Taking Sides

A number of the leading scientists and philosophers of the 20th century – from Karl Popper to Per Bak for example, have spent time thinking about how systems evolve and break down. Their insights are useful today, as globalization disintegrates, and we wait to see ‘what’s next?’.

In the systems literature, frameworks that have become outdated or failed to evolve are undercut by often events. Per Bak framed this as a heap of sand, collapsing when a marginal grain is added. It is not the marginal grain of sand that leads to the collapse, but rather the growing instability of the ‘system’ over time (the fall of communism is an example).

The crisis around Ukraine is yet another grave case, and it helps to clarify several things – the erecting of another barrier to trade from west to east, the arrival of new geopolitical constellations and a deeper cleavage between the democratic and non-democratic worlds. The day after the invasion of Ukraine, the German foreign minister stated ‘we have woken up to a new world’, but the fact is that ‘new world’ has been in the making for some time.

We have seen other tests in recent years – the subsuming of Hong Kong’s democracy, and the many lessons that need to be learnt from the coronavirus crisis, notably the triumph of humanity and medicine and the failure of governments to collaborate. Taken together they point to the end of globalization, or rather the ‘way we lived’ for the past thirty years.

While there is a growing debate on this important topic, the risk is that politicians, commentators and policy makers remain cosily attached to the idea that globalization can continue and will suffer jolts to their consciousness of the sort that Vladimir Putin is administering. There needs to be a sharp focus on the ‘what’s next?’.

The chief element of the post-globalization world will be the emergence of a multipolar world, where instead of a singular (Anglo-Saxon) way of doing things, rival value driven approaches will emerge in Europe and China, to complement the American approach to political economy. The idea of a multipolar world is incidentally something Vladimir ascribes to, though beyond a powerful army his country has few of the ingredients – a strong economy, financial system or soft power – required to sustain a geopolitical pole.

The picture that emerges is of a more frictioned (i.e. higher inflation or less lowflation), fractured world, and regular readers will know that I have laboured this point!

What is new is that companies, financial institutions, international institutions and individual countries are being forced to choose sides as political-economic tectonic plates pull apart. The striking example is the Nordstream pipeline. The SWIFT payments hub could be another.

The deeper the crisis in Ukraine, the more (or less) wedded governments will be to alliances and values, and eventually the clearer the geopolitical map of the 21st century becomes.

For example, Japan has sanctioned Russia but China stands by it. India, a long-time ally of Russia, is an odd example of a democracy siding with a ‘strongman’, something that will cause tension in its relations with the US and UK. Poland is another example – this crisis and the security imperative it brings may present a chance to mend the differences it has with the EU over ‘values’. Turkey could play an important strategic role, and might ‘come back onside’.

Switzerland, which has potentially terrific financial power over wealthy Russians and Russian commodity dealers, has done little, and the quid pro quo for this may be a much tougher attitude by EU and US regulators to its banks. Internationally, fintech companies and payment firms will have to be more careful where, and with whom they do business.

In general, many large companies have tiptoed around widening diplomatic divides, will increasingly have to choose sides, not only with respect to Russia, but China too. This will be especially the case for those in strategic industries – semiconductors is the prime example, and for large multinationals with business ties to China (e.g. Apple). The flip side of geopolitical risk for large corporations is that in some cases, they feel it necessary to deepen relationships with governments, in strategic areas like AI and data.

On this point, the team at the excellent Longview Economics point out that the asset values of two of the actors that have undermined American democracy (Facebook/Meta and the Russian state – rouble etc) have collapsed in recent months.

In that respect it must be hoped that within political systems, there is a hardening of views around the sanctity of democracy, and that politicians on the payroll of foreign governments in the UK, US, France and many other countries (Africa as well as we noted last week) face sanction. It is also to be hoped that the funding of political parties by outside actors is scrutinised and penalised in a tougher way. In Russia itself, and perhaps more so Belarus, any signs of mass opposition to the invasion will be welcome.

As a final point, to all those European policy makers mugged by reality, is to think about what the new world should look like, and provocatively to think how they can turn events, such that in ten year’s time, Russia is applying to join the EU.

Have a great week ahead,


The Man on Horseback

In 1962 Professor Samuel Finer published an original book entitled ‘The Man on Horseback’ a text devoted to the role of the military in politics, notably in the case of the military dictatorships of the time, and the prevalence of coups d’état. A few years later (1968), another ‘indispensable’ text, Richard Clutterbuck’s ‘Coup d’État: A Practical Handbook’ appeared.

That these two now classic texts on coups d’état appeared in the 1960’s speaks to the impact of the Cold War on poorer countries in Africa and Latin America, the willingness of mercenaries and world powers to supplant leaders to suit their own ends, and to the lure of mineral and commodity wealth.

To stay with the sixties, in 1966 there were 7 coups d’état in sub-Saharan Africa alone, followed by a cluster over the next decade, and this trend then petered out in the late nineties as democracy and globalization spread through the world.

What is new, and relevant today is that in the past year we have seen a rash of coups d’etat in sub-Saharan Africa (the highest number in over twenty years). Reflecting this France has announced that its anti-terrorism force will leave Mali – which itself has seen two coups in the last year.

This outbreak of coups is mysterious, certainly from the point of view of the French, and I am sure has the ingredients of a good spy movie. Some of the coups are driven by age-old factors – the venality of life long rulers, the negative side-effects of corruption and mineral wealth.

There is also, in some countries an undercurrent of dissatisfaction with democracy (surveys from Freedom House or the Mo Ibrahim Index suggest this) and the temptation of strong man ‘managed democracy’. In general, academic work shows that the success of coups depends on the international reaction to them, so the fracturing of the world order creates an environment that is arguably more permissive for coups.

There is also a more troubling trend, which in past notes I have discussed under the banner of ‘The Scramble for Africa’, after Thomas Pakenham’s book that detailed how the colonial powers despoiled Africa. The same is happening today, at the hands of mining companies, Russia and China (whose investment led conquest of Africa is well documented now).  

In particular, the incursion of Russia into Africa, very often at the expense of France is a noteworthy trend and one that remarkably, the French have not aggressively pushed back at. It takes many forms – in 2019 the first Russia-Africa Summit was held and a year later Russian arms companies Rosoboronexport were doing billions in arms sales in Africa (rest assured that Western arms companies are doing even more).

The chief element in Russia’s Africa strategy, is the Wagner group, purportedly a mercenary company with very strong links to the Russian security establishment. They are present in Burkino Faso, Mali, Libya and notoriously so in the Central African Republic (CAR). Oddly enough, there is a close correlation between the occurrence of coups, and the presence on the Wagner group, (to add balance many of the coups in question have been led by younger army officers with Western counter terrorism training). At very least we can say that the Wagner group is capitalizing on instability.

In the light of Russia’s current attempt to terrorise Ukraine, the incursions of the Wagner group across Africa and the Middle East (Syria) suggest that there is a new chapter in the Great Game (you must read Peter Hopkirk’s book), where large powers spread resources across continents in a strategic power game (the Horn of Africa has at least thirteen military bases). Russia, arguably emboldened by the behaviour of Western nations, is spreading its geopolitical reach, largely I suspect to bolster its leverage through mischief, and also to harvest strategic resources (i.e. commodities).

The great loser here is Africa. Foreign intervention, the ‘coups epidemic’ and the breaking down of democracy and institutions makes Africa weaker – economically and politically – and a source of angst to neighbouring regions (i.e. the flow of emigrants to Europe).More broadly, we discuss coups, we cannot avoid the ‘nearly coup’ in Washington last year, an event that highlights the fragility of even the greatest of nations and democracy. In that respect, the wildcard political event might be a coup of sorts in Russia, should Mr Putin miscalculate over Ukraine.

UnGraceful World

There is a cottage industry of people looking for signs that the Russian army is going to spring across its borders and attack Ukraine – evidence that the ground under foot is less muddy, groups of medics armed with blood supplies making their way to field hospitals on the border and the traipsing of Russian boats through the Black Sea. The latest warnings from Washington underline these developments.

The real signal however, was that a few days ago Vladimir Putin’s superyacht ‘The Graceful’ left the Blohm & Voss shipyard in Hamburg, which in its early days saw the construction of the battleship Bismark. That the ‘Graceful’ set sail for home suggests that the Russian President does not want one of his toys to fall under the scope of sanctions.

Last week, the image of the French and Russian presidents at opposite ends of a long, white table dominated the front pages. Putin has a habit of managing the ergonomics and choreography of meetings, usually arriving very late.

In 2014 Merkel had to wait 4 hours to see him, in 2012 Viktor Yankovich also waited for 4 hours, Shinzo Abe waited 3 hours in 2016 – interestingly, and this might tell us about Putin’s psyche – the two visitors who have only suffered a very short wait were royals, King Juan Carlos of Spain (20 minutes in 2006) and Queen Elizabeth II (14 mins in 2003). In addition, Putin likes to make his guests uncomfortable, for example bringing a dog to a meeting with Angel Merkel, who has a fear of dogs.

The reams of commentary on the meeting focused both on Putin’s psychology and on the role of Macron.

On Putin, the quip from the French statesman Aristide Briand that ‘people think too historically. They are always living half in a cemetery’ is worth considering in that Putin seems to think and act in the ‘blood and iron’ mindset of the late 19th century, an approach that today is brutish and dangerous (fittingly Bismark noted that ‘not through speeches and majority decisions will the great questions of the day be decided…but by iron and blood)

Macron is potentially more difficult to fathom than Putin. Despite the widespread belief that he is being played by the Russian president, the aspect that people underestimate most in him is that he is a risk taker. Moreover, he is singularly the only European leader with strong and coherent ideas, and political energy, on the future of Europe. What has however troubled some other European politicians (especially the Baltic and Eastern European ones) is that Macron deigns to speak for them.

In this respect, Macron is taking advantage of the poor design of European foreign policy – it has been expressly set up so that it does not have one single voice, or as Henry Kissinger put it – ‘who do I call if I want to speak to Europe?. In effect, Macron is solving Kissinger’s dilemma in that he is setting himself up as the go to person for the likes of Anthony Blinken, but he is not regarded by Europeans as the ‘voice of Europe’.

In that respect, the role of the EU’s foreign policy commissioner is one that is designed not to pronounce a singular voice. He or she (rarely a top flight, independently minded politician) is kept at a safe distance from power, usually imprisoned in an airplane (for instance in 2011, Javier Solana, the EU foreign policy chief flew over 430,000 miles, over three times that of his American counterpart Colin Powell). That is not to say that EU foreign policy is itself neutered, it’s just very complex, and designed to be at the mercy of large countries with a taste for foreign policy, like France. It is also game theoretically difficult to agree on a common foreign policy stance across twenty seven countries, at speed.

Yet, in policy areas where there is a very specific competence or topic – trade and Brexit are two good examples – the EU can be focused, competent and show solidarity across member states.

The question from here is whether stress tests such as the tension around Ukraine force a structural change in EU foreign policy, in just the same way that the euro-zone financial crisis catalysed a much better organized approach to EU economic and financial policy. Here, there are some tests ahead.

First there is an emerging pragmatism, especially around security operations where (the evacuation of Kabul was an example) missions are undertaken by ‘coalitions of the willing’ instead of having to cobble together a common stance across 27 countries. For military operations this approach is quicker, and enables cooperation with the likes of the UK, Denmark and Norway.

Second, assuming that there is no ‘hot’ conflict in Ukraine, there is a need for deep dialogue between the Baltic/Eastern European states on one hand, and France and Germany on the other. This dialogue may also become mixed up in the bigger debate around European values.

The Ukraine crisis is also a ‘discovery’ moment for Germany and its new chancellor in terms of his shameful ambivalence.

Thirdly, in areas where foreign policy becomes mixed with ‘megatrends’ like climate security, cybersecurity and data protection, the EU will have the time to take a more considered and deliberate approach.

As I send this note it is not clear what could transpire next week – I will grant that the US and UK are in control of the international PR battle, but the troubling private feedback from Macron’s visit to Moscow is that he found the Russian president more pre-occupied with history and more belligerent than ever before.

Ne vous mêlez pas du pain, II

I will not forget the moment I realized that the COVID epidemic was upon us, as it spread from China, then through Italy and the rest of Europe, and the lockdown came upon us. At the time I thought the lockdown might take two weeks, but in effect it has lasted two years (so much for my forecasting ability). That period has done so much to alter societies, economies and our outlook on the world. To a large extent, it has also scrubbed away some of the trends and memories of the immediate pre-COVID period.

Looking through my notes this was a period of very unusual strength in markets and economies – the stock market kept pushing new highs on near record low volatility, whilst the global economy was coming to the end of the longest expansion in modern economic history. There were, however, signs of distress under the bonnet.

In mid to late November 2019, I wrote two notes entitled ‘Ne vous melez pas du pain’ and ‘Demonstration Contagion’. In one, I flagged the sound advice that Robert Turgot, the 18th century French economic thinker and administrator gave to Louis XVI regarding food prices and unrest. It was good advice, which the King did not heed.

In the other, I highlighted ‘a remarkable outbreak of protests across a range of countries – from riots in Honduras, to ongoing tension in Hong Kong to climate related demonstrations in India’. At the time, the number of Google searches on the world ‘protest’ was at a five year high.

Granted the ‘hiatus’ of the coronavirus the question that I want to pose is whether, with inflation barreling forward at multi decade highs, unrest and discontent return (recall that some weeks ago we wrote that high inflation is a gift to populists) to break the general obeyance of the coronavirus period, and what kind of policy response this begets.

As context, for example, in the UK post tax incomes have dropped by 2%, the biggest fall since 1990. Housing affordability in the US is at extremes, and in parts of Europe inflation is out of control. So, in general we may be confronted with a world that, for some time, executes policy for political reasons, very much against the strictures of the textbooks.

Here are some thoughts on the likely fallout.

First, I can see a situation where central bankers face derision (or even more derision as some cynics might have it). As we noted last week, Jerome Powell’s Fed has got the inflation call badly wrong, and individual governors have demeaned the institution through their personal trading.

In Europe, the ECB deserves especial attention. Their record on inflation and rate forecasting is so appalling it is dangerous, driven perhaps by the fact that very few of the ECB governing council members have any experience of industry, finance or investing – occupations that might otherwise condition people to change their minds when proven wrong. If you take a peak at the photos of the ECB governors it a strikingly homogenous group, though even less diverse in the way they think and act.

The tardiness of central bankers in combatting inflation means that for the next year, households will face rising rates, high prices and a negative wealth effect. This cocktail should be enough to turn public attention towards the Fed and the ECB tower in Frankfurt. In Europe an added element of complexity is the divergence of growth and inflation across euro-zone countries, and the unwillingness of euro-zone central banks to use macro-prudential policies to rein in inflation. In time we will also see central bankers dragged before senate/parliamentary committees to explain why they have allowed the inflation genie to escape.

As central bankers grow increasingly uncomfortable under the glare of public opprobrium, politicians may decide to ride heroically to the rescue of households. For instance, in the past few day’s governments in Ireland, the UK and France have issued compensation payments to help people pay energy bills. One estimate I have seen suggests that with this ‘cushion’ the effective rise in electricity prices for French households is only 4% compared to an underlying 45%. When we recall the Gilets Jaunes (a movement triggered by higher fuel prices) and the coming presidential election in France, the logic for such a move is clear.

The risk is that these measures simply sustain inflation and create a greater dependency on governments.

Another, more inventive avenue may be a re-appraisal of fiscal policy broadly in the sense that it can be used is break down bottlenecks in supply chains and in ownership structures. Here one important outcome from the ‘inflation crisis’ may be a greater policy focus on breaking down monopolies in industry and consumer goods, concentrations of ownership in property markets and an increased investment in critical industries like semiconductors.

In the meantime, markets are shifting to the next phase of the ‘inflation’ trade. With equities having had a very sharp initial sell-off, the worry now is that credit risk begins to rise – this is dangerous because it translates directly in the real economy and will continue to undermine other asset classes. Inflation may fall as this occurs, though for some time people will continue to pay ‘high prices’. When growth and wealth fall, there may be ever more discontent, and we might be back to 2019.

Have a great week ahead,