Business as usual—no thanks
Oct 30th 2008
From The Economist print edition
Showing Russia a bit of spine now might save Europe serious pain in future
After Georgia, supposedly, everything was different. Europe had woken up to the reality of the ex-KGB regime in Russia, its repression at home, aggression abroad, and use of divide-and-rule tactics in the European Union and NATO. So goodbye to delusion, distraction and division, hello to unity and resolve. In short, no more business as usual.
That seems a long time ago. The mood in the EU is now rather different. Fault in the Georgian war fell on both sides. If Russia overreacted, it was only because Mikheil Saakashvili provoked it. Russia is stricken by the financial crisis now, and therefore not much of a threat. The priority has shifted to keeping the economies of Europe, old and new, afloat. It is no time to be picking fights with the Kremlin, especially over lost causes. So business as usual it is.
Usual or not, the business in question is almost comically irrelevant. At issue is not freezing bank accounts or prosecuting Kremlin cronies for money laundering. It is merely whether to start talks on a new partnership and cooperation agreement (PCA) between the EU and Russia. The Kremlin has already said it doesn’t care much about this. The existing agreement is outdated, but rolls over each year without causing difficulty. The main effect of talks on a new PCA will be a lot more meetings, with lots of chances for “hardliners” (or sensibly hard-headed countries, depending on what you think of them) to block things they don’t like.
All the same, for some such countries, it seems far too soon to be letting the Kremlin off the hook. Suspending the PCA was a pretty meaningless sanction, but it was something to which the EU agreed as a way of enforcing what were at the time judged to be important conditions for peace and justice in Georgia. Russia has met some of its commitments—but not all. Ethnic cleansing in South Ossetia and Abkhazia, the two separatist enclaves now occupied fully by Russian troops, has been atrocious. Russia has not pulled back its forces to the levels they were at before “8-8-8” (as pro-Georgians have termed August 8th, echoing the use of “9/11” to mark the terrorist attacks of September 11th, 2001). Mr Saakashvili certainly has his faults—but he is coming under tough pressure at home from domestic challengers. That cannot be said about Vladimir Putin’s regime in Russia.
From this point of view, backing down on the PCA will send a dangerous signal to the Kremlin that the EU does not have the willpower to stand up to foreign adventurism.
Countries that think this way are certainly in the minority. Sweden, once hawkish, is softening as its presidency of the EU in 2009 draws near. Britain is wobbly. The Baltic states fear being isolated. The best they can hope for is to insist that the EU also do something more for countries such as Ukraine, Georgia and Moldova. This idea, which has Czech, Polish and Swedish roots, is dubbed the “Eastern Partnership”. For now, it exists only on paper. Some money and political commitment would beef it up.
Insisting on even these minimum conditions may look like a lost cause. The “business as usual” camp (ie, most big European countries) are growling that being obstinate on these issues infuriates your friends and doesn’t damage your enemies. But history suggests the opposite. Lithuania, for example, fought a hard and lonely battle earlier this year to get the EU to pay more attention to Georgia and other issues that concern Russian bullying. Perhaps it was a bit clumsy, but in retrospect, it looks right and rather brave. Had Europe listened and acted then, it might have avoided a war—and a humiliation.
When I first published The New Cold War last February, many contested my title. But what once seemed eccentric now looks mainstream. Relations between the west and Russia have entered a period of extraordinary mistrust and mutual disdain. Indeed, after the conflict in Georgia, the description “cold war” risks looking like an understatement. Russia has shown that it is prepared to use military force against another country; the west has shown that it will not fight and will merely respond with a token protest. Some in the European Union, such as Nicolas Sarkozy, president of France, may see the Kremlin-dictated truce that stopped the fighting (though not the ethnic cleansing, which continues apace) as a triumph. From Russia’s point of view, the lesson of the Georgian adventure is simple: we got away with it.
News last week that a Russian nuclear bomber simulated an attack on a city in northern England, combined with the biggest military manoeuvres since the collapse of the Warsaw Pact and the dispatch of a Russian naval squadron to the Caribbean, raise two pressing questions: what is Russia up to and what should we do in response?
The easy but mistaken answer to the first question is that Russia is simply flexing its muscles in response to the west’s misguided meddling, such as its decision to expand Nato and set up a missile defence scheme in Russia’s backyard. Unlike in the 1990s, we now have to respect, and accept, Russia’s interests. A shopping list based on that thinking might include: sacrifice Georgia, cancel Nato expansion (or better still, dissolve the alliance), scrap missile defence, arm-twist the Baltic states and Ukraine into giving their Russian population special status, allow Russia to buy anything it wants in western Europe – and all will be well.
But supposing Russia’s aim is the re-creation of a “lite” version of the Soviet empire, based not on military might but on economic dominance and pipeline monopolies; and that it wants the “Finlandisation” of western Europe. That involves the use of money, above and below board, to cultivate friendly lobbies. One example is this week’s dramatic €4bn ($5.5bn, £3bn) Kremlin bail-out of Iceland. Another is the former German chancellor Gerhard Schröder chairing a Russian-German gas pipeline consortium. The “Schröderisation” of Europe is matched by divide-and-rule tactics. The result: most big countries of “old Europe” care more about ties with Russia than about their supposed allies in eastern Europe.
Attempts to isolate Russia in response would be wrong: keeping communication with the regime may help slow its paranoia and adventurism. It also sends a signal to the burgeoning Russian business class. The financial crisis has prompted some powerful figures such as Alexander Lebedev, the ex-KGB financier, to criticise openly the Kremlin’s bellicose rhetoric and repressive internal policies.
But we can also make it harder for Russia to do the things that endanger us. The overwhelming need is to rethink energy policy. At the moment, the push inside the EU is for greater liberalisation. That would be fine, if we were not dealing with highly politicised monopolists as our energy suppliers. If the European Commission can bring Microsoft to heel over its outrageous behaviour with Windows software, it can do the same with Gazprom: not just as a tool of Kremlin foreign policy, but also as a flagrant price-fixer and competition inhibitor (for example in its refusal to allow third-party access to its pipelines). Any EU company that operated like Gazprom would find itself in the dock within days.
Even more important is restricting the flow of dirty money (not only from Russia) into our banks and markets. Instead of being bean-counters without a conscience, accountants must be guardians of financial probity, with a demanding test for clients whose business model is based on rent-seeking and cronyism. Some of the energy trading companies with close Kremlin ties based in Europe are little more than conspiracies to loot from the Russian taxpayer, gaining oil and gas cheaply and selling it dearly.
The same goes for bankers. If they conceal the beneficial ownership of these phoney companies they are an accomplice to theft. Perhaps one of the benefits of the credit crunch will be a more sceptical response to financiers who maintain that their critics are Luddites. The west has done well to impede the crudest kind of money-laundering. It is no longer possible to turn up at an Austrian bank with a suitcase full of cash, open an account, and make some transfers. We should apply the same principle to asset-laundering: using western capital markets to sell shares and bonds in phoney companies.
These measures will not stop the regime in its tracks. But they will show its backers that their geopolitical ambitions come at a cost: provoke us enough and it will be bad for business. That lesson has not yet got through.
We need to hurry. It will not be too long before financial centres such as Dubai, Shanghai and Mumbai are competing so effectively with London that clients that we find too dodgy will go elsewhere. What our financial centres sell, above all, is respectability. We have priced it too cheaply in the past few years. It is time to be choosier, while we still have some left in stock.
The writer is author of ‘The New Cold War: How the Kremlin Menaces both Russia and the West’. A new edition is published next week