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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 The existing agreement is outdated, but rolls over each year without causing difficulty.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.

three-page briefing on CEE economics

Eastern Europe

Who's next?

Oct 23rd 2008
From The Economist print edition

The economies of eastern Europe face stormy times, even if Western banks hold their nerve. The political fallout may be even worse

WILL an ex-communist country be the next Iceland? The dramatic collapse of that country’s economy, endangering savings from hapless depositors in Britain and elsewhere, has highlighted other risky but obscure corners of the world’s financial system. The stability of the Ukrainian hryvnia, the implications of the Latvian property crash and Hungarians’ troubling penchant for loans in Swiss francs are among the exotic topics now crowding policymakers’ desks.

Countries such as the ex-communist ones in eastern Europe are particularly at risk during periods of financial turmoil. First, because the counterpart of soaring foreign investment has been gaping current-account deficits (Latvia’s, for example, peaked at 26% of GDP in the third quarter of last year). Second, their central banks and governments are unlikely to be able to muster the financial firepower now being deployed in the big economies of the West. Already a couple of banks have toppled; stockmarkets have plunged, wiping out years of savings and hitting balance-sheets. The price of credit-default swaps—the market’s estimation of a borrower’s creditworthiness—ranges from the reassuring to the alarming (see map). As worries intensified, Hungary’s central bank on October 22nd raised interest rates from 8.5% to 11.5%.

For countries that have benefited from big flows of outside money, delivered by a highly leveraged global financial system, the mix of problems looks scary. Those big current-account deficits in every country save Russia suggest they may be living beyond their means. Some (but not all) have public or private sectors with big foreign debts; these may be hard to refinance. Some (again, not always the same ones) have wobbly banks and large state deficits. At best, the region is in for more nasty shocks that will need external support from lenders such as the IMF. At worst, some countries face debt restructuring, currency collapse and depression; that raises the spectre of political upheaval, too.

The turmoil has been most spectacular in Russia. There the stockmarket has plunged by some two-thirds since its peak in May, sending its fabled oligarchs scrambling to liquidate their portfolios to meet bankers’ demands. Oleg Deripaska, probably the richest of these well-connected tycoons—now embroiled in a British political scandal (see article)—has sold prized stakes in Western companies which he had pledged as collateral in the $4.5 billion acquisition of a 25% stake in Russia’s biggest metals producer, Norilsk Nickel.

These wild shifts in fortunes reawaken memories of the 1998 financial crash, in which default and devaluation wiped out most of Russia’s private banking system. But few expect a reprise. Thanks to $1.3 trillion in oil and gas revenues over the past eight years, Russia now sits on a mighty pile of cash and liquid assets, still in excess of $500 billion, in its foreign-exchange reserves and other funds. It is unclear how well the Kremlin will organise the bail-outs and who will benefit. A lower oil price may affect the geopolitical ambitions of Russia and its allies (see article). Some oligarchs may become minigarchs. But Russia will not need to beg for cash from the outside world.

In Ukraine, the next-largest country in the region, the story is quite different. The stockmarket has plunged by nearly 80% this year. The hryvnia, the national currency, recently hit a seven-year low against the dollar. The sixth-largest bank, Prominvest, suffered a run. Rating agencies have issued downgrades. Economic growth is plunging. Inflation is 25%.

The outside world wants to help. Officials are haggling with the IMF about an emergency loan of up to $14 billion—around a fifth of the $55 billion-66 billion that Ukraine needs to raise by next year to roll over short-term loans, pay interest on other debts and finance the rest of its current-account deficit. That would normally require hard bargaining about banking reform, higher interest rates and a stringent public-spending regime to curb inflation.

The problem is that Ukraine, even by its own awful standards, is in political chaos. The prime minister and president are at loggerheads about whether an impending general election (now postponed until December 14th) is legal. A new government able to take tough decisions will not be in the saddle for weeks, even months. Keen not to be seen as too slow to assist, the IMF may stump up a loan nonetheless.

Lifelines from outside

The IMF is one source of help (and may be happy to have something to do after years in which its role in the region seemed to be shrinking). For countries closer to “old Europe”, another possible provider of assistance is the European Central Bank. On October 16th the ECB provided a short-term credit line of €5 billion ($6.7 billion) to Hungary, which is not in the euro zone but has an economy closely linked to it. The foreign-exchange market there had all but seized up amid worries about debts, public finances and growth prospects.

Although much richer than Ukraine, with GDP per head roughly three times as high, Hungary is in some senses even more vulnerable. Public debt is more than 60% of GDP (a lot by the region’s standards), thanks to a communist-era borrowing spree and spendthrift governments since then. In 2006 the budget deficit exceeded 9% of national income. The current-account deficit this year amounts to €6.8 billion, or 5.5 % of GDP. Recent debt auctions have been cancelled because of a buyers’ strike. Many Hungarian households and firms have taken out hard-currency loans (such loans, originally at much lower interest rates than forint-denominated ones, account for 90% of new mortgages since 2006 and 20% of GDP). In effect these were personal bets, now looking ill-judged, on the convergence of the forint with the euro. The weak forint already means higher interest payments; if that trend continues, many Hungarians risk bankruptcy.

Hungary’s economy could certainly be in better shape. But outsiders give the authorities credit for efforts in the past two years to cut the budget deficit, now slightly less than 4% of GDP. The government has started cross-party talks on a further austerity programme. The Hungarian central bank is impressively well-run. The IMF and ECB are ready to lend more if needed.

The huge question, in Hungary and elsewhere, is whether foreign banks will stand by their local customers. Like most of the new members of the European Union, Hungary has sold off most of its banks to outsiders. That once looked the best way to create a solid financial system, allowing countries to borrow freely and grow fast, without risking the kind of crisis suffered by emerging markets in past decades. In retrospect, it looks risky. For the past decade Western banks, such as Erste Bank and Raiffeisen (Austria), UniCredit (Italy) or Swedbank and SEB (Sweden), have piled in to the promising new markets on their doorsteps, lending boldly and buying up sometimes richly priced local banks. Now those huge loan books—in Austria’s case fully 43% of GDP, compared with 5% for Italy and 1% for Sweden—are souring at a time when wobbly banks may feel that scarce cash is better deployed at home. Such deposits abroad are not covered by home-country insurance.

The foreign banks are already reining back lending, refusing to issue mortgages in foreign currency and demanding better security. That is prudent, if belated. The danger is that they may go much further, cutting off new lending or refusing to roll over outstanding loans, even to solid borrowers. That could send bankruptcies and unemployment rocketing. Another possibility is that one or more parent banks will put a troubled subsidiary up for sale, perhaps to a Russian buyer. That prospect is unlikely. But it sets nerves jangling in places such as the Baltic states.

At first sight it is these economies that seem in the riskiest position. A sharp slowdown had started even before the global financial crash. Estonia and Latvia in particular had enjoyed remarkable property booms, generously financed by bank lending. That was one factor in their colossal current-account deficits. The bubbles have popped; growth, running in double digits in 2006, has come to a halt.

This has been a hard but so far orderly landing. Whether it now turns catastrophic is an open question. The debts must still be repaid. Fitch, a rating agency, which downgraded all three Baltic countries this month, reckons their gross external financing requirements next year (the money they need for foreign debt repayments and their current-account deficits) are 400% of likely year-end foreign-exchange reserves in Latvia, 350% in Estonia and 250% in Lithuania. These are the highest ratios in emerging Europe.

In theory, the external imbalances should unwind of their own accord. The slowdown at home is already shrinking current-account deficits. If the local banks run out of money because of bad loans, their foreign owners will send them more cash; the sums involved are big by Baltic standards, but small by the standards of rich-country banks. Swedbank, for example, has 16% of its loans in the Baltic states, (190 billion Swedish kronor, equivalent to $32 billion or €20 billion). Only 1.2% of the total look bad so far, the bank says. Sweden’s regulators say the biggest banks can write off as much as 10% of Baltic lending without eroding their own capital. Sweden launched a $200 billion bail-out plan this week to bolster confidence.

Furthermore, despite the ballooning foreign borrowings of firms and households, none of the Baltic states has much public debt to worry about (Estonia even has net assets). Public finances are solid. The governments still have investment-grade credit ratings.

Pegs and their dangers

The problem is not so much survival, as finding the right policy mix to minimise the effects of sharp slowdown. All three Baltic states have their currencies pegged to the euro, either in formal currency boards (where the amount of money in circulation is directly linked to foreign-exchange reserves) or, in Latvia’s case, in a similar but slightly more flexible arrangement. That was a shrewd move in the 1990s, when it helped to stabilise economies left prostrate after the collapse of Soviet planning, and was a good way of keeping on track for eventual membership of the euro (something Lithuania missed by a statistical whisker in 2006). It is made safer by the fact that none of the countries is a financial centre: shorting the Icelandic krona was child’s play compared with the difficulties of speculating in the thinly traded Latvian lat or the Estonian kroon.

The main disadvantage of the arrangement is that it limits policymakers’ flexibility. If outsiders suddenly pull money out of a country with a pegged currency, the money supply shrinks, risking a deep depression. A country with a floating exchange rate can try to restore competitiveness and stoke growth by devaluing the currency. For any of the Baltic states, a float would be a catastrophic humiliation. It would also not necessarily help matters: for small countries, the risks of a free-floating currency are greater and the benefits less. So the likelihood is that the three Baltic countries face, at best, big cuts in public spending and lower output, perhaps for several years, while they pay off their debts and regain competitiveness. In happier conditions the governments would run deficits to counter this. In the current gloom, more borrowing risks making outside lenders feel even twitchier.

Most of the EU’s new members are in a stronger position, and should scarcely be put in the same category as the problematic countries. Poland, for example, has public debt of around 40% of GDP, while growth is nearly 6% and inflation at 4.5%. A strong economy has meant healthy tax revenues and kept budget deficits down. The zloty, like the Hungarian forint, has been wobbly, and a sharp slowdown in western Europe, the biggest export market for all ex-communist countries, will affect Poland too. But life should be at worst a bit tougher, rather than downright nasty.

The price of corruption

Potentially more vulnerable are the poorest new members of the EU, Romania and Bulgaria. For now, growth in both countries remains strong. But the imbalances are striking: Bulgaria’s current-account deficit is likely to be 24% this year. Bursting property bubbles and a wave of corporate bankruptcies could expose the poor quality of banks’ loan books. The question then will be how much support and attention either country will receive from outside. Whereas the Baltic states are well-regarded, enthusiasm in the EU for a Bulgarian bail-out is likely to be limited, thanks to the failure of the authorities in Sofia to fulfil commitments to clean up organised crime and corruption.

And that is the deeper problem for eastern Europe: not so much financial wobbles and weaknesses, but corrupt and incompetent politics. Their leaders found it hard enough to govern efficiently even when times were good. What will happen when foreign investors are stingier and growth slows or stops?

Ever since the collapse of communism in 1989, the eastern half of Europe has been struggling to reach the levels of economic, social and cultural development of the west. The ruinous legacy of one-party rule and planned economies was daunting. Everything from the rule of law to competitive companies needed to be rebuilt (in the case of the central European countries) or constructed from scratch (for those whose pre-communist experience was of autocracy or feudalism).

The results were impressive. Living standards soared; foreign investment poured in; politics settled down. The richest ex-communist countries are now nearing “Western” countries such as Greece and Portugal. So the fears of some in “old Europe” in the early 1990s that the new neighbours were likely to be poverty-stricken and unstable, exporting hungry migrants and crime to the rest of the continent, looked ridiculously overblown. Expanding the EU and NATO eastward went from a preposterous fantasy to common sense. One small ex-communist country, Slovenia, has joined the euro; another, Slovakia, will do so in January.

The next few years are likely to be a lot harder. A sharp recession will expose the cost of stalled reforms in previous years. In most of the ex-communist countries, the effort to meet EU and NATO requirements was a high-water mark in terms of political commitment to good government and sound economic policies. Since then, the approach has been to sit back and enjoy the weather: low borrowing costs, high foreign investment, rising tax revenues and higher living standards. Voters may not have thanked governments for this, but the political pressure to take painful decisions has been minimal. (The only real exception has been Hungary, where capital markets sent a sharp warning two years ago.)

Testing democracy

Now more than ever, the countries of the region need to push ahead with tough but urgent policies such as public-finance reform, especially of pensions; raising labour-market participation, particularly by reducing the numbers of early retirees; and improving productivity by modernising education, which is often still hidebound by communist-era bureaucracy. Countries such as Poland and Latvia still have shamefully bad road systems. Officialdom chokes business; corruption is stubbornly entrenched.

But the chances of a big push on reform look slim. The political compass, which once sent a reliable, if often ignored, message about the needed direction of policy, is swinging wildly as Western governments break taboo after taboo in the hope of fending off financial meltdown. For countries that have been told that privatisation, liberalisation and balanced budgets are the sure path to salvation, these are confusing times. The result, says Ivan Krastev, a Sofia-based pundit, is “an implosion in the idea of normality”.

The wrong kind of certainty may be even worse than confusion. The political institutions of the ex-communist countries were created in the great flush of optimism that followed the collapse of the one-party state. But voters have grown steadily disillusioned with politics. A seasoned watcher of the region in Brussels says that the coming years “will be a big test of democracy and the rule of law…will they stick to the rules?” If things get nasty, blaming economic hardship on foreign banks that have taken deposits but don’t want to make loans may prove a tempting theme for ambitious populist politicians.

For countries still outside the main clubs, prospects are even bleaker. The chances of fragile countries such as Macedonia joining the EU any time soon are diminishing. So are the prospects for the more advanced countries that want to join the euro. A cash-strapped EU may think again about the money it is prepared to spend on infrastructure and public services in neighbouring non-members.

In the eyes of many it is market economics, even more than democracy, that has been the big success of the past 20 years. It has brought undreamed-of freedom, choice and prosperity. In some countries, Mr Krastev notes, foreign banks have scored more highly in trust rankings than any public institution. They have become the symbolic and financial linchpins not just of economies, but of whole countries. They have a lot to lose. So does Europe.

Eastern Europe's economies

(from economist.com today)

A chill wind blows east

Oct 17th 2008
From Economist.com

Emerging markets in eastern Europe, battered by financial turmoil, may soon need outsiders’ help

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WHICH country will be the next Iceland? The dramatic collapse of the Nordic country’s economy has concentrated international attention on other risky but obscure corners of the financial system. The stability of the Ukrainian hryvnia, the ill-regulated Kazakh banking system, and Hungarian borrowers’ penchant for loans in Swiss francs are subjects crowding on to policymakers’ desks.

Ukraine said on Friday October 17th that the IMF was about to lend it $14 billion. The fund did not immediately confirm that. Certainly the money and external reassurance would be welcome: Prominvest, the country’s sixth-largest bank, suffered a run amid speculation that it was in trouble and likely to be taken over. Earlier, the national currency, the hryvnia, hit an all time low against the dollar. The stockmarket has fallen by nearly 80% this year. Ukraine’s inflation is an alarming 25%.

Such numbers are not unusual for east European economies (Latvia’s current-account deficit is 15%, having been well over 20% last year). But they highlight the problems that emerging markets face during periods of financial turmoil. They are vulnerable first because they tend to have imbalances: they rely on high levels of foreign investment, which means that they have run up big current-account deficits, for example. Secondly because they are not rich enough to finance their own bail-outs.

The IMF is one place to turn. Its rules allow it to lend up to five times a country’s quota: the amount deposited when a member state joins. But the rules can be relaxed in a crisis. Another source is the European Central Bank. It has just lent €5billion ($6.7billion) to Hungary, which is not a member of the euro zone, but has an economy closely linked to it. Hungarians seeking to buy forints had been battling with a foreign-exchange market that had almost wholly seized up. The IMF is waiting in the wings, prepared to provide a much bigger loan if necessary, and to deliver an important public imprimatur of the government's economic policies.

Although much richer than Ukraine, with GDP per person almost four times as high, Hungary is in some senses even more vulnerable than Ukraine, because of its large foreign debts. Public borrowings amount to 60% of GDP. That is partly the legacy of a wild borrowing spree by communist rulers in the 1970s and 1980s, and also of spendthrift governments since then. In 2006 the budget deficit was over 9% of national income; the current-account deficit was 6%. A further worry is that millions of Hungarian households and firms have taken out hard-currency loans, placing personal bets (perhaps rather ill-understood) on the likelihood that the forint-euro exchange rate would stay stable.

One big question is how many such crises will flare up, and how willing outsiders will be to deal with them. In most of the small, new, member states of the European Union, foreigners own the banking systems. If their loan books go bad, the shareholders will have to stump up. What if one of those home banks is in already in trouble? Nobody knows. Perhaps it will sell a troubled subsidiary elsewhere, maybe to Russia. Even if that prospect is unlikely, it sets nerves jangling in places such as the Baltic states.

Before the crisis, Hungary showed some signs of stabilising, thanks to a tough but unpopular austerity programme. The events of the past weeks have put that in doubt. That highlights the real problem for the ex-communist countries of Europe: weak politics. Their leaders found it hard enough to govern efficiently even when times were good. If foreign investors get stingier, and if growth slows or stops all together, effective government will be all the harder.

EV #103 Russia and the crisis

Europe.view

No crisis here

Oct 16th 2008
From Economist.com

Waiting for the shake-out behind the scenes

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SEEN through the framework of Western logic, the conclusion is irresistible. Russia’s political idiosyncrasies must give way to the imperative of economics. As the Russian stockmarkets (on the days that they are still open) collapse to two-thirds of their May levels, now is surely time for a calm, business-friendly approach. Stop spooking investors with tough-talking (or worse) foreign-policy gambits; concentrate instead on making Russia’s economy stable.

Such a change of approach would be a fine thing—particularly given Russia’s dismal record over the past eight years when it comes to spending its $1.3 trillion oil and gas bonanza on infrastructure and public services. The trouble is, the people who run Russia appear to see things rather differently.

Vladimir Putin and his colleagues came to power on the back of a financial crisis. In 1998, Russia defaulted on some foreign debts, devalued the currency and let the banking system collapse. In desperation, the Yeltsin family turned to the siloviki (former members of the security services); on the third attempt they chose Mr Putin.

That was then. This is now. In 1998, Russia was awash with debt. Now it sits on a cash pile worth more than $500 billion. Then the oil price was a dismal $12 per barrel. Now it is around $70. Most importantly, perhaps, Russia in 1998 had a lively pluralist media that revelled in uncovering official blunders (sometimes out of pure professionalism, sometimes to please an outside paymaster).

Now the Russian media, particularly television, is under tight control. What most Russians have heard on the news is that America’s financial system has crashed, damaging other Western countries with it. Russia is all but untouched. And Mr Putin got a tiger cub for his birthday, and has released a DVD about judo.

Actually, the crisis does mean problems for Russia. The country has far too many banks, and in particular far too many weak ones (some of them would be better termed “bank-like institutions”). The Russian authorities are using the big state banks to lend $36 billion to the rest of the banking system. That means that Russians need not worry about their savings.

A bigger worry is that Russian companies need to refinance a total of $120 billion in corporate borrowings before the end of the year. The Kremlin is going to help with that too—an elegant reversal of the “loans for shares” swindle of 1995.

It was always puzzling that companies such as Rosneft and Gazprom needed to borrow money at all, given that they were profiting from a boom in oil and gas prices. Even more unclear is where that money was spent (certainly not in big new exploration and development projects). Some cynics might say that these vast sums were stolen, but without details that remains mere speculation. So is the outrageous allegation that some well-informed officials and politicians may have been shorting the market as it collapsed.

The likely upshot is that politically well connected tycoons will be bailed out, while those less favoured (and those who have borrowed rashly) will turn from oligarchs to nanogarchs overnight. Those who control the tap of state spending will decide who survives. It will be interesting how that plays out: collecting debts in Russia may start in court, but end in the morgue. If anything goes wrong, it is clear who will be to blame: not the country’s leaders, but the hapless finance minister Aleksei Kudrin and his beleaguered band of economic “reformers” (for which read: literates).

And as far as the outside world is concerned? Wait and see. But cash is king. And Russia has lots.

Kundera: feet of clay?

Milan Kundera

The unbearable weight of history

Oct 16th 2008
From The Economist print edition

A long-buried scandal may taint a giant’s reputation

MILAN KUNDERA’S poignant novels epitomised the tragic division of central Europe from the rest of the continent. Works such as “The Unbearable Lightness of Being” told of lives clouded or ruined by totalitarianism.

The story of Miroslav Dvoracek, a Czech spy for the West, would fit well into a Kundera novel. Caught by the secret police in 1950 while on an undercover mission to Prague, he was tortured and then served 14 years in a labour camp. He was lucky not to be executed. He has spent nearly six decades believing that a childhood friend called Iva Militka betrayed him; he had unwisely contacted her during his clandestine trip. Similarly, she has always blamed herself for talking too freely about her visitor to student friends. Now a police record found by Adam Hradilek, a historian at the Institute for the Study of Totalitarian Regimes, in Prague, suggests that it was one of those friends, the young Mr Kundera, who was the informer.

Mr Kundera, a recluse for decades, insists that he had no involvement in the affair and is baffled by the document. Communist-era records are not wholly trustworthy. But a statement from the Czech archives says it is not a fake; the incident (if it happened) could help explain why Mr Kundera, then in trouble with the authorities, was allowed to stay at university even though he had been expelled from the Communist Party.

True or not, the story echoes themes of guilt, betrayal and self-interest found in Mr Kundera’s own work, such as “unbearable lightness” (dodged but burdensome responsibility). In “The Owner of the Keys”, a play published in 1962, the hero kills a witness who sees him sheltering a former lover from the Gestapo.

As Mr Kundera himself has written so eloquently, “the struggle of man against power is the struggle of memory against forgetting.” Under totalitarianism, fairy tales good and bad often trumped truth. Some heroes of the Prague Spring in 1968 had been enthusiastic backers of the Stalinist regime’s murderous purges after the communist putsch of 1948.

Mr Hradilek surmises that Mr Kundera probably acted out of self-interest, not malice or conviction. Millions faced such choices in those times. Some have owned up; many have not. Countless episodes like that linger over eastern Europe like an invisible toxic cloud.

Attwood on debt

A cultural history of debt

Payback

Oct 16th 2008
From The Economist print edition

Payback: Debt and the Shadow Side of Wealth By Margaret Atwood House of Anansi Press; 280 pages; $15.95. Bloomsbury; £9.99 Buy it at Amazon.com Amazon.co.uk

WITHOUT debt there would be no capitalism; mankind would be living in caves and eating whatever it killed. But Margaret Atwood’s elegant and erudite canter round the literary, cultural and historical aspects of borrowing, lending, owing and repaying has less to do with economics than with human nature. Her new book is a collection of radio talks, conceived and delivered long before the current crisis, but its publication is remarkably timely.

Debt is as old as human civilisation. The first recorded laws had to do with repayments and repossessions. The idea of debt depends on a common sense of fairness: if you borrow and don’t pay back, justice is violated. That is not exclusive to humans; chimpanzees seem to have similar ideas. But debt is not morally neutral. Borrowing too much is a sign of depravity. So is being a merciless lender. Debt metaphors (“overwhelmed”, “drowning”, “crushing”) are dramatic. In the end, money is time, and you may pay with your life—if not through death, then through drudgery.

The best bits of “Payback” are about debts that do not involve money. What do people owe to the planet? To other people? To God? The author is particularly taken with Charles Dickens’s “A Christmas Carol”, a story usually read only as a sentimental fable. Ms Atwood strips it down and rebuilds it with the brisk pen of an expert literary critic. The Archangel Gabriel bears the same relationship to God as Bob Cratchit does to Scrooge, she argues. It sounds odd, but makes perfect sense when you read it.

Ms Atwood weaves in all kinds of literary references from nursery rhymes to modern fiction, from Aeschylus to Darwin, via Mary Poppins and Charles Kingsley’s “The Water Babies” (where the lovely Mrs Doasyouwouldbedoneby is the counterpart to the severe Mrs Be-donebyasyoudid). As one would expect from a novelist of Ms Atwood’s calibre, the phrasing is polished and the metaphors striking: revenge taken in red ink can be even more satisfying and gruesome than that taken through red blood.

One criticism is her caricature of Christianity, which has shaped Western thinking about the debt of sin and the means of redemption for the past two millennia. Ms Atwood’s apology for squashing Christian theological thinking into two chatty and disrespectful pages does not sound wholly sincere.

But the overall effect of the book is stimulating, if a trifle dizzying. Even Ms Atwood, scintillating wordsmith though she is, cannot quite patch holes in the logic. Her greenish, gently leftish convictions poke through rather too visibly sometimes. Ultimately, debt is a way that people bet on their own futures, placing a wager on their own ability, cleverness, diligence and luck. When those bets fail, the consequences for the loser can be sad. But the world is a better place, on the whole, if people have the right to make such wagers in the first place.

FT op-ed piece

Do not let Russia ‘Finlandise’ western Europe

By Edward Lucas

Published: October 8 2008 19:32 | Last updated: October 8 2008 19:32

When I first published The New Cold War last February, many contested my title. But what once seemed eccentric now looks mainstream. Relations between the west and Russia have entered a period of extraordinary mistrust and mutual disdain. Indeed, after the conflict in Georgia, the description “cold war” risks looking like an understatement. Russia has shown that it is prepared to use military force against another country; the west has shown that it will not fight and will merely respond with a token protest. Some in the European Union, such as Nicolas Sarkozy, president of France, may see the Kremlin-dictated truce that stopped the fighting (though not the ethnic cleansing, which continues apace) as a triumph. From Russia’s point of view, the lesson of the Georgian adventure is simple: we got away with it.

News last week that a Russian nuclear bomber simulated an attack on a city in northern England, combined with the biggest military manoeuvres since the collapse of the Warsaw Pact and the dispatch of a Russian naval squadron to the Caribbean, raise two pressing questions: what is Russia up to and what should we do in response?

The easy but mistaken answer to the first question is that Russia is simply flexing its muscles in response to the west’s misguided meddling, such as its decision to expand Nato and set up a missile defence scheme in Russia’s backyard. Unlike in the 1990s, we now have to respect, and accept, Russia’s interests. A shopping list based on that thinking might include: sacrifice Georgia, cancel Nato expansion (or better still, dissolve the alliance), scrap missile defence, arm-twist the Baltic states and Ukraine into giving their Russian population special status, allow Russia to buy anything it wants in western Europe – and all will be well.

But supposing Russia’s aim is the re-creation of a “lite” version of the Soviet empire, based not on military might but on economic dominance and pipeline monopolies; and that it wants the “Finlandisation” of western Europe. That involves the use of money, above and below board, to cultivate friendly lobbies. One example is this week’s dramatic €4bn ($5.5bn, £3bn) Kremlin bail-out of Iceland. Another is the former German chancellor Gerhard Schröder chairing a Russian-German gas pipeline consortium. The “Schröderisation” of Europe is matched by divide-and-rule tactics. The result: most big countries of “old Europe” care more about ties with Russia than about their supposed allies in eastern Europe.

Attempts to isolate Russia in response would be wrong: keeping communication with the regime may help slow its paranoia and adventurism. It also sends a signal to the burgeoning Russian business class. The financial crisis has prompted some powerful figures such as Alexander Lebedev, the ex-KGB financier, to criticise openly the Kremlin’s bellicose rhetoric and repressive internal policies.

But we can also make it harder for Russia to do the things that endanger us. The overwhelming need is to rethink energy policy. At the moment, the push inside the EU is for greater liberalisation. That would be fine, if we were not dealing with highly politicised monopolists as our energy suppliers. If the European Commission can bring Microsoft to heel over its outrageous behaviour with Windows software, it can do the same with Gazprom: not just as a tool of Kremlin foreign policy, but also as a flagrant price-fixer and competition inhibitor (for example in its refusal to allow third-party access to its pipelines). Any EU company that operated like Gazprom would find itself in the dock within days.

Even more important is restricting the flow of dirty money (not only from Russia) into our banks and markets. Instead of being bean-counters without a conscience, accountants must be guardians of financial probity, with a demanding test for clients whose business model is based on rent-seeking and cronyism. Some of the energy trading companies with close Kremlin ties based in Europe are little more than conspiracies to loot from the Russian taxpayer, gaining oil and gas cheaply and selling it dearly.

The same goes for bankers. If they conceal the beneficial ownership of these phoney companies they are an accomplice to theft. Perhaps one of the benefits of the credit crunch will be a more sceptical response to financiers who maintain that their critics are Luddites. The west has done well to impede the crudest kind of money-laundering. It is no longer possible to turn up at an Austrian bank with a suitcase full of cash, open an account, and make some transfers. We should apply the same principle to asset-laundering: using western capital markets to sell shares and bonds in phoney companies.

These measures will not stop the regime in its tracks. But they will show its backers that their geopolitical ambitions come at a cost: provoke us enough and it will be bad for business. That lesson has not yet got through.

We need to hurry. It will not be too long before financial centres such as Dubai, Shanghai and Mumbai are competing so effectively with London that clients that we find too dodgy will go elsewhere. What our financial centres sell, above all, is respectability. We have priced it too cheaply in the past few years. It is time to be choosier, while we still have some left in stock.

The writer is author of ‘The New Cold War: How the Kremlin Menaces both Russia and the West’. A new edition is published next week

Book Review: Nazi Radio

Radio propaganda and 1938 

Chequered airwaves

Oct 9th 2008 
From The Economist print edition

Battle for the Airwaves: Radio and the 1938 Munich Crisis By David Vaughan Radioservis/Cook Communications; 110 pages; £20 Buy it at Amazon.co.uk

RADIO created the Third Reich’s ethnic battering ram: the Sudeten Germans, stranded in Czechoslovakia under the Versailles treaty. As David Vaughan recounts in his meticulous and poignant study of the war on the airwaves, Czechoslovakia’s own German-language programmes were hopelessly outgunned by the quantity, quality and audibility of the Nazi propaganda effort. Patriotic Czechoslovak journalists argued that it was the national radio’s job to broadcast in the national language: if their fellow-citizens wanted to hear programmes in German, they could tune in elsewhere. They did.

What Prague did offer was sometimes magnificently erudite (Thomas Mann, the exiled German literary giant, was a contributor) but had little appeal to skint, resentful German-speaking workers: they were easy prey for made-up stories of atrocities, discrimination, and conspiracies. That forged the crucial link in the Nazi argument: that ethnic Germans, around a quarter of Czechoslovakia’s population, wanted—and deserved—to join the Reich.

The BBC comes off badly too. Like this reviewer, Mr Vaughan is a former BBC man in Prague; he is pitiless in his analysis of its pusillanimity. It banned its best experts on Czechoslovakia from the airwaves. The broadcasts to occupied Europe that won the BBC its reputation were to come sooner and in more ghastly circumstances than even they foresaw.

Some stars pierced the fog. American broadcasters, such as Edward Murrow, brought the drama of Czechoslovakia’s impending vivisection with language that crackles: “fast and dramatic news from Europe tonight, tense news that makes your spine tingle and your heart stop cold”, was how the now-defunct Mutual network opened its broadcast on September 13th, 1938. Sydney Morrell described Czechoslovak policemen listening to a Nazi radio station. “I was accustomed by now to the ‘Czech Terror’ broadcasts, to the rapid voice of the speaker, calculated to whip up mass feeling, the stories of ‘Red troops’ running riot in the Sudeten villages, firing at random, of mass arrests of Sudeten Germans, and tales of sadistic torture in some dark Czech prison cell. The policemen…talked among themselves with the helpless anger of men who are caught up in some movement beyond their control.”

But America was too far away. With even one local ally, Czechoslovakia, the region’s only democracy, would have fought. Betrayed by Britain, France, Hungary, Poland and others, it had no chance.

That is topical as well as tragic. You could read Mr Vaughan’s book, substituting ex-Soviet countries such as Estonia for Czechoslovakia. With Kremlin talk of “privileged interests” in Russia’s neighbourhood, and a litany of real and imagined grievances there, it is easy to imagine a resurgent Russia whipping up its millions of compatriots, living in foreign countries thanks to the collapse of the Soviet empire, into a frenzy while the outside world stands aloof. These stranded Russians tune almost exclusively into the Kremlin-run electronic media, not local stations, which broadcast poorly in Russian, if at all (the same mistake that Czechoslovakia made with German). The lesson of the 1930s is that once you lose hearts and minds, and malefactors gain them, everything else usually goes too.

Norway's security

The High North 

The Arctic contest heats up

Oct 9th 2008 | OSLO 
From The Economist print edition

What is Russia up to in the seas above Europe?

COLD, empty and rich in fish and minerals, the seas of the “High North” are a tempting prize for a big, confident country. Even before the startling news of Vladimir Putin’s offer of a €4 billion ($5.4 billion) emergency loan to Iceland (see article), Russia had been beefing up its presence in a part of the world where the NATO presence is fitful. Although American submarines still ply the northern seas, other NATO vessels are rarely seen. America bruised Icelandic feelings when it pulled out of its Keflavik air base in 2006.

The Kremlin, by contrast, commands a cash pile of over $500 billion and, despite sagging markets in Moscow, is well-placed to assist a country facing bankruptcy. Iceland’s prime minister, Geir Haarde, said that apart from some support from Nordic states, he had received little response to his appeals for help from Western countries. “When our old friends didn’t help us, we had to find new friends,” he declared. What Russia might want in exchange is unclear. But it is unlikely to be nothing.

That highlights worries elsewhere, particularly in Norway, where fighter jets scramble on average once a week to intercept Russian warplanes buzzing close to their country. The Kremlin’s aircraft and ships do not quite break international law. But they commit what a senior official terms “breaches of etiquette”. These have included naval manoeuvres in the midst of Norway’s oil and gas platforms in the North Sea, involving aggressive air sorties that grounded all offshore helicopter flights; that was inconvenient, expensive and dangerous. Also troubling was a mock bombing run against Norway’s northern command centre at Bodo, and at least three other, so far unpublicised, incidents.

Russian planes and ships may be old, but training and upkeep have improved and some of the weapons they carry are increasingly modern, such as a new long-range cruise missile. Some think Russian submarines in the north have been experimenting with the Shkval, a super-fast torpedo that gives Western navies the jitters. “Russia is establishing a new reality in a strategically empty space,” says Jon Bingen, a defence analyst in Oslo.

Legal fuzziness increases Russia’s room for manoeuvre. The “grey zone” off the northern tip of Norway (see map) is claimed by both countries. Another dispute is around the island of Spitsbergen, on which Russia has had mining rights since 1920. Norway says it owns the continental shelf around it. Others, chiefly Russia, don’t agree. Russia is prospecting for minerals beneath the seabed there. Norway objects to that, and to Russian trawlers’ sometimes cavalier behaviour; their on-board electronics can be unusual, too.

Norway is the only old European NATO member bordering Russia. Its military planners are disappointed by their allies’ tepid response to Russian provocation—for instance when a rogue Russian trawler briefly kidnapped Norwegian fishing inspectors in 2005. At stake are not just fish, hydrocarbons and minerals: melting ice means that the Arctic, once largely a dead end, may become a strategic route to East Asia.

How to deal with Russia after its war with Georgia in August has become a key issue for NATO, whose defence ministers met in Budapest on October 9th. America wants the alliance to drop its taboo on making contingency plans to defend members that feel threatened by Russia, such as Estonia. Norway plays down the threat of real conflict. “Unlike some ex-communist countries, we are not hysterical,” an official insists. Indeed, neighbourly relations on border controls and sea safety have survived Russia’s freeze on military contacts with NATO. A Norwegian firm is weighing whether to help exploit the Shtokman offshore gasfield, a showcase investment project for the Kremlin. But even the most sanguine Norwegian officials admit that the “trajectory” in Russia is worrying.

Norway is quietly boosting defence co-operation with Sweden and Finland. And it hopes to “NATO-ise” a big land, sea and air military exercise next spring, named Response. Just what that is responding to is left tactfully unclear.