As the war in Ukraine has entered its second year with suppositions of a major Russian offensive, including a possible attack on Kiev in spring its impact is increasing on Russia and Ukraine but also on Europe and other parts of the world. Albanian Daily News talked with the founder and CEO of Euro-Phoenix, Les Nemethy, who dwelt at length not only on the aftermath of the war but the implications of an eventual Russian victory, the overall challenges to the EU, the dilemmas over the danger of a nuclear war etc.

“In short, a Russian victory in Ukraine would challenge the existing world order,” said Nemethy.

Touching upon how much the developing world and in general the world population is on the US side in its actions the former World Banker said only the OECD countries support the US position on Ukraine, while emerging countries including China, India, Indonesia, Pakistan, etc. are opposed or ambivalent, meaning that only roughly a third of the world population supports the US position. 

Nemethy is of the opinion that the more the Ukrainian war becomes an existential or acute issue for the European Union, the more Serbia will be forced to take sides, publicly endorse support for the European side, like Montenegro did a few years ago, before the EU integration may proceed beyond a certain point. 

In the meantime, he said that it is always a pleasure to see leaders of Kosovo and Serbia communicating, and even more of a pleasure when they can agree on things. However, according to him, there is an enormous chasm between Serbia and Kosovo that will take at least a generation to address. “The 2021 accord between Kurti and Vucic addressed economic issues, better transport links between Belgrade and Pristina and freer movement of people between Serbia and Kosovo. While this represents a very positive first step in the right direction, (probably undertaken due to many carrots and sticks used by the EU!) there is still a large distance to cover before relations are friendly.”

Asked about the current political and economic situation of Albania, the former World Banker, Nemethy thought that while many countries have polarized politics, when it reaches the degree reached in Albania, where elections are boycotted, and where there are strong allegations of corruption, foreign investment shies away. “The Albanian economy needs more and stronger legs to stand on. This will take a very long time to happen with domestic capital accumulation or could happen much faster should international capital begin flowing into Albania.  This, however, would require a less corrupt, more transparent environment, a diminution of polarization, and a round of elections considered fair by all sides,” said Les Nemethy, CEO of Euro-Phoenix in the following interview:   

Albanian Daily News: The first anniversary of the Russian aggression against Ukraine with all its repercussions in the country and worldwide is accompanied with suppositions of a major Russian offensive including a possible attack on Kiev in spring. Mr. Nemethy If this materializes, which might be the implications of a hypothetical Russian victory?             

EURO-Phoenix’s CEO Les Nemethy: The implications of a Russian victory could be horrendous. Most importantly, there would be a very good chance that the Russians would then be inspired to take Moldova, threaten the Baltics, perhaps even Poland.

A Russian victory could also signal to other countries that war is a viable strategy for gaining territory. It may embolden China to take Taiwan, right down to Argentina making another run at the Falklands. 

Ironically, should the Russians be appeased by being allowed to take even a part of Ukraine, the chances of an attack on a NATO member (e.g. a Baltic country) increases, which then either triggers a response from all NATO members, possibly even nuclear confrontation. Or if there is no response, NATO is greatly weakened or falls apart.

A Russian victory would increase Russian influence throughout the former Soviet republics, including Kazakhstan, Georgia, etc., and would beg the question “which country is next?”

A Russian victory could also have an economic impact. It might impact investment, trade and capital flows with countries that might find themselves in the possibly “next” or “at risk” category.  

In short, a Russian victory in Ukraine would challenge the existing world order.

- How will the European Union rise to the challenge as Russia and Ukraine are right on the EU’s doorstep and the US has the option of retreating into Fortress America? As facts of history show, two world wars were fought in European territory…

- Particularly if the American defense shield proves unreliable, the crisis may either forge Europe into a more closely knit union or catalyze its falling apart.  Most European countries have been “free riders” within NATO, spending substantially less than the 2% of GDP recommended by NATO.  Germany, the continent’s largest economy, has now flipped from being among the worst of the free riders for decades, to committing more than 2%.  This is a monumental change.  But Europe’s “force de frappe” can only be effective if it has scale (e.g. coordinated among all EU members). Further military integration is required. Sweden and Finland punch above their weight militarily, and their joining NATO is also extremely significant.

Even assuming Americans prove faithful allies, which I trust is the likelier scenario, an escalation of Russian hostilities in Ukraine would increase the need for military and humanitarian assistance to Ukraine. 

In my view, should the conflict become more intense and protracted, it may prove very difficult to stand up to a military power like Russia where each member state has a veto power on all EU decisions. Decision-making in the EU needs to become more streamlined and efficient. The US has a tremendous advantage over Europe, in having a single federal government that speaks for the entire population, without the horse trading and political compromises that goes on between member countries before most major decisions.  Unfortunately, a perception of weak leadership and bureaucracy has given legitimacy to those who favor centralizing more power within the European Union. The crisis to forge a stronger union must be strong enough to catalyze an evolution of the union, but not strong or sudden enough to overwhelm it.

Ukraine’s achievement of candidate status to join the European Union has strong symbolic value and would result in a massive loss of face for the European Union should it back down or provide insufficient assistance to Ukraine.

- The unfolding of the war is revealing that there are many more dimensions of it than purely military. Having said this, does the Ukrainian War signal the outbreak of World War III?

- The conventional definition of World War is that it involves the participation of multiple major powers in a global conflict.  Yet one increasingly hears that the Ukrainian Wars signal the outbreak of World War III.

Until recently, this seemed far-fetched. The war is asymmetric:  if the US can wear down the Russian military machine by channeling roughly 10% of its defense budget into a proxy war -- and does not even have to mobilize a single combat soldier -- that doesn’t sound like a World War. 

In my view, far likelier than a World War, is that the world degenerates into a much more violent state of neither-World-War-nor-peace.  If Russia is not contained, hybrid warfare is likely to become much more common, which includes:

security hacks, cyberattacks, etc.

misinformation (used for example to rig elections),

kompromat (obtaining compromising information to blackmail a politician or other influential figure),

trade war (embargo on products crossing borders), and financial warfare (freezing reserves, blocking access to platforms such as SWIFT.  Or even something seemingly innocuous as taking payment for oil in yuan or gold. This diminishes the US Dollar as world reserve currency, which has allowed the US its “exorbitant privilege” of printing trillions of dollars, where the world accepts paper in exchange for providing the US with goods.

And I’m not saying that the US is lily white either.  There have been claims of the US staging the sabotage of the Nord Stream II pipeline—not at all beyond the realm of possibility.

- Please let me touch upon the economic aspect on this first anniversary of the war. If we put on balance, which is the greatest loser so far from its repercussions- I mean the EU, the US or Russia?

- In my opinion, Russia is the greatest loser so far. For the Russian people, sanctions will make life more brutish over time for the population at large. They have lost considerable freedom to travel and freedom of expression. The economy will have less access to technology and technology-related imports. While Russia has been quite adept at circumventing sanctions, those technologies and products that do make it through the sanctions barrier will arrive with delay, and at a higher cost, and exports will often achieve less net revenues, due to the need to pay off middlemen. Russian oil and gas production capacity was built largely by foreign technology. Building infrastructure in permafrost is no simple engineering task! Now that sanctions are in effect, it will be increasingly difficult to expand or even maintain production capacity. Loss of European export markets are already hurting and will increasingly affect GDP.

The EU has been a loser, in that the economic model of Germany and several other EU countries was built on cheap Russian energy. Loss of cheap energy has been a challenge to European competitiveness. Germany and the EU have coped better than I would have predicted a year ago, thanks to a mild winter, conservation and finding alternative sources of fuel (record fast construction of Liquefied Natural Gas (LNG) terminals!).

Some claim that loss of cheap energy is resulting in the de-industrialization of Europe. However, it seems that only the most energy intensive companies, like BASF, are moving capacity from Europe to elsewhere. On the positive side for Europe, the Ukrainian war has also accelerated the greening of Europe, with an acceleration of investment into solar and other alternative fuels.

The war has resulted in a humanitarian crisis, with a need for Europe to accommodate millions of Ukrainian (and even Russian) refugees. While this bears an economic cost in the short-term, given the demographic crisis faced by Europe, in the medium- to long-term, receiving a few million immigrants will prove to be a net advantage to Europe.

The United States has borne the brunt of military aid given to Ukraine. However, if the US containment of Russian expansion into Ukraine proves successful, one might say that spending less than 10% of your military budget with no boots on the ground to drain the energy of a major military rival, is not a bad result for the US. The US military has also been able to test new technologies in Ukraine.  (Granted, while US military commanders might look at things in these terms, it is a rather Faustian bargain). The US has also benefited from boosting its energy exports (e.g., LNG shipments to Europe) because of the war.

- Speaking about Europe and the EU, all events are closely connected with the Western Balkans whose countries have applied to join the Union. As a shrewd observer of this region, how do you see their stance when one thing is obvious that despite Brussels’ pressure Serbia continues to back Russia?

- The future of Serbia is in play.  Will it gravitate towards its historical ally, Russia, or the European Union?

In 2021, the Belgrade Institute of Economic Affairs conducted a survey, which showed that 44% of Serbians viewed Russia more favorably than the EU, with only 32% viewing the EU more favorably.  However, the survey was more skewed towards Europe when it came to the younger segment of the population, and when it came to economic issues. 

In my opinion, the more the Ukrainian war becomes an existential or acute issue for the European Union, the more Serbia will be forced to take sides,  publicly endorse support for the European side, like Montenegro did a few years ago, before EU integration may proceed beyond a certain point.

Perhaps a moment of truth is approaching, as politicians come mostly from the older generation.  However, EU politicians are probably aware that because of demographics, time plays in their favor.

- As a follow up there are new developments regarding the conflict between Kosovo and Serbia as Prime Minister Albin Kurti and President Aleksandar Vucic broke the ice meeting in Brussels, which produced an accord although there are some hot issues the parties disagree. Do you think that this event signals hope that at long last a solution is in sight?

- It is always a pleasure to see leaders of Kosovo and Serbia communicating, and even more of a pleasure when they can agree on things. However, I would avoid drawing general conclusions that “a solution is in sight.” There is an enormous chasm between Serbia and Kosovo that in my opinion, will take at least a generation to address.

The 2021 accord between Kurti and Vucic addressed economic issues, better transport links between Belgrade and Pristina and freer movement of people between Serbia and Kosovo. While this represents a very positive first step in the right direction, (probably undertaken due to many carrots and sticks used by the EU!) there is still a large distance to cover before relations are friendly.

- To conclude, Mr. Nemethy with Albania, a country which you are very familiar with. How would you assess the political situation with the ruling and opposition forces deeply divided, and what is more critical what is in stock for this country regarding its economic performance?

- While many countries have polarized politics, when it reaches the degree reached in Albania, where elections are boycotted, and where there are strong allegations of corruption, foreign investment shies away.

This has made the Albanian economy heavily dependent on tourism and remittances. Covid demonstrated the vulnerability of relying on tourism. The Albanian economy needs more and stronger legs to stand on. This will take a very long time to happen with domestic capital accumulation or could happen much faster should international capital begin flowing into Albania. This, however, would require a less corrupt, more transparent environment, a diminution of polarization, and a round of elections considered fair by all sides. 

Another catalyst of long-term prosperity of Albania would be an acceleration of the EU accession process. This, too, would require the fight against corruption and strengthening of democracy.