represents an acknowledgement of the reality that nuclear energy is, de facto, the only scalable solution to reliable base-load carbon-free generation that can displace coal – and eventually natural gas – and does not require the installation of massive, generalizable grid-scale storage, as does an over-reliance on variable renewables. With such popular and ideological forces in favour of the 100%-renewables-and-no-nuclear-model, only the appearance of significant difficulties with this model motivated the Commission and ministerial actors to weather the formidable shaming of “green washing” to open new opportunities for nuclear energy.ConclusionThe United States remains of pivotal importance to Europe’s and Estonia’s security, and this importance was further underlined by its role in countering Russia’s aggression against Ukraine as well as strengthening NATO’s deterrence posture on the eastern flank (or “eastern front,” as it is increasingly referred to). Its continued bilateral and, through various cooperative formats such as 3SI, minilateral engagement in the Baltic region is vital foreign and security policy interest of Estonia. Maintaining this engagement will be increasingly difficult because the US repeatedly seeks to pivot to the Asia-Pacific, as the great power competition dynamics in that area of the globe requires its strong focus on countering the long-term challenge of increasingly assertive China, while European – let alone Baltic or Estonian – security concerns will often struggle to remain among the strategic priorities in Washington. Adding civil nuclear energy cooperation to this continuous engagement is a unique opportunity, available both because of alignment with the bi-partisan pro-nuclear sentiment in energy policy of the United States and the need for the US companies to regain their competitive edge in the international nuclear energy market with novel technology to counter China. It also provides a useful vector for increasing US contribution to the energy security of Estonia and the entire Baltic region that goes beyond the present-day focus on LNG supply – a focus that will diminish in importance due to the temporary “bridging” role of natural gas in energy transition towards “zero carbon” future. In the long-term, it would also help to create a competence base in Estonia enabling country’s integration into the US SMR technology chains, thus further strengthening the bilateral partnership. Full exploitation of this opportunity, however, is clearly contingent on Estonia being among the first movers in adopting the American SMR and thus positioning its programme to be a showcase of the successful adoption of the new generation US nuclear energy technology.