San Francisco Frontiers - EU economy chief doubtful Russian diesel exports will affect prices

US President Donald Trump announced on Friday that he had spoken to President Vladimir Putin and they had struck an agreement for Russia to release large amounts of diesel onto world markets, a bid to lower prices that have spiked since the US leader launched the war on Iran on February 28.

"As regards specifically this question on Russian diesel exports, if we look at the volumes, they are not of any macroeconomic significance, and frankly, there are strong doubts whether Russia is even able to supply those volumes, and according also to US quality standards, those are big question marks," Dombrovskis said in an exclusive interview with AFP on the sidelines of the IMF-World Bank Annual Meetings in Bangkok.

He said the EU would be approaching international partners to step up financial support for Ukraine during the week of meetings in the Thai capital, which brings together finance ministers, central bank governors and other top officials from around the globe.

Dombrovskis addressed a range of topics, including spiking sovereign bond yields in Europe, concerns around inflation due to rising energy prices and a recently concluded trade deal with China under which Beijing agreed to cap hybrid car exports to the 27-nation bloc.

"If we look at the broader EU-China trade relations, so last year we were having around 360 billion euros trade deficit, meaning like almost 1 billion euros per day," he said.

"So obviously, that's very unbalanced relations. That's not sustainable. So here we are discussing specifically automotive, but we need this rebalancing across, I would say, broader range of sectors," Dombrovskis said.

The European Union will cap imports of hybrid vehicles from China to 350,000 a year, a senior EU official said on Monday, after Brussels and Beijing agreed to the limit in a bid to avert a trade war.

The cap will apply from 2027 for a period of four years, and will rise by six percent annually from the second year onwards.

- 'Prolonged uncertainty' -

Addressing spiking sovereign bond yields, especially in France, the EU economy chief said it was important for Paris to pass its recently shared "ambitious draft budget" in order to address uncertainty risks.

The yield on 10-year French government bonds is now flirting with the psychological threshold of five percent, a level not seen since 2002, after weeks of heavy selling.

"Prolonged uncertainty is going to negatively impact those yields, so therefore it's important to have clarity about the budget," he said.

France is considered a core eurozone economy, with investors usually seeing its sovereign debt as among the most trustworthy.

However, since the massive stimulus spending during the Covid pandemic, officials have failed to reduce the resulting debt pile amid anaemic economic growth.

Dombrovskis said the average maturity of French sovereign debt was quite long, so the process of debt servicing costs rising would be gradual.

He did not see the issue as being a risk to financial stability for the time being.

"Euro Area member states have time, but they need to do necessary adjustments. They need to make sure that they have sustainable public finances," he said.

The European Commission will be releasing its autumn economic outlook in the coming weeks, and Dombrovskis said it would be upgrading its inflation projections due to the war in Iran, now in its eighth month and seeing broadening fighting in the region.

"We are already seeing that the inflation shock following the conflict in Middle East, the escalation of war in Iran is going to be more prolonged," he said.

"So we, I would say, with high likelihood, we'll be revising our inflation forecast up for 2027."

M.Hill--SFF