Correspondent's diary

Five 600-words pieces mainly about Estonia from the economist.com "correspondent's diary" slot



Estonia

In the eye of a Baltic storm
Nov 14th 2008
From Economist.com


Prosperous but uneasy on Russia’s border


Monday

“ESTONIANS OUT OF SIBERIA—SOVIETS OUT OF ESTONIA”. Amid the protests against the imposition of martial law in Poland in 1981, that slogan—on a banner carried by two elderly émigrés outside the Polish embassy in London—stood out as seemingly the most lost of all lost causes. True, Britain, like most other Western countries, recognised Estonia, Latvia and Lithuania as still existing de jure, but de facto, they were occupied by the Soviet Union and likely to remain that way for the foreseeable future. Britain had even handed over to the Soviet authorities the Baltic gold reserves entrusted to the Bank of England for safekeeping by the pre-war governments. Complaining about the occupation inside Estonia meant arrest and deportation. In the outside world, it just looked futile.

Undaunted by this gloomy prospect, your diarist promptly hitched himself to the Baltic cause, spending many of the years since then living in, travelling to, and writing about the Baltic states. In 1990, he received Lithuanian visa 0001, issued by the authorities there in defiance of Soviet border controls (he was deported from the Soviet Union a week later). In the years that followed, he lived there and edited a newspaper. His eldest son was born in Tallinn Central Hospital—the first baby from a Western country to be born in Estonia since the Soviet occupation of 1940.

So a few days in Tallinn recently offered the chance both to reflect on the past and to worry about the present. In both cases the picture is mixed. The humming streets of the Estonian capital, now dotted with skyscrapers and clogged with large western cars, epitomise a return to prosperity and freedom that on that cold December afternoon in 1981 would have seemed as unimaginably miraculous as Atlantis re-emerging from the waves.

Indeed, Estonia’s success has excited other countries. President Mikheil Saakashvili of Georgia, for example, is a huge fan of Estonia, and based his policies of deregulation, low taxes and privatisation explicitly on policies pioneered by Estonia in the 1990s. Scores of Estonians have spent time in Georgia, advising on everything from anti-corruption efforts to spy-catching.

The temperaments could hardly be more different: Estonians are reserved, unhierarchical and efficient. That makes them excellent team players—one reason why Estonia’s public institutions are the strongest and cleanest in the ex-communist world. Georgians, by contrast, are emotional, status-conscious and individualistic. This leads to a rather different style of work, to put it mildly. But opposites attract: Estonians and Georgians get on splendidly (much more so, in fact that either country does with its immediate neighbours).

But Estonia’s enthusiasm for “Misha” Saakashvili is now dented, partly because of distaste for some of his policies, and also because of what is seen in Tallinn as his scaremongering. After the war in Georgia, he proclaimed that “the Baltics are next”. Although Estonians and their neighbours are glad to have international attention for their problems with Russia, they are not happy about being bracketed with Georgia. “We are members of NATO and the EU; they are not. Misha’s wild talk makes it sound as if we are as crazy and vulnerable as they are,” said one official frostily.


Tuesday

THE skies over Estonia are full of American and Danish warplanes conducting a large exercise involving mid-air refuelling. It is the biggest such drill ever to take place in Estonian airspace. That is a sign of how NATO (and especially America) is already devoting more attention to Baltic security.

When Lithuania, Latvia and Estonia joined the alliance, Russia was officially not a threat; indeed, it was a NATO partner. So NATO’s presence in the Baltic states has been minimal, just a few fighter planes, supplied by a rota of other NATO countries, based at an airfield in Lithuania. The alliance bases its contingency planning on threat assessment: and if Russia is not a threat, then what is there to plan?


NATO membership for the Baltic states had excellent effects on many fronts (your diarist remembers the alarming days when excitable militias in both Lithuania and Estonia mutinied because they disliked the politics of the defence ministries). The Baltic states are far more stable, prosperous and predictable neighbours for Russia now than they were when they first regained independence. But the reverse is not the case. Russian warplanes have probed Baltic airspace to see if the foreign fighters would bother to scramble (first they didn’t; then they did; the provocations stopped). Across the border in Pskov, Russia’s most modern army units regularly practise intervention and reconquest of what some Russian politicians see as their country’s renegade Baltic provinces.

Since the war in Georgia, that has been changing. America’s top commander in Europe has specifically said that the alliance needs to work out new contingency plans to protect the Baltic states. Estonia is working out a new defence plan of its own, highlighting the need not only to engage in operations far afield (Estonia has more than 100 troops in Afghanistan) but also to protect the home front.

That will mean more anti-aircraft and anti-tank weapons, and more robust radar systems. NATO’s planning machinery is lumbering into action; the threat assessment in 2009 is likely to take formal note that Russia—perhaps not under this regime but another, nastier one—could be at least a potential military threat to alliance members such as the Baltic states and Poland. In practice, this will mean making sure that enough NATO resources—troops, helicopters, ammunition—are available in Europe for use at short notice. That will mean less for other places: not a costless policy.

NATO is also raising its visibility in the Baltic states; more exercises are planned. NATO’s cyber-defence centre is in Tallinn, and although it is not fully operational yet, it is already attracting inquiries from countries as far away as South Africa and India. A cyber-attack on Estonia in April 2007, during riots about a Soviet war memorial, failed to do much damage—Estonia is one of the most wired countries in Europe—but caused consternation in Washington, DC and elsewhere. An official speaks darkly of the possible threat created by countless billions of microchips in devices from cars to household dryers, increasingly networked but largely unsupervised. He highlights four levels of threat: disruption of the public internet; defacement of websites; theft of data (such as banking or passport details) and—worst of all—the hijacking of critical computers and introduction of false commands. That could shut down a nation’s power supply, telephone exchange or financial system.

The new centre is more of a think-tank than an operational outfit, but its experts are already in demand in other countries: two Estonians rushed to Georgia when, as war broke out, that country’s government websites were replaced with images of Hitler. Welcome to the world of cyber-commandos.


Wednesday

YOUR diarist breakfasts with an Estonian who has just been on an extended stay to Lithuania. The Baltic states have little in common apart from a tragic history and geographical proximity, so it is rare to find a local who knows all three. The Lithuanian hosts had tested their guest’s sense of humour with a barrage of jokes, mostly reflecting Estonians’ perceived icy reserve and inconsiderateness. A hitchhiker flags down a car and asks “Is it far to Tallinn?” After two hours, the driver replies, “It is now”. What really riled the Lithuanians, however, was when they asked their guest to tell some anti-Lithuanian jokes. “We don’t have any,” he replied dryly—perhaps unwittingly, if quite unfairly, confirming the stereotype of Estonians as smug and humourless.

The next appointment is a seminar for Estonian journalists about the Russian media—or as it should in most cases be called, the Kremlin propaganda machine. It is surprising that an outsider’s view is needed, but young Estonians don’t read Russian as fluently as their older colleagues. The Estonian media, especially its online bits, tend to react unthinkingly to “news”. A recent book by an obscure Finnish academic, claiming that Estonia will shortly be reincorporated into the Russian Federation, made front-page news. So did a report (which proved to be bogus) that two Estonian farmers were launching a campaign for the restoration of the “Estonian Soviet Socialist Republic”.

Yet another speaker showed why Estonians have some reason to feel paranoid: he produced a selection of Russian-language books bought at the main railway station in Tallinn, all containing outrageous falsifications of history and deeply xenophobic and threatening material towards Estonia and its neighbours. Stalin’s deportation to Siberia of the entire surviving Estonian elite, for example—many thousands of people arrested at midnight, given a few minutes to pack, and herded into cattle trucks—is in one book portrayed as an entirely reasonable response to Estonian “war crimes”.

The really worrying question is how much of this stuff Estonia’s own ethnic-Russian population believes. Your correspondent gives an interview to Estonian television urging the authorities to put more resources into Russian-language broadcasting.

In pre-war Czechoslovakia, the situation was broadly similar. Patriotic Czechoslovaks opposed German-language radio broadcasting because they believed the Sudeten Germans should learn Czech; if they wanted to listen to German programmes, they could listen to the ones from Germany itself. They did—and by the time the authorities in Prague realised their mistake, they had lost their fellow-citizens to the Nazi propaganda machine.

Most Baltic Russians watch Russian television these days—it is lavishly produced and highly watchable. Estonia and Latvia have a huge asset in the form of hundreds of thousands of ethnic Russians who have seen what life in a free society is like; many have learnt the once-despised local languages and acquired citizenship. But the authorities—still twitchy about anything that might blur the lovingly cherished national idea, have been culpably slow in making use of all their citizens. The price for that could be horrendous.



Thursday

The hottest topic in Tallinn right now—and one that no Estonian official wants to talk about, even on deep background—is a spy story. The only detail to have come out publicly so far is that a senior official at the defence ministry has been arrested and charged with spying for an unnamed foreign power (read: Russia). The Russian media is using the incident to push the idea that Estonia is a stooge for Western intelligence, and an unreliable one at that.

The ex-official is of course innocent until proven guilty, and it is right not to prejudice his trial by leaking information to the press. But some general points deserve to be made. One is that it is not much of a triumph when your spies get caught. Russia’s GRU (the formidable military-intelligence service) must be enjoying the humiliation of their great rivals, the snooty SVR (foreign-intelligence service), whose sloppy tradecraft seems to have let a prized asset fall into the hands of the enemy. Conversely, it is a healthy sign when you are an interesting enough country to be spied on, when your counter-intelligence service is smart enough to catch spies, and when you are bold enough to put them on trial rather than hushing things up. Not all NATO countries can make that boast.


Another interesting story on similar lines concerns a bunch of Irish republican extremists who were lured into a sting operation in Lithuania. Some leaders of the “Real IRA” had developed romantic attachments to Lithuanian women. Neat work by British officials and their Lithuanian colleagues created a few fake arms dealers—the basis for an elaborate sting operation in which the Irish gunmen found themselves, investigators say, caught red-handed trying to buy weapons to continue their terror campaign. Few details have come into the public domain yet. When they do, the story should help improve Lithuania’s slightly threadbare image in Britain.

The other big news today is that a recently retired Finnish military commander has written an article publicly supporting his country's membership of NATO. Finland is important to Estonia: their languages are closely related; the national anthems are sung to the same tune. After Estonia regained independence (and to some extent even before), Finland played a big role in modernising Estonia's reborn public administration.

But Finland is not in NATO, and the country’s current president, Tarja Halonen, has infuriated Estonians by saying that they suffer from “post-traumatic stress disorder” and should take a calmer attitude to Russia. That view is not shared by people in the formidable Finnish military and security establishment, who have been keeping tabs on Vladimir Putin since his days in Leningrad, when he and some associates developed a profitable relationship with some parts of Finnish society.

Another addition to the pro-NATO camp in Finland is Martti Ahtisaari, who has just won the Nobel peace prize for his work in the former Yugoslavia. All that is highly welcome in Tallinn, where officials also note the hawkish attitude of the Swedish government, and the intensifying military cooperation between the three big Nordic countries. But relations with the northern neighbour, though close, will never be quite cordial.

The Estonians think the Finns are a bit too taciturn, as this jokes illustrates. A Finn and an Estonian take a sauna together. After an hour spent in amicable silence, the Estonian produces a bottle of vodka and pours two glasses. “Terviseks”, (“Cheers”) he says. The Finn glowers. “Are we here to talk or to drink?” he asks sternly.




Friday

ESTONIA has been a hotbed of freemarket thinking, home of the flat tax, deregulation and privatisation in a way that puts other ex-communist economies to shame. But as the financial hurricane in world markets whips up the seas on the eastern Baltic, it is clear that the many pluses of those policies are matched by minuses.

Air travel, for example, is getting worse rather than better. Profit-maximising foreign airlines choose the cheapest slots for routes to small countries, not the most convenient one. Flying to Estonia from London means either leaving home at 3:30 in the morning, or arriving in Tallinn after 11:00 at night. Flights to Brussels and other European capitals are barely more convenient. The result is a subtle form of isolation—nothing like as bad as the Iron Curtain, to be sure, but a nuisance nonetheless.



A more serious vulnerability is that Estonia has sold all its banks to foreign buyers. In 1993, the newspaper in which your correspondent was the majority shareholder lost all its money when a locally-owned bank went bust. After that, selling the financial system to solid Swedes and Finns seemed by far the best way ahead. It would allow Estonian companies to borrow freely with the least danger to the country’s external financial stability. Coupled with the pegging of the newly reintroduced national currency, the kroon, to the Deutschmark (now the euro), Estonia willingly locked itself in an economic straitjacket: the only way ahead was ever-higher productivity and fast export growth.

That worked pretty well at the time. When the kroon came in, Estonia pledged its gold reserves and even its state-owned forests to support the new currency. Your correspondent and his colleagues threw away their old wallets, in order that the pristine new currency would not be tainted by even indirect contact with the despised Soviet banknotes—known dismissively as “occupation roubles”.

But later, the same arrangements stoked a property bubble. Estonians took out huge mortgages, confident that prices could only go up. When they plunged in 2007, building contractors went bust and economic growth halted. There is not much the government can do about that.

Now the worry is whether the foreign-owned banks will stand by their local branches and subsidiaries. In theory, they should. The Baltic region has been a hugely profitable and fast-growing backyard for Nordic investors of all kinds; it would be insane for them to abandon ship now.

That is the theory, and for now at least it seems to be holding. From outside, the Baltic economies may seem vulnerable and beleaguered; inside, there is a sense of calm. Indeed, some think that the downturn will prove rather beneficial. “Happiness is not just about money” was a slogan in the last election campaign, held at the height of the boom. As Estonians get used to (slightly) higher unemployment and shrinking demand, it is worth bearing in mind that today’s problems would have seemed like unimaginable good fortune only 20 years ago.

It is in that spirit that your diarist finishes his trip, giving a talk at a conference to mark 90 years of Estonia’s diplomatic service. For the majority of that period, the diplomacy was frozen: the task between 1940 and 1991 was survival, rather than active management of international affairs. All Estonia’s prewar diplomats were executed by the Soviet authorities, except for those already abroad, who were issued death sentences in absentia.

In the 1990s, Estonia’s brightest and best young people flocked to the foreign ministry to start work on making independence a reality—something that culminated in Estonia’s membership in the European Union and NATO. Now the foreign ministry seems rather underpowered—the burning, urgent patriotism that fuelled it is no longer needed. Long may that continue.


Copyright © 2008 The Economist Newspaper and The Economist Group. All rights reserved.

Obama and eastern Europe

Looking west, hopefully

Nov 13th 2008 | WASHINGTON, DC

Eastern Europe awaits a new American president nervously but in hope

DETAINING the next president of the United States for three hours in what an eyewitness called a “malodorous” small room at an airport in the provincial Russian city of Perm looks, in retrospect, to have been a pretty bad idea. No matter that the Kremlin muttered an apology for delaying Barack Obama, along with his mentor on the Senate Foreign Relations Committee, Richard Lugar, in August 2005. The hold-up was blamed on a muddle over paperwork—although some Russia-watchers suspected it was a calculated Kremlin snub to the Republican Mr Lugar.

Mr Obama now plays down the episode, but his first-hand experience of the Russian bureaucracy’s capacity for at best capricious incompetence and at worst vindictiveness could yet prove telling. His team of hundreds of foreign-policy experts ranges from those who see the Bush administration’s policy as dangerously confrontational to those who think it too soft. Michael McFaul, a Stanford academic who has become a caustic critic of the Kremlin, is an influential Obama adviser. But it remains to be seen how many people Mr Obama will pick from his own team, and how many from the Hillary Clinton camp of experienced Russia hands.



The Democratic Party is in general rather less hawkish than many of Mr Obama’s senior advisers. Yet the prosaic truth is that, whoever secures the top jobs in the new administration, American policy towards eastern Europe is likely to be shaped mainly by events and bureaucratic drift, not personalities. Barring a new crisis (such as another war in Georgia), eastern Europe is unlikely to get anything like as much attention as the economy. Even more conveniently, the main decisions can easily be fudged or postponed.

Thus the Bush administration is still trying to push for Ukraine to be given a clear path towards future NATO membership. It reiterated this at a recent high-level NATO-Ukraine meeting in Estonia. But if Mr Obama wants to cash in his popularity in Europe, he is more likely to do so by asking European countries to send more troops to Afghanistan, not to swallow their objections to NATO membership for two increasingly unconvincing candidates: a chaotically divided Ukraine and an erratic, indefensible Georgia.

An Obama administration may concentrate on the nitty-gritty of military reform in the Ukraine rather than grand promises of NATO membership. That would be welcome in Russia. So too might be Mr Obama’s rather more doveish line on nuclear weapons. But another sore point with the Kremlin is America’s plans for missile defences, and especially for the siting of ten interceptor rockets in Poland and a radar in the Czech Republic. These—if they work—might stop or deter an Iranian missile attack on America or Europe. But public opinion in the Czech Republic and Poland remains unenthusiastic. And Russia has now threatened a bunch of countermeasures, including putting nuclear-capable missiles in the Kaliningrad exclave and targeting the missile-defence installations with its own nuclear arsenal.

Mr Obama, like many Democrats, sounds sceptical on missile defence. With no money allocated to the programme by Congress, it will be easy to keep the plans alive on paper, but to do little to promote them in practice. And if talks with Russia about nuclear weapons do go ahead, a deal on missile defence might be thrown in. Czechs and Poles may feel a touch queasy as these issues are discussed over their heads; but there is little they can do about it in practice.

Nor is it likely that an Obama administration will fight hard for greater European independence from Russia’s monopoly of east-west gas pipelines. The Bush administration promoted Nabucco, a pipeline that would bring Caspian and Central Asian gas to Europe via Turkey. But a shambolic and inattentive European policy on pipelines and energy dependence in recent years has left policymakers in Washington feeling that they are wasting their time. If the Europeans cannot look after their own interests, why should America?

Is it an ideology? Europe view # 107

Europe.view

Nov 13th 2008
From Economist.com


When revanchism and financial crises meet

Get article background

FOUR comforting bits of conventional wisdom are as follows: 1) Russia has no ideology; 2) if the system there features distinctive political ideas at all, they are merely the same as western ones, but tempered by pragmatism; 3) the financial crisis will accelerate normalisation, rather than entrenching eccentricities; 4) any odd-sounding notions such as “sovereign democracy” are rhetorical flourishes for domestic consumption only.

Certainly some facts support this. Marxism-Leninism was a serious affair, with its roots in a recognisable branch (or dead-end) of 19th-century German philosophy. You could take academic exams in dialectical materialism. (Remember the laws of “negation”, “transformation” and “opposites”?) Marxism in its more modern form influenced, for better or worse, western academic thought in everything from literary criticism to sociology.

The thought patterns (to describe them as neutrally as possible) swirling round the upper reaches of power in Russia are a pale shadow of that. Strands of Soviet and Tsarist nostalgia, coupled with an affection for the corporate state that Mussolini would have recognised, make a confusing and confused mixture.

One might speak of dogmas and historical paradigms, but not a formal ideology. Moreover, some Kremlin spin doctors insist that no real difference exists between Russia and the West, other than the dislocating effects of historical interruptions. And the urgent questions now are practical, not theoretical. The fetid pools of Russian exceptionalism offer few clues about how high the central bank should raise interest rates to defend the rouble.

For a counter-argument to this comforting picture, consider the arguments of Viktor Yasmann, a veteran analyst at the American government-financed Radio Free Europe/Radio Liberty. Mr Yasmann’s central exhibit is a remarkable best-selling book called “The Russian Doctrine” (Russkaya doktrina).

Published in 2007 by the pseudonymous Mikhail Kalashnikov and a group of 50-odd people drawn from the security services, think-tanks, the media and the Russian Orthodox Church, this 800-page tome is in effect a revanchist manifesto.

It outlines how Russia can regain predominance in the Eurasian landmass, drawing on both imperial Russian and Soviet-era traditions. The existing political system is dismissed as convenient camouflage, behind which a new order is taking shape, featuring, among other things, an “aristocracy” of ex-KGB people. Ideas such international law, the separation of powers and human rights get similarly short shrift.

It makes pretty horrible reading. But Mr Yasmann contends that these ideas are affecting mainstream Russian politics. He says the doctrine has “already become the agenda of the Putin-Medvedev leadership” and that it may also prove appealing to corrupt authoritarian regimes elsewhere in the ex-Soviet world.

But the popularity of the book, the credentials of its authors, and the presence of some of its themes in speeches by Dmitri Medvedev and Vladimir Putin do not of themselves prove Mr Yasmann’s case. So far, the “doctrine” does not seem to be producing the desired (and promised) national resurgence. Progress on infrastructure, public services and demography—to take just three indicators—has been dismal. Secondly, corruption and chauvinism are incompatible except in an era of easy money. That seems to have come to an end.

That is not to say that the “doctrine” will be dumped. The economic crisis is more likely to make it evolve—and not necessarily into something more palatable. As Western policymakers grapple with this, they may note that their task is complicated by neglect of Russia-watching capabilities in officialdom. For years, hawkishness towards Russia (or indeed any knowledge of it at all) was a near career-breaker in many countries’ government service. It is lucky that people like Mr Yasmann stayed on their watch.

Interview with Rzeczpospolita

Banki skuteczniejsze niż tanki

Wojciech Lorenz 14-10-2008, ostatnia aktualizacja 14-10-2008 04:21
Do jakiejś formy politycznego anszlusu Białorusi dojdzie w pierwszej połowie przyszłego roku. Kolejne cele Moskwy to Krym i być może kraje bałtyckie – przewiduje autor książki „Nowa zimna wojna” w rozmowie z Wojciechem Lorenzem







źródło: Rzeczpospolita
Edward Lucas; Nowa zimna wojna. Jak Kreml zagraża Rosji i Zachodowi; Rebis, 2008
+zobacz więcej
Rz: Kiedy zaczęła się nowa zimna wojna?

Edward Lucas: Historycy będą się długo o to spierać i zapowiada się fascynująca dyskusja. Niektórzy twierdzą, że zimna wojna się w ogóle nie skończyła. Moim zdaniem zaczęła się, kiedy Władimir Putin został prezydentem, a już kiedy był premierem pod koniec ery Borysa Jelcyna widać było, że władza wraca w ręce ludzi związanych z KGB. Zaczęła się od ostrej retoryki wobec Gruzji, aż wreszcie doszło do ataku na nią.

Niektórzy zachodni przywódcy uważają, że prezydent Gruzji sam się o to prosił, a Rosja jest niewinna.

To nie Gruzja zaatakowała Rosję, tylko Rosja Gruzję. Rosjanie długo przygotowywali prowokację, a prezydent Micheil Saakaszwili dał się wciągnąć w pułapkę, wydając rozkaz ataku na separatystów w Osetii Południowej. Rosja tylko na to czekała i natychmiast przypuściła potężne kontruderzenie, pustosząc, grabiąc i mordując mieszkańców Gruzji. Wiele zachodnich państw nie dostrzega, w jakim kierunku ewoluuje Rosja. Pokazał to szczyt NATO w Bukareszcie, gdzie sojusz nie zgodził się na przyznanie Gruzji i Ukrainie planu działań na rzecz członkostwa. Rosja zobaczyła, że podzielona jest nie tylko Unia Europejska, ale też NATO i potraktowała to jak zielone światło do działania.

Kto będzie następnym celem Kremla?

Najłatwiej byłoby z Białorusią, bo za nią nikt się nie wstawi. Bronienie Białorusi wyglądałoby na Zachodzie głupio, skoro przez tyle lat się mówiło, że rządzi nią dyktator. Założę się, że do jakiejś formy politycznego anszlusu Białorusi dojdzie w pierwszej połowie przyszłego roku. Kolejne cele to Krym i być może kraje bałtyckie. Dzięki licznej rosyjskiej mniejszości są łatwym obiektem prowokacji. Rosja powie np., że jej obywatele są prześladowani i zacznie popierać tworzenie milicji obywatelskiej. Naturalnie władze będą próbowały je rozbroić, a wtedy Rosja wystąpi w obronie mieszkańców z rosyjskimi paszportami.

Pisze pan, że dotąd NATO nie miało dokładnych planów obrony nowych członków przed atakiem Rosji.

Plany były dość ogólnikowe i dotyczyły raczej eskalacji konfliktu politycznego niż militarnego. Nikt nie zakładał, że może dojść do wojny z Rosją, która była traktowana jako partner.

Francja daje do zrozumienia, że nie jest gotowa umierać za Gruzję, więc lepiej jej nie przyjmować do NATO. Myśli pan, że sojusz byłby gotów użyć siły w obronie krajów bałtyckich lub Polski?

Lepiej nie podważać gwarancji związanych z artykułem piątym poprzez podawanie go w wątpliwość. To błąd, który robią politycy niektórych nowych krajów członkowskich. Polska zamiast zabiegać o bazy NATO, powinna powtarzać, że każda jej jednostka wojskowa to jednostka NATO. Nie wiemy, czy Ameryka byłaby gotowa zaryzykować trzecią wojnę światową nie tylko w obronie Tallina czy Rygi, ale także Warszawy czy Londynu. Ale Amerykanie konsekwentnie podkreślają, że artykuł piąty daje pełne gwarancje, a poza tym sporo teraz robią, aby te gwarancje wzmocnić. Niepokoi mnie natomiast niedawny sondaż w „Financial Times”, z którego wynika, że Niemcy nie poparliby użycia siły w obronie państw bałtyckich. Jestem pewien, że Brytyjczycy nie mieliby takich wątpliwości z prostego powodu: często jeżdżą do krajów bałtyckich i interesują się ich historią. To pokazuje, że w ramach sojuszu można podejmować tzw. miękkie działania, które spowodują, że będziemy się czuli ze sobą związani i za siebie odpowiedzialni. Polska też ma w tej sprawie sporo do zrobienia.

Czy grozi nam odbudowanie systemu totalitarnego w Rosji?

W Rosji nikt nie próbuje wskrzeszać komunizmu, bo jako system się on skompromitował. Ale stworzono nowy system, tzw. kapitalizm kolesi, w którym powiązania i znajomości są ważniejsze od konkurencji, a Kreml sprawuje kontrolę nad gospodarką. Putin i Miedwiediew wiedzą, że wykorzystując gospodarkę, mogą lepiej umacniać wpływy, niż robiąc to środkami militarnymi.

Rosja nieprzypadkowo zaoferowała właśnie gigantyczną pożyczkę Islandii, która zbankrutowała. Islandia ma ogromne geostrategiczne znaczenie. Banki są skuteczniejsze niż tanki. Aby odwrócić uwagę obywateli od tego, w jak niedemokratycznym kraju żyją, władze próbują im pokazać, jak wielkie osiągnięcia Rosja ma na arenie międzynarodowej.

Czy musimy się pogodzić z tym, że Rosja będzie się umacniać w opozycji do Zachodu?

Nie wyobrażam sobie, aby Rosja w długiej perspektywie mogła być sojusznikiem Chin czy świata muzułmańskiego. Rosja bardziej niż Japonia należy do świata zachodniego. Ale na razie swój system rządzenia oparła na strachu. Przeciwników politycznych wsadza się do psychuszek, od czasu do czasu przeprowadza się pojedyncze zabójstwa polityczne. To wystarczy, aby zastraszyć media i biznesmenów.

Ostatnie działania spowodowały, że zastraszeni są też sąsiedzi Rosji. Zachód musi się temu przeciwstawić. Musi ograniczyć napływ rosyjskiego kapitału, który przecież nie powstał w warunkach normalnej konkurencji, na swój teren. To byłby pierwszy krok do demontażu tego systemu. Na razie mamy na Zachodzie do czynienia z mechanizmem, który nazywam schroederyzacją. Wielu zachodnich przywódców i biznesmenów uważa, że zyski ze współpracy są zbyt duże, aby można było ją ograniczać.

Edward Lucas; Nowa zimna wojna. Jak Kreml zagraża Rosji i Zachodowi; Rebis, 2008

Edward Lucas jest publicystą „The Economist”. Był korespondentem miesięcznika w Europie Środkowej i Wschodniej. Dziś nakładem wydawnictwa Rebis ukazuje się jego książka „Nowa zimna wojna. Jak Kreml zagraża Rosji i Zachodowi”

Estonian spies

Fog in the Baltic

Nov 6th 2008 | TALLINN
From The Economist print edition


A sensational arrest inside Estonia’s defence ministry

FROM the published information, it hardly seems like a big deal. On September 21st Herman Simm, a middle-ranking civil servant in Estonia’s defence ministry, was arrested, along with his wife, and charged with spying for an unnamed foreign power. Mr Simm has made no public statement and his lawyer has not responded to requests for comment. Estonian officials flatly decline to discuss the case. But it is likely to come to court next year. If convicted, Mr Simm faces a jail term of between three and 15 years.

Some of the case’s details are startling. Mr Simm was already sidelined at the time of his arrest. But his previous job had been ultra-sensitive: he set up and ran the system for handling all classified information—including top-secret documents from Estonia’s NATO allies. He had been responsible for handling security clearances for Estonian officials in the military, security and intelligence services. A foreigner who is familiar with the case talks of “a potential European equivalent of Aldrich Ames” (once Russia’s top spy in America, who for years headed a CIA counter-intelligence department and is now serving a life sentence in jail). That could make this the worst NATO security breach to have happened for many years.



More intrigue surrounds the mysterious disappearance, at about the time of Mr Simm’s arrest, of a contact who is an Italian-employed Spaniard. This person is thought to have been an “illegal”: a Russian spy infiltrated into Europe via Latin America, using a carefully constructed false identity, and able to operate all round the European Union without suspicion. Such “illegals” are the crown jewels of foreign intelligence work: their bogus identities are complex and expensive to arrange, and they usually handle only a single source. But in what appears to have been a bad bit of espionage tradecraft by Russia’s foreign intelligence service, the SVR, this Spanish citizen contacted another highly placed source in a different NATO country and made slightly clumsy attempts to recruit him. The subject reported the encounter, setting in train the investigation that led to Mr Simm’s arrest.

A huge damage-control operation is now under way to work out what Mr Simm knew or had tried to find out. The security clearances he issued and denied, and any personnel moves resulting from them, are also under review. And security officials across Europe are busily checking the elusive Spaniard’s recent movements for other clues about clandestine activities. They are also following up the paper trail that brought him such an apparently convincing identity as an EU citizen.

The affair has raised many other questions. The Russian media are jeering that the Baltic states are not only Western stooges, but incompetent to boot. Yet the consensus in the world of shadows is not that new members of NATO such as Estonia are unreliable. On the contrary, Estonia’s intelligence and security services are well-regarded, which makes them a worthy target for foreign espionage. It was good counter-intelligence work that led to the arrest. And in most NATO countries, notes a seasoned Baltic-based spook, such scandals are usually hushed up, not prosecuted so gutsily.

Smouldering

Eastern Europe
Nov 6th 2008 | RIGA
From The Economist print edition


The ex-communist economies have been steadied. Deeper worries remain

How much will you give me to stop playing?

FLAMES out, but smoke still rising. That is how eastern Europe looks after huge outside intervention to douse worries in debt and currency markets. An IMF board meeting on November 5th approved a lightly conditioned $16.5 billion bail-out for Ukraine. Austria has offered a €100 billion ($129 billion) package for its banks, which are owed $290 billion by east European borrowers: Erste Bank took up a €2.7 billion equity injection on October 30th. In Hungary, which has also received an IMF bail-out, markets firmed as parliament passed a tough fiscal package, based on an expected 1% fall in GDP. Serbia, which is in talks with the IMF, said it would not need extra cash, though it might draw on its $695 billion deposit at the fund.

In London Latvia’s central-bank governor, Ilmars Rimsevics, sought to quell fears that his country faced a meltdown on Icelandic lines.

Flanked by representatives of Swedbank and Nordea, two Nordic banks which own a large chunk of the local banking system, he said Latvia’s currency peg to the euro was not in doubt. Unlike Iceland, Latvia has little external public debt and a thinly traded currency. But questions remain over some locally owned banks and the legacy of reckless fiscal policies (described by one minister as “hitting the gas pedal”). That brought double-digit growth, but did little for competitiveness. The coming months could bring a contraction of up to 5% in Latvia’s GDP.

The intricacies of Latvian economic policy may no longer hold foreigners’ attention. “We were getting a lot of calls about the Baltics and Scandinavian banks a couple of weeks ago. Now attention has shifted to Bulgaria,” says Neil Shearing of Capital Economics, a consultancy. Bulgaria has a large current-account deficit (expected to be 24% of GDP this year). So far, this has been filled by inflows of foreign direct investment. That looks good on paper (it is reliance on short-term borrowing that sets red lights flashing). But up to a third of that money went into property, inflating a bubble that has now popped.

Neighbouring Romania, the poorest country in the European Union, has problems too. Standard and Poor’s, a rating agency, downgraded its debt to junk last month. And the slowdown in “old Europe” will hit remittances from the many Romanians working abroad.

Foreign investment flows to eastern Europe may be shrinking too, now that businesses in the rich half of Europe have less cash to spare for foreign expansion. Having neglected competitiveness-stoking reforms in education, infrastructure, and public administration, ex-communist countries may find it harder to attract companies needing to cut costs. Governments in eastern Europe are now hurrying to adopt the macroeconomic policies necessary to speed the adoption of the euro. But their countries’ deeper problems remain.

The vertigo years

Europe 1900-14

Nov 6th 2008
From The Economist print edition

The Vertigo Years: Europe 1900-1914
By Philipp Blom

Basic Books; 512 pages; $29.95. Weidenfeld & Nicolson; £25

IMAGINE, suggests Philipp Blom, that a “voracious but highly selective plague of bookworms” had deprived us of all knowledge of 20th-century history after 1914. How would the early years of the last century look when taken on their own, rather than overshadowed by the cataclysm of the first global war?

Seen against the backdrop of what followed, the period 1900-14 was a golden evening of civilisation: a time of social stability, peaceful international relations, political reform and economic integration, leavened by startling technological and cultural progress. Yet as Mr Blom argues in his masterly and panoramic history of Europe in the pre-war years, to the “nervous generation” actually living through it, the era felt rather different. For them it was a time of jarring uncertainties, when solid 19th-century conceptions were corroded and eroded. Rudyard Kipling had mourned the already visible (to him at least) fading of British imperial power in his hugely popular “Recessional”. Matthew Arnold, whom Mr Blom quotes in the same passage, wrote of “the long, withdrawing roar” of declining religious faith in his poem “Dover Beach”.



Scientific notions such as radioactivity, and the spooky new business of X-rays, were turning things upside down too. So were philosophers such as Bertrand Russell and Ludwig von Wittgenstein. “If scientific analysis made the world fall apart, philosophical reason poured acid over the remaining truths,” argues Mr Blom. But out of those uncertainties came the age in which we live now.

Mr Blom musters a rich array of details and sources to bolster his argument. His book gives a chapter to each year, stitching together developments in the German-speaking world (his forte) as well as neurotic France, reactionary Russia and self-confident Britain. His themes range from sex to science, from high politics to gruesome crime, from advanced art to popular literature, all dotted with entertaining nuggets of court and other gossip. As the reader reaches the economic and social decline of the English aristocracy after the death of Queen Victoria, it helps to be told that the libidinous King Edward VII was known as “Edward the Caresser” by his disrespectful subjects. Fans of Marcel Proust will be intrigued to know that the French literary titan was obsessed with motorcars: what would now be termed a “petrolhead”. And who will see Walt Disney’s “Bambi” with the same eyes in the knowledge, waspishly passed on by Mr Blom, that his creator, Felix Salten, was the anonymous author of a notorious pornographic novel?

It is a slight weakness of the book that smaller countries are almost ignored. As the narrative sweeps between the great powers of Europe, the reader is left wondering what happened in, say, the Netherlands (then still an empire), in Sweden or in Italy. A second criticism is a possible over-emphasis on sex. The era was indeed marked by an unbuttoning of Victorian sexual mores, by the activities of some brave if marginal feminists (such as the British campaigners for women’s suffrage), by increasing female employment and by a decline in the importance of male muscular strength. It is interesting to see problems ranging from naval shipbuilding to public health viewed through the prism of sexual angst. But it is quite a leap to maintain, as the Vienna-based Mr Blom does, that “all instinct is ultimately sexual.”

A third and more substantial point is that much of the then newfangled thinking that Mr Blom describes would have been regarded by most people at the time as deranged, freakish or irrelevant. Sigmund Freud, Friedrich Nietzsche, Virginia Woolf and Rudolf Steiner all had their followings; their popularity casts revealing light on the cultural and intellectual needs of the time. Their ideas are interesting even today. Yet in his excitement to portray the shock of the new, Mr Blom risks neglecting the fact that the previous century had left a solid legacy. For most people, it was that world—orderly, patriarchal and even devout—that still dominated daily life.

That should not deter the reader from enjoying Mr Blom’s impressive and thought-provoking book. His particular gift is to encapsulate complex historical and biographical events pithily and in an illuminating context. The story of Belgium’s monarchical colonists in the Congo is a gruesome tale of inhumanity (the bit about children’s hands being amputated to punish their parents for slow work is not easily forgotten). It is aptly compared with German and British behaviour in southern Africa. But it also gives the chance to explain how Edward Morel and Roger Casement launched what was, in effect, the first international human-rights campaign, using the mass media to bring an unstoppable torrent of public criticism to bear on the Belgian authorities.

The book brings the fears, enthusiasms and blindspots of the period brilliantly to life. If civilisation lasts another 100 years, perhaps an equally talented historian will one day compare the first decade of this century to its dizzying counterpart before 1914. If so, Mr Blom’s book is unlikely to be bettered as a source.

Europe view 106 Perfidy from Albion

Britain needs to stiffen its spine when dealing with the Kremlin

AFTER the Russian-Georgian war, Britain stood out as the only big European country willing to talk tough to the Kremlin. On August 27th in Kyiv, David Miliband, the foreign secretary, berated Russia for its “unilateral attempt to redraw the map” and spoke of “the moment when countries are required to set out where they stand”. Britain was a big part of a coalition—which also included Sweden, Poland, the Czech Republic and the Baltic states—that stiffened the European Union’s position on freezing talks on a new partnership and cooperation agreement with Russia.

In London, the Foreign Office started a thorough review of Britain’s Russia policy, drawing on planners at the Ministry of Defence, the spooks of MI6, the spy-catchers of MI5, and other government experts. “Project Russia”, as the review was named, also invited selected outsiders (but not this columnist) to contribute. The process was secret and so is the result.



One aim was to nail down what motivates the Russian authorities: are they nationalists salving their country’s wounded pride, aggressive mercantilists, a criminal conspiracy of ex-spooks, or all, none or a mixture of the above? The other was to work out what Britain should do about it: contain, engage, counter-attack and ignore were among the options considered.

But hopes that the British establishment had finally decided to take a tough line have been dashed. Gordon Brown, the prime minister, wants above all to strengthen his alliance with the French president, Nicolas Sarkozy. Both men want to launch a big global financial reform. Mr Sarkozy wants the Nice summit this month to be a success, where he can declare that the EU is ready to relaunch talks with Russia. So Britain has switched sides and backed him, infuriating its former allies.

Critics say that Russia is not allowing EU monitors to operate in Georgia’s separatist enclaves of South Ossetia and Abkhazia. Russia has bolstered its military presence there to far above pre-war levels. The extra troops have not stopped the ethnic cleansing of many thousands of civilians from these territories.

So shouldn’t the EU at least maintain its modest freeze on relations with Russia until the end of the year? That might also give the West a bit more clout in efforts to persuade Georgia’s increasingly erratic president, Mikheil Saakashvili, to talk more to the opposition and less about a renewed military build-up. Those arguments apparently count for nothing with Mr Sarkozy—or with Mr Brown, who has flatly overruled his officials.

Britain is also neglecting its soft power in Russia. The BBC Russian service, already sadly diminished in listeners, transmitters, and editorial clout, is being pruned again, shedding eight staff (including, some fear, the journalists who are the sharpest critics of the Kremlin). Carefully crafted features will give way to cheaper phone-ins. A beefed-up website is some compensation—but most Russians, especially in the provinces, have no access to the internet. A protest letter from Britain’s best-known Russia-watchers is gathering signatures. Don’t get your hopes up.

And “Project Russia”? Its voluminous pages call for “robustness” and “resilience”. It recommends more British attention to countries threatened by Russia. That may be good news for Norway, for example, which feels its allies have failed to help in the “High North”.

The most interesting bit is probably the recommendation that Britain should actively seek out coalitions of like-minded countries to counter Russian mischief-making. But for this to work, Britain itself must look credible. Mr Brown’s cynical deal with Mr Sarkozy, and a sense of general squishiness on Russia lately, have created the opposite impression.

Daily Telegraph rant today

Russia, Georgia and the EU: Victory for the Kremlin?

Britain's shameful U-turn on Russia is alarming many in Eastern Europe, says Edward Lucas

So it is business as usual with Russia. And what a bad business it is. Britain's decision to allow France to lead the European Union back into normal relations with Vladimir Putin's ex-KGB regime in Russia is one of the most startling volte-faces in our country's recent diplomatic history. It has left our allies in Eastern Europe – Poland, the Czech Republic, Estonia, Latvia and Lithuania – aghast at our duplicity. "Our last European hope just ----ed us. We should have known. For we are but a small faraway country about which they know nothing," a senior official in the region wrote in a despairing email after The Daily Telegraph broke the news on Friday.

European unity after the war in Georgia was never terribly impressive – a mild public rebuke and the suspension of talks on a new "partnership and co-operation agreement" until Russia met the conditions of the loosely worded truce brokered by the French president, Nicolas Sarkozy.

Russia has met some of those conditions – but not all. EU monitors are still unable to inspect the war zone properly. If they could, they would see evidence of ethnic cleansing in the two separatist enclaves of South Ossetia and Abkhazia. They would also see that Russia has increased its military presence. The message to the Kremlin is clear: you can invade a neighbouring country, threaten Europe's energy supplies, and the EU will do nothing serious about it.

The reason is simple: Gordon Brown cares little about foreign affairs, but likes the idea of stitching up deals on the reform of international finance with his new friend Mr Sarkozy. France, which is running the EU until the end of the year, wants a triumph to present to the European summit in Nice this month. Showing that it has repaired relations with Russia is part of that. It will please all the pro-Russian countries in the EU. Russia's energetic cultivation of contacts in Germany, Italy, the Netherlands, Austria and France has built up a bridgehead of influence. Those in Whitehall who watch with alarm and disgust as parts of our establishment cosy up to rich and powerful Russians have been outmanoeuvred. The idea that the start of talks is balanced by a new, careful scrutiny of EU-Russian relations should fool nobody. This is surrender.

It must be especially humiliating for David Miliband, whose condemnation of Russia's actions, in a speech in the Ukrainian capital Kiev on August 27, inspired hopes from the Baltic to the Black Sea that Britain was now a champion of the ex-communist countries' freedom and security. He excoriated Russia's "unilateral attempt to redraw the map", calling it "the moment when countries are required to set out where they stand". This week's decision casts those words in a bitter light.

It is also part of a wider and gloomier picture. Even before the war in Georgia in August, Russia was bullying its neighbours, stitching up Europe's energy market and turning money into power across the continent. In the old Cold War, the Kremlin was shackled by communism. Now it has been turbo-charged by capitalism, through the boom in oil and gas prices that has brought it 
$1.3 trillion in extra revenues since 2000. That enables it to exercise influence not only on us, but among us, too. It has built up assets, commercial and human, in positions of power across Europe. German industry makes tens of billions of euros in the Russian market; Russia is Germany's main energy supplier. The former German chancellor Gerhard Schröder chairs the consortium building a Russian-German gas pipeline (conceived, in secret, while he was still running Germany).

Even though the EU is far stronger than Russia on paper, three times bigger in population terms, and more than 10 times larger as an economy, it seems unable to stand up to the Kremlin. The financial crisis has hit Russia hard – but it has hit us harder. A few years ago, threatening to freeze dodgy Russian companies out of the developed world's capital markets would have been a real threat. Now, if they find London, New York, and Frankfurt unwelcoming, they can turn to the exchanges in Dubai, Mumbai and Shanghai.

Nor does Russia greatly care if it is excluded from clubs such as the Council of Europe or the G8, or if talks on joining the World Trade Organisation or the Organisation for Economic Co-operation and Development are frozen. Such "punishments" may even reinforce the message of the ex-KGB regime to the Russian people: that their country is surrounded by malevolent hypocrites. The Kremlin's message to Europe is cold and confident: you need us more than we need you. President Dmitri Medvedev is proving as tough and tricky as his predecessor, Vladimir Putin. His new security plan is to end the Atlantic alliance, pushing America out of Europe and creating a new security regime in which the continent's biggest countries – chiefly Germany and Russia – will boss everyone else about.

It is not too late to fight back. Nato has already changed its approach. Belatedly, the alliance's top-secret military planning bureaucracy is working out how it could defend the Baltic states and Poland. Nato warplanes last week held air exercises over Estonia, while senior American commanders are paying frequent visits to the Baltic states.

That is encouraging, but it is not enough. There are other matters that need addressing urgently – including Russian spying. This has reached unprecedented levels, and is probably more dangerous and destructive to Western interests than during the old Cold War. A co-ordinated, wholesale expulsion of Russian intelligence officers and their hangers-on from, say, London, Stockholm, Oslo, Copenhagen and Warsaw would send a powerful message to the Kremlin.

The key to the West's future security is the security of the Baltic states. Estonians, Latvians and Lithuanians have thrown in their lot with us and we must not let them down. Consider this scenario. Imagine that Estonian extremists start intimidating local Russians (who amount to around a third of the Estonian population). Russia can easily stoke this covertly, while demanding publicly that Estonia crack down. Then imagine that Russian activists (again, backed, discreetly, by Moscow) set up "self-defence units" which start patrols, and set up checkpoints. When the Estonian authorities try to stop this, the Kremlin complains; Russian military "volunteers" start mustering across the border, proclaiming their intention to defend compatriots from "fascism". The Russian media report this with wild enthusiasm; the Russian authorities say they cannot indefinitely restrain the spontaneous patriotic sentiments of their citizens.

Suppose Estonia requests support under Article IV of the Nato charter. At this point, Russia's cultivation of assets in the West pays off. Germany, Italy and other big European countries tell Estonia to sort out its problems with Russia bilaterally. The result is a worse split in the Alliance even worse than the one over Iraq. Faced with the West's weakness, the Kremlin ups the odds. Estonia tries to restore order; Russia terms that an intolerable provocation and demands a change of government, immediate changes in the language and citizenship laws, and the establishment of what it calls a "Swiss solution": cantons in which Russians will be allowed "to run their own affairs". To back this up, Russian forces start military manoeuvres.

So what does Estonia do then? America may offer moral support, but is it going to risk a Third World War with Russia to protect Estonia? Such a course of events is not inevitable, or even likely. But it is not as preposterous as it should be. Too many of the ingredients are in place and the Kremlin is perfectly capable of cooking them into a dangerous dish. The big question for Estonia and its friends is what can be done to make sure that never happens.

The answer is not to give up on Nato but to complement it with a regional grouping. The existing Nordic ties between Sweden, Norway and Finland, boosted by support from Poland and Denmark, would put this scenario back where it belongs: in the world of geopolitical thrillers. Add in British, Canadian and American involvement and you would have a formidable counterweight to Russian mischief-making in both the Baltic and the Arctic – the likely hotspots of the new Cold War.

Edward Lucas is author of 'The New Cold War: How the Kremlin menaces both Russia and the West' (Bloomsbury). An updated edition is published thismonth.

europe view

Europe.view

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

AP
AP


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.

from this week's Europe section

The euro

Seeking shelter
Oct 30th 2008
From The Economist print edition


Countries outside the euro zone are worried, but joining may not be easy

SHARING a currency but not a government—the hybrid arrangement for the 15 countries that use the euro—may look less than ideal in times of turmoil. But from the outside, the single currency looks like an increasingly attractive shelter.



Even solid ex-communist countries such as Poland want to speed up their preparations to meet the conditions for joining the common currency. And rich EU members that stayed out by choice, Sweden and Denmark, are thinking again. Joining the euro, at least in some eyes, means a loss of national identity. It also means governments cannot devalue or change interest rates to suit economic needs. During the sunny financial weather of the past years, that seemed to argue for staying out. The balance of the argument is now changing.

Denmark twice raised interest rates in October to help protect its currency, the krone, which is pegged closely to the euro. Sweden’s krona fell to a record low against the euro in October as the central bank there cut interest rates in the hope of fending off a recession. The Danish prime minister, Anders Fogh Rasmussen, says that being outside the euro zone during the financial crisis is “detrimental” to the economy, and he wants a referendum by 2011. Even in non-EU countries, such as Iceland, adopting the euro is now a hot topic.

In eastern Europe, meanwhile, Slovenia has already adopted the euro and Slovakia will do so by the end of the year. But no other country looks close. Standard & Poor’s this week cut Romania’s credit rating to “junk” status, blaming politicians’ irresponsibility about public-sector wage increases. Poland, ambitiously, says it wants to meet the criteria and set a fixed rate for the zloty against the euro in 2011. The government is now seeking cross-party support for the necessary constitutional amendments.

To join the euro, countries are required to have inflation and budget deficits at sustainably low levels (“low” is an average based on other countries’ performance). In past years, eastern European countries have missed that because roaring growth pushed up prices. Foreign investment is likely to fall sharply. Soaring tax revenues once shrank budget deficits—but now the tax take is falling, exposing unreformed public finances. In Poland, these include wastefully untargeted social benefits such as early retirement.

Talking about a quick move to the euro may be a good gimmick for politicians, but the practical difficulties are huge. The countries of the euro zone are not longing for troubled new members; its existing ones, such as Greece and Italy, are worry enough. The higher taxes and lower spending needed to satisfy the entry criteria are not the choices that a country would normally make in a recession.

The prospect of euro membership in three years’ time is unlikely to calm panicky financial markets now. That requires, at a minimum, large quantities of cash—as seen in this week’s bail-out of Hungary (see article). This week the European Union said it would raise its own rescue fund from €12 billion ($15 billion) perhaps to €25 billion. Yet even with such outside help, running an independent currency is beginning to look too risky for all but the biggest economies.

From the finance section...

Emerging markets

Unfunded mandate
Oct 30th 2008 | RIGA
From The Economist print edition


The IMF adopts a more flexible approach

TIME was when a bail-out by the International Monetary Fund was a uniformly horrid experience. Cold-eyed, sharp-suited men pored over your country’s books, demanding painful structural reforms and bone-chilling fiscal stringency. Faced with the current turmoil in emerging markets, the fund now seems more like a generous uncle.

Well-run countries now have fewer hoops to jump through to gain IMF money. On October 29th the fund announced the creation of a new short-term liquidity facility for the soundest emerging markets. The facility will disburse three-month loans to countries with good policies and manageable debts without attaching any of its usual conditions. The Federal Reserve added its considerable firepower to the rescue effort, announcing the establishment of $30 billion swap lines with each of the central banks of Brazil, Mexico, South Korea and Singapore.



The fund’s traditional lending also comes with fewer strings attached. The IMF-led $25.1 billion bail-out of Hungary on October 28th was “fast, light and big”, in the words of one person involved. The rescue came just days after the fund agreed on a $16.5 billion package to shore up Ukraine’s collapsing economy, a prospect which seems to be unblocking the country’s wretchedly deadlocked politics. It is also standing by to help Pakistan.

The huge international support package for Hungary is a shocking turn of fortune for eastern Europe, a region that has enjoyed growth and stability for a decade. But a toxic combination of external debt and collapsing confidence left the economy floundering. Even spending cuts, tax increases, a €5 billion ($6.7 billion) loan from the European Central Bank and a sharp rise in interest rates, from 8.5% to 11.5%, had failed to calm the markets.

The fund had tried to get the governments of Germany, Italy and Austria on board for the rescue. Their banks are most exposed to Hungarian borrowers (thanks to eager lending in euros and Swiss francs). Austria was willing to take part; Germany was not. So the IMF has put up $15.7 billion (to be agreed on at an IMF board meeting shortly), the European Union has added $8.1 billion, and the World Bank a further $1.3 billion. In return, all Hungary has to do is pass a law on fiscal responsibility that is already before parliament.

The fund may be calculating that it is better to be lavish before a crisis than stringent after one. Iceland, which is negotiating a $2 billion bail-out from the IMF, is being forced to take some bitter medicine after the failure of its banks. The central bank raised interest rates by a full six percentage points to 18% on October 28th, as trading resumed in the Icelandic krona after a suspension of nearly a week.

The big uncertainty now is how many more fires the fund and other lenders must fight—and whether they can afford to do so. The IMF may well need more than the $250 billion it now has. Gordon Brown, Britain’s prime minister, wants countries with big surpluses, such as China and the oil-rich Gulf states, to contribute more. The fund’s backers, it seems, need to be as flexible as its new lending criteria.

Discussion on CEE economics

Your correspondent in discussion with his former LSE economics teacher

Bailout latest from economist.com today

The IMF and eastern Europe

Into the breach
Oct 27th 2008
From Economist.com


The IMF helps eastern Europe’s two most vulnerable economies. Will it stop the rot?

Get article background

SIX months ago it all looked so different. The countries of eastern Europe were the poster-children of economic reform: having privatised, deregulated and stabilised after the collapse of communism, they seemed on a clear path leading to convergence with the richer half of the continent.

That picture was always a bit optimistic. Now it looks wildly out of date. A noxious cocktail of public foreign debt, heavy private borrowing in foreign currencies, big current-account deficits, lax public-spending controls and wobbly governments (different in each country but all potentially lethal in conditions of collapsing investor confidence) has sent policymakers scurrying to talk to the ultimate financial backstop: the International Monetary Fund.

This weekend, the IMF reached broad agreement on big bail-out packages for both Hungary and Ukraine. On October 22nd Hungary had raised its interest rate to an economy-crunching 11.5% (up from 8.5%) in the hope of halting steep falls in its currency, the forint. Fortuitously, the Hungarian markets then closed for a two-day break, followed by the weekend.

Over the weekend, as the hours ticked closer to the moment of the Hungarian markets’ reopening, the IMF was scrambling to gain agreement from the European Union, countries such as Germany, Austria and Italy, and other international lenders such as the World Bank, to support the bail-out. That task was hindered by Europe’s leaders' absence at an international EU-China summit in Beijing.



The rule in such panicky conditions is “the more the better”. The bail-out needs to be big enough to reassure lenders that they can roll over existing Hungarian debt. If not, the economy faces meltdown. Late on Sunday, time ran out to present the plan in full. Instead, the IMF issued a statement endorsing the Hungarian authorities’ planned stabilisation measures. “The policies Hungary envisages justify an exceptional level of access to Fund resources,” said the IMF’s managing director, Dominique Strauss-Kahn. On Monday, the European Bank for Reconstruction and Development issued a statement supporting the IMF plan. It could play an important role in recapitalising Hungary’s banks. Earlier this month the European Central Bank took the extraordinary step of issuing a €5 billion ($6.7 billion) credit line to Hungary’s central bank (Hungary is not in the euro zone). More may be in store.

The central feature of the plan is reform of public finances. But the room for manoeuvre is limited. Hungary’s growth is already feeble—likely to be only 2% this year. The government had already reined in spending and lifted taxes, and became highly unpopular as a result. More of the same risks plunging the country into recession. But without tough measures, international lenders may just walk away.

The early verdict from the market was sceptical: shares plunged by a further 10% when the market opened on Monday. That adds urgency to the need to finalise the deal. Those involved hope to have it ready by Wednesday. Politics is playing a big role. America sees Hungary as a strictly European problem, but has been pushing the IMF to provide more generous and immediate help for the other stricken economy, Ukraine.

Riven by political disputes, Ukraine is vulnerable in a crisis to its cash-rich neighbour, Russia. The Fund said on Sunday that it had agreed a $16.5 billion two-year loan to Ukraine, although it is unclear how the country, which lacks a government and is facing its third parliamentary election in three years, is in any position to adopt the tough economic policies needed to restore confidence.

A statement by the Fund said that it was moving “expeditiously” and that the programme would focus on “essential upfront measures”. It did not stipulate what these might be. A joint central bank and finance ministry statement mentioned a balanced budget and legislative moves to support the banking system. Parliament, normally fractious and deadlocked, is due to meet on Tuesday. Outsiders will be watching closely.

Daily Mail on Deripaska

Peter Mandelson and his very dangerous friends


Let's imagine that during the height of the Cold War, a British shadow chancellor had visited a member of the Soviet Politburo privately, during which they had discussed - even in the vaguest terms - the possibility of the Kremlin donating money into his party's coffers.

Such an episode is barely conceivable: yet had it happened and become public knowledge, the result, at best, would have meant instant resignation and permanent disgrace. It could even have led to charges of treason.

Fast forward to today and it is a sign of the mental decay and moral timidity in our public life that the meetings between senior figures in both our main political parties with Oleg Deripaska, one of the richest and most powerful men in Russia, have led to no such national outrage or official censure.

You may shrug and point out that no money changed hands. Equally, it cannot be proven that anyone in power has made decisions favouring Mr Deripaska in return for his lavish hospitality.

But that is not really the point. The glaring scandal here is that neither the shadow chancellor George Osborne nor the Tory fund-raiser Andrew Feldman nor even the Labour master-fixer Lord Mandelson saw anything wrong in socialising with someone like Mr Deripaska.

My last meeting with Mr Deripaska, in Moscow a few years back, was strictly journalistic. He spoke forcefully about the ins and outs of the aluminium industry, which is the focus of his business interests.

His minders, jumpy and solicitous, were keen to keep me off other subjects, such as his relationship with the Kremlin.

They wanted me to portray him as a mainstream businessman whose fortunes came not from connections or ruthlessness but from hard work. Clearly, Mr Deripaska was a man to be reckoned with, I concluded.

The metals industry was a terrifying business in Russia in the Nineties, where the losers in commercial disputes about control of smelters, electricity, raw materials and the finished product could easily end up dead. Mr Deripaska's clearly had friends and influence at the very top.

But Lord Mandelson, George Osborne and the other people who so happily hobnobbed with Mr Deripaska on his colossal yacht, the Queen K, and elsewhere cannot have been ignorant of the fact that their host is a man unable to enter the U.S.

As officials of the FBI and the Justice Department are happy to explain privately (in briefings that could have been arranged for senior figures from a valued American ally such as Britain), the U.S. is unhappy with some of what might euphemistically be described as Mr Deripaska's 'business associates'.

Those planning to strike up a friendship with Mr Deripaska might also find a chat with British officials useful. A subject that comes up in conversation with such intelligence experts is the fate of Mikhail Gutseriyev, a Russian oilman whose company was the subject of a hostile takeover from Mr Deripaska's business empire.

He has fled Russia and gained political asylum in Britain.

Suffice it to say that a briefing from British officials dealing with Russia should have made it abundantly clear to Mr Osborne, as well as to Lord Mandelson, that any dealings with Mr Deripaska should be limited, formal and cautious.

Of course, Mr Deripaska has his side of the story, too. He denies any wrongdoing, blaming his visa difficulties with the U.S. on 'bureaucracy'. His defenders claim that U.S. officials have been influenced by malicious rumours spread by his business rivals.

Like other Russian tycoons, he may feel that moralising westerners are judging him overly harshly. True, he succeeded in the rumbustious Russia of the Nineties, when rules were few and the rewards for risk-taking were high.

But in those days, western advisers to Russia welcomed the emergence of the oligarchs - tycoons who seized control of Russia's natural resources industries, usually adding banking and media divisions to their commercial empires.

The argument then was that any kind of private ownership was better than retaining the old Soviet system of state planning.

Once things settled down, the new business class would assuredly be the backbone of a capitalist system, adopting our western values and anchoring Russia for ever in the modern era.

Now Mr Deripaska and other tycoons from that era are doing just what we asked and predicted: going respectable.

They send their children to be educated at our finest boarding schools. They buy the grandest properties in London. They diversify their businesses into western economies. They make friends with those at the heights of our establishment - and then they get pilloried. Is that not just sickening hypocrisy?

Indeed, it is. But the sickening thing is not the belated and limited complaints being voiced, but that we allowed ourselves to be bought in the first place.

For decades, London has been the global leader in the respectability business. Indeed, it is precisely that commodity which has attracted some of the world's more colourful business characters.

In the Seventies and Eighties, it was the Arab world that discovered the mix of cachet and pleasure on offer in Britain's most salubrious corners.

With mansions in Surrey, townhousesin Belgravia and everaccommodating bankers in the Square Mile, the despotic and corrupt rulers of countries such as Saudi Arabia found that Britain offered an unbeatable mixture of personal relaxation and upmarket financial advice.

An array of fixers, PR men and go-betweens opened the doors of British society to these playboy princelings. Few knew or cared that the petro-dollars were also financing the extremist form of Islam that has bubbled over to such deadly effect in the Middle East and in terrorist attacks on western countries.

Now, London is offering rich Russians that same prestige and safety. Whether it is an entree to high society or to popular culture, our wily brokers of respectability can provide it.

Buy a football team, sponsor a charity or make a hefty donation to a posh boarding school - and even dirty money suddenly gains the right up-market cachet.

In exchange for (to them) trivial amounts of cash, the oligarchs have bought that one trinket they could not acquire elsewhere - priceless respectability.

Dzentelmenski is a Russian word meaning 'politeness', 'decency' and 'trustworthiness': something that in their eyes at least is still the epitome of what Britain stands for. And what could be more valuable than that?

In retrospect, we have sold respectability rather cheaply. Blinded by enthusiasm for Russia's burgeoning capitalism and rackety democracy in the Nineties, we overlooked its dark side.

As the Soviet empire collapsed, the KGB and Communist Party squirrelled away billions through pliant banks (some of them Britishrun) in places such as Cyprus and Austria (a story brilliantly told in John Le Carre's latest novel A Most Wanted Man). That was the seedcorn for many a fortune in the new Russia.

In other cases, the money came from an even darker corner: organised crime.

The Russian mafia grew up in the undergrowth of the failing planned economy of the Soviet era, trading everything from condoms to caviar on the black market.

After private enterprise became legal, it established excellent relations with international organised crime syndicates.

But ignoring that was even less defensible once Russia's political freedom shrivelled as the old KGB returned to the Kremlin.

Even as thousands of people were being tortured and killed in Chechnya, in a war cynically started by Vladimir Putin to consolidate his grip on power, the British establishment decided that the new Russian leader was a man they could do business with.

Tony Blair went for nights at the opera with his 'friend' Mr Putin, a foul-mouthed and brutal man who loathes the West and glorifies the totalitarian Soviet Union.

Britain's elite hobnobbed lavishly and sometimes lucratively with the 'new Russians': Kremlin cronies, some with alarming mafia connections, others linked to the old KGB.

The now jailed Mikhail Khodorkovsky used to fly selected British grandees around Russia on his private jet, awash with champagne and laden with the finest caviar.

Having narrowly escaped a libel writ from Mr Khodorkovsky (after a story questioning his business practices), I dubbed this flying circus the 'plane of shame'.

That brought a furious response from one of the guests. I should be ashamed of myself, he thundered: did I not realise how fortunate we were that the most powerful people in the new Russia wanted to be friends, not foes?

It was a naive and blinkered response. But he was by no means alone. Bankers, accountants and lawyers rushed to the trough, too.

As we now know, our financial system has for years been based on perilously fragile ethical foundations. But it is still striking how quickly the guardians of our system's integrity went along with Russian businesses' attempts to subvert it.

Oil and gas companies that are little more than criminal conspiracies, stealing billions of dollars (chiefly, let it be said, from the Russian people), had their accounts signed off by our finest auditors.

Bankers handled the colossal cash flows of what was in effect mafia money flowing directly into our financial system. Top lawyers helped them set up the web of anonymous offshore companies that conceal the real owners.

In a final twist, publicity-shy Russians have discovered that Britain's ferocious libel laws provide a perfect means to intimidate journalists - British and foreign - who ask nosy and troublesome questions or dare to publish the truth about their activities.

If writs don't work, the next option is a bullet: my colleague Paul Klebnikov, the editor of the Russian-language edition of Forbes Magazine, an American business journal famous for its investigative work, was gunned down in 2004 for his temerity in probing the network of money and power that surrounds the Kremlin.

What is so galling is that the British governing class retains its moral myopia even now, when it is clear the Russian regime is a threat to our security.

In the shadows of Whitehall, officials are aghast at the way in which Russian money is buying friends and influence in our politics, officialdom and business.

All three parties have parliamentarians who are loyal members of the Kremlin chorus. British Tories, for example, supported an attempt to make a former KGB politician the head of a top human rights body, the Parliamentary Assembly of the Strasbourg-based Council of Europe.

But the LibDems and, particularly, Labour have little to be proud of either. What will it take to wake them to the reality of the situation?

Russian warplanes practise dummy nuclear missile attacks, just outside the airspace of Nato countries including Britain.

Alarmed by Russia's invasion and dismemberment of Georgia, Nato is making contingency plans to defend its members from Russian attack for the first time since the end of the Cold War.

Our brave allies in the Baltic states and Poland are braced for another onslaught - perhaps financial, perhaps diplomatic, perhaps something more sinister.

Even the Swedes and Finns are seeking new security ties as they watch their eastern neighbour's increasingly paranoid and xenophobic behaviour.

Yet Britain, which under Margaret Thatcher provided a blazing moral beacon to dissidents inside the Soviet Union, has doused its lights.

Once it was us who bailed out the Kremlin, supporting Mikhail Gorbachev and Boris Yeltsin as they tried to establish some semblance of Russian democracy and salvage an economy ruined by state planning.

Now the money is flowing the other way, from the Kremlin to our rulers. Yet the bitter truth is that the tainted millions from Russia make our true bankruptcy - of morals, not money - even more humiliating and dangerous.

nuanced take on Deripaska from Guardian

Corfu is a scene in the great Russian buy-up of Britain

The Osborne scandal testifies to the governing class's capitulation to Moscow money and the loss of a moral antenna

Comments ()

Once it was the Kremlin that came begging to people like George Osborne for cash. In the old cold war, it secretly sold off the Soviet Union's gold reserves to pay for desperately needed grain imports. Mikhail Gorbachev and Boris Yeltsin sought bail-out after bail-out from the west, strongly backed by Margaret Thatcher and John Major. Now it is the other way round: Russia sits on a vast pile of cash, and we are selling principles and self-respect.

Even before the financial crisis, London was the global leader in the respectability business: offering rich Russians the chance to turn their ill-gotten billions into prestige. Whether you wanted an entree to high society or to popular culture, British go-betweens and highly paid PR barons were willing to provide it. Buy a football team, sponsor a charity, or make a hefty donation to a posh boarding school - and you suddenly gain the right upmarket cachet. In exchange for what are to them trivial amounts of cash, the numerous oligarchs bought priceless respectability and safety. As fugitives from Russia found, Britain is a safe place - police and bodyguards work smoothly together; Russian extradition warrants count for little.

In retrospect, that respectability was sold rather cheaply. With the war in Chechnya and imposition of state control on Russia's once pluralist media still in full swing, the British establishment decided that Russia under Vladimir Putin was a place to do business. The Russian tycoons - some of them ex-gangsters or ex-KGB - were seen as at worst a bit roguish. Tony Blair went for nights at the opera with his "friend" Mr Putin, the undertaker of Russia's political freedom. Britain's elite - the Rothschilds and Murdochs, even minor members of the House of Windsor - hobnobbed lavishly and sometimes lucratively with the "new Russians".

Those who found their eyebrows rising or their stomachs heaving were told not to be so fuddy-duddy. Surely we should be glad that Russia was now roughly on the right track: rough capitalist diamonds are better than communist coals. Those who refused to play along soon got discreet warnings about the litigiousness of London's new elite.

The banks, accountants and law firms joined the rush to the trough. Instead of upholding the principles - however shaky - on which our financial system is based, they have entered into the fray of Russian business, and connived in its attempts to subvert and evade those principles. Companies that are little more than criminal conspiracies, stealing billions of dollars from the Russian people for the benefit of unnamed shareholders, have their accounts signed off by our finest auditors. Top lawyers help them to conceal their identities and bombproof their business models. Bankers handle the cash and manage the dense web of offshore companies that conceal a trail pointing tantalisingly back to the Kremlin.

In the shadows of Whitehall, officials are aghast at the way in which Russian money is buying friends and influence in our politics, public administration, independent regulatory bodies and businesses - particularly energy. All three parties have parliamentarians who are loyal members of the Kremlin chorus. British Tories, for instance, supported an attempt to make the former KGB man Mikhail Margelov president of the parliamentary assembly of the Council of Europe.

But the Lib Dems, and particularly Labour, have little to be proud of either, as the fracas over Oleg Deripaska shows. It is not just the unsolicited non-donation to the Conservative party that is so shocking. It is that anybody claiming respectability in British public life thought it appropriate to have even social dealings with oligarchs like Mr Deripaska - who rose to power and riches first in the aluminium business in the 1990s, which witnessed some terrifying violence, and then at the court of Mr Putin.

But even so, it cannot have escaped the notice of Peter Mandelson or George Osborne that Mr Deripaska is a man unable to enter the United States. A private briefing from the FBI - easily arranged in London - would have revealed that American officials are unhappy with some of Mr Deripaska's business associates.

Mr Deripaska's defenders point out that he has never faced any criminal charges and blame his visa difficulties on unsubstantiated allegations from rivals. Moreover, Mr Deripaska has himself denied any wrongdoing in this and other controversies.

A brief chat to informed British officials should have made it abundantly clear to Messrs Osborne and Rothschild, as well as Lord Mandelson, that dealings with Mr Deripaska should be limited, formal and cautious.

The British governing class has not just mislaid its moral antenna. It has also forgotten that Russia is a national security threat: a point underlined repeatedly and publicly by MI5. Nato is now making contingency plans to defend its members from Russian attack for the first time since the end of the old cold war. Yet on the home front, we seem to have surrendered without a fight.

• Edward Lucas is the author of The New Cold War: How the Kremlin Menaces Russia and the West

Europe view 104: pipelines & iran

Europe.view

President's dilemma
Oct 23rd 2008
From Economist.com


Deciding between Nabucco and South Stream

Get article background

WHICH will it be? The next American president will have to decide. Either Europe gets natural gas from Iran, or Russia stitches up the continent’s energy supplies for a generation.

In one sense, it is hard to compare the two problems. Iranian nuclear missiles would be an existential threat to Israel. If Russia sells it rocket systems and warhead technology, or advanced air-defence systems (or vetoes sanctions) it matters. By contrast, Russia’s threat to European security is a slow, boring business. At worst, Europe ends up a bit more beholden to Russian pipeline monopolists than is healthy politically. But life will go on.



Europe’s energy hopes lie in a much discussed but so far unrealised independent pipeline. Nabucco, as it is optimistically titled (as in Verdi, and freeing the slaves) would take gas from Central Asia and the Caspian region via Turkey to the Balkans and Central Europe. That would replicate the success of two existing oil pipelines across Georgia, which have helped dent Russia’s grip on east-west export routes.

Russia is trying hard to block this. It is reviving the idea of an international gas cartel with Qatar and Iran. It also wants to kybosh Nabucco through its own rival project, the hugely expensive ($12.8 billion) South Stream. Backed by Gazprom (the gas division of Kremlin, Inc) and Italy’s ENI, it has already got support from Austria, Bulgaria and Serbia. The project has now been delayed two years to 2015.

But politicking around it is lively. This week the Kremlin managed to get Romania—until now a determined holdout on the Nabucco side—to start talks on joining South Stream. As Vladimir Socor, a veteran analyst at the Jamestown Foundation, notes, that creates just the kind of contest that the Kremlin likes, in which European countries jostle each other to get the best deal from Russia. Previously, that played out in a central European battle between Austria and Hungary to be Russia’s most-favoured energy partner in the region. Now the Kremlin has brought in Slovenia to further increase its leverage.

All this works only because the European Union (EU) is asleep on the job. Bizarrely, Europe’s leaders publicly maintain that the two pipelines are not competitors. They have given the task of promoting Nabucco to a retired Dutch politician who has not visited the most important countries in the project recently (or in some cases even at all).

The main reason for the lack of private-sector interest is lack of gas. The big reserves are in Turkmenistan, but Russia wants them too. Securing them for Nabucco would mean a huge, concerted diplomatic push from the EU and from America. It would also require the building of a Transcaspian gas pipeline.

That is not technically difficult (unlike, incidentally, South Stream, which goes through the deep, toxic and rocky depths of the Black Sea). But it faces legal obstacles, and could be vetoed by both Russia and Iran. As Zeyno Baran of the Hudson Institute argues in a new paper, “the fortunes of the two pipelines are inversely related”.

That is America’s dilemma. Befriending Iran would create huge problems for Russia. An Iranian bypass round the Caspian allows Turkmen gas (and Iran’s own plentiful reserves) to flow to Turkey and then on to Europe. But the same American officials, politicians and analysts who are most hawkish about Russia tend also to be arch-sceptics about starting talks with the mullahs (or even turning a blind eye to Iranian gas flowing through an American-backed pipeline).

If Iran can make it clear that does not want to destroy Israel and promote terrorism (and stops issuing rhetorical flourishes on the subject) it stands to benefit hugely. The “grand bargain” has never looked more tempting—or more urgent.