30 January 2008

The New Cold War

By Eric Jansson
Published by BIRN's Balkan Insight

Is Edward Lucas paranoid?

He is a kind of whirlwind – fast-moving, fast-talking, fast-thinking – who claims to be able to write “in any conditions, at any time”. He is The Economist magazine’s correspondent in Central and Eastern Europe, and somewhere along his zigzagging circuit between post-communist capitals he has just produced a volume called The New Cold War. Bloomsbury is the publisher, and it hits store shelves next Monday.

You read the book, you set it down, and then you ask yourself: is this guy paranoid?

If he is not, and his book is accurate, then our world stands on the brink of an ideological, geopolitical schism akin to the original Cold War, different but no less worthy of the name, once again posing Russia against the US and Europe.

On the other hand, if he is, then who cares? Europe can be expected to continue bumbling along in the frustratingly semi-competent, semi-united manner to which we have become accustomed, swimming more or less freely in a murk of bureaucracy and good intentions. In this case, Lucas’ grave warnings of a menacing Russia will nev
er materialise.

There is another
way to regard Lucas, of course – a third way, a European way, Europeans being congenitally enamoured of the middle ground even when the patch in question is situated on an intellectual floodplain. This view would be that Lucas is merely over-excitable, a well-meaning chronicler of life between Berlin and Moscow but frankly over-the-top. Yes, Russia is messy, but it is merely a menace to itself and a few messy neighbours.

But the right answer is that Lucas is of sound mind – sound enough to follow a story that others have mostly ignored, despite its importance. And he thinks we’re in trouble.

As a journalist, he has reported sympathetically for 22 years so far from Central and Eastern Europe’s fragile, fractious, formerly captive nations. He is one of just a few Western journalists who have paid careful, sus
tained attention to these places where history was reported to have ended in the anti-authoritarian revolutions of 1989-1991, prompting Francis Fukuyama’s fatuous claim that history had ceased everywhere. In fact, history carried on, but most Western journalists’ attention faltered, and Western intellectual comprehension faltered, too.

Throughout, Lucas seems to have maintained unreservedly that the Cold War was not a cynical contest between morally equivalent forces but a crucial test of free civilisation against malignant Marxism-Leninism and totalitarianism on the march. He is right, and he still applies this view to his reporting and interpretation of post-Soviet affairs, which makes his journalism unusually valuable. The threads his reporting follows lead us to The New Cold War.

In the book, he maintains that Russia’s experiment with political freedom is well and truly over, having finally fizzled in the chaos of the late 1990s, when Boris Yeltsin faded and the former Soviet intelligence apparatus, the chekists reconstituted as siloviki, seized control. These folks, with Putin as the reigning godfather, plan to maximise the Kremlin’s influence domestically and abroad by manipulating those who depend upon the country’s natural resources wealth.

The veracity of this claim is of immense importance to the Balkans and to every scrap of once-contested ground between former empires East and West.

The claim h
as been heard before but is often laid out sloppily. Lucas outlines it persuasively, fattens it with telling anecdotes and describes the likely consequences.

Crucially, he does this with sympathy for the average citizen of Russia and yet also with sympathy for citizens of smaller nations that most analysts and reporters have taken too little time to understand. Estonia and Georgia, two key examples, may be small on the map but as places in which the meaning and purpose of state sovereignty are being challenged directly by Russia, they deserve serious attention.

Lucas argues that the Kremlin’s intentions have become unambiguous under Vladimir Putin, the Russian president, and he clearly believes they will not change under his likely successor, Dmitri Medvedev. The Kremlin he describes views the West with spite and disdain and aims to compete against it directly, wrestling away as much ground as possible, politically and economically. The primary weapon, he says, will be Russia’s energy wealth in Europe’s under-supplied energy markets. But there are plenty of other weapons in its growing arsenal, as well.

Think of a b
oa constrictor wrapping itself around your neck, telling you, “I love you, and I’m only hugging you. I love you, and I’m only hugging you. I love you…” Until…

A copy of The New Cold War should be slipped under the pillow of Vojislav Kostunica, the Serbian prime minister.

Kostunica last week delivered Serbia’s state-owned oil monopoly into the clutches of the Russian state, as represented by the state-owned company Gazpromneft, Gazprom’s oil subsidiary, at a sales price worth one-fifth the monopoly’s estimated value. He also invited the Kremlin to build a natural gas pipeline across Serbia, part of South Stream, a project in strategic competition with the EU’s favoured project, Nabucco. These steps effectively place Serbia within the Russian sphere of influence.

A week earlier, Bulgaria unveiled a trio of energy deals with Russia. Georgi Purvanov, Bulgaria’s president, called the deals a “grand slam”. They include Bulgarian inclusion in South Stream, which now together with Serbia’s decision constitutes a major blow to Nabucco. Perhaps Purvanov needs a copy under his pillow, too.

Although t
hese deals took place after Lucas completed his book, his reporting describes in compelling detail why such arrangements carry serious long-term risks, even if they look like savvy geopolitical positioning in the short-term.

“Energy security is national security, and cheap energy from ill-wishers is a bad bargain,” he writes.

In post-communist Europe, Kostunica is hardly alone in his frustration with the hypocritical moralising of US and European diplomats, who too often bring an air of judgement to the painful conflicts of a post-communist, post-war life they have not themselves been forced to endure.

Russia may appear to offer a more sympathetic approach. For example, the Kremlin understands why Serbia chokes on the bone of Kosovo independence. By contrast, I can recall listening to an American diplomat in Belgr
ade in 2002 describe his frustration upon discovering that no senior Serbian politicians regarded their country’s bombardment by NATO in 1999 as welcome and justified.

But, writes Lucas, Russia’s intentions are not ultimately sympathetic. On the contrary, the Kremlin is busily applying divide-and-rule tactics in Europe, much as it did in decades past.

The Kremlin rejects international cooperation in the Euroatlantic mould, which it deems flawed. It is indeed flawed. But what the Kremlin offers as an alternative is a brand of great power politics characteristic of the 19th Century and early 20th Century, when great empires treated vassal states as playthings, offering “protection” in the form of domination. That option is far worse.

The Kremlin pursues this policy in the diffuse, post-modern, post-imperial setting of 21st
Century Europe. Lucas thinks this should be a source of concern, since – even despite NATO’s evolution and expansion in recent years – Western powers are mostly focused on crises elsewhere and are unprepared to act in concert to defend Europe as they previously were.

The claim is not that Russia wishes to dominate ideologically and militarily, with the vice-grip Central and Eastern Europe still remembers well from the past century. Russia has learned that capitalism pays, and totalitarian ideology enforced at gunpoint breeds discontent and instability. But domination, whatever its form, is undesirable in comparison with rule of law, human rights, political freedom and economic liberty.

For readers broadly familiar with Russia’s past decade, the book covers familiar ground. It fills in gaps with useful details, including many that admirers of Putin’s efforts to date will find difficult to

The pages turn easily, but the book’s value for those who already know Russia’s story relatively well starts multiplying when Lucas dives into the subject of “sovereign democracy”, Putin’s euphemism for rent-seeking autocracy with the occasional (heavily manipulated) popular vote, and the means by which the Kremlin seeks to project this evolving post-Soviet ideology beyond Russia’s borders.

Readers whose preference is to morally equivocate between great power politics ala Washington and Brussels and the despairing Russian alternative will find themselves squirming.

Yet, even after reading, the temptations of equivocation will remain real, given how morally corrosive the experience of unrivalled superpower status has been for America’s political leaders since 1991, and how politically and philosophically lazy many European leaders have likewise been during what for the West has felt like a benign era.

Indeed, such temptations sometimes seem particularly strong in the Balkans, where the West has made grievous errors and where political thought is influenced to this day by the psychological damage of war, residual Marxist instinct and the humbug “non-aligned” propaganda of

Lucas is therefore wise to conclude his book with an essential plea for Western powers to live up more fully to their great ideals.

“Sovereign democracy” offers a critique of a flawed West. But it offers only a contorted version of rule of law, human rights, political freedom and economic liberty to average citizens of Russia and its vassal states.

Yet if Western nations do not consistently uphold such ideals in practice, at home and abroad, then alternative approaches like “sovereign democracy” will look more attractive to more people – sometimes to entire nations.

Just ask Vojislav Kostunica. Just ask Vladimir Putin. Just ask yourself.

25 January 2008

Balkan exchanges defy categorisation

Dramatic fluctuations in value on the world’s largest stock exchanges are partly mirrored in southeast Europe, but the region’s capital markets have yet to ‘couple’ with the defining trends in global finance.

By Eric Jansson
Published by BIRN's Balkan Insight
, 24 January 2008

The stock exchanges of southeast Europe, which have so long dreamed of paralleling the trends of global capital markets, this week briefly saw this dream come true.

It has been a disappointing experience.

Share values plummeted early in the week. Bucharest’s BET nosedived 10.8 percent, while the Total Market Index in Ljubljana fell 10.1 percent. The BELEX 15 in Belgrade and CROBEX in Zagreb each plunged by around 9 percent, and other indices fell, too.

It was not the kind of parallel the region’s investors had hoped for, but the losses recorded on Monday and Tuesday did resemble those seen on leading European exchanges. Early this week in London, the FTSE 100 dropped 9.5 percent before rallying, and the DAX in Frankfurt fell by 12.2 percent.

Some local market analysts in southeast Europe described the parallel plunges as an indicator that Balkan exchanges were, at long last, in step with global trends.

At a certain level, this is unarguable. As Balkan countries have liberalised their economies during recent years, both within the European Union and outside it, they have increasingly exposed themselves to the pressures of international finance for good and ill.

Some markets within the region – especially Slovenia, Romania and Bulgaria, as new EU member states – are more exposed than others.

Yet a broad analysis of market data from across southeast Europe over the past 12 months indicates two broad points.

First, most of the exchanges of southeast Europe cannot easily be lumped into any other category of European exchanges. Across the region of patchwork republics large and small between Austria and the Black Sea, stock market performance bears little resemblance to what is experienced in the two other major groups of exchanges in Europe – the established exchanges of western Europe, where indexed results frequently look like amplified versions of results in New York, and the larger emerging market stock exchanges of central Europe and Russia, where fluctuations are even greater yet often diverge more notably from US-driven trends.

Second, an extreme diversity of exposure to global investment trends continues to characterise the region’s exchanges, with results varying greatly from country to country and exchange to exchange.

To examine the first point, we need look no further than the performance of exchanges in the region during this climactic week. For investors, the early week through Wednesday was characterised around the world initially by the high drama of steep share-price falls. The falls originated outside the US yet were catalysed apparently by perceived risks of US recession. Soon thereafter the market changed colour with the US Federal Reserve’s “once-in-a-generation” interest rate cut of 0.75 percent, a step seen as good news for stock investors but a surprise to many, yielding mixed results.

Faced with a selling urge on Monday and Tuesday as powerful as global markets had witnessed since September 11, 2001, share prices everywhere dropped, and southeast European share prices were no exception.

However, the average fall in southeast Europe was significantly lower than those seen in western European markets. It was lower still than falls seen on Russian and central European exchanges.

However, most exchanges in this region were also slower to recover. While leading US indices as well as those in some west European capitals, Moscow and Warsaw rallied after their initial falls, actually posting gains overall on the week no later than late Wednesday, most exchanges in southeast Europe continued to fall or merely flatten out. Exceptions were the exchanges in Ljubljana, Skopje and Banja Luka, the former being a new EU exchange and the latter being both small and idiosyncratic.

Look much further back, over the past 12 months, and other aspects of divergence show up.

One noteworthy milestone is peak-value for 2007. While indices in Serbia, Montenegro and Bosnia-Herzegovina all peaked early then turned south in April and May, the Bucharest exchange’s BET index kept growing until July, as did the prominent WIG index in Warsaw, matching central Europe’s leading index, Frankfurt’s DAX.

By contrast, indices in Sofia, Ljubljana and Macedonia did not peak until August.

Only Zagreb peaked in October, the same month as the key American indices, the Dow Jones Industrial Average and the S&P 500, along with London’s FTSE 100 peaked. While it is clearly no coincidence that the US and British indices peaked together, there is no evidence that Zagreb’s joining them was anything but coincidental.

This scattered trend calendar indicates that no global trend defined Balkan trading patterns. On the contrary, the factor that continues to define the exchanges of southeast Europe, much more than global capital markets do, is local market peculiarity: balkanisation.

This factor, magnified in most markets by low market capitalisation, is also why the region’s exchanges look back very differently upon the past 12 months.

Bucharest, Banja Luka and Sarajevo paralleled a broad global trend in that their leading indices lost value over the past 12 months, but any suggestion that this is more than coincidental is undermined by the fact that, unlike the central European and Russian exchanges, which also fell during the year, six southeast European exchanges posted spectacular growth – notwithstanding sharp recent falls.

Surprisingly, the region’s 12-month growth club is led by the tiny Macedonian Stock Exchange, whose MBI-10 index has grown by 74.5 percent. But the group of top performers also includes exchanges in Podgorica, Ljubljana and Zagreb, whose range of growth stretches from 45.8 percent to 26.4 percent.

Investors still need to factor in the extreme volatility expected of small emerging markets. For example, the Macedonian exchange, despite its remarkable 12-month growth, has also fallen steeply from its 2007 peak, with the MBI-10 losing 30 percent of its value since August. Other steep fallers include the Banja Luka exchange, whose BIRS index has suffered a brutal 53 percent hit, poorly-performing Sarajevo and the dynamic Montenegro Stock Exchange.

No fewer than seven leading indices, each reflecting performance at a different exchange across southeast Europe, have lost 30 percent of their value since peaking in 2007.

To serious investors active in southeast Europe, it is little consolation that Warsaw’s WIG did, too.

That it did is a reminder that full membership in the EU and exposure to large-scale international finance, so coveted by investors in southeast Europe, are not forms of shelter against brutal market forces. They are merely invitations to compete.