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G7 finance ministers close ranks as tensions with Russia, China fester

U.S. Secretary of State Antony Blinken, left, and Ukraine’s Foreign Minister Dmytro Kuleba, right, attend a bilateral meeting on the sidelines of the G7 Foreign Ministers meeting on April 18 on Capri Island in Italy.  (Gregorio Borgia/Pool/AFP)
By Alan Rappeport New York Times

STRESA, Italy – Top finance officials from the world’s advanced economies moved toward an agreement Saturday over how to use Russia’s frozen central bank assets to aid Ukraine and warned against China’s dumping of cheap exports into their markets, aiming to marshal their economic might to tackle twin crises.

The embrace of more ambitious sanctions and protectionism came as finance ministers from the Group of 7 nations gathered for three days of meetings in Stresa, Italy. The proposals under consideration could deepen the divide between the alliance of wealthy Western economies and Russia, China and their allies, worsening a global fragmentation that has worried economists.

Efforts by the G7 to influence the two powerful adversaries have had limited success in recent years, but rich countries are making a renewed push to test the limits of their combined economic power.

In a joint statement, or communique, released Saturday, policymakers said they would stay united on both fronts as geopolitical crises and trade tensions have emerged as the biggest threats to the global economy.

“We are making progress in our discussions on potential avenues to bring forward the extraordinary profits stemming from immobilized Russian sovereign assets to the benefit of Ukraine,” the statement said.

Regarding China, the finance ministers expressed concern about its “comprehensive use of nonmarket policies and practices that undermines our workers, industries and economic resilience.” They agreed to monitor the negative effects of China’s overcapacity and “consider taking steps to ensure a level playing field.”

Growing concern over how to handle Russia and China dominated the three days of meetings on the banks of Lake Maggiore. The U.S. has been pushing for a harder approach to dealing with Russia’s assets and China’s exports, while European countries have been treading more cautiously as they navigate their internal divisions.

Economic leaders spent much of their time grappling with the details of how they would proceed with unlocking the value of $300 billion in frozen Russian central bank assets to provide a longer-term stream of aid to Ukraine beginning next year.

“The key point is to ensure the right and strong and long-standing financing for the Ukrainian government,” Bruno Le Maire, the French finance minister, said on the sidelines of the meetings Friday. “They need our support, and they can rely on the united support of all G7 countries.”

By Saturday, there was growing momentum behind a U.S. proposal to use the windfall profits from those assets to create a loan for Ukraine that could be worth up to $50 billion and be backed by some G7 countries.

“It really is the main option that is currently under consideration,” U.S. Treasury Secretary Janet Yellen said Saturday after the meeting. “There does seem to be broad-based support for the general notion that that’s a productive way forward.”

But outstanding questions remained, including how countries would share the burden of risk associated with the loan if interest rates fall, which would erode the profits generated by the assets, and what would happen to the loan when the war eventually ends. Another complicating factor in using the assets to back a long-term loan is that the European Union sanctions authorizing the immobilization of most of those Russian assets must be regularly renewed.

The finance ministers will be racing over the next three weeks to work through the details of their options. They anticipate that G7 leaders will decide how to proceed when they convene in Italy next month.

Urgency to reach an agreement has intensified as international weariness over the war has made it more difficult for the United States and Europe to continue delivering aid packages to Ukraine. Looming elections around the world, and in the U.S. in particular, have added to pressure to provide Ukraine with a stream of future funding.

“It would be nice to get this mechanism locked down, so that whatever the outcome of the U.S. election, you have $50 billion to play with,” said Charles Lichfield, a senior fellow at the Atlantic Council.

Although Russia dominated the talks, fears about the threat of China’s excess industrial capacity loomed large. Policymakers worry that a flood of heavily subsidized Chinese green-energy technology products will cripple the clean-energy sectors in the United States and Europe, leading to lost jobs and reliance on China for solar panels, batteries, electric vehicles and other products.

U.S. President Joe Biden on May 14 increased tariffs on some Chinese imports, including levying a 100% tax on electric vehicles, and left in place taxes on more than $300 billion worth of Chinese goods that President Donald Trump had imposed. This past week, Yellen called on Europe and the G7 to more forcefully confront China over its trade practices.

“We need to stand together and send a unified message to China so they understand it’s not just one country that feels this way, but that they face a wall of opposition to the strategy that they’re pursuing,” Yellen said at a news conference at the opening of the meetings.

European countries are pursuing their own investigations into China’s trade practices and are considering more tariffs. However, they are taking different approaches and some nations, such as Germany, worry that a trade fight with China would be damaging to their own economies, which depend heavily on exports to the Chinese market. Germany’s finance minister, Christian Lindner, warned that trade wars are “all about losing.”

There were indications this past week that both China and Russia are preparing their responses to the G7’s actions.

The China Chamber of Commerce to the EU said Tuesday that China was considering a temporary tariff increase on car imports after the new U.S. tariffs and the prospect of new levies in Europe.

“This potential action carries implications for European and U.S. automakers,” the business group wrote.

At the same time, Russia is also mobilizing its response to Western plans to use its assets to help sustain Ukraine. A spokesperson for Russia’s foreign ministry described the idea of using the profits from the assets as an attempt to legitimize theft at the state level and said that the EU would feel the full measure of Russian retaliation.

Russian President Vladimir Putin on Thursday also signed a decree indicating that Russia would move to compensate itself for any losses that it incurs from the freeze on its sovereign assets by seizing U.S. property. Although Russia has little access to U.S. state assets, it could pursue private investors’ property in Russia or funds in Russian accounts.

Yellen on Saturday dismissed Russia’s threats, noting that it had already been warning that it would seize U.S. property.

“That’s not going to deter us from going ahead and taking action in support of Ukraine,” she said.

However, officials in Europe, where most of Russia’s assets are held, remain mindful of the potential for repercussions. Paschal Donohoe, president of the Eurogroup, a club of European finance ministers, said the prospect of Russian retaliation had been a frequent subject of discussions.

“There is, of course, always the possibility that Russia may initiate additional measures in the future,” Donohoe said, explaining that he is confident that the Western allies had the authority to take the actions they were considering. “Any action we take with regard to any sanction or any additional economic measures will respect international law.”

It is uncertain if the policies that the finance ministers are considering will succeed in encouraging Russia or China to change course. Despite internal differences, the ministers appeared to agree that a united front is their best hope.

“The G7’s renewal of strong unity is being forged amid the challenges posed by Russia’s brutal aggression in Ukraine and China’s growing authoritarianism and economic woes,” said Mark Sobel, a former longtime Treasury Department official who is now the U.S. chair of the Official Monetary and Financial Institutions Forum.

This article originally appeared in The New York Times.