Wednesday, January 28, 2015

After Mariupol

Russia is refusing to back down in Ukraine.

All out military force is being used in order to support the declared Russian military objective that Ukraine be defeated and divided. Civilians are being deliberately targeted and the attacks on a major power station and other industrial operations is a clear attempt to destroy the Ukrainian economy.

Put simply, the Russian Federation is engaged in a huge act of aggression against a peaceful neighbour. Despite sanctions, and despite increasing economic weakness Vladimir Putin stands defiant.

In Britain, the evidence of state sponsored murder of a British citizen is now revealed and is both clear and overwhelming. 

Russia is seeking by overt aggression and covert subversion to attack the West. The astonishing lies put out by the Russian propaganda machine are feeding a frenzy of anti-Western hatred. Some countries- including Greece- have been severely compromised by a large scale and long term Russian espionage penetration. Russian espionage activity is higher than it has been at any time in history.

All of this is in support of a regime that is criminal to its very heart. Theft, murder, corruption on the widest scale in human history, backed by an unlimited greed and with no moral brake whatsoever. There are no rules that Russia will observe, there is no taboo- including the use of nuclear weapons- that they will not break.

In short Russia is a declared hostile power that intends to weaken or destroy both the EU and NATO. 

Once this critical fact is understood, it becomes very clear that the West must answer the threat from this barbarian state or risk following Rome into a dark ages of similar criminality and violence.

Firstly, after the escalation of the war by the Russian armed forces, all pretense that Russia intends to abide by any agreement not backed by force must now cease. In short, the time has come to give full military assistance to Ukraine. The equipment and training requested by the Ukrainian government should now be provided to enable Kiev to defend itself. Meanwhile warrants should be put out for the arrest of weapons buyers acting on behalf of the so-called rebels. Supply of such weapons comes largely from Russia, of course, but it will limit the deniability still available to the Russian army. 

Secondly, despite the fears of the impact on the EU of Russian economic collapse, the fears of the impact of war now loom far larger. Russia has launched a war of aggression that must be stopped and therefore this aggression must be met by sanctions that actually limit the freedom of action of the Putin regime. All out economic sanctions must be a part of this. The UK did not continue to trade with Nazi Germany after the outbreak of the Second World War, and neither should the West continue to provide any assistance to a government that is using all its energies against us. 

Putin is seeking through his spy networks, propaganda allies and all the unconventional forces at his disposal to blunt the response of the West. Some Quislings may yet appear, even amongst NATO allies, and we need to be prepared to deal with this possibility in the most ruthless terms. Nevertheless, Putinism must not prevail. The idea of the criminal state must not succeed and the democratic will of Europeans- including Ukrainians- can not be undermined by the thuggish criminality of the despicable bunch of murders in the Kremlin. 

Finally the time has come to publicly expel Russian citizens, including diplomats, that are working to support the espionage activity of the Putinist regime. Russia is already fighting a war against us, the least we can do is make that war more difficult to prosecute in Western capitals. 

Thursday, January 22, 2015

The Next Coalition and the fight for Liberalism and Reform

The UK opinion polls are volatile and extremely difficult to read. it has become a cliche that the next election is both uncertain and very open. The only certainty is that the chances of a hung Parliament seem very high. In fact in the face of such uncertainty I can claim no special knowledge ahead of the result. Yet I think that there are actually some significant shifts which are now on the political agenda.

There is still a chance that at the last gasp either the Tories or more likely Labour can snatch a single party mandate under the current system. Nevertheless although Labour have an advantage in that it takes far fewer votes for them to win each seat, there remains the imponderable of what impact any SNP surge might have on their overall total. For what its worth, I think that, as in the referendum itself, and as so often before, the SNP confidence will prove highly misplaced, and what might be a quite promising result of -say- 15 seats will be deemed a relative failure and the bombast and economic contradictions of the SNP will make the 2015 election their high tide for at least another generation. So, in principle Labour are likely to have an advantage, should the vote, as the polls suggest, split pretty evenly. 

Yet the Tories also have some hidden strengths. There is credible polling evidence that the UKIP surge peaked in 2014, and the sustained attack on that party in the media is eroding their support. Furthermore, the evidence is that that in only a very few seats does UKIP actually look like a credible contender. Therefore it seems entirely possible that over the coming weeks there will be a swing-back to the Conservatives. Nevertheless, at no stage have the pollsters shown a Conservative lead that would allow them to match the structural Labour advantage under the current system. The Tories could win quite a few more votes, but still be behind on seats.


What then of the Liberal Democrats?

The latest polling surge of the Greens has pushed the party back into single figures, and on such numbers, no matter what the advantage of incumbancy and popular local MPs, the Liberal Democrats are on a knife edge. As in a series of council elections, in the Scottish and Welsh elections and in the European elections, the party may face very painful losses and in some areas possible obliteration. 

The implications of this in wider politics are far more profound than they may first appear.

Firstly, if the Lib Dems do not confound their dire poll ratings and do indeed lose more than half their seats, then it is going to be much harder to form a coalition, should one be needed after the election. The message to any other party-UKIP or the SNP, for example- that might be asked to join a coalition, is that there are huge risks to the junior coalition party. The novelty of the situation in 2010, would not be there in 2015- and neither would the immediate economic crisis, so the pressure would be less. It is also probable that a three-party or even four or five party arrangement could be needed, so clearly the negotiations would inevitably take a lot longer- and may not be successful which could lead to new elections or even far reaching constitutional change- a  subject for a different blog.

The second implication is for the Liberal Democrats themselves. Even if it would still be possible for a Conservative-Liberal Democrat coalition to continue in office after the election, I do not believe that it would necessarily happen. For the fact is that the agreed programme of the coalition -forged in the heat of an unprecedented economic mess- has in fact largely been executed. There is now ever less that the Conservatives and the Liberal Democrats can agree on- certainly not Europe- and unless full throated constitutional reform is on the agenda, the timid managerial brake on the Conservatives that Nick Clegg likes to think he supplies to mitigate Tory wrongs, is simply not enough for the Liberal Democrat members to give the leadership a mandate to rejoin a Tory-led coalition. If Mr Cameron emerges as the leader of the largest party in May, the most he can hope for from the Liberal Democrats is a confidence and supply arrangement. The options for a coalition itself would probably only be with whatever UKIP MPs get elected- and it may be less than a handful- and the Ulster Unionists.

What then of a Labour led coalition?

Once again, Mr Miliband- despite his own pretty awful personal ratings- has an extra card: The Scottish Nationalists have already said that they would only join a Labour, not a Conservative coalition. This is despite the fact that if the SNP are to make the breakthrough they already believe they have achieved (before a single vote is cast, let alone counted), it must come at the expense of Labour. A Labour-SNP coalition maybe possible, but it would be fractious, and given the SNP propensity for grandstanding, it could be unstable and volatile too.

Yet the personal relationship between the Liberal Democrats and Labour could hardly be worse. The Lib Dem leaders who actually survive the election- even those more sympathetic to Labour than the Conservatives- have endured five years of bruising, and often highly personal and unfair criticism from the Labour front bench. Some figures, such as Ed Balls, are held in little short of contempt by the Liberal Democrats because of their arrogant and duplicitous attitude towards the Liberal Democrats as a whole. 

Even if the Liberal Democrats emerge from the next election without the losses that the current polls must lead us to expect, it is clearly going to be difficult for the party to form a coalition. Clearly Nick Clegg will downplay these difficulties during the campaign, for to focus too heavily on these difficulties implicitly suggests the party is less of a contender and therefore less relevant to the final outcome.

Frankly, there are many ex-Lib Dem members who have already drawn that conclusion and so left the party. For myself, however, as a convinced Liberal, I see a new phase emerging in the battle for reform. There will be a need to recapitulate fundamental Liberal values and restate the ideological- not merely the managerial- relevance of the Liberal agenda of a reformed and open politics within a reformed and open society. That battle is already beginning, and whether or not the party forms part of any coalition in the next Parliament, we need to renew the Liberal compact.

Externally, Vladimir Putin and Islamo-nihilists, and internally, misused surveillance technology and unaccountable corporate and government interests, are creating new threats to the open society. 

The Conservatives, despite their drastic loss of members, have had no corresponding loss of funding: they have become the prisoners of a narrow and self interested corporate lobby. The Labour Party has lost its ideological soul and become the populist mouthpiece of state employed cronyism. It is not a wonder that the electorate seems poised to reject these two ugly sisters in unprecedented numbers.

The core Liberal agenda of diversity, anti-conformity and freedom is winning converts across wider society. It is something of an irony that only in the political sphere is Liberalism still a beleaguered ideology. The party needs to recover its emotional and intellectual zeal and to push back against the enduring threats of poverty ignorance and conformity and to broaden the sphere of freedom in our society.  

The Liberal Democrats are more relevant than ever. 

The battle for the renewal of the party starts now, ahead of the election. 

Thursday, January 15, 2015

Fighting the New Cold War

A piece in today's FT by Ivan Krastev, suggests that far from backing down, the Putinist government in Moscow may be considering stirring up trouble for the West on a new front: the Balkans. Given the nihilist Russian position on Syria, which has essentially destroyed that country, it is quite possible that Putin could meddle in the region, with some attempt to reward Serbia's more friendly position to Russia by dismembering Bosnia. Yet the economic crisis of Russia is causing a rapid erosion of Russian soft power, and the collusion of corruption, which Krastev identifies as the primary source of Russian leverage is dwarfed by the attractions of European integration. Although Russia is now seeking public spending cuts- with the glaring exception of defence spending, the economic situation in Moscow is looking increasingly bleak. That Putin has a weak grasp of economics has been obvious for some time, and thus he fails to understand the serious and permanent damage his policies are inflicting on his country.

Despite the major economic crisis that Putin's aggression has got Russia into, there is, as Adam Smith once said "a great deal of ruin in a nation". The crisis, as bad as it is, could take several years before it leads to a change of mind in the Kremlin.

Under such circumstances, the West must take Russian hostility and its attempts to disrupt the international order as the "new normal", and respond accordingly. Too many leaders in the European Union regard the crisis as one that should be circumvented, and the new EU representative for foreign affairs, Federica Mogherini is either naive, deluded or corrupted if she thinks that this is in any way an appropriate time to restore friendly relations with Russia. 

As yet another military assault by Russia against Ukraine seems in prospect, and as the democratic government of Ukraine struggles with its own economic crisis, the West may find that the dismemberment of Ukraine leads to complete collapse, with consequences that could include the break up of the EU and even NATO.

In fact NATO offers the best template for the defence of Europe and Ukraine. After the division of Germany, at the hands of the Soviet Union, the West did not delay the reconstruction of West Germany in order to wait for some unity of Germany that only the USSR could provide. The Federal Republic of Germany was given Marshall aid and military support that allowed the country to become a power in its own right and in its own defence. Eventually the puppet state of East Germany collapsed and Germany was triumphantly reunited.

If we want that scenario for Ukraine, then we need to seal the border, in order to prevent further Russian incursion. It seems to me that making further Russian advance into Ukraine as costly as an incursion into Western Germany would have been will help to give the Artseniuk government sufficient breathing space to get to grips with the economic crisis. Clearly some major debt restructuring is required- and the assistance of further transfers from the EU and the USA will be critical to the prospects of the Ukrainian economy, as Marshall aid was to the German economy. 

The front line for the West is no long the Fulda gap, but the Airport at Donetsk. The new generation of European leaders must accept the same responsibilities as Adenauer, De Gaulle, De Gasperi, Schuman. Meanwhile in the United States, the same vision as Truman or indeed General Marshall himself is still very much needed.

Russia has become a rogue state, and its aggression against Georgia, Moldova, Ukraine and its brutal threats against several other neighbours should make it clear that it is extremely dangerous to world peace. Although it is economically weak, as a result of the current oil crash, the incredible concentration of wealth into a few tens of hands has made the country the nexus of virtually limitless corruption. The enemy is quite clear. the problem is how to face the challenge that the lethal combination of malevolence, aggression and corruption poses to the open society on the Western model.

If we face a new cold war, we should take the lessons of the first cold war: good fences make good neighbours and shut down the Russian aggression in Ukraine.

Tuesday, January 06, 2015

The Monarchical Problem

Talking about the Monarchy in Britain is generally a bit like talking about the weather. No matter how odd it might be, it is simply there, a fact of life. It may seem a rather foolish institution, but it has survived into the twenty-first century for two reasons: the strength of character of Elizabeth II, sanctified by her long reign; and the lack of appeal of an alternative presidential system. This second is usually expressed as "you wouldn't want [insert the name of a party politician who is widely disliked, but nonetheless popular on their own side] as President now would you?".

There usually follows some bunkum about the monarchy being "good for tourism", as though the important constitutional role of head of state should be decided by backpackers or overweight Americans in leisure wear. Nevertheless, the fact remains that the Queen remains both respected and popular, and for as long as she remains on the throne, the future of the system she embodies is largely dictated by her.

Nevertheless, the growing scandal concerning Prince Andrew, the Duke of York, is beginning to ask wider questions than simply the details of the allegations against the rather oafish Prince himself. 

In a sense, we have been here before, the Prince has a whole host of bad decisions behind him, from his questionable business dealings to the unusual relationship he has had with his ex-wife, a woman who appears to have even less good judgement than he does. It is quite possible that even were the allegations are true- and they are categorically denied by Buckingham Palace- the Prince himself still did not commit a crime, given that the woman at the centre of the allegations may have been above the age of consent at the time the Prince might have become involved with her.

Unfortunately for the Prince, even if the specific allegations were false, the spectacularly poor judgement and the unrelenting self indulgence that is highlighted in the relationship between the Prince and Mr. Epstein does ring rather true. On the few occasions I have met the Prince or attended events where he has been a guest of honour, I have been struck by his determination to do what he wants, irrespective of the convenience of others. Nor is the Duke of York unique in the Royal family. The late Princess Margaret was famously haughty and she too flirted with scandal. Then, of course there is the matter of Edward VIII, who- as his own father had predicted- "ruined himself within a year".

In recent weeks, the behaviour of the Prince of Wales too has come under scrutiny, with injunctions being sought to prevent publication of his voluminous correspondence with government ministers, and irritation being publicly expressed over a new documentary on the rocky relationship the Royal family has developed with the media. Although these issues lack the immediacy of Prince Andrew's rather juicy sex scandal, in a sense they are more serious, since they strike at the heart of what the constitutional monarchy should be about.

It is clear that a new monarch would do things differently from Elizabeth II, what is not yet clear is how these inevitable changes will work within the rather fragile constitutional framework of the UK. "Conventions" and "soundings" are all very well in an age of deference and secrecy, but in the age of the 24-news cycle the nuances are lost to megaphone democracy. How will the Prince of Wales, with his decided and public opinions be able to keep silent? He clearly does not keep silent in his role as one of the five counsellors of state, but his positions have not generally been made public.

The fact is that many would be surprised to learn how much power the monarch, and indeed the royal family, still holds. They have retained a central constitutional role, and have strongly resisted any reduction in their power, or even their influence. That situation has been tolerable during the long reign of Elizabeth II, because now so few can even remember any other monarch. Yet at 88, it is also true that the Queen is being forced to reduce her own activity, and so changes are coming sooner, even should her reign continue for several more years.

As we see the appalling judgement of Prince Andrew- himself a Counsellor of state- thrown into such sharp relief, I think it is now essential to consider the impact of a royal house who might not- shall we say- live up to the standards set by Queen Elizabeth. The stability of the British constitutional monarchy has rested on the personality of a Queen who is generally recognized as a good monarch. For the institution to survive, it will need to learn to cope with more "human" occupants of the throne.

The 2015 election may create new ground in terms of the electoral part of the constitution, but it is not just the franchise and the Parliament that needs review. It is clear that a future constitutional convention will need to consider the powers and role of the Monarchy too.  

If we let the system continue unchanged, then instead of the gentle rain we have grown used to, the weather for the Monarchy could grow very stormy indeed.

Tuesday, December 23, 2014

Seasonal Shutdown

Well, it only took a few hours from my last comment about the blood in the Russian interbank market, before the first of the Russian banks needed rescuing. An estimated $531 million to rescue National Bank Trust is just the first order of business for the CBR. Clearly there is a huge level of work to do before the Russian financial sector can even begin to recover, even if-for the time being- the oil price seems to have stabilised at around $60/bbl.

After the crash, investors are beginning to put prices on Russian risk- and these are hugely discounted. For some Russian assets, there is simply no bid at all, so although a floor might be visible in some areas, it is still the case that international appetite for Russia is exceptionally low. This is not just because of sanctions, it is also because there is the growing realisation that the economic impact of Putin's aggressive incompetence will be long lasting, and in some sectors the damage is permanent.

Both policy makers and investors now live in a different world, and the transformation of the image of Vladimir Putin from strategic master to thuggish and incompetent bungler is almost complete.

The Russian crisis will be exercising many minds over the coming months, and although the Kremlin is in real trouble, it could be some time before any kind of deal emerges. Until then, the threat of the regime remains real and very dangerous.

I will take a break from my renewed blogging activity over the Christmas season, but will return with some thoughts on both wider Europe, and the place of my own country- the UK- within it over the coming years.

Merry Christmas.  

Sunday, December 21, 2014

"Living in another world"

In the early days after the Russian invasion of Ukraine in March, the German Chancellor, Angela Merkel made a widely reported comment that Vladimir Putin was "living in another world"The point being that the statements that were being made by the Kremlin were so completely untrue that they had literally no basis in reality. 

Over the past few months we have started to become used to Russian propaganda: astroturfing, Putintrolls, and all the rest of it, but nevertheless, no matter how vehemently propagated, the Kremlin position remains completely at odds with objective, evidence based truth. The well funded Russian propaganda machine is slick, well presented and almost entirely half truths and whole lies.

According to Peter Pomerantsev, in his book "Nothing is true and everything is permitted: the surreal heart of the new Russia", the kleptocratic cabal that now controls the Kremlin does not believe in truth even as a concept. Instead they believe that anything and everything is merely a matter of presentation and PR. This message ultimately becomes totally nihilist: the only reality is PR. Those who control the PR machine, control the state. The twisted version of the assassins creed becomes the ultimate reality.

This corrosive cynicism quickly becomes irrational. If nothing is true, then everything, no matter how far fetched, can be believed. The result is that Russians- as in the last days of the Czars- are falling prey to all manner of quacks and charlatans, from soi-disant wizards to astrologers. These people are not the harmless frauds of western newspaper columns, but actually have real influence and power! 

This is a breakdown of all logic, the end of rational thought, and proof, if any further were really needed, just how sick a society Putin's Russia has become.

Angela Merkel spoke no more than the truth: Vladimir Putin is probably seriously detached from reality, to a degree that in a rational society would probably be categorised as mental illness.

Now, as the Russian economic crisis accelerates into breakdown, the decadent court of wizards and astrologers serving Vladimir Putin and his cronies are going to get a cold wet bucket of reality dropped all over them. It remains to be seen how dangerous a process this may become. One thing is sure: it is certainly a necessary one.

Friday, December 19, 2014

Putin jumps the shark

Amid the occasionally rambling and bizarre comments from Vladimir Putin's annual press conference yesterday, a couple of critical points are rather obvious. 

Firstly, Putin accepts no responsibility for the crisis that has hit Russia, continuing to believe his own paranoid fantasy of Western economic destabilization.  

Secondly, he intends to double down and continue his aggressive and disastrous policies.

However, despite the current dead cat bounce in the Rouble, there are two things that could rapidly make the economic situation for Russia irretrievable. The first is in the small print of the Rosneft placement that triggered the deep crash in the currency. Essentially the Bank of Russia underwrote the placement of RUR 625 billion at 150 b.p. below Russian sovereign risk price- and since Rosneft had $7 billion to pay on 21st December, the whole placement went into the forex market. The implication is clear: The Russian central bank, in addition to being the lender of last resort to the banks- which are already under strain as a result of sanctions- is now being asked to take the burden of Rosneft debt too. 

The combined outstanding debt is over $300 billion- which commits substantially all of the Russian reserves to rescuing Putin's cronies- especially Sechin at Rosneft. That the Rouble crash has come despite the gigantic reserves nominally available to the Central Bank shows that the market totally understands the implications of the placement- the Rouble is not backed by anything like the reserves on paper. I think that never in human history has the reserves of such a large state been captured to support such a small group of individuals- it is Kleptocracy on an undreamed of scale.

The second problem is the banking sector. 

The spike in inter-bank rates shows that the Russian banks already scent the blood in the water- one or more of them is facing terminal levels of losses as a result of the market turmoil, breakdown of the oil price, liquidity strike, sanctions or all of the above. The Central Bank will be urgently trying to find the problem, but a systemic breakdown is now more than possible: the CBR is facing too many leaks in the dam and not enough fingers to plug them all. The liquidity crunch is exacerbated by the fact that it is the end of the quarterly tax period- and the reduced liquidity of this short run credit crunch could quickly lead to a credit shut down. The Russian banking system is now in a more dangerous state that it was in 2008-9.

So the Russian financial system is coming under severe pressure- the external Rouble crisis is rapidly turning into a domestic banking crisis- and the central bank, by being forced to bail out Rosneft does not have the firepower to stabilize the crisis. As the MICEX falls, and interbank rates rocket, the intervention to support the Rouble will peter out and the currency can only weaken again. The current mild winter may yet leave the demand for oil and gas at 2013/4 levels over the coming winter, meaning that from the demand side, the situation remains lacklustre- so there is no reason for any sustained increase in energy prices, given current supply. Therefore no help from the Rouble seems likely from that quarter, and if forecasts of $40/bbl for oil by the spring are born out, then the recession in Russia will be in double figures, not the c.5% fall currently forecast. 

So Mr. Putin's blithe assurance that Russia will recover in two years is -as usual with his statements- not supported by the facts. In fact for Russia, the economic crisis is set to take a step downwards within a pretty short order of time.

For as long as Russia has a President that listens more to the voices in his head than to his economic advisers, the economic position will continue to get drastically worse. The Russians are already voting with their feet or their pocket books and where they can they are getting themselves out of Russia and their money out of Roubles.

Meanwhile, almost unnoticed, the United States has authorized military assistance to Ukraine. Should the Ukrainians use this to begin to push back the Russian troops in Eastern Ukraine, then Putin will face a perfect storm of military defeat and economic collapse.

In the press conference he suggested that the bear would not "sit quiet", but "chase wild piglets", but what he may now discover is that some of these piglets are in fact wild boar, with some very sharp tusks. Now even Belarus is taking steps to protect itself from the Russian crisis. Should the Belarusian election go peacefully and political prisoners be released, then Lukashenka will have played a very subtle game indeed- and will be far less dependent on Moscow.  

In the summer, the cliche was that Putin was playing chess and the West was not responding. Now it looks like Putin is being forced to play in the Hunger Games- with an increasingly high risk of defeat. 

His performance yesterday gives no sign that he will back down, and his repeated references to nuclear weapons show how dangerous the situation is- and how detached from reality the Russian tyrant has become. Nevertheless, Putin himself remains responsible for the crisis and unless he deescalates, the game will continue to its logical and potentially grim conclusion.