Sunday, August 31, 2008


“Vacuum is over. It’s an end of an epoch. Short term consequences will be bad, many threats, tough talking. But long term prospects and consequences will be good as the West will now have to take Moscow’s interests into consideration and listen to Russia. Nobody wants confrontation with Russia”. Vyacheslav Nikonov, President of Polity Foundation.

Over a week ago, as Russia celebrated a crushing military victory over its small neighbor, little seemed to deter Moscow from cementing its expansion in the political arena. Having humiliated Georgia, Russian troops were expected to pull out and use the existing bicephalie between Putin and Medvedev for an old style bad cop/good cop exercise in dividing the Western allies and undermining further their somewhat schizophrenic Ostpolitik.

But then, an extraordinary thing happened. Moscow decided to alienate not only Western Europe and Israel, but even China. Quite why the Kremlin managed to squander the political capital offered by the military victory remains a mystery. Populist hubris? Internal divisions? Misreading the resonance of alarm bells that its military adventurism kept ringing even in distant capitals?

One by one, Russia’s escalation ruled out a diplomatic qui pro quod and achieved the impossible by solidifying the fractious Western alliance, whose moves are always defined by the lowest common denominator. With no sign of withdrawal, Russia’s artillery batteries dug in around the Georgian port of Poti. Its army has continued to control Georgia’s east-west transportation axis. It repeatedly turned away Georgian police forces which were moving north to resume its routine responsibilities for the maintenance of law and order throughout the country. In Poti, the Russian army stole US-owned Humvees filled with electronic warfare equipment, including satellite information and sensitive encryption codes. Moscow has thus far refused to return the vehicles. On Tuesday, in direct contravention to the existing UN resolutions, President Medvedev snubbed Chancellor Angela Merkel by signing Duma’s demand to recognize the independence of Abkhazia and South Ossetia. On Wednesday, Canada’s Prime Minister Harper admitted that Russia “had been testing Canadian airspace”. Shortly afterwards, Russia’s foreign minister Lavrov, in an unusually acerbic statement, labeled his French counterpart as suffering from “sick imagination”. Then Russia’s Agriculture Minister Alexei Gordeyev slapped sanctions against US chicken and pork exports, suddenly claiming that the products had high levels of salmonella, arsenic and intestinal bacteria. To top it off, Medvedev boasted that Russia was “not afraid of a (…) cold war”. He then declared that the presence of NATO military in Georgia would be considered ‘a declaration of war’ and threatened a military response to Polish and Czech agreement to station anti-missile defense batteries and radar. And all along, rumors were flying around Ukraine that Russians were illegally distributing passports to the Russophone minority in the Crimea, potentially planting seeds for another Hitler-style intervention “in defense of its own citizens” several years from now, if not sooner.

As Western Europeans were scratching their heads in disbelief, the biggest threat loomed on Friday morning, when Daily Telegraph announced that Russian oil producer Lukoil was being advised to cut oil supplies on time for Monday’s EU emergency meeting in Brussels. While such rumors could prove unsubstantiated, Czech officials admitted that supplies through the Druzhba pipeline had fallen 40% in July, after Prague signed the agreement with the US to install the anti-missile radar. In light of such growing unpredictability, the French foreign minister has now politely backpedaled on his earlier proposal for anti-Moscow sanctions. His imagination is probably now recovering from “sickness”. Mr Lavrov was unnecessarily concerned.

Many people in the so-called “West” are bemused by the whole ‘Georgian’ affair. After all, this is all happening in the “Russian backyard”, and little could be done to prevent Russia from exercising its imperial “right” to near-border. And yet, Russia’s ‘backyard’ also happens to be someone else’s ‘front yard’. Russia’s actions in Georgia and Ukraine increase, rather than decrease the sense of insecurity in Europe. And as much as Western Europeans have long lost the capacity to think in geostrategic terms, Eastern Europeans still do. Not surprisingly, they understand Russia’s Clausewitzian designs much better. But their supposedly outmoded view of Russia as a traditional, expansionist, bullying power could still be ridiculed in Berlin or Paris. Until two weeks ago, that is.

Despite its geographical expansion into most of Northern Asia, Russia has always looked West, not East. Russia’s ancestral fear of China and its complex underbelly in the predominantly Muslim Central Asia limit Moscow’s geostrategic choices. This week, Shanghai Cooperation talkshop bruised Moscow’s hopes to create a monolithic anti-Western alliance. Iranians are too unpredictable and not necessarily happy with Russia encroaching into Southern Caucasus beyond the borders of Armenia, its only vassal state in the region. Azeris and Kazakhs are too keen to do energy business in the West – and with China – independently of Russia’s meddling. Further south, only natural barriers limited the potential for a Russian-British conflict in the 19th century. It is unlikely to erupt now.

So Russia’s focus will be Europe and Western Eurasia. Russian politicians are still deploring “the loss of Ukraine, the cradle of Russian civilization”. Russian intelligentsia has been so enamored with Polish culture and Polish ‘Europeanness’ that Warsaw’s escape from the embrace was always considered a case of high treason. Now, despite all the divisions between the “orange” and “blue” Ukraine and the asymmetric relationship that these movements have with their Western neighbor, Russia’s belligerence is again pushing these two countries into each others’ arms.

Russian occupation of northern Georgia certainly emboldens opportunists – Ossetian militias may continue their looting and intimidation, nuclear traffickers will benefit from the collapse of the international program to monitor Georgia’s borders. But what are Russia’s other designs in the region? Moscow is certainly intent on controlling the Georgian pipelines, which are in the hands of Azeri, Kazakh, Turkish and British investors. Such a move would spell the end to Turkish dreams of turning Ceyhan terminal into a new refining hub in Europe that would rival Rotterdam. Here the stakes for the West are more immediate than Saakashvili’s survival. The loss of Georgian and Azeri independence would cut Europe from direct access to Turkmen gas and Kazakh oil. Indeed, Russia never quite reconciled itself with the opening of BTC pipeline in 2006, which broke Moscow’s monopoly over Caspian oil exports. And when Russia cut off gas supplies to Georgia the same year, Azerbaijan saw a commercial opportunity in opening the spigot to Tbilissi. Undoubtedly, bringing Baku under the Russian boot would be Putin’s ultimate prize, compounding the recent successes in monopolizing gas supplies (Iran, Italy, Algeria, Kyrgyzstan).

According to the most outlandish conspiracy theory I heard over the last three weeks, the Israeli advisors actually pushed Saakashvili to react to Russian provocation in the hope that Moscow’s retaliation would finally seal the deal between Washington and Warsaw to station anti-ballistic missile shields in Poland and defang Iran’s putatively intercontinental threat. In the event, Washington, rather than Warsaw, made the necessary concessions that closed the 18-month long negotiations. But by drawing one more line in the sand and failing to extract a response from the US, Moscow was, once again, “humiliated” in the process. And if Israel was, indeed, involved in Tbilissi, then Russia’s allegedly commercial decision to time its weapon sales to Syria could also reignite the old East/West rivalry in the Middle East. So do Gazprom’s deals in Iran in the wake of Total’s departure. Needless to add, Russia’s sales of S-300 defensive systems to Tehran raised fewer passions in Moscow than the Polish-US shield deal.

But the relations between Moscow and Tel Aviv are complicated by the weight with which racist Russian émigrés led by Avigor Lieberman dominate ultranationalist extremism in Israel. Under a scenario in which American neocons and their erstwhile allies from right-wing pro-Israeli lobbies lose some of their leverage under Barrack Obama’s administration, Moscow could well reposition its chess game in the Middle East. It is, however, a low-probability scenario, given the pervasive influence that these lobbies wield in Washington, focusing US foreign policy almost exclusively on the Middle East and away from much more serious, long-term geostrategic challenges in Europe and Asia-Pacific.

It is in Central Asia that Russian and American interests still meet. For all the grandstanding last week, Moscow would loathe to cut NATO’s northern access to Afghanistan. Russia’s “Afghan syndrome” is akin to America’s “Vietnam syndrome” and the Kremlin is all too happy to see French or Canadian, rather than Russian soldiers die in the lawless mountain desert. This vestige of the past cooperation between Russia and NATO is there to stay, for now.

Empires come and go and when they fall, the humiliations are aplenty. The big difference between Russia and most Western empires is that Muscovite behemoth has always pursued a land strategy.

The last par excellence “landmass power” in Europe’s West and South was Rome. Ever since, any European ruler who tried to extend his control over neighboring landmasses eventually failed – with the French and Germans paying the highest price for their grand misadventures. Instead, the Portuguese, Spaniards, the Dutch and the British projected their power overseas. The sea strategy of the UK meant that the land positions were temporary and the fertility effort of lesser importance. Military powers of the ocean are elusive and mobile, but unstable. Still, the costs of eventual losses are lower. The threat of destruction afflicts only the military capacity, not the metropole. US, one of only a dozen major countries with access to two oceans has always pursued a sea strategy and its colonization of island nations after the 1898 war with Spain was rather accidental.

Chinese and Russian attempts to carry their expansion onto the oceans have been inconclusive despite the 1400s or 1900s episodes, respectively. China mysteriously lost appetite for overseas adventures after its fleet’s successes in the Indian Ocean and heroic feats such as kidnapping of a Sri Lankan king. Russia has always been hamstrung by limited access to warm ports and its maritime ambitions were durably annihilated by Japan some hundred years ago.

A sea power is more nimble, more mobile and more elusive as a military target. A land power is more vulnerable in its extended borders and, as a consequence, more paranoid about the protection of its interests “in the neighborhood”. The continental military powers are not only costlier and more vulnerable, but also more durable – like China or Russia. The tragic episode of seaborne slavery trade notwithstanding, it was usually the land invasions - Roman, Persian, Arab, Mongolian, Turkish, Chinese, Russian and German – that were more lethal, more destructive and more destabilizing. But land conquests, however destructive, also bring the ultimate reward – control over natural and human resources. Usable water and energy are both more difficult and more costly to extract from the oceans, even at today’s technologies.

It took almost 40 years since the Soviet-Chinese war to finally demarcate the border between the two land powers. The obsession with Russia’s land strategy is not lost on China, now at loggerheads with Moscow over the liturgy of “national sovereignty”. But Russia is also struggling to reinstate its control over the Black Sea. Its occupation of northern Georgia has invited US, Spanish, German and Polish warships through what remains a former lake flooded by the Mediterranean waters after the end of the Ice Age some 8’000 years ago. NATO’s control of Black Sea’s mouth, the tenuous hold of the Montreux Declaration and the unresolved status of post-2017 Russian base in Sevastopol make the Black Sea a treacherous terrain for a standoff between a sea power and a land power. Despite Moscow’s swagger, certainly alimented by the overstretch of US ground forces in Iraq and Afghanistan, Russia’s vulnerability in the Black Sea is evident. No wonder, Moscow has done its utmost to extend the controlled shoreline into Abkhazia and beyond.

The US has now apparently sent USS Mt Whitney into the Black Sea. It is a sophisticated intelligence vessel that will collect real-time data for the 6th Fleet. This has certainly prompted Russian vessels to leave Sevastopol and travel south. However, the solution sought by the West is political, not military. This is not the time to consider building deep trenches inside Georgia, or pulverizing Sevastopol’s Russian fleet, which could potentially ignite murderous passions among viscerally anti-Russian Crimea Tatars.

Western presence in Georgia is important. The times when CIA would foster freedom activity in Tibet, Hungary or Kurdistan and then abandon the failed uprisings are, hopefully, over. By electing a democratic government, curbing corruption and modernizing its economy, the independent country of Georgia has sent an unequivocal signal of desire to belong to international institutions. While Russia’s direct objectives appear open-ended and confusing, there is little doubt that Moscow has been trying to force the regime change in Tbilissi. In the current circumstances, this is unlikely, not only because there is no constitutional lever that could eject Saakashvili. It would simply be very difficult to find a Quisling or another sovietized former official like Shevardnadze in what is an openly democratic and independent country. But Russia has an impressive track record of “liberating” its neighbors of their independence and their freedom. Estonians still shudder at the memory of Kommissar Vishinsky who in 1940 stood on the balcony of 500-year old building in Tallinn announcing that Soviet Union had graciously “accepted” Estonians’ insistent demands to join the USSR.

In this context, the presence of Western military forces supplying Georgia either through Bosphorus or from the navy base in Constanza, could create a division not unlike in the bygone era of West Berlin. Like anything else in the world, this would be a temporary stasis, with no permanent solution until the day when energy prices will throw Putinism into the dustbin filled with historical parentheses.

One more word of caution. The conventional theater of war, comprising land, sea and air spaces, is only one of the possible arenas on which this conflict will play out. 21st century conflicts have other dimensions, notably propaganda war, cyberspace and the outer space. The Kremlin has been proudly proclaiming its indignation over Georgia’s alleged atrocities. This brings back the memories of condescending anti-Baltic propaganda in the 1990s (“these countries certainly have not yet ripened to become EU or NATO members”). This time, Russia’s propagandists went even as far as to forge, ex-ante, documentaries testifying acts of genocide by the Georgian army. Russia’s miscalculations and rhetorical machismo have now marginalized the potential impact of such narratives. But then again, the Madison Avenue spin doctors were equally unsuccessful in the Middle East.

On the other hand, Russia’s current capability to wage the operations in the outer space is unknown. But its intention and capacity to use cyberspace for war games has already been tested in the attacks on another NATO member – Estonia. There surely is more to come.

Sunday, August 24, 2008


The last two weeks have seen an astonishing re-emergence of the ‘coalition of the unwilling’. This accidental posse of commentators, literati, politicians and TV-watchers has questioned the West’s right to lecture Russia on its bellicose behavior. By this, I do not mean Russian citizens, most of whom have been galvanized into a strident brand of nationalism by this contemporary version of the 1853 Crimea War – a distracting remedy to internal problems. Unity is best achieved by invoking an external threat and the “victory” over Georgia amounts to the conquest of a territory that could find itself under NATO’s influence. Naturally, the resumption of control over the country formerly dominated by Moscow constitutes a significant boost for Russians’ nationalistic ‘pride’. But such largely monolithic reaction of a population deprived of plurality of views is not surprising. On the other hand, the coincidental alliance that some sections of the polarized West have established with Russian nationalists is well worth investigating.

Contrary to the belief entertained by some hand-wringing neoconservatives, this western relativism does not stem from a ‘post-modern condition’. In reality, it draws on a variety of sources, affecting three categories of people: the realists, the apologists of power and the Russophiles.

This category can be further subdivided into two groups: the ‘slicers’ and the pragmatists. The ‘slicers’ claim that the world is, de facto, divided into unquestionable spheres of influence – Western, Russian and probably Chinese. “There is nothing you can do to stop the Russian bear” – they claim. Russia’s army is strong, its position in Southern Caucasus is unassailable and the 150-year long dominance in the region warrants the supposed legitimacy of “its security concerns”. American meddling with Russia’s ‘natural’ sphere of influence is asking for trouble. After all, the United States would not welcome Russian interference in its own backyard – in the Caribbean, in Latin America or the Canadian Arctic. So when François Fillon, the French prime minister spells out his opposition to Georgia’s and Ukraine’s NATO membership, he cynically evokes “the balance of power between Europe and Russia”. Such re-readings of Yalta pact would have been unimaginable several years ago, but they seem remarkably salonsfähig at Matignon today.

The pragmatists are technical-military ‘experts’ who argue that America cannot afford to confront, simultaneously, the Middle East, Asia-Pacific and Russia. There is, indeed, much to say about the overstretch of the US Armed Forces in the Middle East since the colossal blunder in Iraq.

The realists also indulge in dismissing the “Cold War” metaphors. They emphasize that contemporary Russia, unlike Soviet Union, does not pose an ideological challenge to the West. And since Russia has embraced a cut-throat form of capitalism, it is no longer a rival. Such wishful thinking stems from poor understanding of Russia’s history. The Soviet period was simply a continuation of Russian expansionism which, as Eva Thompson once calculated, had swallowed, on average, 55 square miles per day between 1683 and 1914. This expansionist trend has now outlived its Soviet parenthesis.

The ideological argument is also wrong on another account. It is true that an all-pervasive statism no longer defines Russia’s economic system. The land has been privatized and income taxes are flat at 13%. But Russian state corporatism today is very different from Western-style liberal capitalism. The power of the Russian state is being served through various means, and it resorts to market mechanisms only when it sees fit.

What welds together the two groups of realists is a conviction that the US has been “too aggressive” in its approach to Russia. The realists buy into the mythology promoted by Moscow for domestic consumption, which argues that “the West humiliated Russia in the 1990s”. It also questions the seriousness of diplomatic efforts deployed to address Russia’s supposedly legitimate concerns over the positioning of American anti-missile defenses in the otherwise sovereign states – allies of the Unites States. Such critical views have, unfortunately, been emboldened by the US actions in Iraq.

The second group is constituted by the apologists of power, awed by the might and the performance of might. This group correlates with the politically conservative, though economically liberal circles – from Silvio Berlusconi to Anglo-Saxon market commentators. They claim that the West should recognize the inherent attractiveness of other great powers as markets, as trade partners and as investment destinations.

Indeed, profits and power make exciting bedfellows. To be sure, no other country has exploited this crass naiveté better than China. The fracture in Russia’s capital formation which occurred when Putin attempted to redistribute the spoils captured by the Yeltsin-era oligarchs alarmed many in the West. It appeared much less opaque than equally brutal, though much more dispersed dog-eat-dog infighting for assets within the Chinese Communist Party. To the West, the assault on Yukos was, in short, bad PR. But at every asset grab – from Yukos, to Sakhalin 2 and Russneft, from BP-TNK to Mechel, the Kremlin’s PR disasters are papered over by those who still hope to squeeze their begging hand through the fast closing door. Still, such reversions foil the very love affair that brings big business into the arms of authoritarian regimes – the single-minded focus on “stability”.

Undoubtedly, the speed with which fabulous wealth was accumulated in the 1990s’ Russia presented irresistible lure to foreign corporations and investment banks. By 2003, Russian investment conferences in London would attract thousands of delegates whose long faces hesitated only between the multiple zeros printed in glossy brochures and the long legs of blonde hostesses who graced the crowd with their rounded vowels and unmistakably rolled “r”. The tragically less attractive British matrons must have stumbled against a similarly demeaning scene at the Harrods’ in Knightsbridge, where the most successful and acquisitive of Russian women were putting the Albion’s wallets to shame. From there to the UK companies’ board decision-making, there was only one tense conversation in the executives’ upholstered bedroom.

But there was also genuine fascination with the “new frontier”. The combination of the unknown, the spacious, the grand and the potentially enriching was irresistible for the apologists of power and the apologists of size. Those Westerners who trace their national origin to a former empire thrive on the challenge of size. It is more exciting and more open-ended to plan an investment project in the boundless reaches of Siberia or on the overpopulated coast of China than, say, in Malawi or in Laos. But exciting as the prospect might well be, it is wrong. On a risk-adjusted basis, it is always better to be a big fish in a large pond than a small fish in a hypothetically boundless, but also by definition measureless pond. Yet these were the times when few of my Anglo-Saxon friends, buried for weeks in the Lesson 2 of “Russian for Busy People”, wanted to listen.

The ‘new frontier’ brand of power apologists brings us closer to the most convincing group of pro-Russian westerners – the genuine Russophiles. Although never as influential in Washington as Sinophiles who have shaped the disastrous US foreign policy vis-à-vis Beijing since the beginning of Clinton’s first term, the Russophiles are by no means a spent force. And nowhere more than in the capitals of Western Europe.

Russophiles – both professional academics and amateurs – point to the role that Russian culture has played over centuries, expanding and enriching Europe’s vast civilizational treasure. There is no denying that few other languages have bequeathed comparable literary wealth. And yet, fascination with cultural heritage should not equate with appeasement of aggressive foreign policy. This is just too big a judgmental leap. Our recognition of the superiority of Flemish paintings does not automatically lead us to support the division of Belgium. Does it?

The cultural attraction is real. The Gorbomania I witnessed in Western Europe in the late 1980s reflected as much the relief at the gradual removal of the oppressive military threats, as it showcased the pent-up demand for contact with a poorly known part of the world. Young Western Europeans discovered the subjective beauty of the Russian language and female students traveled to Soviet Union to taste the local culture, sometimes in its more extreme forms.

France’s historical fascination with things Russian has been well documented and favored by the nature of Paris-centered administration topped with a variant of a neo-absolutist regime. In the second half of the 20th century, much of this attraction was bolstered by the surprisingly resilient epigones of the French Communist Party and the left bank intellectuals’ visceral dislike of America’s cultural expansionism.

But the real threat to European cohesion lies today on the Spree. Germany’s egalitarian instincts, the country’s propensity to form collectivist models of administration, and its discomfort with market-based organization of exchanges has pushed the country into Russia’s hands on more than one occasion. If the physical connection between the Bolshevik Revolution and German proletarian revolution in the early 1920s was thwarted by Polish ‘bourgeois’ army, the eventual alliance between Hitler’s National Socialism and Stalin’s Russia brought unprecedented suffering to Europe and the world. Soviet Union’s colonization of Prussia after the 2nd world war proved also to be the most ‘perfect’ (in Eichmannian terms) epiphenomenon of Orwellian nightmare. Nowhere else was the penetration of security apparatus as deep and pervasive as in Staatsicherheit’s country. That was only 20 years ago, lest you forget. And if you do, watch the masterful “The Lives of Others”, directed by Florian Henckel von Donnersmarck.

As the purveyors of Europe’s most sophisticated intellectual tradition, Germans’ susceptibility to Russophile brainwash may owe much to their discomfort with America’s commercialized alternative. Many years ago a German woman told me about her ageing father who, after surviving Stalingrad, had spent 12 years in Russian Gulag with many other POWs. Married late and physically frail, he reacted with disgust at the post-Marshall Plan Americanization of West Germany, which accompanied an unprecedented “Wirtschaftswunder”. Ute remembered: “my father always said that, unlike Americans, Russians had real culture, a great culture”. Although this dramatic confession may have sounded like an outsized version of Stockholm Syndrome, the sentiment echoed Theodore Adorno’s disgust at the resilience of America’s popular culture after the exile of Frankfurt School scholars to the US.

When young German idealists fete today Barack Obama in Berlin, they see him not only as a refreshing savior from eight years of American unilateralism, but also as a liberator of a certain form of aggressive ‘market first’ dogmatism. A very attractive young German woman from a private equity fund complained to me recently at a party in Manhattan: “die jungen Leute in Deutschland verstehen einfach nicht mehr, wie Kapitalismus funktioniert”. Young people in Germany are, indeed, poorly prepared to play a decisive, leading role in the marketplace. Not only is their knowledge of credit markets and other asset markets poor. Their skill base may not be entirely geared up for the competition in the globalized marketplace. German SPD, a minority partner in Angela Merkel’s grand coalition builds its electoral base among these people. And Walter Steinmeier, SPD’s leader and current Minister of Foreign Affairs, occasionally sounds like a KGB agent himself.

There is little doubt that Russian security services are well implanted in Germany. Putin himself was for years based in Dresden and made a priority of wooing Chancellor Gerhard Schröder with his fluent German. Schröder’s major decisions in geostrategically pregnant energy field reveal as much fascination with Russia as personal greed and cupidity. But they have durably affected the aforementioned ‘balance of power’ in Europe, tipping it in Russia’s favor.

Sergei Lavrov, Russia’s soft-spoken foreign minister, addressed both the power apologists and the Russophiles when he flattered the large Western European countries in an article published in April 2007 in FT. He outlined Moscow’s vision of a “strong Europe”, with “strong Germany and France”, living in peace and harmony with “strong Russia”. This selectivity in Lavrov’s definition of what constitutes Europe was revealing. Europe’s unity has been, and will always be a threat to Russia’s monopolizing energy ambitions. Undermining the cohesion of the economic, political and military alliance that now binds Western and Central European countries and the US is the ultimate goal that this policy should help to achieve.

The condescending attitude towards the “smaller” nations is a trademark of Russia’s policy and its roots go back to the role that Russian chauvinism played in the former Soviet Union. When in 1988 a group of carefully selected Russian students visited one of the European universities, they were asked about the future of the Baltic countries. An articulate girl with a Lenin pin in her lapel responded confidently: “but those small nations would never be able to survive without us and without the sacrifices of the Russian people”.

The empire’s borders may have shifted now, but the smaller countries on the eastern fringes of European Union are often considered to be little more than poorly understood irritants. Western Europeans were never properly prepared to welcome these new members into EU. No major marketing effort was made to promote the accession to those for whom “Europe” was but a rump of four or five largest countries in the Western part of the continent. In fact, statistics revealed that only Austrians had visited the prospective new members regularly and uniquely among “Westerners” had a good grasp of European geography, realizing that Prague lies to the West, not the East of Vienna.

Not surprisingly, Russian propaganda falls on friendly ears when it pinpoints the culprits who dare to ‘destabilize’ the partnership between Moscow, Paris or Berlin. The villain of the day is Saakashvili, the ‘madman criminal’, but also American intransigence in encroaching on Russia’s near border, as well as Polish and Baltic anti-Russian adventurism. This is only a step away from brandishing a supposedly Euro-centric, but fiendishly anti-Anglo-Saxon card, so reminiscent of Vichy propaganda in the 1940s. Even if Moscow does not quite venture there yet – it is keen to divide Europe into the poodles (the “pragmatic” capitals of Paris, Berlin and Rome), the brethren (notably Greece, and Serbia) and the bulldogs (the irresponsible firebrands in the UK, Nordic countries, Poland and the Baltics).

The Baltic countries’ fear of Russia’s resurgence is often dismissed as paranoia and the Central European members’ close relations with the United States grate among Euro-centric intellectuals. Shortly before the accession of new members into EU, I recall watching a shocking TV documentary on German ZDF. A German academic morosely cautioned that the entry of Poland into European Union would bring an “American Trojan horse” into the community. This was not the language that the freshly liberated nations of central Europe expected from what they still idealized holistically as “the West”.

The dismissal of the new members as annoyingly pro-American spoilers reached its zenith in the run-up to the Iraqi war. France’s president Chirac famously dismissed the new members as countries that “ont raté une belle occasion de se taire” (they missed a perfect opportunity to shut up). Such displays of public arrogance reveal little more than frustration and a sense of impotence. Just ask Putin and Medvedev. Russian verbal onslaughts were equally disproportionate when Moscow realized that its diplomatic mistakes in Georgia had spurred Poland and US to overcome the differences over missile defense shields, to be now installed on Polish soil. Moscow’s harsh and unwieldy diplomatic efforts to turn Paris and Berlin against Washington over this issue have also had the opposite effect. There is something of a self-fulfilling prophecy here. Through perennial denunciations of external enemies, Moscow has succeeded in creating them.

Although our brains are better at detecting differences than similarities, continued exposure to distinctive features is necessary to keep our minds alert that dissimilarities do matter. Just like our sense of directions gets numbed if we move to a city with a regular checkerboard street grid, lack of exposure to various cultures, languages and viewpoints creates a comforting Gestalt illusion of homogeneity.

But it is time we recalled that not everyone on this planet shares the rationality taken for granted in the Western world. That rationality may not necessarily privilege the same freedoms, the same form of wealth creation and distribution, or the same ordering of collective versus individual identity, of rights and responsibilities.

Despite the Western (and mostly American) optimism of the last twenty years, the commercial decisions of other groups and nations may be little more than a tool to achieve very different objectives. Some of these objectives may clash with the Western values and the Western priorities. The politically correct mainstream fawners like Thomas “the world is flat” Friedman may fail to comprehend this. But when jingoistic “pride” is at stake, when the mythology of past “humiliation” is glorified as a unifying national dogma, when the groups who do not share the nationalistic identity are ruthlessly marginalized and ridiculed, then successful trade and investment fade as the main organizing principles. It was no different in the years leading to the First World War. Or indeed, during Germany’s post-Versailles “humiliation”.

American optimism and Western European naiveté are poorly equipped to deal with the Russian, or Chinese challenge. It is time we all accepted that rationality of even the most soft-spoken partners on the other side of the divide may differ radically from ours. At the end of a Hollywood-produced fairy tale, the hero is often applauded by a crowd, mysteriously familiar with his adventures. These days, few scripts without such happy ending are making it to the box office. But in the traditional Russian fables, the story line differs. The fox always eats the chicken.

Saturday, August 16, 2008


As human lives appear, act, interact and eventually perish, they invariably contribute to their immediate and mediate environment. The intensity of these interactions varies over time. Not surprisingly, social sciences have always suffered from inferiority complex, being unable model these interactions in a satisfactory manner. But there does seem be certain periodicity in the ways human constructs are transformed. Our experience tells us that, sometimes, “history suddenly accelerates”. And when it does, the consequences are dramatic.

At the beginning of 1988, Newsweek welcomed the 20th anniversary of the momentous events that had shaped the worldview of an entire generation of young people in Paris, Prague, Tokyo, Warsaw and America. The magazine complained that by late 1980s, the world had become a placid, almost uneventful place. It took less than two years to shatter that complacency. And soon after, we all celebrated “the End of History” and “New World Order”.

Fast forward. In March 2003, I was boarding a plane from New York to Tokyo. I landed in a different world, by which I do not mean a very familiar Narita terminal. During my long flight, the “coalition forces” entered Iraq. In the name of selective interests, Washington’s unilateralism critically weakened the international mechanisms that, until then, could claim to protect the system of values that promoted basic freedoms. The invasion of Iraq set the precedent of military intervention in the perceived “sphere of influence”. And although it was not immediately obvious to geographically challenged Americans, this colossal geostrategic blunder was to haunt Western dominance for years by underscoring that great military powers may write their own rules of engagement.

Last week, Russian military retaliated against Georgia’s clumsy attempt to reassert its sovereignty over a breakaway enclave. By resorting to military power beyond its borders, Russian actions highlighted the relevance of the three pivotal moments mentioned above: 1968 (Soviet invasion of Czechoslovakia), 1989 (collapse of the communist bloc) and 2003 (invasion of Iraq)

Postjudice will devote some space to the profound changes that this development portends for 21st Russia and for the immediate (and mediate) future of what now reappears to be - to use this allegedly anachronistic parlance – “East-West relations”.

In order to properly understand the context of the events that have shaken the world since August 8th, I will first outline the main historical events. This timeline will be a useful fact-finding reference for the future articles in the series.


Status quo as of mid-2008.
Republic of Georgia is an independent state south of Caucasus. It has been described as “western-leaning” since its democratic transition in 1993. Within its internationally recognized borders, it harbors two enclaves whose linguistically distinct populations have been clamoring for independence of Tbilissi since Georgia separated from the USSR in 1991. Throughout the 17 years of Georgia’s independence, Russia has taken on a role of protecting the enclaves from full incorporation into Georgian control. But the story is a little longer than that…

Kingdom of Georgia becomes a Christian state

Kievan Rus becomes a Christian state

Georgia controls all of Transcaucasia

Mongol invasions decimate the Georgian population

Georgia falls victim to conflicts between Turkey and Persia

Russia conducts annexation of Georgia and Azerbaijan

Russia annexes Ossetia, a Caucasus-straddling population which speaks a language belonging to Persian family.

Russia annexes Abkhazia, a linguistically separate group on the northeast shore of the Baltic Sea. Many local Muslims to flee to the Ottoman Empire.

Georgian Church is forcibly incorporated into Russian Orthodox Church

Russian forces struggle to subjugate other areas of the region, including Chechnya, northern Abkhazia and western Kabardia.

Georgia, Armenia and Azerbaijan create anti-Bolshevik Transcaucasian Federation.

Georgia declares independence

Bolsheviks invade Georgia and incorporate the country into USSR, first as a part of Transcaucasian Soviet Republic.

Abkhazia becomes “an autonomous republic” within Transcaucasian Soviet Republic. Russians and Mingrelian (western) Georgians immigrate into the area. Pontic Greeks are deported and Georgianization of Abkhazia proceeds under Lavrenti Beria, then the Secretary of the Communist Party in Georgia.

Georgia becomes a separate Soviet Republic. It includes Abkhazia and Southern Ossetia within its borders.

Ronald and Nancy Reagan visit Georgian SSR.

In April, a peaceful demonstration in Tbilissi is broken up by the Soviet troops. Several people are killed.
Inter-ethnic violence erupts in Abkhazia.
Violent clashes between pro-Russian Ossetians and independence-minded Georgians, led the former to proclaim Soviet Democratic Republic of South Ossetia.

In March, Georgia’s Supreme Soviet abolishes a short-lived autonomy of South Ossetia.
In November, in the first multi-party elections, Zviad Gamsakhurdia’s party beats the Communist Party.

Conflict erupts with South Ossetia. Ossetians conduct pogroms of ethnically Georgian villages. Moscow supports Ossetians against Georgian forces.
On April 6, Georgia declares independence from the Soviet Union.
In December, Georgia becomes a member of Commonwealth of Independent States (CIS).
Armed opposition launches a coup d’état to depose Gamsakhurdia.

In January, President Zviad Gamsakhurdia is deposed.
In March, former Minister of Foreign Affairs of USSR, Eduard Sheverdnadze becomes the head of the State Council.
Abkhazia declares independence from Georgia and war erupts between Georgia and the breakaway region. Reportedly, Abkhaz revolt is supported by Chechen mercenaries. 200’000 ethnic Georgians flee Abkhazia. The situation is complicated by government’s obsession with the presumed or real activities of Gamsakhurdia’s sympathizers.
In June, a ceasefire between Abkhaz rebels and Georgia leads to de-escalation of the conflict.
Dzhokar Dudayev creates a quasi-independent state in neighboring Chechnya.

End of the military conflict with Abkhazia. Georgia proposes autonomy for Abkhazia. Ever since, Abkhazia functions as a de facto independent state, but has failed to gain international recognition.
Between September and November, Gamsakhurdia tries to mount a military offensive against the government forces. Russia supports Shevardnadze’s troops in the conflict.

Georgia signs a cooperation treaty with Russia, authorizing Russia to keep three military bases in Georgia.
Russian army begins a two-year war in Chechnya and suffers heavy defeats.
Previously displaced Georgian refugees begin to return to Gali district in Abkhazia.

Eduard Shevardnadze is elected President of Georgia.

Georgia and South Ossetia end hostilities. CIS imposes restrictions on providing military equipment and assistance to irregular forces in the Caucasus.

In April, Georgian Parliament votes to threaten Russian army with loss of military bases if it failed to extend its control over Abkhazia. Russians appear to scale down their military presence in the Caucasus.
Aslan Maskhadov becomes president of neighboring Chechnya.

Fighting erupts in Abkhazia’s Gali district. Inflow of ethnic Georgians stops.

Putin is handpicked by Yeltsin as his successor. Second Chechnyan war begins.
NATO conducts military strikes against Serbia to force withdrawal of its forces from Kosovo. Non-military targets are hit during the aerial campaign.
Former Soviet satellites Poland, Hungary and Czech Republic become members of NATO.

In February, Russian troops capture Grozny, the capital of Chechnya.
In March, Putin wins presidential elections in Russia. Eduard Shevardnadze wins presidential elections in Georgia.
Russian authorities begin to distribute Russian passports to ethnic Abkhaz and Ossetian populations in Georgia.

In March, US-led coalition launches military operations in Iraq. Georgia will send a contingent of 2000 soldiers.
In November 2003, in a display of public revulsion against rigged presidential elections, Georgians rise in what was termed a “Rose Revolution”. Widespread corruption and the activity of Russian contraband in South Ossetia as among the targets of Georgian ire.

In January, Columbia Law School graduate Mikheil Saakashvili wins the elections to become the President of Georgia. He promises a vigorous stance towards the separatist regions of Abkhazia and South Ossetia.
In March, Lithuania, Latvia, Estonia and four other Eastern European states become NATO members.
South Ossetia and Georgia find themselves on the brink of war, but are dissuaded by their respective backers in Moscow and the West.
Sergei Karganov, head of Moscow’s think tank Council of Foreign and Defence Policy publishes “Farewell to Georgia” and advocates separation of Abkhazia and South Ossetia.
Several Eastern European countries, including the three Baltic states, become members of the European Union.
In December, Orange Revolution in Ukraine topples the pro-Moscow regime there and brings a western-leaning Viktor Yushchenko to power.

In January, Georgia presents in Strasbourg a plan for resolution of South Ossetian conflict. OSCE and the US would later support the plan.
Georgia offers a federal structure of government to Abkhazia.

In January, Russia cuts off gas supplies to Ukraine.
Georgian forces occupy Kudori gorge in Abkhazia and install a local government in the region. Russia’s foreign minister Lavrov labels Georgia a “Bandit state”.
Efforts to destabilize Georgia’s pro-Western government intensify: spying affairs, accusations over harboring of Chechnyan terrorists, trade embargoes, cuts of gas supplies, airspace violations.
In autumn EU agrees to negotiate a new cooperation treaty with Russia to replace the 10-year agreement, bound to expire in 2007.
In October, journalist Anna Politkovskaya is murdered in Moscow.
In November, an internationally monitored referendum in South Ossetia shows an overwhelming support for independence. It fails to gain support of the international community.
In November, Alexander Litvinenko is poisoned in London.

US proposes to set up an early warning radar in Czech Republic and an interceptor base in Poland as defense measures against potential ballistic missile attack from Iran. Russia vigorously opposes the move.
In January, Dmitry Medvedev, Chairman of Gazprom announces to business audiences gathered in Davos that Russia demands “respect, not love”.
In February, Putin delivers a watershed speech at Munich Conference on Security Policy, prompting strong reaction in the Western media which point to ‘cold war’ themes.
In April Russian cyberattacks target EU and NATO member Estonia after the authorities decide to move a Soviet-era monument to a different location. The response of Estonia allies is initially muted.
In November, fresh heavy-armored Russian troops appear in Abkhazia.

January 2008
Mikheil Saakashvili is re-elected President of Georgia.

February 2008
After eight years of EU administration, Kosovo declares independence. Russia opposes the move.

March 2008
Russia withdraws from the 1996 CIS arms embargo. Tbilissi offers autonomy to Abkhazia.

April 2008
Outgoing Russian President Putin announces opening of Russian “representations” in Abkhazia and South Ossetia to “protect its citizens”. Russia’s military reinforces the troops in northern Caucasus.
At a NATO summit in Bucharest, despite US and Eastern European support, Georgia and Ukraine are not offered an accession Action Plan (MAP), but are promised eventual membership.

May 2008
Russia’s railway troops appear in Abkhazia.
UN General Assembly adopts a resolution to allow Georgian refugees to return to Abkhazia.
Dmitry Medvedev is inaugurated as the new President of the Russian Federation.

July 2008
On July 4, the authorities of South Ossetia announce “general mobilization”. Russian military aircraft appear over Georgia. Russian Caucasus troops (SKVO) conduct military exercises. Regular reconnaissance flights over Georgia begin. Russia withdraws from Reagan-era Conventional Forces in Europe treaty (CFE).

August 1, 2008
South Ossetian separatists engage in exchange of fire with Georgian forces.

August 4, 2008
Five battalions of Russian army are amassing close to Roki tunnel – the only direct line of access between North Ossetia in Russian Federation and South Ossetia in the Republic of Georgia.

August 7 2008
Peace talks between Georgia and South Ossetia collapse. Georgian forces cross into South Ossetia and engage in intense fighting around South Ossetia’s capital Tskhnivali. South Ossetian refugees pour across the border into Russia.
US President Bush and Russia’s Prime Minister Putin are in Beijing for the opening of the Olympic Games.

August 8, 2008
Russian forces enter South Ossetia through Roki tunnel from North Ossetia.
Eastern European members of the EU call on Brussels to discontinue negotiations with Moscow over a new partnership agreement.

August 10, 2008
Russian forces occupy all of South Ossetia and begin incursions into Georgian territory. Saakashvili agrees to pull out Georgian forces and asks for ceasefire, but for most of the day neither Putin nor Medvedev can be contacted.

August 11, 2008
In Moscow, French President Sarkozy and Russian President Medvedev agree to stop the military confrontation. Prime Minister Putin, however, announces that the campaign should lead to “its natural conclusion”.

August 12, 2008
An agreement is signed, involving a vaguely stated “international mechanism” to resolve the conflict. Sarkozy travels to Tbilissi.
Despite the initial denials by Russian foreign minister Lavrov, Russian-backed military activity engulfs Abkhazia, where local forces re-capture Kodori gorge and force ethnic Georgians to flee.
In a show of solidarity with Georgia, the leaders of the three Baltic States, Poland and Ukraine join a patriotic demonstration in Tbilissi.
Russia’s financial institutions begin a massive sell-off of US credit instruments. However, the US dollar continues its rally.

August 13, 2008
Some 100’000 people are being displaced by the conflict. Russia continues to operate within Georgian territory, targeting airfields, Georgian coastal guard, and controlling key communication lines.
US commits humanitarian aid to Georgia and airlifts begin.

August 14, 2008
Georgian Parliament votes to withdraw from CIS.
After many months of difficult negotiations, Poland accepts US anti-ballistic missile batteries in exchange for security guarantees and short-range protection of its airspace.

August 15, 2008
US Secretary of State Condolezza Rice visits Tbilissi.


This lengthy list of historic events has not yet led to what Mr Putin deems its “logical conclusion”. But it is necessary to increase the level of understanding of the complex nature the developments that have led to the most serious geopolitical shock since the fall of the Soviet Union. This understanding is lacking. Western media often insinuate that the “markets should pay attention to the conflict because of the oil pipeline that transports Caspian crude to the Western markets”. Yet this is but a sideshow in the broadening conflict.

The levels of ignorance are bottomless. Dennis Gartman, author of a popular daily market commentary distributed to hedge fund clients around the world, blundered pathetically when he compared Russian retaliation to a putative American reaction in case of Mexican intervention in the US state of New Mexico. There is just too much that separates the history outlined above from President Polk’s annexation of New Mexico and the subsequent purchase of its remaining territory. Postjudice assumes that not everyone wants to cultivate his/her ignorance and hopes that the introduction above will prove useful in our future discussions on this topic.

Sunday, August 10, 2008


"China has stood up"
Mao Tse Tung (Chinese dictator and poet)

Last night, during the opening ceremony of the Olymipic Games in BJ, China stood up many times. And then it crouched. And then it stood up again. The martial order of the show was somewhat intimidating in size, but this must have been more than an artistic accident. And so, the symbolic cheap Chinese labor kept standing up and kept crouching in celebration of 2008 years since the birth of Jesus Christ, you would naturally be forced to think. There were 2008 stood-uppers and 2008 crouchers, 2008 dancers and 2008 tai-chi masters in white pajamas. Christians around the world can be proud of China’s final acknowledgment of the superiority of Christian tradition and Christian calendar. Because for the revolutionary China it is barely 60 years of recurrent ups and downs.

A friend of mine who lives in one stunningly beautiful corner of Europe has recently complained to me. “Why all the focus on China’s human rights, all this menace spewed from the media? It’s enough. It’s not nearly as threatening as al-Qaeda, is it?”

I suppose that as of recent the Western media have, indeed, been saturated with alarming images from both seasoned and overnight “China experts”. The reason is simple. With the (telling) exception of Tibet, foreign journalists are, temporarily, allowed to travel outside Beijing and engage in interviews with the local people. This is an exciting prospect, given that just about all the people that the regime wanted to remove from the capital have, indeed, been sent away. Some of them are, apparently, holed up in ‘re-education camps’ and therefore not accessible at all. But the very concept of freedom to explore the ‘other’ China without a special permit must be thrilling for Chinese speaking foreign journalists. But don’t you worry – the special permits will be introduced back again once the Olympic gala is over. Hence the sudden media focus on the brutal and self-destructive aspects of China’s changes. Some of the testimonies from the locals are revelatory, as for example one registered by an FT journalist yesterday: “China has been invaded and bullied by you too much. Much of our wealth was robbed by Americans and Japanese (…). We Chinese are very friendly”.

Still, the question whether rabid nationalism numbering hundreds of millions of souls in the Far East is more, or less ‘dangerous’ than religious nihilism of 10’000 potential terrorists with their ideological roots in the Middle East is an intriguing one.

Since 2001, the Western world has been obsessed with the terrorist threat emanating from the Middle East and in particular the Manichean branch of aggressive neo-Wahhabism. Large boreal and eucalyptus forests have been chopped down to exhibit, on paper, various putative hypotheses for the rise of religious extremism in the Muslim world. Less space has been devoted to equally bigoted, though arguably less immediately destructive rise of fanaticist Christian, Hindu or Judaic movements and to their political influence. In direct or indirect consequence of their ‘preachings’, lobbying and communal activism, much destruction has been wrought on innocent populations of Iraq, Gujarat or West Bank. Muslims, rather than Islamist terrorists, have often become the victims of these tragic spillovers. But nearly seven years since the telegenic drama between West Street and Church Street of Downtown Manhattan, it is the Muslims who have born the brunt of murderous actions spurred by pseudo-religious indoctrination, which had laced this monotheistic creed with alien theses of Evil Incarnate and perverted versions of Jihad.

This is not to say that the extremist Sunni no longer pose a threat to the world peace. The drift in Iraq and Guantanamo has certainly contributed to the rise a new generation susceptible to fall under the spell of eschatological fanaticism. John Cloonan, an FBI expert recently confirmed in his testimony to the US Congress that a catastrophic ‘revenge’ against the US was, in fact, “coming”.

Terrorist threats do not exhaust the litany of fundamental cultural, behavioral and economic differences between the theocentric Muslim and secularized Western societies. And, with oil prices remaining stubbornly above $100 per barrel, it is very possible that the Middle Eastern wealth will allow the rulers to marry their non-Western lifestyles and dress codes with ultra-modern, if superficial, urbanism and addiction to luxury.

In which, they will eventually join the Chinese exceptionalism.

Whether the Middle Eastern countries mount a geo-strategic challenge to the Western set of values – spelled out in the sacrosanct rule of law, free flow of information, freedom of association, self-determination and electoral or direct democracy – will depend on how adept they are at pushing the button of self-victimhood. Defining their collective identity in terms of “rights” inherited from the suffering of previous generations does little more than feed a sense of grievance and appetite for revenge. But it blocks successfully the attractiveness of the “values” as defined above.

One can shrug off small nations’ claims to real or imaginary past of persecution. But when large nations or former empires fall victim to such destructive propaganda, the world should listen. When Soviet Union was falling apart in 1991, a Moscovite I knew tried hard to rationalize what Mr Putin later famously labeled as the “greatest catastrophe of the 20th century”. Galina stuck to her conviction that the empire continued to exist in the imaginary borders of Stalin’s expansionism. Painstakingly, she went to great lengths trying to explain to me that there were still no borders between Russia and Kazkakhstan or between Russia and Ukraine. And indeed, Ukraine was, in her words, but a borderland, a nation on the fringe of the great Mother Russia, not a separate nation.

Lack of political will to redefine Russia’s place on the world’s map from a neo-imperialistic entity jealous of its “spheres of influence” into a modern nation embedded within a functioning network of partnerships is, as I am writing this, beginning to claim lives in what is quickly becoming the first international military conflict in Europe since 1945. Despite a complex ethnic and political situation in South Ossetia, the Russian Goliath should not expect much sympathy from the West, nor will it receive any from Postjudice.

Russian intervention in Georgia illustrates that the cherished illusions of national victimhood and imperial nostalgia bring little more than human tragedies. The affluent West has learned this lesson - from the Dutch obstructionism in Indonesia to the French brutality in Algeria. But contrary to the claims of anti-Orientalists and their left-wing aficionados, imperialism has not been an exclusively Western phenomenon. What has kept the Russian and Chinese imperialism different and in many ways more durable was their unwillingness or incapacity to project seaborne military power. Instead, the Russians and Chinese states forcefully co-opted and then populated the vast swaths inhabited by very distinct populations. In both cases, they could not help looking down on the exotic populace, labelling the locals, respectively, as inorodtsy (“those born different”) or yemanren (“the wild ones”). With a sense of racial and cultural superiority, actual military might and an economic surplus that facilitated extraordinary fertility of the dominant ethnic group, Russian and Chinese states crawled outward and remained more resilient than any of the “colonial” empires built by the Western nations. The so-called Russian Far East – the only part of East Asia durably colonized by the white man, and the Chinese rule in Turkic and Tibetan parts of Central Asia are the main remnants of that past expansionism, long ripe for an overdue historical correction.

The danger that my European friend severely underestimates is that the last sentence of the previous paragraph will generate an instant reaction in the arteries of a nationalistic Russian or Chinese reader. His or her adrenal glands, located just above the ‘Chinese’ or ‘Russian’ kidneys will have instantly released hormones into the bloodstream, potentially deregulating the bodily electrolyte balance. Their limbic system, which originally evolved to evaluate smells, will have been activated and their indoctrinated minds will create an absurd wall of emotional rejection. “It is ours!”, exclaimed angrily a Korean friend of mine a decade ago, referring to a disputed rocky outcrop somewhere between Korea and Japan. “Tibet is part of China”. “Crimea is part of Russia”. The imaginary walls of nationhood flare up easily, but are doused with utmost difficulty.

Self-victimhood, nationalist nostalgia and theories of humiliation are historically selective and have to overcome many contradictory historical facts and counterfacts. This is true of nationalisms everywhere. Many Israelis prefer to claim that the first two Aliyas brought their ancestors to what was then an “empty” land. Hindutva nationalists would selectively extend the historicity of their claims beyond the Vedic culture into the Indus Valley’s pre-history, even though it bears no relation to the Sanskritic heritage and defies the claims to indigenous sufficiency of the “Hindu” culture. Serbian leaders plunged their subjects into a national tragedy by trying to overcome the contradiction between the populist claims (Serbia is where Serbs live, e.g. Bosnia) with historical grievances (Serbia is where Serbia once historically was, e.g. Kosovo). Interestingly, all these nationalists emote for the past humiliations and the officialdom often glorifies them. Serbs actually lost the much celebrated battle of Kosovo in 1389. Russians celebrate the overthrow of “Latin” (i.e. Polish) rule in Moscow – an episode (1610-1612) virtually unknown elsewhere and hardly meaningful in light of the horrors that Russian and Soviet expansionism wrought on various nations of Europe, Caucasus and Asia in the following centuries. And in China, there is even a special National Humiliation Day, not yet explicitly referring to any specific failure, with some hesitation between commemorating the Opium War (1840-42) and Japan’s invasion of Manchuria in 1931.

Since the Tienanmen massacre, revanchist nationalism has been the Chinese Communists’ favorite bulwark against the insidious influence of Western values. Young Chinese are now more aware of the historic “humiliations” and are quick to list a myriad of grievances encapsulated in the self-serving term bainian guochi (“100 years of national humiliation”). Anything that does not conform to the nationalist dogmatism will “hurt the feelings of the Chinese people” – be it a foreign movie, a comment by a foreign newscaster, an athlete wearing a protective mask in Beijing, a company employing a film star critical of China's support for the Sudanese regime. This thirst for respect is open-ended as so are the continued demands for expressions of guilt. Both desires can never be fully satisfied and are easily frustrated. The paranoia over China’s “rightful place” cannot be easily reversed. Regrettably, historic parallels indicate that there are only two ways out of this cul de sac – large scale re-education or a national calamity. The former is impractical for the current regime and could undermine its own position. The latter is simply too apocalyptic to muse on it here.

Both groups - Chinese nationalists, who suffer from this unattainable aspiration to superiority, and poor madrassa kids, whose intellectual horizon will be confined to Qur’an, Hadith and Sirah, remain inherently insecure in their own self-image. Both groups are oversensitive to any semblance of slight and are prone to overreaction. Their ultimate goals may be diametrically opposed – hyper-materialist in one case, escapist in the other. But the relative success of both is steadily eroding the outreach and influence of the “Western” values, generating a genuine dilemma for the decision makers of the free world. Especially for those decision-makers who see beyond their immediate commercial interest and have decided not to sweat like pigs in 90 degrees Fahrenheit among the stands of an otherwise grandiose Beijing stadium.

Saturday, August 2, 2008

USA or Unequal Socialism of America

I recall a moment after climbing Kilimanjaro. Three days after the conquest of the snowy peak, we were at a local airport. The sizable parking lot was entirely filled with white Toyotas – mostly vans or 4WDs. When I pointed out this extraordinary market saturation, my friend, from Charlottesville, VA replied dismissively – “better to be a small operator in a large market than a large player in a small market”. We disagreed because our assumptions of what that ‘small market’ was differed. For him, it was Tanzania. For me, it was the non-American “rest of the world”. And in the rest of the world, American cars, and indeed, American products are hard to come by these days.

Last Friday, the market capitalization of General Motors fell below $6bn. Meanwhile, Toyota’s market cap is $147bn, thank you very much.

It has been a year since the then oddly dubbed “subprime” crisis broke out. And just as the dotcom bubble at the beginning of the century spread fast beyond the dotcoms’ arithmetical share of 6% of total market capitalization, the “subprime” credit – originally only 14% of total securitized mortgage debt – has proved contagious enough to drag the entire US credit system (and beyond) down the bottomless pit.

For the readers living in net-creditor economies, this last paragraph could elicit little more than a shrug. Credit? Unless you launch your own business, why would that matter, you may ask?

In the US, your credit record counts more than your criminal record or your blood type. If you ever immigrate here, by default you end up with a presumptively “negative” credit record, because you have none to start with. In other words, you are presumed guilty until proven trustworthy. It won’t matter that you have stored your wealth in a Swiss bank or in a loco London gold account. You won’t be able to get a credit card, or lease a car. That is particulary painful if you originate from a wealthy country, say, Australia or Norway. On the other hand, should you arrive from a poor, immigrant-sending country, your own local ghetto will already have a support network, with enough Salvadorian, Pakistani or Filipino bank clerks in your community to facilitate access to credit lines. In larger Chinatowns or Little Indias, banks with familiar names from your home country will do it for you. And somehow, in an economy in which “credit history” is a defining feature of your probity, righteousness and trustworthiness, you will muddle through. It does help a marginal immigrant with no initial income, as it helps a low income, US-born family. Unfortunately, the system also creates a set of expectations that affect economic behavior of people who, in light of their actual income, should not be able to live beyond their means. And yet, access to credit will, with time, make the American Dream possible…

Now this whole system, based on consumption generated from credit, rather than saved income is on its last legs. Not long ago, my American friends were laughing at some European statistics which indicated a falling housing stock in Germany. Such a “contraction” was beyond comprehension for Americans whose entire banking system was anchored in perpetual expansion of the housing market. A veritable ipse-dixitism has ruled here for years: “home ownership is good for you just because we say so”. It certainly is true for those who can afford it. But preaching the gospel of universal home ownership to the entire population created an unsustainable paradigm of anticipatory and eventually dysfunctional economic behavior. This unsustainability was revealed in aggregate data – for several years, growth in consumer demand outpaced growth in incomes. Ever larger houses, ever further away from workplaces, attracted oversize cars to humongous parking lots surrounding monumental shopping centers: Home Depots, Costcos and Wal-Marts. America grew, enriching export-oriented economies in Asia and elsewhere and helping boost their central bank reserves to $5.4 trillion. But this growth was financed with debt and asset sales, not with productive income generation. Spend today, worry tomorrow.

For years, the American consumer purchased and digested so much that the current account deficit required at some point over $3bn in capital inflows into the country per day. Astonishingly, the economy that had stopped producing anything of value for its trade partners shifted gears up, through exploding domestic consumption that reached an unprecedented 72% of GDP. But this consumption was never predicated on income saving. Indeed, the creditor economies’ addiction to saving first and spending later was ridiculed in the official dogma. The fast growing economies of USA and its loyal disciples (Ireland, UK, Spain) based its expansion on unprecedented level of asset-based “saving”. In the case of the US economy, one should rather point to dis-saving, as net equity extraction from real estate reached 9% of disposable income. Not surprisingly, the level of debt has now soared to unheard-of levels – 350% as a percentage of GDP! This is debt recycled in all exotic, opaque, convoluted ways. No wonder, the infectious ripple hit the alphabet soup of products (ABS, MBS), monoline insurers and fraudulent vehicles (SIVs) saddled with the most toxic of credit products.

At the center of it all were entities enjoying implicit government backing – Freddie Mac and Fannie Mae. As it has now been made evident, both cooked their books for years, waving goodbye to their executives with parting bonuses worth several multiples of tens of millions of dollars. Quite why the executives of a notorious Houston-based energy company were once persecuted is, in this light, unclear. Until you realize how internally corrupt the financial system and their Washington backers really are.

But there is a darker side to Freddie and Fannie shenanigans and the ultimate government bailout announced two weeks ago. Out of nearly $1 trillion of Freddie and Fannie debt held overseas, almost $400 billion remains in the hands of China, which recently opted to purchase more of these “agency” products, rather than US Treasuries. Mr Putin and his Petrorussia hold another $100 billion. This very fact, unsavory as it is, may have precipitated the decision to shift the pain over to the US taxpayer. The US taxpayer not only carries the burden of ultimately saving the corrupt financial system, but is also expected to salvage poor investment strategies of nations that can hardly be labeled Washington’s allies and whose resurging neo-imperialism threatens the sovereignty and prosperity of neighboring countries – Georgia, Ukraine, Taiwan or India’s Arunanchal Pradesh.

Now Fannie and Freddie will be able to borrow from “Feddie”, the central bank. The Treasury will have the authority to purchase equity in these two “companies”. In the process, the risk has been transferred, yet again, from the shareholders to taxpayers, in the form of socialism for the wealthy. All this to keep the lending system going, in a false hope that the rescued skeletons of their former glory will now relax their credit standards and push the overextended American borrower back on the spending binge.

A decade ago, a Korean friend of mine complained about Bretton Woods institutions’ mantra repeated ad nauseam in crisis-stricken Seoul: “liberalize, liberalize, liberalize”. In the midst of a liquidity crisis, unfettered free market dogmatism was supposed to avert the economic plunge in Korea, Indonesia or Thailand. But Washington failed to walk the walk. Yes, we knew it from the way the US administration always protected its airline, banking or farming sectors against foreign competition. But the current apex of hypocrisy will make it all the more difficult to resume any of intellectual stewardship over the global economic affairs, not to mention moral authority.

Optimists hope that the legendary flexibility of the American taxpayer, consumer, investor and citizen will bring the country back from the brink. Probably, but this time it may take a while. The tax receipts are falling, consumer is running out of the handout doled out earlier this year, the investor is bruised after the relentless selling pressure in the property markets and securities (especially the earnings-poor, but still dominant financial sector) and the citizen raises doubts about the very efficiency of the system. The tax rebate offered to American consumers earlier this year simply prolonged the agony of buying on credit. Perversely, the politicians expected the overextended consumer to do just that – spend that money, rather than brace for more difficult times ahead and do the unthinkable – begin to save!

The US consumer is simply too indebted to meaningfully pull the economy as s/he repairs the frayed balance sheet. Those who counted on a quick turnaround in US current deficit have been disappointed. It is not enough to flash a weak dollar to save the trade account, even though the recent collapse in imports has been helpful. A tour around this marvelous country will quickly convince you that there isn’t much left of a manufacturing base here, and what America does have in surplus and for which it could command a premium on the world’s markets – coal, grains, natural gas – cannot be easily boosted for export due to lack of adequate infrastructure. It is, therefore, not surprising that the external deficit has been stubbornly sticky at 5% of GDP. Things could even get worse; the weak dollar may not offer a refuge for much longer because the currencies of most of America’s trade partners are now too strong and should weaken correspondingly.

Out of the population of the United States, some 90m people live on less than $40k a year. Half of them do not have health insurance. These people need income support, not a mirage of their own “home”. Many of them have nothing to even start saving from. But income distribution is a taboo among the so-called “conservatives”. They contest the above figures with another one – average pre-tax earned income (some $49k), which has risen 11% over the last seven and half years (except that hourly wage growth has been slowing down since 2006). But it is income per capita – which includes pensioners and children – that has not moved this year. Meanwhile, energy and food prices have jumped. Indeed, Sara Lee, Kellogg and other producers of packaged food are only now starting to pass on significant price pressures to the consumer. There is more to come.

Income inequality is another favorite statistics of the so-called “liberals”. And indeed, it is difficult to refute that mean incomes have grown faster than median incomes, which surely supports the thesis of rising inequality. Even if politicians are loath to call the spade a space and avoid the dreaded R-word, the losers of this game will find it more onerous to withstand the headwinds. In 2001, during the last Recession (and named by this horrifying term), Americans received a tax cut and were still able refinance their mortgages. Now the tax receipt hole is so cavernous that a significant tinkering would give vertigo to the most profligate of legislators. Meanwhile, the credit standards have skyrocketed. Forget about buying a house. Today you may find it difficult to finance a car lease – even if you enjoy permanent employment and a healthy “credit history”. As a percentage of GDP, new credit creation has fallen to the lowest in 14 years. Lowering the Fed funds rate by 3.25% (and discount rate by another 75%) did nothing to de-bottleneck the credit system. The prevailing level of private sector rates is where it was when the crisis began a year ago. No wonder that consumers’ expectation indexes are their lowest since the records began in 1944.

But this is not a country where pessimism pays back. Just ask Jimmy Carter… Prophets of false dawn are aplenty. Last May, most investment bankers ridiculed the fear of inflation and cheered on the allegedly upcoming relief from fiscal stimulus and bank recapitalization. The Dow was back at 13000 and so the headaches seemed over. Certainly, we have seen some rallies over the last year, but they were all caused by government intervention: lowering interest rates when Bear Stearns hedge funds collapsed, setting up new liquidity facilities when the BS eventually folded, and, finally, promising to buttress the failed Freddie and Fannie, effectively doubling the national debt. With each bailout, “profits are privatized and losses are socialized” to use the formulation of one well-known economist.

In an effort to rescue the banking system, the Fed has covered the banks with the manna of liquidity – mostly Treasuries. Historically, these instruments were deployed against cash or pledges embedded in other government-backed paper. Not so now. This lending is “secured” by banks’ paper of dubious quality. Something that overseas Sovereign Wealth Funds, having now suffered significant losses on their investments in US financial sector, are no longer willing to do.

Yet, for all those Anti-American leftwingers, religious fundamentalists and pet nationalists worldwide, I caution against too much Schadenfreude. The US consumer cannot be easily replaced. As I noted previously, in prime time, s/he is worth over $10 trillion dollar, versus $6.5 trillion in Eurozone and $2.5 trillion in Japan. Those whose strategy bet on “rising Chinese demand” are having a rude awakening. The developed economies still account for 70% of the world’s GDP. Even if China were to maintain its current rate of growth, it will take it a decade or more to catch up with Japan. It will be too late to save General Motors and its abominable Buick limos which somehow still sell in Chongqing.

But don’t give up hope. Having bailed out the corrupt financial institutions, the government may yet bail out General Motors and Ford. Their products may be obsolete, but GM has more pensioners to feed than the entire US Army. If Moroccan university graduates can expect the government to “guarantee their jobs”, if Pakistani investors can expect the regulators to “rescue their investment capital”, and if Parisians can expect the government to perennially protect public sector jobs, then may be Americans should also adjust their expectations to the government’s willingness to “help”. Certainly, you do not have to be a professional anthropologist to understand that Washington has already made its non-market choices.

Lesson 1: Certain assets, like housing, should only go up in price. Others, like oil or commodities, should only move down. It is therefore perfectly acceptable to support the bubble in the former and manipulate the market accordingly. But should the commodity prices, for whatever reason, rise – then call a congressional hearing session or find a scapegoat. Lesson 2: Do nothing when the oil price slumps by $25 within 10 days (surely a move of that magnitude within such a short time frame must be caused by “speculation”, n’est-ce pas?). And thus, such short-term tampering plods on, further distorting what has been left of the ‘free market system’, ostensibly in the name of ‘saving the financial sector. SEC has now banned ‘naked short selling’, but only for 19 best-connected financial stocks. The entire blogosphere is wondering: “why only these 19?”

All this may immerse you in dark, morose bleakness of pitch-black, somber, saturnine gloominess and dreary, depressing doom. But you know what? The hard-working people in this country just don’t see it this way. Just look at these pictures and you will understand why. Brazilians may, in fact, have a cidade mais maravilhosa do mundo. But Unequal Socialism of America still spans over the most wondrous chunks of this planet.

Happy Holidays!