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| Image: Independence Square, Kiev, Ukraine - Credit: Sasha Maksymenko License: CC BY 2.0 |
Russia’s military intervention in the Crimea and perhaps
more widely in the Ukraine will have longstanding consequences for government
in Britain, and the impacts will be felt far beyond the Foreign Office and the
diplomatic service. Six implications for British government are immediately
obvious. In order from the shortest to the longest terms, six implications of
the Russian occupation of the Crimea can immediately be identified for British
government having to do loans, distractions, gilts, gas, missiles and boots and
finally containers and pipes.
Loans
At the very beginning of March 2014, Mr Hague, Britain’s Foreign
Secretary flew to Kiev, the capital of Ukraine, very quickly after the Russian
military operations began in the Crimea. The full agenda of his talks with the
government in Kiev are not known, although clearly he pressed the new
government to stop provoking Russia with discriminatory laws on the Russian
language.
But it seems
reasonable to wonder whether one item that the new and desperate government in
Kiev might have wanted to raise with Mr Hague will have been money. And that
means money right now. Bluntly, the Ukraine is all but bankrupt, and those
words “all but” could well have to be deleted in two or three weeks. Once the
country ceases to be able to pay civil servants, police officers, soldiers and
others who provide vital services, the country could collapse very quickly and
then almost certainly Russia would move in to fill the vacuum. So the Ukraine
needs loans urgently. But from whom? Now that it appears to be sliding toward
conflict, it is therefore sliding out of the condition in which it would be
appropriate for the International Monetary Fund to lead the assistance. For the
IMF’s job is to help reconstruction in peacetime. The European Union would like
to help. But it cannot move quickly. Someone else needs to step in immediately
to tide Ukraine over until the EU can agree a package of support. In principle,
when there is unity in Washington, the US can move quickly. But unity in a
scarcer commodity in Washington now than money is. And anyway US lending might be
seen in Moscow as provocative, even as an escalation. Britain is hardly wealthy
at the moment, and its own debt-to-GDP ratio is hardly the most impressive in
the G7. Even if such an idea would survive the morning editorial meeting at the
“Daily Mail”, the British government is in no position to make loans large
enough to sustain the Ukrainian state for more than a few days and even then on
an emergency basis. But in these desperate circumstances, to try to prevent a
situation in which Russia would be able to justify taking over all of Ukraine,
bringing its troops as far west as the Romanian, Hungarian, Slovak and Polish
borders and bringing refugees pouring into those countries, some very, very
short term British assistance might be worth considering, as a stop gap until
the EU can put loans on to a more sustainable basis.
Distractions
Mr Hague’s attention is understandably likely to be given
over almost entirely to the Ukraine for the next few weeks. More generally, the
time available for foreign affairs in Number 10, in the Treasury, across the
Foreign and Commonwealth Office, the Department for Business, Innovation and
Skills and the Department for International Development will be distracted from
other countries about which Britain cares.
One country that
could find itself in a worse position as a result of Britain’s distraction is
Bosnia-Herzegovina. In February, while twenty public leaders from
Bosnia-Herzegovina were taking a month-long course that I designed for them
with us at Queen Mary in London, a series of violent protests broke out in
cities and towns across the Federation of Bosnia-Herzegovina. The expression of
popular dissatisfaction with the condition of the economy, with high
unemployment especially among young people, corruption and insufficiently
accountable party political elites was beginning to galvanise opinion in the
chancelleries of Europe. Britain has been playing a constructive role in
calling for a new EU initiative toward Bosnia, and Mr Hague is one of the few
foreign ministers in the EU who has recently shown much interest in the
country. If even he now has little time to devote to the country, then it will
lose one of the few voices in the Council of Ministers in the EU who remains
willing to work toward some fresh engagement with Bosnia’s imbrangled problems.
Because Bosnia’s position is pivotal for the whole of the western Balkans,
inattention to its difficulties runs risks for the whole continent.
Gilts
When armies move, markets panic, risk premiums rise or even
soar, oil prices rise, stock markets plunge, money flees from risky assets
toward gold and oil and toward the bonds of those countries which are regarded
as safe havens. In the Treasury and especially in the UK Debt Management
Office, no doubt modellers are slaving hard into the small hours over
spreadsheets to calculate scenarios for the effect on the costs of servicing
British government debt. Will British gilts be one of the assets regarded as
safe enough to attract hot money? Or will the possibility of a stand-off between
Russia and western countries lead investors to worry about Britain? After all,
Britain is already heavily indebted; it will incur additional cash costs as a
result of this crisis (see below); the Scottish referendum is beginning to
cause jitters in the markets. It is too soon to tell which is more likely: the
first days of trading after the Russian army moved into the Crimea appear
encouraging, but this small movement of money into sterling assets including
gilts may not last. As the implications of the crisis for global demand and for
the British tax base become clearer, some volatile swings in British bond
yields are quite likely, and the Treasury and the Debt Management Office will
be thinking hard about whether or not to rush forward or postpone the rolling
over of expired gilts.
Just before the
Ukrainian crisis, the Bank of England had allowed one of its monetary policy
chiefs to talk in public of interest hikes beginning in the spring of 2015.
Russian armoured personnel carriers may well have brought that date forward by
some months. And an increase in bank rate will have implications within a few
weeks for the yields on Treasury gilts which the taxpayers must pay to attract
investors to induce them take the government’s debt.
Gas
For all the wild talk in some quarters, Europe is in no
position to impose economic sanctions on Russia even if it wanted to. Germany
and Poland need Russian gas, especially now that Mrs Merkel has announced that
Germany will withdraw from dependence on nuclear energy following the Fukushima
disaster. Much of that gas travels on pipes running through the Ukraine and
civil servants in every energy ministry across Europe are rapidly having to
become experts in the measurement of pressure in those pipes as they snake from
the Russian gas fields toward European factories and homes.
In the medium
term, though, the Ukraine crisis will surely cause Europe generally and Britain
in particular to put renewed effort – and, yes, that inevitably means more
taxpayers’ money, either directly or in the form of guarantees – in pursuit of
reduced dependence on Russia in gas and, to a lesser extent, oil. Even before
the Russian army began to deploy in the Crimea, Britain was in urgent need of
investment in new electricity generation plants, if we are to avoid rolling
blackouts in a few years. Before March 2014, the policy priority was to find a
technology that was not in decline (unlike North Sea oil and gas), affordable
(as nuclear energy rarely is and wave energy still is not) efficient and
scaleable (as onshore wind and biomass are not), capable of being introduced
quickly (as nuclear energy is not) and capable of securing public acceptance
(as hydraulic fracturing of shale gas may not be). Now that greater
independence matters much, much more, the imperative has changed. Now Britain
needs to choose just which mix of expensive, inefficient, slow-to-arrive, deeply
unpopular, and environmentally risky or dirty options it will invest in, and must
accept that, in various different ways, the taxpayer will have to stand behind
much more of the private sector investment if it is to get done at all. The day
to day fiscal consequences will not be large immediately, but the measure on
the government balance sheet of what accountants call “contingent liabilities”
– that is, money that might have to pay out if things go wrong for the energy
generation companies – will quickly start to look ugly.
Missiles and boots
Since the fall of the Soviet Union in 1991, British defence
reviews have consoled the politicians and the taxpayers that the “new world”
after the end of the cold war would be one in which money would be better spent
on boots and small arms for special forces and divisions of flexible marines, on
cyberwar defence, on counter-insurgency, on humanitarian interventions, than on
big missile and anti-missile shield programmes, nuclear warheads, submarines,
massed tanks and on Arctic and satellite early warning stations. Small rogue
states and global terrorist movements were supposed to be the main enemies.
After the Ukraine crisis, this will look dangerously complacent. Whenever or
however Mr Putin eventually hands over to a successor, Britain’s defence
planners must now prepare for another generation or perhaps two in which Russia
will represent as big a strategic threat to western Europe’s security as she
did in eighteenth and nineteenth centuries, when, as now, Russian nationalism
rather than communism inspired her leaders’ policies. In those centuries,
unlike the period from 1945 until at least Stalin’s death in 1953, western
Europe was rarely at risk of invasion and enduring occupation by Russian
troops. But Russia can and presumably will again be a strategic threat in many
other ways.
Preparing for
this will be more expensive for the British taxpayer than the defence spending
forecasts prepared before the Ukraine crisis would suggest. There are no cheap
ways of playing a full part in NATO which must deal with Russia again in its
present mood.
Containers and pipes
It has become a cliché to note that one period of
globalisation in trade and finance ended in 1914 and that another could end in
2014. Of course, the Ukraine crisis alone will not bring about a reversal as
large as that of the Great War. Today, China’s importance to the world economy
is sufficient alone to sustain high levels of world trade and financial
integration, quite apart from the contributions of the US, Japan, India and
others. But it will surely push European countries toward import substitution
in gas and to a lesser extent oil. If the crisis is not resolved quickly, it
could affect many emerging markets which are already struggling as they fear
the consequences of the expected “tapering” by the US Federal Reserve for their
currencies. More generally, this crisis could choke off recovery across the
Atlantic countries and could herald reduced volumes of trade moving on the
great container ships and along the pipes of global commerce for some years.
For Britain,
which is already finding that its consumer-led recovery is sucking in imports
much faster than its firms can improve their fragile export performance and
which is therefore seeing its balance of trade deficit actually worsen as GDP
begins to grow again, the dampening effect on its economy and therefore on the
government’s tax base a new gathering stand-off between Russia and the west
could be quite serious. This is only blade in the pair of scissors threatening
investment and trade, from a British perspective. Combined with the prospect of
a referendum in 2017 on continued EU membership, should the Conservatives win
the 2015 general election, the aftermath of the Ukraine crisis could cut
significantly into British capabilities achieving the target, shared by all three
major parties, for economic and therefore fiscal stabilisation by 2020.
British government
after the Ukraine crisis
Just as was the case in 1973-4 when the Yom Kippur war broke
out leading to a standoff between the US and USSR and when oil prices were
forced up by OPEC, no doubt there will already a “MISC” cabinet committee
meeting in Whitehall to think about the wider implications for Britain of the
Ukraine crisis. Surely, each of the departments whose problems are discussed
here will be sending their ministers. We have to hope that the quality of
British government strategic response in 2014 is better coordinated, better
briefed, and that ministers are more capable of long term thought than was the
case in late 1973 and early 1974. Unfortunately, the present coalition
government has only a little over a year to run before the general election,
tensions between the two governing parties are growing and relations between
ministers and top civil servants have been fractious and mistrustful in recent
months. If anything can concentrate minds in Whitehall, these six implications
certainly should.
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