Mo' Rubles Mo' Problems

Amidst the spring-time clouds and snow over the Moscow sky, there appears to be one bit of good news: the ruble, for now, seems to have stabilized, defying the critics of the Kremlin’s ruble stabilization program. When I was in Russia just two months ago, every stop at the ATM was like a special delivery from Ded Moroz, as the RUB/USD rate dropped from 29 to 32 in 8 short days. In the spirit of the season, I decided to do my part for the economy by “donating” my extra 10% of purchasing power to the fine brewhouses and eating establishments of St. Petersburg.

Yet, before we start celebrating, we should keep in mind that movements in the ruble have correlated almost entirely with movements in the price of oil, which is really the only marketable Russian export (in addition to vodka, defunct ideology, and depressing literature), and thus the indicator for the overall Russian economy. As crude has now stabilized above $40/bbl, so the ruble has stabilized below the euro-dollar basket of 41. This is a good thing, but it can also create an illusion of stability and economic upturn. Meanwhile, inflation continues to soar in Russia, outpacing other Eastern European countries. While inflation has picked up, salaries, both nominal and real, have been falling, and consumption has dropped sharply – it has even hit one of the most rock-solid sectors of retail! Sadly, many of my friends have recently had to choose between leaving their jobs or taking pay cuts of up to 50% - one friend tells me that her employer has not even paid her in the past 2 months, and she has taken out a line of credit to fund her basic living costs.

This last part is particularly worrying, especially since ruble stabilization has necessitated a significant rise in the already sky-high interest rates for personal and business loans at Russian banks. Faced with double-digit interest rates, Russians have done what many in the former Communist bloc have done over the past few years – take out loans in foreign currency, particularly in Euros, at much lower rates. This was great when emerging markets were booming, but now that currency devaluation has hit, consumers and businesses are struggling to make payments, with the latter raising prices on goods. Already in Russian cities, most real estate rental prices are set in Euros. As small businesses get hit with higher real costs for rent and loan payments, prices continue to rise. Moreover, as confidence in the ruble continues to wane, the desire for holdings (and lending) in foreign currencies grows still.

What is the Kremlin to do? Lowering interest rates on loans below the current 13% inflation rate would effectively mean government subsidization of lending, and would drive further devaluation of the ruble, and price inflation for imported goods. While this could cause a further flight of capital from Russia and could plant the seeds for ‘90s era economic chaos, it could also stimulate lending and growth, if coupled with prudent policy reforms, particularly toward small businesses which are drowning in bureaucracy and corruption. It might also cost the Kremlin less, and be more effective, than continuing to subsidize banks who then speculate against the ruble in the Forex markets. Keeping interest rates high, however, may create the illusion of stability, but will surely continue to stifle growth, and will hurt ordinary Russians most. In any case, winter in Russia may not end for some time to come.

(photo from Alcoyotl's photostream)

Russia Almost Gets Served

Eurovision, the annual song competition held among active member countries of the European Broadcasting Union, is just around the corner. This year it will be held in Moscow, so Georgia, still reeling from its embarrassing military loss to the Russian bear this past summer, decided to redeem itself with a disco song: “We don’t wanna Put in.” The chorus:

We don't wanna Put in
The negative move
It’s killin' the groove
I'm a-tryin' to shoot him
Some disco tonight
Boogie with you

First, Georgia, disco? Really? Second, very subtle, Georgia, but not subtle enough for the European Broadcast Union. That’s right. The song has been banned from competition as it is too political. The rules clearly state: No lyrics, speeches, gestures of a political or similar nature shall be permitted during the Eurovision Song Contest. But what about Finland’s losing entry in 1982, you ask? Hey everyone’s asking it.

Well sirs and madams, Kojo’s “Bomb out” apparently does not count as political, because it was a message of peace that called for an end to nuclear weapons. And, apparently, a song threatening to shoot someone named “Put in” is not considered an olive branch in the European community. Plus Kojo is rocking out this red leather suit. Now you get served, Georgia!

Afghanistan: the weak link in a stronger global chain?

The war in Afghanistan may not end well for the US; history has not been kind to foreign forces. But there are signs that it will become the key linkage in the Obama administration's attempts at redefining US foreign relations.

NATO announced today that it was restoring high-level contacts with Russia. US Secretary of State Hillary Clinton said that, amongst others, Afghanistan was an issue of "mutual concern." She also expressed her support for a conference on Afghanistan that would bring together all of the key stakeholders in the region, including Iran. From the BBC:

"If we move forward with such a meeting, it is expected that Iran would be invited as a neighbour of Afghanistan," she said.

The challenges posed by Afghanistan are shared by each country in the region (whether there by geography, choice or military alliance). Beyond the obvious interest of each stakeholder in the country's success, Afghanistan may provide the conduit for a diplomatic thaw in US-Russia (a "reset"), US-Iran relations (a handshake, maybe?). Stay tuned...

Russia and China: a Power House or Broken Home?

Russia and China seem pretty chummy of late. Both countries essentially head the Shanghai Cooperation Organization – an organization which frightens the West because it promotes cultural, security, and economic cooperation among China, Russia, and Central Asia. In the cultural arena, China has dubbed 2009 the year of the Russian language, and Russia will make 2010 the year of the Chinese language. To promote security, the two countries established a hotline between their heads of state.

Most recently, the countries displayed extraordinary economic cooperation. Russia secured $25bn in loans from China in return for supplying oil for the next 20 years. This deal is the largest trade financing agreement between the two countries to date: Russia desperately needs money and China desperately needs oil. Everyone’s happy, right?

Not exactly. Days after the historic agreement, a Russian warship opened fire on a Chinese cargo ship and sunk it. The two countries' foreign ministries blame each other. But Clifford Levy of the New York Times actually blames deteriorating bilateral relations. Why?

While both countries enjoy honoring agreements that are mutually beneficial (economic cooperation) or mutually benign (language exchange), Russia and China have a tendency to disregard cooperation when it affects domestic politics. Levy likens the sinking of the Chinese cargo ship to last year’s Russian-Georgian conflict. China didn’t support Russia because Russia recognized the autonomy of South Ossetia, and China didn’t want to encourage Tibet’s or Xinjiang’s calls for autonomy.

What's clear is that Russian-Chinese relations are only as simple as each country’s domestic politics, which is to say they're not all that simple. Notably, Russia and China don’t have an alliance or even an established method to resolve disputes and disagreements. They just have a mechanism for cooperation, which can be honored or ignored at either country’s whim. Hopefully, ignoring the cooperation won't lead to any more drowned sailors.

Commodity price collapse: who wins and who loses?

One of the great back stories of the ongoing economic crisis is the collapse in commodity prices, which occurred in the second half of 2008 after a record boom period lasting at least five years. The bursting of the bubble has produced clear winners and losers. Thanks to our fantastic contributors, zzzeitgeist has had excellent coverage of these repercussions. I thought I’d try to tie things together.

The biggest winners are consumers, particularly first-world automobile drivers. In the last 7+ months, oil has fallen from $147/barrel to about $37/barrel now. Economists reckon that amounts to a ‘stimulus’ of more than $240 billion. Also, now that the world food crisis has largely subsided, developing-world consumers stand to benefit from cheaper food prices. This means a lot when you spend more than 50% of your budget on food.

The mining sector is obviously a huge loser. Mining is often a boom and bust industry, because it takes a long time to develop new mining projects. It’s hard to forecast future supply/demand fundamentals (remember when this seemed like a good idea?) and unfortunately they can change drastically and rapidly, which is exactly what has happened in the last year. As a result, a number of firms are closing mines, because prices are too low to justify operating costs. Mining firms often take on a lot debt out of necessity – digging mines ain’t cheap. But thanks to the financial crisis and the disappearance of cheap credit, heavily indebted companies are suddenly struggling to stay afloat. Case in point: Rio Tinto, the world’s second largest mining conglomerate. See Rory’s excellent treatment of Rio’s debt woes here.

Finally, commodity-dependent countries suffer perhaps the worst. When prices are high, resource-rich countries are suddenly flush with cash, which they can use to advance geopolitical aims, reward cronies, or invest in infrastructure, education and health to avoid the resource curse (don’t hold your breath). Falling commodity prices have scaled back these ambitions. See Dan’s analysis of Venezuela, Rory’s take on Russia, or this money quote about Iran.

In my mind, these are the biggest winners and losers, but this list is by no means exhaustive. Falling commodity prices also have an enormous effect on agricultural trade, international cooperation, foreign direct investment, Guinea, South Africa, Australia, several Latin American countries, etc. Who else am I missing?

(photo from jeff-o-matic’s photostream)

The Great Game revisited

The Great Game is a term used to describe the 19th century struggles between the British and Russian Empires for supremacy in Central Asia. It’s henceforth been a term that also tends to get thrown around anytime Russia butts heads with a Western power over territory in Central Asia. It happens to be a great day to revisit the Great Game.

Last week, Kyrgyz President Kurmanbek Bakiyev announced in Moscow that Kyrgyzstan will discontinue U.S. access to an air base that is key to military operations in Afghanistan. Why did he make this announcement from Russia? Well, because he had just finished a meeting where Russian President Medvedev pledged to lend Kyrgyzstan $2 billion, write off $180 million in debt, and add another $150 million in aid.

Where to begin? No one wins the Great Game. The base in Kyrgyzstan is currently the only good US access point to Afghanistan, as the Uzbekistani government stopped allowing US operations back in 2005. This will drastically affect the war on terrorism right as the Obama administration was preparing to deploy as many as 30,000 additional troops to Afghanistan this week. Oops.

Moreover, the Kyrgyz sanctioned US use of the base was really the last show of any good relations between the Kyrgyz Republic and the US. Since Kyrgyzstan’s Tulip Revolution in 2005, freedom and human rights have not taken off as the West would have hoped. The country is increasingly turning to its closer neighbor - Russia - for support. Now with this large fiscal promise from Medvedev, the Central Asian country is sure to back slide even further away from the goals of the color revolutions.

Sounds bad? It gets worse. Russia is angling for leverage in running the war on terrorism on its own terms, but she is in no position to make these promises of loans and aid. If history is any indication, Russia is now setting a precedent. It cannot follow through on similar promises to the other Central Asian nations, but will certainly have to go through the motions. Unless the economy hits a dramatic up-turn, Russia is setting itself up to fail.

And the big loser in the Great Game? Well, that continues to be the people of Central Asia. Human rights, independent media, and basic freedoms will continue to decline. The initial capital from Russia will most likely boost a number of government programs, but nothing will be sustained. My advice? We’re all better off playing Risk.

(Photo via markusbc)

Devaluing the rouble

Last month, the Bank of Russia announced a floor under the rouble. So much for that. The floor was already tested this week and the central bank is burning through reserves faster than Putin does ABBA cover bands. On the surface, we would expect Russia to have little difficulty in defending the rouble, given the substantial accumulation of foreign exchange reserves in recent years (high commodity prices + booming exports + the long shadow of the 1998 rouble crisis = big time reserves). But look a little deeper, and that cushion isn't quite a comfortable as it appears.

In fact, Russia is in big, big trouble.

The Russian government didn't anticipate the sudden, rapid decline in commodity prices (to be fair, few did), and it is now struggling to balance its obligations amidst declining revenues and FX earnings. Its 2009 budget relies on $95/barrel oil, and billions of dollars have been committed in support of the banking sector (not to mention the money provided major companies crippled with debt). Defending the rouble and supporting the banking sector/companies alone consumed approximately 40% of Russia's FX reserves since summer 2008, and were a major factor in the Fitch downgrade on Wednesday. If the government's recent actions are any indication, Russia's foreign exchange reserves will come under increasing pressure in 2009. It delayed discussions on amending the budget, and publicly stated that it won't make any cuts to this year’s spending. With social instability spreading, it is unlikely the government will make any significant cut to the budget over 2009-2010. Furthermore, its new crisis strategy directly targets the banking sector, which should be applauded, but will require a significant amount of capital.

Which brings us back to the rouble. The central bank's ability to defend the rouble will be seriously constrained by the budget and banking sector support. Its decision to gradually devalue the rouble, as opposed to allowing it to freely fall to its market equilibrium, has proven ill advised and sacrificed a greater share of foreign exchange reserves than was otherwise necessary. Little official debt, falling imports, and the complacency of the Russian elite would have made a single devaluation possible. But now the central bank is in a bind; let the rouble fall and you risk a loss of confidence in the central bank, keep defending it in the hope that the oil price recovers and you play a dangerous game of Russian roulette (no pun intended).

Russia's spending and banking sector support are necessary under the current economic and financial conditions. The market already expects a further devaluation of the rouble; artificially supporting it is a losing battle that only increases the risk of a serious run on the currency and drains its foreign exchange reserves. Russia should set the rouble free.

(photo from melted snowball's photostream)

Baby, it's cold outside...

Let's hope Mr. Barroso's "warning" to Russia is more convincing than Mr. Blix... 

Come on Russia, play nice... the rest of the world doesn't have your vodka supply to get through the winter.

The Great Resource Guessing Game

Petroleum Intelligence Weekly has published its influential annual ranking of the world's top oil companies. The most notable and widely reported aspect of the report is the global power shift from the traditional private oil majors to national oil companies. 27 of the top 50 oil companies are now majority state-owned. China's CNPC leads the surge, having surpassed both BP and Shell according to the report's metrics. Exxon Mobile is the only majority privately owned company remaining in the top 5.

The impact of a global oil market dominated by state-owned firms on both international growth and security is immense. The recent Global Trends 2025 report published by the US National Intelligence Council, and Patrick's farming piece below, highlight the high probability of future inter-state conflicts over increasingly scarce resources like oil. Energy security has risen to the top of both national and international agendas, and the threat of countries using the "energy weapon" for geopolitical leverage has lead many Western states to move in the direction of resource nationalism.

Beyond military and economic conflict, market uncertainty is the biggest effect of greater state control of natural resources. Reserve and refining capacity statistics are classified as state secrets in many countries with nationalized energy sectors. As Western majors are kicked out, and given the press restrictions in countries such as Russia and Iran, it will be increasingly difficult to obtain an accurate measurement of global supply and capacity (you can find my take on Russia's energy industry here). The hysteria surrounding "peak oil" (due in part to the realization of "known unknowns") last year probably contributed to the record run up in oil prices. The inability of traders to estimate and match long term supply and demand will drive up the speculative risk premium in oil prices, particularly if over-the-counter markets remain unregulated (an issue that has dropped off the political radar since the commodity bubble burst). This will only exacerbate inflationary pressures, political instability, and resource competition similar to what we witnessed over the past few years.

Information, transparency, property rights, and security are all central elements of an efficiently functioning oil market. Greater resource nationalization compromises all of these, and increases the probability of resource-driven political and economic conflict. As long as the trends outlined by Petroleum Intelligence Weekly continue, energy security will remain one of the defining issues of the 21st century.

(Photo: ifijay)

Is the EU finally serious about its energy future?

On November 13, the European Commission proposed the EU Energy Security and Solidarity Action Plan as part of its Second Strategic Energy Review. Three new proposals that stand out: 1) the construction of a European supergrid, connecting power from the wind farms of the North Sea all the way to the Baltics, 2) the construction of two new gas pipelines, connecting Caspian and African gas to the bloc (Nabucco included), and 3) a "Community Gas Ring", which would essentially allow for the pooling of European gas supplies in the event of supply disruptions (here's looking at you Russia). These measures would directly address import diversification (particularly in natural gas, and specifically away from Russia), security of supply issues, and fragmented national power grids.

Despite recycling a lot of old ideas, the new proposals make this a highly ambitious plan, and in my opinion, one that has absolutely no chance of being carried out in its entirety.

The first rule of European energy is that the national always trumps the regional interest. National regulatory and interest-group challenges to EU-wide liberalization in the energy sector are formidable, and to date have blocked any substantive effort towards a single European energy market. With energy prices falling, and the commercial ties between some of the EU's most powerful members (Germany, France) and Gazprom still deep, there is little chance that this strategic plan will be successful. The European Commission has valiantly fought to create a liberal, single European energy market for 30 years, but the European Council always waters down the compromise enough to preserve the status quo in certain national markets. (Germany, France) Thus, fragmentation persists.

One also has to question the commercial viability of the alternative pipelines proposed by the plan. The Nabucco project has been hopelessly mismanaged. Its commercial viability has been suspect from day one, as the Caspian suppliers it seeks to tap are strongly oriented towards the Russian market, and only Kazakhstan has seriously entertained diversification away from Russia. It is important to note that Gazprom is highly dependent on imported Caspian gas for re-export to the EU, and therefore would not go down without a fight to keep the gas flowing through Russia's borders. I find it difficult to foresee the construction of multiple southern pipelines in the near term.

Finally, the chance of a "communal gas ring" is more reasonable, but no easier politically. Under previous EU energy liberalization directives, member states were required to compel private storage facility operators to open these facilities to universal access. In practice, this occurred less than desired because there is little commercial incentive for the private operators (who by the way, are usually state-owned monopolies like GdF). The chance of one country stretching its own supplies in a time of crisis to assist another member state's shortfall seems unlikely.

Ok, time for the rosier outlook. I was extremely pleased to find a reference to the importance of fostering interdependence between the bloc and its external suppliers (again, that means you Russia). The EU desperately needs to find solutions to its rising import dependence in natural gas. Unfortunately, its own supplies are declining at a rapid pace. This means that the diversification of import sources is the key pillar of the bloc's long term energy security. But in the short to medium term, the EU needs Russia, and Russia needs the EU. A commitment by both parties to fostering a mutually beneficial and secure energy relationship would be a truly powerful development.

Press freedom in Russia

Reporters Without Borders (RSF), a France-based nonprofit organization, recently released its annual report, Freedom of the Press Worldwide in 2008. In it, RSF has developed a rather strong argument that the Russian government is actively destroying independent media and seeks to quash any signs of dissent or opposition.

Basically, the situation facing Russia's independent media can be summed up in any number of negative words: horrible, dire, God awful… In the last year, the Russian government has raided and shut down several independent newspapers, and others had to shut down because printers were too afraid to publish the newspapers. Novaya Gazeta, Novyj Times, and Kommersant are the only major independent outlets that remain.

Throughout the year, several independent journalists were arrested just for covering opposition demonstrations. Many journalists were brutally beaten. Most recently on November 13, editor Mikhail Beketov was found in a pool of his own blood after receiving numerous death threats for opposing the construction of a bridge. Also, at least two journalists were forcibly sent to psychiatric hospitals this year – an old trick straight out of the Soviet playbook where you discredit the dissenter by claiming he's insane and end up making him insane because Russian mental hospitals could break even Chuck Norris. It's pretty old school, but effective and a clear violation of human rights.

Where does this leave the Russian population? Well, the dissenting portion of the population remains under constant threat of losing their freedom or their lives. And the remainder of the population is informed of only what the government wants known. For example, if today you should happen to peruse Izvestiya – a state-owned paper – you might be interested in one of its top stories: "Is Barack Obama the Anti-Christ?" Happy reading, Russia.

Russian military capacity

During the Russian-Georgian War this summer, I noted that military analysts the world over would be watching carefully at how Russia fared in its first conventional conflict since Afghanistan. In an article in last week’s Economist, the verdict is in: Russia didn’t do too hot. I strongly encourage you to read the entire thing, but here are the best bits:

· Russian military communications equipment was so dysfunctional in Georgia that the army resorted to using mobile phones to coordinate positions. I can’t help but wonder if they had to pay roaming charges.

· Despite all of the bellicose rhetoric about naval buildup and the imminent construction of 5 or 6 new aircraft carriers, Russia doesn’t even have a naval port with the capacity to build them.

· Although Russian defense spending has doubled in the past 4 or 5 years, massive and systemic corruption ensures that about a third of the funds are wasted.

· In a notable reversal of Cold War geopolitical calculus, Russia now relies on its nuclear deterrent to offset the West’s overwhelming advantages in conventional military combat. It used to be the exact opposite.

While it’s important to acknowledge Russia’s newly aggressive behavior, one should not conflate the willingness to use force with the capacity to use force. Russia remains a threat to its immediate neighbors, but, joint military exercises aside, the country has an incredibly limited capacity to project hard power further than that. In short: Russia is powerful, but that power is constrained by realities (an economy based on resource extraction, corruption, weak institutions) that will make it difficult to sustain.

(Photo from Oleg Zdorik’s photostream)

You just took one in the jugular!

Given my co-author's discussion of Russia's resurgence, I found this interesting. 

Just as Putin was arriving with a group of wildlife specialists to see a trapped Amur tiger, it escaped and ran towards a nearby camera crew, the country's main television station said. Putin quickly shot the beast and sedated it with a tranquilizer gun.

I'm not sure if Putin is sending a message, but Vlad does look pretty tough in camo.

(Photo: Reuters)

Russia-EU relations: a bang or a whimper?

The Russia-Georgia war continues to have repercussions: EU leaders gathered in Brussels today for an emergency summit on the state of relations with Russia. Last month, I attempted to apply a rudimentary public choice model to the major players in the conflict. At the time, for simplicity’s sake, I treated the EU as a single entity with a unified policy position. In reality this could not be further from the truth. There are hawks, such as the previous Warsaw Pact members and the UK, and there are doves, such as Germany and Italy. In determining a member nation’s stance, it is useful to look at two metrics in particular: history and energy. Specifically, has the country been pushed around by Russia in the past (pretty much all of Eastern Europe)? And how much Russian energy does the country import? Personal relationships also play a role: Vladimir Putin and Italian Prime Minister Silvio Berlusconi are close friends, for example.

Where do the Russians stand? I’m troubled by the implications of their explicit declaration of ‘spheres of interest’. However, I still think it’s possible to at least partly understand Russia’s motives through the looking-glass of its leaders’ personal incentives. This is a view that I first heard espoused by Garry Kasparov in 2007 and again last week by Richard Baldwin. It’s certainly true that Russia’s political elites are making an enormous amount of money off of the country’s economic expansion, and they’re aware that war would disrupt this trend. As a friend of mine once put it, capitalism in Russia is like the Wild West: poorly regulated, corrupt, winner-take-all, and unprotected from government intervention. In such circumstances, powerful political actors are well-positioned to get rich. While stoking the fires of nationalism will help solidify their leadership, outright war is undesirable because Russia might lose and the economy might tank. Thus, I suspect that Russia’s leaders won’t push things too far (I’m being purposefully vague), as doing so would be against their own interests. In any case, Russian stock markets have already been majorly spooked by the war and other recent events.

And where does this leave us? For the time being, I suspect that ‘pragmatism’ on all sides wins the day. The EU stopped short of applying sanctions: the last thing that leaders in flagging economies want is to be on the wrong side of high-stakes energy diplomacy. Still, the rarity of such emergency EU summits signals that they’re taking this seriously. Russia, in turn, is quite reliant on the EU for its export market (which feeds into the reasons mentioned above). Is this the right policy for the EU to be pursuing? It’s doubtful: I think the EU ought to be taking a tougher line, and it still might if it can get its own ducks in a row on the appropriate policy response. This is something to keep watching.

(photo by dbarronoss)

The return of history

Eric Posner over at the Volokh Conspiracy makes an interesting prediction:

"When historians write about the post-cold war era, which began in 1989, the date of its termination will not be 9/11/2001, as has been frequently claimed, but 8/7/2008, when Georgian forces attacked separatists in South Ossetia and Russia responded with an invasion. August 7 marks the end of American sole-superpowerdom, or hyperpowerness, or hegemony, or whatever you want to call it, an interval somewhat longer than but still very similar to the periods of global preeminence the United States enjoyed for a few years after World War I and World War II."

The war in Georgia has sparked some intense reflection on the state of international relations and American power. I agree that the American moment of hyperpower (I really love that term) is over. But this was never an unexpected development: the US used its hegemonic position after the Second World War to foster a liberal international economic order and promote stability, mutual economic cooperation, and growth. But hegemony is a concept that measures states’ relative power capacities, so by encouraging a system which facilitates world economic growth, sooner or later America’s power would decline in relation to the rest of the world. As hegemonic stability theory teaches us, a good hegemon sows the seeds of its own decline.

International relations is driven by political and economic factors. The political events by which we mark history may lead us to conclude that America’s decline is something new, but in reality the economic forces which caused it have occurred gradually since the end of World War II. Thus, while perhaps the political environment after the Cold War suggested an ‘end to history’, a cursory look at the world’s economic structure would have cautioned that, at best, history was taking a short break.

In any case, the world has certainly woken up. State relations will need to evolve to accommodate a new power structure, but I am not particularly pessimistic about a multipolar world. Today, the US is still the world’s most powerful nation politically, militarily, and economically. The United States will continue to lead but increasingly will need to engage with other nations on less favorable terms. That said, we should be careful not to overestimate the importance of Russia’s recent actions in Georgia. Economic growth has empowered both potential rivals like Russia and new partners like Brazil and India.

In many ways, Russia is an outlier in modern international relations and may need to be treated as such. Its wealth is based largely on strategic energy reserves. It is a bully when it comes to trade (look at its relations with the EU regarding natural gas.) But if you look at the other BRIC countries, you see economies with strong global links that have an interest in systemic stability. It is more likely that such countries can become “responsible stakeholders” in the global political-economic structure.

History clearly isn't over. But then again, it never was.

(Related: see Rory’s excellent treatment of the resurgence of nationalism over at IPE Journal)

The death of the death of... nationalism?

What good timing! One day after Zeitgeist considers how transport costs might bring an end to our current era of globalization just like the last one, Paul Krugman writes a column about how this era of globalization might be destroyed by a resurgence of nationalism... just like the last one. (Do you think he gets his column ideas from us?)

Anyways, it's a very interesting column and it gives us a chance to continue our "death of the death of" theme here at Zeitgeist. (Ok, last one, I promise.) But I'm not quite sure what Mr. Krugman wants us to take away from it. It's quite pessimistic and seems to lead the reader toward the conclusion that we should somehow 'hedge our bets' on globalization, without quite coming out and saying it.

Yet I know Mr. Krugman is aware that if every country took this logic to its natural conclusion by striving for national self-sufficiency, the 'fragility of globalization' would be a self-fulfilling prophecy. Perhaps he simply meant to highlight the fact that global integration is not the natural state of international relations and is susceptible to nationalism. This is an excellent point that we should take to heart, but precisely because economic globalization is so fragile suggests that we should be doing everything we can to defend it. The alternative is simply worse.

In any case, the situation might not be quite as dire as Mr. Krugman implies. He writes:

And if Russia is willing and able to use force to assert control over its
self-declared sphere of influence, won’t others do the same? Just think about
the global economic disruption that would follow if China — which is about to
surpass the United States as the world’s largest manufacturing nation — were to
forcibly assert its claim to Taiwan.

But as Dan Drezner, aptly points out, China is not Russia, and Taiwan is not Georgia. I'm also not convinced that his point about the food crisis is entirely valid, either:

For years we were told that self-sufficiency was an outmoded concept, and that
it was safe to rely on world markets for food supplies. But when the prices of
wheat, rice and corn soared, Keynes’s “projects and politics” of “restrictions
and exclusion” made a comeback: many governments rushed to protect domestic
consumers by banning or limiting exports, leaving food-importing countries in
dire straits.

This is true, but it's a bit misleading. At least some of the shortage can be attributed to heavily-regulated and closed markets sending inadequate signals to farmers (I'm thinking India and Pakistan especially.) And self-sufficiency is an outmoded concept: a lot of countries don't have enough arable land to produce enough food to survive; others have more than enough. The food crisis was a perfect storm of increasing long-term demand for agricultural commodities combined with poor harvests and exacerbated by government export controls. With the world population expected to hit 9 billion by 2050, now would be a bad time to look for alternatives to international agricultural trade. If anything, we should be looking to improve trade flows by reducing barriers and subsidies (which should allow for the most accurate pricing and price signals in the long term.)

I'll be the first to admit that things are not great in the world at the moment, but let's not throw in the globalization towel just yet.

Georgia, Russia update

This is certainly something to watch carefully:

President George W Bush has said the US will use military aircraft and naval forces to deliver aid to Georgia following its conflict with Russia... Mr Bush hinted that Russia could be jeopardising its international ties. The Kremlin said the US must choose between partnership with Moscow, or with the Georgian leadership.

On Georgia and Russia

Reports are coming in that a peace plan has been agreed by Georgia and Russia. The details remain largely unclear, but French (and current EU) president Sarkozy, who helped broker the deal, assures that Georgia's territorial sovereignty will be guaranteed by the "spirit of the text." Whatever that means, an end to hostilities is welcome news in and of itself: this has truly been a nasty little war, and our deepest sympathy goes out to everyone who has been affected.

There has been an enormous amount of quality analysis of this mini-war from every conceivable angle. I imagine the military types in particular are falling over themselves for a chance to analyze how Russia's army has performed in a large-scale conventional military operation. We here at Zeitgeist have had several conversations about how we could add to the debate. Rather than trying to analyze the outcomes or their implications, we want to try to provide a framework for understanding why the major players behaved as they did (or in some cases, didn't.)

In situations like these, international politics looks a bit like a high-stakes card game. Each player makes a bet and wins or loses depending on how the other players react. In this particular hand, we had:

President Mikhail Saakashivili; President Saakashivili knows that tensions with Russia over South Ossetia and Abkhazia have been brewing for a very long time. Also, he perceives his own personal credibility to rest in large part on whether he can keep his election promises to bring the breakaway regions under control. He understands the power disparity between Russia and Georgia, but calculates that any response would have to be limited, because the terrority nominally belongs to Georgia, and also because Georgia has been seriously courting Western allies for the past few years. They have a disproportionate number of troops in Iraq and have upgraded their military with American weapons technology. Mr. Saakashivili doesn't think that the West will stand idly by if Russia does overreact.

President Medvedev/Prime Minister Putin; Leaving aside any discussion of who's actually in charge, Russia is keen to maintain hegemony in its 'near abroad', the area which comprises the former Soviet Union. The color revolutions and reorientation of Ukraine and Georgia toward the West have infuriated Russia, and Russia perceives Georgia's desire to join NATO as a direct threat. Combine all of this with the fact that Russia believes that NATO helped facilitate Kosovo's secession from Serbia. Russia is therefore looking for any plausible reason to further destabilize Georgia by encouraging the breakaway regions, both to punish Georgia and send a message to the West.

EU President Sarkozy; The European Union is keen to not antagonize Russia, a key energy supplier for much of Western Europe. Most of Europe is also much less enthusiastic about Georgia joining NATO than the United States. There is almost no chance that any European country would forcefully intervene in the conflict. Any actions would likely be primarily face-saving (carefully condemn the use of violence and work for any sort of deal that stops hostilities as soon as possible.)

President Bush; Georgia was a key pillar of Mr. Bush's freedom agenda, and relations between the two countries have been especially strong during his tenure. Mr. Bush is clearly unhappy with Russia's actions, but his hands are tied. He is personally extremely unpopular, American troops are busy fighting two other wars, and the injection of American forces into the conflict would be tantamount to a serious escalation. The US pushes a tougher rhetorical line than the EU and agrees to help transport Georgian troops back from Iraq to take part in fighting, but is highly unlikely to intervene otherwise.

Given the motivations and limitations of the main players, it is perhaps a bit easier to understand why things happened the way they did. Unfortunately, this was not a card game. This was real life, and there were real consequences.