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2 June 2021

Clean and green vs belt and road

At next week's G7 meeting, the US and allies are set to announce an alternative to China’s belt and road initiative, an expansive geopolitical development agenda that has seen billions poured into the countries connecting China to Europe via old silk road trade routes.

Dubbed the Clean Green Initiative, the G7 plan is expected to provide a framework for sustainable development and the green transition in developing countries, according to anonymous officials who spoke to Bloomberg. Dubious name aside, details are scant – it is not clear whether any new money will be put behind the new initiative, nor is it clear how this new plan relates either to an earlier plan floated by the Biden administration, or to the US blue dot initiative, a standards-setting exercise that was also aimed at countering the belt and road initiative, and which went nowhere.

Furthermore, it seems as though G7 leaders do not know where the initiative should be located: Germany, France and Italy are pushing for new activity in Africa, while the US wants to focus on Latin America and Asia. Japan is calling for a focus on the Indo-Pacific region.

Assuming the strategy is not lacking money, structure and a geographic focus, we think its launch reveals a fundamental misunderstanding about the purpose of the belt and road initiative. China’s $1tn plan has been endorsed by more than 100 countries, and its portfolio of belt and road investment already covers much of the developing world, as well as many European countries.

The clean green initiative is meant to improve transparency and help countries avoid white elephant projects, like Montenegro’s €1bn Chinese-financed highway to nowhere, which have left them with unsustainably high levels of debt to China. But this fails to acknowledge that the belt and road initiative flourished best in corrupt countries, where a successful project was never the goal. For China, the belt and road initiative is a tool of debt trap diplomacy. For borrower countries, it offers an opportunity for the ruling political class to enrich itself. Any plan promising the opposite is unlikely to succeed.

If borrowing countries wanted more transparency and stringent lending requirements, they would ask the IMF, World Bank, or EBRD. Which raises the question – why call the new initiative clean and green? Is this a sign that the G7 wants to create its own herd of white elephants?  

Rather than focus on marketing terms that could lend themselves to greenwashing exercises, the G7 should be working on a belt and road bailout plan for countries that cannot afford to repay their debt. This would offer its members better political and diplomatic leverage than new, and perhaps unnecessary projects.

1 June 2021

Crisis in Russian-German relations

When Germany made itself dependent on Russian energy, it did not anticipate that Russia would ultimately try to exercise power over German politics.

Russia last week banned three German NGOs. Specifically, it classified them as undesirable organisation, which under Russian law makes it illegal for them to operate in Russia, and for Russians to be in contact with them. We are sure that German diplomacy will at least try to find a way to muddle through this.

FAZ writes this morning that the decision, announced by Russia's General State Prosecutor, will endanger the St Petersburg Dialogue as a first direct consequence. This is a high-profile annual bilateral forum, initiated by Vladimir Putin and Gerhard Schröder in 2001. The three banned organisations are members of that annual junket, whose aim it has been to strengthen civil society ties between the two countries. The paper quoted several German board members of the St Petersburg Dialogue as saying that the annual meeting would have to be suspended until Russia ends the ban. FAZ writes that the Russian-German relations have reached the lowest point in living memory.

But apparently not low enough for Germany to suspend Nord Stream 2.

The three NGOs are the Center for Liberal Modernity, the German Russian Exchange, and the much smaller Forum of Russian-Speaking Europeans. Russia banned them over undesirable activities that violate Russian interests. Russia accuses the organisations of justifying terrorist activities and of resisting Russian energy projects, including Nord Stream 2. The organisations were accused of feeding nationalist and separatist tendencies and non-traditional values in young people, according to the official statement. The purpose of the ban is to counteract a western-inspired coloured revolution, as the various uprisings in eastern Europe are known in Russia.

The organisations have suspended all activities in Russia, and ended all contacts, including email. If an organisation is classified as undesirable, Russians face up to six years in jail should they be in contact with it.

We are not surprised to see Putin flex his muscles over what he considers an increased anti-Russian tendency in Germany. The Russians have also considered putting the Green's party Heinrich-Böll Foundation on the list, but decided not to do so because the Greens might become part of the next German government. The decision of the ban was announced last Wednesday, and as FAZ writes, it must have been coordinated with the Russian foreign ministry beforehand.

In this context we noted a comment by the British journalist Will Hutton who made the observation that the dictators are winning against the democrats. We agree with his observation, but disagree with the reasons. It is not because the west was not living according to its values, as Hutton argues, but because the west is willing to do dirty deals with the dictators for short-term gains, and not stand up to them. The ban of the three German NGOs is the best example of what happens if you don't.

28 May 2021

What is Putin up to?

It is always hard trying to figure out what Vladimir Putin has in mind, but a good second-best is trying to understand what he is doing. If his real intent is to distance himself from Alexander Lukashenko, as some Russian commentators have been trying to tell us, why would he retaliate by banning European flights over Russian territory - or formally those flights that bypass Belarus? We cannot exclude that there is a motive behind this decision that we fail to understand. But the obvious conclusion we draw from this event is that Putin and Lukashenko are acting together.

We have been reporting about the possibility of a Russia-Belarus political union - not a power grab, but a gradual process. The hijacking of the Ryanair plane has the potential to accelerate this process.

Russia is by far Belarus' largest trading partner, accounting for almost 50% of all trade, followed by the EU's 18%. Yesterday Josep Borrell, the EU’s high representative, told media that the EU will discuss sectorial and economic sanctions against Belarus, highlighting potash and gas as potential targets. Belarus supplies 20% of the world's potash, much of which is exported via Baltic states. Its potash and oil and gas sectors accounted for more than €2bn of EU exports last year, around a third of total exports to the union. 

If the EU widens economic sanctions, the strategic effect will be to make Belarus even more dependent on Russia. We are wondering whether this may have been Putin's and Lukashenko's intention all along.

For a different view we would like to direct readers to Artem Shreibman from Carnegie Moscow, who makes the point that Putin is likely to make some compromises as part of a wider understanding he may reach with President Joe Biden at their upcoming summit. Shreibman says Ukraine is more important to Putin than Belarus. He cannot easily compromise there, but he can let go of Belarus. What we learned from his analysis is that there are influential parts in Russian industry that do not want Russia to pour resources into Belarus, whose leader they regard as an embarrassment.

We keep an open mind on those two conflicting narratives. They can't both be true.

27 May 2021

Signifying nothing

Dominic Cummings is no idiot, but his was a tale of sound and fury, signifying nothing. By that we actually mean nothing whatsoever. The consensus of political journalists in Westminster was that his rant yesterday was hugely significant. Apart from political journalists, nobody is paying attention to the events of the year 2020, when this government, and most other governments, were caught unprepared for the pandemic. Some handled it better than others. The UK did well on vaccinations. And from a party political point of view, that settled the issue. The public is focused on the end of the pandemic, not reliving the nightmare.

The latest YouGov poll, conducted May 19-20 had the Tories at 46% and Labour at 28%. A giant poll of 14,000 voters, on a constituency basis, has the Tories ahead by 122-seats - up from a current 81 seats. 40% prefer Boris Johnson as prime minister, 24% prefer Sir Keir Starmer.

Events will no doubt intrude that will push the numbers in one or the other direction. But Cummings' mammoth testimony was no such event.

What are the real issues to watch out for? We think it is a combination of the following: the post-pandemic economic performance; whether the authorities will be able to keep a grip on inflation, and if so at what cost; the future pace of innovation, which is absolutely critical to making Brexit work; a new business model for the north of England.

James Kirkup, the director of the Social Market Foundation, believes the big issue is gas boilers. This is not as unreasonable as it sounds. Part of the government’s green policy is the obligatory replacement of gas boilers in private homes by heat pumps, which he says would cost more than £10,000 to instal. There is understandable opposition to what constitutes a massive household tax. Unsurprisingly, the people who lead the opposition were also leading figures in the Brexit campaign.

These and the unforeseeable events that have yet to intrude are what will determine the outcome of the next elections. Johnson is a well-liked figure who will be hard to beat at the next election. The Tories would be mad to replace him with another politician. Sir Keir had a bad start. He is a decent parliamentary performer, but he struggles to communicate what he stands for.

Our highly unscientific crystal ball scenario is for an election in the spring of 2024, another Johnson victory, followed by a change in the Labour leadership from Sir Keir to Andy Burnham, the mayor of Manchester, who served under Gordon Brown as chief secretary to the treasury. This is obviously highly speculative. What we are sure of, though, is that the who-said-what-to-whom gossip from the palace of Westminster won’t matter.

26 May 2021

The frozen elephant in the room

At a recent meeting in Reykjavik, Anthony Blinken and Sergei Lavrov failed to rekindle Arctic cooperation. Russia is pushing for Arctic states to resume high-level military meetings, which have been suspended since it annexed Crimea in 2014. Washington is opposed. We are loath to agree with Russia on anything, but the Arctic will be a critical region for future transatlantic cooperation, and we think the military issue is too often overlooked. This poses a risk to European stakeholders.

We noted with interest a recent report published by the Centre for European Policy Analysis, in which Retired Navy Admiral James Foggo called for the creation of a transpolar bridge to address Arctic military issues. We agree with Foggo that military dialogue between Russia and other Arctic nations should be re-established.

The region is geopolitically significant because of its valuable shipping routes and natural resources. 

At present, the Arctic route between northern Europe and east Asia is still too unpredictable to make it a mainstay of the global shipping industry. But this won’t be the case for long.

Goods transiting northern Europe to east Asia will travel 11,200 nautical miles using the Suez Canal, but only 6500 through the Arctic, saving between 12 and 15 days of transit time and fuel costs. Yet as Foggo writes, it’s not only the weather that is deterring shipping companies – Russian transit fees are also playing a role. Putin has targeted boosting cargo traffic through the region to 80m tons by 2024, up from 1.2m tons in 2020. By 2030, the transpolar route across the central Arctic, which links Europe, Asia and North America, is expected to be open for limited periods. This region holds the highest potential as a global shipping route, and it will be one of the world’s biggest geopolitical hotspots when transit is possible.  

And then there are the Arctic’s vast natural resources. These include more than 90bn barrels of oil, 1700trn cubic feet of natural gas, and 44bn barrels of liquefied natural gas, amounting to nearly 30% of the world’s conventional natural gas supply and 13% of undiscovered oil reserves. Russia estimates it holds 33 oil and gas deposits on the Arctic shelf. The region is also home to large reserves of copper, iron ore, nickel, zinc, platinum, cobalt, rhodium and gold. There will be a scramble for these resources in the future.

A military build-up is already happening, and Russia is pulling ahead. Its share of modern weapons and military equipment in the Arctic zone rose from 41% in 2014 to 51% in 2019, and it has invested heavily in a fleet of 40 icebreakers, more than 10 of which are nuclear-powered. In March this year it conducted its most advanced military drills in the region to date, surfacing three ballistic missile submarines within 300 metres of one another. China, meanwhile, has declared itself a near-Arctic nation and conducted dual purpose research missions in the region with its own icebreakers.

All of this led Foggo to argue that the Arctic Ocean is fast becoming a battlefield laboratory and proving ground for new weapons systems. He has called for high-level meetings between chiefs of defence to resume under the auspices of the Arctic Council. Joe Biden's upcoming meeting with Vladimir Putin in Geneva next month might give us an indication of whether that will be possible. 

25 May 2021

Misfits, economists and journalists

We read Tyler Cowen’s criticism of academic economics with interest, not so much as yet another opportunity to point to the increasing irrelevance of this once-mighty profession, but as a wider phenomenon. It applies to our own profession of journalism as well, about which we wrote yesterday. What unites the two is institutional conformism. You don’t find the great journalists of modern times in the newsroom of large media organisations. They are bloggers who risk their lives. Their journalism prize is a prison sentence, or maybe a death sentence.

The biggest insights into economics are nowadays coming from outside the profession - from data science and behavioural psychology. More importantly, they are coming from outside the university sector. For all his many faults, Dominic Cummings got it spot on when he framed a job advertisement seeking weirdos and misfits. If you want to understand big data - anything from polling to disease statistics - you should not rely on the old methods you are taught in Statistics 101. If you seek a true understanding of the interrelationship between politics and economics, about the worst thing you can go about is to study politics, philosophy and economics, and then become an armchair commentator.

Both professions are largely in denial of the crisis that is facing them. This is normal. Journalists and economists are a thin-skinned lot, happy to criticise others, but sensitive to criticism themselves. They are also protective of their status in society. Their professional failures - the global financial crisis for economists, Brexit for journalists - went largely unexamined. In the rare cases when they are scrutinised, as is now the case with the BBC's Diana interview, they become defensive.

But what appears outwardly as a professional crisis is deep down an institutional crisis. Journalism and economics are still there. They're done increasingly in different places and in different forms. In the meantime, we live in a murky transitional phase, in which we see old world fading, but where the new world is not clear either.

24 May 2021

Dark Green

Some of the shifts in opinion polling are noise. But this one isn't. The popularity rankings of the three chancellor-candidates have reversed. Olaf Scholz is now the most popular candidate, followed by Armin Laschet and Baerbock last. This does not surprise us. Baerbock floated on a media bubble for a month, but people are now beginning to listen to the candidates themselves. She is the most knowledgeable of all the candidates, but may lack some of the qualities people are looking for in a chancellor. All the candidates have weaknesses - Scholz' eternal smirk makes him look deeply cynical; Laschet looks like he has nothing to say; but Baerbock's body language seems out of sync with what she is saying. Judging by the sure-footed chancellors of the past, this is not a particularly impressive lot. 

In German politics, there is rarely a strong relationship between the popularity of the candidate and the popularity of the party, but we think it counts for a few percentage points, and so could matter in a tight race. The polls put CDU/CSU and Greens at approximately the same level. Two of the last three polls, Insa and Kantar/Emnid now have the CDU/CSU ahead, while Forschungsgruppen Wahlen has the Greens in the lead. The same is also true for Forsa, the organisation that first registered the shift to the Greens. We think Forsa is the least filtered opinion poll. It had the Greens at 28% during the Laschet/Söder wars, and is now at 24%. We are not at the point where the filtered and unfiltered have converged.

The party that is really doing well right now is the FDP, which is polling at 11-13%, similar to the AfD. The party that is doing really badly is the Left Party. Forsa and Insa have them at 6%. In a high-turned election, they could be squeezed. We noted that their recently elected co-leader called parliamentary democracy much over-rated. While such talk resonates with some of the party's core voters, it might persuade voters on the Left/SPD margin to shift towards a more left-leaning SPD, especially if it becomes clear that the SPD will go into opposition, which we think would be the best course of action.

It's still early days in the German elections, and the outcome in the race between CDU/CSU and Greens is wide open. But some of the coalition options are now becoming less likely - like Red/Red/Green. There are polls in which even CDU/CSU and Greens together have no majority, and would need the FDP to govern. The post-Merkel world will be different. But it may not be a radical departure.

21 May 2021

Short-haul flights won't go gently

This falls into the be-careful-what-you-wish-for category. It is easy to think - or demand - that short-haul flights should become a thing of the past. The price of airline fuel will rise, and flying will thus become less competitive relative to other modes of transport, and especially trains. The pandemic has added to the complexity of flying. Speaking from our own experience, the check-in times at Heathrow Airport in London this week were about an hour because every passenger had to be questioned personally. The passport queue on the way back were 90 minutes. But it would be wrong to extrapolate this week’s snapshot.

The only viable alternative to short-haul flights are high-speed trains. When the Eurostar launched its first connection from Brussels to London in 1994, it took four and half hours. At that point, flying was still faster. Today’s travel time is two hours. In each case, it is the faster connection that is more expensive. In the US, the journey time between New York and Washington has been cut by the Acela Express to such a degree that it is now faster than flying. But it, too, is an expensive means of travel.

The viability of short-haul flights thus depend on two related factors: the relative cost and the relative time. Governments can influence the former through taxes immediately, but the latter only through infrastructure policies.

Now look at the reality on the ground in the EU. This week we heard Andreas Scheuer, the German transport minister, announce a cross-border high-speed link to reduce the journey time from Berlin to Vienna. The current travel time is almost nine hours. He wants to cut it down to five hours by the year 2030. The distance is only 680km - by road - and 524km taking a direct line. A French-style TGV could cover such a distance in less than two hours. But that is not going to happen because the German government, unlike the French government, does not have the legal power to expropriate land. This is the reason why German rail lines are wiggly, and French rail lines are straight. France managed the transition from air to rail a long time ago - and even in France there are still short-haul flights to connect Paris and Nice. The obstacles to do the same at the European level are bigger, and the legal and political scope small. You can do the maths.

For professional travellers, a five-hour journey time between the two German-speaking capitals would still be too long. From our experience, the threshold is around 3 hours, give or take an hour. Frankfurt-Paris is 4/5 hours for some 570km. The distances between Munich and Milan is only 350km, yet it takes between 8 and 11 hours by train.

Air travel is currently also impaired, but we expect this problem to reverse completely. The long queues at check-in and immigration are necessary because of checks for Covid-testing and pandemic-related travel documents such as passenger locator forms. It will be only a matter of time until this process is automated. The so-called advanced passenger information, that holds passport details for travellers, will simply become a longer document, covering vaccine status, for example.

We would not bet on the end of short-haul flights in Europe just yet.

20 May 2021

Doctor Cancelled

Franziska Giffey has become the third minister in Angela Merkel’s cabinet to resign over a plagiarism scandal. The German minister for family and women had written a thesis about the inclusion of civil society in EU decision-making. There is a lot of third-rate academic nonsense going on in political science in Germany, but also in other disciplines. We have yet to understand why politicians feel the need to complete a PhD that adds nothing to the state of our knowledge. While Helmut Kohl and Angela Merkel held PhDs - real ones - none of the three SPD chancellors did. There is no evidence that it furthers your political career.

Yesterday we noted a new element in the debate that was absent during a previous plagiarism scandal. A widespread attitude of indifference in the media. SPD-supporting journalists were even trying to characterise her resignation as a cunning move because she took the step before the publication of a damning report by the University of Berlin. As the SPD is unlikely to participate in the next government, she would have lost her job anyway. We are told that she now has the opportunity to focus her political energy on local politics in Berlin, and may be considering a bid to become the city’s major. Good luck to her. But we doubt very much that it will pan out like this.

We see this resignation differently - as one of the fin de siècle events that characterise the final moments of government past its prime. This is very much like the sleaze scandals of the Conservative government in the UK in the 1990s; or the graft and corruption scandals at the tail end of Helmut Kohl’s long reign. Not one of the incidences is significant in its own right, but together they add up to a sense of malaise. Note the three PhD scandals span the entire grand coalition. These scandals are not the main reason why the two big beasts of German politics - CDU/CSU and SPD - are now polling together around 40%. That used to be considered a bad result for any one of them not too long ago. If the Greens and FDP gain voters far beyond their traditional base, this is one of the reasons why.

19 May 2021

Biden to waive Nord Stream 2 sanctions

Axios reports that the Biden administration is about to waive sanctions on Nord Steam 2 and its chief executive. It adds the implausible comment from an administration spokesperson that it remains US policy for the pipeline not to go into use.

Angela Merkel and her government have been playing hardball on the pipeline, and calculated correctly that the Biden administration would fold. The project itself is going full steam ahead, having just cleared the legal hurdle for the remaining part of the German section of the pipeline still to be completed. Once the pipeline is physically connected, which we expect to happen before the September elections, it's game over.

The sanctions waiver relates to the Nord Stream 2 entity itself and Matthias Warnig, its CEO. The Axios story talks about a shift in strategy. The Biden administration apparently concluded that it would be more effective to sanction German end users of Russian gas. We think this is implausible, as those type of sanctions would be far greater than the more targeted sanctions currently in use. Also, the existing US sanctions legislation do not cover this type of retaliation.

The pronouncements thus do not make sense. What we see instead is that the US wants to co-opt Germany into its China policy, and is willing to drop its opposition to Nord Stream 2 as an advance. But it is far from clear that the Germans will go for it. The Greens are the party most closely aligned with US policy on China and Russia. But it is not a given that the Greens will be strong enough in the next coalition to force this issue, nor that they will want to pay the political capital needed to do this, given their domestic policy priorities.

Our conclusion is that this decision is based on a misjudgement of German politics, which bodes ill for the chances of a successful Biden administration foreign policy.