Arktika

In 2007 two Russian mini-subs, Mir-1 and Mir-2, dived over 4,000 metres below the Arctic Circle to plant a titanium Russian flag, and so launched a primitive claim to the geological treasures at the top of the world. In highly Bond-esque fashion, the subs were supported by Mi-8 helicopters and the Rossiya, Russia’s most powerful nuclear-powered icebreaker.

The exploit was criticized by the then Canadian foreign minister as ‘15^th century’ buccaneering but won the three Russian expedition leaders the medal of ‘Hero of the Russian Federation’ (they were accompanied by a Swedish scientist and an Australian adventurer).

The episode highlighted how the scramble for rare places (we wrote about this in 2021) – the Arctic, Antarctic and outer space, are becoming strategic theatres in a world of great power rivalry. As much was emphasized in 2011 when then Secretary for State Hilary Clinton attended the Arctic Council meeting in Nuuk, a hitherto obscure club, to strengthen America’s commitment to the Arctic.

In that context, it is no surprise that the Trump administration has discovered the strategic importance of Greenland, although there is not a single mention of it in the recent National Security Strategy document. The White House might have asked nicely and had its way to place listening stations and missile batteries in Greenland, but instead the President has banalised his office and his country, and placed in jeopardy the most important geopolitical alliance of the past twenty years.

In doing so he has proven my ‘Rule of Unravelling’ which states that in the post globalization era, all of the constructive institutions and values of the globalized world will be stress-tested, in some cases to breaking point. For instance, the UN is invisible and impotent, and the most sacred of American institutions, the Federal Reserve, has come under a full-frontal attack in recent months. NATO it seems is next.

In most European capitals, especially those with large professional armies, there is considerable doubt that, under the Trump administration, the US will be a reliable ally. The immediate implication is to change the calculus that underpins any security guarantee for Ukraine, and indeed the process by which Ukraine will eventually become a member of the European Union.

Europe already significantly outstrips the US in terms of the extent to which it funds Ukraine (relative to GDP, Denmark is the biggest donor), but the intent of this aid will now have to become more lethal, in terms of what Ukraine can do with the arms provided to it, and craftier, in terms of the ways Ukraine can work with European armies to upset Russia’s war machine.

More broadly, there is also growing chatter that NATO is defunct, and will in effect be replaced by a European army (the Spanish foreign minister, amongst others, called for this last week).

A first step here might be an augmentation (and accelerated implementation) of the EU SAFE (Security Action for Europe) program that allows member states to borrow to fund military equipment for joint use, especially where the bulk of that equipment is made in the EU. Canada is a member of the SAFE, and stupidly the EC made it all but impossible for the UK to join. But, US arms manufacturers will have a hard time selling in Europe.

An EU army could very easily be put together around the structures of existing cooperation agreements, and of course, the structures that have been put in place by NATO. Yet, there is still a considerable amount of work to do however on optimizing collaboration in areas like cyber warfare, intelligence sharing and logistics infrastructure (the EU aims to create a ‘Military Schengen’ by 2027).

The aim of such an army would be the defence of European interests and territories, which in practice takes aim at Russia, but can be broadly interpreted to also cover counter-terrorism, space and the deep seas. In the context of the spat over Greenland, the composition of such an army could encompass elements that are not traditionally classed as military activities, such as economic war, but that in a total war world, might be part of the greater arsenal.

In Europe, the response to each crisis is to create a ‘Union’. In the same way that the euro-zone crisis led to the idea of Capital Markets Union, Europe’s ‘neo-con’ moment may produce a ‘Defence Union’, but unlike CMU, there is now a deadly sense of urgency. To my mind, it is still not at all clear that Europe’s political leaders are ready to command a large, capable military machine.

In a recent note ‘Year of the Riposte’ and in a talk at University College Cork with Prof. Andrew Cottey (‘Europe under Siege), I highlighted the litany of challenges that have been put to European leaders by the White House, China and Russia. In every case, the response has been a mixture of panic and a floundering search for compromise. Europe still dances to the tune set by Trump and others, as the Greenland fiasco has shown.

For example, in an underestimated speech at Davos, Friedrich Merz told the audience that ‘he gets it’ on defence and security. Yet, military procurement and recruitment are inefficient and sluggish.

Europe’s leaders have not yet passed the test set out in our recent ‘Riposte’ note ‘the litmus test for Europe in 2026 is to stop reacting to the disorder that others sow, but to build a positive narrative around the EU, and critically to riposte in a meaningful way against its adversaries’.

Soon they will have no choice, In 2019, Emmanuel Macron boldly stated that ‘NATO is brain dead’. It is now.

Have a great year ahead, Mike

Persepolis

In October 1971, a time when Mao ruled China, Brezhnev was in charge in the USSR and Nixon president of the USA, Maxim’s, the famous Parisian restaurant closed for two weeks so that staff could prepare the restaurant’s greatest order – the feast organised by the Shah of Iran to celebrate the 2500th anniversary of the establishment of the Persian empire by Cyrus the Great.

The Shah’s celebration became known as the greatest party of all time (Life magazine called it ‘the party of the century’) and became highly controversial for its lavishness. For instance, nearly 300 red Mercedes were used to ferry guests around a large, tented city and in the end Maxim’s and other establishments sent some eighteen tonnes of food to Iran. Waiters had to open and taste all of the bottles of Chateau Lafite Rothschild 1945 for poison. Many of the world’s royal families attended, as did a range of social and political figures from Grace Kelly to Tito to Haile Selassie, to Imelda Marcos. It’s perhaps no surprise that this display of excess was followed a few years later by the Iranian Revolution.

The spectacle of the Shah’s party, his ties to foreign governments and the cruelty of his secret police and a drawn-out recession contributed to months of protests in the late 1970’s, which then led to the Revolution. One of the best accounts of the Revolution is a somewhat accidental one – Desmond Harney’s excellent eyewitness account of the revolution “The Priest and the King.” At the time, Harney worked in Tehran. He had been ready to leave Iran on vacation, but for work-related reasons he remained, and then witnessed the eruption of the revolution around him.

My other Revolution-related thought is of former Ayatollah Khomeini, who, on disembarking the Air France aircraft that took him back to Tehran on the outbreak of the revolution, was asked by ABC anchorman Peter Jennings how he felt about his return to Iran. “Nothing. I feel nothing,” was the alleged response. It gave a pointer as to the austere image Mr. Khomeini wanted to portray and of his cold single-mindedness. The fact that the man who translated Khomeini’s comments, was executed three years later, was another clue as to what would follow.

The regime that Khomeini created has outlasted many others – perhaps only the late Fidel Castro and especially so the late Queen Elizabeth II of England have seen as many US presidents, German chancellors, among others, pass on and off the world stage. While Iran has until recently been a dominant player in the Middle East from a geostrategic point of view, it has, to be polite, not been an economic success.

Thus, in keeping with the template of revolutions, high prices, scarcity of food and fuel, and a broken economy, are triggering protests across Iran, that have become so vast, that expectations are growing that Iranians may eject their leadership. That moment may not be too far off, but the path to an Iran that benefits its people remains a difficult one.

Not only are its geriatric rulers stubbornly cut off from its people and the outside world, they have historically, to a worrying extent (this was especially the case under former prime minister Mahmoud Ahmadinejad), relied on heightened tension with the US, Israel and other ‘enemies’ for political oxygen. Also, economically, Iran is like Russia in that most of the assets and resources in the economy are held by a small number of people (IRG, business owners, clerics) who form a sclerotic elite around the theocrats. Breaking their hold on the economy will be difficult, even under a new regime.

Neither is regime change obvious. The name of the Shah’s son Reza Pahlavi is circulating widely (in the West) as a possible figurehead, but the story of the ‘greatest party’ and the memories of his brutality are at least two reasons why he will not lead a ‘new’ Iran. At the same time, it is not obvious what individuals or groups might replace the regime, if it came to that.

A further complication is that Iranians are highly distrustful of interventions from abroad, indeed some people joke that Iran is the only country in the world where MI6 is still considered to be a force to be reckoned with. Military intervention by the US or other states may not be welcome.

The EU is slightly less distrusted than the US and the UK, and it should take a more active stance – in terms of further sanctions, asylum for the hundreds of young people who have been jailed, organise the supply of communication technology into Iran (VPN’s, satellite technology), and potentially begin to plan to assist and shape a transition process.

Iran has been weakened economically by sanctions, humiliated by Israel and had its military capability enfeebled but sadly, the state still has an array of resources with which to repress its people.

My sense is that the brutal repression in Iran will continue now (with very little visible public support in the US and Europe), and the economy will weaken further. An opening may come when the Supreme Leader, Khamenei dies – he is 86 and suffers from cancer. This event could provide the cover for a discrete but meaningful shift in policy, and the start of negotiations on sanctions and Iran’s nuclear program, and the beginning of a more promising era.

Have a great weekend ahead, Mike

Praefectus

Benjamin Jowett is one of the prominent figures in the long history of Balliol College. Jowett, a scholar of Plato and university reformer, was Master of Balliol from 1870 to 1893, where one of his preoccupations was the production of upstanding young men who would then populate the civil service, and in particular who would be sent to ‘run’ India (Jowett favoured a thorough grounding in Greek and Latin as preparation for this task).

It is an understatement to say that India suffered under British rule, during the colonial era (roughly 1700 to 1947) which was marked by the activities of the East India Company, India’s share of world GDP fell from 26% to 4% (after the Second World War). It is still recovering today.

To draw the obvious comparison with Venezuela, which is apparently now to be run from Washington in imperial style (will Marco Rubio be referred to as the Praefectus of Venezuela?), it at least does not have to worry about having its economy destroyed, the revolutionary socialist governments of the past twenty-five years have done a good job of that. Rubio is not made in the mould of Jowett’s scholars, but he speaks Spanish, which will be useful. A knowledge of finance will also be handy, to tackle the mountain of debt that Venezuela owes.

In a week where the American president has been scurrying around like a giddy child opening Pandora’s boxes, the strategy for Venezuela is not yet clear, and it could go very badly wrong, especially if the factions within the current Venezuelan regime start to disagree violently.

The apparent upside is Venezuela’s oil reserves and refining capacity, but this will take a long time and much capital to realise. Indeed, the process of extracting and monetising oil, and driving this wealth into an economy is something that few economies have mastered.

In this regard, the idea of ‘Dutch disease’, a concept that initially referred to the effect of large gas finds on the Dutch economy, is well known, and colloquially, it describes the way the presence of natural resources can (negatively) skew the economic development of a country. Angola, which has been described as a ‘successful failed state’ for the way it has managed to extract and process oil, but does little else, is an example. Nigeria, Russia and of course Venezuela are other examples.

To their credit, the Gulf economies are good examples of states that have used the wealth generated by natural resources in a very ambitious way, whilst top of the league table are Canada, and Norway. Norway’s sovereign wealth fund is the benchmark for many others, and it bears imagining what the UK could have achieved by channelling the wealth from North Sea oil and gas reserves into a sovereign wealth fund from the 1980’s onwards.

If there is a distinguishing factor across the relative success of the above nations it is the rule of law (and its associated values – policy clarity, strong institutions, and enlightened decision makers). The concept of the rule of law (I can recommend a book of that title by Tom Bingham, formerly Lord Chief Justice and Master of the Rolls and like Jowett a Balliol alumni) should be clear to most readers, but its benefits are even more apparent when it is taken away. In this regard, a comment from a US oil company executive regarding investment in Venezuela (in the FT) to the effect that “No one wants to go in there when a random f…g tweet can change the entire foreign policy of the country’ is illustrative of the benefits of the rule of law. Similarly, threats by President Trump to curb the dividend policy of defence companies, and institutional ownership of housing also contribute to policy uncertainty.

World institutions like the IMF and World Bank have produced tons of research demonstrating the link between the rule of law and growth, and stability. Yet the world that ushered in these institutions and globalization, is crumbling, vandalised by ‘world kings’ (Boris Johnson’s phrase) who act in an arbitrary way. Germany’s President Frank-Walter Steinmeier made an important speech to this effect last week.

The litmus test of this view will be the flow of capital. For the moment, the market view seems to be that ‘world kings’ get things done, and markets are reacting in kind. However, there are looming risks, notably the diverging values between the White House and Europe.

If world leaders were stupefied by the raid on Caracas, there was near hysteria in Europe at the suggestion by President Trump and his advisers that the US would annex Greenland. Though the initial reaction from politicians and commentators across Europe was perhaps overblown, there is a gulf between the American view of the White House’s foreign policy, and that of allies, and in the medium to long term this growing lack of alignment and trust will prove damaging.

Have a great week ahead, Mike

2026 – Year of the Riposte

In foreign affairs, the great surprise of 2025, has not been tariffs or the geo-politicisation of AI, but the flipping of American foreign policy to apparently align with Russia, jettison the rule of law, tolerate China, and as our recent, prescient note underlined, rediscover Latin America (‘The Land Full of Vibrancy and Hope’). The ‘exit’ of Nicolas Maduro further undermines the rule of law and reinforces the view of a ‘spheres of influence’, where the bad are emboldened and the good are imperiled.

The big disappointment has been the slow, meek reaction of Europe to the above, the low point of which was the reference to Trump as ‘daddy’ by Mark Rutte, former Dutch prime minister and now NATO chief. Indeed, 2025 might also be described as Europe’s ‘neo-con’ year, when its leaders were mugged by the reality of strategic competition, and more specifically the mendacity of Vladimir Putin and the election of Donald Trump.

There are several strands to this. The first is the shock at the delivery of the message that America (the ‘White House’) is in effect dis-engaging from Europe and shattering the idea of the ‘West’. From the shambles of the Munich Security Conference to the communication of the National Security Strategy, there is still a shock felt across the continent to the change of direction that the White House is pursuing. A notable sign of this is how, in the post-Brexit world, Britain has become much closer to Europe on security and defence and is in the lead on strategy around Ukraine. A consequence of America’s ‘flip’ of this reaction, which I feel is not yet appreciated in the US, will be a much reduced willingness to buy American goods and services.

In practical terms, the new geopolitical climate is revolutionising defence spending in Europe. The Baltic and Nordic states, as well as Poland, are all increasing defence budgets amidst warnings of a future confrontation with Russia. Most notably, Germany has cast aside its debt brake to target Eur 1trn in extra defence spending in the next decade, and the EU’s Eur 150bn loan facility has closed its loan round. Europe is now in effect in a three year scramble to build defensive infrastructure, and there is also growing talk of more offensive (i.e. cyber) actions against Russia.

Beyond the manner of the delivery of US diplomacy there is a mixture of anger and confusion in Europe at the stance of the White House. One is the apparent untethered nature of US diplomats like Steve Witkoff, his alleged closeness to Russia and the peace deal proposals he has concocted. This has caused concern because of the time, energy and political capital that European leaders have had to spend (with Ukraine) counteracting the US/Russia proposal.

A second source of ire is the apparent support by the White House for far-right parties in Europe – the AfD, Reform in the UK and the Rassemblement in France – all of whom have proven ties to Russia, all of whom hold 30% or more in opinion polls and all of whom are in direct opposition to governments in the three largest European countries.

It is also worth noting that the tension provoked by the White House has not brought Europe any closer to China – the perceived dumping of Chinese goods (electric vehicles for example) in Europe, and China’s support of Russia’s war in Ukraine are two major sticking points.

One relative bright spot on the horizon is that growth is beginning to pick up across Europe – bank lending is expanding, unemployment already low and lead indicators perking up. In that context it is likely that growth surprises to the upside next year. One great challenge, which has dropped from the policy limelight in the context of the focus on defence, is the Savings and Investment Union (old Capital Markets Union), and this is an essential part of the policy landscape in the coming year.

Looking ahead, across individual countries, there is now a consensus view in the UK that Sir Keir Starmer could be toppled as prime minister by his Labour colleagues (Wes Streeting is favourite to take over, and another Blairite Yvette Cooper, cannot be ruled out either). A recent YouGov poll showed Starmer to be the most unpopular prime minister in the past fifty years, and Rachel Reeves is the most unpopular Chancellor. The only European leader who is further adrift in the opinion polls than Starmer is Emmanuel Macron.

Macron, it seems, has given up, and in France the political debate bypasses him and is steadfastly focused on the next presidential election which should take place in May 2027 though it is not impossible that an attempt is made to unseat him in 2026. The election to watch is in Hungary, where the pro-Russia/anti EU prime minister Viktor Orban is behind in the polls to Peter Magyar’s TISZA party. A return of Hungary to the pro-EU ‘fold’ would be welcome and would constitute a blow to Russia.

To that end, and in the context of the damp squib that was the last EU summit, the litmus test for Europe in 2026 is to stop reacting to the disorder that others sow, but to build a positive narrative around the EU, and critically to riposte in a meaningful way against its adversaries. Greenland might be an early test.

Have a great week (and new year) ahead, Mike