Vestager was addressing increasing concerns among competition regulators that the control over artificial intelligence is being gobbled up by a few leading technology companies.
Microsoft has acquired a leading stake in OpenAI, the company behind popular chatbot ChatGPT, and is in a fierce race with competitor Google over who can roll out the most advanced AI tech the fastest.
Antitrust authorities have zoned in on the issue. In the United States, both the Justice Department and the Federal Trade Commission are looking at how to probe OpenAI on antitrust grounds. European Union regulators in January asked industry players for feedback on whether they see issues with competition for AI. And the United Kingdom’s Competition and Markets Authority (CMA) launched a similar survey in December.
At the heart of Europe’s fears: A repeat of what happened with the last generation of internet giants. When social media, search and cloud firms boomed, it created titans like Facebook’s parent company Meta, Google and Amazon — but reduced Europe to a bystander unable to catch up and compete.
Big data became “an essential driver of competition … It completely changed market dynamics,” Vestager said in the interview, on her visit to Washington, D.C. “Now, with AI, it is likely that we will see a change in market dynamics as well, and it’s likely that it will happen much faster than what we saw of network effects and the data-driven marketplace,” she said.
The West’s united front on Ukraine is showing more cracks than ever — and Kyiv has little choice but to grin and bear it.
More than 500 days into Russia’s full-scale invasion, Republican lawmakers in Washington DC on Saturday derailed an effort to unleash a major tranche of aid for the war-torn country.
Coming just nine days after Ukrainian President Volodymyr Zelenskyy visited Washington to plead for continued support, the blockage underscored a hardening of attitudes among congressional Republicans who want to end Washington’s assistance for Kyiv.
At the same time as Republicans were voting ‘no’ on Capitol Hill, voters in Slovakia elected a pro-Russian prime minister, Robert Fico, who vows not to send a “single round” of ammunition to Ukraine, and looks set to team up with Hungarian Prime Minister Viktor Orbàn to oppose further European support for Kyiv. Poland, once the most dependable of Kyiv’s allies, made the shock announcement on September 20 that it would no longer send weapons.
These warning signs don’t amount to a profound policy shift in Washington or Brussels. U.S. President Joe Biden has vowed to stand by Ukraine despite the budget fiasco. And most European leaders remain staunchly supportive of Ukraine, with some €50 billion in continued support for the country due to be signed off in coming months, according to two EU diplomats who were granted anonymity to talk about the non-public deliberations.
Asked to comment on the fact that the U.S. stopgap bill lacks any funding for Ukraine, White House press secretary Karine Jean-Pierre said: “The president has built a coalition of more than 50 countries to provide aid to support Ukraine … There is very strong international coalition behind Ukraine and if Putin thinks he can outlast us, he’s wrong.”
Josep Borrell, the EU’s top diplomat, said he was “sure” the decision to block funding would be reconsidered. “We’ll continue to be on your side,” he told reporters in Kyiv Monday when asked how the U.S. budget shortfall would affect Ukraine.
Ukrainian politicians — who’ve faced criticism from the United States and United Kingdom for appearing insufficiently “grateful” for Western aid — sounded similarly upbeat. “We’re working with both sides of the Congress to ensure it doesn’t repeat again, under any circumstances,” said Foreign Minister Dmytro Kuleba, appearing next to Borrell.
‘Words of gratitude’
But despite these attempts to put a positive spin on the situation, open criticism of aid among senior Western politicians — coupled with Elon Musk’s online attacks against Ukrainian President Volodymyr Zelenskyy — sends a chilling message to Kyiv.
The message that the U.S. and Europe will stick with Kyiv — no matter what — is starting to ring hollow.
Ukraine remains heavily dependent on Western support not just to fuel its battle against Russia, but also to keep its public administration ticking over. According to its projected budget for 2024, Ukraine expects to receive $42.8 billion from international donors in the coming year, a big chunk of which would come from the United States. In June, Ukraine’s finance minister, Serhiy Marchenko, told POLITICO that the U.S. should “step in and at least provide us mid-term relief.”
At the same time as Republicans were voting ‘no’ on Capitol Hill, voters in Slovakia elected a pro-Russian prime minister, Robert Fico, who vows not to send a “single round” of ammunition to Ukraine | Janos Kummer/Getty Images
Asked whether the holdup on Capitol Hill now leaves Kyiv with a budget shortfall, a spokesperson for Marchenko declined to comment.
Europe is also worried about what to expect from Washington. While most EU countries agree on supporting Ukraine, aid for Kyiv is tied to a broader review of the EU’s long-term budget on which there is no agreement. And since all EU27 countries need to back the deal, it may prove difficult to pass by year-end, which is when the EU’s current support for Ukraine runs out.
“There is not much political discussion on the financial support for Ukraine. That is not the difficult piece of the puzzle. But the puzzle overall is very hard, that no one dares to predict anything,” said an EU diplomat who asked not to be named to discuss the confidential budget talks.
Indeed, Hungary’s Orbán has already said he’s not prepared to finance Ukraine unless it reviews its treatment of Hungarian minorities living in the country. Although critics describe this stance as a tactical veto meant to unlock funds that Brussels is withholding from Budapest over a separate rule-of-law dispute, Orbán may use the election of his like-minded Slovakian peer to toughen his negotiating tactics.
“Member states remain broadly supportive of aid for Ukraine,” said a second EU diplomat. “Of course the big elephant in the room is, ‘What if this is the precursor to the U.S. just abandoning Ukraine?’ While it’s in the back of everyone’s minds, I just don’t think that’s going to happen now or anytime soon.”
Amid uncertainty about whether Ukraine will be able to finance its budget and keep its war effort going, Ukrainian officials are trying hard to put on a brave face and appear thankful. Speaking to POLITICO last week, Ukrainian Prime Minister Denys Shmyhal insisted on his “gratitude” toward Poland, an ally that has been locked in a dispute with Kyiv over grain exports, and has now vowed not to send any more weapons.
“I would like to express the words of gratitude to the Polish nation and all Polish families for the support that they have given and have provided to Ukrainian refugees,” he said.
Gregorio Sorgi and Suzanne Lynch contributed reporting in Brussels and Eun Kim in Washington DC.
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Nicholas Vinocur, Paola Tamma and Veronika Melkozerova
The European Commission is dropping a plan to reallocate multinationals’ profits among European Union countries in a new framework for taxing large corporates at EU level due Tuesday, according to draft proposals obtained by POLITICO.
Commission President Ursula von der Leyen last year pledged “a single set of tax rules for doing business in Europe.”
The EU executive originally wanted to go for “formulary apportionment,” or a formula splitting the total pre-tax profit earned by multinationals between the jurisdictions where it does business based on where value is created.
But that option received a lot of pushback from countries afraid of losing tax revenue. Countries with comparatively low corporate tax, like Ireland or Lithuania, would miss out on the tax bill of large companies that benefited from booking profits with them, instead having to file their tax returns where they make their sales, or where they keep most of their workforce or productive assets.
Instead, the EU executive will suggest that multinational companies with annual revenues of over €750 millionpool their tax bills, in what the Commission calls an aggregate tax base. Oil and gas, shipping and aviation groups are excluded from the proposal.
In practice, companies keep paying taxes to different countries based on national tax rates, but would do so under an EU framework on what is taxable.
For a seven-year transition phase, each company will be taxed according to its share of the aggregate tax base, calculated as their average taxable income over the past three years.
The Commission’s hope is to“pave the way for a permanent allocation method that could be based on formulary apportionment,” it wrote.
The goal is to allow multinationals to more easily claim cross-border compensation of losses, as well as give more certainty to businesses active across borders on their tax bills.
“We try to maximize benefits for businesses without rocking the boat for finance ministers,” said one EU official.
This approach was criticized by MEP Paul Tang, a Dutch socialist who’s the chair of the European Parliament’s subcommittee on taxation. “[EU Economy Commissioner] Paolo Gentiloni needs to maintain the ambition of the reform,” he said, adding “that is the formulary apportionment.”
All proposals in the field of taxation require unanimous backing of EU countries, and multiple attempts to adopt common tax rules were frustrated by vetoes.
Since then, however, all 27 EU countries signed up to a global tax deal including a minimum corporate tax rate of 15 percent and the partial reallocation of profits of the world’s richest companies across jurisdictions. That’s why the Commission thinks that it has a shot of reaching consensus this time around.
“Something has changed,” the EU official said.
But businesses criticized the Commission’s timing just as corporates brace for the global corporate tax rate which will start to apply from next year.
“We need to understand the compatibility of these proposed rules with the EU’s global tax commitments,” said Mariella Caruana, BusinessEurope’s tax policy lead.
“What is the rush to propose a new tax framework? It may end up in more complexities and it does not promise a more stable and attractive environment,” she added.
The proposal, known as BEFIT, is set to be unveiled on Tuesday together with new rules on “transfer pricing” whereby multinational companies book their profits and costs across countries to minimize their tax bill, also obtained by POLITICO, and proposals requiring EU countries to collect tax on behalf of each other so as to allow small businesses to only interact with their home administration in their own language.
Glazed eyes. One syllable responses. The steady tinkle of beeps and buzzes coming out of a smartphone’s speakers.
It’s a familiar scene for parents around the world as they battle with their kids’ internet use. Just ask Věra Jourová: When her 10-year old grandson is in front of a screen “nothing around him exists any longer, not even the granny,” the transparency commissioner told a European Parliament event in June.
Countries are now taking the first steps to rein in excessive — and potentially harmful — use of big social media platforms like Facebook, Instagram, and TikTok.
China wants to limit screen time to 40 minutes for children aged under eight, while the U.S. state of Utah has imposed a digital curfew for minors and parental consent to use social media. France has targeted manufacturers, requiring them to install a parental control system that can be activated when their device is turned on.
The EU has its own sweeping plans. It’staking bold steps with its Digital Services Act (DSA) that, from the end of this month, will force the biggest online platforms — TikTok, Facebook, Youtube — to open up their systems to scrutiny by the European Commission and prove that they’re doing their best to make sure their products aren’t harming kids.
The penalty for non-compliance? A hefty fine of up to six percent of companies’ global annual revenue.
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The exact link between social media use and teen mental health is debated.
These digital giants make their money from catching your attention and holding on to it as long as possible, raking in advertisers’ dollars in the process. And they’re pros at it: endless scrolling combined with the periodic, but unpredictable, feedback from likes or notifications, dole out hits of stimulation that mimic the effect of slot machines on our brains’ wiring.
It’s a craving that’s hard enough for adults to manage (just ask a journalist). The worry is that for vulnerable young people, that pull comes with very real, and negative, consequences: anxiety, depression, body image issues, and poor concentration.
Large mental health surveys in the U.S. — where the data is most abundant — have found a noticeable increase over the last 15 years in adolescent unhappiness, a tendency that continued through the pandemic.
These increases cut across a number of measures: suicidal thoughts, depression, but also more mundanely, difficulties sleeping. This trend is most pronounced among teenage girls.
Smartphone use has exploded, with more people getting one at a younger age | Sean Gallup/Getty Images
At the same time smartphone use has exploded, with more people getting one at a younger age. Social media use, measured as the number of times a given platform is accessed per day, is also way up.
There are some big caveats. The trend is most visible in the Anglophone world, although it’s also observable elsewhere in Europe. And there’s a whole range of confounding factors. Waning stigma around mental health might mean that young people are more comfortable describing what they’re going through in surveys. Changing political and socio-economic factors, as well as worries about climate change, almost certainly play a role.
Researchers on all sides of the debate agree that technology factors into it, but also that it doesn’t fully explain the trend. They diverge on where to put the emphasis.
Luca Braghieri, an assistant professor of economics at Bocconi university in Italy, said he originally thought concerns over Facebook were overblown, but he’s changed his mind after starting to research the topic (and has since deleted his Facebook account).
Braghieri and his colleagues combed through U.S. college mental health surveys from 2004-2006, the period when Facebook was first rolled-out in U.S. colleges, and before it was available to the general public. He found that in colleges where Facebook was introduced, students’ mental health dipped in a way not seen in universities where it hadn’t yet launched.
Braghieri said the comparison with colleges where Facebook hadn’t yet arrived allowed the researchersto rule out unidentified other variables that might have been simultaneous.
Faced with mounting pressure in the last years, platforms like Instagram, YouTube and TikTok have introduced various tools to assuage concerns, including parental control | Staff/AFP via Getty Images
Elia Abi-Jaoude, a psychiatrist and academic at the University of Toronto, said he observed the effect first-hand when working at a child and adolescent psychiatric in-patient unit starting in 2015.
“I was basically on the front lines, witnessing the dramatic rise in struggles among adolescents,” said Abi-Jaoude, who has also published research on the topic. He noticed “all sorts of affective complaints, depression, anxiety — but for them to make it to the inpatient setting — we’re talking suicidality. And it was very striking to see.”
His biggest concern? Sleep deprivation — and the mood swings and worse school performance that accompany it. “I think a lot of our population is chronically sleep deprived,” said Abi-Jaoude, pointing the finger at smartphones and social media use.
The flipside
New technologies have gotten caught up in panics before. Looking back, they now seem quaint, even funny.
“In the 1940s, there were concerns about radio addiction and children. In the 1960s it was television addiction. Now we have phone addiction. So I think the question is: Is now different? And if so, how?” asks Amy Orben, from the U.K. Medical Research Council’s Cognition and Brain Sciences Unit at the University of Cambridge.
She doesn’t dismiss the possible harms of social media, but she argues for a nuanced approach. That means honing in on the specific people who are most vulnerable, and the specific platforms and features that might be most risky.
Another major ask: more data.
There’s a “real disconnect” between the general belief and the actual evidence that social media use is harmful, said Orben, who went on to praise the new EU’s rules. Among its various provisions, the new EU rules will allow researchers for the first time to get their hands on data usually buried deep inside company servers.
Orben said that while much attention has gone into the negative effects of digital media use at the expense of positive examples, research she conducted into adolescent well-being during pandemic lockdowns, for example, showed that teens with access to laptops were happier than those without.
But when it comes to risk of harm to kids, Europe has taken a precautionary approach.
“Not all kids will experience harm due to these risks from smartphones and social media use,” Patti Valkenburg, head of the Center for Research on Children, Adolescents and the Media at the University of Amsterdam, told a Commission event in June. “But for minors, we need to adopt the precautionary principle. The fact that harm can be caused should be enough to justify measures to prevent or mitigate potential risk.”
Parental controls
Faced with mounting pressure in the past years, platforms like Instagram, YouTube and TikTok have introduced various tools to assuage concerns, including parental control. Since 2021, YouTube and Instagram send teenagers using their platform reminders to take breaks. TikTok in March announced minors have to enter a passcode after an hour on the app to continue watching videos.
Very large online platforms will also be banned from tracking kids’ online activity to show them personalized advertisements | Lionel Bonaventure/AFP via Getty Images
But the social media companies will soon have to go further.
By the end of August, very large online platforms with over 45 million users in the European Union — including companies like Instagram, Snapchat, TikTok, Pinterest and YouTube — will have to comply with the longest list of rules.
They will have to hand in to the Digital Services Actwatchdog — the European Commission — their first yearly assessment of the major impact of their design, algorithms, advertising and terms of services on a range of societal issues such as the protection of minors and mental wellbeing. They will then have to propose and implement concrete measuresunder the scrutiny of an audit company, the Commission and vetted researchers.
Measures could include ensuring that algorithms don’t recommend videos about dieting to teenage girls or turning off autoplay by default so that minors don’t stay hooked watching content.
Platforms will also be banned from tracking kids’ online activity to show them personalized advertisements. Manipulative designs such as never-ending timelines to glue users to platforms have been connected to addictive behavior, and will be off limits for tech companies.
Brussels is also working with tech companies, industry associations and children’s groups on rules for how to design platforms in a way that protects minors. The Code of Conduct on Age Appropriate Design planned for 2024 would then provide an explicit list of measures that the European Commission wants to see large social media companies carry out to comply with the new law.
Yet, the EU’s new content law won’t be the magic wand parents might be looking for. The content rulebook doesn’t apply to popular entertainment like online games, messaging apps nor the digital devices themselves.
It remains unclear how the European Commission will potentially investigate and go after social media companiesif they consider that they have failed to limit their platforms’ negative consequences for mental well-being. External auditors and researchers could also face obstacles to wade through troves of data and lines of code to find smoking guns andchallenge tech companies’ claims.
How much companies are willing to run up against their business model in the service of their users’ mental health is also an open question, said John Albert, a policy expert at the tech-focused advocacy group AlgorithmWatch. Tech giants have made a serious effort at fighting the most egregious abuses, like cyber-bullying, or eating disorders, Albert said. And the level of transparency made possible by the new rules was unprecedented.
“But when it comes to much broader questions about mental health and how these algorithmic recommender systems interact with users and affect them over time… I don’t know what we should expect them to change,” he explained. The back-and-forth vetting process is likely going to be drawn out as the Commission comes to grips with the complex platforms.
“In the short term, at least, I would expect some kind of business as usual.”
France has a dream: to make a name for itself in the surging global artificial intelligence industry.
France also has a problem: It’s right in the heart of the EU, currently known more for regulating AI than for encouraging it.
To carve out a spot in that tricky landscape, French leaders are now hoping to foster one particular segment of the industry, called open-source AI.
“Open-source” computer code — publicly posted to be used and repurposed by anyone — straddles the line between the public interest and a private-sector product. Sometimes developed by universities, sometimes by companies, open-source AI systems are now playing a growing role in the industry. For example, Meta’s powerful LLaMA2, an AI model released in July, is open-source.
In June, French President Emmanuel Macron announced new funding for an open “digital commons” for French-made generative AI projects, a €40 million investment intended to attract significantly more capital from private investors. “On croit dans l’open-source,” Macron stressed in his speech at VivaTech, France’s top tech conference: “We believe in open-source.”
A matter of national pride
There’s a bit of pride involved as well: Officials see it as a way to take on the overwhelming power ofU.S.-based firms in theAI industry.
“We don’t want to live in a world with two or three or four monopolies and to have to negotiate the rights to innovate. So open-source can be a very important answer,” said Henri Verdier, the French ambassador for digital affairs and the country’s top tech diplomat.
France’s open-source focus comes as part of a hard push toward developing a domestic, francophone AI industry. At the same event, Macron said France would invest €500 million in creating AI “champions” — market and research leaders in the emerging technology.
One of its existing champions is an open-source AI firm. In June, Paris-based startup Mistral.ai — whose Frenchfounders hail from U.S. tech giants including Meta and Alphabet’s Deepmind — raised a whopping €105 million in funding by promising to create an open-source competitor to OpenAI’s ChatGPT. The firm’s backers include Cedric O, the former digital minister for Macron’s government.
Alexandre Zapolsky, a co-founder of French tech firm Linagora who, ahead of Macron’s set-piece announcement, had co-written a newspaper column calling on France to foster its open-source AI ecosystem, sawMacron’s speech as a major signal to investors, as well as his own administration.
“Our president endorsed open-source AI — and became a promoter of it — while speaking in front of over 2,000 of France’s top technology entrepreneurs and investors,” Zapolsky said. “And his message has been heard by all the layers of the French government.”
Following the speech, Zapolsky’s co-founder Michel-Marie Maudet launched OpenLLM France, a collective of developers and researchers collaborating via messaging platform Discord to build open-source Al.
France has some academic strengths to build on. It has also been pitching itself as the best place in Europe to train power-intensive advanced AI models because its nuclear power plants offer cheap and abundant electricity. Irene Solaiman, policy director for leading open-source AI provider Hugging Face, said that France was “exceptional in the EU in having labs that develop high-quality language models.”
Some of the top minds in this field are already French nationals — including Meta’s Chief AI scientist, Yann LeCun — but that doesn’t mean it will be easy to attract talent in an extremely competitive industry. “The U.S. has a lot going for it. Like, it has really stellar academic institutions that work on a lot of the research that’s relevant to the field. It has a lot of cloud [computing] providers,” Solaiman said.
A Continent-wide opportunity
In embracing open-source, France is hoping to take advantage of an EU loophole that might offer a friendly regulatory lane for open-source systems. The bloc is currently finalizing its Artificial Intelligence Act, which would ban some AI uses and create obligations for those deemed risky.
The European Parliament, in its version of the AI Act, exempted open-source AI systems from following the strict compliance rules imposed by the law. Kai Zenner, chief policy assistant to Axel Voss, an influential German member of the European Parliament, says that EU governments support this approach, which suggests “chances are quite high” it will make it to the final version of the law. (The AI Act’s final text, expected to pass in late 2023, is currently being negotiated by representatives of European governments and the European Parliament.)
Europe’s Parliament sees open-source as an AI opportunity not just for France, but for the whole Continent.“We completely agree with the French assumption: We see open-source AI as a big chance,” Zenner said. “If Europe really wants to catch up with the United States and China in AI, then without drawing on models or data sets from the open-source community, we would never have a chance.”
Industry skepticism
Industry leaders, though, aren’t so sure the EU law will give them enough running room. The proposedexemption does not apply when open-source AI is used for commercial purposes, which would likely discourage investors and startups in the space. Members of the open-source AI ecosystem — including Github and Hugging Face — have asked European policymakers for more clarity on what constitutes commercial activity when it comes to making open-source AI components available to the public.
They also worry thatso-called foundation models — the big software engines powering generative AI tools such as ChatGPT — would separately have to abide by a set of obligations under the EU law whether they’re open-source or not. This worries tech giants as much as it does open-source startups.
“The latest amendments from the European Parliament — they seem to impose potentially some pretty complex and potentially somewhat unworkable conditions on open-sourcing large language models altogether,” said Nick Clegg, Meta’s president of global affairs.
For France and other European Union economies, it feels like a big piece of the future is at stake. Despite being home to world-class universities and talent, European leaders have spent decades watching their countries fail to capitalize on various waves of tech innovation, with the riches going to giants in the U.S. and China. The EU, meanwhile, has established itself more as a technology rulemaker than as a creator and exporter. Policymakers now are determined not to let the same thing happen with AI.
Cedric O,the former French digital minister turned Mistral.ai’s shareholder and adviser, says that Europe has one other advantage when it comes to developing open-source AI. Unlike the U.S., it lacks powerful corporate actors lobbying against the open-source model on security grounds.
“Europe has the ability to be part of the AI race,” O said. “I would say that — regardless of the fact that its AI is open-source or not — Europe has to do whatever it can to be part of the game.”
The pictures posted on the Chinese company’s website show a tall, Caucasian man with a crew cut and flattened nose inspecting body armor at its factory.
“This spring, one of our customers came to our company to confirm the style and quantity of bulletproof vests, and carefully tested the quality of our vests,” Shanghai H Win, a manufacturer of military-grade protective gear, proudly reported on its website in March. The customer “immediately directly confirmed the order quantity of bulletproof vests and subsequent purchase intention.”
The identity of the smiling customer isn’t clear, but there’s a fair chance he was Russian: According to customs records obtained by POLITICO, Russian buyers have declared orders for hundreds of thousands of bulletproof vests and helmets made by Shanghai H Win — the items listed in the documents match those in the company’s online catalog.
Evidence of this kind shows that China, despite Beijing’s calls for peace, is pushing right up to a red line in delivering enough nonlethal, but militarily useful, equipment to Russia to have a material impact on President Vladimir Putin’s 17-month-old war on Ukraine. The protective gear would be sufficient to equip many of the men mobilized by Russia since the invasion. Then there are drones that can be used to direct artillery fire or drop grenades, and thermal optical sights to target the enemy at night.
These shipments point to a China-sized loophole in the West’s attempts to hobble Putin’s war machine. The sale of so-called dual-use technology that can have both civilian and military uses leaves just enough deniability for Western authorities looking for reasons not to confront a huge economic power like Beijing.
The wartime strength of China’s exports of dual-use products to Russia is confirmed by customs data. And, while Ukraine is a customer of China too, its imports of most of the equipment covered in this story have fallen sharply, the figures show.
Russia has imported more than $100 million-worth of drones from China so far this year — 30 times more than Ukraine. And Chinese exports of ceramics, a component used in body armor, increased by 69 percent to Russia to more than $225 million, while dropping by 61 percent to Ukraine to a mere $5 million, Chinese and Ukrainian customs data show.
“What is very clear is that China, for all its claims that it is a neutral actor, is in fact supporting Russia’s positions in this war,” said Helena Legarda, a lead analyst specializing in Chinese defense and foreign policy at the Mercator Institute for China Studies, a Berlin think tank.
Were China to cross the red line and sell weapons or military equipment to Russia, Legarda said she would expect the EU to enforce secondary sanctions targeting enablers of Putin’s war of aggression.
But, she added, equipment like body armor, thermal imaging, and even commercial drones that can be used in offensive frontline operations are unlikely to trigger a response.
“Then there’s this situation that we’re in at the moment — all these dual-use components or equipment and how you handle those,” Legarda explained. “I would not expect the EU to be able to agree to sanctions on that.”
Disappearing customer
Shanghai H Win, like other Chinese companies producing dual-use equipment, has enjoyed a surge in business since Russia’s full-scale invasion of Ukraine.
According to customs records obtained by POLITICO, Russia has ordered hundreds of thousands of bulletproof vests and helmets made by Shanghai H Win | Genya Savilov/AFP via Getty Images
“Because of the war, a lot of trading companies are looking for us and ask: ‘Are you making this kind of vest?’ We received a lot of inquiries,” a sales representative told POLITICO over the phone.
At first, the representative said Shanghai H Win wasn’t allowed to export directly to Russia unless the Chinese military issues a certificate and it can provide documentary proof of its final customer.
Yet when asked who the man in the pictures was, and where he was from, the representative denied that he was even a customer — even though the website said so.
“He is our customer’s customer. We cannot ask him directly, ‘Where are you from?’ But I guess maybe he is from Europe — maybe Ukraine, maybe Poland, even maybe from Russia. I’m not sure.”
Shortly after the call, Shanghai H Win took down the post featuring the mystery shopper from its website.
Who are the buyers?
So, who exactly are those customers? Evidence of deals — importers, suppliers, and product descriptions — can be found in a registry of declarations of conformity by anyone with access to the Russian internet who is familiar with international customs classifications.
In an earlier story, POLITICO searched these filings and found evidence that sniper bullets made in the United States were reaching Russia, where they were freely available on the black market.
The declarations enable the final buyer to certify that the products are genuine and, in effect, make it possible to import goods without the express consent of the maker. If goods are traded through an intermediary, the maker may not even be aware that its goods are going to Russia. The registry is, however, searchable so it’s still easy to find the ultimate buyers of the Chinese kit.
One is Silva, a company headquartered in the remote Eastern Siberian region of Buryatia. It filed declarations in January of this year detailing orders for 100,000 bulletproof vests and 100,000 helmets. The manufacturer? Shanghai H Win.
Such importers often bear the hallmarks of “one-day” firms, as shell companies are known in Russia, set up by actors who want to conceal their dealings. They tend to be new, listed at obscure residential addresses, and have few staff or assets. Their financial statements often don’t report the levels of turnover that the filings would imply.
According to public records, Silva was registered only last September. It reported zero revenues for 2022. A Google Street View search of its address in Ulan-Ude, the capital of Buryatia, takes visitors to a dilapidated apartment block.
POLITICO tried to contact Silva but the phone number given on its filings rang off the hook and a message sent to its email address bounced.
The sale of so-called dual-use technology that can have both civilian and military uses leaves enough deniability for Western authorities looking for reasons not to confront China | STR/AFP via Getty Images
Another Russian company called Rika declared a smaller shipment of body armor from Shanghai H Win in March. Before that, in January, Rika declared a consignment of helmets from a company called Deekon Shanghai, which shares an address with Shanghai H Win. The two companies are affiliated, another Shanghai H Win representative said.
A woman who answered the phone at Rika said: “We buy in Russia, not in China.” The company didn’t reply to a follow-up email from POLITICO.
The denial is hardly plausible: In addition to the protective gear, a search of declarations by Rika threw up hits for deals for thermal optical equipment from China. That was corroborated by customs data accessed by POLITICO, which revealed more than 220 shipments, worth $11 million, for thermal optics and protective equipment since the outbreak of the war. Rika advertises Chinese-made night sights right at the top of its website.
Another Russian company called Legittelekom, whose homepage reveals it to be a Moscow freight forwarding company, also appears as a buyer of 100,000 items of headgear and 100,000 suits of outerwear from Deekon Shanghai, according to filings dated last November 24.
A man who answered a call to Legittelekom declined to comment on POLITICO’s findings and would not say whether the company supplied the Russian military.
“This is a commercial activity and we do not disclose our commercial activities,” the man said in response to both questions.
Bigger deal
Then there’s Pozitron, a company based in Rostov-on-Don, the southern city briefly captured by warlord Yevgeny Prigozhin’s Wagner mercenaries in their failed uprising last month. It imported more than $60 million-worth of “airsoft helmets,” “miscellaneous ceramics,” and other items from Chinese firm Beijing KRNatural in November and December 2022, according to customs data shared by ImportGenius.
These flows check out with Pozitron’s own declarations of conformity between late October and December 2022, for a total of 100,000 helmets. The declarations also reveal that Pozitron acquired a range of drones from Chinese multinational SZ DJI Technology Co., Ltd last December.
Although the quantity is unclear, the models specified include ones known to have been used in the Ukrainian theater of war, like DJI’s Mavic 2 Enterprise Advanced quadcopter or the Mini 2 lightweight drone.
At first sight, the product descriptions in the declarations and customs records appear harmless enough — the “airsoft helmets,” for example, are said to be for use in paintball games and “not for military use, not for dual use.”
Sanctions and defense experts say, however, that it’s common practice to mislabel dual-use goods as being for civilian purposes when they’re in fact destined for the battlefield.
At any rate, Pozitron, which was only founded in March 2021, is having a very good war: Its revenues exploded from 31 million rubles — around $400,000 — in 2021 to 20 billion rubles — almost $300 million — in 2022, according to its financial statement.
Reached by email, Pozitron’s general director, Andrey Vitkovsky, said that his company has “never imported drones and similar products” from the People’s Republic of China.
“The main activity of Pozitron LLC is the purchase and sale of consumer goods, sporting goods, and fabrics, both produced in the Russian Federation and imported from China,” Vitkovsky added, saying that his company’s activities were “exclusively peaceful in nature, in compliance with all rules and restrictions.”
The denial is typical — Russian companies have good reason to fear Western sanctions if they are implicated in trade that supports the Kremlin’s war effort. After POLITICO reported in March that a company called Tekhkrim was importing Chinese assault weapons, and declaring them as “hunting rifles,” the firm was sanctioned by the United States.
Pozitron is on the West’s radar, said one sanctions expert, who was granted anonymity as they are not authorized to speak publicly.
As for Beijing KRNatural, POLITICO was able to trace a company with a similar name at the address given in the Pozitron filings. The company, Beijing Natural Hanhua International Trade Co., Ltd, is listed as a “small and micro enterprise.” It was founded in April 2022, a few months before the Pozitron deals. Nobody answered when POLITICO called.
Heavenly mechanics
In contrast to the bulk consignments of protective gear that appear intended to equip a large fighting force, the orders for drones found by POLITICO are more dispersed among different buyers — both companies and individuals.
In addition to Pozitron, buyers of drones from DJI and its subsidiaries include firms called Gigantshina and Vozdukh — neither of which responded to emailed requests for comment. Another is Nebesnaya Mekhanika (“Heavenly Mechanics”), which before the war was the Chinese company’s official distributor in Russia.
A DJI spokesperson said that the company and its subsidiaries had voluntarily stopped all shipments to, and operations in, Russia and Ukraine on April 26, 2022 — two months after the war broke out.
“We stand alone as the only drone company to clearly denounce and actively discourage use of products in combat,” the spokesperson said in comments emailed to POLITICO.
DJI said it had also broken off its relationship with Nebesnaya Mekhanika, although the Russian company filed further declarations for shipments of the Chinese company’s drones last September 15 and on March 27 of this year.
The spokesperson said that DJI was not in any way involved in the drafting of the declarations of conformity found by POLITICO: “These documents would have been filled out by Russian parties, and they do not indicate in any shape or form who ex- or imported the products that are being declared conform.”
“We have seen media reports and other documents that appear to show how our products are being transported to Russia and Ukraine from other countries where they can be bought off-the-shelf,” the spokesperson added. “However, it is not in our power to influence how our products are being used once they leave our control.”
Still, a search of ImportGenius shows that a Chinese company called Iflight has continued to ship DJI drones to Nebesnaya Mechnika via Hong Kong, care of a local company called Lotos. The most recent consignment was delivered last October 10. In an apparent anomaly, Russia is stated as the country of origin for the shipments.
Nebesnaya Mekhanika, which still advertises DJI drones on its website, did not respond to a request for comment.
Political will
The trafficking of low-tech body armor to high-tech drones and thermal optics highlights a vulnerability in the Western sanctions regime. The ambiguity surrounding the dual-use status of this equipment, coupled with the fact that a significant portion of it is manufactured in China, seems, at least for now, to have placed the possibility of the West taking meaningful action beyond reach.
Then there is the flow of technology through China that may include components made in the West that could be of direct military use.
Russia is fully aware of the China loophole and is using it to buy Western technology to fight its war against Ukraine, according to a recent analysis by the KSE Institute, a think tank affiliated to the Kyiv School of Economics. More than 60 percent of imported critical components in Russian weapons found on the battlefield came from U.S. companies, the researchers found.
It’s an issue that U.S. Secretary of State Antony Blinken brought up on a visit to Beijing last month — the first by Washington’s top diplomat in five years. He told reporters that China had given assurances that “it is not and will not provide lethal assistance to Russia for use in Ukraine.” Blinken, however, expressed “ongoing concerns” that Chinese firms may be providing technology that Russia can use to advance its aggression in Ukraine. “And we have asked the Chinese government to be very vigilant about that.”
U.S. Secretary of State Antony Blinken told reporters that China had given assurances that “it is not and will not provide lethal assistance to Russia for use in Ukraine” during a visit to Beijing last month | Pool photo by Leah Millis/AFP via Getty Images
France is also concerned that China is delivering dual-use equipment to Russia. “There are indications that they are doing things we would prefer them not to do,” Emmanuel Bonne, President Emmanuel Macron’s top diplomatic adviser, told the recent Aspen Security Forum. Pressed on whether China was supplying weapons, Bonne said: “Well, kind of military equipment … as far as we know they are not delivering massively military capacities to Russia but (we need there to be) no delivery.”
Yet there’s little the West can do to twist Beijing’s arm into halting flows of dual-use products into Russia. Only the United States would have the real power to impose an outright ban on dollar-denominated transactions — as Washington did when it sanctioned Iran over its secret nuclear program.
The EU, however, lacks such a strong sanctions weapon because the euro is far less ubiquitous on global markets. It’s also been hesitant to act. In its latest package of Russia sanctions last month, the EU compiled a list of seven Chinese companies that shouldn’t be allowed to trade with the bloc. But, after lobbying by Beijing, Brussels dropped four companies from the blacklist.
Elina Ribakova, one of the authors of the KSE Institute report, said indirect shipments via China pose challenges in terms of both the scope and enforcement of Western sanctions. Secondary sanctions may not be sufficient, she said. She called for manufacturers to be forced to take responsibility for where their products end up — just as banks were required by regulators to step up customer oversight and anti-money laundering operations in the wake of the 2008 financial crisis.
“What we can do differently is to create the same infrastructure for the corporates,” explained Ribakova, who is director of the international program at the Kyiv School of Economics. “We have to threaten them with serious fines.”
Maxim Mironov, a sanctions expert and assistant professor of finance at the IE Business School in Madrid, reckons that the West, despite expanding sanctions to punish Putin’s helpers, lacks the political conviction to enforce them against Beijing.
“Do politicians have enough will to put sanctions on China? Basically, the answer is no,” said Mironov.
“China signals: You can try, but I don’t care what you are trying to do,” Mironov added. “And the European Union is like: If you don’t like it, we are not going to do it. And if the Chinese see that, they are just going to continue doing what they think is in their best interest.”
The European Commission, the U.S. National Security Council and the Chinese Mission to the EU did not respond to requests for comment.
Stuart Lau contributed reporting.
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Sarah Anne Aarup, Sergey Panov and Douglas Busvine
Jamie Dettmer is opinion editor at POLITICO Europe.
Wars don’t run according to political timetables. And in the lead-up to Ukraine’s counteroffensive, President Volodymyr Zelenskyy and his top aides strove to explain this reality to both nervous allies, impatient for military progress, and their own people, eager for the big counterattack to kick off and hear good news from the front lines.
In the run-up to the long-awaited counteroffensive, which started to unfold last week — later than most anticipated — Ukrainian Minister of Defense Oleksii Reznikov was worried that expectations were “definitely overheated.” “Everyone wants another win,” he said, cautioning allies to temper their hopes, so as to avoid subsequent disappointment.
The worry here is that falling short of expectations might lead to a reduction in international military assistance and renewed, often oblique, pressure to engage with Moscow in negotiations. “They want the next victory. It’s normal, these are emotions,” Reznikov added.
But impatience for a decisive blow against Russia stems not just from emotion but from political calculations too.
A long war risks Western fatigue, the depletion of arsenals and an erosion of unity — especially with China, Brazil and South Africa touting dubious “peace” plans. And despite public promises to back Ukraine for “as long as it takes,” earlier this year Washington officials warned counterparts in Kyiv that they needed to make major battlefield gains soon, while weapons and aid from the U.S. and European allies are still surging.
With the U.S. heading into what’s likely to be an exceptionally torrid and combustible presidential election season — to say the very least — the high level of security and economic assistance from Congress might be hard to maintain, they warned. And according to Ukrainian lawmakers, in recent talks with U.S. State Department and National Security Council officials, queries regarding future commitments and asks were batted away, with the response often being, “let’s see how the counteroffensive goes.”
Former Deputy Prime Minister Ivanna Klympush-Tsintsadze told POLITICO these talks left her feeling anxious about the “continuation of the same level of U.S. support to Ukraine after this financial year” — which, for the U.S. federal budget, is September.
Likewise, there are also signs of war-weariness and wariness in Europe, both among politicians and the public, with Mykhailo Podolyak, an adviser in Zelenskyy’s office, complaining this week: “I understand that sitting thousands of kilometers away from Ukraine you can talk about ‘geopolitics,’ ‘settlement’ and the undesirability of escalation for months. And allow the rampage of the ‘Russian world.’”
Tellingly, even in Poland — one of Ukraine’s staunchest allies — the attitude toward Ukrainian war refugees is deteriorating. According to a survey by researchers from the University of Warsaw and the Academy of Economics and Humanities, in the past five months, the percentage of those who strongly support helping refugees dropped from 49 percent to 28 percent.
So, the political clock is ticking — and not necessarily matching the tempo of war.
Zelenskyy has had to pull off a difficult balancing act in recent weeks, holding out the prospect of delivering a decisive blow against Russia to shore up Western confidence and optimism and keep equipment and weapons flowing, while also underscoring that the counteroffensive most likely won’t be able to achieve the stunning quick success of last autumn’s push in Kharkiv.
Ukrainian President Volodymyr Zelensky
| Alexey Furman/Getty Images
Triggering a cascading collapse of Russia’s defenses and a pell-mell rout, the success in Kharkiv helped keep Western allies on side, but it also unhelpfully colored expectations, adding to the hype surrounding the current counteroffensive, which Kyiv has been keen to calm. However, Ukrainian officials are acutely aware of Western fears about a long-drawn out war of attrition.
But Ukraine also doesn’t want to be pushed into any hasty moves that could result in serious and costly mishaps, which might then undermine military morale or knock Western hopes and have major geopolitical repercussions, a senior Ukrainian military official told POLITICO on condition of anonymity. “This is not like Kharkiv,” he said. “We must be cautious. The Russians have been learning and preparing, and their defensive lines are formidable — we don’t have men to waste, nor equipment. Progress will have to be incremental.”
And incrementalism is the new watchword.
In his nightly address, Zelenskyy noted on Monday that “the battles are fierce, but we are moving forward, and this is very important. The enemy’s losses are exactly what we need.”
Similarly, according to Ben Hodges, a former commander of the U.S. army in Europe, this “offensive is incredibly important for Ukraine’s future.” “Kyiv’s top military leadership has, to date, followed the conservative strategy of eroding Russian formations over time, gaining ground incrementally, avoiding major risks and limiting Ukrainian casualties as much as possible,” he wrote for the Center for European Policy Analysis.
“The offensive has clearly started, but not I think the main attack. When we see large, armored formations join the assault, then I think we’ll know the main attack has really begun,” he added.
Even though the main action is still to come, however, as Zelenskyy highlighted, the going is clearly tough.
And his Deputy Minister of Defense Hanna Maliar made this even clearer, saying on Telegram: “The enemy is doing everything to keep the positions captured by him. Actively uses assault and army aviation, conducts intense artillery fire. During the offensive, our troops encounter continuous minefields, which are combined with anti-tank ditches. All this is combined with constant counterattacks by enemy units on armored vehicles and the massive use of anti-tank guided missile and kamikaze drones.”
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Ukrainians believe they can, and will, deliver a powerful blow with the brigades trained by NATO militaries and supplied by Western allies. And officials in Kyiv believe they can do better than the “moderate territorial gains” forecast by the Pentagon, according to leaked classified U.S. intelligence documents.
FRANKFURT — Swiss banking giant UBS will buy the country’s second-largest bank Credit Suisse in a deal that will come as a relief to financial markets in Europe and across the world.
UBS said in a statement that the total price is 3 billion Swiss francs, or about $3.25 billion, in UBS shares.
The deal was pushed through in an effort to avoid further turmoil in global banking following the failure of Silicon Valley Bank and another regional lender in the U.S.
“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” the Swiss National Bank said in a separate statement, noting that the deal was made possible with the support of the Swiss federal government, the Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank.
The central bank added that UBS and Credit Suisse can obtain a liquidity assistance loan of up to 100 billion francs.
Highlighting the urgency of securing a deal for the bank before markets open on Monday, Swiss authorities adjusted laws to allow further provision of liquidity by the Swiss central bank, while the government agreed to provide additional guarantees.
The expeditious rescue of Credit Suisse was welcomed by the European Central Bank as well as the Federal Reserve in the U.S.
The “swift action” by the Swiss authorities “are instrumental for restoring orderly market conditions and ensuring financial stability,” ECB President Christine Lagarde said in a statement.
The 167-year-old Credit Suisse has been involved in a series of scandals that have undermined the confidence of investors and clients. It has thus found itself in the eye of the storm when the collapse of Silicon Valley Bank sparked fears of a banking crisis.
The EU was quick to hit Russia with sanctions after Vladimir Putin launched the invasion of Ukraine — but it took time and an escalation of measures before Moscow started to feel any real damage.
Since the war started in late February last year, November was the first month when the value of EU imports from Russia was lower than in the same month of 2021. Until then, the bloc had been sending more cash than before the conflict — every month, for nine months. More recent data is not yet available.
The main reason behind this? Energy dependency on Russia and skyrocketing energy prices. But that’s not the whole story: Some EU countries were much quicker than others to reduce trade flows with Moscow — and some were still increasing them at the end of last year.
Here is a full breakdown of how the war has changed EU trade with Russia, in figures and charts:
Former United States President Donald Trump was a useful bogeyman for Europe. His successor, Joe Biden, is proving much trickier — a friend who says all the right things but leaves you in the lurch when it counts.
At each new perceived slight, the Europeans express shock, frustration and dismay: How could Washington fail to consult its allies, or at the very least inform them of its plans? Meanwhile, the American response is always some variant of: Terribly sorry, we didn’t even think of that.
The underlying dynamic is one of polite indifference. Despite Washington’s renewed commitment to NATO and massive outlay of arms and funds to help Ukraine defend itself against Russia, the U.S. remains steadfastly focused on what most perceive to be its main existential challenge: China.
In that equation, Europe is often an afterthought. It’s just that many on this side of the Atlantic have failed to get the message — or draw conclusions of what it means for the bloc’s future — instead preferring to act out a script of outrage and remonstrance.
A current example is the blooming transatlantic argument over Biden’s IRA.
Months in the making, painstakingly hashed out on Capitol Hill, the legislation represents Washington’s best bipartisan effort thus far to decarbonize its economy and prepare for decoupling from China. The bill flags $369 billion for energy and climate programs, including billions in taxpayer-funded subsidies for the production of electric vehicles inside the U.S.
It just so happens that it’s a potential disaster for Europe.
Bruised and confused
Amid an energy crisis that has large parts of the European Union economy staring into an abyss, French President Emmanuel Macron has led the charge against Biden’s IRA, accusing Washington of maintaining a “double standard” on energy and trade. He’s called for Europe to respond in kind by rolling out its own subsidy plan, prompting a visit from U.S. Trade Representative Katherine Tai to an EU trade ministers’ meeting in Prague on October 31.
But rather than try to cajole them with concessions, Tai invited them to get on board the China train by rolling out their own subsidies — which isn’t what the Europeans wanted to hear.
According to an EU diplomat who spoke to POLITICO ahead of a trade ministers’ meeting on Friday, members of the bloc still hope that Biden will send the IRA back to Congress for resizing, a prospect U.S. officials say is about as likely as canceling Thanksgiving.
The result is that Europe is now back in familiar territory: Bruised, confused and scrambling for a response while failing to formulate its own cohesive strategy to contend with China. And instead of receiving solidarity from Washington in a time of war, they feel the U.S. has maneuvered itself into a perfect position to suck investment out of Europe.
The outlines of an EU response to the IRA did start to take shape earlier this week, when Paris and Berlin — only recently back on speaking terms after a falling out — jointly called for an EU plan to subsidize domestic industries.
But that plan is likely weeks, even months, away from becoming a reality. And even if all 27 EU countries manage to strike a deal, their leaders will be hard-pressed to inject anywhere near as much money into it as Washington has earmarked, as most EU countries are still howling in pain over the high price of gas — much of which they now import from liquid natural gas terminals in Texas.
Again, Biden’s America is looking after its interests while the EU’s left to groan about missed signals, hurt feelings and unfair practices.
The tragedy for Europe is that this is happening at a time when transatlantic relations are meant to be at an all-time high. Biden’s election, followed by the war in Ukraine and Washington’s massive investment in shoring up NATO’s eastern flank, was meant to signal the U.S.’s decisive return to the European sphere.
But what the Europeans are discovering is that the Ukraine war is just one facet of the U.S.’s larger strategic duel with China, which will always take precedence over EU interests.
That was true under Trump, and it remains true under his successor. It’s just that the message is delivered in a different style.
In the long run, Biden’s polite indifference may prove more deadly.
The EU is under immense pressure to cap the price of imported natural gas to contain energy costs — but many of the companies making a fortune selling cheap U.S. gas to the Continent at eye-watering markups are European.
The liquefied natural gas (LNG) loaded on to tankers at U.S. ports costs nearly four times more on the other side of the Atlantic, largely due to the market disruption caused by a near-total loss of Russian deliveries following the invasion of Ukraine.
The European Commission has come under fierce pressure to sketch out a gas price cap plan, but some countries, led by Germany, worry such a measure could prompt shippers to send gas cargoes elsewhere. The Commission is also reluctant, and its proposal issued Tuesday sets such demanding requirements that they weren’t met even during this summer’s price emergency.
But a large part of the trade is in European hands, according to America’s biggest LNG exporter.
“Ninety percent of everything we produce is sold to third parties, and most of our customers are utilities — the Enels, the Endesas, the Naturgys, the Centricas and the Engies of the world,” said Corey Grindal, executive vice president for worldwide trading at Cheniere Energy, rattling off the names of big-name European energy providers.
Cheniere, which this year saw 70 percent of its exported LNG sail to Europe, sells its gas on a fix-priced scheme based on the American benchmark price, dubbed Henry Hub, which is currently at about $6 per million British thermal units.
On average, the price across all Cheniere contracts is 115 percent of Henry Hub plus $3, Grindal said. That works out to about €33 per megawatt-hour. For comparison, the current EU benchmark rate, dubbed TTF, is €119 per MWh.
It’s a big markup for whoever is reselling those LNG cargoes into Europe’s wholesale market, profiting from fears that there may not be enough gas to last the winter.
Despite fears that any EU cap will send gas to higher bidders in Asia and result in bloc-wide shortages, Grindal gave a resounding “no” when asked if a cap would have any impact on how Cheniere does business with European companies.
“Our balance sheet is underpinned by those long-term contracts,” he added.
Translation: If buyers choose to trade their precious cargoes away for higher profits beyond Europe once they receive them, that’s their decision.
Blame game
“The United States is a producer of cheap gas that they are selling us at a high price … I don’t think that’s friendly,” said French President Emmanuel Macron | Ludovic Marin/AFP via Getty Images
The difference between U.S. and EU gas prices hasn’t gone unnoticed by European politicians — but most of the finger-pointing has been at American producers rather than the resellers closer to home.
“In today’s geopolitical context, among countries that support Ukraine there are two categories being created in the gas market: those who are paying dearly and those who are selling at very high prices,” French President Emmanuel Macron told a group of industrial players last week. “The United States is a producer of cheap gas that they are selling us at a high price … I don’t think that’s friendly.”
Macron’s dig conveniently ignored that the largest European holder of long-term U.S. gas contracts is none other than France’s own TotalEnergies.
At the company’s latest earnings call last month, TotalEnergies CFO Jean-Pierre Sbraire trumpeted the fact that the firm’s access to more than 10 million tons of U.S. LNG annually “is a huge advantage for our traders, who can arbitrage between the U.S. and Europe.”
“And now, given the price of LNG, each cargo represents something like $80 million, even $100 million. So, when we are able reroute or to arbitrage between the different markets, of course, it’s a very efficient way to maximize the value coming from that business,” Sbaire added. “Cash flow generation of this order of magnitude marks the start of a new era for the company.”
Spain’s Naturgy — which has some 5 million tons of U.S. LNG a year from Cheniere under contract — has also earned nearly five times more trading gas so far this year compared with 2021 thanks to “the increased spread between [Henry Hub] and TTF,” it wrote in its half-year report.
Long-term contracts with the U.S. weren’t always so profitable. In fact, from 2016 to at least 2018, buyers were mostly losing money on the fixed deals, leading some to sell them off.
In 2019 Spain’s Iberdrola, for example, pawned off its 20-year Cheniere contract to Asian trader Pavilion Energy, which is now benefiting from selling into a high-priced global market.
In the U.K, Centrica tried — and failed — to sell off its LNG portfolio in 2020 when government-ordered lockdowns drove real-time prices through the floor. That included a 20-year fixed Cheniere contract set to run through 2038.
Now that real-time prices have shot back up, Centrica — part of Shell-owned British Gas — is reaping the rewards and eagerly snapping up more long-term contracts, most recently a 15-year deal with U.S. LNG exporter Delfin beginning in 2026.
“This is a really important profit stream for us,” Centrica CFO Chris O’Shea told investors on a Friday trading update call.
Unlike some producers — for example in the Middle East — which restrict the final destination of the LNG to consumers in Asia and prevent it being sold onward at a higher price, American gas changes ownership the minute it’s loaded onto a ship and comes with no strings attached.
That leaves buyers free to redirect the precious supply wherever it’s most profitable — sometimes at the expense of their downstream clients, if it’s cheaper to break those pre-existing domestic delivery commitments.
“We can only control what we can control,” said Cheniere’s Grindal. “U.S. LNG is destination-free.”
But as far as getting it on the ship at previously agreed prices, “our focus is being that reliable supplier, being committed to the obligations that we’ve made to our customers, and we’re committed to doing everything that we can to help the EU in this situation.”
